Jussi Pesonen, President and CEO, comments on Q2 results:
“UPM delivered a very good second quarter, and rapid recovery of our earnings continued. In the exceptional economic environment, demand for UPM’s products was strong, and overall, our price increases more than offset rising input costs. At the same time, our transformative growth projects continued on schedule and on budget, and we are in an excellent position going forwards.
Our Q2 sales increased by 15% to EUR 2,384 million, and comparable EBIT was up by 51% rising to EUR 307 million from the lockdown affected Q2 of last year. Operating cash flow increased to EUR 308 million. Net debt at the end of June was EUR 750 million, and our financial position remains strong with EUR 2.5 billion in cash funds and unused committed credit facilities.
The most notable improvement was seen in UPM Biorefining, where pulp and sawn timber prices soared, and the business area made its best second quarter ever. Result was held back by the scheduled maintenance shutdown at the Fray Bentos pulp mill in Uruguay, and a shutdown due to a fire at the Lappeenranta biorefinery in Finland.
Strong markets and good profitability continued for UPM Raflatac and UPM Specialty Papers as recent trends in consumer behaviour, e-commerce and retail prevailed. Labelling materials and specialty papers comprise nearly a third of our sales. Once again, UPM Raflatac had a great quarter, despite exceptional pressure on input costs. These excellent results are not only due to strong market demand but also agile margin and mix management, as well as unrelenting focus on efficiency.
Demand for graphic papers in Europe increased 28% compared to Q2 of last year, which was affected by lockdowns. Strong demand and the timely efficiency measures taken last year resulted in good asset utilisation rates. In terms of profit the quarter was very challenging for UPM Communication Papers due to rapidly rising input costs and market prices for publication papers based on January contracts. The sale of the UPM Shotton paper mill was announced in May and will be completed during Q3.
The markets for UPM Energy remained good and profitability improved due to higher electricity sales prices. Hydropower generation remained on a good level, but nuclear generation was lower due to the maintenance shutdown at the Olkiluoto nuclear power plant. The Olkiluoto 3 reactor project is in its final stages and will be connected to the national grid for test runs during Q4. When in commercial operation, the unit will significantly increase the CO2-free electricity in the Finnish markets.
Profitability at UPM Plywood increased primarily due to increased delivery volumes and high operational efficiency. Demand for plywood remained strong in construction related end-uses and improved in industrial applications.
UPM’s transformative growth projects advanced according to plan. In Uruguay, there are now 5,000 workers on our construction sites. In Paso de los Toros, construction is progressing well in all main areas, and the Montevideo port terminal is close to completion. In Leuna, Germany, our biochemicals investment is proceeding well both at the construction site and in business preparation.
UPM is committed to providing solutions for mitigating global climate challenge. The most efficient way to mitigate climate change is to reduce the use of fossil energy and raw materials. We are contributing through sustainable forest management and innovative climate positive products, thereby enabling more sustainable consumption. We are also committed to cutting our CO2 emissions by 65%t by 2030, faster than the EU target. Our industrial scale initiatives in biochemicals and biofuels are tangible examples of our purpose to create a future beyond fossils.
All in all, throughout Q2 we were able to run our businesses successfully in the rapidly changing market environment, marked by rising prices and demand. More importantly, I am confident that our Biofore strategy is creating long-term value in a world where consumers, businesses and governments are actively looking for sustainable solutions.”
The global economy has started recovering in 2021 from the deep downturn experienced in 2020. World regions will progress at different pace, and China has led 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.
Sales prices for many UPM products are expected to increase in H2 2021 from H1 2021, including graphic paper prices in Europe. Pulp sales prices increased rapidly in H1 2021 and are expected to be higher on average in H2 2021 than in H1 2021.
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 H2 2021 compared with H1 2021 and increase clearly 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. During 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 and long-lasting the following recovery will be. Despite progress with 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 the progression 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, the related lockdown measures, or the following economic recovery. In these circumstances some units may 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's 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. However, even in these businesses, demand is influenced by general economic activity.
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 being 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. In Q2 2021, as economies in Europe started to gradually open, graphic paper demand increased by 28% from the low comparison base in previous 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 has 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. Demand for self-adhesive labels in Europe increased in Q1 2021 by 1% and in Q2 2021, growth is estimated to have continued from the good level of last year.
Adjusting to different scenarios
The potential impacts on UPM are likely to differ by business and phase of the pandemic, lockdown measures, changes in consumer behaviour, and 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 challenges 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 and costs of the projects are possible during the pandemic and the related containment measures. Currently the projects are proceeding according to the planned start-up timeline and budget.
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. For 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 750 million at the end of Q2 2021. Cash funds and unused committed credit facilities totalled EUR 2.5 billion at the end of Q2 2021. This includes the sustainability-linked EUR 750 million committed syndicated revolving credit facility of which EUR 50 million is maturing in 2025 and EUR 700 million is maturing in 2026 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). A second EUR 500 million Green Bond was issued in Q1 2021. The facilities and UPM's outstanding debt have no financial covenants.