UPM-Kymmene Oyj

OMXH:UPM

Earnings Call Transcript 2021-Q1

[Jussi Pesonen, President & CEO]

Ladies and gentlemen, dear audience, welcome to UPM's Quarter 1 2021 Result Webcast. My name is Jussi Pesonen. I'm the CEO of UPM; and I'm here with our CFO, Tapio Korpeinen.

[Tapio Juhani Korpeinen, CFO & Executive VP of UPM Energy]

Hello to everyone.

[Jussi Pesonen, President & CEO]

The year 2021 has started well for us with clear signs of recovery in the world economy, and UPM entered the year well prepared for the turn of the markets. Last year, we took timely actions to secure our performance. Now that the economy is recovering, we have a good momentum in our earnings. Earlier this month, we raised our profit outlook for 2021. Already in Q1, our comparable EBIT recovered back to the pre-pandemic level. At the same time, we are very excited and in the intensive phase in UPM's transformation. I'm proud to say that our 2 transformative projects, both are proceeding on schedule and on budget, and this all in the exceptional times.The pulp mill project in Paso de los Toros represents a step change in UPM's future earnings. And the scale of our pulp business, the pulp business will be scaled up more or less 50%. And the scheduled start-up time is in the second half of next year. The new to the world biochemical market refinery in our Leuna operations is opening a totally new exciting growth business. And the scheduled start-up for that is by the end of next year. In addition, we started a basic engineering or potential next-generation biofuels refinery in January this year. Ladies and gentlemen, but this is not only pulp business and all future growth projects that are performing well. Our specialty packaging value chain, i.e., Raflatac and Specialty Papers, did excellent result as well. On our financial position, it continued to be very strong with little net debt in our balance sheet at the end of the Q1. This means that we can simultaneously pay an attractive dividend to our shareholders and invest in the transformative growth projects. Our Q1 sales was 2% lower than that of last year, about EUR 2.2 billion. Demand was good or even strong for almost all UPM products. Sales prices increased for many products and particularly for pulp. In Q1, biggest improvement in earnings came from biorefinery and Biorefining business. At the same time, Raflatac, Specialty Papers and our Energy business continued their strong performance. In fact, Raflatac achieved record quarter in earnings Q1. Graphic paper demand and prices decreased in Q1 as expected. In this difficult market environment, Communication Paper business area achieved satisfactory Q1 result with competitive cost, good asset utilization rate and commercial success. During the pandemic and the resulting period of uncertainty, our focus has been very clear. First, we have taken a lot of actions to ensure and prepare ourselves for the future to ensure our performance in all operations, timely actions, focus on efficiencies and success in commercial front. Second, we have focused on securing the successful implementation of our transformative projects. And thirdly, we have continued to develop the next strategic growth opportunities in biofuels. We can report good progress in all these focus areas. We saw a turn in our product market and markets in China already last autumn. In Q1, the strong demand in China continued, and the positive signs were visible more widely in other markets as well across most of our product range. The pandemic and the related containment measures continue to impact demand for some of our products. Changes in consumer behavior continue to support demand for daily consumer products and typically e-commerce. This further was supported to the strong demand for self-adhesive labels and specialty papers. And these 2 business areas were representing 31% of the Q1 sales and EUR 160 million as a kind of combined EBIT, being more than 15% of the EBIT margin. Correspondingly, the pandemic continued to affect the demand for graphic papers. In Q1, European demand decreased 14% year-on-year, at the same pace as in Q4. You may recall, the April last year was the first month and Q2 the first quarter when paper demand was affected by pandemic. But at this point, ladies and gentlemen, I will hand over to Tapio for some more analysis of our results. Tapio, please.

[Tapio Juhani Korpeinen, CFO & Executive VP of UPM Energy]

