UPM Financial Review for 2009
Demand has started to improve.
Source: UPM -- Graphic Arts Online, February 2, 2010
Q4/2009: Earnings per share were EUR 0.57 (-0.56), excluding special items EUR 0.21 (-0.19). Operating profit excluding special items was EUR 186 million (loss of EUR 46 million). Stringent cost control contributed to profit improvement, EBITDA margin was 17.2%. Demand has started to improve.
Q1-Q4/2009: Earnings per share were EUR 0.33 (-0.35), excluding special items EUR 0.11 (0.42). Operating profit excluding special items was EUR 270 million (513 million). Strong operating cash flow EUR 1,259 million, net debt reduced by EUR 591 million. Fixed cost savings worth EUR 300 million.
Key figures
| | Q4 | Q4 | Q1-Q4 | Q1-Q4 |
| 2009 | 2008 | 2009 | 2008 | |
| Sales, EUR million | 2,108 | 2,315 | 7,719 | 9,461 |
| EBITDA, EUR million | 362 | 178 | 1,062 | 1,206 |
| % of sales | 17.2 | 7.7 | 13.8 | 12.7 |
| Operating profit (loss), EUR million | 126 | -286 | 135 | 24 |
| excluding special items, EUR million | 186 | -46 | 270 | 513 |
| % of sales | 8.8 | -2.0 | 3.5 | 5.4 |
| Profit (loss) before tax, EUR million | 311 | -360 | 187 | -201 |
| excluding special items, EUR million | 156 | -120 | 107 | 282 |
| Net profit (loss) for the period, EUR million | 295 | -286 | 169 | -180 |
| Earnings per share, EUR | 0.57 | -0.56 | 0.33 | -0.35 |
| excluding special items, EUR | 0.21 | -0.19 | 0.11 | 0.42 |
| Diluted earnings per share, EUR | 0.57 | -0.56 | 0.33 | -0.35 |
| Return on equity, % | 19.4 | Neg. | 2.8 | Neg. |
| excluding special items, % | 7.4 | Neg. | 1.0 | 3.4 |
| Return on capital employed, % | 13.2 | Neg. | 3.2 | 0.2 |
| excluding special items, % | 7.2 | Neg. | 2.5 | 4.6 |
| Operating cash flow per share, EUR | 0.71 | 0.69 | 2.42 | 1.21 |
| Shareholders' equity per share at end of period, EUR | 12.67 | 11.74 | 12.67 | 11.74 |
| Gearing ratio at end of period, % | 56 | 71 | 56 | 71 |
| Net interest-bearing liabilities at end of period, EUR million | ||||
| Capital employed at end of period, EUR million | 11,066 | 11,193 | 11,066 | 11,193 |
| Capital expenditure, EUR million | 741 | 113 | 913 | 551 |
| Capital expenditure excluding acquisitions and shares | 58 | 102 | 229 | 532 |
| Personnel at end of period | 23,213 | 24,983 | 23,213 | 24,983 |
The market in 2009
The global economy experienced a severe recession in 2009 as the financial crisis spread into the real economy. Consumer confidence bottomed out at a historic low level both in Europe and in the US. Declining demand led to lower industrial production, exports and investments. The global economy showed signals of stabilisation in the third quarter of 2009 supported by rebounding confidence and a pickup in global trade. This was partly driven by China, which performed exceptionally well during the recession in comparison with any other major country.
The euro strengthened against the US dollar from February onwards and weakened the competitiveness of euro-area industries.
The UK pound, the Russian rouble and the Swedish crown also weakened against the euro.
Prices for commodities and raw materials were declining most of the year but started to increase in the late autumn as the economy started to stabilise.
Demand for wood raw material decreased from the previous year due to exceptionally low industrial production and high wood inventories in the beginning of the year. Average market prices in Finland declined from peak
years of 2007-2007.
Demand for chemical pulp declined in the first half of the year, but a rebound took place in the second half of the year due to strong demand in China. Chemical pulp market prices started to increase after the second quarter of the
year.
Global advertising expenditure plummeted under the global economic downturn. In Europe, total advertising expenditure fell more than 10% in 2009 while the print media spend declined by some 15%. Although print advertising lost some of its share, it held its place as the largest media in Europe and as the second largest media globally after television. Global direct mail expenditure held up better than total advertising, declining by 4% from the previous year.
As a consequence of the decline in print advertising, the demand for graphic papers in Europe and North America declined. Market balance remained weak throughout the year. The retail sector both in Europe and in the US suffered from the low level of private consumption. The demand shifted towards discount stores at the expense of branded products and affected the demand for packaging materials as well as the advertising focus of the retail sector.
