UPM-Kymmene Corporation Annual General Meeting Report of the President and CEO. Jussi Pesonen March 22, 2006

Transcription

1 UPM-Kymmene Corporation Annual General Meeting Report of the President and CEO Jussi Pesonen March 22, 2006

2 CONTENTS Financial year 2005 Business Drivers 2005 Financials 2005 Summary New business environment and UPM New business environment description UPM actions to improve profitability Summary UPM in Finland UPM 2

3 BUSINESS DRIVERS 2005

4 BUSINESS DRIVERS 2005 In Europe demand for printing papers remained stable '000 tons '05 vs. ' Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Growth % Source: Cepiprint/fine UPM 4

5 BUSINESS DRIVERS 2005 In USA the demand of printing papers decreased '000 tons '05 vs. ' Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Growth Source: Cepiprint, PPPC UPM 5

6 BUSINESS DRIVERS 2005 Paper prices in Europe remained mainly unchanged EUR/ton News 45 g/m² SC rg 56 g/m² LWC off 60 g/m² WFCr 100 g/m² WFUr 80 g/m² Source: PPI UPM 6

7 BUSINESS DRIVERS 2005 In USA paper prices increased USD/ton News 48,8 g/m² SC 51,8 g/m² LWC 59,2 g/m² WFCr 88,8 g/m² WFUr off 74 g/m² Source: RISI UPM 7

8 BUSINESS DRIVERS 2005 Raw material market prices increased significantly Index 2004=100 Electricity (EEX) 190 Coating materials Chemical pulp 160 Electricity(Nordpool) Bleaching chemicals UPM Cost / delivered ton (rolling 12 months) 70 Q1/04 Q2/04 Q3/04 Q4/04 Q1/05 Q2/05 Q3/05 Q4/05 UPM 8

9 FINANCIALS 2005

10 FINANCIALS 2005 Key Figures 2005 vs Sales, M Operating profit, M Non-recurring items Operating profit excl. non-recurring items, M EPS excluding non-recurring items, Cash generated from operating activities, M CEPS, Change 9,348 9, Paper deliveries, 1000 tons 10,172 10, UPM 10

11 FINANCIALS 2005 Non-recurring items 2005 Operating Profit Financial Items Income taxes Gains on sale of assets Asset impairments and write offs -194 Restructuring and other costs -24 Antitrust fine -57 Valuation of associated companies' assets 9 Deferred income taxes 42 Total Non-recurring items total -100 UPM 11

12 FINANCIALS 2005 Consolidated balance sheet Change Non-current assets Inventories Other current assets Total assets Capital and reserves Minority interest Deferred tax liabilities Non current interest bearing liabilities Other liabilities Total equity and liabilities 12,321 1,256 1,964 15,541 7, ,326 2,980 15,541 12,802 1,138 1,887 15,827 7, ,424 2,859 15, UPM 12

13 FINANCIALS 2005 Magazine papers % 19,5 20,1 14,7 18,2 9,6 5,3 2,6 4 1,7 2,2 2,4 3, * Operating profit margin excl. non-recurring items ROCE excl. non-recurring items *Operating profit % required to cover WACC (Weighted Average Cost of Capital): about 11-12% UPM 13

14 FINANCIALS 2005 Magazine papers Investments Schongau PM9, Germany Kaipola PM6, Finland Rauma mill, energy investment Restructuring Miramichi, Canada UPM 14

15 FINANCIALS 2005 Newsprint % 21, ,2 13,2 11,5 11,4 5,4 4,3 6,3 2,3 1,4 1,2 1, * Operating profit margin excl. non-recurring items ROCE excl. non-recurring items *Operating profit % required to cover WACC (Weighted Average Cost of Capital): about 11-12% UPM 15

16 FINANCIALS 2005 Newsprint Paper machine rebuilds Schongau PM6 and PM7, Germany Kaipola PM4 and PM7 RCF investment, Kaipola Power plant investments: Chapelle Darblay, France Shotton, England UPM 16

17 FINANCIALS 2005 Fine and speciality papers % ,0 17,6 13,1 13,4 14,7 14,4 8,1 9,4 6,1 7,1 3,4 4, * Operating profit margin excl. non-recurring items ROCE excl. non-recurring items *Operating profit % required to cover WACC (Weighted Average Cost of Capital): about 11-12% UPM 17

