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Executives

Jussi Pesonen – President and CEO

Tapio Korpeinen – CFO

Analysts

Mikael Jafs – Cheuvreux Nordic

Oskar Lindstrom – Danske Bank

Johan Sjoberg – Carnegie

Lars Kjellberg – Credit Suisse

Karri Rinta – Handelsbanken

Kartik Swaminathan – Merrill Lynch

UPM-Kymmene Corporation (OTC:UPMKF) Q1 2013 Earnings Call April 25, 2013 6:15 AM ET

Jussi Pesonen

Ladies and gentlemen, welcome to UPM’s first quarter 2013 result webcast. My name is Jussi Pesonen and I’m the CEO of UPM-Kymmene. I’m here with our CFO, Tapio Korpeinen.

Tapio Korpeinen

Good afternoon, everyone.

Jussi Pesonen

Let’s then move to the highlights of the first quarter this year. Q1 was well in line with our expectations. Our results were underpinned by continued good performance in our growth businesses. Pulp improved its profits as we had a normal clean run in the quarter in terms of production, and of course, the sales were solid as well.

In Energy, our profits continued to be on a good level, even though the hydro volumes normalized, and Label continued with stable performance. While it’s positive that in plywood and timber we achieved some improvements with our own measures, even though there was little improvement in the Wood products markets, our prices are up on both areas.

In Paper, the market situation was just as challenging as we expected and explained. Publication paper prices decreased in Europe during the Q1 currencies and current development was against us, and paper demand continued to decrease in Europe as we were guiding earlier this year. As a result of the EBITDA, the Paper business decreased significantly and operating profit was just about breakeven.

Of course, it is a pleasure to also comment that our fixed costs were down from that of last year. We have been able to save our fixed cost over EUR30 million, understanding that that couldn’t offset the result decline, especially in paper.

And now, we are in the situation where the challenges are, as we all know, we are fast implementing the cost-saving plan that we announced 17th of January. We are targeting future annual fixed cost savings of EUR90 million, and that benefit will start to materialize in the second half of this year. But I will come back to that.

Next page I would skip and then move to the kind of economic outlook, page 4, so exactly this two-speed world where we are living in. In Europe, the economy continues to be contract and negative for most of the businesses. In our case, it is posting additional challenges for the European graphic paper business, in particular.

In the US, positive GDP growth continues, but still on a low level. Only in the emerging markets the economy growth continues to be relatively solid, as we can see here, and that is visible also in our business in China, especially.

Moving to the deliveries and delivery volumes. This is a good picture to elaborate the kind of situation where we have and this is backdated up until 2008, and so we see the big drop in 2009 and the recession. Of course, these macro realities are affecting the demand for our products as well.

As you can see from this page that the most visible, it is in our publication paper deliveries, which decreased by 6% to 7% from last year. The decrease in deliveries from Q4 was 17%, which is of course probably a normal seasonal pattern for us. It has been typically on the level of 15% on average.

In Pulp, we had the normal clean quarter in terms of production and this was visible in our pulp deliveries as well as profits in the pulp business. We were able to generate more than EUR140 million of EBITDA and a good EBIT margin as well.

You may recall that in the latter part of last year, we had some production problems on top of the normal maintenance and downsize [ph] we had. So this was certainly run for a change.

In Plywood, as they speak themselves, we have been successful to actually, in our commercial strategy focusing on key customers, and especially what is visible here is that we have been able to sell our products outside of Europe, which has been our activity using the UPM platform to sell products also outside of Europe. European economy doesn’t support that kind of increase in plywood, as to kind of seen here.

In Other business, broadly, our volume development has been rather stable.

And now I would like to hand over to Tapio, who is talking about the economics and financials. Tapio, please.

Tapio Korpeinen

Thank you, Jussi. On this following page 6, you can see the development of our EBITDA from last year both in terms of earnings drivers and by business area.

