UPM Interim Report Q3 2018 · +45k m3 in Q3 2019, Russia –Jämsänkoski release liner expansion +40kt in Q4 2018, Finland –Nordland PM2 conversion to release liner +110kt in Q4

Jussi Pesonen

President and CEO

24 October 2018

UPM Interim Report

Q3 2018

| © UPM – The Biofore Company2

Q3 2018: strong quarter sets a new benchmark for UPM’s performance

• Sales grew by 6% to EUR 2,650 million

(2,493m)

• Comparable EBIT increased by 20% to

EUR 420m (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 30 million negative impact

• Operating cash flow was EUR 434m (486m),

net debt decreased to EUR 4m (623m) 0

50

100

150

200

250

300

350

400

450

EURm

Comparable EBIT

420

351


Q3 2018: Sales prices increased in all business areas, outweighing the impact of higher input costs

UPM PLYWOOD

• Price increases offset the higher variable costs

• Good demand, deliveries -2%

UPM COMMUNICATION PAPERS

• Average paper price +10%, 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 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 – The Biofore Company

Comparable EBIT by business area

4

0

2,5

5

7,5

10

12,5

15

0

10

20

30

40

50

60

0

5

10

15

20

25

30

35

0

40

80

120

160

200

240

280

0

2,5

5

7,5

10

12,5

15

0

10

20

30

40

50

60

-2,5

0

2,5

5

7,5

10

12,5

15

-20

0

20

40

60

80

100

120

EURm % of sales

UPM Specialty Papers

EURm % of sales

UPM Communication Papers

EURm % of sales

EURm % of sales

UPM Raflatac

EURm % of salesEURm % of salesUPM Biorefining

0

10

20

30

40

50

60

0

10

20

30

40

50

60UPM Energy

0

3

6

9

12

15

18

0

10

20

30

40

50

60UPM Plywood


0

100

200

300

400

500

600

700

Q3/17 Q3/18

Comparable EBIT in Q3 2018 vs. Q3 2017

Raflatac

Specialty

PapersOther

operations

and

eliminations

Energy

BiorefiningCommunication

Papers

Plywood

EURm

5

Record quarter in Biorefining, improvement

in Energy and Communication Papers.

Specialty Papers weaker.

Prices increased in all businesses, input costs higher

Deliveries impacted by temporary production issues

0

100

200

300

400

500

600

700

Q3/17 Q3/18

EURm

Prices

Variable

costs

Fixed

costs

Deliveries

35114.1%

42015.9%

Currency,

net

impact

Depr.,

forests,plantations

35114.1%

42015.9%


Strong cash flow and balance sheet

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

0

500

1 000

1 500

2 000

2 500

3 000

3 500

2013 2014 2015 2016 2017 Q3/18

Net debt / EBITDA(trailing12 months)

Net debt

Net debt / EBITDA

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2013 2014 2015 2016 2017 LTM

Operating cash flow Net debt

4

1,378

Net debtEURm

Free cash flow

Operating cash flow

EURm

LTM

Q3/18

operating

cash flow

EUR 434m

Working

capital

increased by

EUR 75m


Outlook for 2018 unchanged

• UPM’s comparable EBIT is expected to

continue growing in 2018 compared with 2017.

H2 2018 comparable EBIT is expected to be

significantly higher compared with H1 2018.

• The fundamentals for UPM businesses in 2018

are favourable. Sales price increases in 2018

are expected to outweigh the increase in

variable cost, compared with 2017.


Focused growth projects to develop market position while maintaining and growing earnings

• Completed –Raflatac expansion

in Q4 2017, Poland

–Kymi pulp mill expansion+170kt in Q4 2017, Finland

–Kaukas pulp mill expansion+30kt in Q2 2018, Finland

• Construction stage–Raflatac speciality label expansion

in Q4 2018, Finland

–Chudovo plywood mill expansion+45k m3 in Q3 2019, Russia

–Jämsänkoski release liner expansion+40kt in Q4 2018, Finland

–Nordland PM2 conversion to release liner +110kt in Q4 2019, Germany

–Changshu release liner expansion+40kt in Q1 2020, China


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 150kt biochemicals

refinery, Germany

–Exploring next steps in biofuels,

environmental impact study submitted for

a potential 500kt biorefinery, Finland

Spearheads for growth

10 | © UPM – The Biofore Company

High value fibre

Specialty packaging materials

Raflatac Specialty papers

Communication

papersEnergy

Biofuels Biochemicals

Molecular bioproducts

Plywood

PulpForests

| © UPM

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 2018 set a new benchmark for UPM’s performance

• Q3 sales grew by 6% and comparable EBIT by 20%

• Comparable EBIT margin reached 15.9%, illustrating well the current

performance level compared with H1 2018

• 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


0,0

0,5

1,0

1,5

2,0

2,5

3,0

0

750

1 500

2 250

3 000

3 750

4 500

2013 2014 2015 2016 2017 Q3/18

Net debtEURm

Net debt/EBITDA

(x)

Net debt and leverage

Policy: ≤ 2x

14

Group financial performance

0

200

400

600

800

1 000

1 200

1 400

1 600

2013 2014 2015 2016 2017 LTM

EURm Comparable EBIT

0

2

4

6

8

10

12

14

2013 2014 2015 2016 2017 LTM

% Comparable ROE

Target: 10%Target: EBIT growth

LTM


0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30ROCE %

Business area long-term return targets apply over investment and business cycles

15

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30ROCE % *)