18 FINANCIALS 2005 Fine and speciality papers New Fine paper machine t was finished in Changshu, China Investment USD 470 mill. Mill capacity t/y Started paper machine rebuilds PM3 Nordland, Germany PM1 Docelles, France UPM 18

19 FINANCIALS 2005 Converting 15 % ,3 10,0 7,7 7,9 7,3 5,3 4,9 4,2 5,2 4,4 2,7 3, * Operating profit margin excl. non-recurring items ROCE excl. non-recurring items *Operating profit % required to cover WACC (Weighted Average Cost of Capital): about 4% UPM 19

20 FINANCIALS 2005 Converting Completed investments Raflatac Fletcher, USA, second coating line RFID production line On-going investments Changshu, China label-stock production mill USD 40 milj. Tampere coating line Walki Wisa, Changshu, China converting mill EUR 6 mill. Sold business Loparex UPM 20

21 FINANCIALS 2005 Wood products 15 % 12 12, ,0 4,1 4,3 5,0 2,6 3,1 1,8 2,2 1,3 1,5 2, * Operating profit margin excl. non-recurring items ROCE excl. non-recurring items *Operating profit % required to cover WACC (Weighted Average Cost of Capital): about 4% UPM 21

22 FINANCIALS 2005 Wood products Streamlining of operations continued Program that was started 2004 was completed Decisions of modernizations Korkeakoski Kaukas Jyväskylä The rest 40% of ZAO Chudovo RWS shares were purchased UPM 22

23 FINANCIALS 2005 Value creation % ROCE as reported % 4.5% 3.4% ROCE excl. nonrecurring items WACC pre tax UPM 23

24 FINANCIALS 2005 Gearing ratio and net interest-bearing liabilities Gearing ratio Net interest-bearing liabilities % FAS IFRS, million FAS IFRS Target: maximum 100% Ratings: Moody s Baa2 (stable), latest change October 20, 2005 S&P BBB (stable), latest change May 16, 2003 UPM 24

25 FINANCIALS 2005 Capital expenditure, million FAS IFRS Changes in production and new production lines Maintenance and replacement expenditure Depreciation excl. amortization of goodwill UPM 25

26 FINANCIALS 2005 Cash flow and the utilization priorities million 1800 CASH FLOW PRIORITIES: Net cash used in investing and financing activities Net cash provided by operating activities 1. Maintenance investments 2. Dividend 3. Strategic investments 4. Share buy-backs 5. Reduction of debt UPM 26

27 FINANCIALS 2005 Earnings and dividend per share 3,00 2,50 Dividend per share 2,00 Extra dividend 1,50 Dividend proposed 1,00 0,75 0,50 Earnings per share 0, UPM 27

28 FINANCIALS 2005 UPM has a stable ownership Major owners: Capital Group DWS Investment GmbH Empl. Retirement System of Texas Etera Franklin Templeton Group G. Serlachius (5 shareholders) Harbor International Fund Henki-Sampo Holzhey/Bischoff Group Ilmarinen Kymin osakeyhtiön 100-vuotissäätiö Mondrian / Delaware Northern Cross Investments Sv. Litteratursällskapet i Finland UBS Group % % 30 (estim) 35 % 35 (estim) 35 % North America Europe and others Finland UPM 28

29 UPM AND NEW BUSINESS ENVIRONMENT

30 UPM AND NEW BUSINESS ENVIRONMENT Challenges for paper industry Business environment has fundamentally changed Structural overcapacity in Europe Traditional markets have become mature Downward trend in real paper prices Rapidly increasing cost of production inputs New competition especially in short fibre UPM 30

31 UPM AND NEW BUSINESS ENVIRONMENT Overcapacity especially in coated magazine paper 10,9 Western Europe North America 5,7 5,9 7,3 Other Europe 0,7 Other Asia 0,8 0,7 Japan 1,9 1,8 Latin America 0,2 0,5 Africa Pacific region 0,1 0,3 Source: Cepiprint, PPPC, JP Capacity 19,5 million tons (2006 estimate) Demand 17,0 million tons (2006 estimate) UPM 31

32 UPM AND NEW BUSINESS ENVIRONMENT Traditional markets have become mature World printing and writing paper demand by region mill. tons Forecast Others Latin America Rest of Asia China East Europe Japan Emerging markets growth 4,1% /year 50 West Europe North America Mature markets growth 0,5 % /year 0 '80 '85 '90 '95 '00 '05 '10 '15 '20 Source and copyright: Jaakko Pöyry UPM 32

