UPM-Kymmene Oyj

Dear audience, dear UPM owners, welcome to UPM's Second Quarter 2021 Result Webcast. My name is Jussi Pesonen.

I'm the CEO of UPM and I'm here with our CFO Tapio Korpeinen.

Hello to everyone.

And I would like to start with three key messages. First of all, in Q2 we continued to show rapid recovery in our earnings.

We expect to improve --- improvement to continue in the second half of the year as well. Secondly, our transformative growth projects in Uruguay and in biochemicals in Germany continue in the scheduled and in budget, as planned.

And thirdly, UPM's Biofore strategy is set to create long-term value in this world, where the consumers businesses and governments are actively looking for sustainable solutions. Ladies and gentlemen, all in all, UPM is fit for the future growth.

Our Q2 sales grew by 15%, our comparable EBIT by 51%, as you can see from this slide. As you can see from the graph, we have been achieving a very good result and consistent recovery from last year's Q2, which was the most affected by the COVID lockdowns, i.e., the 2020 Q2.

And then, let's move on to focus areas. During the past years of high uncertainty, we all know that it will still continue in the COVID-19 and rapid changes.

Our focus has been very clear. You have seen this picture quite many times.

Firstly, we have taken decisive actions to ensure performance of all our operations, following the timely actions. In Q2, our costs were competitive and asset utilization rates on a very good level.

On commercial side, our margin management was successful, as we can see from the result. Overall, our price increases during Q2 more than offset rising input costs during that period.

All these drivers contributed to the strong result in Q2. The second focus area is a successful implementation of our transformative growth projects.

As you know, this is and there are most intensive years -- or these are the most intensive years in construction of these two highly attractive and important projects. We continue to make good progress in both projects and as well as in related business preparations.

The business preparation is very important part of the project as well. Thirdly, we continue to develop the next strategy growth options.

As you know, we started the basic engineering study for the second biofuels refinery early this year. Ladies and gentlemen, Q2 was a period of clear economic recovery from the COVID-19 crisis year that was 2020.

It was also period for rising prices, both for our products and for the input costs. Demand was good or strong for -- almost particularly and practically, all of our products and product areas.

Demand continued to grow for self-adhesive labels, materials and for specialty papers, despite the already high comparison figures that we saw last year. Pulp demand continued to be good, although, demand growth slowed down in China, at least temporary, no seasonality.

It is typical for that period, during the summer period, to see lower demand in China. Demand was strong for both sawn timber and plywood, especially in the construction-related end users.

Finally, demand for graphic papers in Europe was good and grew by 28% from that of very low comparison base Q2 last year, when decline was, if I remember correctly, minus 32%. During the first six months, demand was up by 3% from last year.

But giving you some perspective of this demand development and what's the trend line, the Q2 graphic paper demand was 15% lower than in Q2 2019, i.e. the period before the COVID pandemic.

So basically comparing Q2 2019 to Q2 2021 the demand was 15% lower, i.e. meaning 7.5% per year.

Our Communication Paper Q2 deliveries were 10% lower than that of two years ago, i.e. referring to the same time period Q2 2019.

And by the way at the same time and at the same period of time we have closed 18% of our capacity. So 5% annual decline in deliveries from ever since 2019 Q2 and ever since Q2 2019 we have been closing all in all 18% of our capacity.

Then I actually would like to hand over to Tapio for further more analysis of our results. Tapio please.

All right. Thanks Jussi.

So here on the left hand side you have the EBIT bridge comparing the Q2 this year to Q2 one year ago. Sales prices increased year-on-year in all business areas except for Communication Papers.

Variable cost increased as well. But as Jussi already mentioned, at the group level our price increases more than offset the impact of higher variable costs.

Delivery volumes increased in many businesses most notably in Communication Papers. Fixed cost increased by €16 million from last year due to higher maintenance activity.

Last year as perhaps you remember due to the pandemic situation at that time we had very low maintenance activity as for instance in the pulp business we postponed the maintenance shutdowns to second half of the year. In the second quarter, we achieved about €120 million of the targeted €130 million annual fixed cost savings.

If we look at the comparison period the second quarter last year there we did have significant temporary savings in fixed costs due to all the actions that we took to adjust to the rapidly changing pandemic situation at that time. So broadly, one can say that in 12 months we have converted those temporary savings into permanent structural savings and structural improvement in competitiveness and efficiency, plus at the same time offsetting any cost inflation.

On the right hand side, you can see the EBIT bridge comparing sequentially the second quarter to the first quarter of this year. And there we can see that we achieved sequentially higher prices in most business areas from the first quarter.

