Upm Kymmene Corp

Hi, everyone. Welcome to UPM Quarter 2, 2026 Results Webcast. I'm Massimo Reynaudo. I'm the CEO of UPM. Here with me is Tapio Corpeinen, the CFO. Well, in the second quarter this year, we reached two important milestones in our transformation. First, we sign the definitive agreement with SAPI to create the graphic paper joint venture and we secure financing for it. Second, we advance the separation of the plywood business into the future visa group. Following these steps, UPM is becoming an increasingly focused advanced materials and decarbonization solution company with stronger growth prospects and improved earnings quality. Next, looking at the quarter to business performance, all our businesses improved their results from last year. Most also outperformed the previous quarter. Increased volumes, disciplined margin management, and continued efficiency improvements supported our profitability in a business environment that turned inflationary. Our quarter to sales grew slightly, and our comparable EBIT from continuing operations increased 71% year-on-year, reaching $212 million, or 9% of sales. I am here referring to continued operations because the UPM plywood business is now presented as discontinued operations in our reporting. Including plywood, UPM's total EBIT was 230 million euros. Now, let's take a look at the businesses in some more detail. And let's start with decarbonization solutions with another stronger quarter for this segment. If we start with energy, the business improved its results from last year. You may recall that commenting the strong quarter one performance back in April, we talked about seasonal and structural factors. When it comes to the seasonal factors, quarter two followed the normal seasonality, which means lower electricity consumption compared to quarter one, which is the winter period. However, on the other side, here comes the structural element. The electricity consumption beyond seasonality in Finland keeps on growing. It has grown by 5% over the last 12 months. This is a structural growth element which is expected to continue in the coming months and years driven by the electrification of the economy, The installation of new data centers, which is now happening at scale, and the installation of green industries, which represent more of a future prospect at this point in time. Beyond the quarterly dynamics, the effect of this structural increase is well visible in the performance in the first half of 2026, being well above the performance of the corresponding period last year. In a market where demand is expected to grow faster than production, we are in a unique position to generate value. The new large-scale consumers need free things to happen at pace. Locations where to install data centers or other industrial projects, grid connections to feed them with energy, and reliable baseload CO2-free energy. When it comes to the locations and grid connections, we have prepared a portfolio of suitable industrial sites with existing or close-by connections. This is important as site readiness speeds up permitting and construction. As for energy supply, well, we can offer 12 TWh of clean baseload power through PPAs. If market conditions made it relevant and financially attractive, we could also add additional renewable power, as we have developed a pipeline of potential wind and solar power for an extra generation up to 1 gigawatt, ready to be built earliest 2027. Now, if we look at the next generation renewables, we have there two businesses, and when it comes to biofuels, the business recorded strong results that we are making visible in the slide here in this mid-year update. The results were supported by good demand and healthy biopremiums for advanced renewable fuels. Sales prices were further supported by higher fossil fuel reference prices during the disruptions in the Middle East crisis. The business achieved an EBIT margin of 35% in this first half of 2026. On the biochemical side, the ramp-up of our biorefinery in Leuna in Germany continues. Customer deliveries of industrial sugars reached substantial volumes and deliveries of renewable functional fillers and other lignin derivatives are expected to start during quarter three. With these things progressing, we have now locked the date for the official site inauguration, which is October 15, and we will be happy to invite you to visit the site, but we'll communicate more about this later on. Let's move now to advanced materials. In this segment, both the adhesive material and specialty material businesses achieved robust mid-single-digit sales growth and double-digit EBIT margins in Q2. The underlying markets continue to grow in Europe and in Asia with some further support from stock buying during the uncertainty triggered by the Middle East conflict. On the other hand, the North American market remained rather soft. This performance has been supported by strong commercial focus, development in higher margin categories or higher growth geographies, and continued actions to sharpen competitiveness. More in detail, Adhesive Materials has been and is investing to accelerate its growth in the U.S. and build stronger positions in higher growth regions in Asia. Specialty materials? Well, their main focus at the moment is on barrier papers, which is a high-growth segment in the market. It is about papers with barrier treatments that enable the replacement of plastic or multi-layer product in consumer applications like, for example, food or pharma. Let's turn the page and moving on to fibres. Well, if we start with Fibre South, or our world-class pulp platform in Uruguay, it has continued to improve its efficiency and performance for several quarters in a row now. In quarter two, this helped to offset the increases in logistic and other costs and expand profits and margins. The profitability was also supported by a moderate increase in hardwood pulp prices. During the