33 UPM AND NEW BUSINESS ENVIRONMENT Real paper prices trend is down / ton '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 ' Long term price development LWC 1. Real paper price's trend is downwards 2. Own cost level must be adjusted to market prices '99 '00 '01 '02 '03 '04 '05 '06 Source:PPI Real price (defl.) UPM 33

34 UPM AND NEW BUSINESS ENVIRONMENT Rapidly increasing costs of production inputs Indeksi 2004= Pulp 150 Electricity (EEX) Coating materials Electricity (Nordpool) Q1/04 Q2/04 Q3/04 Q4/04 Q1/05 Q2/05 Q3/05 Q4/05 UPM 34

35 UPM AND NEW BUSINESS ENVIRONMENT New low cost fiber sources Input from Latin America has rapidly increased in short time % 80 47% Western Europe North America 60 Africa 40 Eastern Europe 37% 20 24% Asia Latin America Distribution of global Bleached Hardwood Kraft Pulp (BHKP) production Lähde: RISI Nov/05 UPM 35

36 UPM AND NEW BUSINESS ENVIRONMENT UPMs actions carried out to restore profitability Actions carried out Paper production capacity closures -350,000 t/a Pulp production capacity closures Wood products restructuring Cost savings program ' ' Personnel development Sold businesses -220,000 t/a closure of three mills EUR 247 million pa - 4,771 persons, of which - 2,940 in sold businesses appr. EUR -765 million in sales UPM 36

37 UPM AND THE NEW BUSINESS ENVIRONMENT UPM's profitability has remained weak % ,1 16,3 13,5 14,1 7,6 8,7 4,6 4,3 4,5 4,2 4,3 5, * Operating Profit % (excl. non-recurring items) ROCE (excl. non-recurring items) *Operating profit % required to cover WACC**: about 11-12% UPM 37

38 UPM has started an extensive programme to restore its profitability

39 UPM AND THE NEW BUSINESS ENVIRONMENT Roadmap to sustainable profitability Change structure Operate differently Consolidate in mature markets Profitable growth Grow in emerging markets Restructure production portfolio Strenghened competitive position Manage supply based on demand Close uncompetitive capacity Improved cost base Improve operating efficiency UPM 39

40 UPM AND THE NEW BUSINESS ENVIRONMENT Roadmap to sustainable profitability Change structure Operate differently Consolidate in mature markets Profitable growth Grow in emerging markets Restructure production portfolio Strenghened competitive position Manage supply based on demand Close uncompetitive capacity Improved cost base Improve operating efficiency UPM 40

41 PROGRAMME TO RESTORE UPM'S PROFITABILITY Planned closures/conversions of productioncapacity Planned closures: Voikkaa Mill 410,000 tn coated magazine paper Q3/2006 Kymi PM 7 150,000 tn coated fine paper Q3/2006 Tervasaari PM 6 Tervasaari SAP pulp line Planned conversion: 115,000 tn brown sack paper 60,000 tn semi-alcaline pulp Q2/2007 Q2/2007 Jämsänkoski PM 4 120,000 tn coated magazine paper 120,000 tn Label papers Q1-Q2/2007 UPM 41

42 CASE VOIKKAA

43 Investments made at Voikkaa paper mill mill investments total 124,3 mill. euro Production conversions and new production units Maintenance and replacement investments UPM 43

44 % The profitability of Voikkaa has not improved despite of the investments ROCE % UPM 44

45 The delivered costs to customer from Voikkaa mill are high Cost level 2005/I /ton Difference about 250 /t - high costs low costs Delivered costs to Frankfurt* 9: Voikkaa PK18 10: Voikkaa PK11 11: Jämsänkoski PK Cumulative capacity, t/y *All LWC 57g/m2 Source: Jaakko Pöyry, UPM UPM 45

46 UPM AND THE NEW BUSINESS ENVIRONMENT Roadmap to sustainable profitability Change structure Operate differently Consolidate in mature markets Profitable growth Grow in emerging markets Restructure production portfolio Strenghened competitive position Manage supply based on demand Close uncompetitive capacity Improved cost base Improve operating efficiency UPM 46

