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2Q op EBIT misses cons. by 32% on Communication Paper; 2H guidance soft UPM''s Q2 comp. EBIT fell 31% yoy with more than half the shortfall versus consensus from Communication Paper, hit by demand weakness, including in transatlantic trade, as well as decline of the dollar. The latter also added to pressures from the fall in the pulp price on the Fibres segment. Looking into H2 guidance has been struck which we interpret as assuming demand and pricing remains weak - a sensible base scenario for now. We lower op EBIT 7-9% and DCF-based target to EUR27. Offering 6% dividend yield, still covered by cashflow, we retain our Outperform rating. Dollar, demand and pulp headwinds build... Weakness of the US dollar has weighed on revenues in both Fibres (dollar-priced pulp) and Communication Paper with the latter impacted by both US operations and transatlantic shipments. Tariff uncertainty has also hit demand here as well as in Chinese fine paper operations though the rest of Specialty Papers and Adhesive Materials have been more resilient. ...though there are finally more encouraging signs in bio-fuels and -chemicals From EUR58m losses in 2024, biofuels operations returned to breakeven in Q2 and we think can make further modest progress in recovery. Meanwhile the new biochemical plant has started operating its first of three modules with management reiterating expectations of reaching an EBIT profit in 2027 (from EUR73m pre-startup losses in 2024 and EUR41m losses in 1H25). Lowering forecasts and DCF-based target to EUR27/ share Our revised 2H op EBIT of EUR516m sits slightly below the mid-point of EUR425-650m guidance. Some technical guidance (e.g. maintenance costs; assuming spot FX holds) has been given for this but not pricing assumptions. For hardwood pulp we assume an unchanged $513/T for the period (vs. $501/T spot in China as of last Friday). For those meeting management soon, please see inside for suggested questions.
UPM-Kymmene Oyj
Summary: Conference call: A another slightly subdued conference call with continued demand uncertainty in the outlook, alongside the challenge of weaker prices in pulp in particular, and headwind of a weaker US dollar. In QandA most useful was some clarification of some of the assumptions included in 2H guidance albeit pulp price assumptions were (per usual) not shared. Overall, we are surprised (but relieved!) by the resilience of the stock today (+1% as we type), albeit recognise the buyside was braced for weak numbers (which were at least close to our own expectations). Management also indicated likely lower capex again in 2026+, after a sharp fall already in 2025, given no major project commitments remain. Unlike Nordic peers, UPM was unwilling to acknowledge a fall in wood costs (at least in Finland, which is its only Nordic exposure). Results: We last heard from UPM at Q1 on 24 April. Today the company reports Q2 results with comparable EBIT EUR126m vs Infront (and Bloomberg) consensus EUR185m, and also below our EUR133m estimate. Most of the miss versus consensus (EUR36m) came from the Communication Paper segment on weak pricing, though there was also a shortfall in Fibres (pulp) (EUR17m). H2 guidance has been given: EUR425-650m op EBIT, the mid point of which is 7% below consensus. There is also a small restructuring to reduce capacity in the structurally declining Communication Paper segment with a decent c.1 year cash on cash payback implied. Main points from Q2 results call n.b. outlook comments already provided in the statement in detail. See 2Q25 first take: Q2 EBIT 32% miss; H2 guide implies downgrades. Hence below we just summarise incremental news from the call. - H2 guidance: of EUR425-650m op EBIT includes EUR60m maintenance impact for Kaukas and Frey Bentos mill maintenance (roughly EUR30m for each pulp mill, in Q3 and Q4 respectively) versus c.EUR90m in Q2 (EUR70m Paso de los Toros and balance in Energy segment power stations)....
2Q25 first take: 32% comp EBIT miss; H2 guidance implies high single digit cuts to consensus We last heard from UPM at Q1 on 24 April. Today the company reports Q2 results with comparable EBIT EUR126m vs Infront (and Bloomberg) consensus EUR185m, and also below our EUR133m estimate. Most of the miss versus consensus (E36m) came from the Communication Paper segment on weak pricing, though there was also a shortfall in Fibres (pulp) (EUR17m). H2 guidance has been given: EUR425-650m op EBIT, the mid point of which is 7% below consensus. There is also a small restructuring to reduce capacity in the structurally declining Communication Paper segment with a decent c.1 year cash on cash payback implied. Overall, though we think the market was braced for a tough quarter, we think shares will decline today. Main points from Q2 results - Q2 miss: we set out a full variance table in Figure 1 below. Driven by Communication Paper in particular - volumes were weak as we''d expected but prices also fell surprisingly sharply, down 5% yoy (vs our flat expectation). The company particularly cited weak demand from US customers due to trade uncertainties. Fibres was below consensus but modestly ahead of our expectations. Energy was impacted YoY by lower Finnish power prices in the quarter (as expected). Biofuels (within ''Other'') reportedly reached break-even. - Guidance and outlook: For 2H25 the company expects comparable EBIT of EUR425-650m vs consensus (per Infront) of EUR580m (BNPPE EUR577m). The midpoint of guidance is 7% below 2H consensus. The company cites lower variable costs for H2 (inc. energy refund timing) and potentially modest forest fair value changes and resilient performance of advanced materials but lower pulp prices and weaker dollar. The company also announces extending its Kaukas pulp mil shutdown by 2 months due to ''unsustainably high wood costs''. Leuna full integrated operation is (still) expected by the end of 2025. - Restructuring: in other...
What happened? Last night US President Trump released the latest wave of tariff notification letters, shared on social media. This included a 50% rate for Brazil, well ahead of the 10% rate initially indicated on 2 April ''Liberation Day''. In the letter the US accuses Brazil of ''attacks'' on US tech and a ''witch hunt'' against former president Jair Bolsonaro. This morning we have received a number of queries on potential implications and therefore share our thoughts. BNPP Exane View: Firstly, we''d observe that the increase in tariff levels and comments about political issues suggests a degree to which this may be a negotiating tactic rather than a final level. Still, we are not geopolitical experts so will leave that to others to debate! Turning to effects on the Paper and Packaging sector specifically, the main impact would seem to relate to pulp. Here the US has total annual consumption of c.7mT, of which 3.5mT softwood and 3mT hardwood. In 2024 the US imported 7.3mT and exported 650kT (the latter we think mainly specialty softwood fluff pulp). Brazil accounts for nearly half of US pulp imports (Figure 1 below). Given reliance on imports we think US domestic prices are likely to rise, especially in the hardwood grade. Softwood is mainly supplied from Canada and Nordics and there is some domestic capacity. This could create an opportunity for other pulp export countries such as Uruguay. Uruguay is currently on the 10% tariff list and, as a smaller and much less protectionist country, perhaps more likely to fly under Mr Trump''s radar. Of course, any Brazilian pulp which is displaced is likely to weigh on alternative markets like Europe or China though, since most is sat low on the global cost curve. In terms of company exposures we highlight: . UPM (+): c.80% of pulp operations are in Uruguay (and 20% in Europe) so a potential beneficiary of US market share and higher prices there. In our November 2024 field trip management disclosed c.10% of its...
UPM STERV SW
What happened? We have spoken to UPM-Kymmene, which is due to report Q2 results on 24 July and highlight there has been no change to full-year outlook. Our key conclusions from the call are: . Global market pulp prices have declined in Q2, triggered by lower Chinese customer confidence which also impacted volumes for pulp (Fibres segment) and Chinese operations of the Specialty Paper segment during peak uncertainty after ''Liberation Day''. The fall in the US dollar is also a headwind for pulp pricing, . Power prices in Finland have averaged lower year-on-year, partially exacerbated by the break in the interconnector to Estonia which will only be repaired by July, which likely weighs on Energy segment pricing, . Maintenance-related downtime in Fibres has been guided at a EUR75m impact, and EUR15m in Energy . Communication Paper prices have seen some slight erosion, whilst Q2 and Q4 experience the highest seasonal costs in this operation, . Adhesive Materials has seen relatively stable demand, and should benefit from previously announced cost savings from H2, . Plywood demand has seen some improvement albeit UPM was impacted by low inventories due to the (now resolved) strike running in Q1, . Biofuels refining in the Other segment is progressively benefitting from lower feedstock costs whilst Biochemicals fixed costs were already embedded in the PandL in Q1 and depreciation and initial volumes for this new facility will only be visible in H2. Given the above market dynamics, we think consensus might cut Q2 and FY25 estimates, not least to reflect the pulp price decline and adverse USD moves in recent weeks.
Initiation of coverage With this report we initiate coverage of UPM-Kymmene ADR, in coordination with our pre-existing coverage of UPM-Kymmene. We have an Outperform rating on UPM-Kymmene ADR with a target price of USD34.2, calculated from a translation of our DCF-derived target price for the underlying UPM equity. Our latest research on UPM can be found: here.
1Q op EBIT beats by 10% on pulp volumes and margins; forecasts largely unch. UPM''s Q1 comp. EBIT fell 14% yoy but came in 10% ahead of consensus and 14% above our estimates, driven by strong volumes and better margins in the Fibers segment. Looking into Q2, price evolution is mixed (pulp slightly +ve; energy seasonally -ve) and maintenance activity steps up whilst currency (esp. weaker USD) is a headwind given dollar pricing in pulp. As such, despite the Q1 beat we leave full year estimates, and hence our DCF-driven target, largely unchanged. Still on undemanding multiples - 8.5x EV/EBITDA; 11.6% FCF yield - a significant discount to peers, we reiterate our Outperform rating. Demand uncertain given tariff environment... Pulp volumes were strong and Raflatac (labels) is seeing recovery but Communication and Specialty Paper segments softened in Q1. Moreover, on the call management cited some signs of demand slowdown in China towards the end of the quarter, likely a result of tariff-related macro worries. Efficiency projects across most segments remain helpful mitigants in this uncertain environment. ...though UPM is confident its direct PandL risk is limited 8% of UPM''s sales are exports to the US (mainly from Europe) though management is confident the shortage of relevant products means it can pass on any tariffs via increased pricing. We are a little wary, albeit its US domestic production (6% sales) could also benefit from lower import competition. Broadly maintaining forecasts and DCF-based EUR34/ share target H1 op EBIT guidance of EUR400-615m has been reiterated, albeit management sees the upper end as ''unlikely'' given recent trading: we estimate EUR498m. We sit in line with consensus for 2025 and 4-10% ahead on EBIT in outer years. For those meeting management soon, see inside for suggested questions. For latest sector views and expectations for the rest of the Q1 earnings season see: Leafing through the data - Spring isn''t in the air, 3 April.
Summary: Conference call: A slightly subdued conference call despite the Q1 beat with management qualifying H1 guidance saying it looks ''more challenging'' to reach the upper end of range due to current trading - citing some demand slowdown particularly in China and tariff-related uncertainties bite. On direct tariff impacts the company laid out its US domestic and trade exposures (in line with our prior understanding) and emphasised its plans to pass on additional costs via pricing. Elsewhere the company is taking actions in many segments to protect profitability, albeit this is largely a recap of actions already publicly announced in prior months. UPM stock faded during the call - likely and fairly reflecting the nuancing of H1 guidance. Results: We last heard from UPM at Q4 on 5 February. Today the company reports Q1 results with comparable EBIT EUR287m vs Infront (and Bloomberg) consensus EUR262m, BNPPE EUR251m. Most main segments were closely in line with the main beat coming from Fibers with a strong volume performance again and margins better than expected. H1 guidance has been maintained implying a broad range of possible outcomes for Q2. Main points from Q1 results call n.b. outlook comments already provided in the statement in detail. See 1Q25 first take: Q1 EBIT 10% beat; H1 guide maintained. Hence below we just summarise incremental news from the call. - H1 guidance: ''taking into account all the seasonal factors and uncertainties and also the current trading to date, it''s seen to be more challenging to arrive at the upper part of our guidance range'' - the company elaborated that it has seen some demand slowdown in Pulp and Speciality Paper in China in particular towards the end of the quarter attributed to tariff uncertainty. Quarter on quarter than company also quantified (previously qualitatively known) maintenance impacts at c.EUR90m in Q2 versus EUR10m in Q1 and lower seasonal pricing in Energy (Finnish electricity) as headwinds...
1Q25 first take: 10% comp EBIT beat; H1 guidance maintained We last heard from UPM at Q4 on 5 February. Today the company reports Q1 results with comparable EBIT EUR287m vs Infront (and Bloomberg) consensus EUR262m, BNPPE EUR251m. Most main segments were closely in line with the main beat coming from Fibers with a strong volume performance again and margins better than expected. H1 guidance has been maintained. Call at 13.15 EET/ 11.15 UK today. Main points from Q1 results - Q1 beat: we set out a full variance table in Figure 1 below. Driven by Fibres where volumes were 10% ahead of our expectations and margins also stronger. No obvious signs of any unexpected impacts (+ or -) we can see. - Guidance and outlook: For 1H25 the company expects still comparable EBIT of EUR400-625m vs consensus (per Bloomberg) of EUR501m. This implies EUR113-338m in Q2. Since the company only formulated this style of quantitative guidance at the full year results, we wouldn''t read too much into the fact it has not been revised or narrowed. - Outlook: regarding tariffs the company reiterated that 14% of sales are in the US, with 40% of this produced locally, but believes direct impact to be ''relatively limited...and in general passed through in prices''. Nevertheless, management cautions tariffs may cause customer hesitation or demand impacts. Leuna still expected to be a 2H ramp up. - Buyback completed: EUR160m now complete, as announced 8 April (c.1% of market cap). - Valuation: On our current forecasts UPM (at EUR23.26/share) trades on 8.4/ 6.4x EV/EBITDA, 12.7/ 8.8x EV/EBIT and 13.0/ 8.9x PE for FY Dec-25 and Dec-26 respectively. - Conference call: There will be a webcast/ conference call at 13:15 EET, 12.15 CET, 11:15 UK Time at this link. Figure 1: UPM 1Q25 results variance / Source: Company data, Infront (consensus), BNP Paribas Exane estimates
Feedback from BNPP Exane''s TIME Conference: 18-19 March 2025 We hosted eight Paper and Packaging companies at our first Transforming Industrials, Materials and Energy (TIME) conference, spanning upstream forest owners and pulp producers through downstream converters and glass specialists. Short term focus was on the effect of tariffs and associated second order demand impact, as well as pricing, with a mixture of opinions expressed amongst the companies, albeit skewed more cautiously by names like Verallia. Mid-term debates included capital allocation, sustainability and regulatory tailwinds, sector consolidation, and forestry valuation. Timber weak, pulp seeing first signs of resistance, packaging facing demand uncertainty Construction demand remains weak, impacting timber. While increased government spending in Germany may offer some relief, it is residential construction activity that is required to make a meaningful difference. Pulp has got off to a solid start in 2025 but UPM flag that they are seeing increased resistance to the latest round of price hikes. In Sweden Holmen note pulpwood prices are continuing to creep up, squeezing profitability of Nordic producers. Should Russian wood return to the Nordics this could offer some relief. Alarms are not yet going off in relation to packaging demand, but companies noted that second order effects of tariffs could impact consumer demand. Graphic Packaging specifically stated that they are not immune to challenges their CPG customers are facing, SIG Group highlighted cartons'' defensive nature, whilst Vidrala described a subdued outlook. Capex cycles winding down, sustainability tailwinds, and more in this note Companies like Mondi and UPM are now reaching the end of recent capex cycles, with a greater investor focus now on driving efficiencies and capital allocation priorities. Packaging names like Graphic Packaging highlighted the importance of innovation and plastic to paper substitution as a structural...
