UPM HALF YEAR FINANCIAL REPORT 217 Jussi Pesonen President and CEO 25 July 217
Q2 217 Good performance and favourable market demand continued Comparable EBIT increased by 2% to EUR 27m (264m) Temporarily higher fixed costs, lower efficiency due to high maintenance activity Operating cash flow was EUR 269m (434m) Net debt decreased to EUR 1,46m (1,876m), net debt/ebitda to.68x (1.25x) 35 3 25 2 15 Comparable EBIT 264 27 1 Comparable ROE (LTM) was 11.4% Operating cash flow (LTM) was EUR 1,576m, EUR 2.95 per share 5 2 UPM
Q2 217 Good market demand, high maintenance activity UPM BIOREFINING Good demand, pulp deliveries +2%, strong growth in biofuels Pulp prices higher Pietarsaari pulp mill maintenance Kaukas investment decision UPM PAPER ENA Graphic paper deliveries 2% Seasonally high fixed costs, including maintenance Fibre costs higher UPM ENERGY Electricity deliveries 17% Hydropower generation below average and prolonged maintenance at Olkiluoto nuclear power plant UPM SPECIALTY PAPERS Significant progress in product mix, higher release liner deliveries Good demand Pulp costs higher, sales prices higher UPM RAFLATAC Good demand, deliveries +6% Variable costs higher Specialty label investment decision, Tampere UPM PLYWOOD Good demand, deliveries +4% Variable costs higher, sales prices higher 3 UPM
Q2 217 main maintenance impacts UPM Biorefining Pietarsaari pulp mill maintenance (no pulp mill maintenance in Q1/17 or Q2/16) UPM Energy Olkiluoto nuclear power plant prolonged maintenance shut (no maintenance in Q1/17, longer shut than in Q2/16) UPM Paper ENA seasonally higher fixed costs, incl. maintenance (seasonally higher than in Q1/17, similar to Q2/16) Temporarily higher fixed costs and lower operational efficiency: Q2 217 total impact on comparable EBIT was approx. EUR -2m compared with Q2 216 EUR -45m compared with Q1 217 4 UPM
Comparable EBIT by business area 15 UPM Biorefining % of sales 25 12 UPM Energy % of sales 6 12 UPM Paper ENA % of sales 12 12 2 1 5 1 1 9 6 15 1 8 6 4 4 3 2 8 6 4 8 6 4 3 5 2 1 2 2-2 -2 5 UPM Specialty Papers % of sales UPM Raflatac % of sales 12,5 5 12,5 25 UPM Plywood % of sales 2 4 1 4 1 2 16 3 7,5 3 7,5 15 12 2 5 2 5 1 8 1 2,5 1 2,5 5 4 5 UPM
Comparable EBIT in Q2 217 vs. Q2 216 High maintenance activity in Q2/17 resulted in temporarily higher fixed costs and lower operational efficiency. Prices increased. Higher maintenance activity in Biorefining and Energy. Pulp prices increased. Mix improvement in Specialty Papers. 35 35 3 25 2 264 1.8% Prices Deliveries Fixed costs Variable costs Currency, net impact Depr., forests, plantations 27 11.% 3 25 2 264 1.8% Biorefining Energy Raflatac Specialty Papers Paper ENA Plywood Other operations and eliminations 27 11.% 15 15 1 1 5 5 Q2/16 Q2/17 Q2/16 Q2/17 6 UPM
Strong cash flow and balance sheet 1 8 1 6 Operating cash flow 1,576 Net debt 4 3 5 Net debt Net debt / EBITDA (trailing12 months) 4, 3,5 1 4 1 2 1 8 6 4 2 Free cash flow Operating cash flow Q2/17 operating cash flow EUR 269m Working capital increased by EUR 59m 3 2 5 2 1 5 1 5 Net debt / EBITDA 1,46 Net debt 3, 2,5 2, 1,5 1,.68x,5 7 UPM 211 212 213 214 215 216 Q2/17 LTM 211 212 213 214 215 216 Q1/17 LTM,
Outlook for 217 UPM s profitability improved significantly in 216 and is expected to continue on a good level in 217. Demand growth is expected to continue for most of UPM s businesses, while demand decline is expected to continue for UPM Paper ENA. The focused growth projects continue to contribute gradually to UPM s performance. Following a deflationary environment in recent years, 217 is expected to show modest input cost inflation. UPM will continue measures to reduce fixed and variable costs to mitigate this. 8 UPM Q3 217 is expected to include significantly less maintenance activity than Q2 217 in UPM Biorefining, UPM Paper ENA and UPM Energy.
