Upm Kymmene Corp

Hello, everyone. Welcome to UPM Quarters Free 2025 results webcast. I'm Massimo Reinaudo. I'm the CEO of UPM, and here with me today is Tapio Corpainan, the CFO. The third quarter brought some temporary clarity to the terms of the international trade, but significant uncertainty remained and the consumer demand stayed subdued. Our businesses in advanced materials and in the decarbonization solution segment improved their third quarter performance compared to the previous year. On the other hand, the renewable fibers and communication paper businesses were impacted by the unusual volatility in their operating environments. In quarter three, comparable EBIT was 153 millions, up 21% compared to the previous quarter, but down 47% compared to the last year's corresponding period. The EBIT margin was 6.7%. During the quarter, we continued to take decisive actions to further strengthen our competitiveness. Our focus has been and is on improving performance, cash flow generation, and the strength of our balance sheet. I will come back and tell you more about these actions during the presentation. But first, let's look at the macroeconomic environment. We operated it in quarter three. And let's look at renewable fibers to start with. As you may remember, the pulp market prices decreased during the peak of the trade uncertainty in quarter two, and starting from China. In quarter three, pulp sales prices remained low, impacting our quarter three earnings. As a positive sign, though, during the quarter, the pulp demand normalized in China and hardwood pulp prices increased somewhat from the bottom. In Finland, wood cost reached their highest level in quarter three, when then wood market prices started eventually to show the first signs of decline. Communication paper markets remained weak in Europe and in North America. The demand in Europe in Q3 was 7% lower compared to one year before. In the U.S., the new import tariff levels were finally set during the quarter bringing some clarity and allowing the customers to proper plan their needs again, and for us, restoring the possibility to proper plan and optimize production and shipments. Having said that, the general uncertainty continued to weight on the business sentiment and ultimately on the level of the demand. Turning the page, in the advanced materials segment, the demand of labeling materials remained relatively resilient. In the adhesive materials, specifically, the demand was seasonally low, lower than quarter two, but when we look at the full year base, the market continued to grow, even though some signs of a slowdown were visible in the U.S. The demand for plywood was stable, and I will tell you some more about this business shortly. In decarbonization solutions, the market situation in general improved. When it comes to the energy business, in fact, the electricity consumption in Finland continued to be robust, and the electricity prices increased from the comparison quarters. In the same way, the prices of renewable fuels continue to recover, supported also by an improving demand. At this point, I will hand it over to Tapio for some more analysis on our results.

Thank you, Massimo. So let's start here with our results by the business area. Fibers and communication papers were the business areas that reported a lower EBIT compared to last year, whereas adhesive materials, specialty papers, plywood, energy and biofuels all improved their EBIT year on year. First on fibres, as Massimo said, pulp prices were very low in the third quarter, decreasing 11% sequentially from the second quarter or 23% from last year's third quarter. Price development resulted in a significantly lower EBIT than last year and slightly lower EBIT compared to the second quarter. At the cycle low prices, Fibers South, the competitive pulp platform of ours in Uruguay, reported an EBIT of 80 million euros, which is equal to an EBIT margin of 22 percent. Fibers North, that is the pulp and timber operations in Finland, reported an EBIT loss of 37 million euros in the third quarter. during which the Caucasus pulp mill was down for maintenance and for extended production curtailment. And the impact of this was approximately 30 million euros on the quarter. This means that at cycle low pulp prices and peak level of wood costs, UPM Fibers North was slightly negative in EBIT and positive in EBITDA, excluding the Caucus shutdown. Communication papers deliveries were stable from the second quarter, but 13% lower than last year in the third quarter. The average paper price in euros decreased by 1% compared to the second quarter and 6% year on year. Fixed costs decreased in communication papers. EBIT decreased from last year, but improved slightly from the second quarter sequentially. Adhesive materials and specialty papers achieved increased deliveries and lower costs compared to last year. Both increased their EBIT year on year and showed resilient performance from the previous quarter. Plywood reported solid results with normal production now and increased deliveries. Energy had a good quarter, benefiting from increased electricity market prices and from successful production optimization in the volatile electricity market. Our average sales price for electricity increased 17 percent from last year or 12 percent from the second quarter. And on this page, then, you see our EBIT development by earnings driver. And as you can see here, the main headwind in the third quarter were the sales prices. On the left-hand side, lower sales prices impacted the third quarter results by about 190 million compared with last year. Sales prices decreased most notably in fibres and communication papers. Lower variable costs had a significantly smaller positive impact. Changes in delivery volumes were neutral on group level, while deliveries increased for pulp adhesive materials, specialty papers, plywood and biofuels, there was a decrease in deliveries in communication papers. Fixed cost increased, mainly due to the maintenance shutdown at the Kaukas mill. On the right-hand side, sales