All right. Thank you, Jussi. And here, we have our regular slide showing the comparison between the first quarter last year and then fourth quarter last year. And first, starting from the left-hand side, you can see our EBIT development year-on-year. And there, Q1 comparable EBIT, as Jussi mentioned, EUR 279 million, was on par with the first quarter of last year. Paper prices decreased from last year, and this outweighed the positive impact that we had coming from variable costs. Fixed costs were lower by EUR 22 million. And then looking at the right-hand side, you can see the comparison to the last quarter of last year, where the first quarter EBIT now increased sequentially by 11%. On the group level, both sales prices and delivery volumes increased as compared to the fourth quarter. Variable costs increased partly due to regional seasons. Fixed cost came down also due to seasonal reasons and due to the fact that in the fourth quarter last year, we had 2 pulp mill maintenance shutdowns, which increased fixed cost in the fourth quarter. Then on the variable cost, there is also a sort of detail in that in the first quarter now, we sourced less wood from our own forest in comparison to the fourth quarter. At the EBIT level, it doesn't, in a sense, have much of an impact. But in the sort of sequential comparisons, it means that on one hand, it increases variable costs, but then also the fair value of forests are increased by a similar amount. Then on this slide, you see the quarterly development of EBIT by business area. And they're starting from the upper left-hand corner, Biorefining increased its earnings both year-on-year and also sequentially from the last quarter of last year. Demand was strong. Sales prices increased for all the products in Biorefining, pulp biofuels and sawn timber. The increase in pulp prices was even faster than what we had expected. Our average pulp price in terms of euros for the deliveries was 8% higher than in the fourth quarter or 1% higher than in the first quarter last year. In Q1, now there was no significant maintenance activity, whereas in the fourth quarter last year, the impact of the 2 pulp mill maintenance shutdowns was around EUR 50 million. Now looking into the next quarter, in Q2, at the moment, we are having the maintenance shutdown in Fray Bentos pulp mill in Uruguay, and the impact on the second quarter EBIT is estimated to be about EUR 30 million. If Biorefining was the biggest improver in absolute terms, the star performers in the first quarter continued to be Raflatac and Specialty Papers. Both businesses reached record-level results last year. And then coming into this year, they were able to maintain healthy unit margins. Raflatac's deliveries matched the tough comparison figures from last year, whereas in Specialty Papers, the deliveries grew by 12% year-on-year. Specialty Papers achieved one of its best quarters, and Raflatac, again, made a new record in terms of the quarterly performance.Communication Papers achieved EUR 20 million in comparable EBIT in the first quarter, which clearly is a satisfactory result. Following the capacity and cost reductions, the actions that we took during the second half of 2020, now Communication Papers had competitive costs and achieved good asset utilization rates in the first quarter. Delivery volumes declined by 8% from last year, which means they declined less than the market demand declined, which was at 14%. Profitability in Energy business continued on an excellent level. Electricity prices increased, and we succeeded well in optimizing our hydropower assets in the volatile power markets. And finally, Plywood delivered steady results. Demand started to improve for Plywood also in the industrial end users. Referring to the point that Jussi already touched upon earlier, here, we have some notes around our UPM Raflatac and Specialty Papers, which form one of our focus areas for growth, the specialty packaging materials space. The long-term market fundamentals here are attractive, and UPM has a strong position with clear competitive advantages in both businesses. These are businesses that are of lower capital intensity, therefore, also investment projects typically are clearly smaller in size if you