In the first quarter, we had a tough headwind from prices, currencies, and deliveries, particularly in paper. Sales prices and currencies reduced our earnings by about EUR60 million, whereas lower volumes had a EUR40 million negative impact. On the positive side, as Jussi already mentioned, we had EUR30 million reduction in fixed costs. Variable costs were on about the same level as last year.

Comparing to the fourth quarter of last year, we also had a negative impact from prices and volumes to a large extent offset by a reduction in fixed costs. Part of the sequential reduction in fixed costs is seasonal by nature, but there was also a reduction in the run rate of our fixed costs, as some of the actions started during last year came to completion.

On business area level, there was a clear reduction in our paper business EBITDA, whereas the other businesses were more stable. The business area development is shown in absolute terms in terms of EBITDA on page 7. Here as well it is clear that in Energy and Label, profitability has been stable.

In Energy, we had less hydro power than in the comparison periods, but our hedging strategy continued to work well. In Pulp, earnings rebounded from the fourth quarter, since we had a good production run and no maintenance shuts during the quarter. It was a clean first quarter.

In Paper, as already mentioned, there was a clear reduction in EBITDA. After the price reductions that took place in the beginning of this year, paper prices are down to the level of marginal producers’ cash costs. It is no wonder that we have seen a fair number of capacity closure announcements from several companies during this year. The structures in the paper industry are certainly being tested.

In our Paper business, operating profit, we had a EUR55 million reduction and depreciation compared with the comparison periods. Half of the reduction came from certain European paper assets coming to the end of their depreciation periods, and the other half came from the impairment charge that we took in the fourth quarter. As a result, our Paper business operating profit was just slightly positive.

On page 8, you can see the Group level operating profit, which now has been fairly stable in a range of roughly EUR122 million, slightly of EUR150 million for seven quarters now.

Our operating cash flow in the first quarter was EUR103 million. Cash flow was impacted by a working capital increase of EUR96 million, which is seasonally fairly typical for us in the first quarter. Even in the seasonally low quarter, cash flow after investments continued positive.

Our net debt was EUR3.199 billion at the end of the first quarter. There was a small reduction in debt from the fourth quarter whereas it was EUR473 million lower than one year ago. I would like to highlight here that the adoption of new IFRS consolidation standards resulted in about EUR200 million increase in consolidated net debt figure. The increase came from the consolidation of the partly owned combined heat and power plants. We have restated also the comparison quarters of last year 2012.

Our short-term outlook is unchanged. We expect the good performance in pulp, energy, and label to continue at the same time. We expect the situation to remain challenging in paper. We are not expecting significant changes in our cost level in the short term.

Now, I’ll turn it back over to Jussi over some update on the current projects and the summary.

Jussi Pesonen

Thank you, Tapio. As Tapio said, we expect the market situation to continue to be challenging especially in the paper business area, at least in short-term. In this picture, I would like to hand a highlight maybe the kind of EUR90 million annual cost saving plan that we have.

As you know in January the 17th, we announced new plans to further reduction of the fixed cost of EUR90 million concerning 850 people and also 580,000 tons of capacity reduction. The total fixed cost reduction target as said with the new actions is EUR90 million, and therefore, when looking how we are proceeding, this new plan is also proceeding quite fast. The paper machine in Rauma was closed last weekend or last week and the paper machine in Ettringen, in Germany is planned to be closed at the end of this month.

So basically, those two machines will be not running when the summer is proceeding. So basically, Rauma closed and Ettringen will be closed down in one week.

The sales process of Docelles paper mill and the Pestovo sawmill and Aigrefeuille further brought processing release and still ongoing and proceeding, and then regarding the streamlining of the functions and employee negotiations have been concluded in Finland, but on the other areas, they are proceeding based on the schedule that we have announced.

So basically, that is where we are today. We are proceeding according to plan and I’m happy to say that this is what we need to do support our profit.

Next topic will be the update of Lappeenranta biorefinery plant. First of all, the construction works are proceeding well on schedule and budget. We have started installations of the many equipments and they will be completed by the end of the year. It starts in June. We are also preparing the start fleet test of the product. So we have been producing on a pilot scale UPM BioVerno, and that will be soon started to see cars running with this fuel here in Finland.

