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Edited Transcript of UPM1V.HE earnings conference call or presentation 25-Apr-17 10:15am GMT

Thomson Reuters StreetEvents

Q1 2017 UPM-Kymmene Oyj Earnings Call

Helsinki Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of UPM-Kymmene Oyj earnings conference call or presentation Tuesday, April 25, 2017 at 10:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jussi Pesonen

UPM-Kymmene Oyj - CEO, President and Director

* Tapio Juhani Korpeinen

UPM-Kymmene Oyj - CFO and EVP of UPM Energy

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Conference Call Participants

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* Harri Taittonen

Nordea Markets, Research Division - Head of Equity Research, Finland

* Justin Jordan

Jefferies LLC, Research Division - Equity Analyst

* Linus Larsson

SEB, Research Division - Analyst

* Mikael Doepel

Handelsbanken Capital Markets AB, Research Division - Analyst

* Mikko Ervasti

DNB Markets, Research Division - Analyst

* Robin Santavirta

Carnegie Investment Bank AB, Research Division - Research Analyst

* Simon David John Terrant Rowe

Henderson Global Investors Limited - Portfolio Manager

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Presentation

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [1]

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Ladies and gentlemen, welcome to UPM's Q1 2017 result webcast. My name is Jussi Pesonen, I'm the CEO of UPM, and I'm here with our CFO, Tapio Korpeinen.

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Tapio Juhani Korpeinen, UPM-Kymmene Oyj - CFO and EVP of UPM Energy [2]

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Good afternoon, everyone.

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [3]

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Let's get into the businesses and our report. Q1 was another successful, good quarter for UPM. We enjoyed good growth in delivery volumes. We achieved high operational efficiency in all of our businesses. We had very little maintenance activity in the quarter. As a result, UPM's comparable EBIT increased by 8% to EUR 305 million. Our operating cash flow was very strong, EUR 396 million, and our net debt decreased to EUR 807 million. Over the last 12 months, our comparable ROE, or return on equity, was 11.1%. The quarter was, if I remember correctly, 16th consecutive quarter to improve our profits. UPM has and we have actually 6 competitive businesses with strong market position and attractive growth opportunities for the businesses.

Let's turn the page for the Page 3. We were operating in a positive business environment in Q1. Demand was good for most of our products and geographically in most of our markets. Demand growth was particular brisk in Asia. Growth was the main driver for improved results.

In Biorefining, we reached record production in all of these 3 segments: Pulp, Biofuels and Timber. Pulp deliveries grew by 8%, and the profitability was on a good level also in Biofuels business.

Specialty Papers, Raflatac and Plywood all achieved record quarterly profits. As you can see here, they all had solid quarter in deliveries. They also benefited from favorable product mix in Q1. Specialty Paper, in particular, made a good progress in driving its profits and product mix forward.

While we are enjoying a favorable market demand, we also experienced moderate input cost inflation in Q1. Input costs are treating our businesses differently. But overall, we managed to contain the most of that cost increases well. We also were able to increase our sales prices during the quarter in Pulp and Specialty Papers and in Plywood.

Page 4 summarizes the status of the recent focused growth projects of UPM. Common for all these is that we have a finer stem from cash flow. We have implemented them on schedule and budget. And most importantly, they are generating attractive returns on the invested capital.

The Kaukas pulp mill investment that we completed last autumn has been another successful pulp debottlenecking investment with fast ramping -- ramp-up in production. Also, the Otepää plywood mill expansion that we completed last autumn is already contributing to profitable growth in birch plywood.

Both the Lappeenranta biorefinery and the new specialty paper machine in Changshu showed good profitability during Q1.

The biorefinery achieved a new production record at the specialty paper machine in China, high-quality release liner already represents the most of the production.

But ladies and gentlemen, at this point, I would like to hand over to Tapio for some further analysis of the results. Tapio, please.