In Communication Papers, prices were fixed in January contracts and on average for our deliveries remain unchanged. Input costs were increasing during the quarter.

However, also in this comparison one can say that our price increases more than offset the rising input costs. Delivery volumes in this comparison were lower due to the scheduled maintenance shutdowns.

Fixed cost increased by €30 million from the first quarter both due to higher maintenance activity and also due to seasonal reasons. Here we have the development of the comparable EBIT by business area and the upper left corner shows that the biggest improvement was achieved in Biorefining.

Our average pulp prices increased by 32% from the first quarter of this year and sawn timber prices increased as well. As a result, the business area made its best second quarter result ever.

This result though was held back by the scheduled maintenance shutdown at the Fray Bentos pulp mill in Uruguay and by a shutdown due to a fire at the Lappeenranta biorefinery in Finland. The Fray Bentos maintenance shutdown affected our EBIT by about €30 million including the fixed cost and lost margin on lower volume as we did discuss in our earnings call three months ago.

The downtime in Lappeenranta biorefinery affected the result as well, although the impact was clearly smaller than that of the pulp mill maintenance shutdown. On the right-hand side, you can see that the good profitability continued in our specialty packaging materials businesses, Raflatac and Specialty Papers.

Raflatac achieved again a new quarterly record EBIT despite the pressure on input costs that is exceptional this year. These excellent results and margins are not only due to strong market demand but also coming from agile margin management and mix management and the continuous focus on efficiency that we have had.

In Specialty Papers, EBIT decreased somewhat as input costs increased more than sales prices. On the upper row in the middle you can see the performance in Communication Papers.

In terms of the bottom line this was a very challenging quarter for Communication Papers due to rapidly rising input costs and sequentially flat paper prices based on the January contracts. However, good demand and the timely efficiency measures taken last year resulted in good operational efficiency.

Our second quarter graphic paper deliveries increased by 26% compared to the low level that we had in the second quarter last year. And as Jussi pointed out, if we compare this to our pre-COVID levels two years ago, our Q2 deliveries were 10% lower than in 2019.

So again as said by Jussi during that time we have reduced capacity by 18%, which means that obviously our efficiencies or deliveries to capacity is up. Deliveries to capacity has recovered well above 90%.

On the bottom row good profitability continued in UPM Energy. Electricity prices increased clearly from last year.

Hydropower generation remained on a good level, while nuclear generation was seasonally low due to the annual maintenance shutdown at the Olkiluoto power plant. Also there last year in the maintenance shutdown only the minimum was necessary was done due to COVID.

So this year the maintenance outages have been somewhat longer in Olkiluoto. Profitability in plywood increased primarily due to increased delivery volumes and high operational efficiency.

Here this slide summarizes all the actions that we have taken over the past 12 months to ensure performance and improve competitiveness. In May, we signed the agreement to sell the Shotton newsprint mill in the U.K.

This transaction we expect to close by the end of the third quarter. And from there we will achieve €30 million additional €30 million fixed cost savings from -- for Communication Papers.

So the sale of the Shotton mill will increase our total annual cost savings impact from €130 million to €160 million and of this we have achieved about 75% in Q2 as run rate, and expect to get to the full run rate savings by the end of this year. After the Shotton sale, we have removed 1.4 million tonnes of graphic paper capacity during this year and last year which is about 19% of our capacity.

Our operating cash flow increased to €308 million in Q2. Working capital increased seasonally by €72 million.

And obviously, our financial position therefore continues to be strong. Net debt only €750 million at the end of Q2; and net debt-to-EBITDA ratio 0.49, and there it's good to note that during the quarter, we paid the dividend and cash outflow to CapEx has been ramping up as the projects proceed in Leuna and in Uruguay.

Still quite, let's say, modest level of leverage in UPM balance sheet given that. Cash funds and committed credit facilities totaled €2.5 billion at the end of the quarter and there are no financial covenants in UPM's debt or facilities.

And here we have our outlook for 2021. We expect the global economy to continue recovering this year driving demand for many of our products.

We expect sales prices for many UPM products to increase in the second half of 2021 compared with the first half. And we also expect at the same time many variable cost items to continue increasing.

But we will continue to manage margins with product pricing optimizing our product and market mix, keeping the use of our assets efficient and taking measures to improve variable and fixed cost efficiency. So all-in-all, we expect our comparable EBIT to increase in the second half of this year compared to the first half of 2021 and to increase clearly in the full year 2021 compared to the full year EBIT last year.

