UPM Q2 2023 - Update

Navigating Stormy Seas with a Steady Hand

I just wrote a small piece on management, and here is an excellent example of how UPM is a lot better managed than some of its competition.

This is a cyclical business. The result is not pretty, but for me, it builds confidence to own UPM - UPM is in fantastic shape, ready for future cycles, and poised to grow.

Is this cycle at the bottom? When will it end? Will results grow from here? I don’t know.

UPM H1 2023 Key Financial Highlights:

• Sales Performance:

  • Q2 2023: EUR 2,558 million

  • Q2 2022: EUR 2,562 million

  • Observation: Sales remained nearly stable year-on-year. Resiliency.

• Comparable EBIT:

  • Q2 2023: EUR 114 million (4.5% of sales)

  • Q2 2022: EUR 387 million (15.1% of sales)

  • Observation: A significant 71% decline in EBIT, with a notable drop in its percentage of sales. Stora Enso's drop was more pronounced at 93%. UPM's underlying strengths and potential for faster recovery?

• Financial Health:

  • Net Debt: Decreased to EUR 2,557 million.

  • Liquidity: Strong position with cash funds and unused committed credit facilities totaling EUR 6.4 billion.

Operational and Strategic Moves:

• UPM Communication Papers:

  • Action: Permanent closures of certain units.

  • Implication: Reflects adaptation to changing market demand and a strategic shift towards potentially more profitable ventures.

  • Comparison with Stora Enso: While Stora Enso is currently emphasizing its strategic initiatives to enhance resilience and profitability, UPM has already taken decisive steps with its closures, possibly indicating a more proactive approach to market changes.

• UPM Paso de los Toros Pulp Mill:

  • Action: Ramping up of production.

  • Implication: Demonstrates UPM's commitment to expanding its pulp production capacity and tapping into growing market segments.

• OL3 Nuclear Power Plant:

  • Action: Initiation of regular commercial electricity production.

  • Implication: Reinforces UPM's dedication to sustainable energy solutions and environmental responsibility. Again no ESG jargon here compared to other companies. Heading to a fossil-free future via a significant stake in the nuclear power industry.

• Geopolitical Strategy:

  • Action: Complete exit from Russia.

  • Implication: Ensuring a more stable operational environment.

Market and Industry Dynamics:

• Business Environment:

  • Challenge: Geopolitical uncertainty and low economic activity.

  • Implication: These external factors have created a turbulent backdrop for UPM's operations, potentially influencing sales and profitability.

• Industry Trend:

  • Trend: Significant destocking across the industry.

  • Impact on UPM: This trend has directly affected UPM's delivery volumes, leading to reduced sales in certain segments.

Given UPM's strategic moves and the broader industry dynamics, is this a cyclical low point for UPM, presenting a potential buying opportunity for long-term gains?

How well-prepared is UPM to navigate further industry downturns?

Future Outlook and Management Commentary:

• CEO's Perspective:

  • Commentary: Jussi Pesonen, UPM's CEO, acknowledged the challenging business environment marked by geopolitical uncertainties and low economic activity. He emphasized UPM's strategic milestones, including the ramp-up of the UPM Paso de los Toros pulp mill and the start of the OL3 nuclear power plant unit.

  • Implication: Despite the headwinds, UPM's leadership remains focused on long-term strategic initiatives to navigate the challenges.

• Forward Guidance for 2023:

  • Projection: UPM expects the full-year 2023 comparable EBIT to decrease from 2022. However, the H2 2023 EBIT is anticipated to be on a similar level or even increase compared to H1 2023.

  • Implication: While the year might start off rocky, there's potential for a more robust finish, indicating underlying resilience and strategic effectiveness.

UPM hints at their belief that the worst might be behind them.

Conclusion and Investment Perspective

The H12023, to me, underscores UPM's resilience and adaptability.

Whether we're at the bottom of this cycle remains speculative. But as an investor, the stability in sales, proactive strategic decisions, and the company's forward guidance all build confidence in UPM's potential. The result is ugly - let’s not forget that.

UPM's management seems to be steering the ship with a clear vision compared to other result reports I have gone through.

I will definitely add more UPM if there is blood in the street or some panic. It seems like Pesonen managed to add confidence since the stock is up 3% today (Was down -3% right after the results were posted).