Exceptionally low construction activity in 2009 decreased demand for building materials, including wood-based materials. The construction confidence indicator started to improve in late 2009, but still remained at a very low level.
Results
Q4 of 2009 compared with Q4 of 2008
Sales for the fourth quarter of 2009 were EUR 2,108 million, 9% lower than the EUR 2,315 million in the fourth quarter of 2008. Sales decreased mainly due to lower sales prices in most of UPM's business areas.
Operating profit was EUR 126 million, 6.0% of sales (loss of EUR 286 million, -12.4% of sales). The operating profit excluding special items was EUR 186 million, 8.8% of sales (loss of EUR 46 million, -2.0% of sales). Operating profit includes net charges of EUR 60 million as special items, including restructuring charges of EUR 44 million in Timber and Plywood operations in Finland.
Operating profit excluding special items was clearly better than in the same quarter last year. The comparison period was exceptionally weak, as it included a wood inventory write down and extensive production downtime in paper, pulp and plywood mills and sawmills.
The improvement in profitability was mainly driven by lower variable and fixed costs. Wood costs declined by EUR 80 million from the previous year. Other variable costs also decreased clearly, including EUR 25 million saved in lower energy costs.
Cost-saving measures reduced the company's fixed costs by EUR 60 million in comparison with the same period last year. As part of the measures, UPM initiated a flexible operating mode in the beginning of 2009, using temporary capacity shutdowns to adjust production to the low demand.
Changes in sales prices in euro terms reduced operating profit by about EUR 160 million. The average paper price in euros decreased by approximately 8% from the same period last year. The average price for label materials in local currencies was about the same. Timber and plywood prices fell substantially.
The increase in the fair value of biological assets net of wood harvested was EUR 9 million compared to a decrease of EUR 2 million a year before.
The share of results of associated companies and joint ventures was EUR 1 million (16 million negative). The accounting treatment of the associated company Metsä-Botnia was changed as of 30 June 2009. As of December 2009, Metsä-Botnia no longer is UPM's associated company (see Pulp business area footnote 3).
Profit before tax was EUR 311 million (loss of EUR 360 million) and excluding special items EUR 156 million (loss of EUR 120 million). Special items of EUR 215 million reported in financial items include a capital gain of EUR 220 million on the sales of the approximately 30% share in Metsä-Botnia and a capital loss of EUR 5 million related to investments in development units. Interest and other finance costs, excluding special items, were EUR 30 million (60 million) net. Exchange rate and fair value gains and losses were EUR 0 million (loss of EUR 14 million).
Income taxes were EUR 16 million (74 million positive). The impact on taxes from special items was EUR 28 million positive (51 million positive).
Profit for the fourth quarter was EUR 295 million (loss of EUR 286 million) and earnings per share were EUR 0.57 (-0.56). Earnings per share excluding special items were EUR 0.21 (-0.19).
2009 compared with 2008
Sales for 2009 were EUR 7,719 million, 18% lower than the EUR 9,461 million in 2008. Sales decreased mainly due to lower deliveries across all of UPM's business areas.
Operating profit was EUR 135 million, 1.7% of sales (24 million, 0.3% of sales). The operating profit excluding special items was EUR 270 million, 3.5% of sales (513 million, 5.4% of sales). Operating profit includes net charges of EUR 135 million as special items. UPM sold assets related to the former Miramichi paper mill in Canada and recorded an income of EUR 21 million. Restructuring measures resulted in net special charges of EUR 109 million including impairment charges of EUR 18 million. The share of the results of associated companies includes special charges of EUR 47 million.
Operating profit declined clearly from the previous year. The main reason for weaker profitability was significantly lower deliveries in all of UPM's business areas. Lower sales prices also impacted operating profit negatively.
Changes in sales prices in euro terms reduced operating profit by about EUR 260 million. The average paper price in euros decreased by approximately 3% from last year. The average price for label materials increased. Timber and plywood prices fell substantially.
UPM responded to lower demand with a flexible way of operating in all of its business areas, using temporary capacity shutdowns to adjust production to the low demand. Due to cost saving measures, the company's fixed costs decreased by EUR 300 million from the previous year.
Wood costs decreased from their earlier peak levels. Compared with last year, wood costs decreased by EUR 190 million. Energy costs increased slightly.
The increase in the fair value of biological assets net of wood harvested was EUR 17 million compared to EUR 50 million a year before.