So now, I will hand it back over to Jussi for an update on our strategy and growth plans.

Thank you, Tapio. And as I said in my kind of opening words that UPM is fit for the future growth, and most probably this is not a big surprise to any of you that our focus will be in the coming quarters unchanged.

I'm using this picture everywhere I go internally and externally. And like Tapio discussed, we really aim to capture opportunities on the markets with efficient margin management.

We also continue to take measures to maintain cost efficiency in all our businesses, but also our global functions. At the same time, we continue to implement our transformative growth projects in pulp and biochemicals on schedule and on budget.

We continue to take the work on the basic engineering phase of the potential second biofuels refinery in order to scale up the biofuels business, and we continue to develop growth opportunities even beyond this. This once again is very familiar picture and slide for everybody here.

This slide shows our spearhead of growth initiatives. This is how we seek significant earnings growth and this is how we are changing the company's position and transforming the company to the future.

Today, we have reported another set of strong earnings in our specialty packaging materials business Raflatac and Specialty Papers. These businesses are providing solutions for more sustainable packaging and labeling businesses.

The long-term market fundamentals are attractive and our market position and our competitiveness are strong. We continue to grow the businesses with focused investment and product innovations.

In this – in the middle pulp demand growth is driven by global consumer mega trends, such as a new urban middle class consumers in Asia. Our new pulp mill in Uruguay will significantly boost our future earnings and cash flows.

Due to its high competitive cost structure, it is really one of the lowest cost producer. $280 is the word – or the number $280 per delivered tonne as a cash cost.

On the right, our molecular bioproducts businesses are providing sustainable alternatives for fossil-based fuels, chemicals and plastics. Our biofuels business has been a success and now we are planning to scale the business up with further improved competitiveness and sustainable performance.

Meanwhile, we are building and entering in the biochemicals business with the project that we have in Leuna in Germany. All in all, we are truly excited about the kind of phase of UPM's transformation.

This will illustrate the transformation of UPM where we are heading and what kind of future earnings growth potential we have in the company. In this comparison, our gross sales remains basically in stable.

And now we are comparing full year of 2009 and full year of 2020, even if 2020 was quite a challenging year but so was 2009. However, we have achieved significant growth in the businesses with strong long-term fundamentals and high barriers to entry.

In the growing businesses, our average EBIT margin has been three times higher than in the declining Communication Paper business. This is changing and has been changing our business and profitability mix significantly and structurally.

At the same time, we have maintained consistently strong free cash flow in the Communication Paper business. Going forward, we will continue to take actions to ensure performance in all of our businesses including Communication Papers.

At the same time we are also taking clearly larger growth steps. With the transformative growth projects we aim to achieve even higher margins and attractive returns on investment.

I believe this will further drive our future earnings as well as future improve – further improve the position of the company where we are in this business. Next slide.

Here you can see our comparable EBIT return on equity and balance sheet development in the longer-term perspective starting from that year 2009. We have been able to drive UPM's earnings and returns structurally higher.

This is due to improved performance, business model. Our business areas have been very clearly focusing on improving the performance.

Business mix has changed as we already discussed. And then it is combined with good return investments that we have had.

As you can see, we are back on earnings growth in the first half of the year. And as Tapio already went quite clearly through, we expect further improvement in the second half of the year.

Our balance sheet is very strong, despite the ongoing large growth investments. Our ROE and ROCE figures were back on the 10% target level in Q2.

From here the work really continues. With the transformative growth projects, our aim is to continue to grow UPM's earnings and returns as well as further improve our business mix.

The year 2021 will be a very intensive year of construction and preparation for the pulp project in Paso de los Toros in Uruguay and for the biochemicals project in Leuna in Germany. Our CapEx estimate is shown here.

It is unchanged. Total invest for this year €2 billion including €1.8 billion to these transformative growth projects and others are operative ones.

Ladies and gentlemen, then we will see some slides about Uruguay Paso de los Toros and Montevideo port. Currently, on these two mill sites, we are having 5,000 workers daily operating, making the -- or building the project.

And the number will increase to over 6,000 people latter part of this year. Due to continuous challenging COVID-19 situation in Uruguay, we have had very strict protocols to really keep and maintain good healthy level in the construction sites.

At the pulp mill site in Paso de los Toros, construction work is progressing well in all main areas. Part of the civil work has been already completed.

And large-scale cargo transfers of machinery equipment and all kind of structures to the new pulp mill will continue in the next weeks and it is already -- every week, there's a lot of movement from Fray Bentos harbor. At the pulp mill terminal in Montevideo, works are progressing well and a large part of the pulp terminal are already completed.

