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Tapio Korpeinen
CFO
September 2013
SHIFTING GEAR IN UPM
TRANSFORMATION
| © UPM
What are we targeting?
• More than 50% of sales from well performing
growth businesses in 5+ years
• Drive strong cash flow through improved margin,
release capital from mature businesses
• Maintain solid balance sheet and strong cash flow
• Increase UPM’s earnings and valuation
2
| © UPM
Actions have already started to reshape the
business portfolio
0
2 000
4 000
6 000
8 000
2007 2012 "5+ years"
3
3.1bn
4.4bn
Energy Biofuels Pulp Paper China,
label papers Label
+43%
0
2 000
4 000
6 000
8 000
2007 2012 "5+ years"
7.6bn 6.8bn -11%
Paper other Timber Plywood
Expanding the well
performing growth
businesses
Securing cash flow in
mature businesses
Sales, EURm
(*
*) one scenario from UPM’s
growth opportunities
Average
EBITDA margin 21%
ROCE 13%
Average
EBITDA margin 5%,
generating free cash flow
Gro
wth
busin
esses
Matu
re b
usin
esses
Sales, EURm
| © UPM
5,3
8,3
5,4
3,5
8,2
6,8
5,6
0
2
4
6
8
10
12
2007 2008 2009 2010 2011 2012 H1/13
-7,5
-5,0
-2,5
0,0
2,5
5,0
7,5
10,0
12,5
2007 2008 2009 2010 2011 2012 2013E
Operating profit excluding special items
Profitability over two economic slowdowns
Europe continues to underperform
the other major economic zones
Real GDP y-o-y growth %
Sources: Global Insight
% of sales
Euro zone
US
BRIC
4
Real GDP y-o-y growth %
| © UPM
0
200
400
600
800
1 000
1 200
1 400
2007 2008 2009 2010 2011 2012 Q2/13
Consistently strong cash flow
5
Operating cash flow
Cash flow
after investing
activities
Cash flow EUR million
LTM
| © UPM
0
200
400
600
800
1 000
1 200
2007 2008 2009 2010 2011 2012 2013e
Low investment needs in existing assets allow
growth initiatives with modest total annual capex
6
EUR million
Operational investments
350
Capital expenditure
Strategic investments
Depreciation
Uruguay
acquisition
Estimate
Myllykoski
acquisition
340 400
| © UPM
0,20
0,30
0,40
0,50
0,60
0,70
0,80
0,90
0
200
400
600
800
1 000
1 200
1 400
2008 2009 2010 2011 2012
Cash flow-based dividend
Cash flow,
EUR million
EUR per
share
0.40
0.45
0.55
Actual / proposed dividend
7
Dividend policy
• at least 1/3 of net cash flow from
operating activities less
operational capital expenditure
• net cash flow calculated as an
average over three years
Minimum dividend by the policy
• EUR 0.50 per share
Dividend for 2012
• EUR 0.60 (0.60) per share
Operational capex
Minimum dividend by the dividend policy
Cash flow after operational capex
0.60 0.60
| © UPM
Solid balance sheet
8
2 500
3 000
3 500
4 000
4 500
5 000
5 500
6 000
2008
2009
2010
2011
2012
2013
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
Net debt, EUR million Net debt / EBITDA (trailing 12 months)
Net debt
Net debt / EBITDA
3.0
2 500
3 000
3 500
4 000
4 500
5 000
5 500
6 000
2008
2009
2010
2011
2012
2013
20
30
40
50
60
70
80
90
Net debt, EUR million Gearing %
Net debt
Gearing
48
Liquidity was EUR 1.6bn at the end of Q2 2013
SHIFTING GEAR IN UPM
TRANSFORMATION
| © UPM
Shifting gear in UPM transformation
New business structure
Profit improvement actions in all businesses
Focused growth initiatives in biorefining and outside Europe
Seek to simplify business portfolio and uncover the value of
UPM’s assets
Profit improvement target of EUR 400m from
performance improvement and growth initiatives
10
| © UPM
New business structure and reporting
segments as of 1 November 2013
11
UPM Energy
UPM Biorefining
UU UPM Raflatac
UU
UU
UU
UPM Paper Europe
UPM Plywood
UPM Paper Asia
• Pulp (3.2 million tonnes p.a.), incl. plantation operations • Biofuels • Timber
• Self-adhesive label materials for product and information
labeling
• Fine papers in China
• Label paper operations
• Total capacity 1.5 million tonnes p.a.
