Upm Kymmene Corp

My name is Massimo Reinaudo. I'm the CEO of UPM, and I am here today with Tapio Corpain and the CFO. Over the next half an hour or so, we will share the main facts of the second quarter and then open up for your questions. Three months ago, we reported a good start of the year, but the promising start took a negative turn during the second quarter. In quarter two, in fact, our sales decreased by 6% from last year to 2.4 billion euros, mainly due to lower sales prices and unfavorable changes in currency exchange rates. Our comparable EBIT decreased by 31% to 126 million euros. The EBIT margin was 5.2%. The tariff announcements caused uncertainty in the global trade. which weakened the demand for our products and weakened the U.S. dollar. These had negative impact, particularly on our fibers and communication paper businesses. On the other hand, our advanced materials businesses showed more resilience. To secure performance, we took a number of decisive actions to safeguard the competitiveness across all our businesses. In parallel, we also made good progress in the refinery in Loina, successfully starting up the first of the refinery's three core processes. This represents a key milestone in the development of a new biochemical business. Quarter two. was characterized by the widespread introduction of tariffs by the U.S., followed by several changes in the scale and date of applications. Also, and connected with that, there has been significant weakening of the U.S. dollar. This has certainly affected the business activity, not just in the U.S., but in many geographies. I'll give you a brief overview now on the market development during the quarter, and then we'll come back later to the actions we planned in the different businesses. Let's start with fibers. In China, big market for fibers, pulp orders slowed down significantly at the beginning of the quarter, when the trade dispute with the US was at its highest level. Customer deliveries recovered later in the quarter, but at a lower price level. The weakened US dollar impacted the PAL performance as well. In communication papers, the demand has been weak in Europe, minus 9% versus previous year. And in the U.S., the tariff uncertainty is translated into customers facing both unpredictability when it comes to the cost of paper and their underlying business. That ultimately affected the overall demand in the U.S., which slowed down. And because of that significant overcapacity, prices decreased, and the weakening U.S. dollar impacted the performance on top. On a positive side, the advanced material market were more resilient in this prevailing uncertainty. The labeling materials demand in quarter two decreased by 1% in Europe, but grew 3% in North America compared to the year before. On the other hand, the growth softened in the US in the labels and release liners and packaging paper markets. specifically toward the end of the second quarter. Demand for fine papers in China was rather weak, particularly during the peak of the trade tensions, and prices were low as well. And when it comes to plywood markets, the market situation, the demand improved somewhat, but our business in quarter two was not able to capture fully this opportunity due to a strike in the Finnish mills, linked with a labor contract negotiation. After the new collective labor agreement was signed in May, production volume quickly picked up, supported by a high backlog of orders. In the carbonization solution, the market for advanced renewable fuels improved, and our UPM biofuels business improved its performance with higher deliveries, decreasing costs, and reached EBIT breakeven in the quarter. UPM Energy experienced a quarter of historically low market prices, but on a positive side, the second quarter showed increased power demand in Finland, which we can take as an indication that the electrification of the economy is starting to gain traction, and clearly a positive indication for the future. But at this point in time, I'll hand it over to Tapio for some further comments on the results.

Thank you, Massimo. So here on the left hand side, you can see the year on year comparison of the second quarter EBIT. So this year compared to Q2 last year. Sales prices decreased in nearly all businesses in this comparison with largest impacts in fibers and communication papers. Variable costs decreased in most categories, whereas wood costs in Finland still were on the increase. Thus, variable costs only had a minor positive impact on the result. Changes in the delivery volumes had a small negative impact, which was more than offset by lower fixed costs. Exchange rates represented a headwind for us. We started the year with a U.S. dollar-euro exchange rate of $1.04 per euro, and then at the end of the quarter or beginning of the end of the six months or beginning of the third quarter, we were at $1.17 per euro level. That change means roughly for the first half, about 30 million negative impact on our result after hedges. On the right-hand side of the slide, we show the respective comparison sequentially to the previous quarter, so quarter two vis-a-vis quarter one this year. The biggest negatives are in low volumes and high fixed costs, with a combined impact about 100 million euros, and 80% of this is related to high maintenance activity during the second quarter. In the second quarter, the Pasadous, Toros and Kymi pulp mills and all three units at the Olkiloto nuclear power plant took their maintenance shutdowns. Maintenance impact was along what we have earlier guided, meaning around 75 million for the pulp business from the two shutdowns. Let's say, including then the impacts from the shutdowns in Olkiloto, overall impact on the second quarter, a bit more than 90 million. The remaining part of the volume decrease is related to the slower deliveries during the highly uncertain second quarter market conditions. The remaining part of the fixed cost increase is seasonal. In addition, sales prices decreased and asset currencies had a negative impact. Then, looking at the comparable EBIT by business area, So, starting from the right-hand side here, you can see the resilient performance of adhesive materials and specialty papers. In adhesive materials, the