compare with the other spearheads of growth that we have, pulp or biochemicals or biofuels, which then tends to mean that they get, perhaps, somewhat less attention. So that's why we wanted to highlight the 2 businesses after another set of strong results and, as I said, also kind of after reaching record-level performance last year. The 2 businesses are operating in a relatively fast-growing niche parts of the package value chain. Demand growth is driven by global consumer megatrends, sustainability and also by, obviously, e-commerce. Both business areas have a range of different products. And the product mix is increasingly consisting of innovation-driven, technically demanding products. And sustainability is a key success factor and also a driver for product innovation in both businesses. And finally, again, as Jussi referred to earlier, the financials speak for themselves. Together for the 2 businesses, they represented 31% of UPM's first quarter sales or 42% of our EBIT. Both achieved very good EBIT margins, exceeding 15% in the first quarter. And return on capital employed was almost 48% in Raflatac and 25% in Specialty Papers. Even if the businesses perhaps currently are enjoying some, let's say, extra market tailwind, still, let's say, the underlying fundamentals are very strong going forward. And these highlights show why the businesses are among our spearheads for growth. This slide summarizes the actions I mentioned earlier when discussing Communication Papers results. And obviously, the actions go beyond Communication Papers. The conversion of Nordland paper machine #2 from Communication Papers to Specialty Papers took place early last year. The other capacity actions listed here took place during the second half of 2020. The total reduction of UPM graphic paper capacity last year was 1,160,000 tonnes or 15% of our capacity. And with the planned sale of UPM Shotton, the capacity reduction for UPM will increase to 1.4 million tonnes or 19%. In addition, we have taken action in several other business areas and functions to improve UPM's cost efficiency in all corners of the company. All this enabled us to have competitive costs and good asset utilization rates in the first quarter in Communication Papers. This is the way we have generated strong cash flow in the Paper business in the past, and this is how we believe we will continue to generate good cash flows in the future as well. Of course, we have not been alone in addressing the weak paper markets in 2020 and in 2021. So far, the European graphic paper industry has implemented or announced permanent closures totaling about 5.4 million tonnes. Here is the slide on our cash flow. Operating cash flow increased to EUR 217 million in the first quarter. Working capital increased -- increased by EUR 122 million in the quarter, which is typically what happens in the first quarter and first half of the year. We tie up cash into working capital seasonally. And here, we have the financial position of the company, and that continues to be, obviously, very strong. Net debt, only EUR 83 million at the end of the first quarter. Our cash funds and committed credit facilities totaled EUR 3.2 billion, so liquidity, also very strong. We issued our second green bond during the first quarter, EUR 500 million green bond with 10-year maturity. And there are no financial covenants in the facilities or in our bonds. And then to the outlook. As Jussi mentioned, we raised our profit outlook for 2021 on April 15. We expect the global economy to start recovering during this year, and that drives demand for many of our products. The improving global economy and, let's say, improving business activity also means that we expect many variable cost items to start increasing as well. However, we expect that we will be able to manage our margins with product pricing, with optimizing our product-market mix, efficient use of assets and by taking measures to improve variable and fixed cost efficiency. All in all, we expect our comparable EBIT to increase, both in the first half of 2021 compared to the first half of last year and for the full year of 2021 compared to full year last year. So now I will hand it back over to Jussi for an update on our growth projects.