The share of results of associated companies and joint ventures was EUR 95 million negative (62 million positive). The result includes special charges of EUR 29 million from Metsä-Botnia's Kaskinen pulp mill closure, and impairment charges of EUR 18 million related to Pohjolan Voima's two power plants. The accounting treatment of the associated company Metsä-Botnia was changed as of 30 June 2009. As of December 2009, Metsä-Botnia no longer is UPM's associated company (see Pulp business area footnote 3).
Profit before tax was EUR 187 million (loss of EUR 201 million). Profit before tax excluding special items was EUR 107 million (282 million). Special items of EUR 215 million reported in financial items include a capital gain of EUR 220 million on the sales of the approximately 30% share in Metsä-Botnia and a capital loss of EUR 5 million related to investments in development units. Interest and other finance costs, excluding special items, were EUR 153 million (202 million) net. Exchange rate and fair value gains and losses resulted in a loss of EUR 9 million (25 million).
Income taxes were EUR 18 million (21 million positive). The impact on taxes from special items was EUR 31 million positive (86 million positive).
Profit for the period was EUR 169 million (loss of EUR 180 million) and earnings per share were EUR 0.33 (-0.35). Earnings per share excluding special items were EUR 0.11 (0.42). Operating cash flow per share was EUR 2.42 (1.21).
Financing
In 2009, cash flow from operating activities before capital expenditure and financing, was EUR 1,259 million (628 million). Net working capital decreased by EUR 532 million during the period (increased by EUR 132 million).
The gearing ratio as of 31 December 2009 was 56% (71%). Net interest-bearing liabilities at the end of the period came to EUR 3,730 million (4,321 million). This includes the consolidated debt from the acquired Fray Bentos pulp mill and Forestal Oriental plantation forestry company.
In March 2009, UPM replaced the EUR 1.5 billion credit facility that was to mature in 2010 with a new EUR 825 million credit facility, maturing in 2012.
On 31 December 2009, UPM's cash funds and unused committed credit facilities totalled EUR 2.2 billion.
Personnel
In 2009, UPM had an average of 23,618 employees (26,017). At the beginning of the year, the number of employees was 24,983 and at the end of the year it was 23,213. The reduction of 2,294 employees, excluding the impact of Uruguay, is mostly attributable to ongoing restructuring. The acquisition of the Fray Bentos pulp mill and Forestal Oriental plantation forestry company added 524 employees.
Capital expenditure
In 2009, capital expenditure was EUR 913 million, 11.8% of sales (EUR 551 million, 5.8% of sales) and excluding acquisitions and share purchases, EUR 229 million, 3.0% of sales (EUR 532 million, 5.6% of sales). Acquisition of Metsä-Botnia's Uruguayan operations amounted to EUR 602 million. Operational capital expenditure totalled EUR 148 million (235 million).
The new renewable energy power plant at the Caledonian mill in Irvine, Scotland was started in June. The total investment cost was GBP 68 million.
UPM continued its tight investment discipline during 2009. Only few new investment decisions were made. The largest ongoing project is now the rebuild of the debarking plant at the Pietarsaari mill in Finland. The total investment cost is estimated to be EUR 30 million.
In December 2009, UPM made a decision to invest GBP 17 million in a materials recovery facility at its Shotton paper mill in North Wales. Construction of the facility will be completed by January 2011.
The ownership of Botnia and its assets in Uruguay
On 8 December, UPM, Metsäliitto Cooperative, M-real Corporation and Oy Metsä-Botnia Ab (Botnia) completed a transaction whereby Metsäliitto's and Botnia's shares of the Fray Bentos pulp mill and the eucalyptus plantation forestry company Forestal Oriental in Uruguay were acquired by UPM and UPM sold approximately 30% in Botnia to Metsäliitto. In addition UPM acquired 1.2% of the energy company Pohjolan Voima Oy from Botnia. The companies signed an agreement concerning the transaction on 22 October 2009.
Following the transaction, UPM has a 91% ownership of common shares in the Fray Bentos pulp mill, 100% in Forestal Oriental and 17% in Botnia. As of December 2009, Botnia no longer is UPM's associated company but accounted for as an available-for-sale investment. Consequently, UPM's own annual pulp production capacity increased from 2.1 million tonnes to 3.2 million tonnes a year and UPM's share of Botnia's capacity was reduced to 400,000 tonnes. UPM's total pulp production capacity including its entitlement to Botnia's capacity is 3.6 million tonnes a year.
UPM recorded a EUR 220 million capital gain on the sale of Botnia's shares. UPM's assets increased by EUR 1,209 million and interest-bearing net debt by EUR 370 million. In addition, the changes in fair values of the previous holding increased UPM's equity by EUR 443 million.
