UPM Interim Report Q3 218 Jussi Pesonen President and CEO 24 October 218
Q3 218: strong quarter sets a new benchmark for UPM s performance Sales grew by 6% to EUR 2,65 million (2,493m) Comparable EBIT increased by 2% to EUR 42m (351m) Sales prices increased in all business areas, outweighing the impact of higher input costs Temporary operational issues in UPM Communication Papers and UPM Biorefining had a EUR 3 million negative impact Operating cash flow was EUR 434m (486m), net debt decreased to EUR 4m (623m) 45 4 35 3 25 2 15 1 5 Comparable EBIT 351 42 2 UPM The Biofore Company
Q3 218: Sales prices increased in all business areas, outweighing the impact of higher input costs UPM BIOREFINING Average pulp prices in euros +27% Pulp deliveries -2%, held back by temporary production issues at UPM Fray Bentos New production level in Biofuels UPM SPECIALTY PAPERS Price increases offset only part of the variable costs increases Solid demand, deliveries +1% UPM COMMUNICATION PAPERS Average paper price +1%, more than offset the higher variable costs Tight market sentiment, deliveries -8% Turbine damage in UPM Plattling UPM RAFLATAC Price increases more than offset the higher variable costs Stable demand growth, deliveries -3% UPM ENERGY Average electricity sales price +19% Electricity deliveries +2% Dry weather limited hydropower generation UPM PLYWOOD Price increases offset the higher variable costs Good demand, deliveries -2% 3 UPM The Biofore Company
Comparable EBIT by business area 28 UPM Biorefining % of sales 35 12 UPM Communication Papers % of sales 15 6 UPM Specialty Papers % of sales 15 24 2 16 12 8 4 3 25 2 15 1 5 1 8 6 4 2 12,5 1 7,5 5 2,5 5 4 3 2 1 12,5 1 7,5 5 2,5-2 -2,5 6 UPM Plywood % of sales 18 6 UPM Energy % of sales 6 6 UPM Raflatac % of sales 15 5 15 5 5 5 12,5 4 12 4 4 4 1 3 9 3 3 3 7,5 2 6 2 2 2 5 1 3 1 1 1 2,5 4 UPM The Biofore Company
Comparable EBIT in Q3 218 vs. Q3 217 Prices increased in all businesses, input costs higher Deliveries impacted by temporary production issues 7 Record quarter in Biorefining, improvement in Energy and Communication Papers. Specialty Papers weaker. 7 6 Prices Fixed costs 6 5 4 3 351 14.1% Deliveries Variable costs Currency, net impact Depr., forests, plantations 42 15.9% 5 4 3 351 14.1% Energy Biorefining Raflatac Specialty Papers Communication Papers Plywood Other operations and eliminations 42 15.9% 2 2 1 1 Q3/17 Q3/18 Q3/17 Q3/18 5 UPM The Biofore Company
Strong cash flow and balance sheet 1 8 Operating cash flow Net debt 3 5 Net debt Net debt / EBITDA (trailing12 months) 3,5 1 6 1 4 1 2 1 8 6 4 2 Free cash flow 213 214 215 216 217 LTM 6 UPM The Biofore Company Operating cash flow 1,378 Q3/18 operating cash flow EUR 434m Working capital increased by EUR 75m 3 2 5 2 1 5 1 5 Net debt / EBITDA Net debt 4 213 214 215 216 217 Q3/18 LTM 3, 2,5 2, 1,5 1,,5,
Outlook for 218 unchanged UPM s comparable EBIT is expected to continue growing in 218 compared with 217. H2 218 comparable EBIT is expected to be significantly higher compared with H1 218. The fundamentals for UPM businesses in 218 are favourable. Sales price increases in 218 are expected to outweigh the increase in variable cost, compared with 217. 7 UPM The Biofore Company
