UPM-Kymmene Oyj

Jussi Pesonen – President and Chief Executive Officer Tapio Korpeinen – Chief Financial Officer

Mikael Jafs – Kepler Cheuvreux Antti Koskivuori – Danske Bank Alexander Berglund – Bank of America Merrill Lynch Lars Kjellberg – Credit Suisse Mikael Doepel – UBS Harri Taittonen – Nordea Cole Hathorn – Jefferies Kevin Hellegard – Goldman Sachs Markku Jarvinen – Handelsbanken Robin Santavirta – Carnegie Linus Larsson – SEB

Ladies and gentlemen, welcome to UPM’s Third Quarter 2018 Result Webcast. My name is Jussi Pesonen.

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

Hello, everybody.

Ladies and gentlemen, let’s get started. Q3 was a strong quarter for UPM and sets a new benchmark for our performance.

This picture that you see in the Page 2 is really illustrating and telling the story of UPM. Market demand for our products continued to be healthy, and we were able to increase sales prices in all business areas and nearly all product areas.

On UPM group level, the positive impact of increased sales prices were clearly larger than that of the negative impacts of the input costs. Q3 was the 22nd consecutive quarter of earnings growth for UPM, meaning, five years, two quarters.

Our sales grew by 6% and comparable EBIT increased by 20% year-on-year. This was a good achievement, especially as Q3 last year was a tough comparison with high operational efficiency.

This time, Q3 was operationally not among the best quarters. We have temporary production issues at our Fray Bentos pulp mill, and there was also unfortunate turbine damage in our Plattling paper mill, just when the electricity market prices were high.

These issues impacted our Q3 EBIT negatively by about €30 million. Our Q3 comparable EBIT increased by 26% sequentially from Q2.

Our comparable EBIT margin rate is almost 16%, which illustrates well our current performance level compared to that of the first half of the year. Finally, ladies and gentlemen, our cash flow was strong and our balance sheet was particularly debt-free – was practically debt-free at the end of the quarter.

We did have only €4 million of net debt. Page 3 discusses our performance in Q3.

Our business model continues to deliver results. I’m very confident with the model, where if the input costs are rising, we have been able to actually act on the markets and we have been able to mitigate also the cost impacts.

We were able to raise sales prices in all business areas regardless of their position in the value chain. In five out of six business areas, the price increases were enough to cover the impact of the higher input costs.

Ladies and gentlemen, at this point, I will hand over to Tapio, who will make some more analysis of our result. Tapio, please.

Thanks, Jussi. This page shows the comparable EBIT development by the six business areas.

And starting with Biorefining. Biorefining made a new record in terms of quarterly earnings.

Pulp, Biofuels and Timber businesses, all of them achieved higher prices, and there were no maintenance shutdowns in the third quarter. So as a result, Biorefining’s comparable EBIT increased by €101 million from the second quarter this year.

Our Pulp deliveries remained still relatively low, minus 2% year-on-year. We started the quarter with low inventories.

And then our third quarter production was held back by four unplanned production shutdowns at the Fray Bentos mills, caused by a series of thunderstorms. On the positive side, the Lappeenranta biorefinery has reached a new level of biofuel production and yields efficiency after its first turnaround shutdown in the second quarter.

Communication Papers continued to show stable and good earnings. It achieved a 4% increase in the average paper price in the third quarter sequentially, compared to the second quarter, which was sufficient to cover the clearly higher energy and pulp costs.

Energy costs were clearly higher than we would normally have in the third quarter due to the turbine damage at the Plattling mills power plant. We had to replace the lost internal power generation with market purchases at the time when electricity spot prices were high.

The seasonal pattern in Communication Papers’ delivery volumes was smaller than usual, as the business was running at high operating rates and high operational efficiency already in the second quarter. Energy business area benefited from the higher electricity prices.

Its third quarter comparable EBIT increased by €nine million as compared to the second quarter. Hydropower generation was clearly below normal level due to the hydrological conditions in the Nordic area and in Finland, coming from the dry summer.

Raflatac and Plywood performed steadily. They were able to raise sales prices and offset the input cost increases.