• Magazine papers in Europe and NA • Newsprint and fine papers in Europe • Total capacity 10.3 million tonnes p.a.
• Plywood and veneer products (1 million m3 p.a.)
• Power generation (1,721MW), incl. UPM’s hydropower plants
and shareholdings in energy companies
• Physical and derivatives trading
Other operations: Forests (over 900,000 hectares of forests) and wood sourcing,
New Business Development and Group services
| © UPM
Profit improvement through simplified business
structure in existing businesses
• UPM has identified actions with a profit improvement impact of
EUR 200m in the existing businesses
– Each business will implement a program with simplified business model and
variable and fixed cost savings
– Planned actions include the remaining part of previously announced
programs
– Planned actions do not include additional capacity closures at this time
• Full impact of the program is expected by the end of 2014, as
compared with the Q2 2013 results
– UPM will follow and update the progress of this program in its quarterly
reporting
12
| © UPM
Growth initiatives for the next three years
• UPM targets additional EBITDA contribution of EUR 200m from
its growth initiatives when they are in full operation
– Biofuels – Lappeenranta refinery
– Woodfree speciality papers in China – Changshu PM3
– Continued growth in UPM Raflatac
– UPM plans to expand production in its existing pulp mills
• Total investment requirement in the projects is EUR 680m,
including EUR 540 million from previously announced projects
– total remaining investment EUR 620m in the coming three years
• UPM’s total capex estimate for 2013 is EUR 400m
– low investment needs in existing assets allow growth initiatives with modest
total annual capex
13
| © UPM
New business structure
Financial figures in H1 2013 (*
14
Sales
EBITDA
Capital employed
UPM
Energy
UPM
Biorefining
UPM
Raflatac
UPM
Paper Asia UPM
Paper Europe
UPM
Plywood Other
UPM
Energy
UPM
Biorefining
UPM
Raflatac
UPM
Paper Asia
UPM
Paper Europe
UPM
Plywood
Other
UPM Energy
UPM
Biorefining
UPM
Raflatac
UPM
Paper Asia
UPM
Paper Europe
UPM Plywood
*) Preliminary figures
Sales unconsolidated
| © UPM
Profitability challenge in UPM Paper Europe
– improvement programs in all businesses,
growth initiatives in several businesses
-10
0
10
20
30
40
50
-50
0
50
100
150
200
250
UPMBiorefining
UPMEnergy
UPMRaflatac
UPMPaper Asia
UPMPaperEurope
UPMPlywood
Other
EUR million EBITDA in H1 2013 (*
15
% of sales
*) Preliminary figures
22%
44%
9%
15%
2%
10%
| © UPM | © UPM
Timetable
• The new business structure in effect as of 1 November 2013
• Historical comparison figures for the new structure published in
November
• Financial reporting according to the new structure from Q4 2013
onwards
• Profit improvement program – full EUR 200m run-rate by the
end of 2014
• Growth initiatives during the coming three years – targeted
additional EUR 200m EBITDA contribution when in full operation
• Opportunities to simplify business portfolio and
uncover the value of UPM assets will be explored
16
| © UPM
Summary of the new business structure
and actions
17
UPM
Energy
UPM
Biorefining
UPM
Paper Asia
UPM
Paper Europe
UPM
Plywood
Profit improvement program
Full EUR 200m run-rate
by the end of 2014
All businesses
UPM
Raflatac
UPM EBITDA in H1 2013 was EUR 542m
Growth initiatives
Targeted additional
EBITDA of EUR 200m
Biorefining, Paper Asia
and Raflatac
Business portfolio
Seek to simplify the
business portfolio
Uncover value of UPM
assets
| © UPM
• Supersector leader in basic materials
sector, the only forestry and paper
company worldwide listed on Dow
Jones Sustainability Indexes (DJSI)
• ‘Most Innovative Company’ award from
Ethical Corporation Awards thanks to
