Without paper production, UPM would be a decent company

UPM announces construction of EUR 150 million refinery producing biofuels from crude tall oil in Lappeenranta

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Forest industry giant UPM-Kymmene released its fourth-quarter and whole year results for 2011 on Wednesday.
      The long and the short of it is that the company would be in much better shape if it did not have to manufacture paper.
     
Result 2011
      For the paper, pulp, labels and composites, plywood, and sawn timber producer UPM-Kymmene last year was as expected, which means the company’s result was still fairly modest.
      For Q1-Q4 2011, the company’s net sales were around ten billion euros, the operating profit EUR 459 million, profit before tax EUR 417 million, and net profit for the period EUR 457 million.
      Return on equity was a sluggish 6.3 per cent (excluding special items 6.7 per cent) and return on capital employed 4.4 per cent (5.8 per cent).
      Still, UPM’s last year’s achievements were in line with the rest of the industry. In Europe and North America the forest industry sector is doing equally poorly.
     
Strengths and weaknesses
      UPM reports that it is doing well as a producer of electricity and pulp. The earning numbers are high in both fields, but there is one problem: the wrong client.
      UPM’s pulp and electricity is sold primarily to its own paper industry arm, which then spoils the entire group’s result. If these products were sold to outside clients, the company would have no troubles at all.
      The paper industry’s share of the company’s entire sales is nearly three-quarters, but last year the division’s operating profit without non-recurring items was on the negative side. Towards the end of the year the result crept ever so slightly into the black.
      UPM has announced the saving of the European paper industry as its objective. Machines have been shut down, entire mills have closed their doors, but nothing seems to work.
      Last year UPM bought Myllykoski Paper to remove it from interfering with the market. UPM predicted that it would reap considerable synergy benefits from the deal, but at least last year such benefits were still nowhere to be seen.
      The aim of the deal is to strengthen UPM’s negotiating power when discussing the price of paper with printing houses. Unfortunately the seller cannot tighten the screw endlessly in a situation where the customers, too, are struggling.
      When the demand goes down faster than the supply, raising the prices or even keeping them unchanged is not a simple exercise.
      There are other players in the market, often heavily-indebted and on the lookout for cashflow, who are willing to grant clients special discounts.
     
Future
      If UPM truly wants to save the European paper production industry it has to acquire more paper factories.
      The European Union competition rules are not an insurmountable obstacle. The Myllykoski deal demonstrated this.
      UPM CEO Jussi Pesonen began his stint in the winter of 2004, and during his term the company’s executive team has changed fundamentally.
      However, what is worth noting is the fact that there has been no change in the poorly-performing division; in other words, the paper industry’s veteran leaders Jyrki Ovaska and Hartmut Wurster have kept their seats.
     
A new departure and a divestment
      Most recently UPM has announced that it “is to invest in a biorefinery producing biofuels from crude tall oil in Lappeenranta, Finland.”
      The value of the project is EUR 150 million. UPM is not in the process of applying for public investment support for the undertaking. The biorefinery is to produce 100,000 tonnes of biodiesel per year.
      UPM will divest its packaging paper business to the Swedish Billerud. The deal includes two paper machines in Pietarsaari and Valkeakoski.
      The deal is worth EUR 130 million. It still needs to be approved by the competition authorities. The transferred annual production capacity is around 300, 000 tonnes of packaging paper.


Previously in HS International Edition:
  UPM angling to acquire Myllykoski (28.9.2010)
  UPM closing Myllykoski paper mill and cutting 645 jobs in Finland (31.8.2011)

See also:
  UPM is offering its Myllykoski mill to a paperboard manufacturer (15.12.2011)

Links:
  UPM Financial Statement Release 2011 (.pdf file)
  UPM Press Release, 1.2.2012
  UPM (Wikipedia)

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