UPM-Kymmene Oyj

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

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

Hello everyone on the line.

Well, let's get started. Today, we would like to highlight three key messages.

First, Q3 2021 was financially, the best quarter ever for UPM. This was a good achievement in exceptional world - exceptionally volatile global business environment.

It also shows we have fully recovered from the slowdown caused by the pandemic last year. Secondly, our transformative growth projects are making good progress.

In Uruguay, we have now reached the peak activity as planned with more or less more than 6000 workers at the construction sites. In the biochemicals, we also are taking significant steps in commercialization of the new to world products.

Our cooperation with Coca-Cola Cola company in the bioMEG products was made public last week, and we launched the UPM BioMotion renewable functional filler product. And then finally, our Biofore strategy is set to create long term value in the world where the consumers, businesses and governments and regulators are actively looking for more sustainable solutions to mitigate climate change, to safeguard biodiversity, or to find answers to the plastic challenges, for example.

All in all, dear listeners, UPM is fit for the future. Let's then move on into the result.

Our Q3 sales grew by 24% and comparable EBIT doubled from that of last year reaching 424 million Euros EBIT and comparable EBIT margin was 16.8%. The record quarterly earnings was result of good demand for our products, price increases more than offsetting higher variable costs, timely implemented cost effective and efficiency measures over the past years, and the excellent operational efficiency during the quarter.

The global economy has been recovering from the deep downturn of last year. China first led the recovery but has recently slowed down to some extent.

In Q3, demand for our products was strong, particularly in Europe and North America. Strong demand was visible across the product range, pulp, specialty papers, label materials, graphic papers, plywood, timber and renewable fuels and energy.

In Asia, pulp and fine paper markets softened somewhat, however, robust demand continued in Asia for other products such as specialty papers and label materials. We in UPM implemented price increases in all business areas, variable cost increases across the board.

On group level, our price increases more than offset the rise of the variable costs. Energy markets tightened rapidly as we all know during the Q3 and there was a significant raise of electricity, fuel and Co2 prices.

This obviously is benefiting our UPM energy business, but also resulted in significant addition cost, especially for the Communication Papers. Ladies and gentlemen, finally, there are bottlenecks and challenges in the global logistics and supply chains.

This increases cost, limits flexibility, and introduces some unpredictability to the product and raw material markets. It is also representing some challenges for the last investment projects.

In this volatile business environment, I'm very happy that we have been achieving a record quarter in earnings and continued a good progress on our transformative projects. Ladies and gentlemen, at this point, I will hand over to Tapio for some further analysis of our results.

Tapio, please.

Thank you, Jussi. Here we have our usual slide showing the EBIT bridge between quarters and on the left hand side, year-on-year between third quarter this year, vis-à-vis last year's third quarter.

And as you can see here, clearly, sales prices increased in all business areas, and the largest increase being in Biorefining. Variable costs increased across a wide range of raw materials, energy and logistics.

But for UPM, as a whole, price increases were enough to more than offset the rise in variable costs. Delivery volumes increased in most business areas.

Fixed costs were slightly higher in the third - were slightly higher. In the third quarter, we achieved about 80% of the target 160 million euro annualized cost savings.

The remaining part will be achieved now in the fourth quarter after the sale of the UPM Shotton mill in UK was completed at the end of the third quarter. On the right hand side, you'll see the bridge sequentially from the second quarter this year to the third quarter.

And again, we were able to increase sales prices in all business areas while variable costs increased in a wide range of raw materials, logistics and particularly in energy. Delivery volumes were slightly up and fixed costs down compared to the second quarter mainly due to seasonal reasons and due to the maintenance shutdowns that we had in the second quarter.

On this slide, you'll see the comparable EBIT development quarter by quarter split by business area. Biorefining reached record quarterly earnings this third quarter, thanks to significantly higher power and timber sales prices, thanks to excellent operational efficiency as well.

