Jul 29, 2004. /Lesprom Network/. Sales for the second quarter of 2004 were Euro 2,497 million, compared with Euro 2,451 million for the first quarter. Operating profit was Euro 91 million (101 million), 3.6% of sales (4.1%). Operating profit for the second quarter was weaker due to lower average paper prices and mandatory seasonal costs, while paper deliveries were higher. Profit before tax was Euro 83 million (63 million). The improvement is due mainly to higher associated company profits and to lower net finance costs. The company booked to the second quarter profit a net tax credit of Euro 235 million, Euro 161 million of which relates to associated companies. The tax credit resulted from the change in capital gains taxation and, effective as of the beginning of 2005, from the decrease from 29% to 26% in the Finnish corporate tax rate. The decrease in deferred tax liabilities net of deferred tax assets was entered with immediate effect in taxes in the second quarter. Profit for the period was Euro 297 million (49 million). Earnings per share were Euro 0.57 (0.09), and excluding non-recurring items Euro 0.12 (0.09). FIRST SIX MONTHS OF 2004 COMPARED WITH THE SAME PERIOD LAST YEAR Sales for January-June were Euro 4,948 million, somewhat higher than last year's sales of Euro 4,876 million. The lower average sales prices in Europe were compensated for by 7% higher deliveries. Operating profit was Euro 192 million (200 million) and excluding non-recurring items Euro 192 million (239 million). The decline in profit is primarily attributable to lower paper prices and the stronger euro. Operating profit, excluding non-recurring items, was 3.9% of sales (4.9%). The increase in fair value of biological assets (growing trees) was Euro 31 million (31 million) and the cost of biological assets harvested was Euro 18 million (18 million). Profit before tax was Euro 146 million (199 million), and excluding non-recurring items Euro 146 million (238 million). Net finance costs were Euro 90 million (88 million). Exchange rate and fair value gains and losses resulted in gains of Euro 4 million (71 million). The figure for the first six months of 2003 includes the results of cash flow hedging instruments of Euro 51 million and fair value changes in other derivative financial instruments of Euro 20 million. Associated company profits before taxes were Euro 40 million (16 million). Excluding the Euro 235 million credit, taxes were Euro 35 million (57 million) and the effective tax rate was 24% (29%). Net profit for the period was Euro 346 million (142 million). Deliveries Paper deliveries for the first half of the year were 5,315,000 tonnes, 7% higher than the previous year's figure of 4,955,000 tonnes. Magazine paper deliveries increased by 6%, those for newsprint by 7% and for fine and speciality papers by 9%. Financing At the end of June, the Group's gearing ratio was 76% (81% at 30 June 2003 ). Net interest-bearing liabilities were Euro 5,329 million (5,590 million), an increase of Euro 455 million since the beginning of the year. Discontinuation of the asset securitization programme during the first quarter increased debt by Euro 179 million. The dividend of Euro 392 million for the 2003 financial year was paid during the second quarter. The first-half cash flow from operating activities, before capital expenditure and financing, was Euro 267 million (377 million). Personnel During the first six months of the year, UPM had an average of 35,135 employees (36,049 for this period last year). The number at the end of June was 36,818 (37,722). Capital expenditure and restructuring Gross capital expenditure for the first six months of the year was Euro 324 million (376 million), 6.5% of sales (7.7%). The 450,000 t/a fine paper machine project at Changshu, near Shanghai in China , is proceeding well, with start-up planned for summer 2005. Wisaforest's pulp mill rebuild, with 180,000 t/a of additional capacity, was successfully started up in spring. The rebuild of paper machine 2 at the Rauma mill was completed in March. A Euro 50 million sawmill with an annual capacity of 300,000 m3 at Pestovo , Russia was inaugurated in May. During the second quarter, UPM decided to invest approximately Euro 60 million in developing the production of release papers at its Tervasaari mill in Finland . The rebuild will increase the capacity of PM 8 by 45,000 tonnes to 175,000 tonnes and be completed in summer 2005. Also during the second quarter, the company announced an Euro 18 million investment programme for its Kaipola paper mill in Finland . The investment will increase the use of recycled fibre and further strengthens UPM's position as the world's largest user of recovered paper in printing paper production. Shares UPM shares worth Euro 4,926 million were traded on the Helsinki Exchanges during the period January-June (4,827 million). The highest quotation was Euro 16.60 in March and the lowest Euro 14.44 in January. On the New York Stock Exchange, the company's shares were traded to a total value of USD 156 million (96 million). The Annual General Meeting held on 24 March 2004 approved a proposal to buy back a minimum of 100 and a maximum of 26,178,900 own shares. The meeting authorized the Board of Directors to decide on the disposal of own shares bought back. Purchasing of own shares did not take place during the first six months of the year. The meeting also authorized the Board of Directors to decide to increase the share capital by issuing new shares or convertible bonds in one or more issues. The increase in the number of shares may amount to an aggregate maximum of 104,715,000 shares. Together with the authorization and share options, the number of shares may increase to a maximum of 651,493,930 from the 523,578,930 shares at the end of June. Apart from the above, the Board of Directors has no current authorization to issue shares, convertible bonds or share options. UPM's listing of all 2002D share options began on 1 April 2004 . Cost-cutting programme The Group's cost-cutting programme announced in April 2003 and targeting annual cost savings of Euro 200 million by the beginning of 2005 has proceeded well and is ahead of schedule. By the end of June, the target had been achieved in full and some further savings above the target are expected. Litigation In August 2003, UPM received a grand jury subpoena in connection with the US Department of Justice Antitrust Division's investigation into the US labelstock industry. The company is responding to the subpoena as required. Following internal investigations into competitive practices, UPM decided on 15 January 2004 to approach the competition authorities in the European Union, the United States and Canada . The competition authorities have started investigations into alleged antitrust activities and consequently the EU, several of its member states, and the Canadian authorities have informed UPM that it has received conditional full immunity