Upm Kymmene Corp Unsp/Adr

Hello, everyone. Welcome to UPM Quarter 3, 2026 results webcast. I'm Massimo Reynaudo, CEO of UPM. Here with me is Tapio Korpeinen, our CFO. After a strong first half, Quarter 3 turned out to be softer. High energy and fuel costs led and contributed to increased variable costs. Combined with that, Persistent global uncertainty pushed customers to be more cautious and that determined a visible destocking in a number of market segments. On the other hand, a clear highlight for the quarter has been the strong cash flow supported by improved working capital efficiency. Meanwhile, we continued our transformative projects aimed to shape the new UPM built around businesses with strong positions in structurally growing markets. Our quarter free sales totaled about 2.2 billion, 2.202 to be precise, or 1% below last year. The comparable EBIT decreased by 8% to 131 million euros, or 5.9% of sales. The actions implemented to improve the working capital efficiency resulted in a strong operating cash flow of €420 million in the quarter. As a consequence, the net debt decreased. When we enlarged the view to the first nine months of the year, the comparable EBIT grew by 10% to 601 million euros or 8.9% of sales. I'll turn now to Tapio for some further analysis on the results.

Thank you, Massimo. So once again here on the left hand side you can see our third quarter EBIT development from last year. And there first you can see that over the past year prices At the group level have increased more than variable costs. Also you can see that despite low volumes in the third quarter both deliveries and fixed costs were minor positive earnings drivers in this comparison. Last year fair value increase In forest assets supported our result whereas this year the forest asset values decreased so that explains in round figures about 40 million of that difference. On the right hand side you can see the same chart but third quarter compared to the second quarter sequentially this year. So there you can see two significant headwinds. First, variable costs increased significantly and then also delivery volumes were clearly lower. Sales prices increased in most businesses but decreased in fibers and energy. At the group level, Sales price increases covered only part of the variable cost increase. This was particularly true for communication papers. Fixed cost decreased, partly for seasonal reasons, but then also partly due to lower maintenance activity. And here you can see that operating cash flow was strong in the third quarter at 400 The chart shows the nine months cash flow and their EBITDA is 119 million higher than last year for the same period of time. Operating cash flow was impacted by payments for last year's restructurings and also costs related to the transformative projects. Working capital for the first three quarters tied 63 million euros, but in the third quarter we had a significant release from working capital in terms of cash, and we aim to release further cash in the fourth quarter. This is what is the typical seasonal pattern, but then also this year Includes underlying actions to improve working capital efficiency. And as you can see on the right-hand side in the chart, typically, then towards the end of the year, we release cash from working capital. Then here, net debt decreased by 320 million in the third quarter compared to the end of the second quarter. Net debt to EBITDA was 2.09 times at the end of the quarter, and strengthening cash flow and maintaining a strong balance sheet Clear priorities for us. Our aim is to get down to below our two times net debt to EBITDA policy target. We have maintained our second half EBIT guidance unchanged. While there continues to be uncertainty in the operating environment, it's also important to note that there are also positive factors that underpin our performance. Demand continues to be strong in decarbonization solutions businesses, and we are seasonally entering a stronger period in the energy business and in fibers as well. In advanced materials businesses, unit margins are healthy. T-stocking is still going on in some of the markets, but in nature is temporary. And then finally, following the increase in variable costs, we will continue with actions to manage our margins across our businesses. Nevertheless, due to the realized low volumes and increased variable costs during the third quarter, the upper end of the guidance range at the moment looks less likely. And then in the interim report now, we have also outlined the timing of maintenance shutdowns for 2027 already for your modeling purposes. And you will note that there will be no shutdowns next year at the two biggest units, which are now on an 18-month cycle. That means Paso de los Toros pulp mill and Olkiloto III nuclear power plant. So no shutdowns next year in 2027. Then on the other hand, there will be a turnaround shutdown at the Lappeenranta refinery and this By this we mean a shutdown that is done every four years. And now back to Massimo.