Both businesses encountered some headwind from unfavorable currencies. In Specialty Papers, the earnings development was disappointing.

The main reason for this was the continued increase in pulp costs, which we were not able to completely pass on to the sales prices. In label papers, we were able to raise prices but not sufficiently, and fine paper prices in China decreased due to additional market supply coming onstream.

Page 5 shows the third quarter EBIT bridge by earnings driver. And as Jussi already described, the positive impact of increased sales prices were clearly larger than that of the negative impact of higher input costs when we compare it to the third quarter last year.

Sales price increases more than offset higher variable costs also, if we compare sequentially to the second quarter. Electricity was temporarily a negative earnings driver in the third quarter in net terms for UPM.

The Energy business area benefited from the high electricity market prices, but low hydropower availability limited our earnings opportunity in energy sales. The turbine damage in Communication Papers hit our internal power generation.

As a result, electricity costs increased more in the Communication Paper business than our electricity revenues. Typically, UPM as a whole generates about the same amount of electricity as it consumes, even if in different geographies.

So in that sense, it is not a perfect match, but typically, it is about imbalanced. Our delivery volumes increased in the second quarter but remained lower than last year.

There are several reasons for this: first, the production challenges we already discussed limited our deliveries; second, the comparison figures last year are quite high when it comes to deliveries, and also, operational efficiency in the third quarter; and then finally, as costs has been clearly on the increase, we have prioritized margins over volumes. This page shows our cash flow and net debt.

In third quarter, our operating cash flow totaled €434 million. Working capital increased by €75 million during the quarter.

Net debt totaled €4 million, as Jussi mentioned, at the end of the quarter, which means that our balance sheet is practically debt-free now. And here is our outlook statement.

Our outlook for the year 2018 is unchanged. As we stated in our second quarter release, we expect our comparable EBIT to continue growing 2018.

And we expect sales price increases to outweigh the increase in variable costs as compared with 2017. We also reiterate our guidance for the second half of the year.

We expect to report significantly higher comparable EBIT in the second half 2018 compared to the first half. In the third quarter, our comparable EBIT increased by 26% sequentially from the second quarter.

And our comparable EBIT margin reached 15.9%, which illustrates well the current performance level which we have been able to achieve as compared to the first half of the year. In the fourth quarter, we will carry out a scheduled maintenance shutdown at the Pietarsaari pulp mill, and the earnings impact in total of the shutdown is expected to be about €20 million negative.

On the other hand, as we have already discussed, in the third quarter, we had a €30 million negative EBIT impact from temporary production challenges. Thinking of last year’s fourth quarter, in the fourth quarter last year, we carried out the scheduled maintenance shutdown at the Kymi pulp mill.

So therefore, all in all, we do not expect to see a meaningful EBIT impact from maintenance in the fourth quarter, whether we compare it to the third quarter this year or fourth quarter last year. At this point, I’ll hand it back over to Jussi for an update on our growth projects.

Thank you, Tapio. Let’s focus on transformative projects.

Page 8 summarizes our current focused growth projects. As you know, focused growth projects are medium-sized, high-return investments that help us to develop our market position, while maintaining and growing our earnings over time.

All of the projects are proceeding well, in time and well in budget. These projects provide us opportunities to continue growing in the release liner part of the Specialty Papers, in specialty labeling and labels in Raflatac and high-value industry applications in Plywood over the coming years and 1.5 years.

Here, you also see three projects that are and have been successfully completed during the past 12 months: two pulp mill expansions and one expansion in Raflatac. These continue to provide us opportunities for growing going forward.

Page 9 summarizes our transformative prospects. These prospects provide us with a unique and exciting opportunities for significant long-term earnings growth.

In Uruguay, preparations for the potential new world-class pulp mill are proceeding as planned. The rail tendering process is at – in its final stage, and the port concession tendering has started.

UPM has submitted the environmental and social impact study for the mill to the authorities. Next step, we’ll look forward for tangible progress in the infrastructure construction.

Preparation are also ongoing in our attractive biomolecular businesses. In Biochemicals, we are continuing the basic engineering work for the potential first industrial scale biochemical refinery in Germany.