And during the maintenance quarter in biorefining, we had no maintenance shutdowns. Pulp market continued to be strong in Europe, but softened in Asia.

The average pulp price in the third quarter for UPM deliveries was up by 58% year-on-year or up by 12% sequentially from the second quarter. Demand for advanced renewable diesel and naphtha was also strong and naphtha was also strong, and our Lappeenranta biorefinery restarted production in early August after the repairs related to the fire incident earlier.

Raflatac continued to be one of our star performers. Demand growth was consistently strong across most markets and end-uses and sales grew by 19% from last year.

Input costs rose rapidly also for Raflatac during the quarter but were mitigated by successful margin management. For Specialty Papers, the market situation was twofold.

On the one hand, demand for release, label and packaging papers continued to be strong in all markets and sales prices increased significantly from the second quarter. But then on the other hand, fine paper demand in Asia slowed down and prices decreased.

High input costs and the tight energy market situation in China also affected the results. Communication Papers was loss-making in the quarter.

Our paper deliveries grew by 13% from last year and our operating rates were very high. The average paper price increased by 8% from the second quarter.

The cost increases in pulp, recycled fiber and logistics materialized as anticipated, however the rapidly tightening energy markets in Europe resulted in significant additional cost increases despite the 60% hedging rate for purchased energy. But we can say that the market demand for graphic papers in Europe was actually quite good, up from 6% from last year.

Three months ago, when we discussed the results, we compared the second quarter '21 paper demand to the second quarter of 2019. Over that two year period, demand for graphic papers in Europe had decreased by 15%.

Now, if we compare in the same way third quarter 2021 paper demand to the third quarter 2019, the two year demand decrease was 13%. And in the meantime, about 5.5 million tonnes of production capacity has been closed down or converted to other purposes, which is significantly more than the demand decline.

So, that has obviously effectively balanced the market. Energy delivered excellent earnings with an EBIT margin of 50%.

The business benefited from the significantly higher electricity sales process and also succeeded well in optimizing the output of power generated in the volatile markets. Plywood also achieved record quarterly earnings market demand for spruce plywood continued to be strong, and demand for birch plywood continued to recover.

Sales prices increased and operational efficiency was high. Operating cash flow for the quarter totaled 318 million Euros.

In the third quarter, we did have a small increase in working capital, whereas last year we had a significant release of cash from working capital. Over the past 12 months, our free cash flow is only 30 million negative.

This of course includes the CapEx on the transformative growth projects. It also includes the proceeds from the sale of the Shotton newsprint mill in the UK, worth about 160 million Euros.

So our balance sheet continues to be very strong. We only had 667 million Euros of net debt at the end of the third quarter, which means that the net debt-to-EBITDA ratio was 0.38.

The cash funds and committed credit facilities totaled 2.5 billion Euros at the end of the third quarter. Our outlook for 2021 is unchanged.

All in all, we expect our comparable EBIT to increase, both in the second half of 2021 compared to the first half of 2021 and increase clearly in the full year 2021 compared to 2020. In the fourth quarter, our result will be affected by the scheduled maintenance shutdown at our Kymi pulp mill.

We expect this to have an approximately 30 million euro negative impact on Q4 EBIT. As is pointed out here, the tight energy market situation is expected to increase costs during the second half of 2021 and this is particularly the case for Communication Papers.

So we expect the fourth quarter to continue to be challenging for the Communication Papers business. On the other hand, the energy market situation continues to support the energy business area.

And now I'll hand it back to Jussi.

Thank you Tapio and like Tapio already highlighted that the first topic that we wanted to highlight today is the financial kind of situation of UPM and how well we did in quarter three, it was the best ever quarter. And now we are actually turning to the second topic, which is our transformative growth projects.

But before that, and discussing our strategy and the progress of these transformative projects, I will address one more recent news. As you all know early in October, the European Commission conducted an unannounced inspection at the premises of several companies active in the wood pulp sector.

This included also us in UPM. According to Commission's press release, the commission has concern that the inspected companies may have violated EU antitrust rules.