prices had a negative impact, also compared with the second quarter, mainly due to the low pulp prices. Variable costs decreased for most categories compared to the second quarter, but wood costs still increased, however, following the earlier wood market price development with the usual lag. Fixed costs decreased from the second quarter due to lower maintenance activity and also due to seasonal factors. Then our operating cash flow was 218 million euros in the third quarter, and our net debt decreased by 92 million euros from the second quarter. and was 3.218 billion euros in total at the end of the quarter. Net debt to EBITDA ratio was 2.36 times. While we see our financial standing as solid, this is somewhat above our policy limit of two times net debt to EBITDA. And therefore, obviously, we aim to bring the net debt to EBITDA back to below two times level in a timely manner. Massimo will shortly discuss the various actions we are taking to improve our profitability. In addition, we are pursuing working capital release and improving our cash conversion, working capital efficiencies to support our cash flow. Our outlook is unchanged from the previous quarter. We expect our second half 2025 comparable EBIT to land in the range of 425 to 650 million euros. Our fourth quarter performance is supported by the timing of the annual energy refunds in communication papers. the amount of refunds is likely to be similar or slightly smaller than last year. It is also likely that there would be a forced fair value increase in the fourth quarter, which could be of a similar magnitude or smaller than what we had last year. Fiber's performance in the short term continues to be impacted by pulp prices. In the fourth quarter, we have actually already completed, in the month of October, the planned maintenance shutdown at our Fibentos mill in Uruguay, which will have an impact on the quarter result of similar magnitude or scale as was the case in Kaukas, about 30 million euros. In advanced materials, businesses and energy, we expect resilient performance to continue. And now I'll hand back over to Massimo for some comments on our actions and direction from here.

Good. Thank you, Tapio. Well, we continue to take decisive actions to improve our competitiveness and performance, as I said earlier. Most of our businesses have a significant organic growth potential that can be captured with targeted, limited, and capex-efficient investments. That's what we will be looking into. But finally, or in parallel, we continue to develop a portfolio of world-class businesses. Let me illustrate now the most characterizing initiatives we are implementing segment by segment. And let's start with the communication paper. In this business, efficient capacity utilization is critical. And in a weaker market, we plan to close down the paper production at the Kaukas Mill in Finland and at the Ettringen Mill in Germany by the end of the year. Together, these two closures will reduce our paper capacity by 570,000 tonnes, or 13% of our current capacity. This initiative will lead to a combined reduction in annual fixed costs of €70 million. With these measures, we will maintain our competitiveness and future performance. In October, we also sold the earlier closed down plattling paper mill site in Germany. And this will contribute to communication paper cash flow in quarter four. Let's move to UPM Fibers now. Tapio has anticipated it, but given the significance of the UPM fibers business and the distinct characteristic of the business in Finland and in Uruguay, we have decided to provide some additional transparency here. So we introduce today the notion of Fibers South to refer to our fibers platform in South America and Fibers North to refer to the fibers platform in the Nordics. As a first step, today we indicated the EBIT level for the two parts. Next, we will start providing additional financial information for the two parts on a regular basis, starting in quarter one next year. But meanwhile, when it comes to Fiber South, 2025 is the first full year of production at nominal capacity for the Paso de los Toros pulp mill, and also the first full year of operating at full capacity for the supporting logistic network. The pulp prices are very low. as Tapio mentioned earlier. But despite that, Fibre South reported an EBIT of €80 million during the quarter and a margin of 22%, which is indicative of the competitiveness of this platform, despite the weak market conditions. From here on, improvements will continue. By 2027, The expanded plantation areas we have in Uruguay will increasingly reach our vasting maturity, enabling us to optimize the wood sourcing and the inbound logistics. Further, self-sufficiency will increase and inbound transportation distance will decrease, therefore reducing costs. To give it a scale, in the beginning of this year, 2025, we envisioned a cost reduction of some $25 to $30 per ton compared to 2024 in Uruguay. We are well on track to achieve this this year, but we believe that thanks to these farther and ongoing optimizations, we will be able to provide roughly a similar improvement by 2027. Of course, all the rest remaining equal. Beside that, we will continue to pursue growth in a CAPEX-efficient way to further the bottlenecking. When it comes to the other platform and in Finland, Fibers North was in a slightly negative EBIT territory in quarter three, excluding the Caucasus shutdown. Wood cost reached their highest level in the summer before starting to decrease. Pulpwood market prices on average decreased some 5% in quarter three compared to quarter two. In this situation, we took measures to adjust the finished pulp operations to the market situation. We took two months of downtime at the Caucus mill during quarter three. And we will take two weeks of downtime at the Pietarsari mill in quarter four. These measures will allow us to optimize our wood sourcing and avoid the most expensive wood. The benefits of these actions will be fully visible in the P&L when the purchased wood volumes will be consumed, which