This engineering phase will continue until the first quarter of next year, and as it would then be – as it would be then the first biorefinery of its kind in the world, we want to do it this pace, in a detailed level and right. In Biofuels, we completed the environmental impact study for the possible Kotka biorefinery in Finland and submitted it to authorities for their final conclusions.

Ladies and gentlemen, then let’s move to the Page Number 10. In the coming years, UPM seeks a significant growth in pulp, specialty packaging materials and molecular business areas.

Demand growth for all these are supported by global megatrends, and UPM has a unique competitive position in all of them. All of them provides sustainable solution for growing and changing consumers – challenging consumers’ demands.

Our current focused growth projects are supporting our near-term growth in the specialty packaging materials businesses. The new pulp mill in Uruguay would then be a large growth step for our Pulp business and also for UPM earnings.

The molecular businesses: Biofuels and Biochemicals, could provide a large new growth platform for UPM for the coming decades. These businesses are unique for UPM and would open large new market for us, well beyond the limits of the traditional fiber-based forest industry, even innovating for the future beyond fossils.

Finally, UPM is in great shape and ready for crafting unlimitless opportunities of the bio-economy, offering value creation and business growth. We believe that growing sustainable businesses can offer solutions for the global challenges and such as resource scarcity and climate change.

Ladies and gentlemen, this last slide, Slide Number 12, is summarizing the quarter three for UPM. We did have a very good quarter, a record high quarter.

Our balance sheet is very strong. And we have been able to utilize our operating model efficiently, i.e.

meaning when the input costs are rising, we have been able to take actions to keep the margins in a good level, whether it’s through commercial acts or whether it’s through cost savings. Ladies and gentlemen, this is the end of the prepared part of the presentation.

Dear operator, we are ready for Q&A.

Many thanks, good after noon everybody. So I have three questions.

The first is around Communication Papers. We’ve read in trade magazines that apparently, UPM has sent out letters regarding price increases for that product from the start of the year.

Could you comment anyhow on how that has been received? And then my second question would be around your operating cash flow.

How should we think around that going into Q4, given that so far this year, it’s actually down year-over-year compared to last year? And then the last question is more a sort of general one.

It seems as if the stock market seems to be expecting some bad things on the horizon for the global economy. Could you tell us what you see regarding the demand for your products, currently?

Thank you.

Thanks, Mikael. I guess that I start with number 1 and 3, and Tapio will then come to cash flow.

Communication Papers, obviously, you know that we do not disclose any of the activities that we are having between us and our customers when it concerns prices, and then we will report later all of that when things are done. That – I can say that we have a lot of activity ongoing at this point and some of the deals have been already closed, but we will come back to that when time is ready for reporting the success of what we do.

And then the third one actually, how does the global economy look like? When looking six businesses of UPM and think about the kind of underlying demand, underlying demand has been very solid.

It has been good for us. And there has been no signs of that, that it would have had a big change, if any.

Actually, it’s quite solid. So obviously, that is on a good phase at this point of time.

It remains to be seen how the global economy moves on. We are not immune to global changes of the economy, and therefore, time will tell.

But today, it is very solid.

Yes. And Mikael, if I continue with the cash flow question.

As you said, we have been tying up cash and working capital so far this year, which is different from the first three quarters this year. And maybe just to sort of, first, comment on that.

Obviously, our top line has been growing this year as well. We have been tying up more working capital, particularly to inventories.

And there, of course, one key driver for that is the fact that as the prices for both our inputs and our products, finished products have been going up, then the value of inventory goes up as well. So that, in a sense, is explaining kind of the different pattern that we have had this year than last year.

Typically, in the fourth quarter, we do sort of release some cash flow kind of sequentially, so we would expect that the working capital will come down some during this year. But this year will be different from – it will come down during the fourth quarter from the third quarter, but this year it will be, in a sense, as a whole, different than what we had last year.

Perfect many thanks.

Thank you very much. I have – would have also three question.

First, about the temporary production issues in Fray Bentos and Plattling. Could you give us the split of the €30 million impact between Biorefining and Communication Papers?