The Commission stated that the inspection and inspections are a preliminary step in this investigation. The fact that the Commission carries out such an inspections does not mean that the companies are guilty of anti-competitive behavior.

UPM takes suspected violations and antitrust rules very seriously and has a compliance program and training in place to mitigate the risk of such violation. Ladies and gentlemen, unfortunate this is all that we can comment at this stage of the investigation.

But now, ladies and gentlemen, let's move into the second message that we wanted to convey, which is the UPM strategy and transformative growth projects and the kind of progress of those. We are having some pictures and let's move on.

We will now actually discuss about strategy and progress of the transformative growth projects and this slide is very familiar to you. It is called spearhead of growth in UPM.

It is our kind of direction concrete actions, how we actually are seeking significant earnings growth. And this is how we are changing the positioning of the company in the coming years.

This slide is as well, very familiar to you, which is illustrating UPM's transformation, and the impact of our spearhead of growth initiatives. Over the past decade, we have achieved significant growth in businesses with long-term fundamentals and high barriers to entry.

In these growing businesses, our average EBIT margin has been three times higher than that of declining Communication Paper business. In this development, structurally changing - it is structurally changing our businesses and profitability mix.

Going forward, we will continue to take actions to ensure performance in all of our businesses of course, including Communication Papers. At the same time, we are taking clearly large growth steps.

We are having an investment portfolio of more than 3 billion dollars - sorry Euros. With the transformative growth projects, we are aiming to achieve even higher margin and attractive returns on investment.

I really believe this will further drive our future earnings as well as further improve the positioning of UPM going forward. Next slide is actually where you can see we have been able to drive up UPM's earnings and returns structurally higher over time.

We have also recovered well from the last year slowdown. The balance sheet is very strong, despite the ongoing large growth investments.

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 the mix of the businesses.

2021 is an intensive year of construction for the transformative growth projects in Paso de los Toros pulp mill in Uruguay and the Leuna biochemicals refinery in Germany. The ongoing pandemic and global logistic bottlenecks continue to pose challenges to large projects like this.

So far, we have been able to handle these challenges very well. We continue to implement mitigation actions proactively and ensure the timely progress towards the essential startup times of the projects.

In Uruguay, we have now reached the peak activity, as planned, with more than 6000 workers at the construction sites. It is also good to highlight that during the pandemic and during these large investment projects we have been setting very strict criterias to any other investments, which you can see on those bars, blue and green bars.

Thus our CapEx outside of these two transformative projects is lower than typically it will be for the year. But let's move on to the pictures and we will see the progress in Paso de los Toros in Uruguay.

At the pulp mill site in Paso de los Toros, the assembly phase with the mechanical erection continues to progress in many process areas. Part of the civil work have been completed, commissioning work will proceed in the coming months.

So, there's a lot of activity, as you can see from these pictures going on. Large scale cargo transfers of machinery equipments and structures from the UPM Fray Bentos port to the new mill site continues on weekly, almost daily basis.

At the pulp mill terminal in Montevideo, which you can see on the bottom right, works are progressing as planned. A large part of the pulp terminal area has been already completed.

On the bottom left, you can also see the new eucalyptus nursery under construction. So we are having the third nursery coming into our Uruguay platform.

Then moving to progress in Leuna. This slide is really showing the images from the biochemical refinery in Germany.

The delivery of the equipment's for our overgrown [ph] structures is going and first heavy duty transports have arrived, for example, this distillation columns visible on the top of these pictures, at the top row of the pictures. At the bottom center, you can see the newest testing and development facilities for the renewable functional filler products that we have on site.

The hiring process for the operators and operating team is ongoing. One topic that we announced this week or last seven days is the commercialization of the next generation biochemicals, which is now really starting to take steps in commercial front as well.

We are especially excited about the cooperation with Coca-Cola Company, which was made public early this month, as I said. The bioMEG product from the Leuna biorefinery will enable wood-based fully recyclable PET bottles.

