UPM’s cash flow and the simplification of business

To begin with a longish quote (Jussi Pesonen, UPM-Kymmene’s CEO):

“UPM’s business environment in the third quarter of 2012 was impacted by the decelerating global economy. Despite these circumstances, I am pleased that our cash flow continued to be strong and we were able to decrease our net debt and further strengthen our balance sheet. Performance in our growth businesses remained good, but Paper, Plywood and Timber continued to suffer from weak profitability. […]

Energy, Label and Asian Paper businesses maintained strong profitability during the third quarter. Ample hydropower boosted Energy’s performance and Label experienced positive cost development. Pulp profitability was affected by temporary process disruptions at the Pietarsaari mill.

Although both deliveries and prices in Paper were in line with expectations, we were not able to adjust Paper’s cost level enough to improve profitability in the current operating environment. The development of the logistics and energy costs in particular was disappointing. […]

We will use our full toolkit to get Paper’s performance on the right track. Our main focus in the Paper business is to improve margins to maximise cash flow. We have already started to review our costs, margins and structures to make the necessary turnaround in Paper and we have informed our publication paper customers of price increases. We will also investigate consolidation opportunities, and carry out restructuring and capacity closures when needed.(my emphasis)

So, in short: paper and UPM’s traditional saw-mill businesses are weak in profitability. Is this surprising? The CEO does not mention specific markets but the mention of ‘Paper’ versus ‘Asian Paper’ may indicate that he refers to the European and/or North American markets. Well – METLA estimated that the European paper markets will be weak for a long time still, as I mentioned here.

UPM is yet again going to review costs, margins and structures. Most likely this will at some point mean that there will be co-decision procedures in those places that have weaker-than-average profitability and/or higher costs in some way. Also restructuring and capacity closures are mentioned. It is sad that CEOs don’t actually tell what this entails, although everybody understands. Restructuring means that less people have to do the same work – roughly speaking.
But the point is that over the years there have been many investments abroad to the detriment of the domestic paper industry. Thus, the units most likely on the chopping board are again in Finland, especially in combination with a relatively weak employment protection. Given the geographical/regional concentration of paper industry firms, the Finnish paper industry firms should really do a lot more to get their former employees to a new job, especially since the industry has destroyed so many jobs already.

All the talk about cost examination etc. is self-defeating in the same way economic austerity is: in the process much is destroyed – skilled workers lose their job, skilled workers get a heavier burden at work.

The two other points of the press release are not surprising: Asian paper is doing well, labels also. Energy is doing well – no surprise. Before we know it, UPM is the new E.On in Finland.
Oh, and on a not totally unrelated issue: we have informed our publication paper customers of price increases.What did you say, it is the market that determines prices? Yeah, right. Increasing prices in a weak market is a sure way to lose customers and through that profitability (and indirectly, productivity). Customers have a wide range of options to select alternative suppliers, triggering yet another wave of restructurings.

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