means during quarter four or the early part of next year. Another significant action we implemented in this space is the long-term strategic partnership we agreed with Versawood and that we announced in September. Versawood is the largest private producer and processor of sown timber in Finland. The deal is beneficial for both parties. For us, it will strengthen the supply of pulpwood and chips and improve the cost efficiency of our wood sourcing. Moving to another segment, in advanced materials, as we have characterized it before, our performance has been resilient. During 2025, adhesive materials has reduced fixed costs and streamlined its product portfolio significantly. Earlier, we announced the closure of the Kaltenkirchen factory in Germany and the relocation of the production to lower-cost locations. In Q3, we announced plans to discontinue the production in Nancy, in France, in order to increase further production efficiencies and competitiveness. At the same time, and in line with the strategy communicated earlier on, the business continues to seek focused growth in higher margin and higher growth areas. In this direction go the investments announced in the US, in Malaysia, and in Vietnam. In parallel, the business continues to build its positions on the graphic space following the recent acquisitions. When it comes to specialty papers, there too efficiency measures have been implemented aimed to reducing cost in China and protecting the competitiveness in that area. From a commercial standpoint, the business continued to develop solutions being paper-based and alternative to plastics for the growing segment of flexible packaging and users. And in plywood, we initiated a strategic review to assess options for maximizing the long-term potential of the business. The review includes a range of alternative possible outcomes, including potential separation from UPM through a divestment, a partial demerger, or an initial public offering. The aim is to determine the best path forward for the business and for the value creation for UPM shareholders. But let me spend a couple of minutes to tell you a bit more about this business. First of all, plywood is a very good business. It has a strong market position in the mid to high-end market segments where it operates in Europe. And in the liquid natural gas segment, it holds a market-leading position globally. The business success is built on a number of specific strengths. A competitive premium offering generated through or from four spruce mills and three birch mills. The top tier quality of the products manufactured there. A strong and reliable customer base. a strong brand, Visa, extensively recognized in the industry, and unmatched service capabilities thanks to six warehouse hubs and some more. Thanks to that, the plywood business has successfully provided good profitability and cash flow in all the different economic cycles of the past. On the other hand, and despite all of this, and despite the fact the UPM plywood business is the scale of a mid-sized company in Finland, it is the smallest of the UPM businesses. And as such, it competes for focus and resources with much larger businesses. For these reasons, we want to assess whether on a different setup, acting on a standalone base or being part of another entity will enable even better results. Therefore, this is the rationale for the strategic review, and this review is expected to be conducted or concluded by the end of 2026. Finally, we come to the decarbonization solutions. And here we have unique solutions all offering our customers ways to decarbonize their businesses. In energy, we have 12 terawatt hours of CO2-free electricity, which makes us the second biggest producer in Finland, consisting of reliable base load of nuclear power and flexible supply of hydropower. This mix allows us to maximize the value on a highly volatile, weather-dependent electricity market. On the other dimension of growth there, we have the capability to supply CO2 free electricity to a market where the demand is growing due to the electrification of the industrial production, heating moving away from biomass use, and numerous data center related project and road transportation. In biofuels, Our short-term focus has been on improving performance and getting it back to profit after a challenging 2024. Here we have made good progresses. this year. In terms of growth, we're planning capex-efficient de-bottlenecking at the Laperanta Refinery. Simultaneously, we are proceeding with the qualification of process, sorry, with the qualification of sustainable aviation fuels. Last but not least, the startup of our groundbreaking biochemical refinery in Leuna, in Germany, is proceeding. In the first of its three core processes, we have successfully achieved stability after having started production during the summer, and the production levels are now on an industrial scale. The sale of the first commercial products, which are industrial sugars and lignin-based products, are expected to start during quarter four, followed by glycol sales in the first half of 2026. In line with earlier indications, food productions and positive EBIT is expected during 2027. So, and to sum up, The market environment during the third quarter has proved to be challenging. But in this environment, our differentiated business portfolio has ensured resilient performance. Our advanced materials and decarbonization solutions improved their performance compared to one year before. Fibers and communication papers were impacted by the unusual volatility in their business environment. Most of the business have a growth profile and significant growth potential that can be captured with targeted investment and limited extra capex needs. This includes but does not limit to the entering the new promising biochemicals business. So while we work to capture this potential, we continue to work on actions to improve profitability, cash flow, and the strength of our balance sheet. This ends the prepared part of the presentation and we are ready for your questions.