Paper maker UPM hit by shutdowns, sees pulp price pressures

Wednesday, Jul 26, 2017

Finnish pulp, paper and energy company UPM reported a smaller than expected quarterly profit on Tuesday due to maintenance outages, and warned pulp prices faced pressure from new capacity in the industry.

UPM is the world's largest maker of graphic papers such as newsprint and magazine paper, where demand is falling in the West due to a shift from print to digital publishing.

The firm has so far protected its profitability with cost cuts as well as its focus on pulp, a product with a brighter outlook than paper.

Shares in UPM dropped after it reported second-quarter core operating profit of 270 million euros ($315 million), up 2 percent from a year ago but below analysts' average forecast for 289 million euros.

"This time, Q2 was quite heavily impacted by maintenance activity," CEO Jussi Pesonen told a news conference, adding UPM's hydropower generation was also low due to lack of rain.

UPM's stock was down 8.0 percent to 23.37 euros at 1328 GMT. It is still up about 30 percent from a year ago.

"This report came in a bit below forecasts in almost all business units. People are used to ... good results from UPM and the valuation for the stock is quite high," said Evli Bank analyst Markku Jarvinen, who has a "hold" rating on the shares.

Almost half of the quarter's profit came from UPM's pulp division, as the company's average pulp prices rose by 10 percent from a year earlier.

Pulp is used to make paper, and also tissue and packaging board - two product areas where demand is rising, particularly from China.

However, upcoming new pulp plants from companies such as Metsa Fibre, Fibria, Sodra and Asian Paper & Pulp may change the market.

"New production lines entering the market may have a clear negative impact on pulp prices," UPM warned.

Pesonen said UPM was still in talks about a new pulp mill in Uruguay, but any investment was still years away.

With no large investments in sight, shareholders have been hoping for special dividends.

Pesonen said they were one option. "We have all the tools available, and this (a special dividend) is one of them. But that is up to the board," he said.

He also said the company could do merger and acquisition deals, adding consolidation would make sense in the European paper industry amid falling demand.



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