UPM CEO Credits Cost Saving Measures for Improved Third Quarter 2013 Profitability

Oct. 24, 2013 - UPM's chief executive said that the company's cost reduction measures put in place this year have resulted in improved third quarter profitablity for the Group.

"The Paper business was able to compensate for the challenging market conditions through lower costs."
– Jussi Pesonen, CEO, UPM.

Commenting on UPM's third quarter 2013 results, CEO Jussi Pesonen said:

"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 concluded.

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.