This cooperation demonstrates how the leading consumer product companies are now keen on finding renewable recyclable alternatives for the fossil raw material. So, this is actually really a great achievement.

We talk about Coca-Cola, which is using 3 million tonnes of plastics in the bottles, which means that you know 200,000 bottles per minute that they are using. The target is 100% bio-based bottles and we have started this cooperation ever since 2017; a lot of interest on that, as we speak.

If we then move on to this picture that you have seen as well; UN Climate Change Conference COP26, is coming and we underline the importance of the renewable products. Undisputedly the most effective way to mitigate the climate change is to reduce of using of fossil raw materials and energy and that we need to do quite radically actually in the future.

UPM is offering alternatives for fossil-based materials, enabling our customers and consumers to make sustainable choices. We just discussed biochemicals, biofuels is another example enabling decarbonisation of the traffic and aviation.

The basic engineering phase continues regarding the potential second biorefinery. Raflatac and Specialty Paper businesses are offering a number of solution for sustainable packaging including the plastic challenge that we have in the world.

Fiber-based solutions are driver for the for the pulp demand. So basically, you can understand from this description that you UPM is very well positioned on the whole market.

Plywood and timber provides low carbon alternative for steel and cement in construction. So UPM's climate action is based on significant emission reduction, as you can see in the middle, managing forests sustainably and always harvesting less than what we grow, and then innovating climate positive products, so i.e.

finding solutions to replace fossils. With these actions, we fully support the UN business ambition for 1.5 degrees.

And the final slide actually on this topic is here, so here are some of the most important ESG ratings. In Q3, we again received the highest possible Platinum rating in EcoVadis.

This is a wide ESG rating with particular focus on supply chain and is highly valued by many of our customers. During Q3 as well, we were also recognized as one of the world's 37 most sustainable companies by the UN Global Compact.

And for investors perhaps the most widely used rating, MSCI ESG rating with rates UPM in the highest AAA category. Ladies and gentlemen, to summarize my presentation based on these slides, the quarter was strong and UPM has been able to grow earnings over the years with very good operating model, efficient focus on what we do taking care of the commercial front and the asset portfolio very well.

So that is where UPM is having a very solid earnings growth, including the transformative investments, as you can see in the middle, in Paso de los Toros and in Leuna, which is in our focus. And then finally, on the right hand side, this cooperation with Coca-Cola or any of the global brands, we will definitely be able to provide solutions, for example, liquid packages that are bio-based and as this picture is showing, this bottle is 100% plant-based and that's where UPM is through our Leuna biochemicals plant contributing in the future as well.

And then the Climate Change Conference in the UK 2021, i.e. UPM is well committed to 1.5 degrees Celsius.

Ladies and gentlemen, with these words, I will stop here and hand over to the operator. This is the end of the prepared part of the presentations and we are now ready for Q&A.

Thank you.

Firstly, thanks very much for taking my question. Just a clarification on the CapEx around the major projects, I imagine this is just a timing effect from that CapEx shifting into 2022 but just a little bit of color of why their CapEx is shifting from 2021 to 2022 is the first question.

And the second is on the Energy Division. You're given a useful slide, slide 31, in your deck around your consumption of energy and your production of energy.

I just like a little bit of color around your energy division and how you hedge your energy production in that division. And then finally, on the specialty paper division, any color you can give on the trends that you're seeing in China fine paper.

Thank you.

If I take the CapEx, at least the beginning and then Tapio talks about energy and then we come back to the specialty papers later on. The CapEx, if you take the picture where we are having the CapEx spend you can see that it is timing issue, that is correct.

And when we have been during this pandemic and the logistic kind of bottlenecks, we have been actually re-scheduling [ph] some of the things and we have been doing things parallelly to really actually keep the timetable as we are targeting. That is the reason for at least a - partly reason for the for the CapEx allocation in different years, so nothing particular.