We expect that refinery is now starting in the summer of next year. Longer-term, this biofuel business becomes kind of a sizeable business for UPM. So the project is moving according to our plans and is well on schedule.

Next, I would like to move on to our specialty paper expansion project in China, which is also progressing. Although, here, we are still in the early stage of the project, as you can see from page 14. We have all the necessary permits in place for the project and we have started site preparation works at the Changshu paper mill site.

Infrastructure works are under preparation. Some early works have been already started and we have already started with some of the bigger components like the power plant upgrade. And then, of course, the tendering process of the main equipments is still ongoing. There has not been any new paper mill project in China, and therefore, we believe that time has been on our side. But when the time is right, we’ll actually move on on that as well. Another concrete step on the Changshu paper mill is the new sheeting line which has been already installed and started up.

And this project, as well as the other one project, we continue to believe the attractiveness of the business case of the specialty paper in China is solid and we expect the investment to support our good profitability numbers that we have in our growth businesses.

Ladies and gentlemen, then I would like to summarize my presentation by saying that, of course, we are living in this two-speed world and the challenging economic environment especially in Europe. UPM’s growth businesses continue to perform well and are in line with what we have been telling. Obviously, the weak economy puts extra pressure on the paper markets in Europe, and here, we continue to restructure and push new cost savings.

And finally, I believe that the current pressure in European paper market is leading to structural changes, which I think that we have been seeing over the quite many last years, and it is important for the whole industry on longer term. We have already seen this year a long list of capacity closures and a couple of bankruptcies as well.

And with the final words, we will make sure that UPM will remain competitive through this process and we will take actions when they are necessary.

Ladies and gentlemen, this was my prepared part of the presentation. And now, we are ready for your questions. Dear, operator, I hand over to you for Q&A session. Thank you.

Question-and-Answer Session

Operator

Thank you very much, sir. (Operator instructions)

Your first question comes from Mikael Jafs. Please go ahead.

Mikael Jafs – Cheuvreux Nordic

Yes. Hello, gentlemen. I would like to pick up where you ended there on the structural changes. I mean, we have all seen the capacity closures taking place. But could you please give us some form of color and flavor of what and how you see these markets developing?

Jussi Pesonen

Now, Mikael, I didn’t concretely understand your question. Was it that you talk about consolidation or the closures?

Mikael Jafs – Cheuvreux Nordic

Well, actually both, and then whatever you can give us on these statements that there are structural changes taking place that will be important for the paper industry. That would be helpful. And we, of course, all understand that is difficult for you to be very sort of specific, but any color and flavor would be highly appreciated.

Jussi Pesonen

I understand. And I guess that that is for all of us that are actually part of this industry. I think that there will be more closures. That is obviously when looking at the profitability levels of various companies and that is something that I think that happens over time now, there will be closures, not only anymore in the Western Europe, but we have been seeing also some in the Eastern part, like in Russia, which is definitely good for the business.

Second one, I think that will be pretty much of the same as what we have started already earlier, the ORU [ph] and reduction of the administrative costs, which in our case, it was in January announced 410 odd people. And then, finally, the structural change is up. I wouldn’t be surprised that there would be more focus, more concentration of various companies to products that will then be more efficient. And then that would lead to further restructuring.

So basically, all kind of actions, whether they are swaps, whether they are joint ventures, whether they are any of the other type of things. I do not believe that there will be a lot of cash deals done in Europe, but all kind of actions that would increase the focus of various companies, and at the same time, increasing the competitiveness, reducing costs.

Mikael Jafs – Cheuvreux Nordic

Okay, thank you very much.

Operator

Your next question comes from Oskar Lindstrom. Please go ahead.

Oskar Lindstrom – Danske Bank

Yes. Hello, this is Oskar Lindstrom from Danske Bank. I’d like to follow up first with a question on the previous theme. Do you feel that there’s a fear that you see the larger companies in the industry are being more aggressive in shutting your capacity while a number of the smaller producers sort of remain afloat and don’t really close or are sold to private equity or other owners who continue production that we will see actually a fragmentation in the paper industry from what is today is a fairly well-consolidated industry to actually more fragmented rather than the opposite direction, which I think would see more natural. That’s my first question.