[Jussi Pesonen, President & CEO]

Thank you, Tapio. And no surprise, our focus in coming quarters will continue to be unchanged. We aim to capture opportunities on the recovery markets with efficient margin management. We also continue to take measures to maintain cost efficiency in all our businesses and our functions. And then we continue working hard for the safe and successful implementation of our transformative growth projects. And then, of course, the basic engineering for the future growth opportunity in biofuels is in our agenda. So very clear focus and efficient implementation of those. This slide illustrates UPM's transformation and impact on our spearhead for growth strategy quite nicely. There are 2009/2020 and then the future sales of UPM and future position of the UPM. In this comparison, our gross sales has remained basically the same in between these 2 years, 2009 and 2020. However, we have achieved significant growth in the businesses with strong long-term fundamentals and high barrier to entry business areas. In the growing businesses, our average EBIT margin has been 3x higher than in the declining Communication Paper business. This is changing our business and profitability mix significantly and also structurally. At the same time, we have maintained an average EBIT margin of 5% and consistently strong cash flow. I underlined that strong cash flow in the declining Communication Paper business. Over the last 5 years, we have been generating close to EUR 2 billion of free cash flow in our Communication Paper business. The 5% EBIT margin and strong cash flow is something that we are actually aiming for the future as well. Going forward, we will continue to take actions to ensure performance in all our businesses, no surprise, including also all paper businesses, pulp businesses and what have we. However, we are also taking clear, large growth steps, as you can see, in this. With the transformative growth projects, we aim to achieve even higher margins and attractive returns on investment. And I believe this will further drive our future earnings as well as future improvements, and we will be newly positioned in the company. Here, already coming back almost what Tapio went through, we can see the comparable EBIT, return on equity and balance sheet development. But highlighting the issues that how well we have been managing the business, we are able to drive UPM's earnings and returns structurally higher and this is due to improved performance in our business areas, significantly improved business mix and combined with the good return investments that we are currently implementing. Our balance sheet is very strong, in totally different shape than in the past, and we aim to keep that in excellent shape. As Tapio described, we expect our comparable EBIT to increase in 2021. Our return on equity was 9.7% already in Q1 so getting back towards the targeted level. Year 2021 will be intensive year of construction and preparation for pulp project in Paso de los Toros in Uruguay and for the biochemicals project in Leuna in Germany. On this slide, you see our estimate on how the total CapEx will be divided between 2020, 2021 and 2022. The estimate is unchanged. This year, UPM total CapEx is expected to be around EUR 2 billion, including EUR 1.8 billion on these transformative growth projects. This slide is showing that many things are now happening. This is a construction site pictures from Uruguay. The site is currently employing 4,000 workers, and the number will increase when it's on the peak, around 6,000 later this year. Due to pandemic, we have further reinforced the strict safety protocols at the construction site. So we do everything. We work hard to really take all the measures needed. At the pulp mill side, civil works continued to progress in all main areas. The mechanical erection phase started in January this year. And a large-scale cargo transfer of the machinery equipment and structures to the new pulp mill started in February. At the Montevideo port, a large part of the pulp terminal are already completed. Works continues on unloading area and port dock, while the construction of the main pier and tanks are proceeding well as in schedule.Moving to our German project, Leuna, our biochemicals project. Here, you can see some views of the biochemicals refinery construction site in Leuna. The construction is proceeding as planned with excavation works, preparations for laying foundation and connections to utility supplier are under way. Simultaneously, with the construction, we are setting up the business for the eventual market entry. This includes working in concrete customer cases in all main product areas. In January, we announced starting a basic engineering phase of the potential next-generation biorefinery which would be capable of producing 500,000 tonnes of high-quality renewable fuels, including sustainable jet fuel as well. The potential new refinery would scale up our successful biofuels business into a significant size within our business portfolio. It would have access to a wider range of sustainable feedstock, i.e., the raw materials within UPM value chain, and it would achieve a uniquely high CO2 reduction compared to biofuels currently on the market. The basic engineering is expected to take at least 12 months before we are ready to start analyzing and preparing an investment decision FID. If everything goes well, this could be eventually become our next transformative growth project. Coming back to this slide, this shows our spearhead of growth, and we already talked about the specialty packaging materials as Tapio and myself, we were expressing that this is basically already 1/3 of the sales, 1/3 of the profits, and we do have aspiration to grow that business area for the future. Today, we have reported another set strong earnings, like I said, in the specialty packaging areas, but also in the middle, we talk about our pulp growth and, on the right-hand side, our biomolecular products. So this picture, as you remember, was launched 2018, and now it starts to become a real, real benefit and asset for UPM transformation. Moving to the delivery of positive impact to mitigate climate change and really creating a long-term value. Sustainability is good business. While we are transforming the company, we also deliver positive impact to mitigate climate, and we really enhance biodiversity as well. We strive to innovate climate-positive products that allows our customers and end users to make more sustainable choices. Our growth plan in biochemicals and biofuels are prominent examples of this taking place right now. Furthermore, we have ambitious long-term climate targets, including significant reduction of CO2 emissions. UPM has committed to reduce our CO2 emissions by 65% by the end of 2030. We have also, during the first quarter, joined a climate pledge aiming to reach Paris Agreement targets 10 years in advance. And we have also committed to UN Global Compact Business Ambition for 1.5°C and science-based measures to mitigate climate change. As I said, I firmly believe sustainability is good business. Ladies and gentlemen, I'm not going to go through this list of actions. The year started well. We are well positioned. Our balance sheet is strong. Our growth projects, we work hard on those and to mitigate all the pandemic effects. And they are on time, and they are within the budget that we have set for those projects. So ladies and gentlemen, with these words, this is the end of the prepared part of the presentation. Dear operator, we are ready to take Q&A session.

[Operator]

[Operator Instructions] Our first question comes from the line of Antti Koskivuori of Danske Bank.

[Antti Koskivuori, Analyst]

Congratulations on a strong start to the year. I have 2 questions, and first one is on Communication Papers. I think it was quite remarkable achievement to kind of have flat sales prices versus the kind of meaningful drop in the European paper prices in the start of the year. If you talk a little bit about the positive mix impact, is it coming from the customer mix or product mix or both? And should we anticipate the change in the mix to be kind of permanent in the nature? Or is it more realistic to assume that your average sales price will take more of the direction of the market prices in the coming months? That would be the first question. I'll come back to the second one later on.

