Moody's cuts UPM outlook to negative

Moody's Investors Service said it changed the outlook on the Baa3 senior unsecured ratings of UPM-Kymmene to negative from stable.

"The change in outlook reflects the contraction in UPM's profitability of its core operations as a result of (i) higher than estimated wood, fiber and energy costs, further exacerbated by (ii) continued weak pricing in some of its core paper business and lower margins in the sawn timber business, despite improvements in the magazine division. These developments in aggregate lead Moody's to expect UPM to generate an operating profit in 2008 that is materially below 2007 levels," said Martin Kohlhase, a Moody's AVP and lead analyst for the paper and forest products companies in EMEA.

"Despite management's success in realizing cost savings and implementing efficiency measures as well as the company's good vertical integration, UPM has not been able to fully mitigate input cost inflation, resulting not only from wood fiber but also from price increases in recycled paper and energy. In addition, the use of working capital and cash restructuring cost have resulted in a compression of cash flow."

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