Jussi Pesonen

This is actually a very good team, and now most probably everybody that are on the line understands why we did Myllykoski, why we were acquiring Myllykoski to keep the focus especially on magazine, which is for UPM so important, that it won’t fragment more. Like in newsprint, we have seen that happening now. I do not fear that.

I think that obviously there are a lot of pressure for many companies now when it concerns the cash cost level. So when smaller companies have been, yes, sold to private equities, but the cost level has been so far quite high as well and they have not been able to reduce cost that will mean that the margins are squeezed at this point as well.

But obviously, like I have been saying so many times that this industry needs more consolidation and through focus, more cost cutting and restructuring. That is obviously the theme that UPM believes on.

Oskar Lindstrom – Danske Bank

A follow-up on that, do you believe that sort of, so far, a lot of this, excluding your acquisition, has been sort of within companies’ existing structures, do you think that capacity closures and cost reductions have run the course and that they need to be sort of consolidation in order for further capacity closures to be able to take place?

Jussi Pesonen

This is the theme that we discuss every January and ever since 2006 and I’m trying to now maybe highlight a bit backwards 8th of March 2006. We actually came out with the closure of Kaukas [ph] mill, the LWC mill in Finland, and everybody was saying then thereafter that, hey, now it’s done, okay, let’s move on. And we were trying to explain in UPM it is not done yet. There’s plenty of other actions to be taken.

And now at this moment, more or less, more than 10 million tons of the capacity has been reduced and further. If the market development is as the European economy today is, there will be more capacity closures. And what in UPM we are trying to do and we will do and we are confident of that that our capacity is competitive. So we are restructuring ourselves through different measures to actually keep the cost competitiveness on our side.

Oskar Lindstrom – Danske Bank

Okay, thank you. My second question is more sort of state of the pulp market. We have a lot of capacity starting up this year and next year on the short fiber side, and then we have a weaker-than-accepted cyclical recovery at least so far in China. How do you see this if at all impacting the pulp market for the remainder of this year?

Jussi Pesonen

That remains to be seen. Of course it is pretty much dictated by the economic development of the world. China, I wouldn’t be that worried. For the statistics for the first two months at least have been down, but when looking like our own business in China, it is running on a high level flat out for the next coming months as well.

So yes, China is and has been somewhat down early part of this year, but I wouldn’t be worried about the demand development as such so much. Of course, this new capacity is something that – there will be a day that pulp cycle is ahead of us. When, where, what is the timing, I don’t know.

Obviously, at the same time, there’s a lot of old, worn-out capacity moving away from the pulp markets. There will be less and less recycled fiber on the market. So I wouldn’t be that – I’m not that pessimistic on the pulp, actually, business going forward.

Oskar Lindstrom – Danske Bank

All right, thank you very much. Those were my questions so far.

Tapio Korpeinen

Thank you.

Operator

Your next question comes from Johan Sjoberg. Please go ahead.

Johan Sjoberg – Carnegie

Thank you. If you look at your fixed cost reduction program, EUR90 million, I understand you’re closing down the machines now towards the [inaudible]. But could you say something about the impact on these, when they would be seen and given the lag?

Jussi Pesonen

Yes, Tapio will answer this question.

Tapio Korpeinen

Yes. Well, EUR90 million obviously again includes the fixed cost reduction coming from both the mill shutdowns and then the streamlining of, let’s say, the global paper business functions and organization. As the mill closures are now moving forward, we start seeing that impact earlier now going, let’s say, into the second half of the year. And let’s say the rest is coming during the second half. So by the end of the year, we’ll be at the full rate in a sense of that EUR90 million fixed cost.

Johan Sjoberg – Carnegie

Okay. So in Q3, we should more look to see some more? Do you expect already to see something in Q2?

Tapio Korpeinen

In Q3, in the more, let’s say, significant way.