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Tapio Juhani Korpeinen, UPM-Kymmene Oyj - CFO and EVP of UPM Energy [4]

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Thank you, Jussi. On this following Page 5, you can see the result for our 6 business areas in terms of the quarterly development of the comparable EBIT.

In Biorefining, first quarter this year was a highly efficient and a clean quarter with no maintenance stops. Pulp prices increased during the quarter, and we're on the average 4% higher than in Q4 2016. EBIT increased by EUR 55 million sequentially from Q4. Compared to the first quarter last year, pulp and biofuel deliveries increased significantly, but pulp prices we're still on the average 4% lower. So EBIT was EUR 8 million lower than in the first quarter last year.

In Energy, EBIT decreased by about EUR 10 million, both as compared to last year in the first quarter and sequentially. Hydropower volumes were below long-term average level. The winter was very mild which had a negative impact on electricity prices and also reduced price volatility.

Paper ENA had another good quarter, improving its EBIT by EUR 16 million from last year despite of the fact that deliveries were 2% lower, and prices on the average were 2% lower. EBIT was slightly lower than in the fourth quarter as both deliveries and fixed costs are seasonally -- clearly lower in the first quarter than in Q4.

As Jussi mentioned, Specialty Papers, Raflatac and Plywood all recorded -- all reported record quarterly profits. In Specialty Papers, deliveries grew by 3%, and product mix improved with the help of the new specialty paper machine in China. EBIT increased $16 million from last year or by EUR 6 million sequentially.

In Raflatac, delivery volumes increased by 6%. EBIT increased slightly from both last year and sequentially from the fourth quarter.

In Plywood, deliveries grew by 7%, and the product mix was favorable. EBIT increased by EUR 7 million from last year or EUR 8 million sequentially.

Here you can see the change in EBIT by driver and by business area as compared to the first quarter last year. On the left-hand side, looking at the change by earnings driver, you can see that the biggest positive driver was delivery volumes. Depreciation was also lower than in the first quarter last year. We experienced moderate input cost inflation in the first quarter, as Jussi mentioned, and this was evident in logistics costs, energy costs, some chemical costs as well as recycled paper costs. To offset the cost inflation, we continue our programs to reduce, fix and variable costs. And in this, we were quite successful in the first quarter. As you can see, we have a variable component -- a positive component there on variable costs. Changes in fixed and variable costs have very limited impact overall on our EBIT in the first quarter as compared to last year.

As the cost environment has turned, we also look for opportunities to increase our sales price. Because of the increased economic activity, the dynamics have changed, in the past we have had deflation throughout our value chain. Now there is emerging cost inflation, which will also impact the whole value chain, including our customers.

In the first quarter, compared to the fourth quarter, our sales prices increased in Biorefining, Specialty Papers and Plywood and remained stable in Paper ENA and Raflatac. The negative price component that you see in the chart comes from price changes that happened during 2016 from first quarter on.

Here, you can see the strong first quarter operating cash flow, EUR 396 million, which included a working capital release of EUR 36 million. And so over the last 12 months, our operating cash flow totaled about EUR 1.7 billion or EUR 3.26 per share. As a result of the strong cash flow, our net debt continued to decrease. It decreased EUR 807 million or 0.52x EBITDA. These figures are, of course, just before our dividend payment. We paid a dividend of $0.95 per share or EUR 507 million on April 12.

Our outlook for 2017 is unchanged. This will be another good year for UPM. Demand is expected to be strong for most of our products and our markets. We are experiencing moderate increase in our input costs. But to mitigate this, we will continue our measures to reduce fixed and variable costs. We will also work on sales prices in various businesses.

In the short term, the second quarter performance will be impacted by higher maintenance activity as compared to the operationally clean first quarter. Paper ENA is expected to show the normal seasonal increase in maintenance and fixed costs, so within about EUR 15 million to EUR 20 million. And then in addition to that, the second quarter earnings impact of maintenance in Biorefining and Energy is expected to be about EUR 20 million to EUR 25 million.

At this point, I'll hand over to Jussi for some final comments before the Q&A session.