Pro forma financial information
If the Botnia transaction had occurred on 1 January 2009, UPM's sales would have been EUR 7,923 million, operating profit EUR 202 million, and operating profit excluding special items EUR 308 million. Profit for the period would have been EUR 219 million.
Pro forma key figures
| EUR million | Reported 2009 | Pro forma 1) | Pro forma 2) |
| adjustments | 2009 | ||
| Sales | 7,719 | 204 | 7,923 |
| EBITDA | 1,1,062 | 92 | 1,154 |
| Operating profit | 135 | 67 | 902 |
| excluding special items | 270 | 38 | 308 |
| Profit before tax | 187 | 52 | 239 |
| excluding special items | 107 | 23 | 130 |
| Profit for the period | 169 | 50 | 219 |
1) Sales total of EUR 350 million include sales of EUR 146 million to UPM's units. Adjustments, among others, include reversal of special items of EUR 29 million related to the closure of the Kaskinen mill.
Pulp business area pro forma key figures
| EUR million | Reported 2009 | Pro forma | Pro forma 2) |
| adjustments | 2009 | ||
| Sales | 653 | 350 | 1,003 |
| EBITDA | -18 | 92 | 74 |
| Operating profit | -156 | 67 | -89 |
| excluding special items | -127 | 38 | -89 |
2)Reported 2009 includes December 2009, and the pro forma adjustments January-November of the Uruguayan operations.
Restructuring
The Kajaani paper mill and Tervasaari pulp mill closures were completed at the end of 2008. Due to the reduced demand for paper and pulp, the closures had only minor impact on UPM's paper or pulp deliveries.
The Label business restructured its European operations in 2009. The plan was announced in November 2008. UPM Raflatac permanently closed a number of self-adhesive labelstock production lines and reduced slitting capacity in the United Kingdom, France, Germany, Hungary and Finland. One slitting terminal was also closed in the United States. The restructuring was completed by the end of the third quarter of 2009.
In November 2009, UPM announced a plan to improve the plywood and timber businesses' long term cost competitiveness and increase added value in birch plywood production in Finland. Decisions on the plan were announced in January 2010. UPM will permanently close the plywood mill and sawmill in Heinola, the Kaukas plywood mill in Lappeenranta, and the further processing mill in Parkano during the first half of 2010. These measures will decrease the number of UPM employees by approximately 830.
As part of the restructuring, UPM will invest approximately EUR 25 million in the expansion of the Savonlinna plywood mill and the development of production at the Kaukas sawmill and the Aureskoski further processing mill.
The Lahti plywood processing mill was closed in October and its production was moved to other mills.
In Forest and timber, a further processing mill in Boulogne in France was closed in August and the operations were centralised to the Aigrefeuille mill.
Restructuring has been necessary to improve cost competitiveness. The measures taken in 2009, together with measures initiated in previous years, reduced the number of employees by 2,300 from the end of 2008. Out of these, 620 were due to closures of production. The annualised employee-related cost savings are about EUR 115 million.
Shares
UPM shares worth EUR 5,691 million (10,549 million) in total were traded on the NASDAQ OMX Helsinki stock exchange during 2009. The highest quotation was EUR 9.78 in January and the lowest EUR 4.33 in April.
The company's ADSs are traded on the US over-the-counter (OTC) market under a Level 1 sponsored American Depositary Receipt programme.
The Annual General Meeting held on 25 March 2009 approved a proposal by the Board of Directors to authorise the Board of Directors to decide on the buy-back of not more than 51,000,000 of the company's own shares. The authorisation is valid for 18 months from the date of the decision.
The Annual General Meeting of 27 March 2007 authorised the Board to decide on a free issue of shares to the company itself so that the total number of shares to be issued to the company combined with the number of its own shares bought back under the buy-back authorisation may not exceed 1/10 of the total number of shares in the company.
In addition, the Board has the authority to decide to issue shares and special rights entitling the holder to shares of the company. The number of new shares to be issued, including shares to be obtained under special rights, shall be no more than 250,000,000. Of that, the maximum number that can be issued to the company's shareholders based on their pre-emptive rights is 250,000,000 shares and the maximum number that can be issued deviating from the shareholders' pre-emptive rights in a directed share issue is 100,000,000 shares. The maximum number of new shares to be issued as part of the company's incentive programmes is 5,000,000. Furthermore, the Board is authorised to decide on the disposal of the company's own shares. To date, this authorisation has not been used. These authorisations of the Annual General Meeting 2007 will remain valid for no more than three years from the date of the decision.
