UPM-Kymmene Oyj

Jussi Pesonen – President and CEO Tapio Korpeinen – CFO

Mikael Jafs – Kepler Cheuvreux Fabio Lopes – Bank of America Antti Koskivuori – Danske Bank Lars Kjellberg – Credit Suisse Linus Larsson – SEB Cecil Boex – Brigade Capital Cole Hoffman – Jefferies

Ladies and gentlemen, welcome to UPM’s third quarter result webcast. My name is Jussi Pesonen, I am the CEO of UPM, and I’m here with Tapio Korpeinen.

Hello, everyone.

Our performance continued to be strong in Q3. Our operating profit excluding special items improved by 21% from that of Q3 last year.

In the first nine months of 2014, our operating profit improved EUR141 million or 30% compared with the same period last year. The main reason for the improved performance is the successful EUR200 million profit improvement program.

We launched the program in August last year and achieved the target savings in Q3 this year, one quarter ahead of our schedule. Looking at the businesses, we had a good, clean quarter in all of our businesses.

Paper ENA, Plywood, Paper Asia all succeeded well in the profit improvement efforts. In Q3, we had no material maintenance stops or other operational issues and as a result also Biorefining achieved nearly the same result as last year despite the lower pulp prices.

Also, Energy and Raflatac results were on about the same level as last year. I’m particularly pleased with our cash flow and balance sheet development.

With the improved profitability, our operating cash flow in the first nine months was EUR306 million stronger than in previous year. Our net debt has decreased by EUR575 million in the last 12 months.

In fact, our net debt is now on the lowest level in 15 years, both on absolute terms and in relation to EBITDA. Strong cash flow and balance sheet provides the foundation for dividend growth as well as our ability to continue the transformation of UPM.

Let’s move to the next page. Page 3 shows progress of our EUR200 million improvement program.

As I already mentioned, the program achieved its targeted impact already in Q3, one quarter ahead of schedule. Our new business structure and the management teams of our separate six business areas have now been in operation for 12 months.

The businesses have clearly showed that they are capable of delivering results. We have been able to reduce our fixed cost through streamlining and through improved focus.

We have also achieved a significant reduction in our variable costs, a big part of the measures taking under this program improved profitability in Paper ENA. However, it is not nearly all related to a European paper business.

All of the other businesses have also made progress under this program. Our new businesses structure, i.e., the management teams of six separate business areas and the functions have identified further potential for improvement.

This additional we aim to capture during 2015. We are currently preparing a new plan including fixed and variable cost savings.

We are analyzing all the means and tools in our disposal and will communicate a new program and profit improvement target in the coming few weeks. Today, it is too early to discuss of the details and the plan itself.

You will need to wait for a few weeks’ time before we are ready to communicate the size of the program or the planned actions included in it. We can and we have plans to take further measures in order to safeguard our profitability and improve our competitiveness future.

This is important as European economy is not promising any tailwind in the near future. We see future improvement potential within our businesses.

Our target for each business area is top performance relative to relevant peers. This way we can take care of our strong cash flow and continuously strengthening our balance sheet and continue to improve our capacity for future transformation in the company.

But ladies and gentlemen, I now hand over to Tapio to analyze our Q3 results. Tapio, please.

Thanks, Jussi. This following page shows our EBITDA development in the first nine months as compared to last year.

On the left hand side, you can see that both our variable and fixed costs came down significantly from last year. Roughly half of the variable cost decrease shown here was due to measures taken under our profit improvement program and as such specific to UPM, not coming from tailwind in the market so to speak.

Our fixed cost decreased by EUR59 million during the nine months as compared to last year. In Biorefining, we had higher maintenance cost than last year and also we have now the full biofuels organization in place.

So in fact, if we look at the businesses other than Biorefining, the combined fixed cost reduction in those businesses and UPM functions in total was about EUR90 million during the nine months as compared to last year. As you can see, this year we have had headwind from paper prices, hardwood pulp prices as well as currency still during the first six months of the year.

In Q3, the headwind from currency stopped and turned into a small tailwind. But this positive impact was still minor only a few million euros.

On the right hand side, you can see that the biggest improvement came from Paper ENA, followed by Plywood and Paper Asia, which improved as well. Most of the improvement comes from reduced variable and fixed cost.