Yes, the CapEx is the same. It is a timing issue and the progress of the projects is going well.

Yes, and if I'll address the question around energy, and maybe we can also look at that slide while I may be talking about it. So, well, just as a reminder, of course, we have power generation when it comes to electricity in the energy business area, but we do have combined heat and power plants in our industrial operations as well, pulp and paper.

So here, as is shown in the UPM European energy business area, we have the nuclear and hydro capacity 99%, co2 free, low cost, which is why also the margins were as good as they were in this past quarter. In terms of hedging, then we hedge and make hedging decisions in a sense separately for the power generation portfolio out of UPM energy and then on the other hand for the main consumers, and the main one here is his Communication Papers for the consumption portfolio of electricity and fuels as well where that is possible.

And we do that - let's say we build the hedge position on both ends over several years. Obviously, then, also within the liquidity available in the further years of the market, so it's sort of built, typically, let's say, over three and even four years' time.

And maybe the last point being there that then obviously, we do take sort of a view, again, at what pace it does make sense to sort of build up our hedging position depending or given, let's say, what were the sort of forward or futures markets prices lie. Obviously, also one point to remember or keep in mind here is that when it comes to UPM energy we trade in the Finnish price area.

Our power plants are here in Finland. When it comes to consumption then obviously, we have power consumption in different regions and let's say significant regions obviously for Communication Papers Finland, but then also Germany.

And maybe this worth of maybe repeating what we already stated of the specialty paper marketing in China. First of all, the market situation, as stated - as Tapio stated is two-folded.

The demand for release and specialties is very strong in Europe and also it is actually good and solid in Asia, but on the other hand, fine paper demand in Asia slowed down and prices decreased. High input costs are tight - and the tight energy market situation China affects the result as well but it is very much dictated by the economy and how the Chinese economy will then play out in the future.

Thank you.

Thank you very much. So, three questions I have.

First of all related to the Communication Papers division, now, in the past few Q4 quarters you have reported energy refunds which have which have boosted your earnings QonQ. Do you expect a similar situation that this energy refunds to be booked in Q4 this year?

Also related to Communication Papers, we're seeing some of the producers are adding energy-related surges on the price in the middle of the contract, period, are you planning to do so or do you wait until first of January? So, that's on Communication Paper.

Then related to Leuna, how big part of the volumes that you are set to produce in Leuna will this collaboration with Coca-Cola now represent? And I guess we're closing in on Leuna, you're already sort of signing up some clients.

I guess, you have some kind of view of profitability, could the Leuna plant reach the same kind of profitability as the Lappeenranta biofuels production. And finally, in China, what are you seeing in terms of production and in terms of in terms of sales in your categories?

So, those three, thanks.

Robin, there were five questions, but you know - yeah, exactly. First of all, this is the answer that the Communication Papers, we do have that similar pattern when it comes to this energy refunds, but obviously, you need to understand that and you see it yourself what is the electricity cost as we speak today, which will affect negatively on the paper business.

When it comes to prices, that is something that we don't disclose beforehand. We do what is necessary to do in our own businesses and we will report those then later.

Leuna Coca-Cola volumes, unfortunately, this is something as well that we cannot disclose. There will be a lot of customers that we are working with to sign saying contracts for the future.

And finally, your question about the profitability, that is also somewhat too early to discuss and the last one was something that I don't remember it was related to China.

Related to China, your own production and then also what are you seeing in terms of sales to pulp, paper and labor material cost customers?

Probably actually, first of all, our - first of all, when it comes to specialty papers is i.e. the volumes that we produce in release and specialties, it is actually having a very good order book and goes forward.

Of course, this lack of electricity is also affecting us, but it has been - we have been able to really, once again, utilize our own energy and electricity production more efficiently and optimize that cell therefore, that is limiting the effect of the production in China. And when it concerns other raw materials, it is very much kind of related to this lack of electricity.

Demand is solid, but has slowed down. If you remember, early this year, everybody was pointing that China is the first to get out of this pandemic and now it has been slowing down somewhat.

