UPM-Kymmene Oyj (UPM) Earnings Call Transcript & Summary

Hello, everyone, and welcome to this UPM Webcast on Pulp Growth as well as the Paso de los Toros pulp mill project in Uruguay. I'm Mika Mikkola. I'm the Head of Investor Relations here in UPM. And today's webcast is a continuation of our series of webcasts for investors covering various topics of importance in UPM universe. In September, we hosted our webcast on forest and energy-related topics covering our plantation operations in Uruguay, our forest in Finland, our wood sourcing operations as well as our energy business area and the energy consuming side of UPM businesses. And we also covered a number of sustainability topics in that webcast. So please go and check that out if interested on those topics in more detail. UPM Paso de los Toros is the biggest investment in UPM's history. And we do receive a lot of questions on the progress of the project, the cost competitiveness of the project ramp-up is to be expected, et cetera. And that's why we decided to host this webcast today, so that you can actually see yourself from the videos that we provide from the site, what it looks like, what is happening there. And you can also hear from the people in charge of the important topics going on. At the end of the event, you will have an opportunity to ask questions relating to these topics. Spoiler alert. At this point, the project is on time for the start-up by the end of Q1 2023. The cost competitiveness is intact. We have good confidence on the ramp-up and we do believe in the long-term fundamentals in the pulp business. So without further ado, let's get the event going. The first speaker today is Bernd Eikens, who is the Head of the UPM Fibers business area. Bernd, please.