quarter, Fiber South reported a comparable EBIT of 101 million euros, or 24% of sales. On the other hand, the Fiber North platform in Finland, well, for it, the business environment remained challenging. Even though pulpwood prices have decreased, profitability remains low. Fibers North reported a comparable EBIT loss of 10 million euros in the quarter. Performance being impacted also by the maintenance shutdown in the Pietarsari mill. In the current challenging market conditions, in order to protect the profitability of the business, we're planning temporary shutdowns at the Caucus Mill and potentially at the Pietra Sari Mill, so to optimize production and wood sourcing. Next, talking about communication paper, well, the business delivered relatively solid results during the quarter. As everybody knows, the business is characterized or this market is characterized by a structural demand decline. However, during the first part of the year, the decline has been moderate compared to previous periods. We are talking about a minus 3% in Europe year on year and about a flat in the U.S. in the categories relevant to us. In an inflationary environment, the business focused on disciplined margin protection and the quarter ended with a comparable EBIT of 32 million euros or 5% of sales. Blywood continued to perform well and its results improved from last year, proving the solidity of the strategy and the effectiveness of its execution. The comparable EBIT during the quarter was 16 million euros or a 14% margin, 13% of sales. Due to the demerger process, this is not part of continuing operations reported today. Talking specifically about this business, about the plywood business, three months ago we announced the demerger plan to separate UPM Plywood into a new independent listed company named Visa Group. The plan is to lease the new company on the Nasdaq Helsinki in early November. During the quarter we have made progress with the plan and now the demerger and listing prospectus is available on our website for consultation. In this slide you can see the financial targets of Visa Group. These targets underline the ambition of the new company to grow between now and 2030, supported by the proved ability to deliver robust and resilient profits, Together with the ambition to maintain a strong financial discipline and the confidence to be able to pay good dividends. The extraordinary general meeting to decide on the demerger plan will be held on August 31st. We believe this operation will create a long-term value for the UPM shareholders. As an independent company on one side, Visa Group will be able to pursue its own strategic priorities and growth opportunities with increased focus and the required agility. At the same time, this simplifies the UPM business portfolio and increases its focus on growing segments. But when it comes to the other significant transformational initiatives about communication papers, well, preparations continue at full speed for the planned graphic paper joint venture there. In quarter two, as said earlier, we made another significant step ahead as we signed the definitive agreement for the joint venture with SAPI and we secured financing for the new graphic paper company. As a reminder, we are planning an independent graphic paper company out of 50-50 between UPM and SAPI. which would include all of UPM communication paper business and SAPIS graphic paper business in Europe. The transaction would create a more efficient, adaptable and sustainable graphic paper business. It would create a structurally competitive cost base and supply security for European and global customers. For UPM, the transaction would have a positive impact on profit margins and the balance sheet. UPM would no longer have direct sales exposure to the declining graphic paper markets in Europe or in North America. The transaction, as a reminder, is subject to merger control approval by the European Commission and authorities in other jurisdictions. The work in this area continues to, and we expect the final resolutions by the end of this year. Now, if we broaden the focus beyond quarter two and to where we are going as a company, with these portfolio changes implemented, we also change the profile of the company, increasing its growth potential and margins. As already illustrated in other occasions, and it is visible in the charts on the right, the growth on this new perimeter is not just a future ambition. The business that will belong to the new UPM has shown a strong track record of realized growth above GDP during the last years already. We aim to accelerate. Thank you very much. In this visual you have on the slide, you can see the profit generation between decarbonization solutions, advanced materials, and renewable fibers. The base year is the first semester of 2026, and you can see that it is already quite balanced. Now, in it, If we look specifically to the decarbonization solution segment, the profit generation represented here is impacted by the negative contribution of the ramp up of biochemicals. So this means, in reverse, that as soon as that negative will turn into a positive, the share of decarbonization solutions generated profits will be even larger. And so it will be the ones of advanced materials because of the continued growth in this segment. In other terms, if we project this view in the future, we will have a portfolio made of decarbonization solutions, energy, biofuels, biochemicals, with significant growth potential. Advanced materials, which is adhesive and specialty materials, with good growth, good margins, and low capex needs. and Renewable Fibers that is one of the most efficient cash engines in the whole industry already today. Growing each of these three parts with their different profiles and potentials will ensure good returns and balanced performance across all economic cycles. But now I'll pose and hand it over to Tapio for more comments on the results.