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [5]

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Thank you, Tapio. Let's move into the -- our last page of the presentation. And starting this, I would first like to thank all UPMers for hard working in businesses and functions. Our business model is now working well. With 6 separate competitive and agile businesses, we can capture opportunities and react into the change in the market environment. We can grow with our customers with all these 6 fronts, and we can take care of our cost competitiveness, focused actions, smart programs as we do have. And we continue to aim higher with our performance.

This slide is a great explanation of what we do with operating model, performance, capabilities, capital allocation and growth. With our strong cash flow and the balance sheet, we can simultaneously distribute on attractive dividend to our shareholders and invest in profitable growth. We will grow in businesses where we strong long-term fundamentals and where we do see that the entry barrier is high for many other players. But we need to also think about the sustainable competitive advantages. When we invest in our businesses, we are interested in projects that are attractive and giving us attractive and sustainable returns and in timely manner, which I think that has been the case for the past 3, 4, 5 years. We will continue to implement focused growth projects similar to those that you have seen recently. We can invest in selected large growth project as well, such a potential long-term development in Uruguay when the prerequisites for the attractive returns are met. We can grow the net new businesses such as biofuels or biochemicals as we discussed in our Capital Markets Day last autumn, and we can take part of the synergistic M&A when the opportunity and timing are right.

We are looking for growth. We are looking for earnings growth. Money is not burning in our book, it's -- we will allocate capital when we see that there's a best way to increase shareholder value.

Ladies and gentlemen, with these words and with this slide which I think that gives us a very strong outlook for the future, how do we think about going forward, grow businesses with strong long-term fundamentals and sustainable competitive advantage.

I will stop here or we will stop here. And this is the end of the prepared part of the presentation, and we are ready to take your questions.

Dear operator, I hand over to you for Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Mikael Doepel with Handelsbanken.

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Mikael Doepel, Handelsbanken Capital Markets AB, Research Division - Analyst [2]

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A couple of questions. First of all, in terms of the completed growth investments that you have done and which you also mentioned are contributing to your earnings growth right now, would you be able to quantify how much more incremental earnings benefits can we expect to see this year from already completed growth investments?

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [3]

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This is Jussi. I think that it's pretty now simple to answer that. If you remember, third quarter last year, we said that 80% of the EUR 200 million that we promised for the growth investment is done, what we were guiding. But I guess that what we have seen that there have been faster developments of many of the projects now and new debottlenecking opportunities. I think that there are more opportunities, but we do not have a kind of guidance anymore for actual number. But like Biofuels and the Changshu has been performing very good, and there's further to come.

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Mikael Doepel, Handelsbanken Capital Markets AB, Research Division - Analyst [4]

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Okay. And then on the price increases, which Tapio mentioned in his presentation, saying that you are moving from a deflationary and inflationary environment, and that you will seek price increases yourself as well. In which business areas do you see the best opportunities to raise prices right now?

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [5]

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I think that the cost inflation is covering all of our businesses. Therefore, I think that it's absolutely crucial to think about all of the businesses where we do have a kind of more direct cost inflation happening, and that what we were announcing that we have been already doing price increases already during the first quarter. Then finally, it will be in between our customers and ourselves to quantify that. But obviously, this is -- we are using all the opportunities and moments to push through the cost -- moderate cost inflation to the prices.

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Mikael Doepel, Handelsbanken Capital Markets AB, Research Division - Analyst [6]

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Okay. And just one final question. Jussi, you mentioned that the money is not burning in your pockets, and then you're looking for growth and growth opportunities. However, looking at your balance sheet right now, it is becoming quite strong or you could even say overcapitalized. Should you not be able to identify any bigger growth opportunities now, let's say within a year or so, would you see extra payouts in the form of dividends as a viable option?