UPM’s ecodesign concept and overall
sustainability thinking
• Highest score for climate change
disclosure in the Nordic Carbon
Disclosure Leadership Index
• Winner of the ‘Breakthrough Innovation
in Technology’ for improving efficiency
and sustainability of biofuels production
UPM has been recognized
| © UPM 18
FOCUSED GROWTH
INITIATIVES
| © UPM
UPM creates new business in
wood-based renewable diesel
• UPM invests in wood-based renewable diesel production
− Total investment EUR 150m
− Production capacity 100,000 tonnes/a
• Technology is based on UPM’s innovation and
long-term development work
• Raw material is sustainably produced crude tall oil
– Residue from pulp production
– Outside food value chain, no indirect land use change
• Main product is unique renewable diesel
– No blend wall issues - compatible with fossil diesel EN590 quality
– 80% reduction in greenhouse gas emissions
– High energy content
20
| © UPM
UPM creates new business in
wood-based renewable diesel
• Lappeenranta biorefinery status:
– Construction, commissioning works and main
equipment installations on-going, on schedule
and budget
– Fleet tests of the product on-going
– Recruitment of operative staff on-going
• Total investment EUR 150m, start-up in
mid-2014
• Investment supports the good profitability
of UPM’s growth businesses
• Potential to grow into a significant new
business
21
| © UPM
UPM plans to expand production in its
existing pulp mills
22
Kymi
• major investment in 2008
Pietarsaari
• major investment in 2004
Kaukas
• modernisation in 1996
Fray Bentos
• started 2007
BHKP tonnes
BSKP tonnes
Total capacity
Fray Bentos
1,100,000 1,100,000
Kaukas 310,000 430,000 740,000
Kymi 370,000 190,000 560,000
Pietarsaari 320,000 480,000 800,000
Total 2,100,000 1,100,000 3,200,000
Fray Bentos
Pietarsaari
Kymi Kaukas
| © UPM
Over 80% of pulp demand is in growing
end-use segments
Bleached market pulp demand by end-use and region
*Source: Hawkins Wright. End use markets
for bleached kraft pulp, September 2011
WE NA China ROW Total
P&W 14% 5% 10% 9% 39%
Tissue 9% 6% 4% 8% 28%
Packaging 2% 1% 3% 2% 8%
Speciality 7% 2% 3% 4% 16%
Fluff 2% 3% 1% 4% 10%
35% 16% 21% 27% 100%
= declining market segment (19%)
= growing market segment (81%)
23
| © UPM
Consistent growth in label materials
0
250
500
750
1 000
1 250
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
UPM Raflatac sales EURm
24
| © UPM
0
50
100
150
200
250
300
350
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Emerging markets, all products
Growth in higher value added labelstock
products and growth markets
UPM Raflatac sales (indexed)
2003 = 100
Mature markets,
high added value
products
Mature markets, all products
25
| © UPMU
UPM Paper in APAC and China 1998-2012
26
PM2
Start-up
UPM 100%
ownership
Decision on
PM1 PM1
start-up
R&D Center
established
Decision on
PM3
UPM and APRIL
1998 2000 2002 2004 2006 2008 2009 2010 2012 2014 2016
APAC sales
volume,
tonnes
| © UPM
UPM grows in China and in the fast
developing label materials segment
Changshu expansion status:
• Government and environmental permits are
clear
• Site preparation works on-going
• Infrastructure works under preparation
• Equipment tendering process on-going
• New sheeting line started up
Total investment CNY 3,000m (approx. EUR
390m), start-up in H1 2015
Investment supports the good profitability of
UPM’s growth businesses
27
| © UPM
0
500
1 000
1 500
2 000
2 500
3 000
02 03 04 05 06 07 08 09 10 11 12 16e
Nuclear
Hydro
Biomass
+OL3
Consistent growth in low-emission
electricity generation
• During the past decade:
– 83% growth in biomass-based
electricity generation
– 16% growth in hydropower
• 81% of UPM’s power generation
is CO2 neutral
• Biggest on-going projects are
the Schongau CHP plant in