UPM SIGN GPK GPK SW
What happened? Today was Day 1 of our TIME Conference with senior management represented from Holmen, SIG Group, Mondi, UPM-Kymmene and Vidrala from the Forestry, Paper and Packaging industries. Generally, companies tend to see somewhat similar demand levels to 2H24 albeit pricing is improving in several areas and demand ticking up a little in pockets. Other popular topics of common investor focus across the names included capital investment plans, MandA and tariffs. Sustainability, whilst of lesser focus for investors than prior years, remains a longer-term tailwind to demand in the eyes of the companies. Summary takeaways: Holmen (NC): business model remains rooted in the forest Holmen''s business model remains focused on its 1.3m ha of Swedish forest land, taking an 80+ year perspective to grow sawlogs for lumber with the associated benefit from pulpwood processing for paper and board, and hosting renewable power on forest land. Whilst forest land values have risen significantly in recent years the lack of Russian supply to the Nordics means wood costs have risen faster, whilst Holmen is only 50% self-sufficient in supply to industrial operations. Rather than adding capacity and relying more on external supply the company has preferred buybacks to increase forest holdings per share. The impact of the possible return of Russian wood was debated, alongside the potential impact of tariffs - this could have a significant impact on the European consumerboard market where rivals are adding significant new capacity. Mondi (=): EUR1.8bn of capital investments to deliver returns Mondi is coming towards the end of its EUR1.2bn organic capex investment cycle, targeting mid-teens pre-tax ROCE at mid-cycle, focused on structurally growing markets albeit acknowledging containerboard and kraft paper is only just ticking up from cyclical trough. Still, with European government stimulus in Germany, there are hopes for improved demand particularly in sack kraft (for...
UPM VID VID MNDI SIGN
4Q beats on non-cash forest FV gains but 1H25 outlook more cautious than cons. UPM''s Q4 comp. EBIT rose 29% yoy and came in 24% ahead of consensus expectations, though the beat was materially driven by a big gain in Finnish forest fair value changes. Looking into 2025 UPM has guided a wide range of H1 profit expectations, though the mid-point is modestly below consensus. Capex is coming down and the launch of a small buyback is welcome but another 6-month delay at the biochemicals project is disappointing. We trim EBITDA forecasts 1-4%. Still, offering attractive valuation vs peers, including 10% FCF yield we reiterate our Outperform rating. New volume helps offset weak prices... Volumes continued to grow in 2024 in Fibres (pulp) and Energy (electricity) as new capacity ramped up. In 2025 UPM expects to produce another 300kT of pulp. We expect UPM to continue to make cost progress in its Uruguay operations - our confidence buoyed by the November field trip. We estimate production costs for the platform around $350/T vs the $280/T long term target. ...but the remaining major ongoing project, Leuna, continued to disappoint The Leuna biochemical plant project continues to disappoint with another 6 month delay due to quality issues identified in commissioning, whilst there has been a EUR373m writedown (vs. total EUR1,275m total budget) to replacement value, following project overruns. Management maintains its 2027 ''EBIT positive target'' and 14% mid-term ROCE but this is another blow nonetheless. Trimming earnings but maintaining DCF-based EUR35/ share target on better cashflow H1 op EBIT has been guided at EUR400-615m: we estimate EUR542m assuming HW pulp at $582/tonne. Capex is coming down to just c.EUR400m, from 2024''s EUR540m. For those meeting management soon, see inside for suggested questions. UPM is one of 53 companies participating in our Transforming Industrials, Materials and Energy Conference in London on 18-19 March for which registration is...
Summary: Conference call: A slightly frustrating conference call with management unwilling to share the underlying assumptions around its range of H1 op EBIT guidance on key variables such as the pulp price. Elsewhere the company emphasised that delays to its full Leuna startup to 2H are not impacting its 2027 expectations since mgmt. had already allowed for possible delays in starting up this first-of-a-kind operation and highlighted some of the actions taken in 2024 to reduce fixed costs in Communication Paper and Raflatac for example. Overall, given the guidance mid-point is below consensus and there was insufficient detail to reassure that underlying assumptions are conservative, we think shares down low-single digit today seems fair. Results: We last heard from UPM at Q3 on 29 October (ex a 28 November field trip to Uruguay). Today the company reported Q4 results with comparable EBIT EUR418m vs Visible Alpha consensus EUR338m, BNPPE EUR312m. Most main segments were closely in line with expectations but ''Other Operations'' came in EUR81m ahead driven by a strong gain in the FV of forest assets. The company also announced a EUR160m buyback (c.1% of Mcap) and EUR175m bolt-on Raflatac acquisition and cautioned to another six month delay to startup of the Leuna biochemicals plant. Main points from Q4 results call n.b. outlook comments already provided in the statement in detail. See our first take. So below we just summarise incremental news from the call. - Fibres (Uruguay): Railway fully operational by end of Q4. Expect to add 300kT production yoy in 2025. Then plan to debottleneck Uruguay, first pushing past nominal capacity to test limits (low capex) then investing to remove bottlenecks (with capex) a more gradual process. Target to get to USD280/T cost continues. In 2025, mgmt expects a EUR25-30/T cost reduction vs 2024. - Fibres (Finland): New operating model implemented. Sites still make a positive EBIT and cashflow contribution, even at...
4Q24 first take: in line with pre-release earlier this month We last heard from UPM at Q3 on 29 October (ex a 28 November field trip to Uruguay). Today the company reports Q4 results with comparable EBIT EUR418m vs Visible Alpha consensus EUR338m, BNPPE EUR312m. Most main segments were closely in line with expectations but ''Other Operations'' came in EUR81m ahead driven by a strong gain in the FV of forest assets. Main points from Q4 results - Q4 beat: we set out a full variance table in Figure 1 below. Other operations includes a positive FV of forest revaluation EUR90m ahead of our expectations (no cons for this detail). Ex this underlying results were largely in line with our expectations. Flat EUR1.50/ share dividend as expected. - Guidance: UPM has also given quantitative guidance for H1 (this morning having changed its guidance policy). For 1H25 the company expects comparable EBIT of EUR400-625m vs consensus (per VA) of EUR577m. This implies a mid-point 11% below consensus albeit the range is wide so assumptions underlying this will be key. Some qualitative outlook commentary includes H1 to benefit ''higher volumes and lower fixed costs'' but ''lower sales margins'' with ''similar pulp price and lower electricity'' than seen at the start of 2024. - Leuna biochemicals project delayed 6 months: Another disappointment to this first-of-its-kind project that keeps over-running. Now expected to start up in 2H25 (prev. 1H25) - Small buyback: Company surprisingly starting a buyback today, to run 10 Feb-31 May subject to AGM approval, albeit a small one: EUR160m (c.1% of market cap). - Small-ish acquisition: today UPM also announces acquisition of Metamark, a graphics business for EUR175m/ GBP146m which will be rolled into Raflatac. Sales GBP65m (2.25x EV/Sales), expected to bring ''major synergies'' and be ''EBITDA margin accretive'' to Raflatac (UPM''s labels and graphics solutions business). - Valuation: On our current forecasts UPM (at EUR29.06/share)...
Company catch-up We have spoken to UPM which is due to report Q4 results on 5 February and highlight there has been no change to Q4 guidance (for op EBIT to be ''on a similar level to, or increase from, 3Q24''''). Key points include: . Global market pulp prices have declined in Q4 vs Q3, which we expect to weigh on Fibres segment profitability, though with lower prices market demand in China is recovering. . Lower pulp prices are a cost tailwind to UPM''s Specialty Paper segment (and, to a lesser extent, for Communication Paper). However, these costs are more weighed to European pulp prices which have declined more slowly, and also come through with around a one quarter lag, . Production should be higher in the Energy segment in Q4, given higher seasonal demand. Market prices are also higher for similar reasons, as well as benefitting from the reactivation of the Finland-Estonia grid connection allowing Finnish exports again, . Communication Paper should benefit, like in 4Q23, from year-end energy rebates, though these are likely to be smaller year-on-year as power consumption gradually reduces. Fixed cost savings from closures at Hurth and Norland (previously guided at EUR45m) should be partially visible in Q4 and completely realised in 1Q25, . Biofuels refining in the Other segment is starting to benefit from lower feedstock costs but these should be more fully visible in 2025, whilst recent EU action on anti-dumping from China combined with German rules to disallow roll-over of carbon allowances into 2025 are incrementally helpful to biofuel market pricing . Leuna biochemicals plant remains on track to start up in Q1 Given the above market dynamics, we think consensus might trim Q4 expectations a little. Visible Alpha consensus currently expects EUR340m Q4 op EBIT, versus EUR291m reported in Q3.
Feedback from site visit to pulp mill, port, forestry and nursery operations This week we had the opportunity to visit many of UPM''s operations in Uruguay including its $3.5bn pulp mill at Paso de los Toros, as well as supporting forestry and outbound logistics infrastructure. With the mill now ramped up to its 2.1mT/y nominal capacity the company is now focused on end-to-end optimisation to drive costs to the $280/T target whilst already eyeing a material potential capacity increase. The upstream segment of Paper and Packaging faces several challenges in the current environment, not least low pulp prices which we do not expect to start recovering gradually until 2Q25. However, UPM''s cost competitive positioning with a dividend yielding c. 6%, covered by FCF, mean it ''pays to wait'' for market recovery. Hence the stock remains our top upstream pick. Continues on page 2...
Q3 EBIT miss on broad-based volume weakness On 16 October UPM issued a profit warning, including publishing headline numbers with comparable EBIT 24% below consensus expectations, mainly driven by shortfalls in volumes across several segments including Fibres (pulp), Energy (Finnish electricity) and Specialty Papers and Raflatac (mainly sticky labels value chain). Today, following full results publication we update forecasts, anticipating recent trends continue into Q4 and 2025, but the environment normalises in 2026. By then we see UPM offering 10% FCF (and meanwhile a dividend 5% yield). We retain (+) rating. UPM''s Fibres volumes are now at full run rate in Uruguay but being curtailed in Finland Having completed its first maintenance turnaround at its new Paso de los Toros mill UPM ran full production volumes for the first time in its Uruguayan operations. The company reiterated ambitions to reach USD280/T production cost which we estimate will lower total segment unit costs by c.USD125/T by the end of 2026 versus 2H23 levels. However, high wood costs in Finland led to production curtailments in mills there. Lower pulp market prices already started to weigh on Fibres profitability in Q3, whilst the cost tailwind for pulp-consuming segments will only manifest from Q4. Weak demand in Specialty Paper and Raflatac (labels) a negative surprise Having seen labels demand recover in H1, Raflatac saw a sharp qoq reversal in Q3, reflecting wider demand trends in Europe. Specialty Paper also saw weakness from softer Asia Fine Paper demand. Losses continued in the ''Other'' segment though we expect the combination of lower biofuel feedstocks, and startup of biochemicals operations in 2025, to help cover existing fixed costs. Updating forecasts for miss and more cautious outlook We lower operating EBIT forecasts by 7%/ 15%/ 2% for 2024-2026e. With unchanged longer-term assumptions our DCF-based target is unchanged. For those meeting management soon, see...
Summary: Conference call: today''s call dug into some of the details of the short-term challenges, which UPM attributes to weak underlying demand at end consumers, especially in Europe, rather than company-specific issues. Mid-term messaging on the outlook and on major projects was consistent with that given at the recent CMD. Overall we conclude there is little more information for the share price to digest today, so the muted share price reaction seems fair. Results: UPM pre-released Q3 headline results, sales and segmental operating EBIT, earlier this month, as well as guiding Q4 (Profit warning on weak demand and high costs, 16 Oct). As such, the Q3 results and the outlook statement today hold little new news. Commentary on major projects and operational performance also appears unchanged from messages given at the September Capital Markets Day (Capital Markets Day feedback: continuity candidate, 6 September). Main points from Q3 results n.b. outlook comments already provided in the statement in detail. See our ''first take''. So below we just summarise incremental news from the call. - Fibres (Uruguay): Uruguay still expected to reach USD280/T production cost with management clarifying that this is not predicated on additional capacity to debottleneck capacity above the (current) 2.1mT/y design capacity of the Paso de los Toros mill, albeit were unwilling to be drawn on the unit cost level currently or timeframe to reach this efficiency goal. Still, Q3 was the first quarter of full production at Paso de los Toros and the mill-to-port railway connection will be fully utilised in Q4. Mid-term, as commented at the September CMD, management sees scope to grow beyond nominal capacity though additional investment. - Fibres (Finland): Given high marginal wood costs UPM decided to take 3 weeks'' downtime during Q3 at two Finnish mills with a combined 800kT/y capacity. Management reiterated the prior view that the structural tightness of the wood market...