[Jussi Pesonen, President & CEO]

Yes, Antti, thank you for the question. It is obviously when UPM takes timely actions to actually run the business efficiently, it is not only closing capacity or reducing capacity that is part of that. But then commercial success is as well very important on this whole thing. And obviously, it is coming from product-market mix that -- where we have been able to be quite good on commercial side. Whether that will be permanent for all of the -- around the year remains to be seen, but this is a good showcase that what can you do when you really actually put a strategy in place in commercial front, not only in the commercial but also in the supply chain, that you use prime roots and then run efficiently with high operating rates, your assets. The result is evitable as we have seen in Q1. And when you take timely actions, then you have all the time to prepare how you operate also in the market. So basically, this is a kind of combination of many things that we have been doing in the business. Yes, it is product-market customer mix that we have been able to improve and optimize.

[Antti Koskivuori, Analyst]

Okay. Great. Then second question is on the variable cost side. You used -- a lot of the cost items increasing over the 2021. I was just wondering if you could elaborate a bit on which cost items you are seeing the biggest pressure at the moment. Also, if you could give a sense of what is the level of the increase you expect to see in variable cost in '21 would be very helpful. And maybe finally, is the kind of cost increase that you expect, do you see it more like a gradual coming to the numbers over the course of the year? Or is it more tilted towards the closest quarters?

[Tapio Juhani Korpeinen, CFO & Executive VP of UPM Energy]

Yes, if I comment on that, well, first of all, one thing that is always important to remember in our case when we are looking at this cost impacts and also, let's say, these comparisons but also, let's say, our ability to manage costs and margins, you have to remember the business model that we have.So on these variable cost items, we have costs such as pulp, energy, release liner, label papers, which are costs for those businesses which are consuming those production inputs. So of course, as an example, pulp has been a cost item that now is moving up, but then it is also a positive for our pulp business. Energy costs have been high in the first quarter, and that has been, obviously, a variable cost increase for power-consuming businesses, but then it has been a positive for the energy business area. So that is one thing that is obviously important to keep in mind. We do have other areas on fiber, recovered paper as, I think, is public information that market has been tight in Europe for recovered paper, so that we have seen some cost increases in the short term as well. On the wood cost side, fiber, wood -- pulp wood, quite stable. Obviously, in Uruguay, there, it's under our own control. Actually, we are, over the long term, working to reduce the cost of wood per tonne of pulp consumed. But also here in Finland, the pulp wood market has been pretty stable in terms of cost. On the log side, there has been some pressure as the construction markets have been enjoying quite strong demand, logistics costs, polymer costs because of, let's say, kind of consequence of oil price and sort of demand-supply in the petrochemicals market. So there are, let's say, certain areas where variable costs have been on the increase. And obviously, early to say, let's say, how exactly it will sort of flow through the year. But certainly, at the moment, we are at the stage of recovery where we have seen us, again, I think it's publicly well-known or seen, is we have seen many sectors sort of revising their demand estimates upwards, which then has caused the kind of pickup of demand in the inputs. And with bottlenecks, including bottlenecks in logistics, that has kind of created short-term tightness and this sort of upsurged in the first part of the year. Obviously, business activity picking up in the world in general normally does mean that then, there is a kind of a trend in prices upward for many production inputs, which is what we kind of referred to in our outlook statement. What is maybe the most important part or point here, referring back to the business model, is not as such trying to guess a number in terms of what the costs will be throughout the year, but rather our ability to manage the margins. And there, I think, we have a good track. So there, we are obviously confident. And there, we obviously have to sort of focus on during the coming quarters because, again, if and when the recovery continues in the world, then the business activity will affect all markets also for our production inputs.

[Operator]

Our next question comes from the line of Linus Larsson of SEB.

[Linus Larsson, Analyst]

A couple of follow-up questions on Commercial Paper to start with because you outperformed the market not only in terms of price/mix, like we already talked about, but also on the volume side. So maybe if you could talk a bit more about your commercial strategy, how you managed to do this outperformance in both price and volume? And also on that note, if you care to share some insight as to your current operating rates. I understand there's overcapacity in the industry overall, but are you operating in your own [ system ]?