And welcome, everybody also on my behalf. Before we go to the main part, which is the update on Paso de los Toros, which we will broadcast live from Uruguay, we just would like to review some of the fundamentals of the pulp market, how we see it, how it has developed over the last years. And especially the first 3 or 4 slides are well known to the ones who are following the pulp market already since a longer time. We have always talked about long-term mega trends which are supporting our business, whether it's a population growth in Asia, in particular in China. It is an organization, middle-class expansion, resource scarcity around the world, role of renewables replacing plastic, in particular, in the packaging sector. But overall, also, then the digitalization, e-commerce boom in the western world, in Asia, which are driving the fiber consumption, not only in bleach chemical pulp, but also in the brown grades. These mega trends will continue and they have continued also during the last 3 years, despite the fact that we have seen short-term impacts, for example, of the corona wave, short-term impact on the inflation, the Ukraine war, on the consumption pattern when it comes to, for example, chemical pulp. But nevertheless, we believe and we can also see in the long-term forecast, especially for example, when I refer to the tissue growth that these transient disruptions and these transient shocks, they will pass by. They have an impact. If I look at the overall forecast, which we, for example, published 3 years ago on the market, our market understanding there is a slight correction, but nevertheless, the overall growth outlook is intact and is unchanged. We see that the demand for pulp is growing. The demand for brown pulp for packaging grades, for example, containerboard is growing, but also cartonboard, spec paper and tissue, and it's growing faster than the decline of graphic papers. If you take a look at the consumption here, graphic paper is clearly declining, and that's what we can see, roughly, is it 4%, 5% per annum. But nevertheless, in graphic papers, if you look at the recipes, it's not a one-to-one decline with respect to the fiber base because a lot of pigments are being utilized in graphic papers. Opposite to that, especially in tissue, for every ton tissue is growing, it's more or less a ton of pulp grows. And that drives globally the growth also for bleached chemical pulp. The second growth segment is Specialty Papers, while chemical pulp plays an important role and then cartonboard, all these segments are outgrowing the decline we see in graphic papers. When it comes to packaging paper in general, especially the lack of RCP, for example, leads to a substitution of softwood bleached craft or, for example, unbleached kraft papers and pulp to make up for the lack of RCP in the market. That is visible already today. So if we look at the growth until 2035, our belief is that the global consumption of fiber will continue to grow at a healthy rate, outgrowing the decline in graphic papers, driven by a particular, I would say, tissue. More than 80% is coming out of the tissue segment when it comes to bleach chemical pulp, but then also spec paper and cartonboard. If you look at the supply side, we only see a moderate number of decided project in the next years. You can see here the forecast for '23 until '25, which includes also our Paso de los Toros project and a couple of others. We have not listed any of the market pulp exits, which are not decided, they come on a short notice. But more than 1.5 million tonnes have been exited the supply side on an annual basis. So that will also help even in the short term to moderate the situation between supply and demand. And looking beyond the 3 years we have mentioned here, it is clear that it is becoming more and more challenging to find suitable location for competitive chemical pulp mills. This applies not only to South America but also to other places, other countries, other continents around the world. Our product mix development, which started this year and was triggered by the Ukrainian war, which led to the lack of birch fiber for our finished pulp mills has led to the following situation: Softwood, due to the increase in our finished pulp mill has increased by 38%, so from 1.2 million to 1.6 million tonnes; 400 tonne in addition is slightly less than the hardwood decline, and I'm referring here to the birch pulp in Finland, and that is due to the yield in the pulp mills. On the hardwood side, when it comes to eucalyptus, we are growing due to the Paso de los Toros project, which is obvious. And in the birch segment, birch is a highly demanded product especially in the specialty paper segment. We have a limited capacity nowadays. And that is directly targeted to the customers who are really valuing birch pulp versus eucalyptus or then softwood fiber. So in that respect, we have a very healthy balance, a very attractive product portfolio for our customer in place, and we can also develop our finished assets based on this product mix further. Looking at our production portfolio at our production side, on the right-hand side, you can see the 3 finished pulp mills. And for all of them, they're highly integrated sites, whether it's Kaukas, which is quite unique with the biorefinery plus the sawmill and the paper mill, then we have Kymi is a modern paper mill attached to a modern pulp mill and Pietarsaari, an integrated site, whether it's energy production or sawmill production, all of them are integrated, all of them have a high capacity, if you make a comparison, the benchmark with pulp mills in the northern hemisphere. On the left-hand side, our eucalyptus plantation and the production platform in Uruguay, starting with the forest operations in the bottom, more than 500,000 hectares of plantation in Uruguay, we have a rotation time of 10 to 12 years. And by now, we have also a highly experienced team, especially when it comes also to R&D development, clone development, eucalyptus plants development. It is very impressive the way we are operating in the plantation space in Uruguay. Based on these plans, we are then converting them to pulp today in Fray Bentos, the pulp mill was 1.3 million tonne capacity and a significant energy generation, 8% of the energy and overwrite generated in Fray Bentos. On top of that, we will have, in the next year, a 2.1 million tonne Paso de los Toros mill start-up, as Mika already mentioned, is projected to be in quarter 1 '23. It is a state-of-the-art machinery, as you can imagine, state-of-the-art processes, but it's also more or less a one-to-one copy and increase of the pulp mill in Fray Bentos. A lot of synergies to be harvested, not only on the plantation side but also on production, on maintenance, on logistics. And this is a platform which will be beneficial for us for a long time to go. Before we now continue to discuss Paso de los Toros project with Petri Hakanen, let's have a small video on the progress we have made so far. [Presentation]

There you've got a nice glimpse on what it looks like at the Paso de los Toros site today. Now we will go more into the details and our next speaker is in Uruguay, it's Petri Hakanen who is the Head of the Uruguayan development projects. Petri, please.