Focused growth projects have been successful, contributing well to UPM s profits and returns Ongoing projects under construction Kymi second pulp mill expansion, Finland UPM Raflatac expansion, Poland New investments announced in Q2 217 Kaukas second pulp mill efficiency, expansion UPM Raflatac specialty labels expansion, Finland Longer term growth option Discussions continue with the Government of Uruguay concerning the infrastructure development and other local prerequisites for a potential pulp mill investment 9 UPM
Summary Comparable EBIT continued on an increasing track in Q2, including maintenance-related impacts Favourable market demand continued Variable cost pressures mitigated with cost reduction measures and targeted price increases Two new focused investments announced, discussions continue in Uruguay concerning prerequisites for longer term growth Good profitability is expected to continue 1 UPM
Direction: grow businesses with strong long-term fundamentals and sustainable competitive advantage Operating model Performance Capability Capital allocation Growth Better than sum of parts Continuous improvement Foundation for opportunities Attractive returns Earnings growth and valuation Separate businesses Top performance Corporate benefits Profit focus High performing people Value-based leadership and responsibility Innovation Strong cash flow Strong balance sheet Corporate structure Attractive dividend Focused growth investments Selected larger investments Synergistic M&A Current growing businesses New bio-based businesses 12 UPM
Business area long-term targets compared with realised returns 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 3 28 26 24 22 2 18 16 14 12 1 8 6 4 2 UPM Paper ENA FCF/CE % 3 28 26 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 Long-term return target 13 UPM
Group financial performance 1 4 Comparable EBIT % Comparable ROE 12 Net debt 4 5 Net debt and leverage Net debt/ EBITDA (x) 3, 1 2 Target: EBIT growth 1 Target: 1% 3 75 2,5 1 8 8 3 Policy: 2x 2, 6 2 25 1,5 6 4 4 1 5 1, 2 2 75,5 211 212 213 214 215 216 LTM 211 212 213 214 215 216 LTM 211 212 213 214 215 216 LTM, 14 UPM Comparable figures for 214 217, excluding special items for earlier years
Comparable EBIT +5% in H1 217 vs. H1 216 Good growth in deliveries. Higher maintenance activity in Q2/17. Prices and costs slightly negative. Growth in deliveries in Biorefining, Raflatac and Plywood. Mix improvement in Specialty Papers. Cost control in Paper ENA. 7 7 6 5 4 545 11.1% Prices Deliveries Fixed costs Variable costs Currency, net impact Depr., forests, plantations 575 11.6% 6 5 4 545 11.1% Biorefining Energy Raflatac Specialty Papers Paper ENA Plywood Other operations and eliminations 575 11.6% 3 3 2 2 1 1 H1/16 H1/17 H1/16 H1/17 15 UPM
Serving the increasing customer demand with the focused growth projects 16 UPM Fully contributing Pietarsaari pulp mill expansion Fray Bentos pulp mill expansion Kymi pulp mill expansion Raflatac expansion in APAC, Poland Kaukas pulp mill efficiency Contributing well in H1 217 Lappeenranta biorefinery Changshu speciality paper machine Otepää plywood mill expansion Under construction Kymi pulp mill expansion 2 Raflatac expansions in Poland and Finland Kaukas pulp mill expansion 2
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 486 326 35 2 Operational investments 28 29 21 211 212 213 214 215 216 217 17 UPM
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 1,6 37 21 9 18 UPM
Maturity profile and liquidity Liquidity Committed credit facilities Liquidity on 3 June 217 was EUR 1.2bn (cash and unused credit facilities) Bilateral committed credit facilities EUR 657 million for general financing purposes 8 Maturity profile of outstanding debt 8 Committed credit facilities maturities 6 6 4 4 2 2 19 UPM
Chemical pulp market Q2 NBSK pulp price increased by 5% from Q1 Q2 BHKP pulp price increased by 15% from Q1 USD/tonne 1 1 Days of supply 65 Pulp inventories 1 9 NBSK 6 55 5 Hardwood inventories 8 7 BHKP 45 4 6 35 5 4 3 28 29 21 211 212 213 214 215 216 217 3 25 2 Softwood inventories 15 28 29 21 211 212 213 214 215 216 217 Source: FOEX Indexes Ltd. Source: PPPC World-2 statistics 2 UPM
Cost efficient power generation enables robust profitability also in challenging market environment MWh Market electricity prices vs UPM sales price 5 4 3 2 1 212 213 214 215 216 217 Helsinki Front Year System Front Year UPM average sales price UPM Energy profitability 212 213 214 215 216 H117 Comparable EBIT, 217 186 22 181 116 34 % of sales 45. 39.9 43.5 43.6 32.7 23.4 21 UPM
Graphic paper prices EUR/t 1 Europe USD/t 11 North America USD/t 11 China 9 1 1 8 9 9 7 8 8 6 7 7 5 6 6 4 5 5 News SC LWC WFC WFU News SC LWC WFC WFU WFC r (1% chemical pulp) Uncoated Woodfree Reels (1% chemical pulp) Sources: PPI, RISI 22 UPM
Demand-supply balance in European graphic paper is visible in margins EUR/t Price Cash cost of a marginal producer 23 UPM 24 25 26 27 28 29 21 211 212 213 214 215 216 217 Sources: PPI, RISI, Pöyry