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UPM Reports Good First Quarter 2022 Results on Strong Demand, Pricing

Jussi Pesonen "Prices increased in all UPM businesses and the upward trend in market prices continued also for UPM Fibres. Our Uruguay pulp mill and UPM Timber performed very well." – Jussi Pesonen, President and CEO of UPM.

April 26, 2022 - UPM's President and CEO, Jussi Pesonen, said the company's businesses performed well despite labour strikes at its mills in Finland that took place from January 1 to April 22, and demand and pricing was strong.

Mr. Pesonen commented:

"Market demand was strong and UPM businesses performed well. We delivered good Q1 results, on par with the corresponding quarter of last year. Prices increased significantly in all our businesses, more than offsetting the rise in variable costs. The result is a good achievement when viewed against the background of the strikes that took place at most of our Finnish mills and the war in Ukraine.

Quarterly sales increased by 12% to EUR 2,507 million, and comparable EBIT was in line with last year at EUR 277 million, 11.0% of sales. Operating cash flow was EUR 12 million, impacted by inflation and energy-related items in working capital. Net debt at the end of March was EUR 837 million. Cash funds and unused committed credit facilities totaled EUR 2.9 billion. Our strong liquidity and balance sheet are a great strength considering our ongoing transformative growth investments and the unpredictability of the operating environment.

Prices increased in all UPM businesses and the upward trend in market prices continued also for UPM Fibres. Our Uruguay pulp mill and UPM Timber performed very well. However, with two-thirds of our pulp production down because of the strikes in Finnish mills, the business area result was modest in the current markets.

UPM Communication Papers returned to profitable numbers, thanks to tight market as well as timely and successful commercial execution. The business experienced a steep rise in input costs, particularly energy, but was able to increase sales prices accordingly. A third of our graphic paper capacity was down because of the strike in Finland, but UPM Communications Papers was able to cover deliveries partially from existing stock and the mills outside of Finland.

The market for UPM Specialty Papers' release liner and packaging paper continued to be good, and prices increased. However, our delivery volumes were lower than usual due to the strikes in Finland. Fine paper prices increased in Asia. High input costs were met with mitigating actions.

UPM Raflatac's underlying demand and margins continued to be healthy despite significantly higher raw material, energy and logistics costs. Q1 comparable EBIT includes a EUR 13 million provision for expected credit losses related to business in Russia. Delivery volumes decreased as the strikes in Finland caused raw material shortages and production curtailments.

UPM Plywood achieved another record quarter in earnings, thanks to strong demand and high sales prices. The new business-specific collective labour agreement signed in December improved flexibility in production in our Finnish mills. This is particularly important in the current strong markets with declining Russian volumes.

UPM Energy reported strong Q1 results, thanks to continued high prices in the Finnish price area. However, Finnish prices and the business area result came down from the record high levels of Q4. The OL3 nuclear power plant unit was connected to the national grid in March and production is rising steadily. Once the unit starts regular commercial operations in Q3, it will markedly increase UPM's CO2 free electricity generation. In addition, this will improve Finland's self-sufficiency regarding electricity.

In other operations, UPM Biofuels had no production or deliveries because of the strikes in Finland. The market for advanced renewable fuels continued to be strong.

The geopolitical environment in Europe has changed dramatically after Russia's attack on Ukraine. Consequently, the uncertainties related to European and world economy have increased significantly. Our primary concern are the people suffering from the war, and we have started delivering humanitarian and material aid to Ukraine. UPM ceased its deliveries to Russia and wood sourcing in and from Russia. We also decided to dial down production in our Chudovo plywood mill.

The Paperworkers' Union's long strike at UPM Pulp, UPM Communication Papers, UPM Specialty Papers, UPM Raflatac and UPM Biofuels units in Finland affected our Q1 production volumes greatly. Business-specific collective labour agreements were reached on 22 April, and we are currently ramping up production in the affected mills. Our plywood mills and sawmills have operated as usual during the first quarter.

We entered this negotiation round with a long-term view to ensure the future competitiveness of our businesses. We achieved our goal, seven business-specific agreements, that improve productivity while at the same time offer competitive terms for our employees. In Finland we have more than 6,000 employees and nearly EUR 10 billion of assets. We have the responsibility for enabling our people and businesses prosper in this country. Business-specific collective labour agreements play a key role in this. The new agreements will improve the flexibility of our units and provide opportunities for investments. Improved competitiveness will ultimately benefit our customers, too.

At the same time, we have attractive major growth projects under construction in Uruguay and Germany, and under consideration in the Netherlands. The projects are an important part of our strategy, enabling future value creation and earnings growth.

The pulp mill project in Paso de los Toros is progressing well towards its start-up by the end of Q1 2023. With the very competitive cash cost level of USD 280 per delivered tonne of pulp, the mill will bring significant earnings growth once up and running.

The biochemicals refinery project in Leuna is now also progressing well. We have finalised a new investment estimate of EUR 750 million for the project, considering the scheduled ramp-up by the end of 2023 and the current high-cost environment. Supported by high customer demand, the investment case for the project is attractive and the long-term growth strategy for the biochemicals business looks increasingly appealing. Thus, we already have a team in place planning for the next growth steps beyond the first refinery in Leuna.

In biofuels, the basic engineering phase of a potential new biorefinery is continuing at full pace, now focusing on the site in Rotterdam. The demand for climate solutions is clearly on the rise. At the same time, the dramatically changed geopolitical situation has further underlined the need to rapidly find alternatives for fossil fuels. I believe that UPM can play an important role in decarbonising society and creating a future beyond fossils.

As the latest example of UPM's commitment to sustainability, in March we published the Forest Action Programme that will run until 2030. This programme is steering our global wood sourcing operations and covers our forests in Finland and the United States as well as plantations in Uruguay. Forest Action pushes us beyond current standard requirements and its measures will have a positive impact on all fundamental aspects of sustainable forestry: climate, biodiversity, soil, water and social contribution. By taking concrete actions, we can make the 2020s a decade of sustainable growth."

Outlook for 2022

UPM's earnings recovered to the strong pre-pandemic level in 2021 and overall, 2022 is expected to be another good year for the company.

There are significant uncertainties in the outlook for 2022, related to the war in Ukraine, the ongoing pandemic, growth in the European and global economy, the energy market situation in Europe and the tight raw material and logistics markets.

Good demand is expected to continue for most UPM products in 2022. In the first half of the year, production and earnings are affected by the strike at the Finnish units of UPM Pulp, UPM Biofuels, UPM Raflatac, UPM Specialty Papers and UPM Communication Papers, and the two scheduled pulp mill maintenance shutdowns in Finland in Q2.

Sales prices and variable costs are expected to increase in most of UPM businesses in H1 2022. UPM will continue to manage margins with product pricing, optimising its product and market mix, efficient use of assets as well as by taking measures to improve variable and fixed cost efficiency.

UPM's comparable EBIT in H1 2022 is expected to be on similar level compared to H1 2021. Comparable EBIT in the full year 2022 is expected to be on similar level or higher than in 2021.


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