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [7]

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All the options are now possible for UPM. That's the really the great. I'm smiling when considering that all the options are available for us. But like I stated on our last page, that aiming higher page, we will continue to implement focused growth projects similar to those that we -- you have seen recently. So all of the businesses are in our focus. And then obviously, we do have now -- based on the balance sheet, we do have the option for large-scale projects as well for new businesses or even M&A. So we do have all the options now available. And then of course, the attractive returns to our shareholders is something that we have the option. So we do have all the options available. And obviously, we are looking at all the options obviously when stating that the money does not burn in our pocket is that we need to really find attractive and sustainable returns, so the growth itself is not interesting. But if there's attractive and sustainable returns and underlying in timely manner, we are very keen to use our shareholders' capital on those kinds of projects. But all options are open, and I'm happy to report again strong cash flow which I think that is even giving us small confidence of the future to give good returns for our shareholders.

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Operator [8]

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And moving on to the line of Harri Taittonen with Nordea.

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Harri Taittonen, Nordea Markets, Research Division - Head of Equity Research, Finland [9]

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Starting with a couple of a balance sheet, cash-flow-related questions. Working capital, you managed to get that lower. So that was a positive item, which is quite rare for the first quarter. I was just wondering how you managed to do that. And the second is also looking at the capital employed, how that's been coming down by more than the size of the business, I think 6% down from the previous quarter and 10% down from a year ago. What is behind the reduction in capital employed in your balance sheet? Those 2 questions, please.

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Tapio Juhani Korpeinen, UPM-Kymmene Oyj - CFO and EVP of UPM Energy [10]

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Well, let's say to the first question and perhaps to some extent to the second as well, we have been, as I think we have been describing earlier, looking for ways to increase our efficiency in working capital, so really looking at the way or the different means through which we can improve our working capital turns with all the components of net working capital, not just the onetime tricks, but rather becoming more efficient on that front. And let's say we have achieved good progress on that, and that is, over time, working through and contributing, in a sense, to better capital efficiency, which means lower working capital, but then, of course, in the short term releases some cash from working capital as well. That's sort of quarterly figures, obviously. As we have seen in the previous years as well, they can sort of swing up and down. But -- so in that sense, there is perhaps not point to, sort of look at 1 quarter figure too much as such. But in the background, there is a contribution from the better turns and efficiency that we are targeting and achieving here going forward. Then on the working capital side, otherwise, of course, what we have been doing on one hand as overall investment level has been lower than CapEx. Our depreciation has been coming down. And then we have been also working on divesting some non-core assets, let's say in transactions, let's say smaller- and medium-sized ones but one after another. We sold the Schwedt mill. Now we announced the sale of some mill hydropower plants in Central Europe and the U.S. and so on and so forth. So all those sorts of measures also improve the capital efficiency. And not the least, for Paper ENA, where, as you remember, our metric for the management there is cash flow return on capital employee. So they are incentivized to work on both parts of that calculation, cash flow and capital employed.

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Harri Taittonen, Nordea Markets, Research Division - Head of Equity Research, Finland [11]

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Okay, that's pretty convincing. Maybe one sort of last question. On the -- well, the guidance, let's say, are there other -- you referred to the sort of near-term maintenance impact, but are there some other seasonal factors that we should remember to sort of offset the negative EUR 35 million, EUR 45 million that you -- that one can calculate from the maintenance delta, Q2 versus Q1 that we should remember? Also related to that, I think you earlier -- you said that you have not been willing to give that specific guidance for the second half because obviously the world is uncertain. And because of that uncertainty, you remained fairly in sort of broad terms and guidance. But when do you think you're ready to guide for the second quarter sort of outlook more specifically? And that's my last question.

