UPM plans to keep its leading office paper position in China

UPM (OMXH: UPM1V) is making another investments on its Changshu mill site near Shanghai. It will add a new wood-free speciality paper machine in a 3 billion RMB (around 390 million Euros) investment. The new machine will start by the end of 2014. Local subcontractors should have sizeable deals in the offing. In addition a 100 000 tonnes cut-size sheeting line investment is already in the process of completion.

Changshu Economic & Technological Development Zone already hosts a 900,000 tpy fine paper mill, a labelstock factory and R&D Centre as well as supporting facilities. The two machines lines produce mainly wood-free uncoated and wood-free coated paper respectively. UPM plans to have over half ot its sales to come from”well performing growth businesses” by the end of this decade. High quality office paper demand is expected to grow by 8% each year in China.

The Finnish firm reported quarterly earnings this morning. Sales of 2.6 billion, EBITDA of 316 million and operating profit of a mere 92 million Euros were a disappointment. The company does not foresee profitability improvement during H2 2012 and operating profit excluding special items for the full year is expected to be lower than last year.

What is UPM up to?

UPM-Kymmene (OMXH: UPM1V) in negotiations to sell UPM Stracel paper mill in Strasbourg, France. A joint venture of VPK Packaging Group NV (Euronext: VPKB) and family-owned Klingele Papierwerke is on the other side of the table and they have made an offer subject to finalization of a bank review. The mill which was founded in 1937 and acquired by UPM in 1988 has been producing matt, book paper and other publication papers. VPK and Klingele plan to convert the Stracel mill into a recycled fibre-based containerboard unit producing fluting and test-liner. The new mill would create some 140 jobs, which is about half of the current personnel. The transaction is also subject to completion of employee information and consultation process. UPM would retain some piece of land for potential future advanced biofuels production

Last Friday UPM said it had concluded co-determination negotiations and decided to restructure sawn timber and further processing operations in Finland when it renews its business strategy. UPM and Pölkky Oy signed a contract for intended sale of sawn timber operations in Kajaani, with the entire Kajaani sawmill personnel continuing to work for Pölkky Oy. UPM will stop production at Aureskoski and Heinola further processing mills by the end of 2012, resulting in permanent layoffs of 97mill employees. Common sales and management staff functions are also reorganized leading to a few dozen lost jobs in Lahti.

Within the last week, UPM has also communicated the redeeming of the Myllykoski power plant from Vamy Oy and the closure of Pietarsaari and Tervasaari mills to Billerud was completed a few weeks before that. All of these happenings have made investors wonder what bold President & CEO Jussi Pesonen and the fast moving Chairman Björn Walhroos are plotting. Newspaper Arvopaperi said that a large international bank has featured UPM as a potential spin-off candidate, with its energy business potentially having a lot of hidden value.

Relatively good numbers from UPM

Finnish pulp, paper and timber manufacturer UPM-Kymmene’s (OMX: UPM1V) report did not show as fast earnings decline as had been feared. Sales of nearly 2.6 billion Euros in Q1 is a few percentage points less than in the previous quarter but operating profit of 155 million is somewhat higher. Year-on-year operating margin is however down from 8.4 to 5.8%. Net profit of 117 million means an EPS (both reported and ex special items) of 22 cents.

Cost synergies from Myllykoski acquisition were starting to show. Overall the cost side development was mixed. UPM expects global economic growth to continue in 2012 with uncertainty mainly in Europe. UPM’s own operations seem to be stable. Operating profit in H2 2012 should slightly best H2 2011. Shareholders liked what they saw and drove up the the stock market price by more than 5%.

Itochu buys into Metsä Fibre

M-real Corporation (OMXH: MRLBV) is selling 7.3% of its shareholdering in Metsä Fibre Oy (formerly Metsä Botnia) to Itochu Corporation for 138 millions Euros as a part of a larger arrangement with Metsäliitto Cooperative also selling some shares to Itochu. The total value of the deal is 472 million Euros, valuing Metsä Fibre at just over 2 billion Euros.

At completion Metsäliitto Cooperative will exercise its purchase option on UPM’s (OMX: UPM1V ) 11% shareholding in Metsä Fibre. This is valued at 150 million Euros. Following transactions, which is subject to regulatory approvals, M-Real and Itochu Corporation will both have a 24.9% stake and Metsäliitto Cooperative maintains a direct majority in addition to its indirect holding via its near 40% stake in M-Real.

Metsä Fibre and Itochu enter into a commercial arrangement where Itochu will be a sales agentfor Metsä Fibre’s long fibre pulp in Asia and Metsä Fibre continues as a sales agent for Itochu’s short fibre pulp i Europe. The companies already have a long working relationship. Metsä Group’s equity ratio will improve by >4% and net gearing by some 30%.