Hello. Good morning, ladies and gentlemen, or good afternoon, should I say, and greetings from Uruguay. So as said, my name is Petri Hakanen and I'm running this development project down here in Uruguay. And I'm going to give you an update of the growth investment status here today. Let's put us first on the map. Here you see how we are actually located here in Uruguay with our current operations as well as with the new platform under development. UPM has been present in Uruguay for a long time since 1997 as we started the plantations here. Our current operations consist of the forestry operations, i.e., the eucalyptus plantations, nurseries, Fray Bentos pulp mill started 15 years ago and the logistics were through the Nueva Palmira port. New mill scheduled to be started up by the end of Q1 '23 is located in Paso de los Toros in the middle of the country. Specialized pulp terminal, deep sea port is located in the heart of Montevideo and will be our new door to the world. The rail connection -- the new rail connection, which is the government-led PPP project between Paso de los Toros and Montevideo will enable the cost-efficient, environmental-friendly and safe transportation of pulp and chemicals. Map also shows how well our plantation base, the green areas located to serve pulp production, both in Fray Bentos and in Paso de los Toros. This investment is indeed a transformative growth initiative. And while the construction of the 2.1 million greenfield pulp mill is a challenge in itself. What we are doing is a completely new industrial platform to secure, as Bernd said, a secure wood supply, new state-of-the-art pulp connected by the rail to the deep sea pulp terminal with a direct access also to all the main markets we dedicated ocean vessels. Regarding securing wood supply along this project, we have also increased our nursery capacity by building a new facility in the middle of the country, a small village called [indiscernible], reaching the total capacity of 45 million seedlings with 3 nurseries going forward. New setup is bringing additional benefits regarding cost supply security for our operations here in Uruguay as Fray Bentos volumes will continue to go through Nueva Palmira port when the ships will be half loaded and continue to the Montevideo to be top loaded with Paso de los Toros volumes. This makes us an independent on the other cargos in the region compared to the current state. Moreover, example of the synergies in our 2 mill concepts, certain chemicals used in production in Paso de los Toros will be produced in chemical island in Fray Bentos expanded by Kemira. Regarding the wood supply for the new platform here in Uruguay, today, we are ready. We are ramping up the forestry operations by harvesting loading, transporting as planned. And as we see today, the first wood trucks arrived to Paso de los Toros site for testing purposes. As mentioned in the plantations, visible in the map are well located to serve the both mills going forward. Regarding the new mill in Paso de los Toros, we are today in the very final stages of the project before the start-up. The new mill is, for sure, world-class it's a single-line pulp mill with the best available technologies. Experiences we have in the company and our main key suppliers are surely utilized to develop the processes and to fulfill the more demanding requirements when it comes to the environmental performance, safety, mill availability, efficiency and also very importantly, pulp quality to meet our customers our expectations. The new logistics setup is also already. The new pulp terminal in Montevideo port is operational. We inaugurated this modern and efficient facility 2 months ago, and this is the only deep sea port in the whole region capable to receive ocean vessels with a draft of 30 meters. When the pulp mill will start, we will be operating 24/7, and there will be around hundreds-odd ships a year visiting the port. When the pulp mill will start, we will start the pulp transportation first with the special truck traders tailored for the pulp transportation. When the rail connection is ready, we will receive 4 to 6 pulp trains a day and 1 chemical train a day to deliver the chemicals to the mill in Paso de los Toros. On top of the port terminal and the rail connection, a lot of road improvements are also carried out in different parts of the country to enhance, particularly the wood transportation to the mills. But let's see next a short video of the first ships arriving to our pulp terminal in Montevideo. [Presentation]