Focused growth projects to develop market position while maintaining and growing earnings Completed Raflatac expansion in Q4 217, Poland Kymi pulp mill expansion +17kt in Q4 217, Finland Kaukas pulp mill expansion +3kt in Q2 218, Finland Construction stage Raflatac speciality label expansion in Q4 218, Finland Chudovo plywood mill expansion +45k m 3 in Q3 219, Russia Jämsänkoski release liner expansion +4kt in Q4 218, Finland Nordland PM2 conversion to release liner +11kt in Q4 219, Germany Changshu release liner expansion +4kt in Q1 22, China 8 UPM The Biofore Company
Transformative prospects with unique and exciting opportunities for significant long-term earnings growth Possible new 2mt pulp mill, Uruguay Second preparation phase proceeding: The rail tendering process in final stages, port concession tendering started. Environmental and social impact study for the mill submitted. Molecular bioproducts, possible biorefineries Basic engineering work continues regarding a potential 15kt biochemicals refinery, Germany Exploring next steps in biofuels, environmental impact study submitted for a potential 5kt biorefinery, Finland 9 UPM The Biofore Company
Spearheads for growth Specialty packaging materials High value fibre Molecular bioproducts Raflatac Specialty papers Forests Pulp Biofuels Biochemicals Communication papers Plywood Energy 1 UPM The Biofore Company
Inspired by the limitless opportunities of bioeconomy Delivering renewable and responsible solutions Innovating for a future beyond fossils 11 UPM Biofore Beyond Fossils
Summary Q3 218 set a new benchmark for UPM s performance Q3 sales grew by 6% and comparable EBIT by 2% Comparable EBIT margin reached 15.9%, illustrating well the current performance level compared with H1 218 Sales prices increased in all businesses, outweighing the impact of higher input costs temporary operational issues had a negative impact Preparations continue for UPM s transformative prospects with unique opportunities for significant long-term earnings growth 12 UPM The Biofore Company
Group financial performance 1 6 Comparable EBIT % Comparable ROE 14 Net debt 4 5 Net debt and leverage Net debt/ EBITDA (x) 3, 1 4 1 2 1 Target: EBIT growth 12 1 8 Target: 1% 3 75 3 Policy: 2x 2,5 2, 8 2 25 1,5 6 4 6 4 1 5 1, 2 2 75,5 213 214 215 216 217 LTM 213 214 215 216 217 LTM 213 214 215 216 217 Q3/18 LTM, 14 UPM The Biofore Company
Business area long-term return targets apply over investment and business cycles 3 28 26 24 22 2 18 16 14 12 1 8 6 4 2 UPM Energy ROCE % * ) 3 28 26 24 22 2 18 16 14 12 1 8 6 4 2 UPM Biorefining ROCE % UPM Specialty Papers 3 ROCE % 28 26 24 22 2 18 16 14 12 1 8 6 4 2 UPM Communication Papers 3 3 FCF/ 28 28 CE % 26 26 24 22 2 18 16 14 12 1 8 6 4 2 24 22 2 18 16 14 12 1 8 6 4 2 UPM Plywood ROCE % 3 28 26 24 22 2 18 16 14 12 1 8 6 4 2 UPM Raflatac ROCE % * ) shareholdings in UPM Energy valued at fair value 15 UPM The Biofore Company Long-term return target
Maintenance shutdowns in 217 and 218 Timing Q2 17 Q4 17 Significant maintenance shutdowns in 217 and 218 Unit Pietarsaari pulp mill Olkiluoto nuclear power plant Kymi pulp mill Maintenance shutdowns have an impact on Maintenance costs Production volumes Operational efficiency Q2 18 Q4 18 Fray Bentos pulp mill Kaukas pulp mill Lappeenranta biorefinery turnaround Olkiluoto nuclear power plant Pietarsaari pulp mill 16 UPM The Biofore Company
Low investment needs in existing assets allow growth projects with modest total capex 1 2 Capital expenditure Estimate 1 8 Myllykoski acquisition 6 Uruguay acquisition Depreciation 4 Strategic investments 33 3 2 Operational investments 29 21 211 212 213 214 215 216 217 218E 17 UPM The Biofore Company