Johan Sjoberg – Carnegie

Okay. And also could you say something – could you quantify the operational efficiencies from these programs, I mean, moving volumes from the closed machines to your 61 or are they included into the EUR90 million.

Tapio Korpeinen

Well, let’s say, EUR90 million is on the fixed cost savings. So again, typically, there can be some savings operationally, also, let’s say logistics, for instance, that are on the sort of variable cost side, but those we have not quantified. But there’s, let’s say, some obviously variable cost savings there that we are going after as well.

Jussi Pesonen

Yes. And obviously, we are of course running on a higher operating rate for the remaining paper machines. That will actually also improve our efficiencies. So basically, Tapio, like he said that it is fixed cost savings that we’re acquiring and then the rest is on top of that.

Johan Sjoberg – Carnegie

Do you dare to say, give some type of estimate how big that will be out of your total, the EUR90 million?

Jussi Pesonen

No, unfortunately.

Tapio Korpeinen

Again, it’s EUR90 million that is fixed cost. So it will be on top of the EUR90 million.

Johan Sjoberg – Carnegie

Yes, exactly. I’m just trying to get a feel for how big that boat, but okay, let’s see.

Jussi Pesonen

I understand, but unfortunately, we are not giving that out.

Johan Sjoberg – Carnegie

No, that’s fine. That’s fine. If you look at your other operations here, especially within the forest and timber, and also the plywood here. How far have you come in your cost cutting? I mean, you have done a number of programs there, but is everything now in the Q1 figures, would you say?

Jussi Pesonen

Not necessarily, I guess, that there’s a plenty of things happening, currently as well. We are consistently doing a lot of interactions to improve the profitability, and of course, when looking at the kind of past of the plywood and timber, we cannot stop here and stay where we are. We need to take actions every day, every week, every month, every quarter.

Johan Sjoberg – Carnegie

Yes, that’s fine. And just also looking at your pulp operation, I’m considering the strong profitability on that unit. Volumes is of course of big importance here. When is the next big maintenance shutdown? Fray Bentos, normally, it’s in Q4, isn’t it?

Tapio Korpeinen

Yes, that’s correct.

Johan Sjoberg – Carnegie

And in your Finnish operations and I think that happening in Q2, Q3 or we should expect the current volumes of 790 to be like a run rate right now until Q4?

Tapio Korpeinen

Well, typically, let’s say in summer time or in the third quarter, we have some maintenance in the Finnish mills. So that has some impact, but not, let’s say to the extent as the Fray Bentos big shut down.

Johan Sjoberg – Carnegie

My final question, can you say something about the prices for second half? [inaudible] was quite optimistic upon the operating rates especially within newsprint and also SC paper. How do you view the supply, demand balance right now?

Tapio Korpeinen

Obviously, when looking the closures as it has happened, you know some of the closures and our closures as well. I would like to say here that when we announced the 17th of January, now we are already closing. This should be the name of the game in this whole industry that when the announcement comes, the rapid implementation is crucial.

Yes, the operator rates are of course getting more solid than the beginning of the year. It remains to be seen of course as we have said a million times that whenever there’s a possibility to increase prices, UPM will support that.

Johan Sjoberg – Carnegie

One final question, sorry, March deliveries. One of the provinces was quite weak. How big of an Eastern [ph] effect did you see in Q1?

Tapio Korpeinen

Well, let’s say there were some effect but I would say overall actually, Q1 March included for us was pretty much in line with what expected, so no big surprises there.

Johan Sjoberg – Carnegie

All right, great. Thank you very much.

Operator

Your next question comes from Lars Kjellberg – Credit Suisse. Please go ahead.

Lars Kjellberg – Credit Suisse

Yes, most of my questions have been answered. I just want to prod in to your thought about margin or cost of production. Do you see any meaningful differences between the different segments i.e. newsprint, magazine and fine paper, where there is more attuned pressures or not really?

Jussi Pesonen

Maybe I answered this question, I think that when I have been looking this marginal cost and those curves and the prices, the only area where I could see the differences of course, the specialty papers like our label stock, label papers whether it’s release or face paper. But when it concerns publication papers or fine papers, I don’t see any big difference.