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Tapio Juhani Korpeinen, UPM-Kymmene Oyj - CFO and EVP of UPM Energy [12]

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Well, let's say perhaps to the sort of the seasonality or other factors, of course. One element that you can see from, in a sense, the market information is that kind of short-term trend for pulp price has been now up, so that sort of still continues to come through in our P&L as a positive in the pulp business, obviously, and then as an increased cost item in the paper business. But of course as mentioned then on the pricing side, in the paper business, we have been working on kind of passing it through in Asia and then fine paper that has been possible. Otherwise, it's -- as mentioned, the normal seasonality in maintenance cost in the paper business around the mid-summer shutdowns, which we had last year as well. We have maintenance stop at the Biorefinery as normal in the second quarter this year. And then different from last year, we have bigger maintenance shut at Pietarsaari and actually a longer shut in the Energy business in the nuclear power plant. Normally always, we have in the second quarter the shut at the 2 reactors. But this year, for the 2 STVO has announced the shut is a bit longer than normal, about 40 days.

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Operator [13]

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And moving on to the line of Justin Jordan with Jefferies.

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Justin Jordan, Jefferies LLC, Research Division - Equity Analyst [14]

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Firstly, thank you for putting in on Page 5, you released the commentary on the Uruguay platform development. I just would like to get a little bit more color, just potentially on time lines here. Now I appreciate you're obviously in negotiations with -- or discussions, sorry, with the government of Uruguay currently. And then assuming success with that, then you're into a pre-engineering study. Equally assuming front-page success with that, are we talking about at the earliest 2019 for potential CapEx from this project. And I appreciate that we're jumping the gun for 2 years here, but is that sort of the time line we should be thinking about 2019, 2020 for the first of any potential real CapEx for this project?

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [15]

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Basically, these 3 paragraphs are explaining the progress. And that we are -- at this point of time, we are really on the infrastructure building and discussion with the Uruguay government of the possible options and potential for the large investment in Uruguay. When that's completed, then starts the second phase where there are pre-engineering and the permitting, and that kind of things are put together. Of course, there are some costs coming from those as well. But then to be clear and always, after the decision of the board, when that happens, then the kind of big CapEx starts to flow out. But not to really put any guidance on the timing, but what we have been guiding that it is 18 to 24 months that the second phase after completion of the first phase where we are still in and we are entering to really make a market study and put all the things together.

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Justin Jordan, Jefferies LLC, Research Division - Equity Analyst [16]

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Okay. And ultimately your project return hurdle would be the same 14% percentage you use in Biorefining?

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [17]

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Obviously, we just renewed our targets. That would be kind of interesting if we wouldn't actually have that kind of targets for the investment.

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Justin Jordan, Jefferies LLC, Research Division - Equity Analyst [18]

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Sure. I'm just questioning whether it potentially would be higher. That's all.

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [19]

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That, I'm not commenting at this stage.

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Justin Jordan, Jefferies LLC, Research Division - Equity Analyst [20]

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Okay, Okay. All right. Just on -- sorry, just moving to the increased maintenance that you guided to the EUR 35 million to EUR 45 million in Q2. Can you just remind us what the maintenance expense was in Q2 '16? I'm just trying to get a sense of what that extra increase is on a year-on-year sense?

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Tapio Juhani Korpeinen, UPM-Kymmene Oyj - CFO and EVP of UPM Energy [21]

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Well, let's say no figure on that. But again, you can get the sort of the scale sequentially from Q1. One difference for -- between this year and last year was that we did not have a bigger pulp mill shut in the second quarter, which now we do have in Pietarsaari.

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Justin Jordan, Jefferies LLC, Research Division - Equity Analyst [22]

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And obviously new closure as well, okay. All right. And just in terms of -- also Otepää for you, the assets disposals that you've done in hydropower or announced, I suppose, in Q1 and recently. Now you talked a bit in a statement about a EUR 65 million cost of gain, obviously, you expect between Q2 and Q3. Can you just give us some idea of just the cash proceeds from those 3 disposals in aggregate, please?

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Tapio Juhani Korpeinen, UPM-Kymmene Oyj - CFO and EVP of UPM Energy [23]

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Well, let's say you will see the cash flow statement then when it comes, so we don't disclose more than that. But of course, let's say -- so that the kind of value that we got from these assets was quite high. Therefore, also the sort of gains were good from that. And of course, for us, they were sort of non-core assets being kind of run-of-river-power plants related to the paper mills and Paper ENA. And of course, in the case of Madison, Maine, we had stopped operations as far as paper production is concerned in Maine. So obviously then these hydro assets became available for sale, and we were able to have an attractive valuation on the assets.

