UPM-Kymmene Oyj

Jussi Pesonen - President and CEO Tapio Korpeinen - CFO

Mikael Jafs - Kepler Cheuvreux Henri Parkkinen - OP Group Antti Koskivuori - Danske Bank Lars Kjellberg - Credit Suisse Mikael Doepel - Handelsbanken Linus Larsson - SEB Stockholm

Ladies and gentlemen, welcome to UPM's first quarter 2015 result webcast. My name is Jussi Pesonen, the CEO of UPM.

And I'm here with our CFO, Tapio Korpeinen.

Hello everybody.

Let's directly move into the results. UPM's first quarter was solid quarter.

Our results improved from that of last year slightly. Looking at our business areas, we had significant improvements in Biorefining and Plywood, and stable good performance in Raflatac and Paper Asia.

On the other hand, Paper ENA and Energy faced challenging market conditions. As we expected, publication paper prices in Europe and electricity sales prices decrease in the beginning of the year.

Also paper deliveries in Europe decreased by 125,000 tons from that of last year. We were able to offset these market headwinds with our profit improvement action, and here I need to underline, we have two profit improvement actions that are relevant to this improvement that of the EUR 200 million that was run last year and then this EUR 150 million, a new program.

And then of course some help from favorable currencies. As a result, the good profitability that we achieved last year continued in Q1.

And this gives us a good position for earnings growth for going forward. The current market headwinds were already affected our Q1 results, but the major part of the positive impacts from the ongoing profit improvement program and favorable currencies is still ahead of us.

Furthermore, the earnings impact from the ongoing growth investments is also yet to come. On Page 3, you can see that we made some progress in nearly all financial metrics.

Sales was on the same level as last year and our earnings and profitability increased slightly. But now ladies and gentlemen, I like to hand over to Tapio for some analysis on our results.

Tapio, please.

Thanks, Jussi. On the following page, on the left hand side, you can see the figures concerning the main drivers that Jussi was referring to.

As the currency exchange rates have changed significantly in this chart, we show the earnings drivers in constant currencies and the net impact from the exchange rates is shown as a separate component. We had significant headwind from sales prices, especially from publication paper prices in Europe, as well as electricity sales price in our energy business area.

In the first quarter, our publication paper prices were about 5% lower and electricity sales price 13% lower than last year. All in all, changes in sales prices decreased our EBITDA by about EUR 80 million as compared with the first quarter last year.

Our European paper deliveries decreased by 6%. Furthermore, we had lower hydro and nuclear power volumes compared to last year, partly related to an unplanned outage in the Olkiluoto number two nuclear reactor.

On the other hand deliveries continued to grow in Raflatac, Plywood and Paper Asia. All in all volumes had a EUR 20 million negative impact on our EBITDA.

Fixed costs were EUR 13 million lower than last year, and variable costs decreased by about EUR 60 million. About half of the decrease in variable costs was due to the actions taken as part of our profit improvement program last year, as well as the new EUR 150 million profit improvement program this year.

The other half of the variable cost decrease is due to lower input costs in the marketplace. As you know, the euro weakened significantly towards the end of the year and early this year.

Without hedging, this would have had nearly EUR 70 million positive impact on our first quarter EBITDA, as compared to last year's first quarter. This positive impact is of course moderated by the currency hedges that we have in place.

We typically hedge about 50% of the estimated net currency cash flow for the coming 12 months. Taking the hedges into account, the positive impact from currencies on our first quarter EBITDA, as compared to the first quarter one year ago, was about EUR 30 million.

If the currencies stayed at the current level, there would be another EUR 30 million positive earnings impact ahead on a quarterly level as that hedges rollover. On the right hand side of the slide you can see the EBITDA changes on business area level.

As already discussed, prices and volumes decreased in Paper ENA and in Energy. And as a result, they lowered - reported lower EBITDA than last year.

On the other hand Biorefining and Plywood showed clear increases in their EBITDA and Raflatac and Paper Asia showed stable good performance. Out of our six business areas, Biorefining has enjoyed the biggest relative benefit from exchange rates.

The following Page 5 gives an update on the progress of the EUR 150 million profit improvement program that we announced in November last year. In the first quarter, the actions under the program decreased our costs by about EUR 46 million, which means about 31% of the targeted savings had been achieved.