Thank you, Tapio. Let me give you some more detail, business area by business area. If we start with decarbonization solutions, well, markets, Tapio said it before, continued to be strong in the quarter. In energy specifically, the performance was in line with the low seasonality of quarter three. But meanwhile, the electricity consumption in Finland continues to grow. I'm going to be talking a bit more and specifically about energy and the situation in Finland soon. But then on the other hand, on biofuels, our refinery Lappeenranta undergo the planned maintenance shutdown during the summer. moderating our quarter-free performance. But the demand for renewable fuels was good, and the biopremiums are at a healthy level. In biochemicals, the interest for our products stays strong, and the LOINA ramp-up continued. But here, let me spend a couple of minutes to tell you some more about our operational ramp-up in LOINA. In this slide here, it's a bit busy, but in this slide here we are providing a visual description of the various processes happening in the refinery. Basically, or simplistically, two of the three core processes are producing commercial volumes already. When it comes to the first process specifically, the one you see in the middle, that is where wood is transformed either in lignin or sugars. Well, that process was started up in the quarter four of last year, in 2025. And it has been ramped up during this year and commercial deliveries of industrial sugars have reached substantial volumes already. This represents a major milestone as nobody until now has achieved a success in this process and definitely in this scale before. The production of lignin-derived specialty chemicals has also reached stable operations and we are ramping up sales into attractive growth segments such as batteries and construction materials. This is for the first process. When it comes to the second process, you see here on the slide, in the bottom part of the slide, we have reached technical readiness to produce renewable functional fillers. The production is ramping up now, during this quarter. We will immediately start qualifying the final products at the customers and subsequently start the cells. And these cells will go in areas like tires, mechanical rubber, rubber goods, or plastics. And then it comes the third process. It's in this slide, the upper part of the slide. That is the so-called sugar to glycols process. This process was expected to start production by the end of this year. During the commissioning of this last process, we have identified small technological challenges that require some modifications. We expect these modifications to be completed by Quarter 1, 2027 and the refinery to start integrated production in Quarter 2, 2027. This means approximately six months later than we earlier anticipated. As already discussed, the final process, the conversion, yeah, sorry, yeah, this has been covered. We expect the production will reach the nominal capacity as a consequence of this in the early part of 2028. And this is the prerequisite for EBIT positive operations. The EBIT impact for the full year 2027 is expected therefore to be broadly on a similar level as it was or as it is in 2026. The commercial interest, on the other hand, in the main products and the side stream is strong. The confirmed customer contracts and the sales and customer qualification pipeline Exceed multiple times the annual capacity of the refinery. During the project, we have been also able to widen the portfolio of high-value products and materials, opening up additional market opportunities. This includes, for example, lignin-derived specialty chemicals and additional grades in the renewable functional fillers category. We have also continued strengthening our IPR portfolio, which is going to be a critical element for the future. In other terms, the biochemical business case is intact. Let me turn now to energy. As we have discussed in earlier earning calls, Finland is a very attractive location for data centers. During quarter three, several new data center projects have been announced and this is a significant or has a significant impact on the electricity market outlook. We are an active player in this market and we are having discussions with various counterparties now because we have three things which are in high demand. We have electricity. As the second largest provider in Finland, we have annually about 12 TWh of reliable, CO2-free electricity production. We are able and willing to offer long-term PPAs. And in addition, we can offer trading and balancing services for large electricity consumers, such as data centers. This is the first point. We have powered land. This is the second thing. This means the reduced time to market to hyperscalers or developers that want to build data centers capacity quickly. We are also the second largest landowner in Finland with extensive industrial presence and expertise in permitting in the country. Here we can offer about one gigawatt worth of powered land in a relatively short period, less than two years. And we have the possibility to add another three gigawatt in the next three years. And then comes the third element. We can add the generation. Data centers often want or are required to bring additional energy generation. We can help with this as well. We have a