Okay. Let's go back to the pulp mill and discuss a little bit about the current status there. This picture illustrates the pulp mill construction phases in general in our project. As said, we are very tail end of the mechanical, automation, electrical works and basically in the middle of commissioning, testing and water runs. Today, the commissioning proceeds at intense pace preparing the way to the start-up. Okay. Let's zoom in on Paso de los Toros. This is the mill site how it looks like today. I will walk you shortly through of the mill. The mill is located in the southern side of the Rio Negro river and fenced area is about 360 hectares. Here you see the mill entry point where the wood trucks are coming in and basically also the pulp trucks in the beginning are coming out -- going out. And here is the woodyard which is about 30 hectares where the wood is stored before it's going to the shipping or shipping lines and through the wood handling processes. Continuing with this container to the fiber line, where the real pulp making is happening, the cooking and bleaching in the fiber line processes followed by the train unit. We have 2 train machines in this train building and then 6 -- lines before the loading area. And first, we start with the truck traders, as said, but once the rail connection is ready, we will start regular use of trains and then the exit point of the mill will be here for the pulp. And then today, in the first phase, we will start using the truck trader asset and this is the [indiscernible] next point at that moment. The other important process areas here are cost recovery boiler and the other boilers related. We have turbines here, turbine haul and then water treatment in the middle of the plant and other subprocess areas here as well. Important part as well is the effluent treatment plant, which is here in the upper right corner, primary clarification equally based in the secondary clarification and aeration. And here in the water front, you see is the water intake where we pump the fresh water to the mill and then also this starts the effluent when the mill is up and running. And this is how the mill is look like today. But if it -- a bit about the status where we are actually, this is how it looks. So the machinery installation is practically completed. As said, we are very, very final stages in mechanical, electrical, instrumental and automation works. Testing and commissioning has started and is progressing and ongoing basically in all process areas and incredibly completing area by area. Water intake, water treatment is in use and naturally fully tested and commissioned as you see in the green in this feature. Soon we will see much more green pictures -- green boxes or so when we are going forward. This is a simplified process description of the -- how the pulp is made. And in commissioning, we basically test and secure all the departments, process areas to ensure a successful startup. The first step was to test water intake and treatment processes and then commissioning continued with the boilers to enable the steel production and now move on the other process areas as we speak. Today, the current status is the boilers, auxiliary boilers, power boilers are commissioned water intake, water treatment is in use, process air systems are in use, recovery boiler, testing is in the final stages and advancing well. And then as I said, commissioning continue with the other areas, paving the way to the startup. As Mika mentioned in the beginning also, the discussion has been also how the startup will be, once the mill is tying up, the main focus will be stabilizing the processes to ensure the constantly reliable and smooth pulp production. Normally, pulp production process creates a steep ramp up curve, which is, of course, based on thorough testing and commissioning. The key objective as said is the stable production and quality. This takes some months and nominal capacities to be achieved within the first running year. We are confident to have a successful startup. We have a very experienced team in place here. We have a well-known technology a supplier who is capable and has been running and starting up these kinds of mills around the world. And on top of that, of course, the proven material base, we have been operating Fray Bentos mill utilizing the eucalyptus there for a long time. So we are confident for the success of the start-up. Then, of course, also mentioned, this cash cost of USD 280, what has been the indication and the wood cost is the individual main element when pulp making and considering our own and leased plantations locations -- optimally located nearby the mills, improved and advanced logistics, we are gradually increasing the freight trains towards special vehicles to improve the logistic woodworks logistics to the sites. And then optimizing the 2 mill concept as mentioned also earlier. The other areas, of course, we have a long-term contracts and visibility there regarding the surplus electricity inland and also in traffic and logistics and the chemicals produced in Uruguay. Of course, on top of that, the scale of economics, and as mentioned earlier are increasing the confidence of this cost level as we have been indicating. Okay. Ladies and gentlemen, this was my part today. Thank you.

Thank you, Petri. So there will be new pulp produced by UPM. So the last part of the presentations before questions and answers is the commercial strategy. So Bernd will give you some highlights of that next. Bernd, please.

Thank you, Mika, and thank you, Petri. So as we have heard only good news from Uruguay at this stage, the pulp mill will be ready as promised. The cost competitiveness is there. So the only thing which is left is to bring it to the customer and to sell it successfully. So how do we plan to do it? If you look at the segments, which I described earlier today, tissue, packaging, spec paper, graphic paper, we have seen the growth segments, we have seen also the regional growth, which is also depicted here in this picture. So the global growth is happening more or less if you look at the map, more in the Southern Hemisphere than in the Northern in particular, if you look at Europe and North America, they are growing at a level of 1% to 2% while especially Latin America, Africa, other Asian markets. But then at the end of the day, China is growing and is basically the growth machine for bleached chemical pulp mill in the next year in the next decade. But on the other hand, if you look at the total map, there's hardly any area which is not growing. So hence, we need to be prepared also to cover the growth in the main markets. And that these main markets are for us, of course, APAC in Europe, where we have been present in the past, but then also North America. We have established competitive routes from Uruguay and from Europe to the various markets. We have a good solid contractor and supplier base when it comes to logistics services, not only within Uruguay but also on the shipping lanes. Here shown the expansion from Uruguay to North America, but then also to Europe and to Asia, and the newly established, in particular, for the softwood business from Europe to North America. So this is basically the regional coverage for us. And that is also described in our commercial strategy, which we have summarized in the 1 pager. We have 3 categories there, the value proposition, referring to the quality. Our quality -- our pulp quality is well liked by our customers, whether it's in tissue, in spec paper or in graphic paper. And there, of course, it helps that we are able, to a large extent, to develop these pulp grades and the pulp quality together with our customers, whether they are in-house or whether they are external. We have seen multiple projects with customers where we have refined the quality to the needs of the customers. We are serving future winners in particular, also in the spec paper business area and in the tissue business area or in the cartonboard area. We are serving multiple end use segments with multiple products with birch, with eucalyptus and with softwood and there's hardly any competitor who has the same product portfolio to offer. I mentioned already our expansion when it comes to the region. APAC and Europe, we have a very solid customer base, which is eagerly awaiting the startup of Paso de los Toros. But then we have also made now inroads in North America and created a starting point to grow also significantly our position in the U.S. market. We are ready for selling 6 million tonnes when it comes to the organization. When it comes to the processes and tools, we have made significant investments over the last 3 to 5 years in this area from a new SAP platform to new customer online and sales force tools, which we are using internally all together with our customers, and we will continue to invest in this area. And we will continue to invest in this business for the long-term profitability of UPM Fiber. We strongly believe in the successful future of our business area. Thank you very much.