And also, if you could comment if I understood correctly that you don’t expect any impact of this going into Q4. That will be my first question.

Secondly, on the fine paper market in China, you comment that there’s been an increase in supply, and hence, a decrease in prices in that market. How do you see the supply-demand balance there?

And should we expect further pressure on prices? That would be the second.

And then thirdly, if I look at the European benchmark biodiesel prices, I see a big increase in those in the beginning of October, almost 40%, I believe. Should this support your profitability in Lappeenranta biodiesel operations or it’s the kind of the same price?

Any kind of – does it have any relevance to your pricing? That will be my third questions.

Thank you.

Well, maybe if I’ll take the first one. One can say this €30 million roughly is sort of split evenly between Communication Papers and the Biorefining.

And well, let’s say, that impact in a sense will be no longer in the fourth quarter. Obviously, the issues in Fray Bentos have been solved.

The mill is running at full, or – and let’s say, also, the biggest impact in this Plattling case in Communication Papers has been felt. So that sort of €30 million will no longer be there for the fourth quarter.

But you should – should we expect some impacts still from Plattling in Q4?

I would say nothing, in a sense, if you compare the headline for the two quarters.

Okay.

For the – I will actually, Antti, cover then the two of them. Fine paper prices, yes, if you follow the trend of any of the statistics.

Fine paper prices have been coming down in China. But obviously, looking even our margin on the specialty papers, with the high pulp prices, yes, there might be some pressure on prices, but the margins are starting to be quite squeezed on the papermaking side as well.

So I don’t believe that, that would actually be the similar kind of pressure that we have seen or similar move that we have seen in the past. And then the last question was benchmark of – where was it?

Biodiesel prices in Europe, yes.

European biodiesel prices, obviously, we are actually – we are a player in the market than before. Obviously, if things are moving to the right direction, we will benefit out of that as well.

That is correct.

Okay, thank you very much.

Thank you very much. I think most of my questions have already been answered, but I’ll do one on the balance sheet.

Now that you’re basically debt-free or the net debt is zero, how do you really kind of view of – take that in context when you’re going to recommend the shareholder returns going forward? And is there anything you would might want to comment on kind of where you see your operational – or sorry, your optimal financial gearing in the medium term?

I mean, obviously, it depends on if you go ahead in Uruguay or not.

Well, I would say that, as we have commented earlier, basically, we believe that it makes sense for us to have a strong balance sheet at the moment because we are obviously planning significant investment projects. So if we, let’s say, proceed with several of those, then obviously, our – or let alone, the Uruguay project by itself, obviously, a very sizable project.

So in that sense, our CapEx will increase. And therefore, it makes sense for us to kind of have the capacity in the balance sheet to prepare for that.

At the same time, we also want to, in a sense, have a consistent track going forward in terms of offering an increasing trend in our dividend payout. It is – our dividend policy is connected to our cash flow, as you know, but also, let’s say, strengthening the balance sheet gives you comfort that we can continue in a sort of a positive trend there as well.

And then, finally, there’s always the factor that you cannot plan for, which is that if an attractive opportunity in the sort of M&A arena would come along, then we want to have the – kind of a headroom in the balance sheet to be able to look at those opportunities as well, if or when they might come, which obviously, again, we cannot plan for in advance. So the capacity needs to be there.

Yes, okay. Thanks a lot for color.

Maybe if I can get a follow-up on your last point there on M&A, I mean, given that at least in the public markets, you’ve seen quite a sharp correction and especially kind of in the paper and packaging sector. I mean, obviously, I know you’re always on the look.

And do you – have you seen that also kind of in – kind of assets that you are monitoring, that potential valuations have become more attractive now than, say, one month ago?

I wouldn’t draw any conclusion of this one month. And like Tapio said, that our kind of three piece is three points.

Superior shareholder return is our one goal. And then, actually, the – is it organic growth or through M&A?

Obviously, M&A front has been quite challenging because of the valuations of the assets. Time will tell.

And like Tapio said, that you cannot plan it, but if there will be attractive opportunities, we definitely have then a right type of balance sheet for – going for that kind of thing as well.