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Justin Jordan, Jefferies LLC, Research Division - Equity Analyst [24]

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Sure. And I appreciate what you said earlier about having the Paper ENA management improved on both the numerator and the denominator of the returns hurdles. And I guess what I'm really intrigued about, are you flagging the potential for further asset disposals of these nature?

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Tapio Juhani Korpeinen, UPM-Kymmene Oyj - CFO and EVP of UPM Energy [25]

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I would say that we're looking obviously all the time, kind of turning every stone and so on. Let's say larger-scale divestitures, there aren't that many assets left there in terms of this kind of adjacent assets as such. But as said, we are looking to kind of find any possible way to release capital where it's not really core to the paper business at hand in Paper ENA.

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Justin Jordan, Jefferies LLC, Research Division - Equity Analyst [26]

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And just one follow-on for Paper ENA, obviously you had EUR 35 million depreciation in Q1. But since then, you've done these sort of -- or you will have done the 3 asset disposals. You'll have done the 2 mill closures. Can you just give us some idea of what the quarterly depreciation for Paper ENA would be post that? I'm guessing supposedly around EUR 30 million or so. But is there anything you can help in terms of guidance on what the run rate depreciation for the quarter in Paper ENA would be going forward, please?

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Tapio Juhani Korpeinen, UPM-Kymmene Oyj - CFO and EVP of UPM Energy [27]

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That figure, I'm afraid I don't have at hand here right now for you. So we'll have to sort of cover that separately.

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Operator [28]

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And the next in line is Robin Santavirta with Carnegie.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Research Analyst [29]

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Right. So a question on the volume growth, which was better than I expected. Now what is driving that volume growth? And could you comment whether it was stronger early in the quarter or strengthening towards the end of the quarter? Are you gaining market share? And in which areas, sort of in terms of geographies, are you growing the strongest at the moment?

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Tapio Juhani Korpeinen, UPM-Kymmene Oyj - CFO and EVP of UPM Energy [30]

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Well, of course, I would say if I start generally, the 2 kinds of drivers do the volume growth, on one hand, that we have had quite a positive, let's say, market demand and sort of growth in demand from our customers. In several of our businesses, Plywood, Specialty Papers in Asia, but label paper within Specialty Papers, also in other parts of the world. In the label business as such in Raflatac as well and also in the Pulp business, as you can see in the, let's say, shipment figures for the pulp industry now in the beginning of the year. And also, we have invested in all of these businesses, so the new capacity or the additional capacity that we have added then comes to full use. And then perhaps finally, also what was mentioned is that when it comes to the UPM Specialty Papers, the good sort of demand in those sorts of label and uses and its success with our new investment in Changshu has allowed us to have a very good development, also in terms of the mix, in terms of the share of label papers in the mix of our operation in Changsu.

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [31]

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If you take the Page 3, there you can see that the Pulp deliveries were 8% up; Specialty Paper deliveries, 3% up; our Raflatac deliveries, 6% up; our Plywood deliveries, 7% up. And maybe to note here that for the first quarter paper demand in Europe, Paper ENA, the deliveries were minus 2% down. So that's a kind of where -- that comes from almost everywhere. And this is a good picture, this Page 3, to illustrate where the deliveries were getting -- coming.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Research Analyst [32]

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So would you say it's more accelerated market growth or accelerated market share gains?