And on top of this, Plywood was also benefitting from increased prices. This page summarizes operating profit development in our six business areas.

On the bottom row, the good profit improvement achievement in Paper ENA, Plywood and Paper Asia is clearly visible. In Plywood, the third quarter is seasonally weak due to vacation period and seasonally low production and deliveries.

From that perspective, the third quarter operating profit of EUR7 million or 7% of sales was a solid result, in fact, the best third quarter result for Plywood in 10 years. In Paper ENA, the underlying business performance was on the same level as in the second quarter.

The third quarter operating profit includes a EUR13 million energy-related refund in Europe which accounts largely for the positive different vis-à-vis the second quarter. This refund is attributable for the first nine months of the year.

But due to the authority’s decision making process, it was booked in the third quarter result. Excluding this, refunds or looking at it in a different way, one would allocate it over the three quarters.

Paper ENA performance has been quite stable during this year and clearly better than last year. In UPM Energy, good profitability continued partly due to successful hedging, but also due to good value creation from our hydropower assets.

Raflatac profits recovered from the weak second quarter. You may remember that in the second quarter result, we had the impact of some temporary operational issues.

More importantly, Biorefining operating profit recovered well from the weak second quarter. Pulp prices continued to be about on the same level as in the second quarter.

But in third quarter, we had no maintenance stops or other operational issues. As a result of high production efficiency and delivery volumes, we achieved nearly the same operating profit as last year.

Our operating cash flow continued to be strong in the third quarter at EUR300 million. Over the past 12 months, our operating cash flow totals EUR1.041 billion.

Our cash flow is strong enough to cover our attractive dividend, our maintenance investment needs that are quite low and also our focused value enhancing growth projects and still at the same time continue the strength in our balance sheet. Our cash flow has been consistent and reliable.

And as a result, our balance sheet has been strengthening continuously. In the third quarter, our net debt totaled EUR2.736 billion, that is EUR575 million less than 12 months ago.

Our net debt to EBITDA was 2.2 times in the third quarter. And our gearing was 36%.

As Jussi mentioned, these are the strongest balance sheet metrics this company has had in 15 years. Our liquidity continues to be strong at EUR1.7 billion euros.

Going forward, cash flow and continuously strengthening balance sheet puts us in a quite unique position. To date, we have been able to show that we can improve our cash flow through our own actions.

And therefore, we’ll target further actions for profit improvement for the next 12 months or the next year. Page 9 shows our outlook for the second half of the year.

The second half outlook is unchanged from three months ago, but we have added some further information about the fourth quarter. Third quarter was a good, clean quarter where everything went well.

Fixed cost are seasonally low in the third quarter and we had no major maintenance stops or other operational issues in the quarter. In addition, the timing of the energy refunds added EUR13 million to the Q3 profits like I already described.

Compared to this, our fixed cost are seasonally higher in the fourth quarter more similar to the second quarter fixed cost level. In the fourth quarter, we also have had the maintenance stop of the Fray Bentos pulp mill in Uruguay.

And at the end of the year, stoppages in our paper mills. And at this point, I’ll hand it back to Jussi.

Thank you, Tapio. It is absolutely a great pleasure to see this cash flow coming into the company and as well as balance sheet being stronger than in the last 15 years.

But on the other hand, we have a clear focus on growth investments that I will report to you now, i.e., for main project that we have. Let’s move on the to the Page 10 which gives you an update on Lappeenranta Biorefinery.

As you remember, the testing and commissioning process was stated early this autumn. I’m happy to say that this has proceeded well.

We are really taking all of the needed steps. The unit has already started the hydrogen pressurizing and the heat.

So we are actually already commissioning some of the parts. At the commercial production of advanced renewable diesel under the brand of UPM BioVerno is expected to start during the current quarter.

So we are proceeding well on that project. Like we said earlier, earnings impact is expected to be minor during this year.

Growth project that is considering this 10% expansion in pulp production capacity – as you remember, we were targeting of 10% increase in our pulp production capacity with relatively modest CapEx. I’m happy to report that all of the main items are proceeding well.

Pietarsaari is already up and running adding 70,000 tons of capacity. And the completion was early this summer.

And the startup after the investment has proceeded well. Annual stoppage in Fray Bentos is over.