Nearly all of the savings in the first quarter were variable cost savings. We closed down three paper machines during the first quarter.

But as you can see here, almost all of the positive impact on Paper ENA, fixed costs, is still to come. The fixed cost impact from the closures will be visible in Paper ENA profit especially in the second half of the year when also deliveries are seasonally stronger.

All in all, the program offers a further EUR 104 million of annualized cost reduction impact to be realized by the end of this year. Page 6 shows the operating profit development by business area.

You can see the strong development of Biorefining and Plywood stable; good performance of Raflatac and Paper Asia; and lower profits in Energy and Paper ENA. Plywood continued its strong track of improving profits, driven by 6% high year delivery volumes and lower costs.

Biorefining benefited from the increasing pulp prices in euro terms. First quarter was also clean quarter in terms of there haven't been no maintenance stops in the pulp mills.

Lappeenranta Biorefinery was in the early stages of its production ramp up. The higher pulp prices represents a cost increase for Paper ENA and Paper Asia.

Paper Asia achieved nearly the same operating profit as last year. Paper ENA operating profit decreased more materially due to the combination of lower publication paper prices volumes and higher pulp costs.

As already discussed, the closures had no meaningful impact yet on Paper ENA costs in the first quarter. In Energy, the sales price was impacted by lower hedging price, but also by the unusually warm winter in the Nordic countries.

We had less hydropower available compared with last year, and the Olkiluoto number two nuclear power plant was out of production for three weeks due to generator outage. Raflatac achieved good volume growth in all regions, but was also impacted by some temporary increase in costs before the capacity additions can be started up in the second quarter.

Page 7 shows our cash flow. In the first quarter, our operating cash flow was EUR 108 million.

First quarter cash flow was impacted by a seasonal increase in working capital, up EUR 147 million for the quarter. Typically UPM’s working capital increases in the first half of the year and is then released in the second half of the year.

From this perspective, the comparison period first quarter of last year was quite untypical. Over the past 12 months, our operating cash flow is EUR 1.85 billion or EUR 2.03 per share.

The changes in currencies also had a small translation impact on our net debt. As a result, our net debt remained on the same level as in the previous quarter.

Gearing decreased by 1 percentage point to 31%, and net debt to EBITDA was unchanged at 1.8x EBITDA. Our outlook for 2015 is unchanged.

We expect that the good profitability achieved last year will continue in 2015, and we see some prospects to improve further. The main negative items in the year 2015 are: first, the publication prices in Europe; secondly, paper deliveries in Europe and thirdly, electricity sales prices.

The main positive factors are: firstly, our EUR 150 million profit improvement program; favorable currencies as compared to last year and a generally benign cost environment due to the oil prices for example. Nearly all of the negative impact from paper prices, paper deliveries and electricity sales prices was already visible in the first quarter results.

On the other hand, only 31% of the positive impact of the EUR 150 million profit improvement program and other 50% of the direct positive impact from the current currency rates was visible in the first quarter. Furthermore, practically no positive impact from our growth investments was visible yet in the first quarter and therefore it’s yet to come.

In the second quarter, we will have a maintenance stop at the Kaukas pulp mill, as well as the normal mid-summer maintenance stops in the paper mills. And now I’ll hand it over to Jussi.

Thank you, Tapio. And now we move onto the area of focus, the investments, as we have kind of plan to invest in the growing businesses.

In UPM, every business is targeting top performance in their own markets and in their own businesses area. Plywood is a business that has been able to saw consistent improvement in its performance over the past couple of years.

First, through restructuring, but then increasingly throughout the focused commercial strategy, superior quality and customer service. And now we are pleased to tell you that we have decided to invest in our Plywood business by expanding our in Otepää mill in Estonia.

Total investment cost will be EUR 40 million, and it will be completed by the end of 2016. And we definitely expect this to be an attractive investment from return point of view and it will enable the business to grow in its own key customer segments.

Lappeenranta Biorefinery. Next we will talk about this EUR 680 million projects.

You remember that we are investing totally EUR 680 million on biofuels, pulp capacity additions and labeling materials in China, self-adhesive labelstock in Asia-Pacific and in Poland. At the end of first quarter, we have already spent EUR 350 million out of that EUR 680 million, a bit more than half of the total.