All right. Thank you, Bernd, and thank you, Petri. Now we start the Q&A session of this event, and we have already received a fair number of questions and feel free to type in further questions. But let's get started. Some questions about the logistics concept, so the railway to the port in Montevideo. So when do we expect that railway to be available? And how important is that to the cash cost of the mill or the operation? Who would be, Petri -- is Petri?

Petri, do you want to answer or I go first? We always have a plan with 2 alternatives for the logistic connection between Paso de los Toros and the mill to ensure also that we can deliver at times when we have problems, for example, in the railway or when there are maintenance breaks. So in that respect, this was planned from the very beginning. Now the railway, as we see it right now, based on what we hear from the consortium should be ready by the middle of next year, roughly, so slightly later than the pulp mill startup. But nevertheless, we have this truck fleet already prepared for it. The infrastructure is ready. The street is there, the connection is there to the port. So we have an alternative plan, which can also then work in times when the train is not there. When it comes to the cash cost, I would say that the cost differential is not significant given the cash cost level we have indicated. So it's far below 10%, even below 5%, I would say, of the total cost.

There was kind of another question related to the logistics. It was kind of about the landed cost to China, but this is the kind of delivered cost per tonne, the USD 280 that we have provided. So that includes the logistics setup as well. Then kind of in terms of inbound logistics, there is a question about how is the roundwood Logistics organized in Uruguay. So what can we tell about that? Of course, we did have some coverage on that in the Forest and Energy webcast as well, but.

Petri, if you want to go?

Okay. So yes, what comes to the wood logistics here in Uruguay, this is more or less like an expansion of our current operations, expanding the whole forestry operations. Regarding the transportation, it's a truck transportation as we are having today, but also we are -- new truck starting to be credibly in use. We called them 3 trains. They are like bigger trucks than the current ones and then improving the efficiency and reducing the number of trucks coming to the sites on a daily basis.

And then in addition to that, we have also expanded the plantation platform in Uruguay from the western part of Uruguay into the central region, where we have Paso de los Toros now located. So that gives us opportunity also to optimize the total inbound logistic cost when it comes to the wood logistics between Fray Bentos and Paso de los Toros. And it has a significant impact, we can see it already on the cost side of Fray Bentos.

Right. When I was visiting Uruguay last time, there was a fair amount of kind of road improvements going on as well. So that is probably kind of helping the logistics as well.

That's true.

Then about the kind of a bit beyond the ramp-up question, whether there is potential to kind of expand beyond this 2.1 million tonnes once it is reached first. So any thoughts, is that possible? Is it in your minds?

Of course, there's always a potential, and it is in our minds. But our focus is now to get Paso de los Toros up and running. And then we will see what we -- and where we can grow then afterwards. Clearly, what we have communicated and also from a corporate strategy, fibers is one of the spearheads for growth, and that means that growth will not stop with Paso de los Toros.

Then there is a number of questions about the ramp-up. And of course, probably can't go into very much detail but kind of a -- there are kind of questions like how quickly will this kind of cost level be reached? And how long will it take to reach nominal capacity? What to expect in the first year of operation? And how quick such an operation to reach breakeven, there's kind of number of very detailed questions and probably we'll not...