The Annual General Meeting of 27 March 2007 also decided to grant share options in connection with the company's share-based incentive plans. In option programmes 2007A, 2007B and 2007C, the total number of share options is no more than 15,000,000 and they will entitle the holders to subscribe for a total of no more than 15,000,000 new shares in the company.
The Annual General Meeting of 2005 decided to grant a total of 9,000,000 share options of which the total number of share options designated as 2005H was not more than 3,000,000, and would entitle the holders to subscribe for a total of no more than 3,000,000 new shares. The share options designated as 2005H are outstanding as at 31 December 2009. The share options designated as 2005G expired at the end of October 2009. No shares were subscribed with share options 2005G.
Apart from the above, the Board of Directors has no current authorisation to issue shares, convertible bonds or share options.
The number of shares entered in the Trade Register on 31 December 2009 was 519,970,088. Through the issuance authorisation and share options, the number of shares may increase to a maximum of 787,970,088.
At the end of the year the company did not hold any of its own shares.
The company has received the following notifications from shareholders: BlackRock Inc. on 8 December 2009 held 5.36% of UPM's shares and voting rights. Franklin Templeton on 27 July 2009 announced its ownership in UPM had declined below 5% of the company's shares and voting rights.
Company directors
At the Annual General Meeting nine members were elected to the Board of Directors. Mr Matti Alahuhta, President and CEO of KONE Corporation, Mr Berndt Brunow, Board member of Oy Karl Fazer Ab, Mr Karl Grotenfelt, Chairman of the Board of Directors of Famigro Oy, Dr. Georg Holzhey, former Executive Vice President of UPM and Director of G. Haindl'sche Papierfabriken KGaA, Ms Wendy E. Lane, Chairman of the American investment firm Lane Holdings, Inc., Mr Jussi Pesonen, President and CEO of UPM, Ms Ursula Ranin, Board member of Finnair plc, Mr Veli-Matti Reinikkala, President of ABB Process Automation Division and Mr Björn Wahlroos, Chairman of the Board of Sampo plc were re-elected as members of the Board of Directors.
The term of office of the members of the Board of Directors lasts until the end of the next Annual General Meeting.
At the assembly meeting of the Board of Directors, Mr Björn Wahlroos was re-elected as Chairman, and Mr Berndt Brunow and Dr. Georg Holzhey were re-elected as Vice Chairmen.
In addition, the Board of Directors appointed from among its members an Audit Committee with Mr Karl Grotenfelt as Chairman, and Ms Wendy E. Lane and Mr Veli-Matti Reinikkala as members. A Human Resources Committee was appointed with Mr Berndt Brunow as Chairman, and Dr. Georg Holzhey and Ms Ursula Ranin as members. Furthermore, a Nomination and Corporate Governance Committee was appointed with Mr Björn Wahlroos as Chairman, and Mr Matti Alahuhta and Mr Karl Grotenfelt as members.
Litigation and other legal actions
The investigations of certain competition authorities into alleged antitrust activities with respect to various UPM products, as well as litigation arising therefrom, have ended in all material respects.
In Finland, UPM is participating in the building project of a new nuclear power plant, Olkiluoto 3, through its associated company Pohjolan Voima Oy. Pohjolan Voima Oy is a majority shareholder of Teollisuuden Voima Oy ("TVO") with 58.12% of shares. UPM's indirect share of the capacity of the Olkiluoto 3 is approximately 29 %. The original agreed timetable for the start up was summer 2009 but the construction of the unit is delayed. The latest anticipated start-up time is after June 2012. TVO has requested the plant supplier, the consortium AREVA-Siemens, to provide a re-analysis of the anticipated start-up time.
TVO has informed UPM that the arbitration filed in December 2008 by AREVA-Siemens, concerning the delay at Olkiluoto 3 and related costs, amounted to EUR 1.0 billion. In response, TVO filed a counter-claim in April 2009 for costs and losses that TVO is incurring due to the delay and other defaults on the part of the supplier. The value of TVO's counterclaim was approximately EUR 1.4 billion.
Events after the balance sheet date
The Group's management is not aware of any significant events occurring after 31 December 2009.
Risk factors
UPM has increased its ownership interest in the Fray Bentos pulp mill in Uruguay to 91% as a result of the acqusition of Metsäliitto Cooperative's and Oy Metsä-Botnia Ab's shares in the Fray Bentos pulp mill in December 2009. There are three separate litigations pending against the government of Uruguay related to the Fray Bentos pulp mill, and one litigation directly against the company operating the pulp mill. All of these litigations have been commenced before the pulp mill started its operations in November 2007 and may last several years.
