UPM-Kymmene Oyj

Jussi Pesonen - President and CEO Tapio Korpeinen - CFO

Mikael Jafs - Kepler Cheuvreux Justin Jordan - Jefferies Lars Kjellberg - Credit Suisse Linus Larsson - SEB Harri Taittonen - Nordea Mikko Ervasti - DNB Markets

Ladies and gentlemen, welcome to UPM's Third Quarter 2016 Result webcast. My name is Jussi Pesonen.

I’m the CEO of UPM. And I’m here with our CFO, Tapio Korpeinen.

Hello everyone.

Let’s get them start. Let’s move to the page number two.

UPS performance in Q3 was excellent. First our growth projects continue to gather pace contributing significantly to our earnings.

In Q3, we reached 80% run rate of the EUR200 million growth project EBITDA target that we had. Second paper ENA showed very strong performance in Q3, in paper Europe and North America Q3 is seasonally the best quarter combined seasonally low fixed costs with high capacity utilization rate and the delivery volumes.

Obviously this is also supported that we actually took the action last year to close down 850,000 tons and therefore we have had a very solid quarter. Our EBITDA increased by 23% and our comparable EBIT by 31% from that of last year.

Our operating cash flow was record strong being EUR506 million in the quarter and our net debt decreased by nearly EUR1 billion from that of same period last year. Page three is actually kind of describing what kind of market we are in most of the UPS products continue to develop favorably in Q3.

Healthy demand growth pulp advanced biofuels, self-adhesive label materials, specialty papers, office papers in Asia and plywood. For example pulp growth for the year-to-date figure is 3.8%.

Demand continued to decrease for graphic papers in Europe and North America and the year-to-date figure is roughly 4%. Pricing our products was mostly stable in Q3 compared with Q2.

Pulp prices stayed on the same level in Q3 as in Q2, having fallen significantly during the first half of the year. So comparable Q3, Q3 price decline was 13%.

Electricity price increased from Q2 bottom level, this was driven by decreased water reservoirs in the Nordic countries as well as increased coal prices. Price for graphic papers in Europe decreased slightly during Q3.

At this point I shall hand over to Tapio for some analysis of our results. Tapio please.

Alright, thank you Jussi. Here once again we have EBITDA change for the quarter from one year ago by driver and by business area.

And as you can see in the third quarter 2016, our EBITDA increased by EUR78 million or 23% as compared to the same period last year. On the left hand side you can see that our cost efficiency measures continued on a strong track.

All of the fixed cost reduction shown here and slightly more than half of the variable cost reduction come from our internal cost efficiency measures, so they are specific to UPM. You can also see a positive EBITDA contribution from delivery volumes, volume growth from the various growth projects in biorefining, specialty papers and raflatac more than compensated for the lower graphic paper deliveries and paper ENA.

The impact of currency hedges in the third quarter was neutral, while in the comparison period last year we had a negative impact from realized currency hedges. You can also see that overall we’re still operating in a deflationary environment.

Changes in sales price in UPM’s product range had a negative overall net impact on our EBITDA, while changes in raw material and energy prices had a positive impact on the bottom-line. On the right hand side, you can see changes in the business area results compared to last year.

Cost efficiency measures were contributing in all businesses; lower pulp prices had a negative impact on biorefining in the pulp business, but also positive impact on paper ENA and specialty papers. Rolling over of currency hedges had a positive impact on paper ENA results.

And growth projects contributed to earnings in biorefining specialty papers and Raflatac. Here on page five, we can see the comparable EBIT by business area, EBIT decreased in biorefining and energy and increased in all the other business areas from last year.

Paper ENA’s performance in particular shows that value can be created also in a challenging business environment. The EBIT for our Paper ENA increased by EUR68 million from the second quarter.

In the paper ENA business, Q3 is typically seasonally the best quarter for the year as the fixed cost are at their lowest and capacity utilization and delivery volumes are high. This time we came to this seasonal sweet spot with competitive costs following our cost efficiency measures and decreased capacity as a results of our previous closures.

Therefore as a result, the capacity utilization rate was high and therefore also operational efficiency was very high for the quarter. Paper ENA fixed costs are always seasonally low in the third quarter, but as we were running the machines close to full run, our maintenance costs were EUR10 million lower even then normal for third quarter in that business.

Also depreciation has come down and was lower in the third quarter. If we compare the third quarter to last year paper ENA EBIT increased by EUR104 million.

Cost efficiency measures decreased both variable and fixed costs significantly. Lower pulp prices had a positive impact.

