UPM sees markets stabilizing, invests in biofuels and energy

UPM’s (OMX: UPM1V) Q4/2011 EPS excluding special items was 0.16 EUR and reported EPS 0.20 EUR (with that that extra quarter coming from an increase in fair value in biological assets). EBITDA of 301 million corresponded to an EBITDA margin of 11.2% of sales. All of these numbers were well off last year’s strong performance. Sales were higher mainly a result of the Myllykoski Corporation and Rhein Papier GmbH acquitition. Sales prices were higher in Paper, Label and Plywood but down in Pulp, sawn timber and Energy.

UPM is making a 150 million Euro investment in its Kaukas mill site in Lappeenranta, Finland to build a biorefinery which will produce biofuels from crude tall oil. This is the first of its kind globally. The biorefinery will produce approximately 100,000 tonnes of biodiesel for transport. UPM sees this as the first step in a promising line of business. The project is estimated to be completed in 2014 and give a job to a few dozen people directly and to 150 people indirectly. UPM is also considering to construct a biorefinery using energy wood as raw material either in Rauma, Finland or in Strasbourg, France

Energy generation investments continue as well. UPM will build a new combined heat and power gas plant on its Schongau mill premises in Germany replacing the current 40-year old power plant facility. This investment of 85 million Euros aims to secure energy supply at the site and reduce energy costs in general. The plant will also provide district heating to 750 local households and public institutes in the small Upper Bavarian town.

The majority of the current members of the Board of Directors are seeking re-election. Former Shell Executive Director and current Chairman of AEGON and A.P. Moller - Maersk A/S Board member Robert J. Routs is stepping down. Nomination and Corporate Governance Committee suggest Kim Wahl to be elected as a new Board member in his place. Wahl is the co-founder and Deputy Chairman of private equity firm IK Investment Partners (formerly Industri Kapital). Before that he has experience from Goldman Sachs within Corporate Finance and Mergers & Acquisitions. He is also a former Board member of Norske Skogindustrier ASA (OSE: NSG) .

UPM expects global economic growth to continue in 2012 with a mild recession taking place in the Eurozone in early 2012. The company feels that market conditions in its businesses have stabilized and expects operating profit to stay in current levels during H1 2012. The company expects slightly lower variable costs in Q1 2012 as raw material market prices have decreased. Synergies from the Myllykosi & Rhein Papier deal will also start to take effect. The stock has gained nearly 5% today helped in part by the proposal to increase dividend by 9% to 60 cents a share.