Jussi Pesonen, President and CEO, comments on Q4 and full year 2020 results:
“In 2020, the global pandemic and related lockdowns caused an abrupt and severe economic shock that put all societies and businesses to the test. With decisive measures we ensured the safety of UPM employees and the satisfactory performance of the company. Our growth projects proceeded as planned.
The year ended on a positive note. In the fourth quarter, the demand for our products was good. Sales of EUR 2,188 million and comparable EBIT of EUR 252 million were higher than on the two previous quarters, although considerably down from the corresponding quarter of 2019.
The star performers of the quarter, as for the whole year, were UPM Raflatac and UPM Specialty Papers. These business areas benefited from favourable markets and changes in consumer behaviour, e-commerce and retail. Both businesses had taken commercial and efficiency measures to improve profitability and started the year with already improved margins.
In UPM Biorefining the demand for pulp, renewable fuels and timber was good. China is leading the demand growth in the pulp market. Market prices for pulp have been at a low level for quite some time, and the first price increases during the fourth quarter were offset by changes in currencies. Two extensive pulp mill maintenance shutdowns pushed the quarterly results down to break-even.
The performance of UPM Communication Papers in the last quarter was better than the two previous quarters due to seasonally low energy costs and higher year-end demand. However, the market demand for graphic papers was down 14% year-over-year. The closure of UPM Kaipola paper mill in Finland was finalised at the beginning of 2021 and the sales process of UPM Shotton paper mill in Wales is ongoing. The measures taken were timely and necessary for the efficiency and competitiveness of the business.
Excellent hydrological conditions continued, and UPM Energy again delivered strong earnings. Energy prices decreased, both during the quarter and on a yearly basis. In UPM Plywood, demand continued to be good in construction end-uses, but on a low level in industrial end-uses. The markets remained highly competitive.
In 2020, the exceptional shortfall in graphic paper demand due to COVID lockdowns and unusually low pulp prices had a clear impact on our earnings. At the same time, I am very proud of the spectacular performance of our specialty packaging materials businesses, UPM Raflatac and UPM Specialty Papers.
Our sales decreased by 16% in 2020, and comparable EBIT was down 32% year-over-year. Operating cash flow decreased to EUR 1,005 million from the all-time high of the previous year. Our financial standing remains very strong with net debt close to zero and cash funds and unused committed credit facilities totalling EUR 3.2 billion at the end of 2020.
During a year of high uncertainty our focus was clear: ensure the performance of all our operations and at the same time secure the successful implementation of our strategic growth projects. We took several measures to decrease fixed costs, which are expected to result in annual savings of approximately EUR 130 million. Our two major growth projects in Uruguay and in Germany are on schedule and on budget.
The year 2021 will be an important year of construction and preparation for the projects in Paso de los Toros in Uruguay, and in Leuna, Germany. The construction sites in Uruguay are currently employing 3,000 workers and the number will double later this year. The construction of the biochemical refinery in Germany began during Q4. Simultaneously, we are setting up the business for the eventual market entry. During the most intensive year of these projects, UPM’s total capital expenditure is expected to be EUR 2 billion.
Our transformation does not stop there. Today we announced the next step to advance our biofuels growth plans. We are starting the basic engineering phase of a next-generation biorefinery with an annual capacity of 500,000 tonnes of high-quality renewable fuels. The planned biorefinery would scale up UPM’s successful biofuels business to a new level. At the same time, it would further improve the long-term competitiveness and sustainability performance of UPM Biofuels by introducing several sustainable feedstocks and achieving uniquely high CO2 reduction compared to biofuels currently on the market.
With its Biofore strategy UPM is well positioned to respond to global megatrends and growing demand for renewable products. We enable our customers and consumers to make more sustainable choices. Our purpose is to create a future beyond fossils.
Sustainability is at the core of everything we do. In 2020, we committed to the UN Business Ambition for 1.5°C and to the science-based measures to mitigate climate change. We were recognised as a UN Global Compact LEAD company, listed as the industry leader in the Dow Jones European and World Sustainability Indices (DJSI), and received a triple ‘A’ score from CDP for outstanding environmental performance. We also established a Green Finance Framework and issued our first Green Bond. Our syndicated revolving credit facility is also linked to biodiversity and climate targets.
In the coming quarters, we will do our utmost to ensure business continuity and performance as well as secure safe and successful implementation of our major growth projects. Even though there are some signs of recovery, the pandemic is not over yet.
Confident with our financial position and future cash generation, UPM’s Board of Directors has today proposed a dividend of EUR 1.30 (1.30) per share for 2020."
The global economy is expected to start recovering in 2021 from the deep downturn experienced in 2020. World regions will progress at different pace, and China is leading this development. Demand for most UPM products is influenced by overall economic activity and hence, depends on the shape and rate of the economic recovery.
The COVID-19 pandemic continues to cause significant uncertainty in 2021. In 2020, lockdowns had a significant negative impact on graphic paper demand but supported the strong demand for self-adhesive labelling materials and specialty papers. Opening of the economies is likely to allow for some normalisation of these demand impacts. However, further waves of the pandemic and related lockdowns remain possible.