5-year cumulative cash flow (213 217) disciplined capital allocation in action Strong operating cash flow EUR 6.4bn Focused investments EUR 1.9bn Deleveraging EUR 2.6bn Attractive dividend EUR 1.9bn Industry-leading balance sheet Net debt /EBITDA ~ x 18 UPM The Biofore Company
Illustrative capital allocation *) for next 5 years, assuming the Uruguay pulp mill investment Performance focus Strong cash flow Attractive dividend EUR ~3 4bn Industry-leading balance sheet High return investments EUR ~3 4bn Net debt /EBITDA < 2x Maintain headroom *) This is not a forecast 19 UPM The Biofore Company
Second preparation phase for the potential new pulp mill in Uruguay proceeding Phase I Completed in Q4/17 Phase II Expected to take 1.5-2 years Phase III Discussions with the Government of Uruguay Prerequisites for a possible pulp mill investment Investment agreement signed in Q4/17 Permitting Pre-engineering Development of infrastructure Necessary conditions Potential UPM investment decision Investment project Development of infrastructure Main items in preparation phase II: Mill permitting, pre-engineering Rail permitting, tendering, start construction Port permitting, tendering, concession Roads Labour protocols, regulation Investment regimes Regional planning and development Energy and complementary items 2 UPM The Biofore Company
UPM s main currency exposures Key currency exposures USD, GBP and JPY Policy to hedge an average of 5% of the estimated net currency cash flow for the next 12 months Estimated annual foreign currency net cash flow, before hedging USD GBP JPY Others 1,3 35 17 34 21 UPM The Biofore Company
Maturity profile and liquidity Liquidity Liquidity on 3 September 218 was EUR.7bn (cash and unused credit facilities) Committed credit facilities bilateral committed credit facilities EUR 132 million for general financing purposes EUR million 8 Maturity profile of outstanding debt EUR million 8 Committed credit facilities maturities 7 7 6 6 5 5 4 4 3 3 2 2 1 1 218 219 22 221 222 223 224-226 227 228 229 23 218 219 22 221 222 223 224-226 227 228 229 23 22 UPM The Biofore Company
UPM Biorefining Chemical pulp market prices EUR/tonne 12 Pulp market prices, EUR USD/tonne 13 Pulp market prices, USD 11 12 1 11 9 8 7 6 1 9 8 7 6 5 5 4 4 3 3 BHKP, Europe, EUR BHKP, China, EUR NBSK, Europe, EUR NBSK, China, EUR BHKP, Europe BHKP, China NBSK, Europe NBSK, China Sources: FOEX Indexes Ltd, ECB 23 UPM The Biofore Company
UPM Energy Cost efficient generation enables robust profitability in challenging market environment MWh Market electricity prices vs UPM sales price 5 4 3 2 1 213 214 215 216 217 218 Helsinki Front Year System Front Year UPM average sales price UPM Energy profitability Comparable EBIT, 213 214 215 216 217 9M/18 186 22 181 116 91 91 % of sales 39.9 43.5 43.6 32.7 28.8 31.4 24 UPM The Biofore Company
UPM Communication Papers Graphic paper prices EUR/t 1 Europe USD/t 12 North America USD/t 13 China 9 11 12 8 1 11 7 9 8 1 9 6 7 8 5 6 7 4 5 6 News SC LWC WFC WFU News SC LWC WFC WFU WFC r (1% chemical pulp) Uncoated Woodfree Reels (1% chemical pulp) Sources: PPI, RISI 25 UPM The Biofore Company
UPM Communication Papers Paper price vs. cash cost of marginal cost producer EUR/t Price Cash cost of a marginal producer 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 26 UPM The Biofore Company Sources: PPI, RISI, Pöyry