Finnish papermaker UPM Q4 strong but tempered by cautious outlook

Finnish papermaker UPM-Kymmene reported better-than-expected earnings thanks to tight cost controls, but a share rally was tempered by the firm's warning of falling paper prices and a challenging 2010.

"In our main markets, recovery is expected to be slow and differ from country to country," UPM said in a statement on Tuesday.

"Low capacity utilisation rates and a flexible way of working in our timber, plywood and European paper mills will continue."

Underlying fourth-quarter operating profit at UPM, the world's top magazine paper maker, surged to €186m ($259m) from a year-ago loss of 46 million, topping all estimates in a Reuters poll and helped by cost cuts and lower wood prices.

Net sales also fell less than expected, by nine percent to €2.1bn, and helped push UPM shares 2.2 per cent higher to €8.34 at 0839 GMT.

The global paper industry has struggled for the better part of a decade to emerge from a slump as soft demand and overcapacity keep prices down.

While demand has slowly started to recover, the upturn has been uneven, with segments like newsprint still struggling- UPM called the price pressure "severe" -- but areas like pulp growing strongly.

UPM said while 2010 paper deliveries are expected to climb versus last year, the average price would be clearly lower, and its full-year underlying operating profit would be roughly flat - well below expectations in the Reuters poll.

"Despite the fact that it's a good report, we can't see it as a positive (due to the outlook)," said analyst Claes Rasmuson at Swedbank.

"It seems like there weren't any problems with demand and prices in the fourth quarter, but no one is really positive when it comes to the outlook for publication papers," he said.

Analyst Karri Rinta at Handelsbanken added: "It was known that paper prices are coming down, but (UPM) spelled it out very clearly. This year's guidance was weaker than markets expected."

UPM proposed a dividend of €0.45 per share, above consensus and towards the upper end of forecasts.

The results kick off the reporting season for Nordic forestries, with rivals Stora Enso, Norske Skog, and M-real due to report on Thursday.