M-Real said a part of the reasoning behind the deal was to strengthen Metsä Fibre as one of he global leaders in pulp market. Additionally the company reduces its own pulp surplus from 0.5 million annual tonnes to 0.3 million annual tonnes.

M-Real is also divesting 0.5% of its holding in Finnish energy company Pohjolan Voima Oy to Metsä Fibre for 64 million. This leaves M-Real with a 2% stake. M-Real will book a capital gain of approximately 88 million from divested Metsä Fibre shares in Q2 2012 accounts and 40 million from Pohjolan Voima sale.

In the AGM towards the end of last Month, it was decided that M-Real’s business name changes to Metsä Board Corporation to better reflect the current form of the company. Its share gained over 6% in today’s trading.

UPM: Forest owners sue

UPM said today that it has received the claims related to Market Court decision on the Finnish roundwood cartel from 1997 to 2004. It was reported last August that forest owners were going to sue UPM (OMX: UPM1V), Stora-Enso (OMX: STERV) and Metsäliitto for the damages. Total capital amount of the claims now received according to UPM is 227.7 million Euros , 54.1 million of which is individually to UPM. Additionally the claimants want compensation on value added tax and interest.

As expected claims come from state owned forest administrator Metsähallitus, individual forest owners plus from municipalities and parishes. UPM revealed the cartel to authorities and thusly avoided a fine from the Market Court. Market Court ruled against the companies in 2009 and slapped a competition infringement fine on Stora Enso and Metsäliitto. UPM says that it considers the claims completely unwarranted and has not booked any provision in its accounts. UPM and Stora Enso are down 2% for the day.

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.

UPM divests Radio Frequence IDentification business, gets shares in return

Finnish forest industry company UPM-Kymmene Corporation (OMX: UPM1V) has agreed to sell its UPM RFID business to SMARTAC in exchange for a 10.6% indirect economic interest in SMARTAC through OEP Technologie B.V. The transaction, which is still subject to regulatory approval, would further add to SMARTAC’s lead as the company with the widest RFID business portfolio. The closing of the deal is expected in Q1 2012.

UPM RFID is world number one in HF, NFC and UHF radio frequency identification (RFID) tags and inlays (with product uses in RFID labels, hangtags, hard tags and on-metal tags) and is a part of UPM’s Engineered Materials business group. UPM RFID was established in 1997 and has production sites in Fletcher, North Carolina, USA and in Guangzhou, China (UPM Raflatac production sites) with a global network of sales offices.

SMARTAC N.V has about 3300 employees and is focused in RFID as one of the global leaders in RFID inlays for electronic passports in contactless credit cards and in RFID transponders for public transportation applications. SMARTAC is majority owned (also through OEP) by JPMorgan Chase & Co One Equity Partners LLC., via a public offer in 2010 for the then Frankfurt Stock Exchange listed firm. The company has 10 factories worldwide and already has NFC and UHF RFID tags and inlays production site in Kulim, Malaysia.

RFID technology is used to identify, track and trace objects and UPM feels that there is greater potential reward when taking part in a larger player in this growing field, especially as the business has little relation with UPM’s other activities. SMARTAC has been actively seeking growth opportunities, with recent acquisitions of Neology Inc. and KSW Microtec AG in December followed by a capital increase this Monday.

Major cost cutting resumes

Major restructuring news hit the wires this week. Nordea (OMXS: NDA, OMXH: NDA1V) started to prepare for tightening global banking regulations in advance and announced on Monday that it is initiating negotiations with unions on staff cost reductions. The action is a part of Nordea’s “new normal” plan that has been hinted at several times before. Nordea is aiming to reach 15% ROE and will announce additional measures towards that end.

The negotiations in four Nordic countries are anticipated to result in over 5% cut in total workforce as up to 2000 jobs are at risk. The cuts are relatively even between Denmark, Finland and Sweden at 500 to 650 and a couple hundred in Norway. Nordea also released economic outlook statement titled ominously as “signs of crisis”.

UPM-Kymmene (OMX: UPM1V) acted quickly and decisively after Myllykoski acquisitions and said today it plans to reduce 1.3 million tonnes of paper capacity in Europe (1.2 million tonnes of magazine paper in Finland, Germany and France plus 110 tonnes of newsprint capacity in Germany). This will be done through closure of Myllykoski mill in Kouvola, Finland, Albbruck mill in Germany and paper machine 3 at the Ettringen mill in Germany, meaning a near 1200 reduction in headcount.

