Jussi Pesonen, President and CEO, comments on Q2 2020 results:
"In the second quarter of 2020 people and businesses around the world felt the impact of the COVID-19 pandemic and the related lockdowns. For UPM the impact was divided. Demand for graphic papers seriously suffered as a result of lockdowns, whereas labels and specialty papers saw strong demand and delivered excellent results. Our financial standing remains strong, and our strategic growth projects continue as planned.
We have taken proactive and extensive precautions to ensure the safety of our employees and continuity of our operations. Consequently, few UPM employees have been infected and we have been able to serve our customers without interruption. This is a great achievement and has enabled satisfactory results in highly exceptional circumstances.
Our sales decreased by 20% to EUR 2,077 million and comparable EBIT by 41% to EUR 203 million. Operating cash flow was EUR 156 million. Net debt decreased from last year to EUR 301 million and liquidity totalling EUR 2.0 billion.
The lockdown of businesses, offices and schools caused a drastic decline in printed advertising and use of office papers. In Europe, Q2 demand for graphic papers decreased by 32% from last year. We achieved significant savings in fixed costs, but this could not offset the headwind from the markets. UPM Communication Papers’ quarterly EBIT was negative for the first time in five years.
At the same time lockdowns had a positive impact on some of UPM’s businesses. UPM Raflatac and UPM Specialty Papers benefited from strong demand for daily consumer goods and growth in e-commerce, increasing the need for labelling and packaging solutions. In Europe, Q2 demand for self-adhesive labels grew by 10% compared to last year. The favourable markets combined with long-term efforts to improve margins resulted in excellent profits in both business areas.
In UPM Biorefining, pulp deliveries were strong in Q2. Due to the pandemic, maintenance shutdowns were postponed until Q4 and our pulp mills were running at full capacity. However, prices remain low and the results leave room for improvement.
UPM Energy achieved good results despite lower prices in highly volatile markets. UPM Plywood had a relatively solid quarter, but the market for birch plywood remains weak.
In the coming quarters, we will focus on two main topics. First, we will ensure good performance in all our businesses through these exceptional times. Second, we will implement our transformative growth projects in Uruguay and Germany with determination.
During the current uncertainty, we have adjusted our operations using measures such as temporary lay-offs and shift arrangements. In addition, we have taken action and will continue to take action to ensure the profitability and competitiveness of our operations both during the current downturn and in the long term. Last week we announced the closure of UPM Chapelle mill, which will reduce our newsprint capacity by 240,000 tonnes. This week we decided to permanently close the UPM Jyväskylä plywood mill.
I am happy to say that our growth projects are well on track. Unlike many Latin American countries, Uruguay has taken stringent COVID-19 measures and managed to keep the overall level of infections very low throughout the country. This, combined with UPM’s own safety processes, has kept our sites in the country free of COVID-19 cases. In Paso de los Toros, the mill foundation works have started and housing is getting ready to accommodate the increasing number of workers entering the site during the autumn. In the biochemicals project in Germany, the planning has proceeded well, and we are starting work on site at Leuna.
UPM’s value creation today and in the future is based on offering sustainable products and solutions to consumers and businesses. We are confident with our Biofore strategy and committed to growing businesses for a future beyond fossils."
The COVID-19 pandemic, the related containment measures and the economic downturn continue to cause high uncertainty for H2 2020.
The COVID-19-lockdowns had a significant negative impact on graphic paper demand. The lockdowns also supported the strong demand for self-adhesive labelling materials and specialty papers in H1 2020. There are early signs of some normalisation of these temporary demand impacts, both positive and negative. However, the development is uncertain and likely to be gradual, depending on the easing of lockdowns and changes in consumer reactions.
Demand for most UPM products is influenced by overall economic activity and hence, also depends on the shape and rate of the economic recovery.
Paper prices are expected to decrease moderately in H2 2020 compared with H1 2020. Pulp sales prices are starting H2 2020 at a low level.