And the mill is well up and running. At this point, during the stoppage, we were making some minor investments that will help us to increase the pulp production towards the level of allowed by the production permit.

And finally, the 170,000 tons expansion of our Kymi pulp mill is well underway as you can see from this picture. The additional startup or the additional capacity will be completed by the end of 2015, so basically Kymi will be up and running end of 2015.

Page 12 shows you construction site in our Changshu mill in China where we are building the new labeling materials and woodfree specialty papers machine. Also, this project has had a good start.

In the picture, you also see the existing paper mill on the background. As you can see and know, there are clear infrastructure synergies in expanding to existing mill site.

The new production unit will start up by the end of 2015. On the same mill site, by the way, we have also Raflatac self-adhesive label factory where we are currently expanding our production capacity.

These projects combined with a smaller expansion in our Malaysia mill will increase our production capacity in the Asia-Pacific region by 50% in Q1 2015. Page 13 shows our CapEx.

As you know, our maintenance investment needs are low, only about EUR200 million per annum. And there is no pressure to increase that.

This means that we can realize our focus growth investments with relatively low total CapEx. We do not need to user our balance sheet for our organic investment, instead like Tapio said, we can fund our dividend and CapEx needs from our strong cash flow and still continue the strength in our balance sheet.

This gives us a unique opportunity and position in the industry. Ladies and gentlemen, I’m then summarizing my presentation.

Our profit improvement program was a success. So we have been achieving the EUR200 million.

It clearly improved our profitability despite the headwind that we have had from the paper and pulp prices and currencies. The economic outlook particularly in Europe continues to be challenging.

On the positive side, we have identified further improvement potential within our businesses. We will communicate a new profit improvement in few weeks’ time.

Q3 showed further evidence that UPM’s cash flow is strong and our balance sheet continues to be strengthening. This forms the foundation both attractive dividend as well as our ability to continue the transformation.

Ladies and gentlemen, I will stop here. And this is the end of the prepared part of the presentation.

And now we are ready for your questions. Dear operator, I hand over to you for Q&A session.

Thank you.

Yes, hello. Good afternoon, everyone.

And first of all, congratulations to a very good quarterly result. Then I have three questions.

The first one is about the pulp market. What is your view on the short fiber pulp market pricing given that we see new capacity coming on the stream.

Then the second question which is actually two questions that are linked together. And then in Europe, we see some pricing pressure on some of the publication paper grades.

Do you expect this to eventually result in capacity closures? And then as an add on question to that, what are the trends you see among lenders to the European paper industry given that marginal producers are not covering their cash costs.

Thank you.

Thanks. I guess Tapio should take the pulp price.

I will then go for the paper pricing pressure.

Yes. Well, let’s say if you look at in euro terms, third quarter pulp price is for us on the average, they were pretty stable from the second quarter.

And I would say overall we would expect to see a fairly stable situation in the fourth quarter as well. Then longer term, of course, it remains to be seen how this new short fiber capacity coming to the market affects pulp pricing.

But at the moment, it is a fairly stable situation overall from our point of view.

Yes. And then the second was about the kind of pricing pressure existing and then what happens to the capacity.

Of course, when looking the industry average operating rates, they are somewhat lower than that of last year and there is a kind of our view for the fourth quarter is that our prices will be flat. What happens then thereafter remains to be seen.

And we will report when it is ready for that. I guess that is no surprise that we do have overcapacity situation in European markets and obviously whether there is a price pressure or not, I think that efficiencies comes through high operating rates as well remains to be seen what happens on that field.

And then Tapio, you talk about the lender’s view on marginal players.

Yes, I guess probably the best view you would get from the lenders directly but I would hope that the lenders are and would be very discriminating going forward because like you said, let’s say, the smaller players, they have – a few remains to take the kind of actions as we have been taking to maintain and improve cash flow so the margins are quite thin. And therefore, also, let’s say supporting smaller or marginal producers that are struggling going forward should be a decision to make very critically.

Okay. Maybe thanks for that.

Hi, good morning. Thanks for taking the question.

I have three questions. One, on pulp.

You had a very strong pulp shipment. And I wonder if you saw in the market some pre-buying ahead of some big pulp players and now seeing price increases.