[Jussi Pesonen, President & CEO]

Linus, thank you. I take these questions. In a way maybe -- actually, latter part of the question, there was some background noise. But obviously, what we do in UPM is that we have assets that are having a competitiveness of making a business. And then we have the volumes and markets and customers and products that are on the other side of the whole thing. And then we start to optimize, we run the business as we see that it generates good cash flow, good margin. So that is the obvious starting point for us. And we then adjust capacity when we don't see the business that makes sense. Obviously very clear when it starts to be EBITDA and EBIT margin or EBIT negative, it doesn't make sense to run the business. But we take actions before that, that we are falling into that kind of challenges, typically, timely action gives us an opportunity. And then how we run the business in the markets, we don't have one single strategy, but we work on all products and all markets and customers and run that business efficiently so that it generates maximum possible earnings for the business. So that's the way that we do it. We are not actually kind of -- ever, we have not been a market share driven. But if the market share improves, I'm not against, but it does need to increase based on very efficient way of running the business. So obviously, yes, we are trying to find businesses, customers, products that makes good returns to UPM and especially good cash flow. So that's how we do. In the capacity, how does the capacity run at this stage, we have the high operating rates obviously for the reason that we were taking timely action last year, as Tapio went through, the 1.1 million tonnes. And then when Shotton finally realizes, it will be 1.4 million tonnes. And many of those tonnes, maturity of those tonnes we can keep at home, if I say it that way, that all of the business that makes sense are profitable, we keep at home and run our remaining assets with high operating rates. That's a very simple philosophy of UPM, market balance or market share kind of consideration is not driving us, it is profitability, cash flow generation, efficiencies that are driving our actions.

[Operator]

And our next question comes from the line of Robin Santavirta of Carnegie.

[Robin Santavirta, Head of Materials Research & Financial Analyst]

I was wondering related to the Communication Paper business, most of that is probably in Europe, but how much do you export to other markets such as Americas or Asia? And has that increased now in the quarter?

[Tapio Juhani Korpeinen, CFO & Executive VP of UPM Energy]

No, it has not increased, and I don't know the number for you that how much we export. Obviously, we do have assets in the U.S., the blending asset. And then in the printing and writing papers, we have assets in China. But basically, the main focus is, of course, in Europe, and we do have export markets. We are a global player in many of the magazine grades, so we do export globally.Actually in Asia and in the U.S., in South America, even Africa, on those pockets, those customers, those businesses that make sense to generate long-term good kind of margin, we are not typically coming in and going out, that we move that export rate. And therefore, I don't even know the rate because I have not followed that lately.

[Robin Santavirta, Head of Materials Research & Financial Analyst]

All right. Probably fair to say it's a fairly small part, some 10% to 15% perhaps of the division.

[Tapio Juhani Korpeinen, CFO & Executive VP of UPM Energy]

I don't have a figure for you.

[Robin Santavirta, Head of Materials Research & Financial Analyst]

Now the second question I have could you comment a bit, pursuing in May, what are you seeing in the European paper market at the moment? Is it still unchanged weak demand? Or do you see it improving already? And in terms of capacity, sort of the supply-demand overall in the market, has that improved? Or is it still at unchanged levels?

[Jussi Pesonen, President & CEO]

Like Tapio went through, that out of the 20-plus million market, 5.4 million tonnes are taken with the actions of the whole industry. So basically, it is a quite massive number to balance that kind of thing. We are not forecasting for the May and then the future paper demand. We then comment later when we do have the figures.

[Robin Santavirta, Head of Materials Research & Financial Analyst]

I do understand that. Then final question related to the Leuna investment. Could you just remind us of the key applications on this biochemicals plant and with what kind of customers are you -- in what industry are you mainly negotiating at the moment?

[Jussi Pesonen, President & CEO]

Packaging industry, liquid packaging is one of the areas that we work on, car industry, many other as well. It is -- there are a lot of pockets for the -- this carbon black market that you can work on in those that black rubber is used. And then like I said, that the packaging, especially liquid packaging, i.e., the PET bottles, so there are plentiful of industries that we work on. Obviously, we are targeting into those points and businesses where there's a huge ambition to reduce the carbon footprint in their products.

[Operator]

Our next question comes from the line of Mikael Doepel of UBS.

[Mikael Doepel, Executive Director & Analyst]

Firstly, if I can ask on the Raflatac and Specialty Papers, you pointed to very strong performance there. And also at the same time, pointing to perhaps also feeling a bit of a tailwinds there right now. How do you expect this trend to evolve over the course of the year if we assume that the lockdowns come to an end? Do you continue to see strong momentum heading into the second quarter? Or are you seeing some tempering off in terms of the volumes trend in Q1?

