UPM reports 3Q operating profit rose by almost $50 million

before non-recurring items EUR 140 million (91 million)

Earnings per share excluding non-recurring items EUR 0.19 (0.12)

Sales EUR 2,449 million (2,497 million)

Paper deliveries in January-September increased by 6% against 2003

Cash flow remained good, balance sheet strengthened

President and CEO Jussi Pesonen comments on the third quarter of 2004:

«The brisk increase in paper demand continued. Order books are strong and the capacity utilization rate is very high. Because of low prices and cost pressures profitability was again unsatisfactory, but improved year-on-year. For the first time in three years, our result showed an improvement on the corresponding quarter the previous year.»

«The autumn price increases in our non-contractual business went through as anticipated. We raised prices not only in North America and Asia, but also in Europe. As expected we lost some orders, but in most cases the increases were successful.»

«We are now operating more cost-effectively, but we still need further improvements to raise profitability. UPM is restructuring its operations e.g. in its wood products division and at the Miramichi mill in Canada.»

«The market outlook for paper continues to be positive: demand continues strong and advertising is on the increase. The price increases announced in Europe and North America will become effective gradually. During the fourth quarter higher costs are likely to more than offset the price increases already introduced. In Europe, UPM aims to substantially increase next year's contract prices for papers.»

«The markets for converted products will remain good. In the wood products business, plywood markets are firm, whereas the market for sawn timber will continue to be oversupplied,» said Mr Pesonen.

MARKET OUTLOOK

Fourth-quarter paper deliveries are forecast to increase from the third quarter. The price increases announced in Europe and North America will become effective gradually, but during the fourth quarter higher costs are likely to more than offset the price increases already introduced.

In Europe, UPM aims to substantially increase next year’s contract prices for papers. The markets for converted products will remain good. In the wood products business, plywood markets are firm, whereas the market for sawn timber will continue to be oversupplied.

Magazine Papers

Sales for January–September were up marginally compared with the same period last year. Deliveries were up by 4%. The average capacity utilization rate for magazine papers was 90%. Operating profit excluding non-recurring items declined on last year’s corresponding period. Although cost efficiency was good and deliveries increased, lower average prices in Europe and the negative effects of the stronger euro resulted in decreased profitability.

The demand for magazine paper showed healthy growth as a result of the stronger direct mail and catalogue markets. In Western Europe demand for both coated and uncoated magazine paper grew by 5% compared with January–September last year.

In the United States, demand for coated magazine paper increased by an estimated 8% but that for uncoated magazine paper (SC) decreased by 3%, caused partly by the substitution of coated magazine paper for SC paper.

Average market prices for magazine papers were 3% lower in Western Europe during January–September relative to the same period in 2003. In the United States average prices were 4% higher.

Third-quarter profitability improved from the second quarter.

The increase in prices outside Europe contributed to profits in a relatively stable currency market environment.

Newsprint

Sales for January–September were 3% higher compared with the same period last year. Deliveries increased by 5%. The capacity utilization rate was 96%. Operating profit was negative and down on last year. Average prices were lower in Europe, and the stronger euro negatively affected profits from overseas sales. The price of recycled fibre was unchanged during the review period. Higher energy prices, especially in continental Europe, resulted in additional costs.

Driven by improving advertising and the growth in classified ads, demand for standard newsprint grew by about 3% in Western Europe. Demand in North America continued to be weak declining by 1%. Demand figures look more positive when specialty newsprint grades are included.

Newsprint market prices were about 2% lower in Western Europe than during the first nine months of last year. In North America and other overseas markets average prices were higher.

Operating profit for the third quarter was higher than for the second quarter mainly for seasonal reasons. Higher prices in overseas markets contributed to the better profits.

Fine and Specialty Papers

Sales for January–September increased slightly from the same period a year ago. Deliveries grew by 10%, mainly due to higher volumes of coated paper. The capacity utilization rate of the fine and specialty paper machines was well above 90%. Operating profit declined by about one-fifth on this period last year, partly caused by the lower average fine paper prices. Higher average pulp prices also had a negative impact on profitability due to the division’s partial exposure to purchased market pulp.

Demand for uncoated fine paper in Western Europe was up by 5% on January–September last year and for coated fine paper by about 8%. Market prices for fine papers in Western Europe were on average about 6% lower than during the first nine months of last year. Operating profit during the third quarter was up on the second quarter. The fine paper market in Asia has continued to experience good demand but prices have fluctuated somewhat.

Demand for label papers has been robust and prices have increased. Some packaging paper price increases have also been successful.

Converting

Sales for January–September were practically unchanged from a year ago. The market situation has been very strong for self-adhesive label stock. In siliconized papers, the markets were favorable in North America, with an improving trend also in Europe. The markets for industrial wrappings have also improved from last year. Profitability was better than last year mainly due to higher volumes but also to higher prices and internal measures.

Wood Products

Sales were slightly down in January–September compared with the same period last year. Excluding non-recurring items, profitability was unchanged. Plywood production increased by 2% and that of sawn timber by 7%. As a result of improved demand, plywood prices have strengthened and profitability was up on last year. Sawmilling business profitability weakened further and operations were loss-making, due to oversupply and high raw material costs. Profits for the building supplies trade declined somewhat.

The third quarter is seasonally weakest for wood products and hence profitability was down on the second quarter. The plywood market has strengthened and prices are on the rise. The building supplies trade was relatively stable.

The restructuring plan announced for the Wood Products division aims at adjusting production to the present and future market situation. The Brooks Group, which was sold at the end of August, had a turnover of € 195 million in 2003 and employs 430 people.