From an established position as a vertically integrated leader in the paper space, it is a bold move to then remodel as a six-business portfolio company providing Biofore solutions. That is precisely what Finnish company UPM has embarked upon. Jim Banks speaks to CFO Tapio Korpeinen about the vision and practicalities of making such a shift.
Diversification is a natural instinct for many successful CEOs and their executive teams, but it is often a steady process of evolution. Rarely does it involve a radical rethink of a company's organisational and management structure. In some cases, however, such a huge change can yield enormous benefits, but the successful transition from, for example, a vertical integrated manufacturing company to a diversified portfolio business, places enormous responsibility on the finance team.
Finnish company UPM is in the middle of just such a transformation to drive value, growth and profitability by radically changing its organisational structure, and reaching beyond its traditional focus on the paper and forestry sectors. Its aim is to become a global leader in industries that stem from what has been its core business, such as biomass energy, and maximise the synergies from new and existing assets.
"Over the past six years, the company has been on a journey and we are still in the middle of a big process of change," says Tapio Korpeinen, CFO of UPM and EVP of UPM Energy. "Ten years ago, UPM was a leader in the paper industry - especially graphic papers including magazine paper - with its core business in the US and Europe. It had expanded into the Asian markets, too. But the paper business in the Western world was entering a phase where changes in demand led to a structural decline.
"Demand started shrinking from 2007 in Europe and earlier in the US, so the challenge was to renew the portfolio of a company in that very capital-intensive business. We began exploring options in depth in 2005 and we concluded that in our value chain we had a lot of strength. We had operated as a vertically integrated company, so we had significant upstream assets - such as forests, energy and pulp - and we were strong in downstream areas such as speciality packaging. So, we turned our vertical business around to create a portfolio of six businesses by decoupling upstream, midstream and downstream assets."
UPM's new structure is built on fibre and biomass-based businesses, and recyclable raw materials and products. Its six business areas are UPM Biorefining, UPM Energy, UPM Raflatac, UPM Paper Asia, UPM Paper Europe and North America, and UPM Plywood. Together, these underpin its move to become 'the Biofore Company' - a front runner of global bio and forest industries.
Biofore is a new industry category UPM has created to describe its future. It incorporates future orientation, sustainable solutions and good environmental performance, along with market-leading credentials in the forestry sector. It intends to bridge its history in its core business areas with a culture of innovation.
"Biofore is the foundation of our strategy. We have a strong legacy in sustainable businesses. We had it for many years before sustainability became such a high profile issue for management. UPM has a good starting point because the resources in our value chain are renewable - such as the forests we have managed in a sustainable way for many years. Sustainability is good business and has positive economic drivers in the long term," Korpeinen says.
Looking back, looking forward
The company's guiding ethos is heavily informed by its heritage and its reorganisation positions it to embark on a process of innovation, which forms many of its long-term goals. UPM is only part of the way through its journey of transformation but it is looking closely at how to maximise opportunities in its legacy business while opening up new lines of business that will yield growing revenues in five to ten years. "In the next decade, for a €10-billion topline company, we will need to develop some things that will take a long time to deliver, so we are focused on innovation. There is a big challenge in terms of capital allocation and performance management. The fundamentals of each business - and the challenges they face - are very different," says Korpeinen.
Strategies are set for profit improvement across all six business areas. The actions required in each division will differ, but there is an overarching goal to reduce variable and fixed-cost savings. Furthermore, UPM is investing in the expansion of production at its existing pulp mills and in the growth of its business in emerging markets such as China.
In terms of new business areas, the growth of interest in low-emission energy opens up clear opportunities in biofuels and UPM has already launched the first renewable diesel, which is derived from crude tall oil, a residue of pulp production. It is also exploring opportunities for Biofibrils - the brand name for its cellulose micro and nanofibril products - and biocomposite materials that combine characteristics of natural fibres and plastics.
"The old graphic paper business now represents only one quarter of our capital. The challenge there is to optimise revenue in a shrinking market. It is a strong cash flow positive business, so management needs to focus on that by streamlining capacity. For the pulp and energy businesses the challenge has been more about creating a new commercial capability and acquiring new customers. Then when you launch a new technology like biofuels the challenge is to recruit the right talent. As you can see, the managerial direction and priorities of each business are different," Korpeinen explains.
"In the time of our portfolio development, the epicentre of global growth had changed. We had a strong platform in China to build on and we have the ability to find new businesses for the portfolio that could leverage the know-how we have in the company. There is high growth in our Chinese businesses and we have also developed new technology to enter the biofuels market. We developed the first renewable biodiesel and we are working on many ideas in the biochemicals area," he adds.
A firm hand on the rudder
Keeping UPM on course during its transition to a portfolio business requires the CFO and CEO to work in harmony. Upon taking the role of CFO, Korpeinen became a key player in UPM's strategic decision-making processes.
"Finance has paved the way in our transformation. The challenges we face are similar to those faced by all of the corporate functions in the portfolio. Different businesses have different needs. The paper business, for instance, is focused on cost-efficiency and rationalisation. Finance, therefore, has some guiding goals - to meet the needs of each business, improve scalability to suit each market or business area, and to enable the businesses steer the kind of support they need from the functions," Korpeinen remarks.
"In finance, the big change is in how we allocate capital and structure the balance sheet. We set firm targets for each of the six businesses and target the best performance as measured by the best peers in each sector. Our aim is selective organic growth, so we invest in the businesses that have positive fundamentals to scale them up. Now that we have shifted the portfolio through restructuring and selected growth investments, our balance sheet has never looked so good."
The finance function itself has changed its structures in order to reflect the needs of a portfolio business seeking efficiency. In 2013, for instance, UPM signed a five-year outsourcing deal with Genpact for transactional finance processes, which were moved to a service centre in India. This now works closely with UPM's own financial shared service centres in Finland and China.
"We have worked to harmonise the key processes and platforms in finance, which has allowed us to centralise step by step and transactionalise much of the work done by the finance function. Now, more specialised support functions can be centralised and there are fewer manual tasks involved," Korpeinen explains. "That has been key to improving cost-efficiency, quality and control through centralisation and scalability. We have moved more processes to the shared service centres so that people in the finance function can play a more strategic and analytical role in decision support. Just like the company as a whole, the finance function is on a journey."
In the transition of the finance function - and the company as a whole - Korpeinen's diverse background has been of great value. He has a history of management roles in specific business units and a background in consulting that enables him to view the industry in broad terms and bring insight into other business sectors, which has proven valuable to a company embracing diversification.
"Looking at what UPM has been through since I joined in 2005, my experience in international consulting in many countries and with many clients in similar industries has been very important. Also, UPM was familiar to me as a client when I joined to take charge of M&A activities and that role was a good way to make the transition. The timing was also good, as our CEO, Jussi Pesonen, initiated a lot of change. It was an opportunity for me to be part of the transformation and be at the core of decision-making and strategy formation," he says.
"Now we have to look at the agenda of UPM as a whole and identify clear priorities in terms of profitability improvement. We are coming to the end of an important investment cycle and it is essential that we get the areas in which we have invested to contribute to the bottom line. In the current uncertain world, in which there are many question marks about global growth, we could use our balance sheet for acquisitions that would help us with our portfolio shift. At the same time we can fund selected investments in organic growth from our existing cash flow and keep strengthening our balance sheet."