The unloading line for the railway was also completed, whereas work continues in the port basin. So, basically that is going well to the future.

Leuna. Here you can see some views from the biochemicals refinery construction site in Leuna in Germany.

On the bottom middle, you can see the German Federal President, Frank-Walter Steinmeier visiting the next-generation biochemicals site. And that is only a kind of showcase that we really are triggering a lot of interest and also political support to make the transformation and replacing fossil raw materials.

So basically, we're happy with the good support and cooperation with the local authorities. Construction of the biorefinery is proceeding as planned.

At the site, utility connections and foundations are now built and the delivery of the equipments for the overground constructions are starting and continuing as well. Simultaneously, with the construction, which I think that is really on the focus, we are as well putting a lot of focus on setting up the business for the eventual market entry.

This includes working with the concrete customer cases in all main product areas. Then, I would like to move to third pillar of our growth spearhead of growth i.e., if there's pulp by molecular businesses and then the specialty packaging areas.

UPM Raflatac and Specialty Paper form a great spearhead of growth i.e. for specialty packaging materials' value chains.

These two separate businesses are operating in relatively fast-growing niche part of the packaging value chain, but that is -- that fits to us very well. Demand growth is driven by global consumer mega trends sustainability and e-commerce.

So, there are very good kind of mega trends supporting those businesses. Both businesses have a range of different products of course, with product mix increasingly, consisting a lot of innovation-driven technically demanding products.

Sustainability is a key success factor and driver for the product innovation in both business areas. Capital intensity is lower and growth investment projects are typically smaller in size than in pulp or biochemicals or even biofuels businesses kind of -- that is for sure.

The two businesses today are representing 31% of UPM sales and 37% of UPM's EBIT. Profitability and return on capital employed figures for the businesses are also highly attractive.

And then let's move to the very important part of our position in the fighting for -- against and mitigating the climate change. And there I'm proud to once again repeat this picture where in this industry and especially UPM is having a very lucrative position, it is not only reducing the efficiency -- the emissions through the efficiencies, which is in the middle of this picture, but so do we work there as hardly as -- hard as everywhere else.

Our target is to reduce CO2 emissions by 65%. But on the other hand we act through the forest and UPM's forest strategy has been very clear.

We are having a very good balanced forest land 0.5 million hectares here in Finland, which is having a role of keeping our supply and prices stable when there's a need for that, and of course learning and being part of how the biodiversity is built. And then another 0.5 million or 430,000 hectares is in Uruguay where for the coming new business we have been -- or two businesses like Fray Bentos and then Paso de los Toros, we have been building the kind of raw material storage, which is a quite huge CO2 storage as well more than 40 million tonnes of CO2, which is the new one.

So basically UPM's forest strategy has been very much driven by what we need for the future. And the balance of these two is good and we are -- as we -- currently we have been buying land more in Uruguay to be even more growing the raw material base for ourselves.

And then last but not really least is the third element of our area where we can really do a lot is that we act through the products. From my opinion, the main challenge of the whole climate change is to reduce fossil energy and fossil raw materials.

So basically those raw materials that are taking underground whether it is oil, whether it is gas, or whether it's coal to replace products that are produced based on that. And our biochemicals and biofuels are really a tangible part of examples of how we are contributing to even further replace fossil-based raw materials.

So basically this is the way that UPM is positioned and we are absolutely well-positioned and for the future. And therefore it has been very easy to us to commit to business ambition for 1.5°C or then what we enjoy of course is the science based target settings.

And then as you can see from the bottom right hand corner, we have actually committed to The Climate Pledge, which is Paris minus 10 years or earlier than 10 -- 10 years earlier. So ladies and gentlemen, I'm confident that our Biofore strategy is creating long-term value for the world where consumers businesses and governments are actively looking for sustainable new solutions.

Dear audience, I will stop here and I'm not starting to repeat these three main messages. We are fit for the future.

Our earnings improved clearly and rapidly in Q2 and our transformative projects are supporting the value of the company for the future. Ladies and gentlemen with these words, we are prepared to move on to the Q&A session.

Yes. Thank you very much.

I would have two questions both actually for -- related to Biorefining. Firstly, about the Q2 very strong €120 million improvement in EBIT year-over-year with 6% lower pulp deliveries.

Obviously, this is supported by higher pulp price. But could you just talk a little bit about what was the contribution of sawn timber in this quarter?