3Q24 first take: in line with pre-release earlier this month UPM pre-released Q3 headline results, sales and segmental operating EBIT, earlier this month, as well as guiding Q4 (Profit warning on weak demand and high costs, 16 Oct). As such, the Q3 results and the outlook statement today hold little new news. Commentary on major projects and operational performance also appears unchanged from messages given at the September Capital Markets Day (Capital Markets Day feedback: continuity candidate, 6 September). Main points from Q3 results n.b. we set out a full variance table in Figure 1 below. Recall, these figures were already provided on 16 October. - Valuation: On our current forecasts UPM (at EUR29.06/share) trades on 10.0/ 8.0x EV/EBITDA, 14.9/ 11.2x EV/EBIT and 16.3/ 11.8x PE for FY Dec-24 and Dec-25 respectively. - Conference call: There will be a webcast/ conference call at 13:15 EET, 12.15 CET, 11:15 UK Time at this link. Figure 1: UPM 3Q24 results variance / source: Company data, Infront (consensus), BNP Paribas Exane
UPM lowers guidance on weaker demand and high wood costs Today intra-day UPM has pre-released headline Q3 numbers and lowered its 2H guidance. Q3 operating EBIT of EUR291m is 20% below our EUR365m estimate and 23%/ EUR89m below Visible Alpha consensus'' EUR380m. See Figure 1 for variance by segment. The company states: ''During the second half of the year, market demand for UPM''s products has been weaker than expected, leading to lower delivery volumes in most businesses. On the positive side, the new UPM Paso de los Toros pulp mill has operated in full production since its first maintenance shutdown in June. However, the weakened pulp market and the high wood cost in Finland had a negative impact on the UPM Fibres business.'' The company also guides that Q4 op EBIT ''expected to be on similar level or increase from Q4 2023 (EUR323 million)'' versus consensus EUR440m and BNPPE EUR379m. Moreover, the company consequently now guides full year operational EBIT ''comparable EBIT in full-year 2024 is expected to be on similar level or increase from 2023''. BNPP Exane View: Forecasts (ours and consensus) had been coming down for UPM and its peers as we approached Q3 (see FORESTRY, PULP and PAPER: Leafing: Pulp pressure vs forest saviour, 16 October), but nevertheless performance has clearly been weaker than anticipated. By segment Fibres accounts for EUR73m of the EUR89m op EBIT shortfall versus consensus, with smaller misses in Raflatac and Specialty Paper largely offset by small beats elsewhere. Fibres is also the biggest driver of the revenue miss, though at this stage without volumetric disclosure we can''t be sure how much is lower tonnes versus the pulp price decline coming through quicker than previously expected. See Figure 1 for full variance. In terms of attribution of the weakness, commentary on ''weaker volumes'' has broadly negative read-across to the whole sector, especially pulp-producing peers such as SCA (-) and Stora Enso (=) whilst the ''high wood...
Increasing capital returns...but not quite yet Today UPM hosted a CMD in London, the company''s first since 2021 and its first under Massimo Reynaudo (CEO since 1 January). Overall strategic priorities for the group are unchanged and no new major projects were announced. The capital returns framework retains possibility of a buyback but no immediate action is being taken whilst there was some caution regarding profit ramp profile of the Leuna biochemicals plant. Overall, the market has concluded the event mildly underwhelming, but with fundamentals intact and valuation undemanding we reiterate our Outperform rating. UPM will continue to run Communication Paper for cash This structurally declining segment remains a cash cow for the group - with stable FCF over the last five years versus the prior five as capacity is managed - with no plans to dispose. Strategically simplifying the rest of UPM, management presented plans under three areas, though there are no immediate plans to change segmental reporting: Renewable Fibres (Biomaterials segment), Advanced Materials (Specialty Paper, Raflatac labels and Plywood) and Decarbonisation Solutions (Energy and key elements of Other segments). Although rebranded, these three areas largely echo the ''Spearheads of Growth'' avenues under prior leadership. In Fibres the company indicated c600kT further pulp potential The Paso de Los Toros mill in Uruguay is now operating at its nominal 2.1mT annual capacity and should still reach the long-standing $280/tonne EBITDA cost target once overland logistics fully shift to rail (end 2024) and plantation self-sufficiency reaches 80% (2027, from c.68% today). The timeframe to the cost target is somewhat disappointingly behind our end 2025 target. However, in more positive news, management estimates Uruguay can achieve a further 200-300kT output based on performance so far, with another 300kT possible with debottlenecking investments. Long term, the company is laying the...
Q2 EBIT miss driven by weak biofuels performance UPM''s Q2 comp. EBIT rose 60% yoy but was EUR34m/ 16% below consensus. The beat in Fibres (pulp) segment was offset by small shortfalls in Comm. Paper and Energy with the net miss attributable to ''Other'' (biofuels). Current big projects are on track with Paso de los Toros (pulp) now at full run rate and Leuna (biochems) on track for Q4 startup. An investment decision on Rotterdam is now at least 2 years away - a positive in our view given current EU biofuels market uncertainties, meaning capex should fall further next year. Our forecasts now imply a 9% 2025 FCF yield - Outperform. UPM''s Fibres volumes now at full run rate Having completed its first maintenance turnaround at PdlT (and more established mills), UPM should see full target volumes in Q3. This should aid continued progress of production costs from USD500-550/tonne today to the longstanding USD280/tonne target. We do anticipate market pulp prices to decline from here, as other new industry capacity also ramps, but still anticipate Fibres profits rising in 2025. Overall whilst UPM is a beneficiary of higher pulp prices, this decline would at least provide a tailwind to the input costs of Comm Papers and Specialty Papers segments too. Biofuels hit by lower market prices; Rotterdam investment decision now 2026 (prev. 2024) The decline of biofuels prices, driven by higher imports, is weighing on UPM''s existing refinery profits. However, with the EU imposing anti-dumping duties on imports and investigating fraud in the GHG offset market we expect to see improvement in market pricing towards year end. The company also announced postponing its investment decision on its 500kT Rotterdam biofuels project for two years whilst the company works on technology for innovative and flexible feedstock options. An outright cancellation would probably have been better greeted by investors, but this is a reassuring compromise. We trim our EBIT forecasts by 4-5%...
A long list of price increases as costs push prices higher. Q2e EBIT likely down q-o-q: higher maintenance costs. Smart to buy when macro is low.
UPM HOLMB HOLMB BILL BILL NSKOG NSKOG NPAPER METSB ESSITYB ELO SCAB SCAB BRG BRG HUH1V STERV
UPM will report its next quarterly results on 23 July. We reiterate BUY with a TP of EUR 37 (36). Q2'24e EBIT of ~EUR 200m.
Feedback from BNPP Exane''s Future of Packaging Conference: 14-15 May 2024 We hosted a dozen companies at our 4th Annual Future of Packaging Conference, spanning upstream forest owners and pulp producers through downstream converters, glass specialists, and key capital goods suppliers. Short term focus was on the pace and scale of demand recovery, as well as pricing, with a varied picture painted by sub-sector. Costs, particularly from the forest, were also frequent themes. Mid-term debates included capital allocation, sustainability, and regulatory tailwinds. Timber weak, pulp strong, board demand improving, packaging outlook improving? Construction demand remains weak but upstream names like UPM have been positively surprised by the strength of pulp price recovery, partly due to near-term supply constraints. Holmen, amongst others, cautioned that high wood costs are likely to continue to be a feature of the Nordic market whilst Stora Enso elaborated on its turnaround plan including cost cutting and commercial initiatives. Mondi sees strengthening order books though Metsa Board remains sceptical on how much of the improved demand for packaging materials is driven by restocking versus being supported by improved underlying demand. Both Elopak and Vidrala continue to gain market share whilst SIG and Graphic Packaging are confident of 2H acceleration. Huhtamaki was more balanced in this regard. A mixed outlook for capital investment plans Andritz anticipates a pickup in pulp and paper capital project orders in 2025, though Valmet remains more cautious. In general, most producers are moderating investment plans though both Mondi and UPM consider strong balance sheets as providing flexibility to pursue bolt-on MandA with the latter also continuing to review its biofuels opportunity. The conclusion of the EU''s PPWR is allowing Huhtamaki and its customers to start planning investments in Europe with greater clarity again. More generally, plastic-to-paper...
UPM STERV SMDS VID VID MNDI SWR
BNPP Exane''s 4th Future of Packaging Conference: 14-15 May We had the pleasure to welcome 12 companies spanning the entire value chain, from forest to packaging and everything in between, and key equipment suppliers earlier this week. We summarise our initial highlights from the last two days. Hosting leaders from across the board Participating companies this year were: Andritz, Elopak, Graphic Packaging, Holmen, Huhtamaki, Metsa Board, Mondi, SIG Group, Stora Enso, UPM, Valmet and Vidrala. Demand and pricing improving in most areas Contrasting a tough 2023, management near-universally cited improved order books, albeit in some areas driven by end of destocking effects, whilst end consumer-related evidence remains mixed. The main exception is timber due to continued muted construction activity, albeit even here sustainability trends are favourable with signs of increased use in substitution to concrete and steel. Pricing is also moving positively in most areas, albeit gains is recycled grades have largely already been eaten up in higher OCC prices. Near term, multiple supply-side shocks are particularly tightening the pulp market though some management were more wary into 2025 given new capacity coming to market. Costs remain a challenge for Nordic producers Downstream packaging companies are generally seeing a benign cost environment, following strong inflation in the last two years. Wood costs continue to rise significantly in the Nordics though with all impacted management teams believing the drivers to be structural and hence unlikely to improve. Reducing demand remains key but no one indicated plans to reduce installed capacity, albeit future additions are on hold or cancelled. Capital goods companies painted a mixed picture on demand for new projects, with main hopes here focused on Latin America. Plenty of company specific detail Andritz (=) remains more positive on pulp project demand than Valmet (+) albeit the latter is optimistic on...
UPM STERV HUH1V MNDI SIGN ELO GPK GPK
Welcome to BNPP Exane''s Future of Packaging Conference: 14-15 May 2024 This year marks the 4th annual edition of our Future of Packaging Conference, encompassing physical meetings in London alongside virtual sessions. Companies attending span the full value-chain from forest, through pulp and board, to packaging producers and buyers as well as sustainability experts. Near term debates are likely to focus on the nascent demand recovery as well as sustainability of the recent rallies in many prices, whilst mid-term topics include the impact of MandA, capital cycles and, fibre''s role in future packaging solutions. The guide provides a snapshot profile and question bank for each company participating. Hosting leaders from across the board The conference also provides investors the opportunity to unwrap the company-specific stories within the forestry, paper and packaging industries as well as their key capital equipment suppliers. This year we are delighted to host: Andritz, Elopak, Graphic Packaging, Holmen, Huhtamaki, Metsa Board, Mondi, SIG Group, Stora Enso, UPM-Kymmene, Valmet and Vidrala. The near term: demand recovery, but are price rallies sustainable Volumes are starting to inflect positively across many sub-sectors but the ''new normal'' post destocking is yet to fully establish. However, pricing has run ahead, led by pulp, followed by board, and likely packaging prices too by the second half. A month after Q1, our conference should allow us to see if momentum is building or fading. The mid-term: capital cycles, MandA, sustainability challenges and opportunities dominate Several companies are in the midst of completing major capital cycles - individually positive to PandL''s from increased sales capacity but in aggregate a potential over-supply risk for the industry. MandA has also picked up in the sector, raising debates on both sides of the Atlantic on potential implications. Structurally, most companies are positive on demand with the view their...
Q1 EBIT a clean beat, mainly driven by Fibres (pulp) UPM''s Q1 comp. EBIT fell 7% yoy but was EUR75m/ 29% ahead of consensus with two-thirds of the beat from Fibres and the remainder from Energy. Looking into Q2 the company will experience more maintenance downtime, as already flagged, but beyond that management confirmed an unencumbered 2H should result in significant profit acceleration. Taking a more upbeat view on pulp pricing near term we raise forecasts materially albeit outer years are less impacted resulting in a more modest increase in our target price. Trading on 9x 2025 EV/EBIT we reiterate Outperform. UPM''s Fibres volumes continue to ramp nicely Fibres volumes rose another 3% qoq despite Finnish political strike disruptions with Uruguay operations more than compensating. In Q2 a two-week maintenance turnaround will dent volumes but looking into 2H we expect Paso de los Toros to fully ramp up with costs benefitting from leverage and the recent start of rail connections from mill to deep sea port. This should reduce production costs from USD500-550/tonne today (on our estimate) to the longstanding USD280/tonne target. Pulp prices are proving more resilient than we previously anticipated Reflecting near-term supply tightening (Finnish strikes, Kemi explosion, Red Sea) market pulp prices have continued to climb even as we approach the arrival of significant new supply into the market (UPM full operations in 2H; new Suzano mill etc). We now model BEK $100m higher in 2024. Increasing DCF-derived target price to EUR40 - reiterate Outperform In the wider business destocking effects are also over whilst prices are also improving. With capex also reducing we see free cash flow accelerating from 2025 onwards, even if the Rotterdam biorefinery project goes ahead. With higher forecasts our target price increases to EUR40 (from EUR37). For those meeting management soon, including at our conference on 14 and 15 May, see inside for questions.
60% of pulp production in Lat-Am - less exposed to the Nordic wood shortage. Paper is late-cyclical and follows pulp. SOTP points to EUR ~43/sh incl. growth projects
UPM will report its next quarterly results on 25 April. We reiterate BUY with a TP of EUR 36 (38). Q1'24e EBIT of EUR 265m.
4Q EBIT ahead of consensus but H1 guidance weak on production downtime UPM''s Q4 comp. EBIT fell 50% yoy but was 4% ahead of consensus albeit 20% below our expectations due to misses in Energy and Fibres. Despite being uncovered, the EUR1.5/ share dividend was maintained reflecting UPM''s confidence in benefits to come from capacity ramping in 2024 and 2025, and a strong balance sheet. Near term though UPM guided to a surprise decline in 1H24 EBIT, in part due to a large step up in power plant and mill downtime. We cut forecasts, albeit the impact is more limited in outer years, whilst our DCF-based target falls to EUR35. With shares down excessively, in our view, we still see upside. Trading on 10x 2025 EV/EBIT we reit. Outperform. UPM''s Fibres segment is charting a volatile path through its capacity ramp up... Fibres (pulp) volumes were broadly stable as Pasos de los Toros'' ramp up was interrupted by problems that have now been resolved. However in 1H24 management anticipates a EUR100m drag from planned maintenance in this and other mills, as well as in Energy. Communication Paper had another strong performance, but profitability here was underpinned by a c.EUR90m timing benefit from electricity rebates and carbon credits. ...but cash generation should continue to improve in 2024 From EUR1bn in 2023, capex is set to fall to EUR550m in 2024. This includes the final EUR300m for the Leuna biochemicals plant before it starts operations at the end of 2024. As a result, excluding one-time working capital inflow in 2023, we see accelerating free cash flow in 2024-26. For now, we exclude the potential cost and benefit of the possible Rotterdam biorefinery project, pending greater clarity on i) likelihood of happening, ii) returns - though we think 14%+ ROCE if announced. Trimming DCF-derived target price to EUR35 - reiterate Outperform We lower op EBIT 33% in 2024 reflecting the unusually high planned maintenance in key assets, and by a more modest 10% in outer...