All of the projects are expected to start by the end of this year. And with these investments, once they are all fully up and running, we are targeting to a positive EBITDA contribution of EUR 200 million.

And now the Lappeenranta Biorefinery. One of the first of these projects to reach the ramp-up phase as this is the first refinery of its kind in the world.

The construction and commissioning took some six months longer than we originally planned. That delay is now behind of us, and we started commercial production of renewable diesel in January, and then retail distribution of the high-quality product will start in May here in Finland.

Based on the experience so far, we know that the technology works, the product meets all expectations and the business case is still valid. And like Tapio mentioned what kind of Q1, the ramp-up was still in its early days.

Now in the coming quarters, we will ramp-up the mill and optimize the production to reach our targeted good production output and returns. Page 2 summarizes the debottlenecking investments at our pulp mills resulting in a 10% increase of the pulp production capacity.

The small investments at Pietarsaari and Fray Bentos pulp mills have been done and the production optimization is ongoing. The investment at Kymi mill is proceeding well, and we'll start-up by the end of this year and it meets all the requirements.

And then the third and fourth investment category, the labeling materials machine, the Changshu label paper machine is also proceeding very well and then the machine is going to start by the end of this year as the Kymi pulp capacity. And then Raflatac’s expansions in Asia-Pacific and Poland are slightly late of the original timetable.

We guided that they will be up and running during the first quarter. And now we know that they are going to be in full use in second quarter of this year.

Ladies and gentlemen, moving to the Page 14 which is summarizing our CapEx. Our CapEx guidance for this year is EUR 500 million.

And as we know, that majority of those big projects are finalized during this year. We see that the next year's CapEx is again going to be significantly lower than that of that EUR 500 million.

Ladies and gentlemen I like to now summarize our presentation. UPM's good profitability continued in Q1.

We had a solid quarter. Our outlook didn't change.

Our own profit improvement actions and favorable currencies offset the market headwinds that we had in Paper ENA and Energy in the quarter. This gives us a good starting point for earnings growth for the later quarters and into the next year.

The current headwind from the paper prices, paper volumes and electricity prices were already impacting our results during the first quarter. On the other hand, our profit improvement programs has more than EUR 100 million of annualized cost reduction impact to materialize by the end of this year.

Our growth projects are either ramping up or expected to start up by the end of this year. And then when they are full use, the positive earnings impact is expected to follow.

Our cash flow and balance sheet are strong, which enables UPM to simultaneously distribute attractive dividend. And with the new dividend policy implementing growth projects and act on strategic opportunities.

And the Page 16 is still pretty much the kind of overall short-term, medium-term and long-term picture of where we are heading with following the page 17, what is our kind of model of operating. And this is now the end of the prepared part of the presentation.

Now we are ready for questions. Dear operator, I hand over to you for handling the Q&A session.

Thank you.

Thank you. Can you hear me?

Yes, we can.

Okay, so a couple of questions. The first one would be on the cash flow.

Could you please elaborate a little bit about this working capital increase and sort of enlighten us a little bit about what's happened there?

Well, as I said, it’s fairly simple point that typically we had a working capital increase in the first quarter. At the end of year, we’ve run the working capital down or the working capital runs down particularly in the paper business.

And so therefore then there is sort of built up then during the first half, and particularly in the first quarter. So this year, we had working capital increase of EUR 147 million.

And the point that I was making earlier is that actually last year in the first quarter, we did have a unusual pattern as far as working capital is concerned. We did actually at that time, basically have flat working capital or even a decrease of EUR 1 million.

So overall the big picture is that it's seasonality that we have had normally in the previous years as well.

And if you take the working capital increase away, we would have had a pretty similar cash flow as last year.

And is it then - so just to that, I understand that this would be released during the second half of this year that is the intention?

Yes, that's typically what then happens, because again kind of the highest volumes we have in the second half and then towards the end of the year working capital starts to wind down.

Okay. And then just my last question would be on the maintenance that you're guiding for in Q2.

Could you give us some estimated cost level of what that will be roughly in Q2?

Well, let's say, nothing - we haven't sort of given any exact figures on that. But let's say the additional fixed costs in round figures for large integrate can be somewhere around EUR 10 million.

Okay. Many thanks.

Yes, hi. It’s Henri Parkkinen from OP Group.

