UPM Annual Report 2016

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Strategy

In brief

Businesses

Stakeholders

Governance

Accounts

UPM renewed its long-term financial targets UPM has achieved a clear improvement in the financial performance since adopting the current business model of six separate businesses in 2013. With renewed long-term financial targets, UPM aims higher.

EURm Comparable EBIT

1,200 1,000

Target: EBIT growth

800 600 400 200 0

IN THE NEW TARGETS: • the business area return targets and the comparable ROE target have been increased. • comparable EBIT growth has been introduced as a new group-level target • a new financial policy on leverage based on net debt/EBITDA has been introduced • the cash flow-based dividend policy remains unchanged At the business area level, UPM targets top relative performance in their respective markets compared with key peers. UPMhas increased the long-term return targets (below) for five of the six business areas. The new return targets reflect UPM’s increased ambition for business performance over business and investment cycles. Group earnings growth On the group level, UPM introduced a new target. UPM aims to grow its comparable EBIT over the long term. In 2016, comparable EBIT increased by 25% to EUR 1,143 million (916 million). UPM aims to grow its businesses with strong Business area long-term return targets increased

12 13 14 15 16 11 Comparable figures for 2014–2016, excluding special items for earlier years

long-term fundamentals. Earnings growth is prioritised over top-line growth. UPMwill invest in projects with attractive and sustainable returns, supported by a clear competitive advantage. The company also aims to capture opportunities to develop its business and product mix and further improve its cost competitiveness. Efficient capital structure and return on equity UPM aims to maintain a strong balance sheet. Investment grade rating is an important element in UPM’s financing strategy. UPM’s new financial policy on leverage is based on net debt/EBITDA ratio of approximately 2 times or less. In 2016, net debt/EBITDA was 0.73 times. The previous maximum gearing limit of 90% has been discontinued as redundant. At the end of 2016, gearing ratio was 14%. UPMhas increased its ROE target, now aiming for a 10% return on equity. ROE also takes into account the financing, taxation and capital structure of the group. In 2016, comparable ROE was 10.9%. The previous target was variable: 5 percentage points over a ten-year risk-free investment such as the Finnish government’s euro-denominated bonds. At the end of 2016, the minimum target for return on equity, as defined above, was 5.3%.

UPM as an investment

Dividend proposal +27% Share price 2016 +35%

% Comparable ROE Target: 10%

UPM AIMS TO INCREASE LONG-TERM SHAREHOLDER VALUE

12 10

8 6 4 2 0

UPM is committed to continuous improvement in its financial, social and environmental performance. At the business area level, UPM aims for top performance in its respective markets compared with peers. UPM invests to expand its businesses with strong long-term fundamentals for growth and profitability. The company has clear long-term return targets for its businesses. Earnings growth is prioritised over top-line growth. Increasing the share of attractive growth businesses improves the company’s long-term profitability and boosts the value of the shares. UPM’s expertise in renewable and recyclable materials, low-emission energy and resource efficiency is the key to developing new, sustainable businesses with high added value and unique competitive advantage.

PERFORMANCE

Strong cash flow enables focused growth invest ments, focused M&A, new business development as well as attractive dividends to UPM shareholders. An industry-leading balance sheet mitigates risks and enables UPM to accelerate its business portfolio transformation, when the opportunity and timing are right. Responsibility is good business: Good governance, industry-leading environmental performance, responsible sourcing and a safe working environment are important sources of competitive advantage. Attractive dividend UPM aims to pay an attractive dividend, 30-40% of the company’s annual operating cash flow per share.

12 13 14 15 16

GROWTH

EURm Net debt and leverage

PORTFOLIO

EBITDA (x)

4,500 3,750 3,000 2,250 1,500 750 0

3.0 2.5 2.0 1.5 1.0 0.5 0

Policy: ≤ 2x

INNOVATION

12 13 14 15 16

■ Net debt

Business area returns and long-term targets

5-YEAR SHARE PERFORMANCE AND VALUATION MULTIPLES 2016

2015 2014 2013 2012 17.23 13.62 12.28 8.81 1.38 1.20 0.91 0.74

EUR per share Cash flow-based dividend

ROCE %* ) UPM Biorefining

UPM Specialty Papers

FCF/CE %** ) UPM Paper ENA

UPM Plywood ROCE %* )

UPM Raflatac ROCE %* )

ROCE %* ) UPM Energy*** )

23.34

Share price at 31 Dec, EUR Comparable EPS, EUR 1) Dividend per share, EUR

ROCE %* )

31.0

1.65

0.95

1.0

100

0.95 *)

0.75

0.70 0.60 0.60

25.5

22.6

0.8

3.16

Operating cash flow per share, EUR

2.22 2.33 1.39 1.98

20.9

17.6

16.5

4.1

Effective dividend yield, %

4.4

5.1

4.9

6.8

0.6

15.0 14.1

14.6

12.9

12.6

12.1

14.1 1.51

P/E ratio

10.0 14.2 19.5

neg.

10.6

0.4

9.1

7.6

7.3

6.9 6.5 6.7

P/BV ratio 2)

1.16 0.97 0.87 0.62

5.5

5.0

4.6

4.7

0.2

8.7

EV/EBITDA ratio 3 )

8.4

7.5

8.3

6.0

12,452

Market capitalisation, EUR million

9,192

7,266 6,497 4,633

14 15 16

12 13 14 15

% of operating cash flow per share

■ Long-term return target ■ Old target

*) 2016: Board’s proposal 1) Comparable EPS for 2014-2016; EPS, excl. special items for 2012-2013 2) P/BV ratio = Share price at 31.12./Equity per share 3) EV/EBITDA ratio = (Market capitalisation + Net debt)/EBITDA

10.9%

* ) ROCE % = Return of capital employed excluding items affecting comparability. ** ) Free cash flow after investing activities (investments and/or divestments) and restructuring costs. *** ) UPM Energy assets valued at fair value.

Comparable return on equity

2016

CONTENTS

UPM Annual Report 2016

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