markets were largely stable and our sales actually continued to grow. EBIT was flat from the first quarter. In specialty papers, label papers and release liners, business was holding relatively well, but then fine paper deliveries and prices in China were impacted by the high market uncertainty during the spring. In plywood, our performance was held back by the strike. Then looking at the upper row, you can see the two businesses most impacted by the global trade uncertainties and by the weaker US dollar as well, fibers and communication papers. In fibers, the biggest negative impact sequentially from the first quarter was the high maintenance activity. However, prices decreased as well. The average pulp price in euros in the second quarter was 6% lower than in the first quarter, or 18% lower than last year. Compared with last year, costs in Uruguay decreased, whereas wood costs in Finland still increased. Communication papers' EBIT decreased. mainly due to lower paper price and unfavourable exchange rates. The average paper price in euros decreased by 5% from the first quarter. Paper deliveries increased by 1% from the first quarter, but then, compared to the second quarter last year, showed a decrease of 6%. Finally, energy experienced historically low market price of electricity in Finland. Second quarter is seasonally low season. In addition to that, after a mild winter, the Nordic hydro reservoirs were high. and also the transmission connection S-link 2 from Finland to the Baltic States was under repair and has been put back to operation then after that. However, there were also some, let's say, green shoots or early indications in the market, as Massimo mentioned. Electricity consumption was higher for the second quarter consumption than in any year since 2008. And obviously, 2008 timeframe, we saw a, significant restructuring in the energy intensive traditional industries post global financial crisis. So let's say, After that sort of a reset in industrial consumption, now then, for the first time, we are seeing higher consumption and therefore an indication, in a sense, of the new dynamics and demand of electrification starting to take shape in Finland. Then, On our financial position in the second quarter, our net debt stood at 3.3 billion euros and the net debt to EBITDA ratio was 2.12. In the second quarter, we paid the first part of the dividend decided in the annual general meeting. And also during the first half of the year, we implemented the share repurchase program. Our financial position continues to be solid. Nevertheless, we aim to bring the net debt to EBITDA ratio back below two times in the near term. Massimo already mentioned the positive development as regards to the profitability in the biofuels business. Here you can see the biannual update of our performance in biofuels and biochemicals, which are reported as part of our other operations. As most of you know, last year was a challenging year in biofuels. Sales price since then have still remained low, but our deliveries have increased and we have been able to drive down our costs. In the second quarter, the business reached EBIT breakeven. In biochemicals, we achieved the first milestone in starting production in Loina, as the wood to sugars and lignin process was successfully tested and started up. This is key to enabling the refineries further conversion processes to renewable chemicals and materials. Three months ago, we discussed the potential impacts of tariffs to our business. As it turned out, the direct impact of tariffs has been minor thus far, and as we had anticipated on this regard, but then the indirect impact of the high uncertainty and weaker dollar related to that has been material, and particularly so in fibers and communication papers. It is good to note that there continues to be uncertainty about the tariff levels, as we all well know, between the US and the EU, and on top of that, between the US and many other regions, some of which have competitors to our businesses. This slide also reminds you of the scale and nature of our business in the US. Then looking at our exposure to foreign exchange. Again, as mentioned, the US dollar weakened rapidly during the first half. Further currency fluctuations are possible given the uncertainties in geopolitics, fiscal policies and global trade. And this slide summarizes our main currency exposures and our hedging policy. And then to our outlook, we guide for the second half 2025 comparable EBIT to be in the range of 425 million to 650 million euros, so to improve from the first half of 2025, but then compared to second half of last year to decrease from that. When we compare with the first half 2025, we expect lower variable costs in the second half, including the timing of the annual energy refunds in the fourth quarter in the communication papers business area. And I would say that the amount of refunds we expect likely to be similar or slightly smaller than what we saw last year. Given the continued high wood prices, it is also possible that we will see a forest fair value increase in the fourth quarter here in Finland. And if then that will be the case, could be somewhat smaller or let's say at the most similar to what we saw last year. We expect resilient performance to continue in the advanced materials businesses. On the negative side, pulp prices are currently lower than they were during the first half of the year. Then when we compare the second half to the second half of 2024, Our performance this year is negatively impacted by lower sales margins in the pulp business, lower communication papers deliveries and higher maintenance activity. So during the second half, we will have shutdowns at the Kaukas and Fribentos pulp mills. And the total maintenance impact of this is about 60 million euros on the second half result. On the positive side, we expect performance to improve in the advanced materials businesses year on year. In both comparisons, the current Euro-USD exchange rate is worse for us than in either comparison period. And then obviously, one can finally say that significant uncertainties still prevail as far as the global trade policies are concerned. So now I'll hand it back over to Massimo for our focus growing forward from here.