Lars Kjellberg – Credit Suisse

So then it’s equal pressures across the board?

Jussi Pesonen

Yes, and if you look at the results of the various companies now and looking at how the performance of the paper business cleaned of energy or pulp or anything like, the pressure is tough.

Lars Kjellberg – Credit Suisse

As I was going through my [inaudible], there’s an impact. In terms of variable cost, I mean, we’ve seen various pressures on coming through on the wood side. And then none of the companies have yet to report any meaningful wood cost reductions. Given that there’s so much capacity coming out both but in the whole noted [ph] area, when do you expect to see any pressure on the wood prices and any such benefits in our variable cost structure?

Tapio Korpeinen

If you look at wood price in Finland, which obviously is relevant for us about wood prices. They have been, if you look at it, let’s say over several quarters now, they have been pretty stable, somewhat lower than what they were in the past but no major sort of reduction yet as you say. But at least they have been sort of pretty stable whereas in logs there has been actually a small uptick now.

But then time will tell, like you said, there have been some actions taken here. So I think the pressure will built on the above wood market as well.

Jussi Pesonen

At last, this is an excellent question in a way which I have been considering myself as well when looking like a country in – here in Finland, we have 100,000 annual growth of our forest or the wood material and the kind of annual consumption is 50 million. So that’s every year, that’s 50 million cubic meters of increment.

Lars Kjellberg – Credit Suisse

Final question for me which refers to you renewable diesel project. The economics of this now given that we have pressure on fossil fuels, how does that stack up versus when you initiate at the project with all these prices over [ph] and natural gas prices, et cetera coming sharply off.

Jussi Pesonen

They say, this is going to be a kind of like I have been always saying that this is a performance chemical for the diesel and fuel markets in a way. And when deregulation is that 10% of the transportation fuels will be renewable, this will have a good market and that at least then project is still in good numbers for the profitability. And as CS today reported, the Neste Oil is already getting to the levels as they should be.

Lars Kjellberg – Credit Suisse

Thank you.

Operator

You next question comes from Karri Rinta. Please go ahead.

Karri Rinta – Handelsbanken

Thank you. Karri Rinta, Handelsbanken. I can actually continue on that topic. If we look at your biodiesel ambitions and compare those to Neste Oil, to me it would seem that you are a bit disrupting the existing value chain when it comes to the raw material, i.e. pine oil. How do you see the sort of the raw material availability playing out, given that there is the existing pine oil industry that uses the same raw material that you are using and to some extent, Neste Oil is also moving into this value chain.

So I understand that you can build this first plant, but how do you plan to scale up the investment and where do you get the raw material.

Jussi Pesonen

Yes, Karri, first well toll oil, that is to raw material for our first plant is definitely something that there is excess, which can be and then turn to toll oil. So there will be no at least limitations at this point of the toll oil.

And what Neste Oil is doing, it is a toll oil pits, which is a different raw material for their diesel which is kind of residue of the distillers of the toll oil. So basically we are not actually having any challenge on that, that coming from Neste Oil.

So basically, the toll oil, there’s excess in the world where we are already taking actions on that. But for us the next step, big step will be other raw materials, which is solid wood step as well. So basically I do not see any restrictions on the raw materials side especially when we do not have any kind of trouble with the food chain or like that kind of sustainability issues. Raw material and raw material price, I do not see the big issue at this point.

Karri Rinta – Handelsbanken

Okay. Well, maybe one detail still, when it comes to how this is different raw materials are calculated in the different subsidy systems. Are you counting on your raw material receiving favorable treatment, i.e. double counting or something like that in the subsidy system or are you basing your calculations on sort of the single accounting? Did you understand what I mean?

Jussi Pesonen

Yes, yes. When we made the investment decision, obviously we both know everything that we had in hand, the regulation and everything. And obviously, we are definitely not counting on this kind of what has been lately this cost whether it’s four times or less than that.