I have two questions. My first question is about this overall situation on the pulp market.

How do you see the current situation on the pulp market at the moment? So there is some new short fiber pulp coming to the stream, and how do you see price development when going forward?

And second question is related to your energy division and your energy hedges. Now we saw that your average churning price came down by some EUR 5 per megawatt hour during the first quarter.

What kind of hedging situation you have at the moment, and how do you - how should we see this price development during second, third and fourth quarter of this year? Thank you very much.

First of all, if I take the pulp question first. The pulp markets are pretty solid at this point.

Of course, the new capacity doesn't come on stream in next couple of years, if you’re referring to Anticosti [ph] investment. It will be only starting up by the end of 2017.

The soft market - soft pulp markets has been, I don't know how many years pretty solid. No growth, stable, good kind of solid demand increase.

And in short fiber, there has been a solid growth, 1 million a year. This was - this year - this first quarter was both 100,000 tons again particularly in China.

So China has been having all growth of the pulp markets solidly year-in year-out almost 8 million ton per year and that remains to actually stay there. Obviously similar thing happens when it comes to market where other growth markets for the softwood, they are obviously in Asia, in China, whereas Europe is slightly going downwards when it comes to demand.

It remains to be seen. It has been pretty solid, stable growth in short fiber.

And long fiber, stable, no growth, but where the markets are growing are in Asia, whereas the Europe and North America are declining.

Then maybe if I'll take your second question around electricity and the energy business. As you’ve seen from the report, our average sales price for the first quarter was EUR 40 per megawatt hour and the spot price for the same time was EUR 32, so there was EUR 8 difference.

And that is partly due to hedges and partly due to, let's say, the optimization of our volumes, particularly hydro during the quarter, as we have previously discussed. So the average price did come down as you mentioned and there basically - because of the sort of hedges rolling over overtime, I would say sort of going forward and sort of broad terms, the kind of delta in terms of the hedge price level that we have seen in the first quarter.

So that I think is in line with then what we will see as a kind of a price level going forward as far as the hedge prices are concerned in the coming quarters as well.

Okay. Thank you very much.

Very helpful. Thank you.

Yes, thanks. Three questions, if I may.

Firstly, on paper. Could you talk about a little bit of what this improvement in the product mix that you are talking about in the text?

Is this a permanent change, or should we see a reversal going forward in next quarters? And the second question still on paper, about the volumes.

Now your volumes are down, I guess, 6% year-over-year. And that's more or less, I guess in line with the market.

Do you expect your volume development to deviate from the market due to your closures that you are doing? And then thirdly, on Lappeeranta Biorefinery.

Could you give us an indication of the contribution to the Q1 numbers, because when I look at your pulp business, I think looking at the volumes and your comments - a little bit of your comments I would have thought that the EBITDA would have gone a bit more higher. Is the case that the Lappeeranta Biorefinery had a negative impact on Q1 numbers?

Thank you. Those are all my questions.

All right. If I talk about paper and then Tapio comes to the biofuels business.

First of all, obviously as you have seen that we are closing down newsprint capacity, so we are really actually having a more actually favorable paper business mix through the magazine grades and that is where we think. Now the 6% decline and 6% volumes, I guess that we have been going through with the market, but obviously when we take 6% or 7% of the capacity away, as we have been taking out of this 800,000 tons, it is actually even more than 6%, 7%.

Then our operating rates will be higher than that of the rest of the gang. So we will benefit out of that.

But obviously I would expect that our overall volumes will go in the similar nature than the market. But absolutely that’s close to 7%, 8% of capacity reduction.

We will keep those volumes. Our business case is pretty valid on that respect.

So our operating rates will be higher based on that, because we keep all of the volumes that we will close down and that's the beauty of the big system as UPM is having, that we can easily allocate and keep all of the customers that we have currently. But when it comes to market development, I guess that overtime we will see similar type of decline as the markets, where the newsprint demand will and has been declining 8% whereas the magazine 3% and fine papers 4%.

So that's how we go. And then I will hand over to Tapio to talk about the Biorefining.

Yes, well let's say, of course first of all, it's kind of good to remember that in Biorefining we have not only pulp but also timber and then the new biofuels plant in Lappeenranta. So obviously the change in EBITDA comes as a sum of those three parts.