Thank you, Jussi.

Thank you.

Thank you very much. I'd like to continue on the energy side.

Olkiluoto 3 is started or will be starting up during next year. I wonder if you could share with us how you expect that to impact your group net balance of electricity and maybe also how you see EBIT contribution at current pricing.

Maybe if I comment on that. So, again, like we had on that slide that we looked at earlier, we will have additional electricity coming to our sort of portfolio from Olkiluoto 3, so obviously, our sort of long position will grow.

Also, actually in a smaller scale, but still, startup in Paso de los Toros will bring us some renewable electricity generation as well. So in our kind of group, sort of balance, we will be having a larger sort of net balance of power generation vis-à-vis consumption.

And let's say earlier, I've said that this kind of impact on EBIT this, not, let's say, material on UPM level. Of course, let's say, now we have seen quite different prices than usual, so we will see how that continues into next year but I would say that, again, unless we only continue going up on in the power markets, then it's still valid on the UPM level that the contribution is not material next year.

Have you hedged Olkiluoto 3 volumes?

Well, I won't, let's say, maybe go into details but obviously, when it comes to both consumption and power generation, then you have to be kind of estimating what is the uncertainty on the volume so that you don't sort of end up being in an overhead situation.

Okay. And then on a more general group level one, slide number four that you showed is quite helpful.

There we can see that in the third compared to the second quarter, price improvement outpaced variable cost increases, do you expect that to be the case in the fourth compared to the third quarter as well?

That we are not commenting, unfortunately.

Okay. Those were my questions.

Thank you.

Thank you.

Thank you. Just a couple of short ones for me.

In terms of the shifting of the CapEx, could you give us a sense of more precise time of the start of Paso de los Toros. You obviously said second half of '22 but if you could share any further light on that, that'd be a be helpful.

And also, what you seeing in the Raflatac business going forward? You talked about continued strong order books, but it seems part of the strong growth in that business have been related to e-commerce.

Can you see - is there still a continuation of that strong business driver and/or is there any change in those business drivers? And if you at all have been impacted by the sort of supply chain disruptions we've seen generally moving of goods and labels.

And the final one, if you could give us some sense of the timber contribution to the biorefining earnings, because, of course, those prices have been exceptional, especially the year today and/or in the quarter. Those are my questions.

Yeah, Lars, I will start with the first one. Of course, the kind of clear what we have been announcing that the latter part of the or the second half of the next year will be the startup.

As we speak, we are in the most intensive phase of the of the project and we have been quite successful on mitigating all the challenges that you know, obviously, there has been in the whole globe. We have seen many, many projects that have had challenges.

We have had quite a success on that then end. And we will actually come back to the kind of more detailed, more narrow time for the startup in our annual accounts kind of meeting, which is in end of January.

Raflatac issue is --, yeah, it is - one driver is this ecommerce but Raflatac is driven by many other things as well. A lot of hygiene products that are in place, a lot of labeling which is like information on food or any other stuff that we use in our everyday life, and many other things.

So, basically, Raflatac, we feel that is having a very good, solid outlook, even if the pandemic is now over and even if the ecommerce would somehow ease or slowdown, which I don't believe. I think that in ecommerce, the step change is now real and will continue as well.

So, very good kind of solid mega trends that are really supporting the growth of the labeling business. And then I hand over timber issue to Tapio.

Yes, well, of course, timber business made a positive contribution to the biorefining bottom line to say the least in a sense that the business was doing quite well but then you have to remember the fact that it is a business consisting of four saw mills in Finland, so it is a small business performing very well; vast majority of the bottom line is coming from pulp and biofuels.

Just a very short follow up, if I may, Jussi. The issue of supply constraints or logistics bottlenecks has flattened [ph] at all impacted Raflatac specifically and/or any other part of your business?

It has not actually really. We are a global operator.