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30ROCE %

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30ROCE %

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30ROCE %

*) shareholdings in UPM Energy

valued at fair valueLong-term return target

UPM

Specialty Papers

UPM

Communication Papers

UPM

PlywoodUPM

Raflatac

UPM

Energy

UPM

Biorefining

FCF/

CE %


Maintenance shutdowns in 2017 and 2018

Maintenance shutdowns have an impact on

• Maintenance costs

• Production volumes

• Operational efficiency

Timing Unit

Q2 17 Pietarsaari pulp mill

Olkiluoto nuclear power plant

Q4 17 Kymi pulp mill

Q2 18 Fray Bentos pulp mill

Kaukas pulp mill

Lappeenranta biorefinery turnaround

Olkiluoto nuclear power plant

Q4 18 Pietarsaari pulp mill

Significant maintenance shutdowns

in 2017 and 2018


Low investment needs in existing assets allow growth projects with modest total capex

0

200

400

600

800

1 000

1 200

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E

Depreciation

EURm

Operational investments

Capital expenditure

Strategic investments

Uruguay

acquisition

Estimate

303

Myllykoski

acquisition

17

300


5-year cumulative cash flow (2013–2017)– disciplined capital allocation in action

Industry-leading

balance sheet

Net debt /EBITDA

~ 0x

EUR 6.4bn

Deleveraging

Strong operating cash flow

Attractive dividend

Focused investments

EUR 1.9bn

EUR 2.6bn

EUR 1.9bn


Illustrative capital allocation*) for next 5 years,assuming the Uruguay pulp mill investment

Industry-leading

balance sheet

Net debt /EBITDA

< 2x

Attractive dividend

EUR ~3–4bnPerformance focus

Strong cash flow

High return

investments

EUR ~3–4bn

Maintain headroom

*) This is not a forecast


Second preparation phase for the potential new pulp mill in Uruguay proceeding

20

• Labour protocols, regulation

• Investment regimes

• Regional planning and development

• Energy and complementary items

• Mill permitting, pre-engineering

• Rail permitting, tendering, start construction

• Port permitting, tendering, concession

• Roads

Phase ICompleted in Q4/17

Phase IIExpected to take 1.5-2 years

Phase III

Discussions with the

Government of Uruguay

Prerequisites for a possible

pulp mill investment

Investment project

Development of

infrastructure

Main items in preparation phase II:

Investment agreement signed in

Q4/17

Permitting

Pre-engineering

Development of

infrastructure

Necessary conditions

Potential UPM

investment decision


UPM’s main currency exposures

• Key currency exposures USD, GBP and JPY

• Policy to hedge an average of 50% 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

EURm 1,030 350 170 340


0

100

200

300

400

500

600

700

800

2018

2019

2020

2021

2022

2023

2024-2

026

2027

2028

2029

2030

EUR million

0

100

200

300

400

500

600

700

800

2018

2019

2020

2021

2022

2023

2024-2

026

2027

2028

2029

2030

EUR million

Liquidity

Liquidity on 30 September 2018 was EUR 0.7bn

(cash and unused credit facilities)

bilateral committed credit facilities EUR 132 million for general financing purposes

Committed credit facilities

Maturity profile of outstanding debt Committed credit facilities’ maturities

Maturity profile and liquidity


300

400

500

600

700

800

900

1000

1100

1200

1300

USD/tonne

BHKP, Europe NBSK, Europe

BHKP, China NBSK, China

Chemical pulp market prices

23

UPM Biorefining

300

400

500

600

700

800

900

1000

1100

1200

EUR/tonne

BHKP, Europe, EUR NBSK, Europe, EUR

BHKP, China, EUR NBSK, China, EUR

Pulp market prices, USDPulp market prices, EUR

Sources: FOEX Indexes Ltd, ECB


UPM Energy

profitability2013 2014 2015 2016 2017 9M/18

Comparable EBIT,

EURm186 202 181 116 91 91

% of sales 39.9 43.5 43.6 32.7 28.8 31.4

UPM Energy

Cost efficient generation enables robust profitability in challenging market environment

0

10

20

30

40

50

2013 2014 2015 2016 2017 2018

MWh Market electricity prices vs UPM sales price

Helsinki Front Year System Front Year UPM average sales price


400

500

600

700

800

900

1000

News SC LWC

WFC WFU

25


Graphic paper prices

EUR/t

EuropeUSD/t USD/t

ChinaNorth America

600

700

800

900

1000

1100

1200

1300

WFC r (100% chemical pulp)

Uncoated Woodfree Reels (100% chemicalpulp)

500

600

700

800

900

1000

1100

1200

News SC LWC

WFC WFU

Sources: PPI, RISI



Paper price vs. cash cost of marginal cost producer

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EUR/t

Cash cost of a marginal producer

Price

Sources: PPI, RISI, Pöyry

Documents

UPM Interim Report Q3 2018 · +45k m3 in Q3 2019, Russia –Jämsänkoski release liner expansion +40kt in Q4 2018, Finland –Nordland PM2 conversion to release liner +110kt in Q4