UPM’s profitability recovered thanks to lower costs in European Paper operations and strong cash flow from operations

UPM-Kymmene Corporation      Interim report     24 October 2013 at 9:35 EET

Q3/2013 (compared with Q3/2012)

• Earnings per share excluding special items were EUR 0.26 (0.16), and reported EUR 0.26 (0.07)
• Operating profit excluding special items was EUR 194 million, 7.8% of sales (126 million, 4.9%)
• EBITDA was EUR 311 million, 12.6% of sales (313 million, 12.1% of sales)
• 25% of the targeted annualised EUR 200 million cost savings achieved in Q3/2013
• Operating cash flow was EUR 286 million, net debt decreased to EUR 3,301 million

Q1–Q3/2013 (compared with Q1–Q3/2012)

• Earnings per share excluding special items were EUR 0.64 (0.54), and reported EUR 0.57 (0.69)
• Operating profit excluding special items was EUR 476 million, 6.4% of sales (410 million, 5.2%)
• EBITDA was EUR 853 million, 11.4% of sales (995 million, 12.7% of sales)
• UPM announced a new group structure, profit improvement programme and targets for focused growth initiatives

1) EBITDA is operating profit before depreciation, amortisation and impairment charges, excluding the change in value of biological assets, excluding the share of results of associated companies and joint ventures, and special items.

CEO Jussi Pesonen comments on the third quarter of 2013:

 “Our progress in the third quarter was in line with expectations: growth businesses continued to perform well, and thanks to the recovery in Paper, Group profitability was restored to the same level as last year. The Paper business was able to compensate for the challenging market conditions through lower costs. Our EBITDA reached the same level as last year and our operating profit excluding special items increased to EUR 194 million (126 million). Operating cash flow was EUR 286 million (319 million) and we resumed the downward trend in our net debt.

The Pulp business experienced a solid quarter with good delivery volumes, taking into account the maintenance shut down on the Fray Bentos mill in Uruguay. Stable profitability in the Asian paper business continued. In Label, our growth activities are paying off with volumes more than offsetting the increased fixed costs. In Energy, profitability continued to be good, despite low hydropower volumes and the summer.

In Q3, we made a significant effort in our European Paper operations and cost reductions successfully compensated for the 4% decrease in both prices and deliveries compared with last year. The recovery from low profitability in the first half of the year was driven by the decrease in fixed and variable costs, together with determined cost reduction measures and seasonally higher delivery volumes. In Q3 we also had a positive impact from unrealised energy hedges.

We announced in August that we will implement a new business structure to drive a clear change in profitability. We also set ourselves a profit improvement target of EUR 400 million from performance improvement and focused growth initiatives.

We have progressed well with the programme. The new organisation is set to start on 1 November 2013 and we are well on track with the senior management appointments and planning of the organisation at the next level.

A variety of profit improvement activities in various businesses and operations resulted in a cost reduction of EUR 13 million in Q3/2013, representing 25% of the targeted EUR 200 million annualised cost savings.

In October, the State of Uruguay granted us permission to increase the annual pulp production of the UPM Fray Bentos mill from the current 1.1 million to 1.2 million tonnes. This enabled the immediate start-up of the mill after the maintenance shutdown and provides a positive outlook for the development of the mill. We have defined debottlenecking actions in all of our pulp mills, which will result in a 10 % increase in our 3.3 million tonne pulp capacity over the next three years.

When planning our future, we have to look beyond the next few quarters. Therefore our profitability programme includes both short-term actions and initiatives for the next three years. What we have seen in Q3 are just the first steps. Our new business structure will sharpen operational focus as we continue working towards an improved business portfolio,” Pesonen concludes.

Outlook for 2013

Economic growth in Europe is expected to remain low in the latter part of 2013. This will continue to have a negative impact on the European graphic paper markets in particular. Growth market economies are expected to fare better, which is supportive for the global pulp and label materials markets, as well as paper markets in Asia and wood products markets outside Europe. The current hydrological situation in Finland is weaker than the long-term average. Based on forward prices, electricity prices in Finland in H2 2013 are expected to be slightly higher than in H1 2013.