I mean I know it's a relatively small business for you, but the market is quite an extraordinary phase I would say. Then second question is about the Lappeenranta biorefinery and the fire incident there in mid-May.

If I understood correctly, the refinery has been down since and I was just wondering what is the situation with this at the moment. Have you scheduled a start-up already?

And do you see a need for a meaningful repayment CapEx upside? Thank you.

Yes, if I take the questions. Let's say first of all, as far as the Q2 result is concerned, obviously let's say our sawn timber business did quite well given the strong demand and the sort of development of sawn timber prices as we have communicated.

So certainly, a positive contribution to the bottom line. On the other hand, you have to keep in mind that our sawn timber business is for sawmills here in Finland.

So in scale, still let's say relatively small business. So therefore, obviously in absolute figures then clearly the vast majority of the bottom line comes from the pulp business and therefore of course the improvement of the performance of that business.

Lappeenranta your question on the fire incident there or accidental fire there, as you said the refinery has been now down since May 10 and obviously unfortunate incident. What can be said is that no harm to any of our employees or to personnel.

So then just a matter of repairing the damage done by the fire. We estimate that we'll have a start-up at the refinery in the first part of August so the repairs will be done.

It will take some time because also we need to wait for the suppliers to get there to be able to do the necessary repairs. But the first part of August is when we expect to be able to start up again.

And about the potential CapEx related to repairments is that anything meaningful?

I think of course there's some cost for the repairs, but nothing material for -- at the sort of UPM level.

All right. Thank you very much.

Thank you, and good afternoon, everyone. I've got two separate questions on two different divisions.

Firstly, on Communication Paper and I appreciate you've had extraordinary volatility in demand in the first half of this year. But clearly, prices were down significantly in January for most contracts for the first half, but we've just seen announcements of what looks like an average double-digit price increases for July from last month receipt for at least for Germany and I expect for most markets across Europe.

Can you just give us some indication of what that might mean for the second half? And clearly, I'm thinking in the context of your slide 37, where you've got your cash cost of the margin producer versus spot prices for Communication Paper for many years.

We're very familiar with the chart, but it looks like hopefully pricing is in a better place shall we say as we think about the second half of 2021. And then secondly, just more generally more strategic I suppose.

You've been talking about your Biofore strategy for years and certainly [ph] for years long before the EU ever gave us any information about Taxonomy or Fit for 55 as they did last week. But when we think more generally, more strategically, how is UPM positioned now that we've had three months to think about Taxonomy?

What does that mean for UPM, I'm thinking in terms of potentially biofuels? And what does the CO2 shall we say regime that we have going forward from Fit for 55, what does that potentially mean for UPM?

Sorry, two separate questions but delighted to hear your response.

Could you Tapio take the pricing? I will actually cover then the climate issues.

Yes. Well, if I take that first.

So as you said Justin, prices were down in the beginning of the year and obviously particularly then concerning publication papers there in a sense prices did not move in the first half flat then overall Q2 vis-à-vis Q1. Now we have seen as you said with price increases announced in the market for publication papers in particular for second half.

Also fine papers are let's say on the rise. One can say that given what we know now this impact on our mix on the average is let's say in the sort of high single-digit percentage increase in the average sales price.

And if I actually continue to do actually all of that first of all, like I said earlier that the kind of -- the most efficient way of mitigating climate change is to reduce of using the fossils and we are very well-positioned on doing that. We do have the ability to reduce CO2 emissions.

We have the forest land here in Uruguay, but also we are making all, kind of, products for the future. And the climate you can divide these European decisions in two parts.

First of all to the climate where you -- as you referred the Taxonomy RED directive or LULUCF directives and there are list of things. Obviously like in the RED directive there are wordings that are promoting the advanced fuels for the future.

So basically that's a positive note for us. Taxonomy is more -- today it is covering only our forest land our energy and biofuels.

So basically out of UPM's sales it is small portion, less than 10% of sales is in Taxonomy. But, of course, these all are important to understand that what are then the details on those regulations and LULUCF as well.

One of the concerns that I have in this area is that only four years ago 2018, the RED and LULUCF directive were launched and these are the directives and now they are changing again. So basically this -- that long-term view that what happens on these areas is important, but like I said that we have alternatives.

We have products for supporting this green growth. I would rather see that it will be more green growth rather than limiting regulating or putting a lot of taxes or duties at the same time.

So that's my worry that the EU cannot -- even if they say -- even if we say in the EU that green growth is what we want. But at the same time there's a lot of complex regulation limitations and taxation or duties coming and in the consideration.

