UPM.COM
Article | Oct 31, 2018

A future of GROWTH beyond fossils

Global megatrends are reshaping the future of business, with sustainability leading the transformation. President and CEO Jussi Pesonen is confident that UPM is set for decades of solid growth as a bioeconomy innovator.

September saw the launch of UPM’s new brand promise linking the phrase “Beyond Fossils” to UPM Biofore. President and CEO Jussi Pesonen sees this promise of a future based on non-fossil raw materials as a natural extension of UPM’s purpose to seize the limitless potential of bioeconomy.

“It all begins with responsibly grown wood biomass that is processed into renewable, innovative, high-quality products,” Pesonen states.

UPM’s Biofore strategy has proven to be a great success over the past ten years. The company is thriving. Its six business areas are highly competitive, and all have secured a firm foothold in their respective markets.

“Now we have raised the bar even further. From now on, we are aiming higher and shooting for continuous renewal and earnings growth.”

Jussi Pesonen

What the world needs now

Global megatrends provide an excellent springboard for UPM’s future expansion. They present numerous long-term opportunities, as everyone around the world wants the same thing: sustainable solutions to the challenges of population growth, urbanisation, climate change and resource depletion.

“Consumer demand is primarily driven by the new middle classes in emerging economies. But growing consumption also highlights the need for responsibility. Manufacturing has to transition away from dwindling fossil resources and towards renewable, recyclable raw materials.”

As an example, demand for pulp manufactured by UPM is on the rise, driven mainly by urbanisation and increasingly prosperous consumers who want pulp-based, biodegradable and recyclable packaging materials and personal care products.

Consumer demand is primarily driven by the new middle classes in emerging economies. But growing consumption also highlights the need for responsibility. Manufacturing has to transition away from dwindling fossil resources and towards renewable, recyclable raw materials.

“Current megatrends indicate that pulp will remain a very interesting product in the long term.” Another great example of a megatrend feeding UPM’s business is the case of UPM Raflatac’s self-adhesive label materials. Demand for labels is increasing due to the rapid growth of online sales: adhesive labels are needed on every parcel to facilitate smooth delivery to customers.

“Another growth driver is food labelling, as more and more consumers in emerging economies are buying pre-packaged food products.”

Building on four cornerstones

Over the coming years, UPM will continue to build on its current four cornerstones: performance, growth, innovation and responsible operations.

“We can increase our earnings in two ways: by improving cost competitiveness or by increasing sales. In the latter case, new growth projects are crucial.”

Pesonen emphasises that the demand for continuous improvement applies not only to financial performance, but also to employee competence and working culture.

“Innovation is at the core of our strategy, as new products and technological advances generate opportunities for growth. But we also need to continuously reform our existing businesses.”

Pesonen sees the biomolecule segment as particularly fertile ground for new growth. Thanks to UPM BioVerno diesel produced in Lappeenranta, new-generation biofuels are already a profitable business segment for UPM. The company’s biochemicals business is still in the early stages, but it has potential to become a substantial source of growth in decades to come.

Innovation is at the core of our strategy, as new products and technological advances generate opportunities for growth. But we also need to continuously reform our existing businesses.

Pesonen notes that the journey of an innovation from the initial idea through R&D to a successful market launch is a long road fraught with challenges. For example, UPM began developing biofuels in 2006, but the decision to invest in a production facility was not made until 2012, and it took another four years for production to ramp up to full speed.

Three spearheads of growth

Pesonen explains that while UPM strives to grow across all its business areas, there are three strategic spearheads: specialty packaging materials, high-value fibre products and biomolecules.

“In particular, we aim to invest in businesses that offer attractive long-term fundamentals for profitability and growth, as well as opportunities to achieve a sustainable competitive advantage.”

The key factor these segments have in common is the deep level of knowhow required to manufacture high-quality products. What is more, there is a high threshold for potential competitors to enter such specialised markets.

In the case of specialty packaging materials, for instance, UPM has developed more advanced manufacturing technology than its competitors, helping to establish itself as a global leader on the label release paper market.

“In the segment of biofuels and biochemicals, we have a lot of proprietary knowledge and protected intellectual property rights that our competitors can’t match. We are the first company to develop a process for manufacturing these products from solid wood.”

Why quality always wins

The pulp industry, too, is a market with a high entry threshold, because setting up production facilities requires massive investment. Pesonen believes that UPM has a competitive edge in pulp thanks to its cost-effective, responsible production and supply chain all the way from the forest to the customer.