In H2 2013 compared with H1 2013, the Paper (UPM Paper ENA in the new business structure) business area is expected to benefit from lower costs, driven partly by the ongoing cost reduction measures and seasonally stronger demand. The Pulp (UPM Biorefining) business area will be impacted by annual maintenance stops in three of the four pulp mills. However, the Fray Bentos maintenance shutdown was shorter than in previous years. Capital expenditure for 2013 is forecast to be approximately EUR 400 million.

Conference call and press conference

UPM's President and CEO Jussi Pesonen will present the results in a conference call and a webcast for analysts and investors, held in English language, on 24 October 2013 at 13:15 EET.

Later in the afternoon, UPM's President and CEO Jussi Pesonen will present the results in a press conference held in Finnish language at UPM Group Head Office in Helsinki (main entrance, Eteläesplanadi 2) at 14:30 EET.

Conference call details

The conference call can be participated in either by dialling a number in the list below or following the webcast online at www.upm.com or through this link.

Only participants who wish to ask questions in the conference call need to dial in. All participants can view the webcast presentation online.  The presentation is available at www.upm.com for 12 months after the call. We recommend that participants start dialling in 5-10 minutes prior to ensure a timely start of the conference.

Conference call title: UPM Q3 Interim Report January - September 2013

DIRECT TELEPHONE NUMBERS:

BE: +32 2404 0642
DK: +45 3544 5579
FI:  +358 9817 10462
FR: +33 1707 22026
NO: +47 2350 0204
SE:  +46 8519 99363
UK:  +44 2031 940544
US:  +18 5571 61589

INTERNATIONAL TELEPHONE NUMBERS WITH PIN:

AU: +61 2 8073 0498
AT: +43 1 928 6161
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DE: +49 69 2017 44 210
ES: +34 914 142 009
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IT: +39 02 3600 6663
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NL: +31 20 716 80 20
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PIN: 471708#

It should be noted that certain statements herein, which are not historical facts, including, without limitation, those regarding expectations for market growth and developments; expectations for growth and profitability; and statements preceded by “believes”, “expects”, “anticipates”, “foresees”, or similar expressions, are forward-looking statements. Since these statements are based on current plans, estimates and projections, they involve risks and uncertainties which may cause actual results to materially differ from those expressed in such forward-looking statements. Such factors include, but are not limited to: (1) operating factors such as continued success of manufacturing activities and the achievement of efficiencies therein including the availability and cost of production inputs, continued success of product development, acceptance of new products or services by the Group’s targeted customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by the Group’s patents and other intellectual property rights, the availability of capital on acceptable terms; (2) industry conditions, such as strength of product demand, intensity of competition, prevailing and future global market prices for the Group’s products and the pricing pressures thereto, financial condition of the customers and the competitors of the Group, the potential introduction of competing products and technologies by competitors; and (3) general economic conditions, such as rates of economic growth in the Group’s principal geographic markets or fluctuations in exchange and interest rates. For more detailed information about risk factors, see pages 74–75 of the company’s annual report 2012.**

UPM-Kymmene Corporation
Pirkko Harrela
Executive Vice President, Corporate Communications

UPM Media Desk
Mon-Fri 9.00-16.00 EET
Phone: +358 40 5883284
E-mail: communications@upm.com
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Through the renewing of the bio and forest industries, UPM is building a sustainable future across six business areas: UPM Biorefining, UPM Energy, UPM Raflatac, UPM Paper Asia, UPM Paper Europe and North America and UPM Plywood. Our products are made of renewable raw materials and are recyclable. We serve our customers worldwide. The Group employs around 22,000 people and our annual sales exceed € 10 billion. UPM shares are listed on NASDAQ OMX Helsinki. UPM – The Biofore Company – www.upm.com