And as far as Lappeenranta Biorefinery is concerned, again obviously very early weeks and first couple of months into ramp-up. You can't expect much of a contribution.

So let's say impact on change in EBITDA was a minimal. It was a small negative, but obviously again this early in the game, very small impact as such.

Just wanted to come back to working capital again. Given the fact we saw declining prices and lower volumes and this is the big - and the backdrop is, this is the biggest working capital outflow you've had since 2005 in a very different environment.

Is there any issue with weaker demand than you had expected and i.e., an element of overproduction or what is really behind that in this environment, very significant working capital increase? The other question that I wanted to talk about is, what opportunities do you see in terms of overseas exports given the fact that there is a significant price premium, and particularly in the United States.

Any data that I look at so far doesn't seem as if the European industry is taking advantage. If you want to comment those two first, please?

Tapio, you take the WoC [ph] and then I talk about the overseas exports.

Yes. Again, I would say there is nothing special as such, let's say referring to the points that you mentioned there in terms of the working capital increase.

So in that sense I would expect that we see sort of normal pattern as the work - years sort of proceeds to the second half.

And exports?

Then Lars, obviously UPM has had kind of very solid export markets over the years. We have been always having a good balance in our European business and exports, and especially now, I think that we are now one of those companies that will benefit out of the U.S.

markets where our position is strong, especially in the magazine grades, being a kind of local domestic supplier, but also we have had actually over the years, say very solid business going from Europe to those markets, and we have the kind of supply chain system in place. And therefore I think that is for our benefit.

You're not seeing an opportunity to raise the exports into the United States, given this windfall profit, if you like?

Very solid business. Obviously, we are trying to look at whether there are some more opportunities and we will definitely explore those opportunities if they exist.

Okay. Two further questions, if I may.

The electricity component of the energy division is well understood but shouldn't there be a sort of metering positive impact in the industrial parts of the business, meaning paper and plywood, et cetera with lower electricity prices? And the second component is, when you are still referencing the EUR 200 million in EBITDA which has been what you've been saying since you started the projects, but given what's going on with oil prices, energy or electricity prices, tougher markets in paper, et cetera.

Is that still an appropriate number, and what conditions do you base that on? I can see the benefit from pulp, of course right, but is that based on current prices, or how do you view this, the EUR 200 million.

What's the components?

If I start with that and Tapio may continue on the electricity side. Obviously yes, that is our target then this all these four initiatives are full run obviously.

If you remember, our main product for the paper is label papers and that is having a totally different kind of marketplace, totally different kind of cost structure when it is actually in Asia. I don't see any kind of reason to believe fully what was the business case at this stage.

Pulp business you've already mentioned yourself is pretty clear. When it comes to Raflatac, I do not have any doubts of labelstock to actually get those figures that are on the calculation.

And then biofuels, as we mentioned, is somewhat delayed but the fundamentals are not changing. Oil price relation is less than typically people believe into the price of the renewable diesel.

So that is not having that kind of big tissue on coming from the oil price. That market will have its own kind of drivers going forward, and we believe that, with all these delays, the business case is still solid.

So all in all, for all of these four focused investments, EUR 680 million, we will still believe that all of them are having a solid business case.

And to your question concerning the electricity and energy, of course that is a positive for our energy consuming businesses. So as I mentioned, let's say, variable cost improvement or change was EUR 60 million lower.

Variable cost for us in the quarter roughly half or about EUR 30 million coming from coming from tailwind in the market. And energy cost, electricity cost of course is meaningful part from that.

So as you say, what is the negative in a sense for our energy business is a positive for the energy consuming businesses.

Very good. Thank you.

Thank you. Just a couple of questions.

I could actually continue on these EBITDA growth initiatives that you have. What kind of a contribution would you expect to get this year out of these projects?

Well, that is something that will be pretty minor when you remember that the big investments like Changshu paper mill and then the pulp expansion will be already during the end of the year. So that is definitely being the kind of the big two ones, EUR 277 million and EUR 170 million, the big investments.

So therefore it will be minor, but obviously there are like the pulp debottlenecking investment in Fray Bentos and Pietarsaari will contribute to this year. We have not guided what is the magnitude of the contribution.

Okay. And then perhaps a more general question on paper demand in Europe going forward.