Björn Wahlroos is the Chairman of the Board in Both UPM-Kymmene and Nordea. Union leaders are fuming in national media, even going as far as saying that personal assets should be frozen when leaders make such decisions, hinting at Wahlroos. Investors have welcomed the announcements. Nordea is up nicely for the week and the entire pulp & paper sector gained strongly today also aided by the fact that UPM’s estimate of the annual synergy benefits from Myllykoski & Rhein Papier GmbH deal was doubled to approximately 200 million Euro.

Companies involved in Finnish wood cartel from 1997-2004 to face lawsuits

Yle reported this morning that private forest owners who sold roundwood to UPM (OMX: UPM1V), Stora-Enso (OMX: STERV) and Metsäliitto [Metsäliitto Cooperative is the largest shareholder in M-Real (OMX: MRLBV), M-Real is not involved] are going to sue the companies for damages suffered from the cartel that was in place from 1997 to 2004. STT reported on Tuesday that as an example, the city of Jyväskylä might have lost 1.2 million Euros

Stora Enso and Metsäliitto were both given competition infringement fine by The Market Court in 2009, the total amount of which was 51 million Euro. UPM escaped a fine on the grounds of being the party that tipped authorities on the existence of the cartel. The Market Court did not prove actual price agreements between companies but concluded that companies were aiming at stable price development for round timber.

On 04.01.2011 Finnish Forest Research Institute (Metla) estimated that damages suffered by forest owners could have been over 1 billion Euro including non-direct losses and interest payments until now. A private forest machine selling entrepreneur has been urging individual sellers to join in a class action suit and Association of Finnish Local and Regional Authorities has been coordinating municipalities’ actions. Supposedly hundreds of private forest owners and a couple dozen municipalities may file suit.

The municipalities are hiring an advocate to conduct a research on the damages suffered and will decide on a lawsuit on the basis of that. Numerous parishes are also looking into the possibility of joining in. Finnish Metsähallitus (Administration of Forests,) has already made a claim of 282 million Euro, which is in preparations in district court. The Pulp & Paper sector companies involved say the claim is baseless. Lawsuit need to be filed before the end of the year.

UPM relatively upbeat in interim report tone, share down on earnings miss

UPM Kymmene (OMX: UPM1V) reported EPS of 26 cents excluding special items. This was down a notch from 2010. Special items included an 86 million gain from Pohjolan Voima Oy’s sale of Fingrid Oyj shares and EPS with special items was 56 cents. Sales were up 9% to 2.4 billion plus on higher prices (for instance average paper prices were up 6% for the year).

Operating cash flow was strong 280 million Euro. EBITDA increased to 372 million or 15.2% of sales. Variable costs were up strongly: fibre costs were 49 million higher and energy costs 18 million higher than in Q2 2010.

Myllykoski and Rhein Papier GmbH acquisition was completed on August 1st for an enterprise value of around 900 million. EU commission approved the deal on July 19th. UPM expects the acquisition to have instantaneous positive impact on cash flow and a positive impact on the result from next year. UPM has started Q3 with an increase of 2% in prices for newsprint and magazine papers in Europe.

UPM’s earnings guidance continues to call for a higher operating profit excluding special items than in 2010. The company foresees H2 operating profit to match H1. Demand has levelled off and the demand outlook is stable. UPM says that variable costs are no longer climbing at a fast rate. The share is down 7% to 9.2 Euro one hour into the session.

UPM's Myllykoski and Rhein Papier deal approved

EU commission unconditionally approves UPM Kymmene's (OMX: UPM1V) Myllykoski and Rhein Papier GmbH deal discussed in detail in 21.12.2010 blog item. Competitors Stora Enso (OMX: STERV) Holmen (OMX: HOLM B) Svenska Cellulosa Aktiebolaget (SCA) (OMX: SCA B), M-Real (OMXH: MRLAV, OMXH: MRLBV) and Norske Skog (OSE: NSG) are also up strongly on the news.

EU commission conducted an in-depth investigation and concluded that the combined entity will face enough competition so as to that consumers are not hurt. Competitors also have significant spare capacity left. Nevertheless some of the excess capacity in the field may now be cut by UPM. Analysts had been suggesting to buy European pulp & paper sector companies ahead of the approval as it was speculated that a ruling would be positive.

Combined Myllykoski and Rhein Papier have even paper mills with annual capacity of around 2.8 million tonnes. Myllykoski is a family business with long traditions. The owners have been rueing post initial announcement that situation had to come to this and now the most likely cuts should be from its assets. Rhein Papier has a couple of prime assets. UPM has now cleared all regulatory hurdles and expects final closing of the 900 million Euro per enterprise value deal within a month. UPM Kymmene's release is available here.