Adj . EBIT 20-30% below (energy refunds and maintenance ). Paper is late-cyclical. SOTP points to EUR ~44/sh incl. growth projects.
UPM will report its next quarterly results on 1 February. We reiterate BUY with a TP of EUR 38. Q4 2023e EBIT of EUR ~303m.
3Q beats but trimming numbers on updated price outlook UPM''s Q3 comparable EBIT fell 72% year-on-year but came in 16% ahead of consensus driven by beats in the Communication and Specialty Paper segments more than offsetting a shortfall in Fibres (pulp). Paso de los Toros and OL3 are now running close to nominal capacity and the Leuna biorefinery is on track with its (admittedly previously revised) build. Anticipating soft volume trends persist and moderating our price assumption outlook in Fibres and Energy though, we trim our above-consensus forecasts and target price accordingly. However, offering a 7% 2024 FCF yield, rising to 9% in 2025 we continue to see upside and reiterate our Outperform rating. New volume helps offset weak prices... Fibres (pulp) volumes rose 35% qoq with the new BEK pulp mill (PdlT) achieving 70% of nominal production capacity whilst Energy deliveries rose 27% yoy with the second full quarter''s benefit from nuclear power station OL3. These helped offset the sharp decline in pulp prices whilst pulp production costs fell 24% per tonne qoq as the new low-cost pulp mill increased its share of the mix and some underlying costs started to ease. ...but Paper segments were the surprise point of strength Despite continued weak volumes Communication Paper and Specialty profits rose qoq as production costs fell as a result of lower input costs. Given the lagged effect from pulp we expect continued benefit into Q4 and early 2024. Trimming DCF-derived target price to EUR36 (from EUR37) - reiterate Outperform FY23 capex guidance has increased slightly but management reassuringly reiterated a sharp fall for FY24+. No decision has been made on the Rotterdam biofuels project but retiring CEO Jussi Pesonen reiterated his view that the opportunity looks promising. For those meeting management soon, see inside for suggested questions.
Clean EBIT 13% above - much better on Paper. Trying to find a higher trough. SOTP points to EUR 45/sh incl. growth projects.
UPM reported weak Q3 results despite profitability exceeding the street’s expectations. Besides a strong rebound in sequential profitability after a poor Q2, there were various promising takeaways/dynamics in most divisions. While the firm is set to see a change of CEO in early-2024 – after a good run of nearly 20 years under the out-going CEO – this transition is not a worry, as UPM is on a front-footing (vs. peers) in various key aspects. Hence, its quality proposition remains attractive, despite the looming market fears/uncertainties.
UPM will report its next quarterly results on 24 October. We reiterate BUY with a TP of EUR 36.5 (34). Q3 2023e EBIT of EUR ~200m.
High costs and ongoing destocking drives 42% Q1 EBIT miss vs consensus UPM''s Q2 comparable EBIT fell 70% year-on-year. Raflatac (labels) saw the biggest revenue miss, whilst profits fell short in Fibres (pulp), Energy and Other (biorefinery) segments due to lower volumes and higher costs in particular, though encouragingly these are starting to roll over. Operationally the biggest disappointment is a year''s delay and cost overruns at Leuna, but against this the new Uruguay pulp mill is ramping up according to plan whilst group capex requirements are falling. We lower EPS 9-47% and DCF-derived target price slightly but, on 10x 2024 PE, we see attractive fundamental value and reiterate our Outperform rating. Weak underlying volume trends persisting but new capacity starting to ramp up... Volumes fell 30% yoy in Plywood and 12% in Communication Paper but most notable was the 25% revenue decline in Raflatac, or c.32% on an organic basis on our estimates. More encouragingly, Fibres volumes rose 60% yoy or 10% yo2y (stripping out the impact of last year''s strike) as the Paso de los Toros mill began operations. Management has confirmed full output should be achieved by the end of 2023, with the USD280/tonne delivered production cost reconfirmed. ...whilst costs remaining high, but are now starting to fall Fibres production costs rose a further 4% qoq but encouragingly management sees Finnish wood costs stabilising from here. The fallen pulp price should also feed into a cost tailwind to paper divisions in 2H. Hence, we see UPM''s guidance for 2H comparable EBIT ''to be on a similar level or increase'' versus H1 to be potentially conservative, though much depends on the end of destocking pressures and market prices. We model a flat pulp price of c.USD505/tonne to year end. Trimming DCF-derived target price to EUR35 - reiterate Outperform The Leuna biochemical project cost has jumped EUR430m but the 14% project ROCE reiterated and overall group capex...
Clean EBIT -32% below consensus. Pulp and Paper prices could drop 20-30%. SOTP points to EUR 46/sh (growth projects).
Even UPM reported poor Q2 results – with a major profitability miss vs. the street’s expectations owing to various issues across the board. Finally, the guidance was slashed and the management even materially revised upwards the cost of developing a key growth asset. While the situation seems tough, by virtue of its balance sheet strength, impressive (cost savings) track-record and limited forest and wood market dependencies, UPM remains a quality sector bet.
Feedback from BNPP Exane''s Future of Packaging Conference: 15 - 17 May 2023 We hosted a dozen companies at our 3rd annual Future of Packaging Conference, spanning upstream forest owners and pulp producers through downstream converters, packaging buyers and ESG experts. Short term focus was on destocking trends and the volatile cost and selling price environment, whilst mid-term topics included industry (over)supply risks and sustainability tailwinds. Short term: investors demanding answers on demand Following on from the recent profit warnings at Stora Enso and UPM, upstream companies were wary to ''call'' the end of destocking pressures, though conviction remains that this has generally been the incremental driver rather than underlying demand deterioration. On pricing, there are tentative signs of stabilisation in pulp and board, whilst downstream operators are either still pushing through increases to offset 2022''s cost increases, stable or, in the case of box prices, softening. Mid-term: all eyes on supply The strong pipeline of: new pulp mills, including UPM''s new site in Uruguay; containerboard mills including Mondi''s Italian site and new machines producing various consumer board grade lines (Mesta Board, others) was a key focus for investors worried about structural over-supply. Near-term though, fallen prices and high fibre costs mean some operators indicated they, or peers, are likely to take downtime in 2023. In Paper, UPM and Holmen continue to play the ''last man standing'' strategy, taking the view their low-cost Nordic energy provides advantage over Continental rivals. Sustainability: green shoots but not a game-changer Most companies talked to their opportunities in shifting packaging demands, including Mondi in flexibles, Graphic Packaging in foodservice, Huhtamaki in both areas, Elopak in liquid packaging and DS Smith and Smurfit Kappa in corrugated. Where, on the rare occasions, this was quantified though it typically represented...
Welcome to BNPP Exane''s Future of Packaging Conference: 15 - 17 May 2023 This year marks the 3rd year of our Future of Packaging Conference, but the first to include physical meetings in London alongside virtual sessions. Companies attending span the full value-chain from forest, through pulp and board, to packaging producers and buyers as well as sustainability experts. Near term debates are likely to focus on the rapidly turning inventory and price cycles whilst mid-term topics include life post the Russia embargo, capital cycles and, fibre''s role in future packaging solutions. The guide provides a snapshot profile and question bank for each company participating. Hosting leaders and experts from across the board The conference also provides investors the opportunity to unwrap the company-specific stories within the forestry, paper and, in particular, packaging industries. This year we are delighted to host: DS Smith, Elopak, Graphic Packaging, Holmen, Huhtamaki, Metsa Board, Mondi, Smurfit Kappa, Stora Enso, UPM-Kymmene and Vidrala, plus a major packaging buyer and a Life Cycle Analysis expert. The near term: Destocking with prices dropping 2023''s biggest theme so far has been ongoing pressure on demand as customers through the value-chain continue to destock on softening underlying macro trends, reduced safety stock post 2022''s supply chain crises, and in anticipation of further price falls. Meanwhile prices have reversed sharply in containerboard, timber and pulp though boxes have been resilient (so far) and input wood costs stubbornly high. A month after Q1, our conference should allow us to see if the situation is stabilising. The mid-term: capital cycles, cash uses, sustainability challenges and opportunities dominate Several companies are in the midst of completing major capital cycles - individually positive to PandL''s from increased sales capacity but in aggregate a potential over-supply risk for the industry. Balance sheets are...
Destocking drives 32% Q1 EBIT miss UPM''s Q1 comparable EBIT rose 29% yoy as the company lapped the impact of strikes in Finland last year, but still came in 32% below consensus expectations with a shortfall in all major divisions. In turn this was largely due to a shortfall in sales which management attributed to customer destocking. Nevertheless, softer demand and a sharper fall in commodity prices like pulp drive us to lower comparable EBIT forecasts 9-35%. Assuming recovery in the mid-term this results in a more modest cut to our DCF-derived target. Lacking conviction in pulp prices finding a bottom, low visibility of energy profits and concerns about communication paper profit sustainability we stay Neutral. Pulp prices falling faster than even previous bear case scenarios In just the four weeks since we initiated coverage of the sector global pulp prices have fallen c.22%, ahead of even the most bearish market commentator forecasts, as softer global demand has met significant major increases in new supply. Meanwhile Nordic pulpwood price increases show no signs of abating. UPM is partly exposed to these higher costs. However, the ramp up of its Paso de los Toros mill, which should add c.50% to its pulp output by the end of 2023, means we estimate the group reaching c.55% self-sufficiency in wood from forests and plantations it owns. Communication paper headwinds building again but OL3 provides more power to sell Despite Communication Paper volumes declining 15% yoy, EBIT was stable due to strong price increases over the last 12 months. However, prices are starting to fall again (-4% qoq) and we anticipate profits decreasing from Q2 onwards. In Energy, after some initial delays, the new nuclear power station began output in mid-April, adding c.50% of UPM''s surplus power to sell onto the Nordpool grid. However, with grid prices falling faster than the forward curve previously predicted, we lower our profit forecasts for the division....
2023 began on a weak note, with the Q1 results missing street expectations. Normalisation in legacy paper was glaring but inevitable. While there were some vulnerabilities in non-legacy paper divisions as well, their underlying dynamics remain reassuring. Also, with sustained dominance in legacy paper, UPM could capitalise any further shortages, besides pursuing further opportunistic curtailments/conversions. UPM remains our top sector-bet, also thanks to its cost optimisation capabilities, strong balance sheet, and (much-)lower exposure to forest and wood markets.
Despite Q4 sales missing street expectations, UPM has managed good results, which is also reflected in a major dividend increase – despite aggressive capex. Moreover, unlike peers, a promising 2023 guidance was shared. While UPM’s share has been very resilient (vis-à-vis peers) over the past couple of months – also justifying its premium valuation, the kickstart of various growth initiatives and intact virtues for existing offerings implies that there’s more value on offer. Hence, our positive recommendation is re-iterated.
UPM reported ‘record’ Q3 results, with healthy performance dynamics across the board. While the promising 2022 outlook was maintained – despite the looming macro uncertainties – we still expect earnings growth/margins to normalise in the coming years. Nevertheless, by virtue of its presence/dominance in compelling businesses/markets, well-targeted growth investments, an enviable cost control track-record and a strong balance sheet – also helping sustain attractive dividend yield – the Finnish giant remains our preferred sector bet.
UPM 3Q22 Comparable EBIT rose 84% Y/Y to EUR779m, due to strong Energy, Raflatac (labels), Communication Paper, Biofuels and Fibre (Pulp) performance. With increased confidence in UPM ''Spearheads for Growth'' organic expansion, our upgraded UPM EUR2.2bn 2023e Comparable EBIT sits 7% ahead of street. Outperform with increased EUR44TP. 84% UPM 3Q22 Comparable EBIT growth As per UPM''s positive October 13 trading update (see: UPM: Positive profit warning), UPM 3Q22 Comparable EBIT rose 84% Y/Y to EUR779m, due to strong performance in UPM Energy, Raflatac (labels), Communication Paper, Biofuels and Fibre (Pulp) divisions. Our upgraded EUR2.2bn 2023e Comparable EBIT sits 7% ahead of consensus With increased confidence in successful UPM ''Spearheads for Growth'' organic expansion: 1) 1Q23e Uruguay pulp mill ramp-up and 2) end 2023e German bio-chemical start-up: our upgraded EUR2.2bn UPM 2023e Comparable EBIT sits 7% ahead of Infront Data 2023e consensus. UPM is net long energy, hence its profits are boosted by higher energy prices In 2021, UPM consumed 11.7 TWh of electricity and produced 14.0 TWh of electricity, giving 2.3 TWh ''net long'' electricity position. With new Finnish OL3 nuclear power reactor (Dec 2022) and UPM''s Paso de los Toros pulp mill (Q1 2023), this electricity ''net long'' will increase to over 7 TWh, boosting UPM 2023-25e profits if current elevated energy and electricity prices are sustained. Outperform with increased EUR44TP Confident of UPM''s ''Spearheads for Growth'' organic evolution from structurally challenged graphic paper to green growth in pulp, biofuels and bio-chemicals: reaffirm outperform with increased EUR44TP (from EUR40), based on unchanged 11x CY23 EV/EBIT.
