Jussi Pesonen, President and CEO, comments on Q1 results:
“UPM entered the year well prepared for the turn in the markets, which is also evident in our first quarter results. We took timely actions last year, and now that the world economy is recovering, there is a good momentum going forward.
The year began with good demand for almost all UPM products. Pulp prices increased rapidly, while UPM Raflatac, UPM Specialty Papers and UPM Energy continued to perform strongly. In addition, UPM Communications Papers achieved satisfactory results in the difficult market environment. Our earnings recovered to pre-pandemic levels, and our transformative growth projects continued on schedule and on budget. All in all, a good start to the year.
Our sales decreased by 2% to EUR 2,234 million, and comparable EBIT reached EUR 279 million, in line with the corresponding quarter of last year and higher than the three preceding quarters. Operating cash flow increased to EUR 217 million. Our financial position remains strong with a net debt of EUR 83 million and cash funds and unused committed credit facilities totalling EUR 3.2 billion at the end of Q1 2021.
The biggest improvement in earnings came from UPM Biorefining. Demand for pulp, timber and biofuels was good and pulp prices increased faster than expected. At the same time, strong markets continued for labelling materials and specialty papers. Demand trends in consumer behaviour, e-commerce and retail, accelerated by the pandemic, carried UPM Raflatac and UPM Specialty Papers to excellent results again. For UPM Raflatac, the quarter was its best-ever.
Demand and pricing for communication papers decreased from the comparison periods, as expected. Despite difficult market conditions UPM Communication Papers achieved a clearly positive comparable EBIT due to efficient operations, satisfactory asset utilisation rates and commercial success. This would not have been possible without the timely measures taken last year.
Profitability of UPM Energy continued on an excellent level. Electricity sales prices were clearly higher than on comparison periods, and UPM succeeded in optimising the use of its assets in volatile markets. Hydropower generation decreased but was on a good level.
UPM Plywood delivered steady results. Demand continued to be good in construction end uses, and started to improve in industrial end uses, such as panel trading and vehicle flooring.
In the recovering world economy, China is leading the development. The pick-up in business activity is driving demand for many of our products, but it is simultaneously pushing commodity and raw material prices higher. We are aiming to capture opportunities in the recovering markets by efficient margin management and optimising our product and market mix. At the same time, we will continue to take measures to offset cost pressures and to maintain cost efficiency in all our businesses and functions. I believe UPM’s operating model will again help us in steering the businesses in the rapidly changing market circumstances.
We are in a very exciting and intensive phase in UPM’s transformation. I am proud of both of our strategic growth projects, which proceed on schedule and on budget in these exceptional times. In Uruguay, we have now 4,000 workers on our construction sites in Paso de los Toros and Montevideo, and the number will rise to 6,000 later this year. UPM has implemented strict COVID-19 prevention measures to protect workers and to ensure the progress of this strategic project. In Leuna, Germany our biochemicals investment is progressing at full speed in terms of construction, business preparations and concrete customer cases.
In January we announced the start of the basic engineering phase of a potential next-generation biorefinery with an annual capacity of 500,000 tonnes of renewable fuels. As primary locations, we will review Kotka, Finland and Rotterdam, the Netherlands. This basic engineering phase is estimated to last at least 12 months before our standard procedure of analysing and preparing an investment decision can be initiated.
Our ambition is high when we develop business opportunities related to mitigating climate change. We strive to innovate climate-positive products that allow our customers and end-users to make more sustainable choices. Our growth plans in biochemicals and biofuels are prominent examples of this, taking place right now. Furthermore, we have ambitious long-term climate targets, including significant reduction of our CO2 emissions. During the first quarter, we joined the Climate Pledge, aiming to reach the Paris Agreement targets 10 years in advance. We have also committed to the UN Global Compact Business Ambition for 1.5°C and science-based measures to mitigate climate change.
We are continuing to demonstrate our aim for sustainable growth and long-term value creation in our actions. Our purpose is to create a future beyond fossils."
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 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.
Pulp demand has continued to be good and pulp prices have increased rapidly. At the same time, strong markets have continued for labelling materials, specialty papers and energy. Demand and pricing for communication papers have materialised as expected, decreasing from the comparison periods.
With improving global economy, many variable cost items are expected to increase in 2021. UPM will continue to manage margins with product pricing, optimising its product and market mix, efficient use of assets as well as by taking measures to improve variable and fixed cost efficiency.
UPM’s comparable EBIT is expected to increase both in H1 2021 compared with H1 2020, and in the full year 2021 compared with 2020.
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 have therefore seen 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 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 influence demand for electricity, plywood and sawn timber.
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. These impacts moderated to some extent as the year progressed, and graphic paper demand decreased by 18% in Q3 2020 and by 14% in Q4 2020 year-on-year. During Q1 2021 the pandemic and the related containment measures continued to impact the business environment, and graphic paper demand decreased by 14% from last year.
Pulp demand has 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 has decreased.
Demand for self-adhesive label materials and specialty papers have grown during the pandemic, as consumers have shifted some of their spending from away-from-home categories to packaged daily consumer goods. E-commerce has continued to grow, supporting some labelling and specialty paper applications. Demand for self-adhesive labels in Europe grew by 7% in Q1 2020 and 9% in Q2 2020 year-on-year, decreased by 4% in Q3 2020 due to destocking in the customer value chain, and resumed growth at 6% in Q4 2020. In Q1 2021, demand for self-adhesive labels in Europe increased by 1% from the good level of Q1 2020.
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 thereof. UPM has used 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. The UPM Kaipola paper mill was closed in January 2021.
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 2020 TVO announced that fuel loading into the OL3 reactor would not happen as originally planned in June 2020. TVO announced an updated schedule in August 2020, and the fuel loading was completed in April 2021.
UPM rescheduled two pulp mill maintenance shutdowns from Q2 2020 to Q4 2020 due to the pandemic. Both shutdowns were successfully completed in Q4 with strict health and safety controls. In 2021, UPM has rescheduled the maintenance shutdown at the UPM Kymi pulp mill from Q2 2021 to Q4 2021.
Significant maintenance shutdowns in 2020 and 2021
UPM’s financial position is strong. UPM's net debt was EUR 83 million at the end of Q1 2021. Cash funds and unused committed credit facilities totalled EUR 3.2 billion at the end of Q1 2021. This includes the sustainability-linked five-year EUR 750 million revolving credit facility signed during Q1 2020 and EUR 159 million equivalent rolling overdraft facility. During Q4 2020, UPM successfully issued a EUR 750 million Green Bond under its EMTN (Euro Medium Term Note). A second EUR 500 million Green Bond was issued in Q1 2021. The facilities and UPM's outstanding debt have no financial covenants.