Jussi Pesonen, President and CEO, comments on Q1 2019 results:
“The first quarter of the year lived up to our expectations, and we are thus able to report the 24th consecutive quarter of increased earnings. In five of our six business areas, prices increased more than offsetting the higher costs and keeping overall margins healthy.
Our sales grew by 7% and comparable EBIT increased by 5% to EUR 374 million. Operating cash flow was strong, and our balance sheet remained debt-free even after all leases (EUR 495 million) were recognised on the balance sheet in accordance with the new IFRS16 accounting standard.
UPM Biorefining reported another excellent quarter. As expected, pulp prices were somewhat lower than the historically high prices seen in the latter half of the previous year. Pulp, Biofuels and Timber all enjoyed good customer demand and consequently deliveries developed favourably in an operationally successful quarter.
UPM Communication Papers had a strong quarter with improved earnings due to year-end increases in sales prices. To ensure our longterm success in declining markets, we continue to implement measures to improve cost competitiveness and adapt capacity to the profitable customer demand. The conversion of PM2 at UPM Nordland, Germany, to release liner is proceeding well and in April we announced plans to close PM10 at UPM Plattling, Germany.
Good demand continued in the label paper and release liner businesses of UPM Specialty Papers. Destocking in the Asian fine paper market appears to be over and margins are turning. We aim to
restore profitability with various cost, growth and product development initiatives.
UPM Raflatac regained upward momentum in sales and profitability after last year’s challenge with rapid increases in raw material costs. In January, the new product line for specialty labels was completed in Tampere, Finland, and in March we began a fixed-cost reduction programme to further improve earnings.
Margins remained good in UPM Plywood and market demand in Europe was solid. The expansion project at the UPM Chudovo plywood mill in Russia proceeded to the production trial run phase.
UPM Energy is back on track as electricity prices have improved. Hydropower generation is still hindered by the dry hydrological situation.
Furthermore, we look forward to our transformative prospects that are set to provide us with unique opportunities for significant long-term earnings growth. In Uruguay, preparations for the potential new worldclass pulp mill are proceeding. While encouraging progress has been made in many areas, several important conditions stated in the Investment Agreement are still pending. These include e.g. the execution of the Railway Contract in relation to the Central Railway Public-Private-Partnership (PPP) project. Labour protocols, conflict mitigation regulation and certain material outstanding items as specified in the Investment Agreement are all critical for UPM. If the ongoing second preparation phase is concluded successfully, UPM will initiate the company’s regular process of analysing and preparing an investment decision on the potential pulp mill project.
Preparations are also ongoing in our attractive biomolecular businesses. In UPM Biochemicals, we have completed the basic engineering of the potential biorefinery. We are currently assessing two alternative industrial parks in Germany, in Frankfurt and in Leuna, to select the optimal set-up for our facility. Also, the commercial studies need to be concluded before starting UPM’s regular process of analysing and preparing an investment decision.
UPM Biofuels is evaluating the growth opportunity in Kotka, Finland, and new sustainable feedstocks in order to scale up the business. The development work is expected to continue into next year, as we aim to create a competitive next generation biorefinery in terms of production, products and feedstocks.
UPM is in great shape and ready to grasp the opportunities for value creation and business growth offered by bioeconomy. We firmly believe in growing sustainable businesses that offer solutions to global challenges such as climate change and resource scarcity. Our innovations create value and business opportunities for an era where the world is no longer dependent on fossils.”
Outlook for 2019
The global economic growth is estimated to continue in 2019, albeit at a slower pace than in 2018. There are, however, significant uncertainties related to this, including trade negotiations between China and the US, growth in China, the undefined nature of Brexit and political uncertainties in several countries. These issues may have an impact on the global economic growth and on UPM’s product and raw material markets during 2019.
UPM reached record earnings in 2018. UPM’s business performance is expected to continue at a good level in 2019.
In 2019, favourable demand is expected to continue for most UPM businesses. Demand decline is expected to continue for UPM Communication Papers.
In the early part of the year 2019, pulp prices are expected to be lower and graphic paper prices in Europe higher than in Q4 2018.
Input costs are expected to stabilise after the significant increases seen in 2018. UPM will continue measures to reduce both variable and fixed costs.
Fair value increases of forest assets are not expected to contribute materially to comparable EBIT in 2019.