47 PROGRAMME TO RESTORE UPM'S PROFITABILITY Improve operating efficiency Cost-efficiency will be strongly raised by streamlining operations in all UPM divisions and functions New ways of operating: -Global sourcing -Centraalized R & D -Integrated IT -Enhanced sales approach -Integrated human resources -Global finance and control New operating modes and efficiency improvements will reduce the number of personnel significantly UPM 47

48 PROGRAMME TO RESTORE UPM'S PROFITABILITY Estimated personnel impact of the programme Personnel reductions in all divisions and functions during years 2006, 2007 and 2008 are totally about 3,600 persons Streamlining Closing uncompetitive capacity Yhteensä 2, about 3,600 In 2006 UPM will additionally start outsourcing negotiations affecting approximately 400 employees UPM 48

49 PROGRAMME TO RESTORE UPM'S PROFITABILITY Personnel reduction Alternatives available Planned personnel reductions are carried out during years 2006, 2007 and 2008 Alternatives available in the employee negotiations: pension or an unemployment benefit until retirements will be offered to approx. 1,500 persons relocation within the company retraining The need for temporary employment contracts will be reviewed (currently at 1,000 employees) UPM actively seeks possibilities with the authorities and other parties for retraining and employment of the redundant. UPM 49

50 PROGRAMME TO RESTORE UPM'S PROFITABILITY Estimated financial impact of the programme Cost impact vuonna 2006 Fixed asset write-off 130 mill. Provision for headcount reduction about 65 mill. Annualized cost savings After completion of the program annual costs savings are estimated to be about 200 mill. UPM estimates that no revenues will be lost due to the closures (except for the brown sack paper 50 mill. after Q2/2007) UPM 50

51 PROGRAMME TO RESTORE UPM'S PROFITABILITY Roadmap to sustainable profitability Change structure Operate differently Consolidate in mature markets Profitable growth Grow in emerging markets Restructure production portfolio Strenghened competitive position Manage supply based on demand Close uncompetitive capacity Improved cost base Improve operating efficiency UPM 51

52 PROGRAMME TO RESTORE UPM'S PROFITABILITY Restructure production portfolio New investments: Kymi pulp mill recovery plant 550,000tn 325 MEUR Q4/2008 Jämsänkoski PM 4 label papers 120,000tn 45 MEUR Q2/2007 After the investment Kymi is very competitive two paper machine fine paper -integrate with paper production exceeding 900,000 tpa Jämsänkoski PM 4 investment will strengthen UPM's leading position in the fast growing label paper business UPM 52

53 PROGRAMME TO RESTORE UPM'S PROFITABILITY Sources of improved profitability Efficiency improvements + Sources of profitability Better capacity utilization Optimized customer/product mix Lean organization Optimization of production Variable costs Fixed costs + Global sourcing Raw material use Flexible capacity Permanent closures Headcount reduction Out sourcing UPM 53

54 Summary Business environment has fundamentally changed UPM has started an extensive programme to restore its profitability by: closing uncompetitive capacity streamlining operations all over the organization investing in most competitive units and growing businesses PROFIT IMPROVEMENT NUMBER 1 PRIORITY Due to the improved capacity utilization on remaining production lines UPM expects to have improved profitability When completed UPM will be strong and competitive in the new business environment UPM 54

55 Forward-looking statement It should be noted that certain statements herein which are not historical facts, including, without limitation those regarding expectations for market growth and developments; expectations for growth and profitability; and statements preceded by "believes", "expects", "anticipates", "foresees", or similar expressions, are forward-looking statements. Since these statements are based on current plans, estimates and projections, they involve risks and uncertainties which may cause actual results to materially differ from those expressed in such forward-looking statements. Such factors include, but are not limited to: (1) operating factors such as continued success of manufacturing activities and the achievement of efficiencies therein, continued success of product development, acceptance of new products or services by the Group's targeted customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by the Group's patents and other intellectual property rights, the availability of capital on acceptable terms; (2) industry conditions, such as strength of product demand, intensity of competition, prevailing and future global market prices for the Group's products and the pricing pressures thereto, financial condition of the customers and the competitors of the Group, the potential introduction of competing products and technologies by competitors; and (3) general economic conditions, such as rates of economic growth in the Group's principal geographic markets or fluctuations in exchange and interest rates. UPM 61

56 JATKUVASTI UPM 62