1. Executive Summary

UPM delivered a clean quarter of margin recovery in Q2 2026, with comparable EBIT from continuing operations up 71% year-on-year to €212 million (9.0% of sales), and every one of its six reporting segments improving profitability versus Q2 2025. For the half, comparable EBIT rose 17% to €471 million (9.8% margin) despite sales declining 3% to €4,781 million, evidencing genuine margin expansion rather than volume-driven growth — variable cost deflation and fixed-cost discipline (down €43 million in H1) did the heavy lifting.

The more consequential story for the equity is portfolio reshaping. Two structural moves are now crystallising: (i) the graphic paper joint venture with Sappi (definitive agreement signed 28 May 2026, now in EU Phase II merger review) will remove UPM Communication Papers from consolidated accounts and replace it with an equity-accounted 50% stake, and (ii) the Plywood business is being demerged into a separately listed entity, WISA Group Plc, with an EGM on 31 August 2026 and expected Nasdaq Helsinki listing in early November 2026. Both actions reduce cyclicality and sharpen the remaining portfolio toward decarbonization (Energy, Biofuels) and advanced materials (Adhesive Materials, Specialty Materials), UPM's two structurally growing pillars.

Balance sheet metrics deteriorated modestly: net debt rose to €3,313 million (from €3,004m at year-end 2025) and net debt/EBITDA climbed to 2.36x from 2.29x, driven by a working-capital build (+€339m in H1) and the first €395m dividend instalment. Operating cash flow of €225m in H1 was materially below H1 2025's €468m — a point that warrants monitoring even though the P&L trend is positive. H2 2026 guidance of €375–575m comparable EBIT implies a wide range, with the mid-point roughly flat to H1, tempered by planned Kaukas and Pietarsaari pulp mill downtime and rising Leuna ramp-up costs offsetting an expected pickup in sales prices.

2. Segment-by-Segment Analysis

2.2 UPM Energy — the standout

Comparable EBIT more than doubled year-on-year in both Q2 (+140%) and H1 (+107%), the single largest driver of group earnings growth. UPM's average achieved electricity sales price rose 24% in H1 to €62.4/MWh, helped by higher nuclear (Olkiluoto) output and firm Nordic pricing. Q2 alone saw a 35% sequential price decline versus the seasonally strong Q1, and results were further muted by dry hydrological conditions. With Nordic hydro balances still below the long-run average and OL3 scheduled maintenance shifting into H2, Energy's earnings trajectory into year-end will hinge on autumn/winter spot pricing and OL1/OL2/OL3 availability — a business investors should treat as high-margin but structurally volatile.

2.3 Advanced Materials (Adhesive & Specialty Materials) — steady compounding

Both businesses posted their best comparable EBIT levels in several quarters. Adhesive Materials benefited from stronger deliveries and EMEIA volume growth, with Q2 margin reaching 9.8% of sales — its highest since before the 2025 restructuring charges tied to the Nancy (France) and Kaltenkirchen (Germany) site closures. Specialty Materials' H1 improvement was driven more by lower depreciation than by pricing, as fine-paper markets remain "highly competitive" per management's own characterization — a signal that this segment's growth is coming from portfolio/cost actions rather than pricing power. Both businesses continue to invest counter-cyclically (Mills River NC, Johor Bahru Malaysia, and new distribution terminals near Hanoi and New Delhi), positioning for structural APAC self-adhesive label demand growth.

2.4 UPM Fibres — a tale of two continents

The pulp and timber segment is bifurcating sharply by geography. Fibres South (Uruguay) delivered a 22.5% H1 comparable EBIT margin (up from 16.8% in H1 2025), driven by consistent efficiency gains at the Fray Bentos/Paso de los Toros platform that have offset logistics inflation for several consecutive quarters — this remains UPM's most competitive pulp asset globally. Fibres North (Finland), by contrast, posted a negative Q2 comparable EBIT margin (-2.2%) and a full H1 margin of just 2.6%, down from 10.5% in H1 2025. Elevated Finnish pulpwood costs, planned Pietarsaari maintenance, and weak sawn timber demand are compressing returns to the point that management has announced production curtailments — a six-week Kaukas pulp mill shutdown from 3 August 2026 and a potential further Pietarsaari curtailment in October. This is a clear signal of structural overcapacity/cost pressure in Finnish pulp that will likely persist into 2027 absent a wood-cost correction.