We have a very good actually position in Chinese and Asian markets from China and the European businesses as well. Basically, we have been able to actually kind of serve our customers very well and so it has not actually.

Of course, sometimes the primary routes are - prime routes has to be changed into the secondary routes but not really that it would have been a kind of corporate level issue.

Got it. Thank you.

Hello, everyone, it's Johannes here. Two questions.

My first question is on your plywood business, which did very well in the third quarter. Could you give them maybe some background to this and if you think that this level is sustainable for the coming quarters?

That's the first question and then if you maybe could indicate if Leuna will start its commercial production more at the end of the second half of next year or is it more tilted to the first half of the second year? And also I remember you have talked about the plans affecting [ph] Leuna and Lappeenranta into a new business division that you will report in external reporting, is this still the planning?

That's my question. Thanks.

Very good, if I started with the plywood, obviously, we do have three clear segments that we are in construction, transportation and LNG tanker materials, insulation materials and basically the portfolio of our products are really well, actually, kind of meeting the needs of the Global Green Growth. Construction is still strongly going on and transportation, especially the transportation segment, which is typically the flooring of the lorries and trucks is now moving on quite nicely and then the LNG tanker business is very solid, and we do actually have a very good market position on that.

So, basically, plywood is having a good - once again, good, very solid outlook for the coming years as well after the pandemic, and we're really comfortable with the business. What we have been doing over the years that we have changed the kind of portfolio of where we operate, we do have a low cost countries that we operate in Estonia and Russia plus in Finland, where we have the high quality and efficiency as well, so solid outlook for the business.

Leuna, almost the same answer that we are in the middle of the activities and we will come back to that timetable early next year when we do have even more visibility than today but progressing. And then the bio - kind of starting new innovations, whether it's biochemicals, biofuels or any other, yes that consideration moves on and when the time is right, we will actually move to that direction.

Okay, thank you.

Thank you. A couple of questions still here.

Firstly, in terms of the European graphic paper markets, do you see demand continuing to recover there currently? And would you say that the markets in general are tight enough to give producers sufficient pricing power to cover the cost inflation or do we still need more closures for that to happen?

That would be my first question.

Now that, as we all have seen, and you read it from the trade press, that the demand for graphic papers has been strong in Europe and that is the case, if you just compare Q3 '19 to Q3 '21, so, two year time, what is the decline of the demand, it is 13%. Similarly, if you compare Q2 '19 and Q2 '21, the decline has been 15%, i.e.

per year 6.5% and 7.5%. And that is actually quite an actually story that even if, last year Q2, the demand went - 2020 went down 32%.

Overall, the demand of the papers has continued on that 5% plus trend decline but at the same time, the industry has closed capacity much more 5.5 million tons into last two years, if I remember correctly. So, the markets are having a good balance, the operating rates are high.

Okay. No, that's helpful.

And then secondly, I just wanted to ask you on the on the sawn timber markets, there was a question about this earlier about the owner's contribution. But if you think about the business overall, what are you seeing in there right now?

Do you see a continued good demand, continued price increases or how would you characterize the current market environment for your sawn timber operations?

Well, I would say that, let's say, the market this sort of - I think the general expectation for sawn timber markets is that the market is kind of stabilizing and maybe starting to sort of normalize. The hottest point in the cycle perhaps is past us, but demand continues to be good.

And as I said, also, let's say, when it comes to plywood, which is in the wood products business, construction related, but logistic related as well and there sort of demand continues to be good done and outlook is very strong. So demand side, we think that the market is good.

Perhaps as far as the pricing is concerned, the sort of hottest point in the cycle is starting to be behind us.

Right. Okay.

Well, that's clear. And then finally, a similar question on the pulp markets and what you see there, overall, right now, and perhaps more specifically, also on a Europe, given a quite wide price spread we have currently to China?

What's your take on that?

Well, let's say, obviously, we won't sort of comment or forecast prices going forward. But we have in the short term, of course now had the like Jussi was describing earlier the sort of somewhat of a slowdown in the sort of Chinese economy overall and then that's their concerns around the energy situation, perhaps impacting the operations for paperboard tissue in China, so it remains to be seen.