Post market close yesterday, UPM issued a positive trading update, stating that 3Q22e Comparable EBIT will rise 84% Y/Y to EUR779m, 38% above Infront Data EUR564m Comparable EBIT 3Q22e consensus, due to strong performance in UPM Energy, Raflatac (labels), Communication Paper, Biofuels and Fibre (Pulp) divisions. Our upgraded UPM 2023e estimates of EUR2.1bn Comparable EBIT and EUR3.05 Comparable EPS sit 16% ahead of consensus. Reaffirm Outperform with (conservatively unchanged) EUR40TP ahead of October 25 UPM 3Q22e earnings. 38% 3Q22e consensus Comparable EBIT beat Post market close yesterday, UPM issued a positive trading update, stating that 3Q22e Comparable EBIT will rise 84% Y/Y to EUR779m, 38% above Infront Data EUR564m 3Q22e Comparable EBIT consensus, due to strong performance in UPM Energy, Raflatac (labels), Communication Paper, Biofuels and Fibre (Pulp) divisions. UPM is net long energy, hence its profits are boosted by higher energy prices In 2021, UPM consumed 11.7 TWh of electricity and produced 14.0 TWh of electricity, giving 2.3 TWh ''net long'' electricity position. With a new Finnish OL3 nuclear power reactor (Dec 2022) and UPM''s Paso de los Toros pulp mill (Q1 2023), this electricity ''net long'' will increase to over 7 TWh, boosting UPM profits if current elevated energy and electricity prices are sustained. We sit 16% ahead of 2023e consensus: Reaffirm outperform with EUR40TP Following UPM''s 3Q22e consensus beat with increased confidence in sustained elevated electricity prices and successful 1Q23e Uruguay pulp mill ramp-up, our upgraded UPM 2023e estimates of EUR2.1bn Comparable EBIT and EUR3.05 Comparable EPS sit 16% ahead of Infront Data 2023e consensus. Reaffirm Outperform with (conservatively unchanged) EUR40TP ahead of October 25 UPM 3Q22e earnings.
UPM-Kymmene has reported extraordinary preliminary performance figures for Q3 22. These are enviable numbers for a Europe-focused corporate – both in business and asset terms – especially at a time when many larger firms are battling serious challenges. While the detailed Q3 figures should be known in few days from now, it is clear that the business dynamics across most divisions were healthy. Overall, UPM remains our preferred sector bet, especially given its ability to withstand the current market challenges.
Yesterday, UPM hosted a Forest and Energy seminar. Attention focused on its ''net long'' electricity position, which will increase to over 7 TWh in 2023e, boosting UPM profits if current elevated energy prices are sustained. Confident of energy advantaged UPM''s evolution from structurally challenged graphic paper to green growth in pulp, biofuels and bio-chemicals we reaffirm Outperform with EUR38TP ahead of UPM October 25 3Q22e earnings. UPM is net long energy, hence its profits are boosted by higher energy prices In 2021, UPM consumed 11.7 TWh of electricity and produced 14.0 TWh of electricity, giving 2.3 TWh ''net long'' electricity position. With a new Finnish OL3 nuclear power reactor (Dec 2022) and UPM''s Paso de los Toros pulp mill (Q1 2023), this electricity ''net long'' will increase to over 7 TWh, boosting UPM profits if current elevated energy and electricity prices are sustained. UPM forest strategy: committed to biodiversity UPM has over 1m hectares of forest assets globally, valued at EUR3.2bn at FY21. While UPM forests supply 10% of its Finnish wood and the majority of its Uruguay wood needs, UPM is committed to net-positive biodiversity, harvesting less than 100% of forest growth, planting 50m trees annually. Uruguay pulp mill on track for 1Q23e ramp-up; Expect EUR600m+ EBIT contribution. UPM''s EUR3bn 2.1mT Uruguay pulp mill is on track for 1Q23e start. Post ramp-up, we believe this new pulp mill can contribute some EUR600m UPM comparable EBIT (or over EUR1,000m EBIT, if current pulp prices were maintained). Outperform with EUR38TP ahead of October 25 3Q22e earnings With UPM Energy''s ''net long'' energy position, sustained higher electricity prices give 4%/3% 2022/23e EPS upgrades. Confident of energy advantaged UPM''s evolution from structurally challenged graphic paper to green growth in pulp, biofuels and bio-chemicals we reaffirm Outperform with EUR38TP ahead of October 25 3Q22e earnings.
UPM reported 26% 2Q22 Comparable EBIT growth to EUR387m on July 21. With Uruguay pulp mill on track for 1Q23 ramp-up: We remain confident of UPM''s evolution from structurally challenged graphic paper to green growth in pulp, biofuels and bio-chemicals. Outperform with unchanged EUR38TP. 4% 2Q22 cons EBIT miss, due to slower than expected post-strike Finnish pulp ramp-up UPM EUR387m 2Q22 Comparable EBIT was 4% Infront Data consensus miss, due to slower than anticipated Finnish pulp ramp-up, following UPM''s January-April 2022 strike. Uruguay pulp mill on track for 1Q23e ramp-up; Expect EUR600m+ EBIT contribution. UPM''s EUR3bn 2.1mT Uruguay pulp mill is on track for 1Q23e start. Post ramp-up, we believe this new pulp mill can contribute some EUR600m UPM comparable EBIT (or over EUR1,000m EBIT, if current pulp prices were maintained). UPM is ''net long'' energy, hence its profits are boosted by higher energy prices UPM consume 11.7m TWh of electricity and produce 14.0m TWh of electricity annually. This 2.3m TWh UPM ''net long'' electricity, will increase by additional 3m TWh to 5.3m TWh ''net long'' post ramp-up of new Finnish OL3 nuclear power reactor in December 2022, hence UPM benefits from higher electricity / energy prices. Back on track, with spearheads in view: Outperform with unchanged EUR38TP Following Finnish strike resolution, with increased energy prices and Uruguay pulp mill on-track for 1Q23e ramp-up, UPM is firmly ''back on track''. Confident of UPM''s evolution from structurally challenged graphic paper to green growth in pulp, biofuels and bio-chemicals: reaffirm outperform with (unchanged) EUR38TP.
Again, on the back of stronger prices, UPM reported impressive Q2 results – although the performance fell short of street expectations. There were healthy contributions from most divisions, despite below-par deliveries – which were crippled by strikes, maintenance shutdowns and/or other disruptions. While macro risks are on the rise, management expects 2022 operating profits to exceed 2021 levels. Overall, UPM remains an attractive sector bet and, by virtue of asset holdings/exposure, it is better-positioned to navigate the respective market challenges.
Our Future of Packaging conference on May 23-25 provides an opportunity to hear from eleven European and US packaging companies on demand, cost inflation and pricing power in uncertain macro environment. Additionally, expect update on sustainability and circular economy trends (e.g. plastic to paper replacement). This Conference guide provides an overview of global packaging demand/pricing trends, details of companies presenting, with questions for management. BNPP Exane Future of Packaging Conference on May 23-25 The BNPP Exane Future of Packaging conference on May 23-25 provides an opportunity to hear from eleven European and US packaging companies on demand, cost inflation and pricing power in an uncertain 2022 global macro environment. Focus on 1) demand and 2) pricing power vs cost inflation With elevated macro and geopolitical uncertainty, expect focus on 2022 packaging demand outlook. Additionally, pricing power to relentless offset cost inflation (energy, raw materials, transport) is critical to 2022 profit growth. Sustainability and packaging innovation important to growth and profitability We seek an update on multi-year sustainability and circular economy trends (e.g. plastic to paper based packaging) supporting innovation and medium term profit growth. Conference guide with sector overview, timetable and questions for each company This conference guide provides an overview of global packaging demand/pricing trends, details of each company presenting at the conference, with questions for management.
UPM STERV ENC HUH1V SMDS VID MNDI SWR ELO GPK 0K96 VID WRK*
Despite the impact of the Finnish strike in many key divisions, UPM’s Q1 22 results came in well ahead of market expectations. Market dynamics in most divisions remain largely promising and, hence, the firm’s earnings seem resilient – which is also reflected in the management guidance. However, considering the brewing risks and challenges, particularly in Europe, some near-term performance pressure/restraint cannot be ruled out. Nevertheless, any sell-off should be capitalised on as an accumulation opportunity, given that UPM’s long-term projects and prospects remain promising.
EUR277m 1Q22 Comparable EBIT was a 24% consensus beat, due to Paper division return to profit (despite Finnish strike). Positively, following strike resolution, with increased graphic paper, pulp and wood prices, UPM reaffirmed unchanged 2022e outlook. Our upgraded 2022e estimates: EUR1,474m Comparable EBIT and EUR2.17 EPS sit 10%-12% above the street, but in-line with UPM guidance. With Uruguay pulp mill on-track for 1Q23e, we remain confident of UPM''s strategic evolution from challenged paper to green growth in pulp, biofuels and bio-chemicals. Outperform with EUR38 TP. 24% UPM Consensus 1Q22 Comparable EBIT beat UPM 1Q22 EUR277m Comparable EBIT was a 24% Infront Data consensus beat, principally due UPM''s Communication Paper return to profit, despite the negative impact of Finnish mill strike. Following strike resolution: positive 2022e demand/pricing outlook leads to upgrades Positively, despite EUR180-200m 1Q22 EBIT impact from Finnish mill-worker strike (now amicably resolved), following 74% Y/Y 1Q22 increase in European graphic paper prices and higher pulp/wood prices, UPM reaffirmed 2022e Comparable EBIT ''expected to be on similar level or higher than (EUR1,471m) in 2021'', some 10% above Infront Data (pre results) April 2022 consensus. Our upgraded UPM 2022e estimates sit 10%-12% above street (but in line with guidance) Our upgraded 2022e estimates of EUR1,474m Comparable EBIT and EUR2.17 Comparable EPS sit 10%-12% above Infront Data (April 2022 pre results) consensus, but in-line with UPM guidance. Green growth strategy intact: Outperform with EUR38 TP With the Uruguay pulp mill on-track for 1Q23e, we remain confident of UPM''s strategic evolution from challenged paper to green growth in pulp, biofuels and bio-chemicals. Outperform with EUR38 TP.
While UPM delivered 4Q21 consensus EBIT beat, flattered by a forest gain, cost pressures impacted underlying profitability. Due to supply chain issues, UPM''s ''Spearheads for Growth'' organic expansion projects in Uruguay and Germany are delayed, with increased costs. While disappointing, our confidence in UPM''s strategic evolution from challenged paper to green growth remains firmly intact. Post yesterday''s weakness, reaffirm Outperform with revised EUR38 TP. Forest revaluation flattered 4Q21 EBIT, but cost pressures impacted underlying profitability While 4Q21 UPM EUR461m Comparable EBIT was a consensus beat (due to EUR109m forest fair value gain), underlying profitability in Communication Paper, Speciality Paper and Raflatac was impacted by cost pressures (energy, raw materials, transport) and supply chain issues. UPM ''Spearheads for Growth'' delays in Uruguay and Germany, with increased costs Due to Covid-19 and supply chain issues, UPM''s new 2.1mT Uruguay pulp mill is delayed from H2 2022 to end Q1 2023, with 10% project cost increase from EUR2.7bn to EUR3.06bn. Positively: the projected USD280/t pulp production cash cost is unchanged. Additionally: the start-up of UPM''s German Bio-chemical plant is also delayed (due to supply chain issues) by 12 months, to end 2023. Our UPM 2022e EUR1.3bn Comparable EBIT sits 6% below street While improving pulp outlook gives modest 2022e upgrades, reflecting our cautious view of 1) cost inflation and 2) impact of on-going Finnish mill worker strike; our revised UPM 2022e EUR1.3bn comparable EBIT and EUR1.89 comparable EPS sit 6% below Infront Data consensus. Green growth strategy intact: Outperform with revised EUR38 TP While UPM''s ''Spearhead for Growth'' project delays with increased costs are disappointing, our confidence in UPM''s strategic evolution from challenged paper to green growth in pulp, biofuels and bio-chemicals remains firmly intact. Post yesterday''s weakness: reaffirm Outperform...
2021 ended on a strong note for UPM-Kymmene, with profitability exceeding pre-pandemic highs. This performance was led by all segments (particularly pulp and energy), except for legacy and speciality papers, and helped overshadow cost challenges. Moreover, despite an aggressive capex, the dividend and, hence, industry-leading yield was maintained. Even though management is confident of the 2022 market dynamics, cost escalation and delay at mega-pulp investment in LatAm has unnerved investors. However, we believe UPM still remains well-positioned to leverage respective market opportunities.
As confidence builds in 2022 1) Global pulp recovery, 2) Communication Paper return to profit and 3) UPM ''Spearheads for Growth'' delivery: expect UPM re-rating. We model EUR1.3bn UPM 2022e Comparable EBIT (in-line with street), rising to over EUR2.0bn in 2024e (22% UPM 2020-24e EPS CAGR). Outperform with increased EUR39 TP, ahead of UPM Q4 2021 results on January 27. UPM to benefit from 2022 pulp price recovery Global pulp demand fell in 2021, due to China de-stocking, leading to 30% Chinese pulp correction. However, Chinese pulp prices have risen 9% from November 2021 low, with 20% recovery in Chinese pulp futures and multiple pulp prices hikes announced for Q1 2022 globally. UPM is ''net long'' 1mT pulp: each 10% pulp price = EUR56m EBIT (4.5% 2022 EPS). UPM''s sensitivity to pulp recovery will increase with ramp-up of its new (Paso de los Toros) 2.1mT Uruguay hardwood pulp mill. UPM Spearheads for Growth to double UPM EBIT by 2024e UPM organic ''Spearheads for Growth'' projects (Uruguay pulp mill and German Bio-chemicals plant) will help double UPM Comparable EBIT from EUR0.95bn in 2020 to EUR2.0bn in 2024e (giving 22% UPM 2020-24e EPS CAGR), whilst maintaining modest (1x ND/EBITDA) financial leverage. Graphic paper price hikes to improve Communication Paper 2022 profitability UPM Communication Paper division was loss-making in 3Q21, due to increased energy costs. UPM (and industry peers) target c10-15% Q1 2022 price increases to return to consistent 2022 profitability. Pulp recovery and ''Spearheads for Growth'' delivery: Outperform with increased EUR39 TP As confidence builds in 2022 1) Global pulp demand/pricing recovery, 2) Communication Paper return to profit and 3) UPM ''Spearheads for Growth'' delivery, with 4) Continued appealing dividends: expect UPM re-rating. Reflecting our upgraded estimates: reaffirm Outperform with increased EUR39 TP (from EUR37), based on 12x CY23x EV/EBIT, ahead of UPM Q4 2021 results on January 27.