There will be more maintenance activity in H2 2020 than in H1 2020, particularly as the two pulp mill maintenance shutdowns were rescheduled from Q2 2020 to Q4 2020.
UPM will continue to implement measures to decrease fixed and variable costs.
UPM’s comparable EBIT is expected to be significantly lower in 2020 than in 2019.
Impact of COVID-19 pandemic
The COVID-19 pandemic and the related containment measures around the world continue to represent significant uncertainty for the rest of the year.
Economists expect a severe global recession in 2020. In the first phase of the recession, the pandemic containment measures and lockdowns around the world severely limit or temporarily stop significant parts of the economy. Once the lockdowns can be eased, it is uncertain how potent the following recovery will be and how long it will take for the world economy to reach the pre-pandemic level of activity. Additional waves of the epidemic in different parts of the world are possible and represent further uncertainty.
Safety and business continuity
UPM has implemented extensive precautions to protect the health and safety of its employees and to ensure business continuity and progress of its strategic projects during the pandemic. Despite these efforts, the operation of one or more units or the supply chain and logistics could be temporarily disrupted during the pandemic and the related lockdown measures. In these circumstances some units would need to limit operations or be temporarily shut down.
So far UPM has been able to protect its employees and business continuity well.
Demand for UPM products
Many of UPM products serve essential everyday needs and may therefore see relatively resilient demand during the crisis. These products include pulp, speciality papers and self-adhesive label materials. Even in these businesses, demand is influenced by general economic activity, however.
Demand for graphic papers, plywood and timber is more prone to be impacted by the lockdowns and the recession. The lockdowns during the first phase of the crisis limit a wide range of consumer-driven services and retail, as well as work at the office. This has a negative impact on printed advertising and graphic paper demand during the lockdowns.
The lockdowns are also likely to temporarily affect demand for electricity.
In Q2 2020, graphic paper demand in Europe decreased by 32% from last year, as particularly advertising-driven paper consumption and office paper demand were impacted by the lockdowns across Europe.
Pulp demand held up relatively well, supported by good demand for tissue and hygiene products as well as for some packaging and specialty paper products. Pulp consumption in graphic paper production decreased.
Demand grew for self-adhesive label materials during the lockdowns, as consumers shifted some of their spending from away-from-home categories to packaged daily consumer goods. E-commerce continued to grow, supporting some labelling applications. In Q2, demand for self-adhesive labels in Europe grew by 10% from last year. The same drivers supported demand for UPM's specialty papers during Q2 2020.
Adjusting to different scenarios
The potential impacts to UPM are likely to differ by business and by the phase of the pandemic, lockdown measures, the recession and recovery. UPM is using shift arrangements, temporary layoffs, or reduced working hours as required to adjust its operations in different scenarios.
Projects and maintenance shutdowns
The pandemic and the required health and safety measures add challenge to large investment projects and maintenance shutdowns. UPM's transformative pulp project in Uruguay and biochemicals project in Germany are proceeding with strict health and safety controls. Despite these efforts, some changes to the detailed timeline of the projects are possible during the pandemic and the related containment measures. Currently the projects proceed in line with the planned start-up timeline.
In April TVO announced that due to the COVID-19 pandemic, fuel loading into the OL3 reactor will not happen as planned in June 2020, and it is possible that the regular electricity production would be delayed respectively.
UPM has rescheduled two pulp mill maintenance shutdowns from Q2 2020 to Q4 2020.
Timing of significant maintenance shutdowns in 2020
UPM’s financial position is strong. UPM's net debt was EUR 301 million at the end of Q2 2020, after paying the dividend of EUR 693 million during the quarter. Cash funds and unused committed credit facilities totalled EUR 2.0 billion at the end of Q2 2020. This includes the sustainability-linked five-year EUR 750 million revolving credit facility signed during Q1 2020, and the EUR 550 million of bilateral committed credit facilities signed during Q2 2020. The facilities and UPM's outstanding debt have no financial covenants.