Germany and the OL3 nuclear
power plant in Finland
MW CO2 emission neutral electricity capacity
28
| © UPM
New opportunities for the future
29
BIOFIBRILS
BIOCHEMICALS
NEW AREAS
NEW BUSINESSES
BIOFUELS
First large-scale
investment on-
going
Pilot plant start-up
in Q1 2012
Pilot plant start-up
in Q3 2011
Mill scale concepts
under development
BIOCOMPOSITES
Q2 2013 RESULTS
| © UPM
Q2 2013 key figures
EUR m Q2 2013 Q2 2012 Q1 2013 H1 2013 H1 2012
Sales 2,520 2,632 2,474 4,994 5,240
sales growth, % -4% 9% -5% -5% 10%
EBITDA 258 325 284 542 682
% of sales 10.2 12.3 11.5 10.9 13.0
Operating profit (* 138 128 144 282 284
Profit before tax (* 120 101 129 249 243
Earnings per share, EUR (* 0.20 0.16 0.18 0.38 0.38
Operating cash flow 84 142 103 187 360
Net debt 3,524 3,593 3,199 3,524 3,593
Gearing % 48 38 42 48 38
31
*) excluding special items
| © UPM
Q2 2013 highlights 1(2)
Growth businesses continued to perform well
• Strong quarter in Pulp with good delivery volumes and increased prices
• Continued good profitability in Chinese and speciality paper operations
• In Label increased volumes more than offset the higher fixed costs from
expanded operations
• Energy had less hydropower than last year, but good profitability
Plywood and Timber improved in a challenging environment
Operating profit excl. special items was EUR 138m (128m in Q2 2012)
• Fixed costs decreased by EUR 36m from last year
Operating cash flow was EUR 84m (142m in Q2 2012), impacted by a
temporary increase in working capital
| © UPM 32
| © UPM
Q2 2013 highlights 2(2)
Weak quarter for Paper Europe
• Sales margins in European graphic papers and in exports from Europe
significantly lower than last year
• Unrealised energy hedges had a negative impact in Q2
Plan to reduce annual fixed costs by EUR 90 million on schedule
• Capacity closures were concluded in Rauma, Finland and Ettringen,
Germany by the end of April
• Employee negotiations have been concluded in all countries except in
France, where they started in July
• 40% of the annualised benefits were achieved in Q2 2013, full run-rate of
EUR 90m expected from the beginning of 2014
• Cost reductions offset the impact of lower delivery volumes, but could not
compensate for the lower sales margins
| © UPM 33
| © UPM
0
50
100
150
200
250
300
350
400
EBITDA
Q2/12
EBITDA
Q2/13
EBITDA affected by lower paper prices and
delivery volumes in Q2 2013 vs. Q2 2012
Pulp
Paper
Other
Forest
and
Timber
Energy
Label
Plywood
0
50
100
150
200
250
300
350
400
EBITDA
Q2/12
EBITDA
Q2/13
EUR million
Prices,
currency
Fibre
costs Other Fixed
costs
Deliveries
Energy
costs
Paper prices and volumes decreased
Savings in fixed and variable costs
EUR million
Paper impacted by
lower prices and volumes
34
325 12.3%
258 10.2%
325 12.3%
258 10.2%
| © UPM
0
50
100
150
200
250
300
350
400
EBITDA
Q1/13
EBITDA
Q2/13
EBITDA in Q2 2013 vs. Q1 2013 impacted by
unrealised energy hedges
Pulp
Paper
Other
Forest
and
Timber
Energy
Label
Plywood
0
50
100
150
200
250
300
350
400
EBITDA
Q1/13
EBITDA
Q2/13
EUR million
Prices,
currency
Fibre
costs
Other
Fixed
costs
Deliveries
Energy
costs
Deliveries, fixed costs increased seasonally
Energy costs impacted by
unrealised energy hedges EUR million
Paper impacted by unrealised energy hedges,
Pulp strong, Energy seasonally weaker
35
284 11.5% 258
10.2%
284 11.5% 258
10.2%
| © UPM
Operating profit stable
-100
-50
0
50
100
150
200
250
300
Operating profit excluding special items
36
138 5.5%
128 4.9%
EUR million
| © UPM
Outlook for 2013 (*
(* See complete wording of the "Outlook"
in the Interim Report Q2 2013
Business environment
• Economic growth in Europe in 2013 is expected to remain very low, having a negative impact on the European graphic paper markets.