Despite legacy paper – continuing to witness structural headwinds – accounting for one-third of group sales, UPM reported ‘record’ Q3 results. They were largely driven by exceptional pulp results and well-complemented by energy and labels. While there’s a brewing industry-wide challenge in the form of normalising wood and forest earnings, UPM is fortunate enough to have limited exposure to these areas. Instead, its growth focus supports our expectation of a medium-term healthy margin progression and, hence, our positive stock recommendation is reiterated.
UPM EUR424m 3Q21 EBIT was 9% cons beat, principally due to (cycle peak) pulp prices. While higher energy prices boosted UPM Energy, Communication Paper was loss-making. Modelling 15% European pulp correction, we forecast EUR1.2bn UPM FY22e Comparable EBIT (8% below cons). As confidence builds in: 1) Global pulp stabilisation, 2) Communication Paper return to profit and 3) ''Spearheads for Growth'' delivery: expect UPM re-rating. Outperform with EUR37 TP. Record EUR424m 3Q21 EBIT: a 9% consensus EBIT beat 3Q21 EUR424m Comparable EBIT was 9% cons beat, due to (cycle peak) Biorefining pulp prices and Energy (higher electricity prices), offsetting Communication Paper loss (higher energy costs). Modelling a 15% pulp correction gives EUR1.2bn UPM FY22e EBIT: 8% below consensus UPM is ''net long'' 1mT pulp: each 10% pulp price = EUR56m EBIT (5% EPS). Modelling 15% European pulp correction: forecast EUR1.2bn FY22e Comparable EBIT, sitting 8% below street. Communication Paper EUR30m 3Q21 EBIT loss: additional paper price hikes targeted UPM Communication Paper was loss-making in 3Q21, due to increased energy costs. UPM (and industry peers) target additional paper price hikes to return this division to consistent profitability. UPM Spearheads remain on track and on-budget to double UPM EBIT by FY24e UPM organic expansion ''Spearheads for Growth'' projects (Uruguay Pulp mill and German Bio-chemicals plant) remain on-track to double UPM Comparable EBIT from EUR0.95m in FY20 to EUR2.0bn in FY24e (giving 22% UPM FY20-24 EPS CAGR). Confident of ''Spearheads for Growth'' delivery: Reaffirm outperform with EUR37TP As confidence builds in: 1) Global pulp demand/pricing stabilisation, 2) Communication Paper return to profit, 3) UPM ''Spearheads for Growth'' delivery, with 4) Continued appealing dividends: expect UPM re-rating. Reaffirm Outperform with EUR37 TP.
UPM-Kymmene reported strong results, largely driven by pulp – also the group’s biggest growth focus area. Apt support was provided by the high-margin non-paper divisions. While there were some issues in paper, management is well-positioned to leverage its past experience and market dominance to address the respective challenges gradually. Overall, UPM remains an attractive bet to play paper & packaging market’s long-term fundamentals.
UPM delivered 8% 2Q21 cons EBIT beat via increased pulp prices. Its organic ''Spearheads for Growth'' projects remain on-time and on-budget to double EBIT by FY24e. While modelling a 10% 3Q21 pulp correction, with confident demand outlook and 9% July 2021 paper price hikes: we upgrade FY21e Comparable EBIT to EUR1.3bn (5% ahead of cons). Outperform with EUR38 TP. 8% 2Q21 consensus EBIT beat UPM EUR307m 2Q21 Comparable EBIT was 8% beat vs EUR285m Infront Data consensus, principally due to increased pulp prices boosting Biorefining profits, with smaller beats in Energy and Raflatac (labels) offsetting Communication Paper losses. Spearheads remain on track and on-budget to double UPM EBIT by FY24e UPM Spearheads for Growth (Uruguay Pulp and German Bio-chemicals) remain on-time and on-budget. Due to Spearheads for Growth ramp-up, we expect UPM Comparable EBIT to double from EUR0.95m in FY20 to over EUR1.9bn in FY24e (giving 21% UPM FY20-24e EPS CAGR). Upgraded EUR1,305m FY21e Comparable EBIT sits 5% ahead of street Following 2Q21 beat, with positive outlook and 9% July 2021 European graphic paper price hikes (1% paper price = EUR32m UPM EBIT), we upgrade FY21e Comparable EBIT by 7% to EUR1.3bn, 5% ahead of Infront Data cons. However: 2021 may be the cyclical peak of pulp prices. Modelling a 10% pulp 3Q21 correction give cautious FY22e outlook Chinese pulp prices have fallen 13% since April 2021, we expect 10% European pulp correction in 3Q21, (see: Pulp correction), with a 10% pulp fall = cEUR56m annualised UPM EBIT. Reflecting our pulp correction view: we model EUR1.2bn FY22e Comparable EBIT, sitting 1% below street. Confident of ''Spearheads for Growth'' delivery: Reaffirm Outperform with EUR38TP As confidence builds in 1) Communication Paper stabilisation, 2) UPM ''Spearheads for Growth'' delivery, with 3) appealing dividends: expect UPM re-rating. Outperform with increased EUR38 TP.
UPM has embarked upon 2021 on a promising note. While legacy paper remains a concern, the firm remains well-equipped to continue restructuring efforts. Moreover, with strong fundamentals across all other divisions and various growth investments underway, UPM remains on track to transform its old school positioning as a European paper major. Although such measures require sizeable investments, its strong balance sheet allays any financing concerns and, at the same time, renders an apt cushion with respect to dividends.
We hosted French investor roadshow with UPM CFO Tapio Korpeinen. Three key points were: 1) UPM ''Spearheads for Growth'' organic expansion projects remain on track and on-budget to double UPM EBIT by FY24e. 2) Communication Paper demand stabilising, with modest 2021 price increases. 3) Despite Chinese pulp futures volatility, UPM confident of 2021 pulp profit recovery. Spearheads remain on track and on-budget to double UPM EBIT by FY24e UPM Spearheads for Growth (Uruguay Pulp and German Bio-chemicals) remain on-time and on-budget. Due to Spearhead for Growth ramp-up, we expect UPM Comparable EBIT to double from EUR0.95m in FY20 to EUR1.9bn in FY24e (giving 20% UPM FY20-24 EPS CAGR). Communication Paper demand stabilising, with modest 2021 price increases EU graphic paper demand fell 18% in 2020. Positively, with nascent return to office, UPM see 2021 graphic paper demand stabilising in -5% p.a. longer term decline range. Post mill closures, UPM confident of maintaining high mill operating rates, with modest 2021 graphic paper price hikes. Chinese pulp futures volatility, but UPM confident of pulp profit recovery US and European pulp prices has risen by 40% in 2021 YTD, mirroring recovery in Chinese pulp prices. However Chinese pulp futures have eased in recent weeks, currently trading at 12% discount to China pulp spot prices. While UPM remain confident of 2021 global pulp demand, we believe global pulp prices may have plateaued after recent gains. Modelling EUR1.2bn FY21e Comparable EBIT (in-line with street): Outperform with EUR37TP UPM''s guide that ''comparable EBIT is expected to increase both in H1 2021 compared with H1 2020, and in the full year 2021 compared with 2020''. We model 26% UPM FY21e comparable EBIT growth to EUR1.2bn, in-line with consensus. As confidence builds in: 1) Paper stabilisation, 2) UPM ''Spearheads for Growth'' delivery, with 3) Continued appealing dividends, we expect continued UPM re-rating. Reaffirm Outperform...
UPM 1Q21 highlighted strong label, specialty paper and energy demand with recovering global pulp prices. Our upgraded UPM EUR1.2bn FY21e Comparable EBIT sits in-line with the street. We believe UPM ''Spearheads for Growth'' remain on track to double UPM EBIT from EUR0.95bn in FY20 to EUR1.9bn in FY24e. Outperform with increased EUR37 TP (from EUR36). Limited UPM 1Q21 surprises, following April 15 pre-announcement On April 15, UPM pre-announced 1Q21 Comparable EBIT of EUR279m; hence yesterday''s actual 1Q21 results contained few surprises. UPM highlighted continued strong label, specialty paper and energy demand with recovering global pulp demand and prices. While cautious of paper: our EUR1.2bn FY21e Comparable EBIT sits in-line with the street While remaining cautious on UPM graphic paper demand and profitability, modelling 30% CY 2021 pulp recovery, our upgraded UPM EUR1,201m FY21e Comparable EBIT sits in-line with the street. Spearheads on track to double UPM EBIT from EUR0.95bn in FY20 to EUR1.9bn in FY24 UPM''s ''Spearheads for Growth'' (Pulp in Uruguay and Bio-chemicals in Germany) remain on-time and on-budget. Due to pulp recovery and Spearhead for Growth delivery, we model UPM Comparable EBIT doubling from EUR0.95m in FY20 to EUR1.9bn in FY24e (20% FY20-24 EPS CAGR). Post 8% FY21e EPS upgrade: Reaffirm Outperform with increased EUR37 TP Improving demand and prices leads to 8%/5% FY21/22e EPS upgrades. As confidence builds in: 1) Global pulp recovery, 2) UPM ''Spearheads for Growth'' delivery, with 3) Continued appealing dividends, we expect UPM re-rating. Reaffirm Outperform with increased EUR37 TP.
Late yesterday, UPM issued positive profit warning disclosing EUR279m 1Q21e comparable EBIT, 25% ahead of consensus, due to better than expected pulp, labels and graphic paper profit. Modelling 30% CY21 pulp price recovery, our upgraded UPM FY21e estimates of EUR1,118m comparable EBIT and EUR1.59 EPS sit 8% above street. See positive UPM read to pulp peers Stora Enso and SCA. Reaffirm UPM Outperform ahead of its 1Q21e results on April 27. Positive profit warning, disclosing EUR279m 1Q21e EBIT, ahead of formal April 27 1Q21e Ahead of formal 1Q21e results on April 27, UPM issued positive trading update yesterday, stating it will deliver EUR279m 1Q21e comparable EBIT, 25% ahead of EUR223m Infront Data 1Q21e consensus, due to better than expected pulp, labels and graphic paper divisional profitability. Modelling 30% CY21 pulp price recovery: our FY21e EBIT estimates sit 8% ahead of street UPM is ''net long'' 1mT pulp: each 10% pulp price = EUR56m annualised EBIT. Modelling 30% CY 2021 pulp recovery, our upgraded EUR1,118m FY21e Comparable EBIT sits 8% ahead of street. Spearheads on track to double UPM EBIT from EUR0.95bn in FY20 to EUR1.9bn in FY24 Expect April 27 update on UPM ''Spearheads for Growth'' (Pulp in Uruguay and Bio-chemicals in Germany) which we believe remain on-time and on-budget. Due to pulp recovery and Spearhead for Growth delivery, expect UPM EBIT will double to EUR1.9bn in 2024 (19% FY20-24 EPS CAGR). Reaffirm Outperform with EUR36 TP ahead of UPM 1Q21e results on April 27 As confidence builds in: 1) Global pulp recovery, 2) UPM ''Spearheads for Growth'' delivery, with 3) Continued appealing dividends, we expect UPM re-rating. Outperform ahead of April 27 1Q21e. Positive UPM read to Stora Enso and SCA With confidence in 30% 2021 European and US pulp recovery, at pulp makers Stora Enso, UPM and SCA; our FY21e EBIT estimates sit 4-8% ahead of consensus. For more, see our April 12 note: Unwrapping Q2 pulp and packaging...
UPM ended 2020 on a good note, with the Q4 performance witnessing meaningful (sequential) recovery and management deciding to maintain the dividend – despite ambitious growth plans being implemented. With various green shoots across (key) divisions and growth investments progressing well, we believe UPM remains an attractive sector bet. While the next few quarters could be tricky – due to re-emerging COVID-19 risks, market-aligned long-term vision plus a credible track record renders support to the investment case.
Post 31% 4Q20 cons EBIT beat, with maintained EUR1.30/sh dividend (4.3% yield), UPM''s Spearheads for Growth are on-track to double group EBIT to EUR1.9bn in FY24e. As confidence builds in 1) global pulp recovery 2) continued Communication Paper cash generation and 3) Spearheads for Growth delivery, expect UPM re-rating. Reaffirm Outperform with EUR36 TP. 31% 4Q20 cons EBIT beat, with maintained EUR1.30/sh dividend EUR252m 4Q20 EBIT was 31% beat vs EUR193m Infront Data cons, due Communication Paper, with smaller Energy, Raflatac (labels) and Speciality Paper divisional beats. Importantly: despite lower FY20 profits, with confident outlook: UPM maintained its EUR1.30 dividend (4.3% div yield). Modelling 15% CY21 pulp price recovery: our FY21/22e UPM ests are 5%/7% ahead of street UPM is ''net long'' 1mT pulp: each 10% pulp price = EUR63m annualised EBIT. Modelling 15% CY 2021 pulp recovery, our FY21/22e EBIT estimates sit 5%/7% ahead of street. UPM''s pulp sensitivity will increase post expected 2H22 opening of its 2.1mT Uruguay pulp mill. Spearheads on track to double UPM EBIT to EUR1.9bn in FY24 UPM ''Spearhead for Growth'' (Pulp in Uruguay and Bio-chemicals in Germany) are both ''well on track with the planned start-up timeline''. Due to global pulp recovery and Spearhead for Growth delivery, we model UPM EBIT doubling to EUR1.9bn in 2024 (giving 20% FY20-24 UPM EPS CAGR). Communication Paper managed for cash, will represent just 4% of FY24e EBIT UPM FY20 graphic paper volumes fell 19%, with EBIT down 53% to EUR180m (19% UPM FY20 EBIT). With Spearheads for Growth ramp-up, we model Communication Paper representing just 4% FY24e EBIT, with UPM continuing to exit paper capacity to maintain cash generation. Reaffirm Outperform with EUR36 TP As confidence builds in: 1) Global pulp recovery, 3) UPM ''Spearheads for Growth'' delivery, with 3) Continued appealing dividends: Expect 2021 UPM re-rating.