[Jussi Pesonen, President & CEO]

Okay. Basically, I don't know if the kind of pandemic tailwind is, yes, obviously, there is some of that. But the behavior of the consumers is more kind of related to that. E-commerce is here to stay and many other applications that Raflatac, for example, is producing. And that is actually, hopefully, for the benefit of the industry. Even longer-term phenomenon. And as you can see from the earnings comparison, where the 6 businesses are, that Raflatac's profit improvement started already before the pandemic situation. And then when it comes to our Specialty Papers, similar type of things. There's a lot of innovation ongoing to find a different type of packaging materials, different applications on top of what we do in our release liner business. So there's a plentiful of actions going on which, hopefully, is once again a longer-term source of excellent business growth and profitability.

[Mikael Doepel, Executive Director & Analyst]

Okay. And then on the pulp business, as you pointed to, yourself, it's been a very strong pulp market with the prices continuing to increase quite a lot and, obviously, UPM being a big player in that market, you probably have good market intelligence there. But just wondering if you could share your views on what you see as the key drivers for the very strong pulp price performance in the last 6 months or so.

[Jussi Pesonen, President & CEO]

Very typical, it's a hygiene issue. It has been very strong performing packaging grades, very typical end uses where there has been a strong market in the pulp business. China, of course, the Chinese economy, as we all know, is really fastly growing as we speak and performing well. So these at least are main phenomenon. I don't know if, Tapio, I missed something, but basically, these are the main drivers for good pulp markets at this point of time. And of course, there are no new capacity coming on stream. And still, like in China, there's a kind of a consistent reduction of all kind of non-high-quality or low environmental performing capacity as well. So the balance of the industry, the supply-demand balance is healthy and now the economic growth, not only in China, but also in the product areas of ours in the other markets as well.

[Tapio Juhani Korpeinen, CFO & Executive VP of UPM Energy]

I think also, if you look at already last year's kind of industry figures or shipment figures, China obviously has been strong, but the North American market as well. So basically, it sort of follows the macro picture in a sense that we are seeing now in the first part of this year as well.

[Mikael Doepel, Executive Director & Analyst]

Okay. That's clear. Then just finally, on the growth projects in Uruguay and the pulp side and then the biochemicals side, I was just wondering when you start up those mills, how long would it take before you reach full capacity basically from start-up to reaching the full volumes? Is that something you could comment on already now?

[Jussi Pesonen, President & CEO]

Yes. The -- first of all, the pulp is maybe easier part, where it takes, of course, quarters. And maybe first year will be ramping up year; whereas the Leuna and the new world novelty, nobody else has never done this in the Leuna Biochemicals. It is something that we don't know. In biofuels, we have a good example of that. The first operating year was tough, but then was it after 12 months, we had a kind of shutdown, where we made the changes. And suddenly, we were very close to the full run. So basically, it depends. But very confident on what we can and how we have been able to handle like the Lappeenranta, the first plant that we were ramping up, very good work done on that crew that was ramping that, as well, up. But of course, it takes several quarters to be in full run.

[Operator]

And we currently have one further question in the queue, and that's from the line of Harri Taittonen of Nordea.

[Harri Taittonen, Senior Director & Sector Coordinator]

On the presentation, Page 37, you're showing that the paper price is now below the cost of marginal cost producer, and it seems to be a fairly exceptional situation. I'm just wondering what you're feeling or is that -- what are the implications from that. And in the context also that according to trade journals, you are kind of communicating about price increases in the paper side, so would be interesting to hear your thoughts.

[Jussi Pesonen, President & CEO]

Harri, this is absolutely excellent question that you make. But if you just follow that, you can draw your own conclusion, it works perfectly. This is actually Mika Mikkola's great innovation 10 years ago to 2010, when he draw his first time, and it works. When the costs are coming down, the prices are following. And when the costs are rising, the prices are following. So basically, this is X. And obviously, the guideline for UPM Paper business is to be well below of the marginal cost producer to make margin and good cash flow. But in a way, as you can see, this is banging like a floor price, which is actually giving you some confidence that this sets the floor price in that respect. And you can draw your own conclusion. This is a brilliant picture. This is one of the key pictures to follow how the business will change.

[Harri Taittonen, Senior Director & Sector Coordinator]

Yes, agree. Well, just another question then on the guidance. You don't guide the second half versus first half anymore because you have also -- you have revised the maintenance schedule. But is there something you want to say about it? Or is it sort of that this is now not guided at all but -- or you still have a feel of second half versus first half?