And you probably also remember that last year paper ENA was negatively impacted by currency hedges. Depreciation decreased as I already mentioned.

UPM’s average pulp price in the third quarter in our pulp business was 14% lower than last year and stayed at the same level in previous quarter Q2. Pulp price is therefore significant driver for the business area results, where we compare Q3 to Q3 last year, but has sequentially little impact if we compare now the third quarter to the previous second quarter.

Biorefining comparable EBIT decreased by EUR28 million year-on-year. Lower pulp prices had a significant negative impact, which we were able to partly offset with our cost efficiency measures and the positive contribution of our growth projects, biorefining had the maintenance shutdown of the Kaukas pulp mill in the third quarter, resulting in a small decrease in EBIT sequentially from the second quarter.

Energy comparable EBIT was down from last year due to 14% lower average electricity price. EBIT recovered somewhat from the second quarter due to good hydropower volumes and somewhat higher electricity prices.

In specialty papers comparable EBIT there you can see the positive impact of the new specialty paper machine ramping up at the UPM Changshu mill in China. When comparing with the third quarter of last year also pulp prices are having a positive impact on the specialty paper results.

Raflatac continued on its strong track with sales margins and deliveries increasing from last year. And finally plywood reported another good quarter; Q3 is seasonally a weak quarter in the plywood business.

The combination of strong EBITDA and working capital release of EUR119 million resulted in record operating cash flow of EUR506 million in the third quarter. Over the latest 12 months, our operating cash flow totals EUR1,671 million or EUR1.671 billion or EUR3.13 per share.

During this 12 month period our working capital has decreased by EUR175 million and at the same time many of our growth projects have been ramping up. Due to the strong cash flow our net debt decreased by EUR986 million almost EUR1 billion from the third quarter of last year ending the quarter at EUR1.479 billion.

Our net debt-to-EBITDA is now below one times and our gearing ratio is 19%. This page eight gives you an update on the progress of our focused growth investments.

In the third quarter we continue to ramp up Lappeenranta renewable diesel refinery, as well as the specialty paper machine at UPM Changshu. We have now achieved 80% as a run rate of the EUR200 million EBITDA target we have set for our first set of focused growth investments.

We are confident that we will meet the EUR200 million when all the projects are fully ramped up and optimized. Already now these investments have been clearly value enhancing.

And we believe that the same true for the later projects you see here below the green line. Of the later growth investments the Kaukas pulp bill expansion and Otepää plywood mill expansion are starting up their ramp ups in the fourth quarter.

The second phase of the Kymi pulp mill expansion is scheduled for startup next autumn. And in October we have announced a new growth investment in Raflatac self-adhesive label business in Poland.

There will be further focused growth projects when the timing and opportunity are right as we discussed in our Capital Markets Day in September. Through the focused growth investments with very disciplined capital expenditure we have been able to grow our growing businesses quite substantially over the past five years.

We have been able to grow in line with or slightly faster than the markets in which these businesses operate. And now I’ll hand it back over to Jussi.

Thank you, Tapio. I guess that this page 10 is now pretty much a great description of what UPM has been doing and achieving ever since 2013 when we changed our operating model, the value creation through cash generation and sustainable growth.

As a background you may recall that we announced the current business structure and the business model combined with EUR200 million EBITDA target for the first set of growth investments and EUR200 million profit improvement program in August 2013. So these two were announced at the same time.

The upper part of the slide shows how paper ENA has been consistently been able to generate strong cash flow, having operated already eight years in consistently declining markets. As discussed in our Capital Markets Day, this is achieved through successful there are three things commercial strategy, strict control of both fixed cost and variable costs and efficient use of assets and plus on top of that you know when looking this EUR300 million cash generation that is existing we have been investing lately only EUR50 million to the business and we are looking forward to invest roughly on that level 1% of the turnover.

So basically that’s the concept which has been generating good returns for the company. One particularly important thing has been timely actions we have been taking timely our actions and therefore I believe - we believe that we can continue to generate strong cash flow in paper ENA.

However, as the business is operating in a declining market it requires consistently and timely actions to keep the competitiveness and efficiency in the business. Therefore we have today announced that we are in the process of rebuilding our graphic paper assets in Europe and any potential restructuring plans would be then announced in the near future.

For the other five businesses biorefining, raflatac, specialty papers, plywood and energy commercial success and the cost competitiveness are equally important, but we also are investing in growth in these businesses. Tapio showed you how we have been able to grow these businesses with attractive high returns in investments.