In the beginning of 2021, pulp prices are expected to increase compared with Q4 2020. Paper prices are expected to decrease moderately, compared with Q4 2020.
UPM will continue to implement measures to decrease fixed and variable costs.
UPM’s comparable EBIT in H1 2021 is expected to be lower than in H1 2020, due to lower paper prices and higher maintenance activity. Comparable EBIT is expected to recover in H2 2021.
Impact of COVID-19 pandemic
The COVID-19 pandemic and the related containment measures around the world continue to represent significant uncertainty in 2021.
The COVID-19 pandemic and the related containment measures resulted in a sharp decline in the global economy in 2020. In the first phase of the recession, the pandemic containment measures and lockdowns around the world severely limited or temporarily stopped significant parts of the economy. It is uncertain how potent the following recovery will be and how long it will take for the world economy to reach the pre-pandemic level of activity. Despite the start of vaccinations, additional waves of the epidemic in different parts of the world remain possible.
Safety and business continuity
UPM has implemented extensive precautions to protect the health and safety of its employees and to ensure business continuity and progress of its strategic projects during the pandemic. Despite these efforts, the operation of one or more units or the supply chain and logistics could be temporarily disrupted during the pandemic and the related lockdown measures. In these circumstances some units would need to limit operations or be temporarily shut down.
So far UPM has been able to protect its employees and business continuity well.
Demand for UPM products
Many of UPM products serve essential everyday needs and may therefore see relatively resilient demand during the crisis. These products include pulp, specialty papers and self-adhesive label materials. Even in these businesses, demand is influenced by general economic activity, however.
Demand for graphic papers, plywood and timber is more prone to be impacted by the lockdowns and the recession. The lockdowns limit a wide range of consumer-driven services and retail, as well as work at the office. This has had a negative impact on printed advertising and graphic paper demand during the pandemic.
The lockdowns and the level of economic activity may also affect demand for electricity.
In Q2 2020, graphic paper demand in Europe decreased by 32% from the previous year, as particularly advertising-driven paper consumption and office paper demand were impacted by the lockdowns across Europe. In Q3 2020, there was some recovery in demand, but graphic paper demand remained 18% lower than in the previous year. In Q4 2020, a second wave of COVID-19 was under way in Europe, with gradual introduction of new lockdowns in various countries. Graphic paper demand was 14% lower than in the previous year.
Pulp demand held up relatively well, supported by good demand for tissue and hygiene products as well as for some packaging and specialty paper products. Pulp consumption in graphic paper production decreased.
Demand grew for self-adhesive label materials and specialty papers during the lockdowns, as consumers shifted some of their spending from away-from-home categories to packaged daily consumer goods. E-commerce continued to grow, supporting some labelling and specialty paper applications. In Q2, demand for self-adhesive labels in Europe grew by 10% from the previous year. In Q3 2020, demand for self-adhesive labels in Europe was 3% lower than in the previous year, driven by destocking in the customer value chain. In Q4 2020, demand for self-adhesive labels resumed 7% growth year-on-year, partly impacted by the re-established lockdowns.
Adjusting to different scenarios
The potential impacts to UPM are likely to differ by business and by the phase of the pandemic, lockdown measures, changes in consumer behaviour, the recession and recovery. UPM is using shift arrangements, temporary layoffs, or reduced working hours as required to adjust its operations in different scenarios. During Q3 2020, the company also announced plans to permanently reduce graphic paper production capacity and other plans to improve cost efficiency in different businesses and functions.
Projects and maintenance shutdowns
The pandemic and the required health and safety measures add challenge to large investment projects and maintenance shutdowns. UPM's transformative pulp project in Uruguay and biochemicals project in Germany are proceeding with strict health and safety controls. Despite these efforts, some changes to the detailed timeline of the projects are possible during the pandemic and the related containment measures. Currently the projects proceed in line with the planned start-up timeline.
In April TVO announced that fuel loading into the OL3 reactor would not happen as planned in June 2020, TVO announced an updated schedule in August 2020.
UPM rescheduled two pulp mill maintenance shutdowns from Q2 2020 to Q4 2020 due to the pandemic. The two shutdowns were successfully completed in Q4 with strict health and safety controls.
Significant maintenance shutdowns in 2020 and 2021
UPM’s financial position is strong. UPM's net debt was EUR 56 million at the end of Q4 2020. Cash funds and unused committed credit facilities totalled EUR 3.2 billion at the end of Q4 2020. This includes the sustainability-linked five-year EUR 750 million revolving credit facility signed during Q1 2020, the EUR 550 million of bilateral committed credit facilities signed during Q2 2020 and EUR 158 million equivalent rolling overdraft facility. During Q4 2020, UPM successfully issued a EUR 750 million Green Bond under its EMTN (Euro Medium Term Note) programme. The facilities and UPM's outstanding debt have no financial covenants.