What kind of trends do you see right now in the market? Do you expect demand declines to continue at the same rate as we saw last year, or would you expect demand in Europe to decline to accelerate or bottom out, or what's your view on the paper demand outlook for Europe?

When looking of quarter-after-quarter, couple or three years looking, magazine papers, newsprint and then fine papers, my kind of general view is that the newspaper demand will - the newsprint demand will be somewhere 6% to 8% down year-on-year and then magazine grades being 3%, 4% down. And similar when it concerns coated fine and uncoated fine, 3%, 4% down.

So that's the kind of general view that you can draw from the trend, and I expect that to continue. The newsprint is still most difficult when it comes to demand development.

Yes. Then finally in terms of your labeling materials business in Asia.

You're mentioning some increased competitions from new mills in Asia and some conversion projects. Could you talk a little bit more about what's happening in that market right now?

Would you be please to - are you talking about the label papers or label materials?

Materials.

But the label materials is a label papers. It's kind of - not the self-adhesive label business, Raflatac business, rather about the paper.

About the paper business.

I think that our position is pretty solid and on that region the label paper demand is growing more than 4%, it could be 5%, 6% year-on-year. And therefore being the high quality producer of the label papers and especially release paper which is the liner, we believe that our business case is very solid.

And there are new capacity coming on-stream which are conversions with the lower technology and targeting to also somewhat lower quality. So basically the businesses case is pretty solid.

Okay. That's clear.

Thank you very much.

Yes, thank you very much, and good afternoon to everyone. You talked about delays in a couple of your investment projects.

Could you give us a brief update on the Changshu project and the timing? Is there any risk that we might see a delay there as well?

First of all, obviously the biorefinery in Lappeenranta, that was delayed. And then when it comes on the label stock materials, i.e., the Raflatac business, the delays are one month to two months.

Those are pretty insignificant. When it comes to our Changshu project, it is spot on.

It’s spot on in everything. It will be meeting the budget quite nicely.

It will be on time and proceeds, absolutely spot on. It's one of the projects that has been doing very good performance, and I do not have any doubts of being on the position to start it up by the end of this year.

Great. And when it comes to CapEx, you give a clear guidance for 2015, and looking at Slide 14 I just wonder, are you giving guidance for CapEx in 2016 as well?

As you can see from that, we do not have a figure. But as you can see, there is a kind of merits that our maintenance CapEx will go down, although it is a slight decline, which is the yellow part of the bar and then our green bar will be significantly lower.

Okay. Good.

And then just a couple of follow-up questions. On the electricity price hedging, when it comes to timing assuming today's spot trades, when is the next potential step-down in average price?

Would that be at the start of next calendar year, or could you say something about the timing of such average price decline going forward?

Well, I won't say anything more - I won't give any more guidance in a sense then what I already said that basically for us this year is sort of - its price levels are concerned, I think in a sense the message is the delta we have seen there. So what happens then in the coming years that we will see.

But as you know, we are selling forward on a continuous basis more or less sort of three years forward. So then we'll see change taking place in line with what has been happening in the forward market with time, but more exactly we won't be providing that.

But just to understand the way you are hedging, I mean, do you hedge - is it once a year, or is it every quarter or every month? I mean, what I was referring to calendar year basis, has that any relevance whatsoever?

Are in the market every day.

Okay. So there is no - the fact that there was a step-down at the end of one calendar year, we shouldn't draw any conclusion from that?

Well, not as such, but again you know what kind of products are being traded in the NASDAQ OMX, so obviously it does have some impact in terms of how the sort of hedge prices develop.

Right. Okay, good.

And then just for clarification sake, when it comes to working capital, are you saying that working capital for the full-year 2015 should be roundabout flat? Is that the full-year expectation that we should have?

Well, let's say, no reason to expect a sort of major change to one direction or another if you kind of look at the turnover days in terms of working capital in our businesses overall.

Because just keeping in mind that you have these pretty significant closures taking place here in the first half of 2015, that might also affect that figure obviously?

Well, let's say, the closures are such - the volume of the business overall that drives working capital rather than closures as such necessarily.

Although the fact we are closing that that business will be kept inside of UPM and all of those volumes will be kept.

Right. Great.

Okay. Thank you very much.

Ladies and gentlemen, I apologize of the technical trouble that we had, but have a very nice day. Thank you.

Bye now.