This is receivable in the EBITDA margin and return on capital employed as well. Since 2013 their combined EBITDA has grown by 27% or more than EUR250 million.

Even in the environment where pulp and electricity prices have been in declining. Next page is actually covering our outlook, the page 11 shows that our outlook for 2016 is unchanged.

We expect our profitability to improve in 2016 from that of last year this is also true for the second half of the year comparing that to first half of the year. As we are closer to the end of the year, we have given some further clarification, our Q4 performance as compared with Q3 is expected to be negatively impacted by seasonal factors.

Christmas is coming as well as clearly higher maintenance activities in biorefining and paper ENA business areas. Ladies and gentlemen, summarizing actually our activities and this presentation.

We had an excellent quarter three, our cash flow and balance sheet are record strong, and we are making good progress with our focused and value enhancing growth investments. There will be more when the time is - time and opportunity are right.

Paper ENA continues to generate value for its strong cash flow and we are well positioned for continuing in our transformation. So this is the end of the prepared part of the presentation.

And now I will hand over to our operator. We are ready to answer all of your questions.

Dear operator, please?

Yes hello first of all congratulations to a very good result. And then have two questions, when you're speaking about your maintenance cost for Q4 and sort of say that they are clearly higher than before, can you sort of give us some sort of references in terms of what were they in total in Q3, so that if we get something to think around.

And then my second question is on your operating cash flow for Q4, I know that you don't guide on that, but are there any seasonal sort of factors we should be thinking about when we are trying to sort of do the rest of the years in terms of the operating cash flow? Thank you.

Right maybe I'll try and cover both questions. On the maintenance cost maybe not the reference point as such, but as I already mentioned in the third quarter we did have quite low maintenance cost particularly in paper ENA as we were running full and we're having very good cost efficiency there.

So I mentioned the EUR10 million lower maintenance cost and typically would expect. Then in the fourth quarter what we say in our outlook statement that there is let's say clearly higher activity in terms of maintenance both in biorefining and paper ENA sort of sequentially compared to the third quarter.

As we first of all in the paper ENA typically do have there is sort of seasonality there as you know in the end of Christmas. I mean at the end of December then we have downtime at the paper machines typically and some maintenance work as well.

So therefore there is a kind of a seasonality on fixed cost, which typically means that again no there won't might be EUR15 million or so seasonally higher maintenance cost in the fourth quarter, but now there is that sort of extra EUR10 million that we had unusually low in the third quarter maintenance cost as far as paper ENA is concerned. Then we have in the fourth quarter Fray Bentos maintenance shutdown, which we have had in the fourth quarter previously as well.

We still have some impact from Kaukas which has been ramping up from the shutdown in the third quarter. And let's say different from our regular biorefining maintenance shuts we actually this year have revisions on two steam turbines, which is more than we would have had for instance last year.

And overall that means that in the biorefining business we have perhaps in round figures about EUR20 million higher maintenance cost than we would sort of typically have like for instance last year. So that perhaps gives you some let's say color around that higher activity in terms of maintenance that we mentioned in the outlook statement.

And then on the operating cash flow I think first of all perhaps to again give you a little bit of background. One thing that I would note as we have discussed for instance in our capital market that we have an ongoing program looking at efficiency and managing our working capital.

So let’s say looking for improvement over a longer period of time in terms of our capital - working capital returns in each of the business and let’s say that program, those actions in that program are having an impact in terms of improving our working capital efficiency and that sort of trend is kind of working in the background here obviously any particular quarter there is always some fluctuation in working capital so one shouldn’t sort of only look out run quarter and figures as such. But the trend has been for improving efficiency and in terms of the seasonality, you mentioned typically we do while we have particularly in the paper business higher fixed cost some downtime at the end of the December month that translates on the other hand then lower inventories some working capital cash release at the end of the year.

Okay, perfect. Many thanks.

Thank you, good morning everyone. So, firstly just on the CapEx within the Q3 statement you talk about CapEx for calendar ‘16 being EUR350 million for the year, back in Q2 that was 400, just curious as what changed?

I guess that nothing has changed, it’s always an estimate of the cash out of the investments and therefore nothing has changed, nothing kind of decisions that would have been going any way, it has been pretty much a estimate and therefore when we know more we have been always guiding that to the market and EUR350 million has been the guidance now. So, nothing has changed.

Right. It benefited obviously the free cash flow.

And then just moving onto Raflatac Polish announcement that you’ve announced in early October, should we think about this as a calendar 2017 EUR35 million of CapEx?

Yes it will be mostly used in 2017.