Okay, thank you very much.

Thank you. I just want to get back to your comments about solid demand and then, well, looking at your own deliveries that are not growing at all, in fact, contracting in most segments, what – how should we read that?

Are you strapped on capacity or are you – is it because you’ve been more pursuing price increases? And that also goes for Raflatac.

You have Avery Dennison talk about, I guess, a 3% volume growth in their labels business, and you’re basically calling it down 3%. So I’m just curious why we have this in a solid demand environment, a negative volume development.

I guess that, Lars, there are two things. Obviously, as we said, that like in Pulp business, we have had not the greatest operative quarter through that – what happened in Fray Bentos.

And also, the Q3 last year was a very strong operational. It was well done.

But then coming to the operating model and how we think about the market, when we have seen quite an increase on costs, we have been value – we have been prioritizing the margin and the cost measures as well over the volumes. And so that has been pretty clear way of operating in all businesses.

In Raflatac, we were already increasing prices already in the second – first and second quarter of this year already. So margin has been very important to us to be able to make the kind of record earnings as we’d made this quarter.

And that has been our name of the game for the full year, that the cost pressure we have seen, whether it’s pulp prices, 27% higher than that of a year ago in third quarter, or the wood costs. And I’m quite happy with the way that we have been doing.

Obviously, we are having high operating rates as well, but we can squeeze more out.

Understood. When you’re looking at the communication – or generally, paper as a whole, it’s been a pretty significant – greater decline in overall market volumes this year versus a very good year, admittedly, in 2017.

How do you think about that as you go forward into 2019? And with cost pressures, et cetera, are you sort of considering to do any aligning with your capacity to, call it, a 5%, 6% decline in demand environment after, call it, 1% last year?

Is that on your book of things to do now?

This year, actually, for the first – the three quarters, the market has gone down. The market demand has gone down 5% as – by the way, UPM volumes as well.

Communication Paper volumes are 5% down, even if third quarter was somewhat higher. But for the full year, it’s 5% down.

I consider next year pretty similar type of figure, 5%. And if there’s need, that our mills are not operating with high-operating rates, then we need to take actions.

Luckily, there are quite many conversions going on, i.e. the alloys and magazine papers, and if possible, all of them coming on fine papers as well.

So there will be conversions. But having said so, if there’s a need, you know how we act.

Yes, absolutely. And final question for me, which is slightly unclear.

Clearly, wood costs have been a significant discussion point, especially for Swedish-based production. And just looking at the official stats from Finland, there seems to be a bit of a squeeze-up on wood costs also on Finland now.

How – do you see any change to this environment? How much of this would be relating to the harvest difficulties we experienced in the first half?

And do you see any of this coming back? Because essentially, you’ve had deflation for most part of 10 years, right?

So this is quite a change. What are you seeing?

What’s going to happen next?

Well, I would say that, first of all, of course, if you look at kind of the year as a whole, we had those issues that you mentioned here in Finland in the first part of the year that related to the wet weather and harvesting logistics challenges to that, and let’s say, the forest fires and so on. That has been a Swedish phenomenon.

But in the first part of the year, of course, just the necessity to sort of deal with the wood supply as such caused sort of an increase of costs at the mill gate. Then, let’s say, during the year, a sort of stumpage prices have been also on the increase in Finland, as the sort of harvesting volumes have been on the rise as well.

But I would say that, that sort of increase, which, by the way, also as we discussed in the second quarter call in terms of outlook, at that point, that increase on costs has been felt in the first part of the year. And one can say, overall, the cost increases sequentially from second quarter to third quarter or the outlook during the second half compared to the first half is much more moderate.

So in that sense, if you think of the sort of domestic wood market, as such, it has moderated compared to what we saw in the first part of the year. And we would expect that to be the case for – going forward here as well.

So just to be clear. When stumpage prices increase, how quickly does that come on to your P&L?

When do you start to pay this? I mean, you typically buy wood in advance, of course.

But would it be six months out when you see – if you see a move in stumpage prices? Or how should we think about that?

