Jussi Pesonen, President and CEO, comments on Q1 2020 results:
"The key foundation in implementing our transformation strategy has been a very strong balance sheet and an agile and efficient operating model. Therefore, we are well prepared for the current uncertainty and can continue implementing our strategy and growth projects.
The global socioeconomic outlook has changed dramatically since January as the COVID-19 outbreak in China quickly developed into a worldwide pandemic. We implemented extensive precautions to protect the health and safety of our employees and to ensure business continuity and the progress of strategic projects. UPMers proactive and diligent response to the pandemic has allowed us to run our operations uninterrupted.
During the first quarter our businesses were not significantly impacted by the pandemic—not even in China—and we are able to report solid results. Our sales were EUR 2,287 million and comparable EBIT was EUR 279 million. First quarter operating cash flow was seasonally low, after the record level in Q4. Our financial position is exceptionally strong. UPM has net cash in the balance sheet (net debt EUR -405 million), and our liquidity totalled EUR 2.2 billion at the end of March.
The Annual General Meeting was held under special arrangements ensuring safety and shareholder rights. The joint effort by our organising team and UPM shareholders enabled us to have the AGM on schedule and to make important decisions including the dividend of EUR 1.30 per share. The adoption of the Financial Statements and the election of the Board were also completed.
In terms of business areas, UPM Raflatac and UPM Specialty Papers reported their best quarter ever. Remarkable profitability was due to a combination of long-term efforts to improve margins and continued good customer demand.
The industry-wide strike in Finland affected UPM's pulp and paper businesses for two weeks and timber and plywood businesses for four weeks. In UPM Biorefining the demand for pulp was stable and prices continued at a low level. UPM Timber was affected by softening demand. In UPM Communication Papers the year began with lower deliveries, affected by the strikes in Finland, and moderately lower paper prices.
UPM Plywood achieved stable results despite only two months of operation at the Finnish mills. UPM Energy performed well in highly exceptional weather conditions and volatile energy markets.
At the very end of the quarter UPM withdrew its outlook for the year and will not provide a new outlook for the time being. The uncertainties in the global economy are unprecedented due to the pandemic-induced lockdowns that are affecting one third of the world population.
UPM takes various measures to protect its employees and to ensure business continuity, but temporary disruptions in production, the supply chain and customer demand are nonetheless possible. UPM is planning to use shift arrangements, temporary layoffs, or reduced working hours as required to adjust its operations in different scenarios.
Many of our products serve essential everyday needs and may therefore see relatively solid demand during the pandemic, particularly for pulp, speciality papers and self-adhesive labels. On the other hand, the demand for graphic papers, plywood and timber is likely to be impacted by the lockdowns and the following global recession.
Our growth project in Uruguay is proceeding as planned with strict health and safety controls. To give one example, new workers entering the UPM Paso de los Toros pulp mill construction site are being tested for COVID-19. In January we took the next transformative step by investing in a biochemicals refinery in Germany, which opens totally new markets for UPM. Engineering and planning of this investment are ongoing.
UPM’s operating model will once again prove our strength even in these exceptional conditions, and our financial standing and corporate resources ensure our strategic projects. I am proud of the resilience and solutions-orientated approach of UPM staff. Our businesses have the focus, competitiveness and agility to perform and protect cash flow even in a changing business environment. Long-term value creation continues to be driven by our spearheads for growth. We are committed to sustainable businesses that offer solutions to global challenges."
2020 and the COVID-19 pandemic
UPM does not provide an outlook for the time being. The COVID-19 pandemic and the related containment measures around the world represent significant uncertainty for the rest of the year.
Economists now 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.
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 containment measures. In these circumstances some units would need to limit operations or be temporarily shut down.
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, speciality papers and self-adhesive label materials.
Demand for graphic papers, plywood and timber is likely 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 is likely to have a temporary negative impact on printed advertising and graphic paper demand.
The lockdowns are also likely to temporarily affect demand for electricity.
Adjusting to different scenarios
The potential impacts to UPM are likely to differ by business and by the phase of the pandemic and the recession. UPM is planning to use shift arrangements, temporary layoffs, or reduced working hours as required to adjust its operations in different scenarios.
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 due to the COVID-19 pandemic, fuel loading into the OL3 reactor will not happen as planned in June 2020, and it is possible that the regular electricity production would be delayed respectively.
UPM has rescheduled two pulp mill maintenance shutdowns from Q2 2020 to Q4 2020. The maintenance shutdown at the OL1 nuclear power plant in Q2 2020 is planned to be shorter than usual.
Timing of significant maintenance shutdowns in 2020
UPM’s financial position is strong. UPM has net cash in the balance sheet (net debt EUR -405 million at the end of Q1 2020). Cash funds and unused committed credit facilities totalled EUR 2.2 billion at the end of Q1 2020. This includes the sustainability-linked five-year EUR 750 million revolving credit facility signed during Q1 2020. The facility and UPM's outstanding debt have no financial covenants.