Okay, right. And just moving on to the stellar performance in both paper Asia and specialty paper, and I appreciate you’ve talked about some positive one-offs in paper ENA, in specialty paper or I am going to put paper Asia that 11.9% EBITDA margin in Q3 are there any sort of positive one-offs in there or should we think about this as the new normal shall we say for specialty paper?

No, one-offs as such again I think kind of important to note compared to or let’s say looking at the improvement from last year, we have the impact of the new paper machine in Changshu, but then also we have kind of a positive various compare to last year because last year we did have some negative impact from currency hedging. And then of course pulp cost, variable cost in general have been lower and improving the profitability of the business as such.

And again you have to kind of note that in the specialty paper business we do operate in niches where in a sense we are able to manage and keep cost savings in our own bottom-line greater than for instance in the more sort of standard grade paper business in Europe and North America.

Okay. And just one final question, just going back to a Mikael Jafs, just on page 6 of your presentation here you talk about operating cash flow in last 12 months of EUR1.67 billion, just remind still the policy for Board of UPM to pay 30% to 40% of operating free cash flows as a dividend?

Yes, that is our policy as we target to pay 30% to 40% of cash flow per share as the dividend.

Okay. And obviously given the cash generation and the very strong balance sheet and the no material step up in shall we say calendar ‘17 over calendar ‘16 anticipated has the Board given any thought to potential special dividends in 2017?

As we actually we’re guiding our Capital Markets Day that yes UPM’s policy is getting stronger and stronger and we do see that it will continue as is and therefore we have all the options in our hands of course the sustainable growing dividend this is the kind of base for that pattern, we have all measure to distribute our kind of capital back to the shareholders as well, but that is something that is under consideration.

Okay thank you, Jussi.

Thank you. Most of the questions have been answered just a couple of follow-ups, when it comes to cash distribution first and foremost, just to confirm you do not have a mandate to buy back stock today is that correct?

We do actually have a mandate from the annual general meeting,

Okay.

But that mandate as we have had that in previous years as well and that mandate has not been used.

But you’re free to do so, if you choose at any time.

It’s up to - I mean we have that mandate from the annual general meeting, so the Board obviously has the authority.

Right. Just coming back to paper ENA, of course as you mentioned you were running full and EUR10 million lower in annual maintenance cost I suppose.

How should we see the impact of that very, very strong efficiency during the quarter if you were to think about that in normal terms? Is that captured in the EUR15 million that you talked about in terms of seasonal impacts or is there anything else that we should think about to be slightly not too carried away by the fantastic performance in Q3.

And also just wanted to clarify, what was the impact of Madison in terms of your remaining operating rates did you actually lose any revenues or did you - or you’re able to transfer that volume into your other mills.

Well maybe on the first question. As I mentioned already in the third quarter, we had about EUR10 million lower maintenance cost than you would kind of typically expect in the third quarter.

So in that sense there is that sort of additional delta plus then that sort of EUR15 million seasonal variance. So we will see how efficient we’ll be in the fourth quarter, but third quarter was let’s say EUR10 million better than one would usually expect on that note.

And if I actually comes to Madison, Madison was part of that 850,000 ton restructuring program that we lost last year and we have been pretty successful in commercial strategy keeping maturity of all those volumes inside of the company and therefore it has been all of the actions that we have been taking on that program has been benefiting UPM quite nicely.

Understood. And just one final one, on biorefining obviously your - the biodiesel assets have been ramping up, can you give us any sense of how important that is for that EBIT that we’re seeing coming through in that division?

I mean, I understand you had some maintenance in Q2 and that swung back, so the delta between the two quarters if you have any light you can share with regards to the biodiesel, what part that played in the sequential move in the quarter?

Well as I show that if you look at the operating profit for the quarter, the biofuel business was solidly in black figures and also obviously if you look at the biorefining result overall again obviously there has been negative impact because of pulp price, but we have been able to - for the pulp business but we have been able to should have compensate for that through volumes and lower cost in the pulp business, but also through profit improvement in the biofuel business.

But you’re not willing to give as a quantum what that really means, so we can get any sense where you’re actually generating the profit?

Not more than what I have just mentioned that it in the third quarter it’s solidly in black figures as far as EBIT is concerned.

And just to calibrate what was it a year ago? Solidly in the red I guess.

At the end of the year we were getting sort of breakeven level last year.

Okay, very good. Thank you.

Yes, thank you very much and good day to everyone. You say that you are in the process of conducting a review of your European graphic paper assets.