So basically, our calculation is based on very good kind of calculations. We definitely have the kind of sensitivity analysis if it’s double counted or if it’s four times counted, which obviously improves the profitability of the facility.

Karri Rinta – Handelsbanken

All right. Thanks you. Then back to basics, can you remind us of the seasonality in the second quarter. I understand that energy typically has lower earnings in the second quarter but other seasonality when it comes to volumes and so forth in other businesses that we should keep in mind?

Tapio Korpeinen

Yes. Well, like you said, energy is typically down in the second quarter and best quarters are the fourth and the first, winter time, obviously. There is, let’s say, spring uptick in the publication papers especially from a volume point of view, typically. So I would say – and of course then, let’s say, in the wood products business we are getting to the construction season so that’s also is in the second quarter. Then we start coming to the sort of summer time or towards the summer break.

Karri Rinta – Handelsbanken

All right. Then finally, just a reminder, what have you said about the CapEx levels for this year?

Tapio Korpeinen

We have no new guidance on that.

Karri Rinta – Handelsbanken

Well, what’s the old guidance?

Tapio Korpeinen

That was EUR500 million.

Karri Rinta – Handelsbanken

All right. Thanks. Thank you. Those are my questions.

Operator

Your next question comes from Kartik Swaminathan. Please go ahead.

Unidentified Analyst

Hi there. Thank you for taking my question. I just had some questions about potential M&A opportunities in the paper segment outside of Europe and also on the wood projects and/or energy side. I was wondering if the company has any kind of interesting assessing with the assets outside of Europe, potentially in emerging markets could be of interest. Can we expect this as one of your strategic methods of diversifying away from Europe and the current situation out there?

Jussi Pesonen

That is obviously always in our mind to consider all the options that are outside of Europe as well and emerging markets, growth markets. We do have a quite nice platform already in China and in Latin America. But having said so, we are putting a lot of emphasis now to actually put the European business right. And that is something that we are considering all the time, how to restructure, how to turn the European paper business around actually. But obviously, every time when there’s a good candidate, we are interested.

Kartik Swaminathan – Merrill Lynch

Okay. And a very quick follow-up, I was wondering if you did acquire some standard assets in China on the paper-making side. How easy is it and how CapEx intensive to convert that into label making?

Jussi Pesonen

I guess that if you would actually acquire old, worn out capacity to turn that to high-quality label, especially release paper that will be absolutely a challenge. But I’m a paper maker but not that good that I would exactly know difficult it would be. The more specialties it is you produce, the more difficult it is. And label, especially, release paper, which are going to produce with this new machine is one of the most challenging products we’re producing. Therefore, turning old machines that, yes, it is an option but quite a difficult road for high quality efficient mill.

Kartik Swaminathan – Merrill Lynch

Thank you.

Operator

Your next question comes from David Gladstone [ph]. Please go ahead.

Unidentified Analyst

Hi, good afternoon. Quick question back on the pricing, given the capacity closures that are taking place across Europe this quarter or next quarter, what’s your view or how much confidence do you have in an improvement and pricing in the second half in the paper print, newsprint business or do you think more likely that it may just slow down some of the negative trends temporarily?

Tapio Korpeinen

We already said earlier that obviously, the cost level and the business profitability of the whole industry require price increases. Obviously, very good and positive trend has been that there has been closure. The supply-demand balance in especially some of the greats improved now. And like I said that if there are any kind of possibilities to increase prices, UPM will definitely be one of those that is an increasing prices.

Obviously, European economy will dictate plenty of things, what happens in next quarter, next coming months. But this is positive that we have seen closures and the supply-demand balance has improved quite nicely in many of the products.

Unidentified Analyst

Okay, thank you.

Operator

There are no more questions registered at this moment, sir. Please continue.

Jussi Pesonen

Ladies and gentlemen, with these words, thank you for coming and joining us for this hour with UPM first quarter results 2013. Thank you and have a very nice evening. Bye now.

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Source: UPM-Kymmene's CEO Discusses Q1 2013 Results - Earnings Call Transcript
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