UPM Annual Report 2016

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Benefitting from growth investments UPM Biorefining

EFFICIENCY AT A NEW LEVEL AT UPM KYMI The investments made at the UPM Kymi pulp mill improve the efficiency of the entire mill integrate: the pulp and paper businesses can independently optimise their production and simultaneously benefit from mutual synergies related to energy, logistics and environmental management. The largest investments at the pulp mill have been the new chemical recovery island introduced in 2008 and the investment in a new pulp drying machine, debarking plant and the modernisation of the soft- wood fibre line, which was completed in the autumn of 2015. In the summer of 2016, UPM decided to invest a further EUR 98 million in the pulp mill and increase the annual production capacity to 870,000 tonnes by the end of 2017. Previously, the pulp mill had to limit pulp production when the paper machine was not running because the mill did not have enough capacity for drying all the pulp before baling it for export. Now pulp production is no longer dependent on whether the paper mill is running or not. The investments will also improve the energy efficiency of the integrated mill site. Despite the major increase in the pulp mill’s production capacity, emissions into the air and water will remain at the same level as before.

• Capital-intensive process industry • Sustainable wood from certified sources • State of the art production technology • Community engagement • Engaged high-performing people • Reliable well-functioning supply chain CAPITALS

OUR DIRECTION • In Pulp: Provide customers with direct access to the most versatile pulp range and advanced technical service. Maintain cost competitiveness through continuous operational improvement. Grow as a responsible and cost-efficient pulp supplier. • In Biofuels: Provide unique wood-based advanced biofuels in various markets and segments, achieve top performance at UPM Lappeenranta Biorefinery, evaluate opportunities for scaling up biofuels business. • In Timber: Enhance profitability through efficient use of wood supply, integrated full-production and sharpened commercial strategy. New customer promise “Grown to Sustain” will strengthen the competitive advantages of UPM Timber on strategic markets. OUR STRENGTHS • Versatile range of sustainably produced pulp grades suitable for a wide range of end-uses • Modern, efficient mills and business committed to growth • Responsibility integrated in all operations from wood sourcing to logistics • Established producer of advanced renewable diesel • Competitive sawmills with skilled own global sales network • Synergistic supply chain of wood for sawn timber, pulp and renewable diesel

Benefits from integrated production In the UPMBiorefining business area, UPM combines integrated production of pulp, timber and biofuels with a synergistic supply chain of wood raw materials. Timber by-products are used as pulp rawmaterial. Pulp mills produce renewable energy in their recovery boilers and provide CO 2 -neutral biomass-based electricity. Crude tall oil, a residue of pulp production, is the rawmaterial in UPM’s renewable BioVerno diesel. Benefitting from focused investments in pulp Over recent years, UPMhas made focused investments to expand production and improve efficiency at all four pulp mills. Debottlenecking investments continued in 2016. The UPMKaukas pulp mill investment was completed in December. The investment strengthens the mill’s efficiency and competitiveness. In July, UPM announced a EUR 98 million investment in its Kymi pulp mill in Finland, increasing the mill’s annual pulp production capacity by 170,000 tonnes to 870,000 tonnes by the end of 2017. This investment will further improve UPMKymi’s cost competitiveness and environmental performance. UPM’s total pulp production capacity has grown by more than 500,000 tonnes since 2013 with investments of approximately EUR 350 million. Simultaneously, production efficiency has improved at all mills thanks to these growth investments. UPMhas also focused on strengthening employee competencies and mill maintenance as well as environmental performance. Performance buoyed by growth and improved efficiency Thanks to increased capacity, UPMhas been able to respond to growing demand from existing customers in tissue, specialty papers and packaging. UPMpulp deliveries increased by 7% in 2016 compared to the previous year. In combination with lower operating costs, the negative impact of UPM’s lower pulp sales prices was partly offset. As an integral part of the value chain, efforts to enhance wood supply continued. Profitability in sawmill operations improved thanks to increased delivery volumes and improved production efficiency but remained modest due to stiff price competition. The quality of the wood fibre impacts sourcing costs, production efficiency and pulp quality. In 2016, benefits were gained in both fibre quality and optimisation of harvesting and logistics costs. UPMTimber is a significant operator in the high quality Nordic certified sawn timber segment and a reliable supplier for the growing construction,

UPM PULP AND TIMBER VALUE CREATED

Responsible and competitive sourcing Modern and efficient integrated production Reliable pulp and timber deliveries Multi-fibre pulp product offering World-class technical service close to customer Best-in-class sustainability offering