Just a clarification there, if you could say what you mean by that? I assume you've reviewed that part of your business long time ago, is there any new element in that sense?

And more specifically would you in that process also consider external parties as part of that process and reviews?

Maturity of our consideration is how do we improve our internal efficiencies and like I was stating in my previous slides, we are in the process of reviewing asset structure what we need for the future. And therefore we are looking for similar type of thing that would actually yield to a competitive asset portfolio that UPM has in the paper business.

So basically that's what we have been doing eight years almost or almost 10 years actually in a row that we are reviewing our assets and then take actions to keep our competitiveness and future cash flows strong.

But in your view has anything changed when it comes to the possibilities and potential for structural change between different operators in the industries?

No I guess you all on the line know that our view has never changed. We believe on consolidation, we believe on synergies.

So nothing has changed in our heads.

Alright, thank you.

Yes, thank you Harri Taittonen, Nordea. One question on variable cost outlook, I mean you did mentioned that there is sort of the area era of deflation is not yet over.

But there has been one area recovered paper or recycled fiber process have been moving up over the last few months and just wonder how you are seeing sort of is there going to be a delay or any impact in your cost base compared to the Q3 levels we saw now?

Perhaps not let's say on that sort of frame, but certainly let's say there has been tightness in the recovered paper market, which is obviously means has consequences both for availability and cost. And I think there is no change as such for that going forward as well.

And that's well something that will impact the competition and impact the review that we are going through as well.

Yes. And the other question I had was that we had then basically the currency exposures as such was your earnings will be affected by that [indiscernible] and you have assets in the pound-sterling area.

So basically if one thinks of the price increases you have manage to achieve in the UK, I mean how much does that cover the calculated sort of currency negative impact that one could sort of calculate on the annual report sensitivities? And how much have you been able to compensate that by price increases in the country?

Well not all of the currency impact has been compensated. While there has been in local currency terms some increases in the UK market.

But then on the other hand also when it comes to paper we have also local production as you know in the UK. So in that sense we have benefited from that in the newsprint and coated magazine business.

Okay, thanks.

Thank you very much and good day to everyone. My questions are around the paper units, paper ENA so you had those paper prices the achieved prices you had quite stable versus the European market down.

So can you please comment on this outperform a little bit. And then on the specialty paper side, so your margins are now close to around 12% and you've mentioned that you have further optimized the customer product mix.

I just want to know how much more there is the gain now and where are you exactly with full ramp up? And related to this can you perhaps please comment on the working capital dynamics for the group from here onwards.

Thank you.

Well perhaps first starting with the paper prices in Europe, it is true that there has been some slight decrease in paper prices in the euro area with the exception for newsprint prices. As mentioned earlier there has been in the pound area some increase, but not sufficiently to totally compensate for the change in currency.

But at the same time in a sense the mix of our business also has changed in the paper ENA business during the third quarter and kind of the sum total of all of these factors is that our average sales price is flat sequentially.

Okay, thanks.

And can you remind me of the second question you had?

Yeah just on the specialty paper, so that you have further optimized the customer and product mix and the margin is quite nice already and I just want to know how much more do you have to gain there and where are we with the ramp up and these optimizations, how far can you go there in terms of the margins? And then perhaps related to that the group working capital dynamics.

Thanks.

Yeah then well on the point actually as was also covered by Bernd Eikens in our Capital Markets Day this sort of work to improve and develop the mix of business in specialty papers overall and also Changshu in particular is work that will be ongoing during the rest of this year and next year. Because as the new paper machine has been ramped up then as the local market for specialty papers for label papers is growing then the mix on the new machine will be sort of more and more shifting to label papers.

And then that also gives us opportunity to work on the rest of the mix and specialty papers. So that sort of change will continue into next year and probably even beyond from there.

So there is in a sense room to improve and work to be on that front for positive impact. And then as already mentioned again as far as working capital is concerned, again we are working sort of structurally to improve our efficiency and that will continue to sort of have a kind of a positive trend for our working capital and typically let's say seasonally again at the end of the year we tend to release some cash from working capital.

Alright, thank you very much.

Hi good morning. I wanted to ask how will the recovered paper price affect the review you're currently undergoing.

I guess that the review of our assets are always based on costs, what we are considering that how cost efficiently we can manage our assets. So the review is based always on the cost of savings and measures that we can really actually harvest the kind of cost possibility in UPM.

Okay, thank you.

Thank you ladies and gentlemen. It was nice to listen to you and it was nice to talk to you.

Thank you. Bye now.