UPM-Kymmene Oyj (UPM1V), Europe’s second- largest paper maker, booked writedowns and other charges that clipped fourth-quarter profit by 1.6 billion euros ($2 billion) after Europe’s debt crisis dented demand for paper.
UPM will record an impairment charge of 1.8 billion euros at its paper unit, including 783 million euros related to goodwill and a 987 million-euro writedown on fixed assets, Helsinki-based UPM-Kymmene said in a statement today. Operating profit before items was about 138 million euros in the fourth quarter versus 147 million euros a year earlier.
“The continuing challenges in the European economy have significantly impacted the consumption of paper, exacerbating the effect of structural changes in paper end-uses and resulting in further decline in the demand of graphic papers in Europe,” the company said. “High costs and significant overcapacity continue to challenge the industry operators.”
European paper producers have suffered from declining demand since at least 2005 as consumers shift to online media. Europe’s sovereign debt crisis, unemployment and austerity measures seen in much of Europe is exacerbating the challenges faced by the industry. UPM said it has not been able to improve the profitability of its European graphic paper business as much as targeted and it doesn’t see any significant improvement in profitability in the foreseeable future.
The Finnish company plans to reduce graphic paper capacity in Europe by 580,000 tons.
UPM-Kymmene had initially forecast fourth-quarter operating profit before special items at the same or at a lower level than in the third quarter, when it stood at 122 million euros. The company reported an operating loss before special items of 10 million euros at its paper business in the latest three months. UPM is scheduled to report final 2012 earnings on Jan. 31.
The paper- and pulpmaker also said that the introduction of new accounting rules in the first quarter will increase asset values at its energy business area by about 1.95 billion euros. UPM’s interest-bearing liabilities will increase by some 200 million euros because of the new accounting standards, while its equity will be reduced by some 315 million euros in the first quarter because of new pension liability accounting rules, it said.
UPM is expanding in energy generation and electricity trading to counter a glut in paper production and the rise of the Internet. Paper operations have been operating at about break even for the past two years and the merger of plants had failed to achieve the targeted cost savings by the end of last year, according to the company.
“UPM’s asset values will now better represent the fair values of the businesses,” said Chief Financial Officer Tapio Korpeinen. “I believe this will contribute to investors’ confidence on our balance sheet values.”
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