So do you think that Q3 was impacted by people buying a lot of pulp ahead of the price increases and we should see a lower Q4 in consequence of that? The second question would be on – in terms of your hedges in energy, would you be able to quantify a mark-to-market impact if we were just to mark to the current rate, what would be the impact in the business?

And the third question would be, on the biological assets gains, you had EUR17 million now. Would you be able to give us any idea on how this is going to behave in Q4?

Thank you very much.

Okay, if I take the first one and Tapio goes for the two second ones. Pulp deliveries were high but our kind of production was actually running well as well.

So basically, we do not expect that there has been a kind of phenomena that the bulk price are kind of pre-taking those volumes. Looking how we sell our pulp, we are selling more than 2 million tons of pulp to the third party customers.

There’s no kind of evident of that. Then Tapio hedges in energy.

Well, I would say that the only way to sort of quantify or maybe refer to your question, in a sense there is that if you look at on one hand our average sales price that we have been achieving in the market vis-à-vis, what is the sort of average price in the market in Finland, that price difference obviously is explained partly because of the hedges that we have in place since many years ago and partly because of the optimization that we are able to do on the day ahead market than the intraday market in terms of, let’s say, timing our hydropower generation and sales to the sort of best time in terms of price, so adding value through that. And maybe you can say that larger part comes from the hedges but the significant part comes from this optimization which is something that obviously we continue to do in the future as well.

And as the volatility and the Finnish market has been rather on the increase than decrease, so that opportunity should be there going forward as well.

Tapio, then the biological assets.

Biological assets, no sort of guidance as such on that there typically. It has been, let’s say, in that sort of level, EUR10 million past per quarter.

But obviously as you know from the past, it can also vary, so no further more guidance on the fourth quarter yet.

Okay, thanks.

Yes, thank you. Going back to your Q4 outlook, I mean historically, you typically have been able to improve a bit in Q4 versus Q3.

Now you mentioned the one-offs you had in Q3. Should we expect the single kind of trend also this year?

That would be my first question. And secondly on your targeted EUR200 million EBITDA improvement from growth project, could you give us a number, what part of that EUR200 million is already in your P&L?

I guess some of the above capacity would be the contributor. And what part we should expect to come in coming years.

And thirdly on the biodiesel startup in Lappeenranta, you say that in H2 this year the impact will be fairly small. Looking into Q1 ‘15 and onwards, should we expect positive EBIT contribution from the unit already in Q1 ‘15 or how should we look into that startup curve?

Thanks.

Maybe if I will start with the Q4, actually, if you look at the business profitability of UPM, the performance of the business areas, energy being exception seasonally that if you have a cold winter then the fourth and first quarter tend to be higher. But otherwise, typically seasonally, fourth quarter is actually down.

And the fact is that, as we mentioned in our guidance, that we first of all in our pulp business, we have the maintenance shutdown in Fray Bentos which is a bit new which we have had now in the fourth quarter. And then we do have in our Finnish integrates and paper assets also stoppages and additional fixed cost in the fourth quarter.

So seasonally, our fixed costs are up in the fourth quarter and that tends to impact the fourth quarter result. So that is what we are also highlighting in the outlook.

So it really comes back to the potential fair value gains in biological assets, if there will be one, I guess?

Well, let’s say yes. If you look at last year, actually we did have actually kind of from a timing point of view, we did have sales of sort of larger pieces of forest land in Finland which happened closed in the fourth quarter which actually impacted also that sort of fair value change.

So that’s why, let’s say, at the UPM level, the operating profit was up in the fourth quarter. Okay.

And then when it comes to the focused investment program, actually we have not guided about this in maturity will be in the future as you can see that the main of the – main and part of the investments, big investments are only in preparation, i.e. the Chinese label materials machine and then obviously the Kymi pulp mill.

Obviously we have some gains already in but not significantly. Like I said, that like in Fray Bentos, although we have got the new permit still we made this smaller investments during this annual stoppage to be able to then increase the capacity further.

So obviously Pietarsaari is the only one in. And then when it comes to biodiesel, obviously we are not giving at this point any guidance for the first, second and third quarter of next year.

But obviously we are putting all our efforts to ramp it up as soon as possible.

Okay, thank you very much.

Thank you.

Thank you. Just a couple of follow up questions.