2.5 UPM Communication Papers — margin recovery ahead of its own obsolescence

Comparable EBIT jumped to €32m in Q2 (from €5m in Q2 2025) on "slightly better unit margins," even as delivery volumes and European graphic paper demand continued to decline (-3% YoY in Europe; magazine papers -5%). This is a business in structural decline being run for cash and margin discipline ahead of its planned removal from UPM's consolidated perimeter via the Sappi JV. The H1 comparable EBIT margin of 3.7% remains the weakest in the portfolio outside Other Operations, reinforcing the strategic logic for combining it with Sappi's European assets to rationalize supply in an industry facing "declining demand, structural overcapacity and high energy costs" (management's own framing) — investors should read the Q2 improvement as good execution within a shrinking business, not a change in the secular narrative.

2.6 UPM Plywood — strong momentum ahead of its spin-off as WISA Group

Now reported as a discontinued operation, Plywood posted a 12.0% H1 comparable EBIT margin (up from 4.2% in H1 2025, when strikes disrupted production). LNG shipbuilding end-use demand was described as "very good," and birch plywood demand held firm even as spruce plywood remained soft on weak European construction activity. The business is being carved out at a cyclically favourable moment, which should support WISA Group's initial trading multiple upon listing (expected ~2 November 2026), though investors receiving WISA shares 1:1 should note the segment's small scale (€409m sales in FY2025, ~€196m average capital employed) and product-mix cyclicality tied to construction and shipbuilding capex cycles.

2.7 Other Operations (Biofuels & Biochemicals/Leuna) — losses narrowing, optionality building

Comparable EBIT losses nearly halved in H1 to -€45m from -€94m, driven by materially better UPM Biofuels performance on favourable bio-premiums, higher fossil reference prices, and RED III regulatory clarity in Germany. The Leuna biorefinery ramp-up continues to be a cost drag but is progressing: industrial sugar deliveries have reached "substantial volumes" and renewable functional filler/lignin derivative sales are expected to start in Q3 2026, with full production and positive EBIT targeted for 2027. This remains the highest-optionality, highest-execution-risk asset in the portfolio (€1,370m total capex) and the key swing factor for Other Operations profitability over the next 18 months.

3. Portfolio Transformation: The Two Structural Catalysts

3.1 Graphic Paper Joint Venture with Sappi

● Combines the entirety of UPM Communication Papers with Sappi's European graphic paper business into a 50/50-owned, independently financed JV valued at a combined €1,420m enterprise value (UPM's contribution valued at €1,100m EV).

● UPM receives €475m cash, an €88m preferential shareholder loan receivable, a further €10m shareholder loan receivable, and a €167m book-value 50% equity stake — while transferring €411m of net pension and other liabilities to the JV.

● Expected annual synergies of ~€100m from asset/logistics optimization and portfolio rationalization.

● Now under EU Phase II merger review (opened 28 April 2026), with final regulatory resolutions expected by end-2026 across the EU, US and China — this is the primary execution risk and timing swing factor for the transaction.

● Post-closing, UPM's direct exposure to structurally declining European/North American graphic paper markets ends; the JV stake is equity-accounted below operating profit, which should be modestly accretive to consolidated EBIT margin (%) even before considering synergies.

3.2 UPM Plywood Demerger into WISA Group Plc

● Board-approved demerger plan (29 April 2026); shareholders receive 1 new WISA Group share for every 1 UPM share held, with UPM shareholders retaining their existing UPM stake unchanged.

● EGM to approve the demerger is set for 31 August 2026; planned completion 31 October 2026; WISA Group listing on Nasdaq Helsinki expected on or about 2 November 2026.

● Demerger and listing prospectus published 16 July 2026 and approved by the Finnish FSA the same day.

● Rationale: sharper strategic focus, direct investor access to a standalone construction/LNG-shipbuilding/vehicle-flooring business, and streamlining of UPM's remaining portfolio toward higher value-added, lower-cyclicality segments.

● The Board retains the right to abandon the demerger at any point prior to completion if it concludes conditions have changed materially — a standard but non-trivial optionality clause for investors to note.