[Jussi Pesonen, President & CEO]

Is it, Harri, so that we have firmly considered what we want to guide and that we have been written into the paper.

[Harri Taittonen, Senior Director & Sector Coordinator]

I can believe that.

[Jussi Pesonen, President & CEO]

Sorry for the answer.

[Operator]

We've had one further question come through. That's from the line of Linus Larsson.

[Linus Larsson, Analyst]

It's Linus Larsson with SEB. I lost the line previously, but I think I got a question, Jussi. And if I may, just one more question now on Specialty Papers. You had positive price/mix realization sequentially in the first quarter. And now with costs continuing upwards, presumably in the second quarter, I wonder if you could share your thoughts on the price direction for Specialty Paper sequentially in the second quarter, please.

[Jussi Pesonen, President & CEO]

Not that I would actually talk about the second quarter or any of the future aspects, but basically, coming back to that fact what Tapio said about our operating model, and same applies in our Specialty Papers. We do not have any pulp inside of the business, so basically, energy, pulp, chemicals are always a cost. And when the cost is going up, you need to work on your margin, and that's what we do efficiently. And the business is well focused on margin management. So it is a kind of a brilliant nature of UPM model that we are spot on early enough starting to think about how to manage our margins when kind of costs are moving. Whether they go up or downwards, then you need to just keep the margin management in your focus.

[Operator]

And we've had one final question come through. That's from the line of Lars Kjellberg of Crédit Suisse.

[Lars F. Kjellberg, Research Analyst]

It appears I've had some technical difficulties getting into the queue. Just had a follow-up to -- a couple of follow-ups. On paper first, the EUR 130 million of cost takeout, where do we stand on that now? Should we expect more cost to come out? And also on the sustainable side of the Raflatac, Specialty Paper business, what are you seeing there? What sort of developments are you actually already commercializing? And what do you see in that pipeline that could drive your business performance?

[Tapio Juhani Korpeinen, CFO & Executive VP of UPM Energy]

Well, if I comment on the paper and, let's say, the overall cost takeout, EUR 130 million, it's just good to remember that, of course, large part is coming from Communication Papers, but it includes actions in several of the businesses. We had some benefit from it but -- in the first quarter. But let's say, there is more impact to come because, again, let's say, the actions were taken during -- and completed during the first -- sorry, the second half of last year. And now the sort of savings are sort of ramping in, so we're not at full run rate in the first quarter yet. On the sustainability part, of course, let's say, first of all, particularly when it comes to Specialty Papers, of course, paper is a sustainable alternative to -- for instance, for plastics. So therefore, Specialty Papers and, for instance, paper-based labels are a kind of a good solution. But then obviously, also this kind of objective to replace plastics or the sort of ban or fight against plastics is presenting many opportunities where paper can come in. And for instance, in China, it is very much concrete reality today. And as you know, when China decides to get rid of plastic straws, then it adds up to a sizable business for somebody, and it's implemented immediately. So those kind of end uses for specialty papers are a new opportunity for us as well that we are pursuing. Raflatac, then obviously, again, paper labels and paper as a label material has kind of an advantage over plastics. And then even in film-based labels, we are looking at solutions where actually the films can be replaced by non-fossil alternatives.

[Jussi Pesonen, President & CEO]

NAFTA coming from our biofuels plant where you can make wood-based filmic products as well.

[Lars F. Kjellberg, Research Analyst]

Got it. As a follow-up, can you share with us, Tapio, roughly, where you are in the EUR 130 million run rate? And the final question's where do we stand on Shotton now? When should -- when do you expect to get a deal done?

[Tapio Juhani Korpeinen, CFO & Executive VP of UPM Energy]

We don't have a number on this run rate at the moment on the EUR 130 million to share with you. But -- and the Shotton process is proceeding. And obviously, we will then communicate when we have a result out of it, but it is sort of in progress as planned.

[Jussi Pesonen, President & CEO]

Absolutely.

[Lars F. Kjellberg, Research Analyst]

And some of that EUR 130 million will come after Shotton then, I guess? Is that fair?

[Tapio Juhani Korpeinen, CFO & Executive VP of UPM Energy]

Well, this Shotton is not included in the EUR 130 million savings. So that is then a new item.

[Jussi Pesonen, President & CEO]

Thank you, ladies and gentlemen. Thank you for joining us in this quarterly report, and have a nice day.