UPDATE 2-UPM considers more closures after profits dip

Thu Oct 25, 2012 6:58am EDT

* Q3 adj. EBIT 122 mln euros vs 137 mln in Reuters poll

* Paper business back to loss

* Says looks to cut capacity, eyes consolidation

* Shares fall 6.0 pct (Adds analyst comments, background, updates shares)

By Jussi Rosendahl

HELSINKI, Oct 25 (Reuters) - Finnish forestry group UPM-Kymmene continues to suffer from the shift to online media as it reported a surprise fall in quarterly profit which may force it to close more paper mills in Europe.

The world's biggest producer of graphic paper has struggled with weak sales in Europe exacerbated by the region's debt crisis which led its nearest competitor, Stora Enso, to unveil plans to shut down more mills and cut jobs after it reported a 22 percent fall in quarterly profit on Tuesday. .

UPM shares were down 6.2 percent to 8.33 euros at 1018 GMT after it reported third-quarter underlying operating profit fell 10 percent to 122 million euros, missing all forecasts in Reuters poll. Shares in rival Stora Enso were 1.5 percent lower.

UPM's paper unit, which accounted for 69 percent of the group's total sales in the period, posted an adjusted operating loss of 7 million euros as its total paper deliveries fell 10 percent from a year ago.

Despite years of mill closures, UPM has said Europe's paper industry still carries 10-15 percent more capacity than it needs in newsprint, magazine and office products.

The two giants have closed down several paper mills since 2006 with thousands of jobs disappearing in the process.

"We will... investigate consolidation opportunities, and carry out restructuring and capacity closures when needed," Chief Executive Jussi Pesonen said.

Some industry experts have said the ideal solution for the troubled industry in Europe may be a merger of the two giants giving them substantial control over capacity as well as prices.

"The European paper market is very weak, and it will not get any better until the companies make substantial restructuring in the industry," said Katja Keitaanniemi, the head of investment banking in Swedbank Finland.

But so far, even UPM's acquisition of debt-laden rival Myllykoski in an 835 million euros ($1.08 billion) deal last year has failed to improve profitability.

The move raised hopes paper makers would gain more pricing power, but the impact has been limited.

MORE CLOSURES

Credit Suisse analyst Lars Kjellberg said UPM seems to have lost market share after the Myllykoski acquisition, adding that the paper unit's numbers for the quarter were disappointing.

"They are down more than the market, they lost market share, which obviously delimits the positive impact they would have had from the Myllykoski deal," he said.

Forest economist Matleena Kniivila from Pellervo Economic Research think tank echoed the view the paper industry is facing more difficult decisions.

"The problems remain in the industry. It is likely we will see more closures in Europe next year," said forest economist.

UPM's total quarterly profit was bolstered by its pulp, energy and label divisions. The company forecast its fourth-quarter operating profit, excluding special items, would be the same or lower than in the third quarter - an outlook that was weaker than analysts expected. ($1=0.7711 euros) (Editing by Ritsuko Ando and Mike Nesbit)

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