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [33]

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It depends. Like in the Biofuels, we are gaining market share, of course. And many of the growth businesses, we are -- it's a combination. With -- in paper business, we are spot on of the market. If I correctly remember, the demand, the decline in Europe was 1.8%, and our deliveries were minus 2%. So it's a kind of -- we have been growing with the market. But then when it comes to new products that are having a little high-entry barrier, most probably we are growing also market share, but the main driver is good market demand. So the businesses are having a very solid, good growth opportunities.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Research Analyst [34]

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Good. And then another question on cost. Now you talk about the input cost inflation, and we can see now that you have around 1% the input cost inflation in Q1. Now how should we look at Q2 and the rest of the year? Are you sort of guiding that -- this input cost inflation is set to accelerate toward sort of Q2, Q3 and Q4? And could you give a ballpark figure if 1% was the input cost inflation in Q1, what sort of would be the working figure going forward?

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Tapio Juhani Korpeinen, UPM-Kymmene Oyj - CFO and EVP of UPM Energy [35]

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I would say that it's -- we don't have a number for the inflation to give as such for the Q1 or for the coming quarters. Obviously, what you can see is the net impact in a sense of whatever is happening in our input prices, on one hand, in the market, and then on the other hand, how much we are able to sort of compensate for that to our own measures in terms of saving on variable costs. And again, in the first quarter, we were able to -- for the company, as a whole, as I said, it obviously -- the picture varies business by business. But for the company as a whole, we still had a kind of a small positive on that, so we were able to sort of do more than what we have. As a headwind from the cost factors, I think -- let's say, looking at many of the components going forward, I think there's sort of a cost pressure and pressure for increased costs will continue to be there in some cases. Like for instance, recovered paper, we have seen in the short term quite clear increases in costs, which perhaps are not yet fully felt in the costs and continue to sort of be there. So overall, I think this inflation will be with us most likely for this year at a moderate level. And then what we have to do is continue fighting it against or through the cost-saving measures that we have. And as said also, the overall dynamics, in a sense, have changed that we have -- as we see sort of cost pressure from our suppliers coming through the value chain, and then the sort of dynamics going further down in the value chain are different as well. So we are also seeing price increases for many of our products already at this point in time. Maybe just to sort of come back to the previous question that was around depreciation here, we checked the figure, and it's about EUR 32 million for -- per quarter for Q2 onwards this year.

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Operator [36]

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And moving on to the next line of Mikko Ervasti with DNB Markets.

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Mikko Ervasti, DNB Markets, Research Division - Analyst [37]

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My question is a little bit more detail on the delivery volumes and especially on the paper side. So the Paper ENA deliveries, about minus 2% year-over-year. You have the mill closures or the machine closures there. And I believe the market, that drops a bit faster. So what is driving this sort of outperformance there? And also regarding the Changshu further improvement, how much from here is now additional volume growth? And how much will be mix shift? Or can you perhaps work more on the costs there. What will be the sort of future improvement there?

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [38]

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Mikko, maybe I was not clear enough. The market for the quarter 1 in graphic papers in Europe declined only 1.8%. So the market demand in whole Europe was only 1.8% down, whereas our deliveries were 2% down.

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Mikko Ervasti, DNB Markets, Research Division - Analyst [39]

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Okay. But the -- is that the impact from the (inaudible)

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [40]

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That is -- we have always been -- when we are closing capacity, we are fully utilizing that in our high-operating rates, and we are utilizing those customers. We are not giving any of the customers to anybody else. We use them ourselves and improve our cost efficiency. Meaning that we are having a good utilization rates for the mills. But we have been very much online with the -- in line with the market. One market minus 1.8%, and our deliveries minus 2%. And then Changshu, I think that we are not going to go in any of the details. Definitely, we are now -- this is 1 year, 1 quarter that we have been running the mill. And I have to say that I'm absolutely pleased with the product mix development that we have been able to deliver and then of course the profitability. Therefore, further work continues on efficiencies on quality, on sales mix, and that's excellent achievement where we have been putting a new specialty paper line into the market and really have good benefit out of it.

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Operator [41]

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And moving on to the line of Linus Larsson with SEB.

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Linus Larsson, SEB, Research Division - Analyst [42]

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Couple of questions on capital allocation or a couple more questions maybe. Wonder if you could maybe update us if it's all possible around your thought process on potential further investment into biodiesel. Is that something that is closing in, in time? And if so, what sort of CapEx would that involve, do you think?

