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Exclusive Interview: European CEO of the Year - Jussi Pesonen, UPM

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Exclusive Interview: European CEO of the Year - Jussi Pesonen, UPM

February 13, 2011 - 14:00

HELSINKI, Feb. 14, 2011 (RISI) -Jussi Pesonen has been president and CEO of UPM since January 2004 after originally starting in the company as a production engineer in 1987. This meteoric rise now sees him at the head of a company that turns over close to Euro 9 billion ($12 billion) through its three business groups, Energy and Pulp, Paper and Engineered materials. This is the second time that Pesonen has been awarded European CEO of the year; he also picked up the award in 2007.
“Like in a good game of chess, you make certain moves in order to facilitate the next few moves. It’s easy to make mistakes if you are impatient and try to jump directly into the end game”

In recommending Pesonen for this year's award, investment analysts and portfolio managers covering the pulp and paper industry cited his assured leadership through what have been tumultuous times. One analyst said: "Pesonen has shown clear vision in a number of ways, strategic acquisitions in paper, CAPEX spending on low cost pulp production in Latin America, and investment in CO2-free energy production in Finland. What impresses me is that he is not talking about all these opportunities, he is actually doing them." PPI spoke to Pesonen shortly after he received the award:

PPI: You also won this prestigious award in 2007; how different is the landscape of the global pulp and paper industry now, four years later in 2011? What have been the main challenges in that short space of time?

Pesonen: The main challenges have been very much the ones which we identified before launching our profitability program for the years 2006-2009: high cost capacity and oversupply in Europe, mature traditional markets, a downward trend in real prices, increase in the cost of production inputs and new competition in short fiber.

The landscape is definitely somewhat different than in 2007 but the cost restructuring and consolidation of the industry has been much slower and more cumbersome than I could foresee in 2006. I dare to say that UPM's transformation has been more intensive than with most of our peers. This company looks and feels different to how it was in 2007.

If we look at our results for last year, the recovery of the production volumes meant that were able to take full benefit of our early cost efficiency improvements and bring profitability back to pre-recession level. Pulp, Energy and Label were our profit makers, whereas Paper still lagged behind. This year we look forward to also getting our Paper business into the black.

If we want to have a sound and dynamic pulp and paper industry in Europe in the future, this industry still needs to continue on the rocky road to achieve a higher level of cost efficiency.

And what have been the achievements you are most proud of over that period

There are two clear phases: that of cost cutting through internal restructuring in 2006-2009 and that of repositioning and transforming the company in 2008.

The first phase meant heavy streamlining of the company but also investments in, say, energy efficiency. Without this phase we would not be in the financial position where we are today.

The second phase started in 2008, when we began talking about the new forest industry and later defined a new vision for UPM - the Biofore Company.

The vision was followed by the new strategy which highlighted energy and pulp as market driven growth businesses instead of being just suppliers to the Paper business. Expansion of our Label business in China, the US and Poland were also important for the balanced development of the company.

New business development with wood plastic composite, biofuels and biochemical was also coinciding.

Acquisition of Botnia's Uruguay operations is something that has definitely added value to UPM's shareholders and hopefully we will close the pending Myllykoski transaction with the same result.

What I am proud of is that at UPM we have walked the talk! We have created a mindset change within the company and implemented our plans.

The analysts we spoke when conducting the poll voted for you because of a number of areas that UPM is investing in for the future, including low cost pulp production in Latin America, biofuels and energy projects in Europe, and acquisitions of companies in Europe, there is also your strategy in Asia. What for you personally is the most exciting of those areas going forward?

It is extremely hard to say. We have a forest of opportunities which are exciting but also challenging. All our growth and development opportunities have a solid business logic, but what is particularly exciting is whether we are able to pull all the strings together with the right momentum. With Uruguay we clearly managed to do that.

Talking about those investment areas, can you enlarge upon your expansion program in Latin America? We understand you have acquired more land in Uruguay. Are there plans to increase capacity at Fray Bentos? Or perhaps invest in another greenfield pulp project in the region?

Currently we are focusing on the efficient operations of the Fray Bentos mill. The 25,000 hectares of land was recently acquired to improve our wood procurement options in Fray Bentos and to support the self-sufficiency of the wood supply. About half of the area is currently planted.

Latin America is a continent of many opportunities but for the moment we do not have specific plans to disclose.

We know that UPM is calling itself the Biofore Company. Can you enlarge further on your strategy and plans for bioenergy and biofuels projects? How important do you see these areas for future revenue opportunities for UPM, and can you give us an idea of how much you are investing?

First of all, Biofore is name for UPM's transformation and renewal in all our businesses, it does not relate only to bioenergy or biofuels. We add value to renewable and recyclable materials, do it efficiently and with good environmental performance - that's the core of our Biofore thinking and that's what our business is already today. Biofore also clearly illustrates our mindset, which is to be at the forefront of development in everything we do.

On top of developing our existing businesses we aim to develop production technologies and new products with high added value. Biofuels are among these products.

