UPM Annual Report 2016

Strategy

In brief

Businesses

Stakeholders

Governance

Accounts

Risks and opportunities

The operating environment exposes UPM to a number of risks and opportunities. Many of them arise from general economic activity and global megatrends (see previous page). Execution of strategies exposes UPM and its business areas, functions and production plants to a number of risks and opportunities.

3

1

2

4

PERFORMANCE

GROWTH

PORTFOLIO

INNOVATION

STRATEGIC FOCUS AREAS INVOLVED

RISK DESCRIPTION

IMPACT

MANAGEMENT

OPPORTUNITY

INFLUENCING TRENDS

Global economic cycles

Impacts the demand and sales prices of various UPM products and main input costs items, as well as currency exchange rates. UPM’s main earnings sensitivities are presented on page 115.

Industry leading balance sheet. Continuous improvement in competitiveness, resource efficiency and customer offering. Business portfolio development. Continuous improvement in competitiveness. Focus on more attractive paper end-use segments. Adjust paper production capacity to profitable customer demand. Business portfolio development.

UPM’s strong balance sheet and focus on competitiveness mitigate risks and may present strategic opportunities (incl. M&A) in an economic downturn.

3 2 1

Faster than expected decline in demand for graphic paper

Increased pressure on UPM’s graphic paper deliveries and sales prices

UPM’s large paper production platform provides continuous optimisation opportunities. Reliable supplier of high quality products and customer service merits customer loyalty. Share of UPM businesses in declining markets is decreasing. UPM’s diverse business portfolio, focus on competitiveness and strong balance sheet mitigate risks and may present strategic opportunities (incl. M&A) in a cyclical downturn of a business. UPM’s diverse business portfolio and geographical presence, focus on competitiveness and strong balance sheet mitigate risks and may present strategic opportunities in changing currency environment. UPM’s diverse business portfolio and geographical presence mitigate risks and may present opportunities for optimisation in case of trade barriers in some products and locations. May drive market growth for sustainable products and energy, e.g. renewable fuels. Resource efficiency, circular economy and renewability are increasingly important sources of competitive advantage. In electricity markets, hydropower is an increasingly important and competitive form of power generation. Increased wood growth in northern hemisphere. Increasing relative competitiveness improves profitability and mitigates risks related to the external business environment (above). Carefully selected and implemented growth projects improve UPM’s profitability and ROCE. UPM’s financial targets are presented on page 17. The investment provides a competitive, safe and CO 2 emission-free electricity supply for the long term. UPM’s strong balance sheet and cash flow enable value- enhancing M&A when timing and opportunity are right. Societal value creation. Existing products and services redesigned to bring more value. New value-added products to replace oil-based materials may be a significant source of value creation and growth for UPM. Good governance mitigates risks and promotes best practices. High responsibility standards and transparency are a differentiating factor and create long term value. Good governance and responsible sourcing practices mitigate risks and provide competitive advantage. UPM’s continuous improvement in resource efficiency and circular economy mitigate risks and offer competitive advantage.

3 1

Overcapacity in some of UPM’s products due to changes in demand or supply

Temporarily impacts sales prices and deliveries of the product in question

Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development.

3 2 1

Significant moves in currency exchange rates relevant for UPM

Impacts UPM’s earnings and cash flow directly and competitiveness indirectly. UPM’s main currency exposures are presented on page 138.