So that's the climate part. I feel that in UPM, we have really good opportunities to be a part of that.

But that also means that the politicians and regulators need to have a long-term good view and turn their attitude more towards green growth rather than stated regulating and limiting. Then the forest strategy, which has had at least in some of the countries a lot of noise.

From my point of view, it is not really yet and I said yet a real strategy. It's rather of list of detailed actions whether it is how you treat forest and all of the kind of details that are existing there.

We do have one and half years now time to really make that as a strategy, which is actually taking care of three pillars of green growth, which is sustainability of course all of the social, economical and environmental pillars that needs to be there. And once again, really actually, there's a lot of work to be done that it starts to look like comprehensive forest strategy.

But like I said, it is one and half years to go, and we need to be actively participating on the discussion. But all-in-all, if I think about the whole thing green growth is what Europe wants.

And I hope that, finally, everybody understands that the green growth is not regulation limitation and taxation. It is quite other – quite many other things.

Thank you, Jussi. Thank you, Tapio.

Best wishes for the second half.

Yes. Thank you very much.

First of all, regarding the railway delay you have in Uruguay, could you give some kind of indication what that means for the cost of transport for example put on Uruguay until then the railway is open in 2023? You say, you will rely on truck transport.

What kind of distances and what kind of roads do you have between Paso de los Toros and Montevideo? Second question is related to the energy business.

You have a quite significant expansion ahead with Olkiluoto 3 there. Could you shed some light on when should we expect earnings impact for UPM from Olkiluoto 3?

And what kind of profitability should we expect if we would be looking at that current power prices in Finland? So those two.

Thank you.

Thank you, Robin. That – I guess they were excellent questions, especially I like that somebody asked about the rail.

Because when the decision was made 2019, we were already having a very clear plan of kind of dual logistic corridors from Paso de los Toros to harbor of Montevideo. So basically that was already in the plans.

And obviously yes there's a delay of eight months of the rail and that would be of course our one – our primary route. It will be the lowest cost.

But I have to say that, it doesn't really be significant in the UPM level or nor in the whole project level. So basically the cost increase, if that is actually delayed as we have stated that eight months it doesn't really move the kind of $280 per tonne cash cost level that we are aiming.

So, yes, it will be somewhat more costly, but not significantly.

Thank you. And then related to the energy question, please?

Yes, if I'll take that. So Olkiluoto 3, the schedule that Teollisuuden Voima TVO has communicated for the project is that the connection to the grid is planned to be in October this year, and then the start of commercial operations in February next year.

So there will be some electricity available during the test period from the connection to the grid. But as it is, let's say, the ramping up and testing of the plant that is still, let's say smaller amount from our point of view.

So then the kind of a real kind of impact on volume of electricity that also comes to us is from February on – based on that schedule. And then the earnings question, obviously, as you indicated is very much related to power price in Finland, which has been, let's say quite volatile lately or actually quite high now recently.

If you look at the forward prices for next year at the moment in Finland, actually, we're once again in a situation where let's say given that we -- for the electricity that we receive from the Olkiluoto 3 power plant in our bottom-line pay the full cost of both the power generation direct cash cost and the capital cost of Olkiluoto 3. Then that full cost per megawatt hour is at a level where let's say actually the sort of current forward prices next year let's say are hovering around not too far from that.

So, let's say in our bottom-line not very material impact as it looks right now. Of course for the project as such it will mean that there will be cash generation then to start sort of paying off the debt that has been incurred in the project.

Thank you very much. Very clear.

Thank you. I just had a couple of questions.

In terms of your Communication Paper again Jussi you mentioned 18% down in the -- or you had shut down 18% and your volumes are down only 10%. And you also mentioned putting into context that 15% lower volumes in the market I guess since the comparable 2019.

So, my question is really where are your operating rates today ought to be relatively high arguably? But also what are you seeing in terms of current demand trends as we head into H2 in comparison again to 2019?

That's the first question. Raflatac clearly this business have seen a step change in earnings margins, et cetera.

It's kind of starting to go a bit sideways now, but of course, at a very good level. How should we think about this business going forward in terms of growth and margins?

And the final question to Tapio. You spoke about variable costs starting to move up.

Where do you see this cost moving up? I mean fiber costs recycled fiber seems to have moved up already.

Is that incremental, or are there any other cost items that you would like us to focus on now that would be incremental for you?

Excellent questions Lars. First of all in the Communication Papers, as we have been quite many years talking about minus 5% trend decline and I guess that now we have first time a kind of opportunity to really consider what has happened over this pandemic.