The demand for biofuels is slowly growing and finding added value for energy wood like logging residues, stumps and bark is interesting for us. Therefore building a biomass-to-liquid biorefinery may be an option for us providing we get EU's New Entrants Reserve (NER300) grant for the development of the new technology.

The cost of the first full scale commercial biorefinery is significant, around EUR 300 million, and I do not think that anyone would start these investments unless there is a strong political commitment to back them up.

Our options for location are Rauma in Finland or Strasbourg in France, where the environmental impact assessment is still ongoing. Decisions on the EU funds are expected only during the second half of 2012. Therefore no quick investment decisions are expected.

In your opinion, does UPM's recent entering into the agreement to acquire the Myllykoski Corporation and Rhein Papier signal a new era of consolidation in Europe? How vital do you think further consolidation is in the region, and do you have plans for any other acquisitions in the near future?

We're fully focused on getting the Myllykoski/Rhein Papier transaction completed and having a successful integration process during the second half of the year. We do not have other plans at hand.

The consolidation of the European industry has been very cumbersome and only little has happened. The Sappi/M-real deal is the only large deal so far. The Myllykoski acquisition will be a remarkable one when completed.

It goes without saying that further cost efficiency is needed in the industry and that might lead to further consolidation. The print media is challenged by electronic media and thus paper demand is declining. There is still structural misalignment between paper demand and supply which calls for constant cost efficiency.

Continuing with the acquisition of the two companies above, why are you investing in what is considered a ‘mature' market, and not putting all funds into emerging markets like Latin America or China, or in new revenue streams, for instance, bioenergy or biofuels?

We cannot and will not abandon those markets where we still see plenty of potential for good business! We are very committed to serving our print customers and realize that unless we can guarantee undisputed cost efficiency, they cannot for their part have cost competitiveness against the alternative media channels.

With this transaction, we create the conditions needed for improving UPM's cash flow and mid-term profitability. As a result of consolidation in the European paper business, we will also have better financial resources to implement our growth plans in emerging markets and our other businesses.

Like in a good game of chess, you make certain moves in order to facilitate the next few moves. It's easy to make mistakes if you are impatient and try to jump directly into the end game.

We have excellent portfolio of opportunities. We have very recent moves in expanding our Label business and acquiring pulp operations in Latin America. Our associate company has a major investment in low emission electricity. We have an option to expand our paper production in Changshu China and we are building our competencies in biofuels and other new bio products.

We just have to see the best timing for these initiatives.

Can you enlarge upon your strategy for China? Any plans for further investment in the region?

UPM has a positive track record in China and the market is annually growing by 8-10 %. Chinese authorities have given us recognition for our environmental performance and we are the only Western company to own 100% of the operation in China.

Some 100 km south of Shanghai we have the Changshu mill site which comprises two paper machines with an annual total capacity of 900,000 tonnes of fine papers, a UPM Raflatac label factory, an R&D Centre, a power plant and a jetty by the Yangtze River.

The Chinese authorities last year granted UPM an investment permit for the expansion of Changshu paper production. We are now working on feasibility and permitting phases but have not made any investment decisions.

And what about India? UPM has an office there, and there is talk of moving a production facility from Finland to India. What stage are you at with that project, and do you see India as a place where UPM should be operating in a stronger capacity?

UPM has not only an office is India but the label business operates a slitting and distribution terminal in Bangalore. India is a very interesting area and we are studying the opportunities of the market.

In general, what do you see as UPM's core papermaking strength, the areas you further wish to expand?

UPM has an exceptionally wide product range in printing papers and that is naturally our core. This one- stop-shopping is something that our large customers appreciate. The Myllykoski transaction would result in expansion of papers serving magazine and commercial print end uses.

All suppliers have more or less the same machines and more or less the same recipes. Therefore there is less of any significant product differentiation, but it is the overall package that counts: the product, efficiency of the supply chain, the service experience, the environmental performance. We aim to be the world leader in graphic papers, with deep market view and media understanding. This requires outperforming cost efficiency coupled with sustainable and innovative products and services.

And can you see UPM exiting from producing less performing grades in the near future?

Our product offering is undergoing constant review and adjustment all the time. Customers' needs are changing and we respond to that.

What is your general opinion about the health of the paper industry worldwide, and its challenges going forward into the future as regards threats from digital media (ebooks, iPads, etc)?

There is still high cost capacity and excess of supply in Europe and the growth has moved to new markets. It's not a pretty scenario, if the industry does not respond. On the other hand the demand has returned and many companies are more cost competitive than couple of years back.

We will see continued growth in Eastern Europe, Asia and Latin America.

We believe in the co-existence of print and digital media, but it happens only if print is cost competitive as a media.

And finally, how do you feel UPM is positioned going forward and what are your long term goals for the future?

UPM is well positioned. We have a versatile business portfolio and all businesses have also growth opportunities. Our financial situation is improving and our organization has shown that it is able to transform the company to meet the challenges of the future.