Continuous hedging of net currency exposure. Hedging the balance sheet. Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development. Monitoring through international trade associations. Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development. Monitoring for early signals for regulation changes. Communicate the impacts of such policies on employment and creation of value- added clearly. Continuous improvement in competitiveness, materials and energy efficiency. Leading environmental performance. Innovation and selected investments in value added renewable products and energy. Business portfolio development. Sustainable forest management and UPM biodiversity programme. Continuously improving resource efficiency. Long-term supply contracts and relying on alternate suppliers. Selected ownership of forest land and long-term forest management contracts. Disciplined selection, planning, project management and follow-up processes. Investing in projects with attractive returns and sustainable competitive advantage. Ensuring that contractual obligations are met by both parties. Arbitration proceedings have been initiated by both parties. Disciplined acquisition preparation to ensure the strategic fit, right valuation and effective integration. Environmental and social impact assessments. Stakeholder engagement. Disciplined selection, development and commercialisation of processes for innovations. Collaboration and partnerships in R&D and commercialisation. Business model development. Governance, compliance procedures, UPM Code of Conduct, UPM Supplier and Third Party Code, audits, whistleblowing channel, trainings. UPM Code of Conduct, UPM Supplier and Third Party Code, supplier audits, certification. Best available techniques (BAT). Maintenance, internal control and reports. Certified environmental management systems (ISO 14001, EMAS). One Safety system (p. 45). Loss prevention activities and systems. Emergency and business continuity procedures. Programmes for savings in variable and fixed costs. Culture and track record of continuous improvement in productivity and resource efficiency. Product and service development.

3 2 1

International trade barriers, e.g. antidumping duties

Impacts trade flows and short-term market balances and may directly or indirectly impact sales prices and deliveries of UPM’s products.

3 2 1

OPERATING ENVIRONMENT

Changes in regulation, subsidies, taxation, e.g. related to climate policies

May distort markets, e.g. for energy or wood raw material. May change relative competitiveness of energy forms. May create additional competition for wood raw material. UPM’s sensitivity to carbon pricing is presented on page 102.

4 3 2 1

Availability and price of major production inputs like wood, fibre, chemicals and water

Increased cost of raw materials and potential production interruptions. UPM’s cost structure is presented on page 115 and sensitivity to water prices on page 102.

3 1

Weakening relative competitiveness impacts profitability and increases risks related to the external business environment (above).

Continuous improvement in competitiveness

4 1

Selection and execution of investment projects

Material cost overruns. Inopportune timing. Return on investment does not meet targets.

2

OL3 nuclear plant project completion and start-up

Loss of profit and cost overruns. Inopportune timing. Return on investment does not meet targets.

2

Selection and execution of M&A

Cost of acquisition proves high and/or targets for strategic fit and integration are not met. Return on investment does not meet targets. Damage to reputation.

3

Developing and commercialising innovations and new businesses

Return on investment does not meet targets. Lost opportunity.

4 1

Compliance risks; competition law, anti-corruption, human rights, securities regulation

Damage to reputation. Loss of business. Fines and damages. May impact the value of the company.

3 2 1

Supply chain and third party reputation risks

Damage to reputation. Loss of business. Loss of competitive position. May impact the value of the company.

3 2 1

OPERATIONS AND STRATEGY

Environmental risks; a leak or spill due to malfunction or human error

Damage to reputation. Sanctions. Direct costs to clean up and repair potential damages to production plant. Loss of production.

Industry-leading environmental performance provides competitive advantage, including efficiency gains.

3 2 1

Physical damage to the employees or property

Harm to employees and damage to reputation. Damage to assets or loss of production.

Leading health and safety performance strengthens the brand as an employer, as well as improving engagement, efficiency and productivity. Engaged high-performing people enable the implementation of the Biofore strategy, as well as commercial success.

1

Ability to retain and recruit skilled personnel

Business planning and execution impaired, affecting long-term profitability

Competence development. Incentive schemes. Workplace safety. Acting on employee engagement and management effectiveness.

4 3 2 1

Availability and security of information systems

Interruptions in critical information systems cause a major interruption to UPM’s business. Damage to reputation. Loss of business.

Technical, physical and process improvements to mitigate availability and security risks.

Sophisticated IT systems enable efficient operations, optimised performance as well as new customer services and data security.

4 1

CONTENTS

22

23

UPM Annual Report 2016

UPM Annual Report 2016