There is a little bit, but let’s say, three months to six months.

Right thank you.

Sorry, three questions. First of all, on Uruguay.

If things proceed as planned today, when would you expect to make a final decision on that investment? That would be the first question.

Second question would be on pulp prices in general. What kind of the trends are you seeing out there now in Europe and in China, and what do you expect for the fourth quarter?

And then finally, on Olkiluoto, if you just could give an update what’s happening there and when you expect this to – the Olkiluoto three project to impact your P&L.

All right, I will start with the – at least the first two of them, and Tapio will come back to Olkiluoto. Uruguay timetable, as it is kind of published and you could follow it, you know where we are.

We are on the second phase of the preparation, and the second gate in the second phase has now completed. So we are well proceeding.

If things goes as they are moving today, we are talking about the end of the first half next year, that we are coming to the phase that then the – all the preparatory work are done, actually. But let’s just see how it proceeds.

But basically, that’s the time scale, in a way, the timetable for Uruguay. Pulp prices have been pretty stable over the last couple of months.

And I do not have any forecast for the fourth quarter, but the balance of supply and demand is pretty healthy at this point of time.

Yes. And then if I continue with the Olkiluoto.

You may have noticed, as we have pointed out in the report as well, TVO, now in the beginning of October, came out with the information that there is a review at the moment going on by the supplier consortium in terms of the remaining time schedule or remaining plan for the project. Some of the testing work that has been going on in the project has not been progressing, let’s say, as planned or according to the earlier schedule.

The results of that review will be known, as TVO has announced, in September. So at this time, we don’t know whether this kind of a review has impact on the overall schedule of the project.

But then, let’s say, what has been or is the schedule at hand at the moment there, the commercial production would start in the end of September next year. So in that sense, the delivery of electricity in larger volumes from Olkiluoto – from us, according to that schedule, would be in the fourth quarter next year.

And let’s say, given where the forward prices for electricity have been now recently, actually, the impact on UPM would be quite neutral. But in terms of any change to that sort of schedule, that we’ll have to see, whether there is any news on that when this schedule review is known.

And TVO will disclose more about that.

Okay thank you very much.

This is a following-up on the, basically, on the sequential basis for Q4. You said that cost inflation, as such, is at a fairly moderate – but are there business areas where you are sort of seeing pricing efforts or price movements?

We know from the trade you announced that in Europe, there is some sort of increase in fine paper for the fourth quarter, but most of the other areas, the increase is a – more sort of a scheduled for the beginning of next year. But given the sort of a margin pressure for the specialty paper producers overall, I mean, are there sort of ongoing initiatives in that area, which could still have an impact on sort of Q4 average prices, either in specialties or in sort of other business areas that you are seeing?

Harri, this actually would disappoint you, that we typically don’t kind of put the kind of efforts that we do with our customers beforehand. You would need to read the trade press and then draw a conclusion.

I’m sorry, but that’s how it is. Obviously, we do – like I said, that we are prioritizing margins over the volumes, and that is the case also for the paper businesses.

Sure, sure. On the Lappeenranta biodiesel unit, I mean, I understood that you have sort of managed to raise the capacity after the sort of stoppage in – earlier this year.

Would you sort of then roughly quantify how – what is the current sort of capacity compared to the initial capacity when the line was started up?

Yes, we can. We – actually, of course it is.

We did have the break in the end of the second quarter, and therefore, of course, it’s early stage, but we are talking more than 10%.

Okay, okay. And the final question is about the – sort of the harvesting and planting activity in Q4.

You had a fairly large valuation item related to the biological assets now in the third quarter, but based on the schedule, like, what sort of number could we expect for the fourth quarter in your view.

Well, we don’t sort of guide for that, as you know. But you can look at what we have had in the fourth quarter, typically.

Yes we will do thank you.

Tapio and Jussi, could you give me a little bit more color on the release liner business? What kind of lengths are those pricing contracts?

Are they significantly different to your graphic paper-type contracts? I’m just trying to get a feel for when you will be able to put through price increases and if there’s anything that would restrain you from explaining to your customers now.