We all remember when the quarter two last year was minus 32%. People were asking that is this going to be kind of much more than the 5% decline trend line.

And that time we said that we don't know. Do we know today?

Not sure. But at least we have some actually points to try to analyze.

And therefore we took the 2019 second quarter which was clearly before the pandemic where we saw that 5% or 5%-plus trend decline. And compared that to what now after 28% of increase has meant into the business which is like minus 15% as said which is 7.5% a year per se.

And from our perspective, it is like I stated as well that during this time our deliveries has gone down -- sorry 5% per year so i.e. 10%.

Whether you can draw the conclusion from that that it's hovering there in 5% trend decline, I cannot kind of declare the victory at this point, but at least it is not -- it is giving some comfort that the business is -- has been bouncing back into the level that we are talking about as analyzed these numbers. And basically industry is in a better shape.

As stated that we have been taking from 2020, our capacity to 2021, it is now almost -- it is even more than 18%. It is 19% down meaning that our operating rates if our deliveries has gone down 10% and we have been taking capacity 18% on -- 19% down.

So, yes, our operating rates are more than 90%. Raflatac.

Raflatac is actually the one of the -- of course, there are several sources for why Raflatac is performing well. And one -- what we actually said last year is that this pandemic has speeded up different type of behaviors whether it's e-commerce or whether it is labeling and information for food or whatever.

All kind of labeling requirements have really boosted the business, and that tends to continue. I don't believe that e-commerce will go back to the pre-COVID times.

Therefore, there's a very solid good growth as we see in Raflatac business. So that has boosted our kind of position there.

We have been growing there. We have been really making new products.

And one of the key sources for the profitability improvement is -- I can go even some steps backwards. It is when we changed the whole organizational model of Raflatac.

In UPM model, we changed that in 2013 and 2008. But ever since we have quite made quite significant changes in different business areas and Raflatac is now really having an organization that is managing the margin very well, i.e.

how to be successful in the commercial front, but also how to cope with the cost increases and then efficiency of the production and supply chain. So basically, there are many sources for Raflatac.

There's a great growth opportunities either organic growth options or even go through the M&A type of things. So Raflatac is having a very good bright future beyond.

As I stated now, we have really a focus on these two big projects. but we are talking about then after that similar actually by the way is in the specialty paper area as well.

So Raflatac is really now in its sixth quarter in a row that we have been really on a new level. So it is not just pandemic boosted good results.

And now I hand over to Tapio to finalize the comments.

Yes. Well, Lars to your question actually I would sort of maybe sort of make two points.

I think the first point to your question which costs to sort of follow or where do we see increases, of course, there is a timing issue here. As an example, like, we have discussed in the previous calls as well, when pulp prices in the market go up then it does take some time before they kind of materialize as costs in the bottom line of pulp consuming businesses.

So in that sense the -- still let's say, some impact to come from the increase in fiber costs including also recovered fiber that has been quite sharp during the first half of the year. So it is kind of still spilling over to the at least first part of second half.

Then the other point that I would make is that of course the positive news that label paper prices are going up, means on the other hand that also the label paper cost for the customers of our Specialty Paper business, including Raflatac is going up. So also that is part of the equation.

Generally speaking also as was made as a comment here earlier is that we do see in the Raflatac inputs films adhesives as well still continued cost pressure. Then perhaps the third area to comment is that, of course, I think it's seen in the public figures that available -- statistics available that is quite sort of a strong demand, tight demand and supply balance in the wood products industry has also impacted log prices, which again with some delay will then flow to the bottom line.

There pulp wood prices have been more stable. And of course in Uruguay particularly we have a stable situation there.

But then the second point in a sense to sort of make here is that -- so what does this mean for the businesses? And there I would say that you can kind of maybe talk about three groups of businesses so three different sort of dynamics in our six business areas.

If you look at pulp and energy obviously there, kind of the market price movement has been strong enough that, it has more than offset any cost pressures. And as we have indicated in the outlook we expect the pulp prices to be higher in the second half of the year than it was for the average in the first half.

So, in that sense kind of relative to that the cost pressures are manageable. Then sort of second group is businesses like Raflatac, like the label papers like plywood where demand is quite strong.

The demand-supply balance is quite favorable from our point of views. There we have demonstrated and we can expect to be able to continue to manage margins vis-à-vis any sort of cost kind of pressures that exist there.

So there the situation is good from our point of view. And then we have let's say Communication Papers.

So we do see price increases in that graph that was referred to earlier in that call. We see that that sort of price increases certainly needed and let's say even more to really make a difference vis-à-vis the cost base there for us and certainly for the higher cost producer.