I think the first part was already answered by Petri looking also at the curve, which illustrates basically ramp-up. I mean once the first pulp has been produced, we will then start to qualify the pulp with various customers, and that has been already prepared today, whether they're in Asia, whether they're in Europe or in North America, we will ship immediately the first pulp from Paso de los Toros to these customer base. Once the pulp is qualified, then it goes basically becomes part of the commercial contracts and the deals we have partly in place today or which we will make in '23 with our customers. Looking at the technical side, like Petri said, I think a realistic number is somewhere between 6 to 12 months as a start-up curve from 0 to reaching at least a nominal capacity of being close to the nominal capacity.

Petri, there's a question, do you see kind of what -- are there any kind of remaining uncertainties regarding the commissioning of the pulp line? So is there anything keeping you awake at night or...

Well Mika, the next milestone is, of course, to complete this construction works and ensure the start-up capability, testing and commissioning is really ongoing right now, and we are proceeding very well there. One thing, of course, what is also -- there was also mentioning the permitting process continues here in Europe. And with this the Uruguay all stages of the project must be permitted and obtain the final startup permit. There are multiple steps in the permitting process, which is, of course, continuing also according to the plans and schedules. Something to add on the technical matters we are doing at the site.

Right. Then a comment you have maintained the USD 280 per tonne cash cost in the current inflation environment, which is a good achievement. A question then related to that, how much of continuous cost improvement is required in that? And how quickly do you see that this kind of -- or close to this kind of cost level can be reached? Is it kind of how dependent is it on the production level?

Of course, it depends on the production level, especially the sender startup curve. You're not at the USD 280 level. On the other hand, what we see already today is the benefit which we gained also in Fray Bentos case, from the second mill, which we have not included in the USD 280. So clearly, we can see the benefit today and we're doing the start-up phase of Paso de los Toros already in the Fray Bentos case. And thereafter, then we will see the USD 280 cost level in Paso de los Toros case. So that's what the simulation have shown that we can achieve it. Due to the long-term contracts which we have made with some of our contractors and due to the fact that we control the cost base through our own plantation.

Yes, exactly. Then on the commercial side, a question about ways how customers contract for pulp. So are any customers looking for kind of ways to achieve more stable prices or -- is that something that we are looking into or...

That's, of course, a topic looking at the volatility of the pulp prices globally. There are a lot of customers who are interested in more stable pricing. And mainly, it's driven by the fact that they have 6 months, 12 months contracts with their own customers. So they look at their own commercial situation, how can they control their cost or then include basically the pulp prices in the negotiations with their customers, but it depends on the segment.

Back to cash costs. Of course, we do not comment on kind of the cost level, on unit level, but anything we can kind of say about Fray Bentos' kind of how big is the cost difference are not going into numbers, but...

I think it's a very competitive side, also compared to Paso de los Toros.

Yes. And will be more so once Paso de los Toros is up and running, and we can optimize the 2 mill concepts.

And then, of course, if you look at the footprint of the plantations, historically, we had more plantation in the western part, as I said earlier. And therefore, Fray Bentos might even benefit more from the inbound logistics optimization than Paso de los Toros, while Paso de los Toros once it is up and running, has a lower variable cost manufacturing cost base than Fray Bentos.

Exactly. Just gunning through this, is there still something that we haven't covered. About the plantations in Uruguay, is there kind of room to grow within our current plantation footprint or would we still kind of develop that further going into the future? Now we have enough for the current footprint of course, but.

Yes, I think it's a continuous start to develop it further and to optimize it further. Also within our own portfolio, for example, we have certain areas where we have pine plantations, which are then being converted to eucalyptus. And this is a continuous exercise and task. In Uruguay we have the Forestry Act like it was described in the previous podcast about the forestry sector in Uruguay. So there is room to grow also the implantation within this constraint given by the Forestry Act.

Well, I think we have covered quite well the questions here. So I think we are then kind of start to be on the finishing line. Thank you, everybody, online for your interest on our pulp growth and the Paso de los Toros project. And thank you, Bernd and thank you, Petri. And I wish everybody a great holiday season.

Thank you.

Thank you.