Taken together, these two transactions will, by early November 2026, leave a substantially reshaped UPM: a group weighted toward Energy, Fibres, Adhesive Materials, Specialty Materials and Next Generation Renewables, with graphic paper de-consolidated into an equity-accounted JV and Plywood spun out entirely. This is a coherent and well-telegraphed re-rating story — the market's job over the next two quarters is to price execution risk (EU merger clearance, WISA Group's standalone valuation) rather than strategic logic, which is sound.

4. Guidance and Outlook

Management guides H2 2026 comparable EBIT (continuing operations, excluding Plywood) to approximately €375–575 million, versus €479m in H2 2025 and €471m in H1 2026. The €200m width of this range is unusually wide and reflects genuine two-sided uncertainty: moderately higher sales prices and Q4 energy refunds at Communication Papers are offset by moderately higher variable costs, increased maintenance activity, and rising Leuna ramp-up costs. Note also that H2 2025 comparable EBIT benefited from a €131m positive fair-value change in forest assets that management explicitly flags will not repeat at similar scale in H2 2026 — a headwind to the year-on-year comparison that is easy to overlook in headline EBIT figures.

4.1 Key sensitivities disclosed by management

● Pulp price: a €50/tonne change in average pulp price moves annual comparable EBIT by ~€180m (net, assuming no pass-through to paper pricing) to ~€270m (gross, assuming full pass-through).

● Electricity price: a €10/MWh change in average Finnish electricity price moves annual comparable EBIT by ~€40m, based on UPM's unhedged net sales position.

● FX: net 12-month currency cash flow exposure of ~€1.5bn, with USD the dominant exposure (~€1.4bn), followed by UYU, GBP, CNY and JPY; ~50% is hedged on a rolling basis.

5. Key Risks

● EU Phase II merger review outcome for the Sappi JV — remedies, delay, or (low probability but non-zero) prohibition would disrupt the de-consolidation thesis for Communication Papers.

● Finnish pulp cost structure — Fibres North's near-breakeven H1 margin and the Kaukas/Pietarsaari curtailments signal the wood-cost and demand backdrop may not normalize quickly; further downtime or impairment risk cannot be ruled out.

● Leuna biorefinery execution — full ramp-up and positive EBIT are targeted for 2027; further delay would extend the current earnings drag in Other Operations and pressure the biorefinery's 14% ROCE target.

● Working capital and cash conversion — H1 operating cash flow nearly halved year-on-year; if this is not substantially recovered in H2, leverage (already at 2.36x net debt/EBITDA) could drift higher against the second dividend instalment due in November.

● Energy segment volatility — hydro conditions, OL3 maintenance timing (H2 2026) and Nordic spot price swings make Energy's outsized H1 contribution difficult to extrapolate into H2 and FY2027.

● Macro/geopolitical — management explicitly cites Middle East conflict-related fossil fuel and logistics cost inflation, US tariff exposure (~13% of 2025 sales to the US, ~54% of which was imported, chiefly communication/specialty papers and eucalyptus pulp), and broader trade-policy uncertainty as ongoing overhangs.

6. Conclusion

UPM's H1 2026 results confirm a business in the middle of a genuine, well-executed strategic transition rather than simple cyclical recovery. The 17% H1 comparable EBIT growth was achieved despite a 3% sales decline, evidencing real cost and mix discipline, and every continuing-operations segment improved year-on-year in Q2 — a broad-based result rather than one driven by a single business. The two portfolio actions in flight (Sappi JV, WISA Group demerger) are strategically coherent: they remove UPM's most structurally challenged asset (European graphic paper) from consolidation and crystallise value in a well-performing niche business (Plywood) at a favourable point in its cycle, while leaving UPM concentrated in Energy, Fibres, Adhesive Materials, Specialty Materials and Next Generation Renewables — businesses management (and the market) associate with lower cyclicality and stronger structural growth.

The near-term watch items are less about strategy and more about execution and cash: (1) EU merger clearance timing for the Sappi JV, (2) whether Fibres North's Finnish cost base stabilizes or requires further capacity rationalization, (3) Leuna's path to positive EBIT in 2027, and (4) a recovery in operating cash conversion in H2 to arrest the recent uptick in leverage. None of these appear to threaten the balance sheet (liquidity of €2.3bn and a well-laddered maturity profile provide ample headroom), but they will determine whether the H2 2026 comparable EBIT guide lands nearer €375m or €575m — a range wide enough that investors should treat H2 as a genuine swing quarter rather than a formality.