We model EUR197m UPM 4Q20 Comparable EBIT on Jan 28. Expect focus on recovering pulp prices, paper demand and UPM Spearheads for Growth projects. Post mill closures; expect stable 2021 graphic paper profit. As confidence builds in 1) global pulp recovery 2) paper stability and 3) Spearheads for Growth delivery, we expect UPM re-rating. Reaffirm Outperform with EUR36TP. Expect EUR197m UPM 4Q20 Comparable EBIT on Jan 28 We model EUR197m UPM 4Q20 Comparable EBIT (2% below EUR201m Infront data cons.). Expect focus on 2021 pulp and paper demand and update on UPM ''Spearheads for Growth'' projects. Modelling 15% CY21 pulp price recovery: our FY21/22e UPM ests are 2%/7% ahead of street UPM is ''net long'' 1mT pulp: each 10% pulp price = EUR63m annualised EBIT (7% of EPS). Modelling 15% CY 2021 pulp recovery, our FY21/22e EBIT estimates are 2%/7% ahead of street. UPM''s pulp sensitivity will increase post expected 2H22 opening of its 2.1mT Uruguay pulp mill. UPM exited 17% graphic paper capacity, reducing FY21e costs by EUR130m In 2020 UPM closed/sold 17% of its 7.3mT graphic paper capacity, reducing costs by EUR130m. Despite paper price falls, we expect stable FY21e Communication Paper profits, post mill closures. UPM ''Spearheads for Growth'' organic expansion into Pulp, bio-chemicals and biofuels Due to UPM''s ''Spearheads for Growth'' organic evolution into pulp, bio-chemical and bio-fuels we model EUR1.55bn p.a. FY21-22e capex helping finance EUR2.7bn Uruguay pulp mill and EUR0.55bn German Bio-chemical plant. Despite elevated capex, we expect peak 1.2x net debt/EBITDA at FY22e, with maintained EUR1.30/share annual dividends (4.2% dividend yield) in FY20-22e. Reaffirm Outperform with EUR36 TP ahead of UPM Jan 28 4Q20 results As confidence builds in 1) Pulp recovery, 2) Stable graphic paper profits and 3) ''Spearheads for Growth'' delivery, while maintaining appealing EUR1.30/sh dividends, expect 2021 UPM re-rating.
Unlike the peers, UPM’s Q3 results came in short of expectations. While operating margins did improve in sequential terms, with Communication Papers regaining profitability, the other divisions were a mixed bag. Overall, the group is yet to re-attain healthy performance levels. However, taking on board the diversity gains via non-paper growth investments, planned cost-saving measures, potential for (material) gains via revaluation of forests and balance sheet comfort, UPM remains our preferred sector bet.
UPM delivered 14% 3Q20 cons EBIT beat. Despite reduced volumes, 3Q20 saw welcome return to profit in graphic paper. As confidence builds in: 1) Global pulp recovery 2) Stabilising Communication Paper outlook, 3) UPM ''Spearheads for Growth'' delivery, while maintaining appealing dividend stream: We expect positive re-rating. We reaffirm Outperform with EUR31TP. 14% 3Q20 consensus EBIT beat Due to 21% fall in UPM graphic paper volumes and lower pulp prices: UPM 3Q20 Comparable EBIT declined 37% Y/Y to EUR215m (3Q19: EUR342m), but this was a 14% beat vs EUR188m Infront Data cons, principally due to a welcome return to profits in UPM Communication Paper which reported EUR19m 3Q20 Comparable EBIT. UPM closing 1.2mT graphic paper (17% capacity), reducing costs by EUR130m UPM has announced closure/sale of three paper mills (Kaipola, Shotton and Chapelle), 17% of its 7.3mT graphic paper capacity, targeting EUR130m annualised cost savings. Global pulp recovery boosts FY21e UPM Biorefining profitability Over past three months Chinese pulp prices have risen 5%, with falling pulp inventories at Chinese ports and Chinese pulp futures rising 8% from July 2020 lows supporting our view that Chinese (and global) pulp prices are at/near trough levels, boosting FY21e UPM Biorefining profit recovery. 4% FY20e EPS upgrade: Reaffirm Outperform with (SOTP-based) EUR31 TP 14% 3Q20e EBIT beat gives 4% FY20e EPS upgrade. As confidence builds in: 1) Global pulp recovery 2) Stabilising Communication Paper outlook, 3) UPM ''Spearheads for Growth'' delivery, while maintaining appealing dividend stream: Expect UPM re-rating. Outperform with EUR31TP.
UPM CMD focused on sustainability as a core driver of organic ''Spearheads for Growth'' expansion plans in 1) Pulp 2) Bio-chemicals and bio-refining and 3) Speciality paper and labels, targeting over EUR400m organic EBIT growth, while maintaining appealing dividends with modest leverage. UPM graphic paper mill closures and global pulp recovery lead to 9% FY21e EPS upgrade. As confidence builds in: 1) Global pulp recovery 2) UPM ''Spearheads for Growth'' delivery with 3) appealing dividends: We expect UPM re-rating. Reaffirm Outperform with increased EUR31TP. Sustainability focus CMD UPM hosted a CMD on its three key organic ''Spearhead for Growth'' plans in 1) Pulp 2) Bio-chemicals and bio-refining and 3) Speciality paper and labels. Post full ramp-up: UPM target additional EUR2bn revenue and over EUR400m organic EBIT growth, while maintaining appealing dividends (EUR1.30/sh in FY19) with modest leverage (we forecast peak ND/EBITDA of 1.1x at FY22e). UPM closing 1.2mT graphic paper (17% capacity), reducing costs by EUR120m UPM has announced closure/sale of three paper mills (Kaipola, Shotton and Chapelle), 17% of its 7.3mT graphic paper capacity, targeting EUR120m annualised cost savings. Global pulp recovery boosts FY21e UPM Biorefining profitability Over the past month Chinese pulp prices have risen by 3%, with falling pulp inventories at Chinese ports and Chinese pulp futures rising 9% from July 2020 lows, supporting our view that Chinese (and global) pulp prices are at/near trough levels, boosting FY21e UPM Biorefining profit recovery. 9% FY21e EPS upgrade: Reaffirm Outperform with increased (SOTP-based) EUR31 TP UPM graphic paper mill closures and global pulp inflection leads to 9% FY21e EPS upgrade. As confidence builds in: 1) Global pulp recovery 2) UPM ''Spearheads for Growth'' delivery with 3) appealing dividends: We expect UPM re-rating. Reaffirm Outperform with increased EUR31TP.
Compared with the sector, COVID-19 has taken a bigger toll on UPM-Kymmene, largely due to its material conventional paper exposure. However, given management’s impeccable past record in both restructuring (inefficient) capacities and slashing costs, generation of meaningful stakeholder returns, and pursual of growth investments (outside paper), we believe that another revival of fortunes is possible. Remember, the group’s balance sheet flexibility and sizeable redundant paper capacities render ample headroom for foray/conversion into better-prospect areas.
UPM has underperformed European pulp and packaging peers in 2020 YTD on fears regarding paper demand/pricing impacting profits, dividends and its ''Spearheads for Growth'' expansion plans. Post yesterday''s fireside chat with UPM CFO, we are reassured on likely paper mill closures to protect profits, on-going pulp price stabilisation (pulp futures +6% M/M) and continued UPM dividends. Ahead of forthcoming UPM Sept 9 CMD: Reaffirm Outperform with EUR29TP. Exane hosted fireside chat with UPM CFO Tapio Korpeinen While our fireside chat did not provide any material new disclosure (unlikely ahead of UPM Sept 9 CMD), CFO Tapio Korpeinen reaffirmed UPM''s longer term strategy of 1) Paying appealing dividends 2) Organic growth via ''Spearheads for Growth'', with 3) modest financial leverage. Expect 4Q20 UPM paper mill closures to rebuild Communication Paper profitability Covid-19 accelerates structural decline in graphic paper use. In response, UPM has closed its Chapelle newsprint mill. We expect additional 4Q20 UPM paper mill closures (potentially with UPM 3Q20 results on October 27), to balance reduced supply to ''new normal'' of c20% lower CY 2020 graphic paper demand, rebuilding UPM Communication Paper profitability. We believe pulp prices at/near trough, supporting UPM Biorefining FY21e profit recovery While ''calling the trough'' of any global commodity such as pulp is part sentiment as well as economic supply/demand fundamentals, with 1) Chinese pulp futures up 6% M/M and 2) global pulp inventories revised lower and 3) several announced pulp price hikes: we believe Chinese (and global) pulp prices are at/near trough levels, supporting FY21e UPM Biorefining profit recovery. Ahead of UPM Sept 9 CMD: Reaffirm Outperform with (SOTP-based) EUR29 TP As confidence builds in: 1) UPM (and peers) paper mill closures to protect profit; 2) Pulp recovery post Covid-19; 3) UPM ''Spearheads for Growth'' delivery; with 4) Continued appealing dividends: We...
After a weak Q1, UPM’s performance severity aggravated in Q2. The situation was complicated by extreme COVID-19-induced pressure in conventional paper – also the group’s biggest division (c.33% of sales). However, taking into consideration management’s prowess to (effectively) deal with paper market challenges, and the potential of on-going transformational projects and pandemic-triggered gains for various divisions, our recommendation should be maintained.
UPM delivered 13% 2Q20 cons EBIT beat, due to strong labels and pulp performance. While Covid-19 accelerates structural decline in graphic paper and defers pulp recovery, UPM strategy is unchanged: Appealing dividends with self-financed ''Spearheads for Growth'' organic expansion. Reaffirm Outperform with revised 29TP. 13% UPM 2Q20 cons EBIT beat Due to 29% fall in 2Q20 communication paper volumes and lower global pulp prices: UPM 2Q20 EBIT declined 41% to EUR203m, but this was a 13% beat vs EUR180m cons, with key divisional beats in Raflatac (labels) and Biorefining (Pulp). H2 paper and pulp challenges lead to 5% FY21e downgrade. We sit 9% below street Covid-19 accelerates structural decline in graphic paper use. In response, UPM has closed its Chapelle newsprint mill. Expect further H2 2020 UPM paper mill closures. Also, reduced paper related pulp demand defers pulp recovery until 2021. Reflecting these challenges, we cut FY21e EPS 5%. Our FY21e ests: EUR988m comparable EBIT and EUR1.42 EPS sit 9% below street. Unchanged strategy: Appealing dividends and self-funded ''Spearheads for Growth'' expansion While Covid-19 impacts FY20/21e profits, expect unchanged UPM strategy of: 1) Pay appealing dividend of 30%-40% of operating cash flow (EUR1.30/sh dividend in FY19). 2) Organic growth via ''Spearheads for Growth'', with 3) modest financial leverage (target net debt/EBITDA 2x). Reaffirm Outperform with revised SOTP-based TP of EUR29 (reduced from EUR30) As confidence builds in: 1) Global pulp recovery post Covid-19, 2) UPM ''Spearheads for Growth'' delivery, with 3) Continued appealing dividend stream: Expect UPM re-rating. Reaffirm Outperform with revised (SOTP based) EUR29 TP (reduced from EUR30).
UPM also embarked upon 2020 on a weak note. There was a pertinent (profitability + cash flow) weakness at the group level. Fortunately, the divisions with packaging credentials did well, while the net cash position was maintained. Although the performance is likely to erode further in the coming quarters, UPM by virtue of its balance sheet resilience and other underlying strengths should do reasonably well.
Despite material pulp market headwinds, especially in Q4 19, UPM reported stable full-year results. The turnaround in paper and energy, along with sustained cost optimisation, rendered meaningful support. Moreover, UPM now has two sizeable high-growth projects – in pulp and biochemicals – underway, and its strong balance sheet position should render a valuable cushion. Although the brewing (Coronavirus-induced) macro uncertainties is a (near-term) cause for concern.
Even though market conditions have become tougher, UPM managed to limit its Q3 business impact via effective cost savings. Interestingly, management has guided to maintain its 2019 performance at a good level. Continuation of paper rationalisation and the pursual of high-potential growth opportunities adds to the group’s overall investment attractiveness.
Q2 results came as no surprise as profit normalisation – after excessive gains in 2018 – is slowly materialising. Even though pulp markets/prices are expected to soften further in the coming years due to evolving demand-supply dynamics, pulp’s long-term prospects remain sacrosanct – reflecting UPM’s decision to invest $2.7bn in a new pulp mill in Uruguay. Through a combination of sustained restructuring measures and non-paper growth investments, UPM is gradually expected to reduce its legacy paper division dependence.
2019 began on a strong note for UPM-Kymmene. Healthy performances were sustained across all divisions, with the exception of Speciality Paper – where the scope for meaningful recovery still remains. While management guides for the secular decline of conventional paper to be sustained, it remains focused on niche, though high-potential, growth opportunities. These efforts should be backed by UPM’s undisputed balance sheet strength. Moreover, cost optimisation measures, in which the group has an impressive track record, are likely to continue.
The year 2018 ended on strong note, with healthy operating earnings across divisions – excluding Specialty Papers – being further complemented by material forest revaluation gains. As a consequence, profits soared to record-highs – despite growing cost pressure, and the balance sheet resilience was maintained. Now, the next leg of growth should come from (transformational) investment plans – with a net cash position lending a more-than-needed financing cushion.
While UPM’s Q3 results were healthy, they were somewhat capped by temporary disruptions. Price movements were positive across divisions, with pulp and energy being big beneficiaries. However, as some of pulp’s recent gains seem to be driven by transient events, some medium-term pricing normalisation seems inevitable. Nevertheless, improvements/stability in the smaller divisions should continue. With fundamentals remaining strong, the recent sell-off offers an attractive entry point.
The Q2 results were in line with the Street’s expectations on the back of better prices across divisions, despite lower volumes, higher costs and the material maintenance shutdown impact. While pulp and paper’s market tailwinds should continue in the near term, even other divisions should perform well – given the supportive market environment. Despite the brewing inflationary pressure and eventually normalising margins, the group should manage to maintain its robust cash flows and, hence, its strong balance sheet position and industry-leading dividends.
The Q1 18 results were supported by pricing improvements across divisions. However, the gains were partly capped by higher costs and lower deliveries. While the benefit of healthy pulp prices could continue in 2018, some normalisation should get underway 2019 onwards. Moreover, a tricky cost environment and the continuation of a volume weakness in Communication Papers are an added burden. While UPM has a strong balance sheet, this advantage (so far) hasn’t been leveraged optimally.