Thank you, Massimo. And here before going into the numbers, I'd like to come back to the point that Due to the demerger plan in this second quarter report, UPM plywood is presented as discontinued operations. So in other words, this means that the continued operations of UPM here are presented as if plywood was already separated from UPM. This also means that the Discontinued operations that is presented here it is sort of the residual of that sort of calculation of what UPM would look like without plywood. This means that there are some notable differences if you look at then the reported figures for plywood as a segment for instance the sales line is significantly less for the discontinued operations here as compared to the reported sales line for plywood as a segment. So the point here is that the first of all financial information here presented as Discontinued Operations is not a representative presentation of the historical or future profitability of UPM Plywood as a standalone business. For information related to Visa Group where we have The demerger plan and a prospectus approved in public domain. So for that information, I would say please look at the figures in the prospectus. Then the other point which Massimo has referred to as well here already is that most commentary that we are now giving here is regarding UPM's continued operations, meaning plywood not included. That also then is the case for Our guidance for the second half so for the first half we had the guidance 325 to 525 and we landed to the upper end of that range at 504 that was given for UPM as a whole and now for the second half of the year as said This is given for continuing operation without plywood. So when you are sort of comparing to your own earlier estimates or guidance or sort of expectations earlier in the consensus estimates for the quarter and therefore second half, please take that into account. But then if we Let's go into the figures. So as Massimo already mentioned, our sales from continuing operations then grew slightly to 2.355 billion and the comparable EBIT increased by 71% to 212 million euros. EBIT margin increased from 5.3% to 9%. Then here on the left hand side you can see the second quarter EBIT compared to the last year's second quarter year on year. And here you can see that variable costs have decreased in most businesses compared to the second quarter last year. Impact of sales prices on the group level were neutral. Prices increased in energy and biofuels. In other businesses there was slight decline on this year-on-year comparison. Delivery volumes increased and fixed costs down by 23 million euros. Exchange rate changes were slightly negative in terms of impact to the EBIT. And then finally the fair value change of forest assets was negative 24 million in the second quarter, 26, which is a 30 million negative difference compared to last year. And then on the right hand side, the comparison to first quarter this year sequentially. And you can see that the variable costs started to increase. So we saw some turn to inflationary environment on the cost side. Wood costs were still coming down, but many other costs increased, for example, logistics costs. We were also able to increase prices in most businesses, however. Delivery volumes were slightly lower than in the first quarter and fixed cost increased by 46 million. This is partly seasonal by nature, but then also impacted by the higher maintenance activity in the quarter. We had the Pietarsaari maintenance shutdown, for instance, in this quarter. In Q2 we also had the Olkiloto 1 and 2 nuclear power plant units in the annual maintenance shutdown. And the overall maintenance impact of this on EBIT was in round figures 55 million euros. Finally, the fair value change of forest assets, again, minus 24 million in the second quarter. That is a 28 million negative difference to the first quarter. And then this slide shows you our cash flow in the first half of the year. And many... and many differences there that are sort of circled in this slide. First of all, temporarily impacted by increase in working capital, also by cash payments or the cash effect of restructurings made last year where the provision was made last year in the P&L, and then items affecting comparability, such as this one-off type effects or items related to the transformational projects. So starting from the working capital and looking at this first half figures, we tied up 339 million of working capital In the first half, partly seasonal like we have discussed earlier, but also the basic point is that as our activity increased, our sales was up by 7% or 335 million euros in the first half of this year sequentially compared to the second half of last year. This obviously then had an impact on particularly receivables inventories as well. This means, looking at it the other way around, that we have been able to improve and maintain our working capital efficiency. Obviously, our working to