Of course, variates from customer to customer. We have long, actually, term customers as well, but also, then we have to quarterly price.

But typically, there are six months to more.

Six months to more. So when will they be resetting?

Next year? Or was it completely variable?

Yes, it depends. We do have the business globally.

We do have the Asian business. We do have the global businesses.

We do have global accounts. We have a different – it is coming all the time, actually.

But also, of course, the beginning of the year will be the next clear point of when that can happen.

And then you spoke earlier about M& A. Which areas of business are most attractive to you at the moment?

Where are you seeing kind of best value for money at this stage?

At this stage, I think that there are not that much of activity. But of course, if you think about the spearheads of the growth, specialty packaging is one area.

In the pulp area, we definitely do not have that many in mind at this point of time, nor in the molecular businesses, but somewhere there. Let’s just see how it goes.

Thank you.

Most of my question have been answered. But I was just wondering if – you talked about some paper capacity conversion, et cetera.

Could you maybe give us a quick run-through how you see supply-demand balance across the different graphic paper grades? And secondly, on the maintenance costs, you said you didn’t expect the maintenance in 4Q to be a big negative versus last year and versus 3Q.

Is that because of the €30 million one-off you had in 3Q? Or what is the key driver of that guidance?

When – if you are looking the industrial operating rates, the graphic papers, the operating rates have been quite high in all segments. It’s not one or two, but all of them.

So basically, the supply-demand balance has been quite tight actually for the year, and that has been one of the reasons that the prices are improving. And like I said, that there will be conversions happening, not only the small assets, but big assets, like I mentioned.

And that’s where we are. So there’s no specific difference between grades.

Some of the grades are somewhat higher than the others, but basically, it has been quite solid and good supply-demand balance.

Maybe I’ll just kind of confirm your second question that, yes, that is correct. If you compare fourth quarter against fourth quarter, we have the Pietarsaari shutdown this year and Kymi shutdown last year.

So those are, in a sense, equaling each other if you look at that comparison on that point. And then, on the other hand, if you look at third quarter this year compared to fourth, this €30 million impact that we had from the operational issues, that extent of impact we don’t have at the moment.

So that, in a sense, again, kind of balances out the Pietarsaari maintenance impact that we are now having in this fourth quarter.

Good afternoon. Just wanted to check on the turbine trouble that you had in Plattling, that the impacts from that was primarily the energy costs and not lost volume or any on the negative impact.

Well, I would say, primarily it’s on the energy costs, but of course, let’s say, when that kind of accident or incident happens, it impacts efficiency as well.

Okay. Then a second question, we’ve seen wood prices increasing quite significantly and we have also seen, to the forward energy prices moving up.

Do you see a potential future need to look at the fair values of your forest assets or your energy assets? And that – how would those mechanisms work?

We do that obviously on a continuous basis. We have our valuation model for both the energy assets, and well, also the fair value of our growing trees, both in Uruguay and in Finland.

So we review that on a continuous basis, and then we come out when we have changes there to report.

Okay. And for Q3, the sort of fair valuations on the forest assets were fairly high.

Is that in part driven by higher wood prices? Or is it more due to forest sales or something like that?

It’s more due to the, basically, growth of our forest base both in Uruguay and in Finland, and then forest sales as well.

Okay. Thank you.

Thank you very much. So can I just ask you, when I look at the cost per tonne in Q3, I do understand there’s some extra cost now, but even so, it’s historically high, the sequential increase, Q3 versus Q2.

And if I understand you correctly, wood costs haven’t increased that much. It’s been moderate, pulp, but at least prices haven’t gone that much during the quarter.

So what is driving that cost inflation? Yes.

So are you talking about UPM as a whole?

Exactly.

Well, basically, you have to – first of all, if you look at what is the sequential – like, if you look at the waterfall chart that we have in the presentation here, the sequential variable cost increased, as we already discussed also in July. It’s €100 million plus year-on-year.

But if you look at that quarter three compared to quarter two this year, then it’s significantly less, some €20 plus million. So that is, quite clearly, more moderate base of cost increase than that we are sort of seeing sequentially today.