Thank you Tapio. In the current uncertain markets, we continue to take decisive actions to secure and improve our performance. Growth remains our objective and we will continue to pursue well-targeted opportunities of organic and inorganic growth. But in this sense, and in line with our strategy and our operating model, we will leverage the opportunities offered by a diversified portfolio, together with the aim to have world-class performance standards in each of the segments where we operate. And talking about world-class standards in fibers, we continue to leverage our world-class business platform in Uruguay. And we will take all the measures necessary to safeguard profitability in the Finnish pulp operations. In Uruguay, we continue to drive down costs during the first part of the year. This work continues, and we will have the full benefits also of our plantation platforms, platform by 2027. In Finland, we managed to run our finished pulp operations profitably in Q2. However, due to continued high wood prices in Finland and low pulp prices, the scheduled maintenance shutdown of the Caucasus pulp mill in Q3 will be extended to approximately two months. This allows us to avoid the most expensive wood sources and the lowest priced pulp deliveries. We will continue to monitor the situation closely and take further curtailment at our finished mills as needed. When it comes to communication paper, business continues to align its capacity to the market demand and to focus on competitiveness and performance. In quarter one, just as a reminder, we announced the planned closure of the Ettringen meal in Germany. And today we have announced plans to permanently end the production at the Kaukas meal in Finland. Together, the two closures would reduce our paper capacity by some 570,000 tons, which represent about 13% of our current capacity. The combined reduction in annual fixed cost would be 70 million euros. With these planned measures, we aim to ensure the efficient use of our remaining assets and secure our future competitiveness. As commented before, advanced material markets have been relatively resilient in the global turmoil. We continue to pursue high performance and focus growth in this segment. The newly rebranded Hadizim material business area continued to grow with sales in quarter two. Actions to sharpen competitiveness and improve margin continued, with positive impact expected in second part of this year. As discussed earlier, our target is to return to double-digit EBIT margins in the near term. In terms of growth, the business is investing in strengthening its presence in faster growing regions. In the U.S., we are investing in a new proprietary coating technology at the Mills River factory in North Carolina that will increase significantly the capacity in the high margin label segment in the U.S. This capacity expansion will also enable the transfer to Mills River of the volumes currently produced in the Fletcher factory in North Carolina. All orders from the Fletcher factory will be moved to Mills River by the end of April 2026, and activities in the site will then stop afterward. Also, and in parallel, we are investing in Malaysia to enhance our capability to serve growing South Asian markets. A new 1.5-metre coating line in the Johor Bahru factory enables new capabilities, superior quality and cost improvement. The combined investment for these two initiatives totals to about $25 million. At the same time, we are in the process of consolidating our position in the attractive graphic solution market following our recent acquisitions. And parallel specialty paper, the specialty paper business, is still dealing with uncertainty in the global trade policies and trend, as well as a slow fine paper market in China. With a specific reference to the latter, The focus in this very moment is therefore on competitiveness, and we are currently optimizing our organizational structure in China and in Asia-Pacific region, and that may lead to reducing up to 130 positions in the region. In the medium term, we look for growth in this attractive business where we have a strong position to leverage. In the decarbonization solution segment, doing a number of things, three are the main one. We're launching a new business, entering now in the biochemical business. We pursue performance improvement in biofuels. And we look to maximize value and capture opportunities in the growing electricity market. During quarter two, we communicated our decision to discontinue the Rotterdam refinery development. However, our interest in the market remains, and we focus our biofuel growth plans on three different directions. One is a further development and de-bottlenecking of the Laperanta refinery. The second is the continuous development of proprietary technologies to enable highly competitive feedstock, which we regard as a key competitive factor going forward. And the third is the qualification of our crude oil-based renewable fuels as a sustainable aviation fuel, a process we have initiated already last year. All of these measures are more capital efficient than a greenfield refinery project at this specific point in time. We mentioned it already a couple of times, but we are also very happy to disclose or to discuss the fact that we have started the first of the three units in Loina. That is the unit that converts wood into sugars and lignin. which will then be converted in the other two units in valuable chemical products. This is a fundamental moment for us. Our teams are actively engaged as we speak in building process stability, overall process optimization, and the quality control measures. The next step will be starting up the lignin to renewable functional filler list, sorry, unit. And finally, the sequence will be completed with the sugars to chemical unit startup. As indicated earlier, the biorefinery is expected to reach full production and positive EBIT in 2027. So we close with this summary slide, which contains the key topics we covered so far. But in the interest of time, I would end here this part of the presentation and open the line up for your questions.