continue get more efficient on working capital, but again, the sort of working capital turns did not change as we had this increase in the top line. But The target is to release cash from working capital during the second half of the year. But then, as mentioned last year, we made significant restructuring actions, particularly in communication papers, but other parts of UPM as well. Restructuring costs were booked as provisions. In last year's result and now then you see the cash impact on this utilized provisions line. And then we also had as said several one-off type costs related to the portfolio transformational projects that we have ongoing and these impacts obviously also one of type temporary items. On the positive side, EBITDA has increased by 93 million compared to last year or by 14 percent. Investing cash outflow 191 million smaller than last year as expected and indicated as we have discussed this capex profile before and you may remember that our guidance for the full year 2026 capex is around 300 million euros. So then how this shows up in our balance sheet as a result of temporary cash flow, but then also including the first payment, first installment of the dividend, 396 million paid out during the quarter, the net debt increased in the second quarter. but we do expect then to work our way down in terms of the net debt during the second half of the year. Then here we have the outlook and profit guidance for the second half of the year. As mentioned earlier, once again the profit guidance is given for the continuing operations excluding plywood. On that basis, we expect our comparable EBIT in the second half to be in the range of 375 million to 575 million euros. On the same basis, the comparison figures In the first half of 2026 were 471 million euros and 479 million euros in the second half of 2022. Now, in the second half of this year compared to the first half of 2026 sequentially, we expect moderately higher sales prices and moderately higher variable costs as well. As usual, communication papers will book the energy refunds in the fourth quarter Also in the second half we will have more maintenance activity. Olkiloto 3 maintenance shutdown and Paso de los Toros maintenance shutdowns are both now in the second half of the year both facilities on a 18-month cycle and this sequential impact compared to the first half of this year coming from the maintenance higher maintenance is around 40 million euros. And then as activity increases further in Loina, we expect to incur somewhat more operating expenses ahead of the sales ramp up, so some headwind on the EBIT there. In the second half of 2026 compared to last year, 2025 second half, we expect higher sales prices and moderately higher variable cost. Then our last year comparable EBIT in the second half included 131 million euro of forest value gains and this year we expect an evaluation impacts to be significantly smaller We know the trajectory of wood cost now is different in Finland and has been during the past nine months than what we saw during last year. Also, we have seen some increase in discount rates, so therefore One can say that the difference in the impact of the forest value change can be up to a three-digit figure. Also in the comparison to the second half of 2025, maintenance activity is expected to increase and that is actually similar around 40 million difference in comparison in maintenance impact to last year's numbers. Energy refunds booked in communication papers in the fourth quarter are expected to be somewhat smaller than last year. around 40 million less impact than last year and then finally in Loina we expect costs to increase year on year as activity is higher. So that is about the outlook and now I'll hand it over back to Massimo for some summary notes.

Thank you Tapio and right in the spirit of a summary I just want to recap The key elements covered during this call. We had a positive quarter two with improved results in all businesses and significant progresses in our transformational projects. From an operational standpoint, going ahead, our focus will remain on fostering performance, margin protection, and as Tapio has underlined, cash flow. From a strategic standpoint, the focus will be on progressing on our transformative initiatives. If so approved by the EGM in August, at our next quarterly call, we will be a few days away from the listing of Visa Group, which is planned for the beginning of November. And that will complete the strategic review we have initiated about one year ago. At the same time, we will be closer to the end of the year. That is where we expect the completion of the merger control activities related to the joint venture with SAPI. In other terms, we are getting closer to the point in time where the new UPM I described earlier will become a full reality. But we will have some more time to talk about these later. For the moment, this concludes the presentation, and let's open up to questions.