UPM experiences difficult second quarter

All Finnish forest industry firms are facing challenges

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Finnish forest industry firm UPM had a weak second quarter, reveals the company’s interim report, published on Tuesday.
      The operating profit excluding one-off items fell to EUR 118 million from EUR 201 million a year earlier.
      The result in April-June was also weaker than in January-March this year, for which period the corresponding figure was EUR 151 million.
      Two-thirds of UPM’s net sales came from paper, the manufacturing of which is currently anything but profitable. The around EUR 1.8 billion in net sales from this branch resulted in operating profit of only about a couple of million euros.
      A year ago the Myllykoski paper mills were merged with the UPM family, and according to the buyer synergy benefits worth of tens of millions of euros have already been achieved.
     
Without a magnifying glass, however, the benefits of the merger are difficult to detect.
      Presumably, without the Myllykoski deal, the result on the paper manufacturing sector would have been noticeably on the minus side.
      UPM President and CEO Jussi Pesonen admits that he is not satisfied with the profitability of the paper side. According to the CEO, new mergers and acquisitions are still being considered. The underlying idea is that by reducing competition and supply the price of paper can be raised more easily.
      The CEO does not reveal, however, if any such M & A arrangements are in the pipeline.
     
In the comparison between the different forest industry companies, UPM trails slightly behind Stora Enso and the Metsä Group (Metsäliitto), but the differences in profitability are minute.
      The common denominator is that all three are doing poorly and no substantial increases in cash flow are in sight in the near future.
      As far as their balance sheets are concerned, UPM and Stora Enso are in good shape, so they can deal with lean years for some time.
      In relative terms, Metsä Group is the one with the most debt hanging over it.
     
The companies’ strategies differ from one another. UPM’s most important product is printing paper, whereas Metsä Group concentrates on paperboard and pulp.
      Stora Enso is a large paper manufacturer, but it tries to shift the emphasis towards paperboard, packaging papers, and pulp.
      UPM is facing tougher challenges than the other two because the demand for printing paper is on a downward curve both in Europe and North America.
      In the shrinking market, the competition over customers is twice as ferocious.
      In the United States, UPM owns three paper machines. In North America the demand and supply are better balanced than in Europe.
     
In China, meanwhile, UPM is in the process of adding another paper machine to its Changshun mill. The value of the investment is EUR 390 million.
      The machine will be in operation towards the end of 2014 and it will produce self-adhesive paper and fine paper.
      Currently there are two paper machines in operation at the Changshun factory, both of which make fine paper. Its raw material is bleached pulp.
      Fine paper is used for example in printers and photocopy machines. According to the UPM calculations, the office paper market in China is growing at an annual rate of eight per cent.
      UPM believes that the growing demand will quickly swallow up the increased capacity.
      The Changshun mill is located 90 kilometres west of Shanghai. The mill employs 600 workers.


Previously in HS International Edition:
  Without paper production, UPM would be a decent company (2.2.2012)
  UPM closing Myllykoski paper mill and cutting 645 jobs in Finland (31.8.2011)
  UPM to acquire Myllykoski Paper and Rhein Papier (21.12.2010)

Links:
  UPM stock exchange release, Interim Report
  UPM stock exchange release, China

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