When you’re talking about the energy refund that you accounted for now in third quarter, should we look at that as part of the cost base also going forward? And also when you discussed energy hedge impact, et cetera, is there a natural offset in the paper division, i.e.

they don’t have the low energy prices that you are partially suffering from in the market prices in the energy division, so as energy hedge is rolled over, they would roll over in a negative way for the energy division and a positive way for paper. Just a clarification on that.

And also if you could, when you’re talking about your capacity increases in pulp between Pietarsaari, Kymi and the potential at Kaukas, if you can talk about if there’s any hardwood in that or is it all softwood?

Well, if I start on the energy matters, yes, there have been actually for some time in several countries where we operate and obviously that’s more significant in the countries where we have the higher energy consuming assets. There are various schemes of refunds or rebates against energy taxes or great fees and so on that have been on the increase during the past year significantly.

And these sort of refunds we have had in the past years and in a sense that sort of scheme or those structures are in place going forward as well. So in that sense, it is a kind of ongoing factor affecting our cost base going forward as well.

On the energy price and hedges, yes, there is a natural hedge in a sense that obviously and that’s what we have been also benefiting from during this year that when energy prices go down, it is a plus for the energy-consuming industry.

All right, and if I take the pulp actual question, when it was concerning about this 10% increase which I think that we will easily achieve this 330,000 tons increase, Fray Bentos is obviously hardwood, as everybody knows. And then when it looks – when we go for Pietarsaari, Kymi and then possibly in the future for Kaukas pulp mill, they all are having a two line so they can produce both.

And it’s a kind of optimization projects that we need to go and we are going through that whether we produce hardwood or softwood, we can actually swing these pulp mills quite nicely. It is a matter of wood supply and then the markets how they go forward.

So basically, it can produce more softwood as well. So basically, these three mills are having an opportunity to optimize the supply of hard or softwood.

Just a follow up, if I may, on the refund. Is this always going to be a lumpy affair and a catch up in the sort of third or fourth quarter every year or sort of a steadier flow in 2015?

Well, it’s a bit of a detail perhaps. But again, the way the decisions are made and become in a sense known in terms of the effect and the quantity of the refund, that is somewhat variable or let’s say unpredictable from year by year when the decisions are made and in a sense when the quantum, so to speak, becomes known.

So therefore, in this year, it was, like you said, kind of a lumpy affair in a sense that we booked it for the third quarter even if it pertained for the full nine months. So obviously we sort of account for it as soon as we have, let’s say, enough visibility and certainty about what the refund is going to be.

But that varies from year to year.

And that run rate would then apply to the fourth quarter I would assume?

That’s correct, roughly speaking.

Thank you.

Yes, thank you very much and good afternoon to everyone. My first question is of a general nature looking into your markets.

What kind of impact, if any, have you seen from overall weakening macro data weakening macro environment over the past many weeks by now in Europe?

Not so far that much. Of course, in paper demand in August, we had some decline but September figures are somewhat better already.

So not much at this point. It also covers the kind of Russian issue for us that we have not seen big changes in the businesses that we are running in Russia as well.

So, so far, not that much.

And since your label businesses tend to be a bit of a litmus test for the macro environment, any interesting observations there?

All the inflow has been solid. That is a maybe interesting point.

Absolutely. And when you look at the paper and maybe the European paper market in particular, you say that there is overcapacity, would you mind quantifying that overcapacity?

And also, do you have a figure for your anticipated market development for 2015 in European graphic paper?

That, unfortunately, we are not, Linus, guiding what it will be. It will be a declining market.

And the overcapacity, as a kind of pro terms in graphic papers, is somewhere 10% to 15%.

And where is it – I guess on where is action most urgently needed?

In my opinion, in all papers it is needed. Actions are needed.

And then just finally, your guidance of CapEx in 2014, do you have a figure for 2015 as well?

No, we have not guided that our kind of CapEx forecast for this is EUR450 million, then most probably we will be somewhat below that but not dramatically below that.

Okay, great. Thank you very much.

Hi, good afternoon. Thanks a lot for taking the questions.

I have three if I may. One, I just wanted to get an overview and understanding on a net basis for the whole group what the impact of lower pulp prices are given obviously the negative impact in the biomaterials business and then positive in the paper business.