• Growth market economies are expected to fare better, which is supportive for the global pulp and label materials markets, paper markets in Asia and wood products markets outside Europe.
• Hydrological situation in the Nordic countries is slightly weaker than the long term average
UPM performance in H2 2013 compared with H1 2013
• Paper BA is expected to benefit from lower costs, driven partly by the ongoing cost reduction measures, and seasonally stronger demand.
• Pulp BA will be impacted by annual maintenance stops in three of the four pulp mills.
| © UPM 37
| © UPM
Cash flow impacted by temporary increase in
working capital
38
0
200
400
600
800
1 000
1 200
1 400
Q10
8
Q20
8
Q30
8
Q40
8
Q10
9
Q20
9
Q30
9
Q40
9
Q11
0
Q21
0
Q31
0
Q41
0
Q11
1
Q21
1
Q31
1
Q41
1
Q11
2
Q21
2
Q31
2
Q41
2
Q11
3
Q21
3
Operating cash flow
Cash flow
after investing
activities
EUR million Cash flow, trailing 12 months
• H1 2013 operating cash flow
was EUR 187m (360m),
impacted by temporary
working capital increase of
EUR 215m (77m)
APPENDIX
| © UPM
20 000
25 000
30 000
35 000
40 000
45 000
50 000
55 000
60 000
65 000
70 000
2006 2007 2008 2009 2010 2011 2012
Asia demand Capacity
20 000
25 000
30 000
35 000
40 000
45 000
50 000
55 000
60 000
65 000
70 000
2006 2007 2008 2009 2010 2011 2012
NA demand Capacity
20 000
25 000
30 000
35 000
40 000
45 000
50 000
55 000
60 000
65 000
70 000
2006 2007 2008 2009 2010 2011 2012
Eur demand Capacity
Asia is as big graphic paper market as
declining Europe and North America combined
Europe Asia North America
Source: Euro-Graph, PPPC, PPI
'000 tonnes '000 tonnes '000 tonnes
10 mt
10 mt
40
| © UPM
Overcapacity in European graphic paper is
visible in margins
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
41
Cash cost of a marginal producer
Price
Price hardly covers the cash costs of marginal producers EUR/t
Source: PPI, RISI, Pöyry
| © UPM
15
20
25
30
35
40
45
50
55
60
65
2008 2009 2010 2011 2012 2013
Chemical pulp market
42
Source: PPPC World-20 statistics
Producer inventories
at balanced levels Days of
supply
300
400
500
600
700
800
900
1 000
1 100
2008 2009 2010 2011 2012 2013
USD/tonne
Q2 pulp prices increased slightly from Q1
Q2 BHKP pulp price above last year
Q2 NBSK on last year’s level
BHKP
NBSK
Hardwood
inventories
Softwood
inventories
Source: FOEX Indexes Ltd.
| © UPM
Wood, RCP and electricity prices
43
60
80
100
120
140
160
180
10
12
14
16
18
20
22
24
26
2008
2009
2010
2011
2012
2013
Spruce Pine Birch
EUR / m³ Log prices in Finland EUR / m³ Pulpwood prices in Finland
Source: Metla, FOEX Indexes Ltd, NordPool, EEX
EUR / tonne RCP prices in Europe
30
35
40
45
50
55
60
65
70
Spruce Pine Birch
20
30
40
50
60
70
80
90
100
EEX (Germany) NordPool (Nordic)
Finnish forward
Electricity 1-year forward prices EUR / MWh