After beating the street’s estimates in Q1 17, UPM-Kymmene’s Q2 17 performance fell short of expectations – especially in profitability terms. Sales (again) were almost flat (+0.8% yoy; -0.7% qoq) at €2.5bn, as gains in Biorefining (+12% yoy, +3.8% qoq; driven by price improvements), Speciality Papers (+4.6% yoy, +3.6% qoq; yoy helped by a better product mix and qoq by volumes), Raflatac (+4.2% yoy, +1.1% qoq; benefiting from higher volumes) and Plywood (+7.6% yoy, +3.2% qoq; also benefiting from higher volumes) was offset by the still ailing Paper ENA (-3.7% yoy, -3.1% qoq; dragged by both lower prices and volumes) and Energy (-20% yoy, -19% qoq; on account of longer than normal maintenance shutdowns and still feeble prices) divisions. Adjusted EBIT declined 5.6% yoy (and 17% qoq) to €237m, as heavy maintenance activity (details in the ‘Analysis’ section) resulted in subdued deliveries, higher fixed costs and lower operational efficiency. Although, healthy gains from the change in fair value of forest assets (€32m vs. €11m in Q2 16 and €16m in Q1 17) and lower net interest costs (€6m vs. €15m in Q2 16 and €13m in Q1 17) resulted in net attributable profit of €205m (+3.5% yoy; -15% qoq). Apart from weakening operating profits, higher working capital use (€60m vs. a release of €10m in Q2 16 and €36m in Q1 17) exerted further pressure on reported OCFs (down 38% yoy and 32% qoq to €269m). This, along with capex of €54m (though down 43% yoy and 18% qoq) and full-year dividend payments of €507m, resulted in net debt increasing (21% vs. Q1 17 end) to €1.3bn. Management announced new investment projects worth €36m to expand: 1/ Kaukas pulp mill capacity by debottlenecking the existing capacity; and 2/ special label capacity in Finland. Apart from Q3 17 maintenance activity expected to be significantly lower compared with Q2 17, management expects to recognise c.€65m of gains from sale of hydropower facilities (announced in H1 17) in Germany, Austria and the US. On 7 August 2017, UPM announced the acquisition of US-based Southwest Label Stock, a supplier of self-adhesive label materials, for an undisclosed amount.
UPM-Kymmene’s Q4 16 results came in ahead of our estimates. Overall, the full-year (FY16) results were impressive, with profit improvements being the key highlight. Top-line remained lacklustre Sales: Q4 – €2.5bn (-3.8% yoy; +1.3% qoq); FY16 – €9.8bn (-3.2%; broadly in line with AV estimates) Weak Q4 volumes (-4.7% yoy; flat qoq) and price pressure (flat yoy in the euro area, though down 3% overall; -1% qoq) continued to weigh on Paper ENA’s sales (-6.3% yoy; -0.5% qoq). Except for a sequential price rebound (+8%), the situation in Energy (-18% yoy; +1.1% qoq) was very similar, as volumes (-7.9% yoy; -4.2% qoq) and prices (-8% yoy) remained weak. For Biorefining (i.e. pulp), despite reasonable volumes (+3.1% yoy; -2.1% qoq), oversupply-induced price weakness (-12% yoy; flat qoq) resulted in sales declining (-8.7% yoy; -1.5% qoq). These Q4 divisional trends reverberated throughout FY16, thereby more than offsetting the resilience in Special Papers (i.e. Paper Asia) and Raflatac (i.e. labels). Another cost-savings-driven FY performance Adjusted EBIT: Q4 – €229m (-0.9% yoy; -25% qoq); FY16 – €1,050m (+30%; +6.3% ahead of AV estimates) The fact that Q4 profits were relatively weaker was not a surprise as management had already guided for a maintenance shutdown impact in pulp and negative seasonality effects. Also, given that the Q3 profitability was exceptionally strong (especially in Paper ENA), normalisation was a given. Keeping aside these factors, the profitability rebound in paper – primarily on the back of cost savings – continued to impress. On an FY basis, barring pulp and energy (which have been marred by tough markets), all divisional performances (paper in particular) were healthy. Mimicking the operating performance, Q4 net profit came in at €187m (-3.1% yoy; -30% qoq). For the full year though, despite the lack of sizeable forest revaluation gains, net profit was down only 3.9% to €880m. This was not the case for Stora, where a combination of weakening operating profits and fair valuation losses on operating assets blemished its full-year bottom-line. Dividends backed by a strong balance sheet Healthy profitability along with working capital releases culminated in strong reported OCFs of €405m (+3.8% yoy; -20% qoq) and €1.7bn (+42%) for Q4 16 and FY16, respectively, while completion of most growth investments resulted in conservative (-19% yoy) full-year capex (€351m). Net debt declined 22% (vs. Q3 FY16-end) to €1.4bn. As a result, the group declared a generous dividend of €0.95/share (+27% yoy; 13% ahead of the AV estimate).
Yet again UPM-Kymmene has posted operating results materially ahead of the consensus and AV’s expectations. Q3 16 sales came in at €2.4bn (-3.4% yoy; flat qoq). Despite 7.2% higher Asian paper volumes (driven by the ramp-up at Changshu), the continued weak pulp and energy prices (both down 14%) and a challenging European paper environment (prices and volumes down 2% and 2.9%, respectively) weighed on the top-line. However, a sequential rebound in energy (+6.9%) and European paper (+6.6%) volumes, and pricing improvement/stability (across most divisions) cushioned this somewhat. Profitability improvements continued unabated with an adjusted EBIT of €305m (+41% yoy; +22% qoq) translating into a record operating margin of 12.5%. Paper ENA again surprised (adjusted EBIT came in at €112m vs. €8m in Q3 15 and €45m in Q2 16) on the back continuous cost savings, favourable comps (as Q3 15 had been marred by unfavourable currency hedges) and seasonal benefits. Growth investments in Paper Asia and Raflatac (labels) – benefiting from growing volumes and/or an improving product mix – too witnessed a healthy profitability progression. Even though profitability in Biorefining (-23% yoy; -5.3% qoq) and Energy (-33% yoy; +36% qoq) suffered again due to weak prices, sequentially there was some relief. Operating improvements percolated down, with net income coming in at €268m vs. €408m in Q3 15 (which included €289m of forest revaluation gains) and €198m in Q2 16. Strong reported OCFs of €506m (+39% yoy; +17% qoq) and conservative capex (given that most growth investments are already through) resulted in net debt being further reduced (down 20% vs. end Q2) to €1.8bn. Management guides Q4 16 performance to be negatively impacted by seasonality, and maintenance activity in Biorefining (pulp) and Paper ENA.
UPM-Kymmene’s Q2 results (barring the top-line) were ahead of consensus and AV expectations. While Paper ENA continued to suffer from the ire of weak prices (-2%) and volumes (-5.2%), lower pulp prices (-12%) and sombre energy market dynamics (prices and volumes down 13% and 5%, respectively) exacerbated the sales pressure (€2.4bn; -4% yoy). Although sequentially sales were flat due to volume support from Raflatac (labels), Paper Asia and Plywood. Despite the top-line vagaries, UPM’s profitability delivery remained strong. Adjusted EBIT came in at €251m (+34% yoy; -5.3% qoq). All divisions, with the exception of Biorefining (pulp) and Energy, witnessed meaningful improvements. These improvements were a combination of initiation of/pick-up in earnings contribution from the growth projects and strong delivery on (fixed and variable) cost savings. However, bottom-line gains mellowed (net profit of €198m; +24% yoy; -13% qoq) due to: 1/ lower gains from revaluation of biological assets; and 2/ higher income taxes. Cash flows remained healthy, both yoy and qoq. Reported OCFs came in at €434m (+34% yoy; +27% qoq). Even after the full-year dividends payments in Q2, UPM’s debt remained largely unchanged at €2.3bn. Management guides for profitability improvements to continue in H2 16 on the back of the incremental contribution of growth investments and the continuation of cost rationalisation.
UPM-Kymmene’s start to 2016 could not have been better with the profitability coming in materially ahead of the Street’s expectations. Although sales were a bit disappointing having declined 1.6% yoy (and 5% qoq) to €2.4bn as European paper volumes (down 2% yoy and 8.7% qoq) continued to sag, with sequential weakness being aggravated by lower pulp and energy prices, and seasonally lower label volumes. However, a material turnaround in the paper ENA and continuation of the good performance in pulp and labels (better margins) helped adjusted EBIT surge by 37% (and 15% qoq) to €265m – a record high. Paper ENA’s EBIT came in at €46m vs. €5m and €18m in Q1 15 and Q4 15, respectively, due to a combination of (fixed and variable) cost savings and the absence of unfavourable currency hedges (unlike the previous periods). Overall, a combination of cost efficiencies (across businesses) and the contributions from growth projects helped profitability gain momentum, after a subtle 2015. Net profit galloped 46% (and 18% qoq) to €227m (despite €29m of charges related to the closure of the Madison Paper Industries JV) and reported OCFs came in at €341m vs. €108m in Q1 15. Although OCF comps were skewed by a one-off working capital use of €147m in Q1 15 vs use of only €14m in Q1 16. UPM’s use of leverage continued to reduce, with net debt reaching another record low of €2.2bn (-8.9% qoq). On the day of the Q1 results release, the group also announced sale of its Schwedt newsprint mill (c.3% of capacities) in Germany to LEIPA group for a consideration of €70m – which is line with our NAV estimates.
UPM-Kymmene ended 2015 on a high with its Q4 and 2015 results exceeding AV and consensus estimates. These results fructified in spite of paper (a key outperformer in 2014) failing to deliver in 2015. *Some top-line growth* Sales: Q4 – €2.6bn (+1.7% yoy; +1.7% qoq); 2015: €10.1bn (+2.7%; +1.5% ahead of AV estimates) Q4 sales were supported by solid growth in Biorefining (pulp; +21%) and Raflatac (labeling; +10%) where a materially weaker Euro (down 14% vs. USD) was the key driver, despite persistent weakness in paper volumes and prices, energy prices and plywood volumes. With feeble European paper being a top-line drag since 2013, UPM finally achieved top-line growth with trends similar to Q4 resonating throughout 2015. *Highest annual EBIT since 2006* Adjusted EBIT: Q4 – €209m (+5.6%; -3.2% qoq); 2015: €808m (+5.5%; +1.6% ahead of AV estimates) Cost optimisation has become an area of unwavered focus for UPM over the years, with the group achieving €41m and €150m of savings during Q4 and 2015, respectively, under the profit improvement programme. Although some of the gains were lost (€24m and €114m in Q4 and 2015) due to unfavourable currency hedges and higher Euro-denominated pulp prices (thereby increasing raw material costs), which primarily impacted the paper businesses. Even sequentially, barring some unexplained intersegment losses, performance across divisions remained robust – especially for the energy segment (+29%), which benefited from lower energy purchase costs. Attributable net profit: Q4 – €193m vs. €8m and €408m in Q4 14 and Q3 15, respectively; 2015: €916m (+79%; +6.8% ahead of AV estimates) Unlike Q4 14 – which was marred by €135m of paper asset impairments – Q4 15 was blemish-free. This was also in stark contrast with Stora Enso which has already announced €262m of impairments for Q4 15. In addition to the operating improvements and no hefty impairments, a one-time gain on forest assets (€265m in Q3 15) culminated into a staggering full-year net profit growth. Although further down in the statement of comprehensive income, €307m and €405m of losses were recognized in Q4 and 2015, respectively, on available-for-sale investments (primarily comprising the ill-fated TVO nuclear assets). *Balance sheet supported growth investments and dividends* Even though OCFs weakened a bit (-5.7%) to €1.2bn as last year’s working capital benefits reversed, a resilient balance sheet (net debt down 12% to record low levels of €2.4bn) helped UPM pursue its growth investments – with 2015 capex up 14% to €432m. Also, full-year dividend was increased by 7.1% to €0.75/share (+3.6% ahead of AV estimate). With most growth investments in place, management guides €350m capex for 2016.
In continuation with its Q2 performance, UPM-Kymmene maintained its business momentum in Q3 15. Sales were up 4.8% yoy (-0.7% qoq) to €2.5bn, driven by material benefits from a depreciating euro (down 19% vs. the USD) impacting the Biorefining (pulp) segment, followed by strong Raflatac (labelling), Plywood (+6.5%) and Energy (+9.6%) volumes. The top-line grew despite lower pulp volumes (-9.1%; due to scheduled maintenance shutdowns), and still weak paper and energy prices. Adjusted EBIT came in flat yoy at €217m as the group managed to reduce its variable costs by €52m (underpinned by a €150m cost savings programme – 73% achieved so far) and realised €19m of net forex benefits (as most gains were moderated by €29m losses on currency hedges in the paper businesses). Although, sequentially some fixed cost rationalisation (after paper capacity curtailments in H1 15) facilitated an 11% improvement in operating profits. Similar to Stora Enso, UPM too recognised (one-off) gains amounting to €289m on the revaluation of its forest assets. Consequently, net profit jumped 1.2x to €408m (+1.6x qoq). Reported OCFs continued to improve (+21% yoy; +12% qoq) to €363m as working capital improvements were sustained – release of €48m vs. use of €36m in Q3 14 and release of €31m in Q2 15). Management reiterated its 2015 profitability outlook being similar to the performance achieved in 2014. Although its optimism over an anticipated H2 recovery in the paper business will not materialise, adequate support should surface from the pulp business.
After a subtle start to 2015, UPM-Kymmene reported a good Q2 performance – broadly ahead of consensus estimates. Sales came in at €2.5bn (+4.4% yoy; +2.5% qoq) driven by higher euro-denominated prices in Biorefining (pulp) and Raflatac (labels), and solid label volumes. These benefits more than offset declining European paper demand (2.5% lower deliveries) and prices, and lower energy prices (-17%; due to a mild winter and improved hydrology in the Nordic region). Even though weakness in paper is continuing to date, strong development of other segments has helped UPM post its first quarterly top-line growth since Q2 12. Despite a slowing pace in cost savings (€27m vs. €47m and €46m in Q2 14 and Q1 15, respectively), adjusted EBIT inched higher (+17%; +3.7% qoq) to €195m. An average 24% depreciation of the euro vs. the US dollar in Q2 culminated in €60m of forex benefits, though €36m of hedging losses in the paper business dampened the gains. The bottom-line turnaround continued with a net profit of €160m (+24%; +3.2% qoq). Improving profitability and the reversion to normal working capital requirements (release of €31m vs. use of €36m and €147m in Q1 15 and Q2 14, respectively) translated into strong reported OCFs at €324m (+51%; +2x qoq). After a dismal H1 for European paper (Paper ENA) so far, management guides for some improvements in H2 earnings.