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [43]

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The question is obviously interesting, but the answer, most probably, is not that interesting. Because obviously what we have been saying for the capital allocation on that page, the last page that I was presenting, we are looking for many of the attractive and sustainable return investments. And like I said that biofuels and biochemicals are on our radar. What this is good news is that the current mill operations or current business, SBU, is working well, making good returns. And like I stated earlier, in last quarter meeting that we do have a 2 organization, one running the mill and the business and then another considering the growth options for the business. Obviously, we have a lot of ideas on biofuels, biochemicals. But also, like stated here, selected large growth investments as well. And then obviously, when it comes to the businesses, all of the other business is growth investment. So nothing to really report on that when or how and what. But obviously, a lot of preparation.

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Linus Larsson, SEB, Research Division - Analyst [44]

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Okay, fair enough. And also question on -- you've successfully invested in debottleneckings of your pulp mills. Could you say something about what's more should be done on that front in your existing pulp production?

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [45]

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That has been the kind of one of the great stories, Sargus and UPM, that when we started. To me, debottlenecking -- if you would have asked me that what next I would have said, "Let us see whether we will find any other before we were celebrating the first operating year we decided another debottlenecking." Because then of the 6 departments that the pulp mill is having, we saw that a -- we are gaining with a relatively small money, a lot of more potential, if we do so. And therefore, we decided a second phase for Kymi. Simultaneously, we made a decision on Kaukas. And that story will continue in a way or another, which has been the case. If you remember our good days when we acquired Uruguay, it was only producing 900-plus thousand tonnes less than 1 million tonne. And now, it's producing closer to 1.3 million tonnes. So we have been able to really take a lot of low investment money needed, the debottleneckings that has been really giving us a lot of new opportunity. I would guess that the similar type of things are still to come but not going any of the details at this stage.

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Operator [46]

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And moving on to the line of Simon Rowe with Henderson.

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Simon David John Terrant Rowe, Henderson Global Investors Limited - Portfolio Manager [47]

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Well, I hope it's not a repeat question. But I just wanted to be reminded of what the topics are when you look at your CapEx on Page 11, the -- what you call strategic investments? Do you break down what those topics are, what those main projects are, the green bit? I mean, I'm assuming the yellow is essentially maintenance CapEx.

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Tapio Juhani Korpeinen, UPM-Kymmene Oyj - CFO and EVP of UPM Energy [48]

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It's basically maintenance CapEx. We do not -- most probably, we announced all of the investments not the even all the -- how big are the investment. But this green bar is consisting all of the big ones or the major ones that we have bottled, so quite a lot of operative investments in all businesses, Kymi being the biggest of it. But nevertheless, they are quite many others, Raflatac is having Polish investment and so forth and so forth. So there are decisions on the operative scale. I do not have the list exactly, but they are -- I guess that we almost announce everything but not the -- what is the capital or CapEx for the investments.

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [49]

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The biggest ones we have announced, and you can see them in the quarterly report. Then there are, let's say, a number of smaller ones that we don't announce but which are ones that -- either add to the top line or bottom line or both that are sort of growing the business as opposed to the operational investments which are mostly about just either maintaining assets or maintaining the cost competitiveness of the existing assets.

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Operator [50]

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Thank you very much. No further questions in queue. (Operator Instructions)

And after no questions in queue, I would like to return the conference call to the speakers.

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Jussi Pesonen, UPM-Kymmene Oyj - CEO, President and Director [51]

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Yes, thank you. I think that is -- this was all. I think that this last page on our presentation is a good illustration what we are aiming in UPM. Operating model is really the core key cornerstone of what we do. Continuous improvement is in our genes now and then of course putting a platform to be able then to have attractive returns and attractive dividend and really earnings growth and evaluation, so that's something that we are aiming.

With these words, from my behalf, thank you for the participation.