We have, let's say, short-term uncertainty as far as China is concerned, logistics bottlenecks remain. So therefore the strong demand for pulp in Europe that has continued and seems to continue not only the graphic papers, but in the tissue sector packaging here in Europe that has been sort of supporting the European price levels so far, but then obviously we'll have to see during the coming weeks and months, whether there's sort of a price differential can, how long it can sort of stay in place.

Okay, that's helpful. Thank you very much.

Thank you and good afternoon, everyone. I've got three very separate questions.

Firstly, for Tapio, on the energies slide 31 in your deck. Thanks for the clarification on the hedging of the electricity purchases.

Can you just clarify just on the electricity sales within the energy division? Are they also simply hedged or are they predominantly at spot?

Secondly, just on the spearheads for growth on slide 30, that you talked to us again about the basic engineering studies being conducted for the potential second bio refinery or potentially even second at third at Costco and Rotterdam. And just mindful of the fact that clearly we're seeing global logistic issues and then they have an impact on 2021 CapEx, should that potentially also impact a board decision on that potential biorefinery projects, whatever that is in 2022?

And then certainly probably one for Jussi, on forest strategy, clearly you've given detailed explanation again, as you have put in slide 16 about UPM's forests strategy. You Chairman Bjorn has been quite vocal in some of the press recently about his views of suppose the EU Fit for 55 and the EU's new forest strategy, which seems to prioritize forests as carbon sinks over their use for supplying, frankly, the wood product industry.

I don't know if there is any sort of formal UPM view on that. Thank you.

I don't know if there was a question for energy, but, if I actually start to talk about the spearhead of growth, and especially the question was around the biofuels. The work continues as we speak and obviously, then, when the work is done, actually, and then we do actually have all the needed parameters in place.

We definitely then are having the ability to start to think about the kind of processes to make a final investment decisions. But of course, we need to understand as well that you raised yourself this Fit for 55, whether it's taxonomy or whether it is forest strategy or whether it is the right directive, especially when it concerns fuel business, all of these regulations, and the clarity of what will happen in details on these regulatory kind of framework is very important part of the decision making and as far as I know that it is a quite a slow process.

Moving from that to the forest strategy, obviously, it is where I have seen a lot of concern, especially that it's like a devil is in the details that the forest strategy is taking a view on very specific items. There are plentiful of them and we should not actually, in the European level do that for the reason that there is no one common forest in Europe, it is - there are Finnish forests, there are Swedish forests, there are Dutch forest, there are UK forests, they are different types of forest in the whole Europe and the best knowledge of how to actually treat the forest, how to manage forest, how to use the raw material from forest is locally, i.e.

in the member states, and hopefully that will be the eventually the kind of solution that it is respected that Finnish authorities forest owners knows best how to treat forest keeping in mind that we are having a good growth of forests today and the biodiversity is important angle on this matter as well. So basically there is a good solution but it is something that is a bit complex, as we speak today but basically I feel that things are now moving into the right direction but we need to still see those detailed proposals of the Commission as well.

Thank you, Jussi.

And maybe there was clarification asked for the energy hedging. So yes, we are - for the energy business area here in Finland, there we are looking at hedging the sales of electricity in the Finnish price area or, let's say, the power generation portfolio.

And as said, that is what the energy business is focusing on hedging, its position into the future on the sales side. And then on the consumption side, again, let's say the consuming businesses, they decide on their hedging and of course, again, there you have to look at where the electricity is consumed, whether it's in or energy, for that matter, whether it's in the Finnish price area in Finland, or Germany, and so on.

Thank you.

Ladies and gentlemen, thank you for your attention. This has been excellent day for UPM, the best ever quarter in profitability in a very uncertain global market.

So, happy with that and we continue to work to be even better than today. Thank you for joining us today.

Thank you. Bye.