Jussi Pesonen, President and CEO, comments on Q3 2020 results:
"During Q3 we delivered on many fronts: performance, cost reduction actions, transformative projects as well as safety and health of our personnel. We are taking action to ensure competitiveness, and our businesses delivered satisfactory performance under the highly exceptional circumstances resulting from the COVID-19 pandemic. Despite weak paper markets and low pulp prices, our profitability improved slightly compared to the previous quarter, our cash flow recovered, and our EBIT margin remained above 10%. UPM Raflatac, UPM Specialty Papers and UPM Energy continued to perform well. Our financial standing is strong and puts us in a unique position to proceed with our transformative projects with determination.
Compared to Q3 of last year, sales prices were lower across all of our business areas, and graphic paper deliveries were down by 21%, resulting in sales of EUR 2,028 million, a decrease of EUR 464 million in a single quarter. Comparable EBIT decreased by 37% to EUR 215 million. Operating cash flow totalled EUR 365 million. At the end of Q3, our net debt was very low at EUR 89 million, and cash funds and unused credit facilities totalled EUR 2.3 billion.
During Q3, UPM took forward plans for decisive restructuring and efficiency improvement. Closing of the UPM Jyväskylä plywood mill in Finland and the UPM Chapelle paper mill in France were finalised. Decision on closing the UPM Kaipola paper mill in Finland was taken in October and the plan to sell the UPM Shotton paper mill in Wales was announced. Streamlining began in the business functions of UPM Communication Papers, in Finnish pulp mills, at the UPM Tervasaari mill and at UPM Forest. In addition, UPM Raflatac and UPM’s global functions announced efficiency improvement plans in October. All of these measures combined are expected to result in annual cost savings of approximately EUR 130 million.
The implemented and announced measures are unfortunate to many UPMers, but they are nevertheless necessary to ensure performance in the short term and competitiveness in the long term. UPM is also taking measures to support transitions from job-to-job.
Demand for UPM Communications Papers has been most severely affected by COVID-19-related measures. As expected, demand in Q3 partly recovered compared to the lockdown part of Q2, but still remained low. Market prices decreased by 5%. However, thanks to the ongoing cost reduction measures and improved efficiency, the business was able to turn back to positive EBIT in Q3.
During the spring, UPM Raflatac and UPM Specialty Papers benefited from exceptionally good demand in many end-use areas, especially those related to daily consumer goods and e-commerce. During Q3, the markets somewhat normalised, but the businesses continued to perform well.
UPM Biorefining had a strong quarter in terms of pulp production and deliveries. UPM Biofuels achieved a new production record. However, pulp prices remain at very low levels, which are affecting the profitability of the business area.
For UPM Plywood, the market for spruce plywood was good, both in terms of demand and price. The market for birch plywood, on the other hand, remained highly competitive in some high-end products.
UPM Energy continued to deliver good results. As the hydrological situation normalised and market prices improved, UPM Energy successfully optimised production in the volatile market.
We are on track to deliver long-term earnings growth and sustainability-driven new business. Our transformative projects in Uruguay and Germany proceed on schedule. Construction in the Paso del los Toros pulp mill site is making good progress, and a long-term service agreement on rail cargo operations was signed. The construction of the biochemicals refinery began in Leuna, and infrastructure leases were signed with the chemical park operator InfraLeuna.
The work on these construction sites, as well as production at all existing UPM facilities, has continued uninterrupted throughout the COVID-19 pandemic thanks to high health and safety standards. As part of the UPM Biofore Share and Care programme, we helped Finnish officials in procuring 30 million protective face masks. In addition, we donated 500,000 masks to health care and educational facilities and nursing homes in UPM’s operating countries.
As one of the 41 companies world-wide, UPM was once again recognised as a UN Global Compact LEAD Participant for our strong commitment to responsible business. We greatly value this recognition, as responsibility is at the core of our Biofore strategy. We have signed the UN’s 1.5°C climate target, committing ourselves to reducing emissions, practising climate-positive forestry and innovating products that replace fossil materials and contribute to climate change mitigation.
UPM’s value creation is based on offering sustainable products and solutions to consumers and businesses and strong focus on performance. Our Biofore strategy has delivered results in all circumstances and enables growth of sustainable businesses for a future beyond fossils.”
The COVID-19 pandemic, the related containment measures and the economic downturn continue to cause high uncertainty for H2 2020.
The COVID-19-lockdowns had a significant negative impact on graphic paper demand. The lockdowns also supported the strong demand for self-adhesive labelling materials and specialty papers in H1 2020. In Q3 2020 there was some normalization of these demand impacts, both positive and negative. However, the development going forward remains uncertain and is likely to be gradual, depending on the pandemic, the related lockdowns and changes in consumer reactions.
Demand for most UPM products is influenced by overall economic activity and hence, also depends on the shape and rate of the economic recovery.
In Q4 there will be significantly more maintenance activity than in the earlier quarters of 2020, as two pulp mill maintenance shutdowns were rescheduled from Q2 2020 to Q4 2020.
UPM will continue to implement measures to decrease fixed and variable costs.
UPM’s comparable EBIT is expected to be significantly lower in 2020 than in 2019.
Impact of COVID-19 pandemic
The COVID-19 pandemic and the related containment measures around the world continue to represent significant uncertainty for the rest of the year 2020 and into 2021.
Economists expect a severe global recession in 2020. In the first phase of the recession, the pandemic containment measures and lockdowns around the world severely limit or temporarily stop significant parts of the economy. Once the lockdowns can be eased, 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. Additional waves of the epidemic in different parts of the world are possible and represent further uncertainty.
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 during the first phase of the crisis 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 last 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 last 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 last year. In Q3 2020, demand for self-adhesive labels in Europe was 3% lower than last year, driven by destocking in the customer value chain.
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 has rescheduled two pulp mill maintenance shutdowns from Q2 2020 to Q4 2020.
Timing of significant maintenance shutdowns in 2020
UPM’s financial position is strong. UPM's net debt was EUR 89 million at the end of Q3 2020. Cash funds and unused committed credit facilities totalled EUR 2.3 billion at the end of Q3 2020. This includes the sustainability-linked five-year EUR 750 million revolving credit facility signed during Q1 2020, and the EUR 550 million of bilateral committed credit facilities signed during Q2 2020. The facilities and UPM's outstanding debt have no financial covenants.