with respect to certain conduct disclosed to the authorities. The US Department of Justice has not decided on immunity, which is pending and available. UPM has also been named as a defendant in several class-action lawsuits against labelstock and magazine paper manufacturers in the United States . In May 2004 UPM received a European Commission Statement of Objection concerning alleged antitrust activities in the market for plastic industrial sacks. UPM manufactured plastic industrial sacks until December 2000. The annual sales of the operations under investigation amounted to Euro 11 million. UPM has responded and will respond to the Statement of Objection as requested by the Commission. All of the above litigation matters may last several years. No provisions have been made in relation to these investigations. Market outlook Third-quarter paper deliveries are estimated to be higher than during the second quarter. In Europe UPM is to increase its magazine and fine and speciality paper prices effective this autumn. In North America and overseas markets further price increases are expected. Markets for converted products are forecast to be good. In wood products, oversupply in sawn timber will persist but the outlook for plywood is improving. DIVISIONAL REVIEWS Magazine Papers Sales for the period January-June were about the same as last year. Deliveries were up by 6%. The average capacity utilization rate for magazine papers was 88%. Operating profit excluding non-recurring items was weaker than during the first six months of last year. The positive effects of higher deliveries did not offset the lower average prices partly caused by the stronger euro. Cost effectiveness improved. Good growth in demand for magazine paper continued. In Western Europe demand for coated magazine paper grew by 5% and for uncoated magazine paper by 7% compared with January-June last year. In the United States , demand for coated magazine paper was up by an estimated 8% but that for uncoated magazine paper was down by 4%. Average market prices for magazine papers were 2% lower in Western Europe and 3% higher in the United States during the first six months of the year. Profitability for the second quarter of 2004 improved from the first quarter, as deliveries were higher and price increases were introduced outside Europe . In Europe , magazine paper prices were stable. Newsprint Sales for the period January-June were up by 3% on the same period last year. Deliveries increased by 7%. The capacity utilization rate was high. Profitability was weaker than last year as a result of lower prices in Europe , the stronger euro and higher energy prices. Compared to the first six months of 2003, demand for standard newsprint grew by about 2% in Western Europe and was unchanged in North America . Newsprint market prices were about 2% lower in Western Europe than during the first six months of last year. Operating profit for the second quarter was down on the first quarter. Prices were stable in Europe but rose in North America and Asia . As planned, the 100,000 t/a book paper machine at Voikkaa mill in Finland was shut down on 1 May. Fine and Speciality Papers Sales for January-June were unchanged on last year. Deliveries grew by 9%. The capacity utilization rate of the fine and speciality paper machines was high. Operating profit was down by one-third on this period last year. Paper prices were lower while paper deliveries increased. Demand for uncoated fine paper in Western Europe was up by 3% on the first six months of last year. Coated fine paper demand was about 8% stronger. Market prices for fine papers in Western Europe were on average about 6% lower than in January-June of last year. Second-quarter profit was down on the first quarter, partly due to lower deliveries and mandatory seasonal costs. Prices in Europe have stabilized and prices for certain coated fine paper grades increased somewhat during the second quarter. The fine paper market in Asia continued to be favourable. Demand for speciality paper is mostly strong. Label and packaging paper prices have been increased. The envelope paper market has remained stable. Converting Sales for the first six months were similar to those for this period last year. The market situation in all business areas has improved. Despite the stronger euro, operating profit increased markedly. Internal measures, especially in self-adhesive labelstock and siliconized paper operations, have been successful. The performance of industrial wrappings also improved slightly on January-June last year. Second-quarter operating profit for the Converting Division was about the same as during the first quarter. The markets for all three businesses have continued to strengthen and some price increases have been introduced in Europe and North America for the first time in several years. Wood Products Sales and operating profit were practically unchanged on this period last year. Plywood production rose by 2% and that of sawn timber by 5%. The plywood business was more profitable than last year, thanks largely to the improved market for spruce plywood. The profitability of sawmilling was affected by lower product prices. The performance of the building supplies trade was good. Profitability for the second quarter was better than that for the first, mainly due to the seasonally stronger building supplies trade. Demand for spruce plywood was robust. There were some signs of stabilization in the market for whitewood goods, but overall sawmilling suffered from oversupply. At the beginning of April, UPM completed the sale of the Danish building supplies retailer Anco Trae. The business had annual sales of about Euro 70 million and currently employs approximately 190 people. The transaction had no material effect on results. In June, UPM announced that it is to begin co-determination negotiations on lay-offs with personnel at its Aureskoski and Kajaani sawmills in Finland due to the slack market. Other Operations Operating profit from Other Operations was higher than in January-June a year ago. The Finnish wood market has been characterized by relatively stable prices. Although short-term market prices for electricity were markedly lower during the first half of the year, the energy department had good profitability. Profitability for the second quarter, however, fell behind that for the first, due to seasonally higher costs in forestry operations and lower electricity sales to the market. Associated companies and joint ventures UPM's share of the results of associated companies, comprising mainly the pulp producer Metsд-Botnia, was markedly higher than for the first half of last year. Demand for pulp was good and the average price of long-fibre pulp in US dollars was USD 620/tonne during the first half of the year, up by 20% from USD 515/tonne in the same period in 2003. The second-quarter 2004 average list price was USD 650/tonne, up by USD 60/tonne from the first quarter.