wind, solar and battery development portfolio in the scale of about one gigawatt, ready to build in a relatively short time. In summary, we're well positioned to take the advantages of the data center development in Finland. Let's turn now to advanced materials. In this segment, we have observed a heavy destocking in quarter three, and particularly in Europe. In the adhesive material business, the shipments, to give you a scale, the shipment of label materials in Europe has decreased 20% compared to quarter two. or 5% year-on-year. And this is typically a segment where demand grows at GDP level. So a significant and evident stocking has taken place during the quarter. Now, despite the sharp decline in demand, our business delivered a performance about in line with the same period last year. Our specialty material business as seen as similar dynamics. But now, despite the stocking and despite the increasing variable cost, both businesses have kept their market positions and healthy unit margins. And this is important because this will ensure that when volumes will normalize, performance will directly benefit from it. but also and specifically talking about adhesive materials. Today we have announced the decision to open up a new factory in India. This investment continues our expansion in the region following the announcement we made in March of the opening of a new terminal in New Delhi. And just for the memory, We have already a terminal operating in Mumbai. This investment is in line with the strategic objective of the adhesive material area to accelerate growth by expanding in high margin areas or like in this case, high growing regions such India is. Let's go next to our fibers business. In Fibres, the performance improved both in Q2 and from Q4 last year. When it comes to Fibres South, well, the platform continued to deliver strong profitability and margins, and this is despite low prices touched during the quarter. Cost inflation in logistics and chemicals has been mostly offset by continued cost improvements. This all proves the competitiveness of the platform. Fibres North returned to positive EBIT during Q3, after the performance in Q2 was impacted by maintenance activities. In both platforms, our delivery volumes were relatively low during Q3. In the case of Fibre North, We have implemented eight weeks of production curtailment in the Kaukas mill to optimize wood sourcing and to protect the profitability. And we will have another five weeks in Pietersar in quarter four. In Fiber South, our eucalyptus pulping ventures were low and they required some replenishment ahead of the Passo de los Toros A maintenance shutdown which is ongoing right now. And then next, next to communication paper. Communication paper has had a really challenging quarter and reported an EBIT loss of 8 million in quarter three. The market demand in Europe weakened further compared to the previous quarters and declining 7% year-on-year compared to Q3 last year. Energy-related input costs increased sharply during the quarter. Average paper prices increased as well, but the speed and the scale of the cost increases combined with Overcapacity in the industry limited the ability to pass through the full cost increase during the quarter. It has to be considered also that we, talking about the overcapacity, we estimate it being roughly 30%. Further, and to make the situation more challenging, There have been no meaningful capacity closures in Europe in 2026. And basically, these market realities reaffirm, if there was still a need, the need to strengthen the competitiveness. And we see the planned joint venture with SAPI as an effective way to achieve this objective while, on the other hand, ensuring Thank you very much. The European Commission restated its serious concerns about the joint venture. We believe in the strength of our arguments and we have been addressing the concerns raised. At the same time, we have opened discussions on potential remedies. The European Commission's final decision is expected by the end of the year or shortly thereafter. and the next is still another ongoing strategic portfolio initiative is relative to the UPM plywood business. It's a separation is in fact a few days away from completion and it will result in the establishment of Visa Group as an independent listed company. Visa Group had its first Capital Market Day in September. And there they had the possibility to highlight our own strengths. And just some of them are the fact of being a leader or a leading plywood player in premium categories. To have an experienced leadership team, a resilient track record across all business cycles, and the ability to pursue strategic growth opportunities. The trading of Visa Group will start on the Nasdaq Helsinki on November the 2nd and the UPM shareholders will receive one Visa share for each UPM share they own. No action is therefore required by them. Now, and concluding, going into quarter four, we remain focused on protecting margins, improving cash flow, and maintaining disciplined capital allocation. We continue to execute our transformation toward a new UPM, focused on a reduced portfolio of businesses with a stronger growth potential and higher value creation opportunities. And with this I conclude or this concludes the prepared part of our presentation and you are ready for questions.