And then secondly, if you could just confirm or remind me, obviously you have the available-for-sale energy assets, but what percent of that is already included in the revenues and EBITDA that you show in your energy segment? And then finally, maybe just following up on the sort of European paper rationalization, I wonder if you can comment a little bit on your own plans.

Obviously you took out significant capacity in 2013 and already ‘14, I’m just wondering, what steps or what would need to happen for you to sort of make a similar type of assessment and take similar action.

Tapio, if you take the first two ones and I will cover the last one.

Yes, on the pulp question, we have 3.3 million tons of pulp capacity. And if you look at how much we sell to outside customers, how much do we purchase for our European, North American, Asian paper businesses, then we are about 300,000 tons in excess or along as far as pulp is concerned.

So that will give you an idea.

And that’s just hardwood or is that hardwood and softwood?

Mostly hardwood.

Okay.

And then on the energy assets, so again, the assets that are accounted for on an available-for-sale basis, those assets are hydro and nuclear capacity that is held by or associated companies – Pohjolan Voima, Teollisuuden Voima, Kemijoki primarily. Those belong to the energy business area.

And again, those companies here in Finland, they are sort of a special structure where these companies generate electricity for their owners and the owners get that electricity at full cost. So those assets are part of the fleet that we run to generate power that we sell to the Finnish market which is all in the revenue and EBITDA of our energy business.

In addition to that, then in the top line and bottom line of our energy business area is the hydropower assets that we own 100% here in Finland.

Okay, so there’s nothing that falls outside of the energy business area that’s not – fair to say [ph], that’s not reported in the energy business area?

Not that would be part of this sort of AFS accounted assets. Of course we have, let’s say, mill power plants in our pulp and paper mills which are part of the capital employed and part of the bottom line of our biorefining and paper businesses.

Okay. Okay.

Okay, and then the last question. When it comes to the further consideration of the paper capacity, obviously in UPM we need to earn and every mill and every machine and every operations needs to earn its position.

Every month we are running consistently and regularly optimization models and if there’s a need we take actions in that respect. But if you can see that what we have been able to deliver last year as well improving the profitability.

We are aiming to improve our profitability as we guided that there will be a new program of new targets for the profit improvement and overall, six businesses are included on that consideration

Okay. Thanks very much.

Good morning. I was wondering if you could give me some idea if you’ve seen any impact from imports into Europe from Asia; and then, what benefits you see going forward with the stronger U.S.

dollar for exports into the U.S. markets.

Very little, if any kind of change in the imports, whether it’s Canadian newsprint imports to the Europe or Asian imports towards Europe. Obviously, the dollar will give us a benefit but at least in UPM we have had a very solid customer base all over the world and the currency changes won’t change that much over our kind of deliveries outside of Europe.

So it is a kind of very stable situation where we are and that has been our kind of long term view that we can then optimize the costs in between customers and ourselves. And the dollar-euro ratio change doesn’t actually change that position.

Thank you. And then on the paper Asia, it’s a very good performance considering the capacity that’s come online in that market.

Is that due to predominantly cost takeouts in growth in the label papers business or are you seeing a positive side from the Asian fine paper side?

It’s both when it comes to costs but the excellent position that UPM has in Asia is that we have a very strong position in the Chinese markets but what we inherited from the old times a extensively good sales network outside of China. So, i.e.

whether it’s Japan, Malaysia, Singapore, Australia, so we are able to optimize that portfolio quite nicely. And therefore, we are able to increase as well our sales in the region.

And that is kind of unique to many Western companies that we have a kind of sales network that is unique. So it is costs but it is also kind of possibilities to optimize our market and product mix.

Thanks very much.

Hi, just one follow-up question on the dividend. Could you provide any guidance or any visibility on what you’re thinking about the dividend for this year?

Thank you.

That is obviously the board’s decision and therefore it’s the board to decide. But what we work, as a management team, we definitely are really working hard to be able to actually consistently over year-after-year to grow the dividend.

But that’s the board matter and therefore, I have no further comments at this point. But obviously, what we do is increasing the cash flow and then being able to grow the dividend as well.

Thanks.

Ladies and gentlemen, I think that this was a very good 45-minute session on our session, so thank you for your attention and have a nice day. Thank you.

Bye now.