One thing that you have to obviously always keep in mind here is that in these charts here or looking at business by business, then obviously, for paper businesses, higher pulp costs means higher cost. So if you look at the kind of the percentage increases in terms of market prices, they have been the strongest in pulp in the third quarter – in energy as well.

And as mentioned, the fact that now, in Plattling, we had the turbine failure and we had to replace, in a sense, the internal energy generation by purchases from the market, that increased cost there as well. So I would say those are the factors there that are impacting.

Then, of course, wood is part of it. But again, where we have seen the biggest percentage increases are in pulp and in energy costs.

But then again, those impact the top line of our pulp business and our energy business as well.

Sure, sure. Can you just remind me how much – I guess, fiber is what, 29% of your total costs.

So how much of that is wood at the mill gate, roughly? Is it 2/3 or that – all of that fiber costs?

No. It’s less than that because, obviously, fiber includes wood recycled fiber and purchased pulp.

But I’m afraid I don’t have the figure for you right now. We can sort of – if you call Mika

Closer to half of that 30%, perhaps?

Less.

Less? Okay, okay.

And after that, you have the logistics and the harvesting and then you have the selling rights. Can you split those up into sort of wood at the gate of the mill?

How much is the selling right, roughly? Is it half or is it a bit less than half?

No, I won’t – we won’t be able to give you that, but obviously again, it depends. For pulpwood, it’s clearly less.

Obviously, for plywood and sawn timber, logs are in a higher portion than for pulpwood.

All right. And finally, just in Communication Paper.

The market obviously has declined, as you said, around 5%. How would you describe the balance at the moment and the outlook now for foreseeable future, end of the year, for example?

Like I said, actually, the balance is pretty good and tight. And when looking forward, there will be conversions.

And that’s where we are. And you can see it also from the curves of the prices, that the balance is quite okay.

All right. Thank you very much.

Thank you very much, and good afternoon. In specialty paper, we saw a bit of a dramatic decline in EBITDA per tonne, and you’ve touched upon the reasons behind that.

But I wonder if you still could, in somewhat more detail, talk about the difference in margin trends in the third versus the second quarter in the specialty papers part and the Chinese uncoated fine paper part, please.

Well, I don’t know that we have much more detail to give on that. But of course, if you look at, let’s say, the co-audit, the sort of public figures in terms of what has happened with the fine paper prices in China and then, on the other hand, where the sort of pulp market has been, obviously, you can see that the fine paper prices have been going down while pulp prices stayed at a quite high level in China.

So therefore, of course, the margins have been contracting quite significantly from that. And as mentioned, again, that is influenced by the fact that there has been new capacity coming to the market in China.

On the other hand, for label papers, then we have been able to increase prices at the moment. It’s in a different direction than for fine papers in China.

But again, not at the same pace, as the pulp cost has been going up, as the label papers basically are purely pulp. So therefore, the pulp cost impact obviously is the largest in those paper grades.

All right. So if we look at the label-based paper part specifically, if I understand you right, there has been a margin compression, Q3 and Q2, but a lot less than what we see for the business area as a whole.

For label papers.

For label papers, yes.

Yes, that’s correct.

And would you, in any way, quantify that, how much of the pressure we’ve seen in the label part sequentially?

I’m afraid I can’t give you more on that.

Okay, fair enough. And then just maybe another somewhat detailed question on Raflatac.

You’ve previously talked about you being someone tough on pricing and margins. You’ve lost a bit of volume, and you’ve seen scope for volume recovery.

Could you tell us how far you are in that process? How much of a volume recovery is there still to be had in the next quarter or quarters to come?

Basically, Raflatac is having a capacity that we can grow, but the profitability is number one topic for us, and therefore, we grow when it does makes sense and improve the profits. So yes, capacity-wise, Raflatac is that kind of converting business where you have kind of possibilities to grow, we do so, and the only dedicated accounts where we actually see a good margin growth as well.

Okay. Thank you very much.

Yes, ladies and gentlemen, thank you for being with us almost one hour. The quarter three was a strong quarter for UPM, and thank you for listening to us.

Thank you. Bye now.