“The pulp operators that succeed are the ones with efficient access to wood. In Finland, we have an efficient wood sourcing organisation for purchasing wood from private landowners. In Uruguay, the raw material is sourced from plantations. This presents certain challenges related to tree cultivation that need to be managed.”

Pesonen highlights the importance of impeccable product quality, which can be a competitive advantage in more traditional UPM product groups. In the graphic paper market, for example, buyers appreciate responsibly manufactured high-quality products.

The same is also true of plywood products, where UPM’s growing customer base includes tanker manufacturers whose vessels are used for transporting LNG (liquefied natural gas).

“Birch plywood has turned out to be the best product for insulating tanks that transport LNG at –163°C. Even in these extreme conditions, the plywood still retains its strength and dimensions.”

Investing in tomorrow

Thanks to its healthy cash flow and balance sheet, UPM has been able to make focused investments in its spearhead growth businesses.

For example, UPM has expanded its Kymi and Kaukas pulp mills in anticipation of future growth in pulp demand. A major step is also planned for Uruguay, where the company is assessing the possibility of building a second pulp mill. The new mill would cost approximately two billion euros.

“The preliminary planning and infrastructure projects are proceeding as expected, but the final decision on investment will not be made until mid-2019 at the earliest. It could even be later,” notes Pesonen.

He adds that starting a large production facility is a long-term project. Planning for the new mill in Uruguay began as early as 2010, when UPM started increasing its plantation area.

“There is plenty of sustainably grown wood raw material available, so in that sense the cornerstone has already been laid for the new plant.”

To meet rising demand, UPM is also increasing the capacity of its label material production plants. Meanwhile, removal of production bottlenecks has been the main focus of attention at the UPM Changshu mill in China, while in Germany, UPM Nordland’s second paper machine is being converted from fine paper to label paper manufacturing.

Significant investments are also in the pipeline for the biomolecule business. UPM is currently looking into setting up a new biorefinery in Kotka to manufacture advanced traffic fuels from several biomaterials.

“The production capacity of the planned facility would be fivefold compared to the UPM Lappeenranta biorefinery. New production technology that allows us to utilise different raw materials requires a lot of innovation.”

In the biochemicals business, UPM is examining the possibility of constructing an industrial-scale biorefinery at the Frankfurt-Höchst Chemical Park in Germany.

“In the preliminary technical planning phase, we are also gauging commercial interest in alternative materials to replace fossils in various end-use applications and markets.”

Journey of transformation

Pesonen has been President and CEO of UPM since January 2004. He has led the company through a challenging transformation. Today, this former traditional paper company is a recognised frontrunner in bioeconomy innovation.

“All stages of the transformation have been extremely interesting. Getting the company into shape was challenging, at times even nerve-racking. But when our people realised that changes were necessary – and achievable – things started moving in the right direction.”

Pesonen commends his employees for their ability to achieve results even in challenging market situations. In the declining paper market, for instance, the company has successfully adapted to changes and developed new products.

“Our business has been profitable even in the most challenging conditions. This is a truly commendable achievement.”

CEO’s top two challenges

UPM’s future is brimming with great opportunities, but there are also complex challenges on the horizon. Two of them are of special concern to the President and CEO, who is responsible for the organisation as a whole.

The first is linked to the continuous improvement of employee competences, whether by adopting innovative production methods or understanding the ever-changing market. Pesonen believes that the CEO’s main duty is to give the personnel the tools to become the very best they can be.

It may sound like a cliché, but the success of the company starts with its people. It’s important to ensure employee wellbeing, so that they can get inspired about their work and achieve results.

“As CEO, you have to know your employees and allow people to do their job efficiently. It may sound like a cliché, but the success of the company starts with its people. It’s important to ensure employee wellbeing, so that they can get inspired about their work and achieve results.”

The second crucial challenge relates to focused capital allocation, an area in which UPM has excelled in recent years. Focused growth projects have exceeded their ROI targets.

“We must continue to focus our investments on exactly the right projects to ensure that they generate growth and meet our ROI targets.”

Pesonen notes that UPM’s financial standing is currently better than ever. Thanks to the company’s solid performance and balance sheet, more capital can be allocated to promote its future growth and transformation.

“In the meantime, we will also strive to increase shareholder returns and create additional value for all our stakeholders.”

 

Matti Remes