And a question mark also let's say obviously fine paper in China. We have a softer market.

Prices have been coming down, but this is the slow season in the Chinese fine paper market. So we will see how that develops later in the year.

But overall I would say still we have let's say, a good handle on the margins for the second half of the year.

Very good. Thank you.

Thank you and good afternoon. Can you just of course I understand there will be a lot of focus goes to the new projects or the transformative projects and how that's going on.

But in the meantime, there's a other kind of news on other developments that are there. But can you remind of the other kind of new business opportunities or areas where -- which might be getting closer to commercial entry in sort of relevant ties?

First of all, the basic engineering that we have stated actually in the biofuels but then it is all about the spearhead of growth. And you need to go to the left wing to see that there we do have the opportunities in specialty packaging areas.

But like I said that now as you understand Harri that very well that now the focus is, we are spending €3 billion of money and we are going to deliver that great results for the company and thus get the value of the company up. But on the other hand like I said that, we have we have opportunities.

Of course, we have already the ideas on what to do with the biochemicals when the Leuna is up and running how fast we can scale it up. So multiple kind of considerations when it concerns these three spearhead of growth areas and especially on the left and the right wing.

I guess that it is something that we are putting some focus.

Yes very good. I was going to ask about Specialty Papers and the cost increase and the sort of the weakness in China paper prices and the possibility.

So, the outlook for that division going towards the second half, but I mean I suppose you tackled that question already as part of Lars' sort of questions.

Tapio went quite clearly through that yes.

So, that’s it. Thank you very much.

Thank you Harri.

Thank you. Just two quick ones.

First, on the graphic papers. I looked at the delivery growth in Q2 pretty much in line with the market.

In Q1, you were actually clearly outperforming the market in a quite big way. So, I was just wondering if you experienced any logistical constraints in Q2 or if there's any other color you can add to that?

Then secondly on the pulp business and the European pulp market dynamics currently, any color you could shed on that would be great. We have seen prices in China coming off, but European prices continue to move up.

And the question is of course, do you see any pressure [ph] downward in Europe, or is the market still quite balanced and the pricing stable?

Look, graphic paper market, I guess that it is not really giving a lot of kind of information to compare in our first second quarter at least on monthly basis, where the delivery side. It can be a mix issue.

I don't know. We don't -- we do not have had any kind of logistical problems that would actually cause that mix issue.

I guess that is most probably the issue, but I don't know. And the European pulp market is good there.

It is solid demand and prices are on rise.

Perfect. Thank you, very much,

Yes. Hi everyone.

So most of my questions have now been asked, but answered, but I can maybe ask a question about Leuna and the future products and discussion with clients. Could you give us a little bit on an update, if you have seen any changes on the consumers if there's a stronger demand for any particular product that you will provide the market?

I mean, you have earlier talked about PET plastic materials being a key for you initially at least. Could you talk a little bit about that?

That would be interesting. Thanks.

There is nothing that has changed I guess that when you have a project to replace fossil-based raw materials. It is actually there, whether it is these functional fillers or whether it is in the cycles that we will produce and really actually no change on either consumer views or our customer views, so basically moving on.

And like I said that, it has been quite interesting to see how even politicians and local people are really inspired of projects that are building really this green growth. This is in the heart of the green growth of Europe, making a new actually entry to replace fossil raw materials.

Okay. Good to know.

Then of course, there is a bit of an inflation for fossil-based products in terms of costs. I mean, what's your sense about the price premiums on your more green products that Leuna can be produced?

Are they about the same, or have you seen any indications that premiums are ticking up on your type of product?

No that -- we are not on that phase yet. But on the other hand, the Leuna supply will be relatively small of the total supply.

So basically, we will find those pockets, where the best premiums and best kind of stable good profits can be made. So it is quite a lot of work that we need to -- how we select the customers and the end users, obviously to promote best possible premium plus also from all respect kind of sustainable good long-term business with our customers.

Okay. Thank you.

Thank you, very much. Most of my questions have been answered.

Thank you, very much. But just a couple of follow-ups, maybe on Paso de los Toros.

Just I mean second half 2022 is only one year away. So, when you say the second half 2022, is it closer to July or closer to December, when you start the ramp-up?

In the second half of the next year.

Thank you. Ladies and gentlemen, I do have a press coming.

Unfortunately, I need to at least disappear. But thank you for joining UPM and thank you for all having excellent questions and have a very nice summer day.

Thank you. Bye.