UPM Annual Report 2016

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Businesses

In brief

Strategy

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Governance

Accounts

UPM Paper ENA

Business development UPMPaper ENA’s systematic performance management enabled a significant profitability improvement in 2016 despite the challenging market environment. Measures such as stringent capacity management, cost reduction and differentiated commercial strategies have been systematically developed and implemented. In 2016, UPMPaper ENA was able to reduce its variable costs resulting in meaningful savings in energy, pulp and logistics costs. The savings were realised partly due to ongoing profit improvement measures. Realised currency hedges had a negative impact on profitability in the previous year. The structural decline in demand of graphic papers in Europe continued. The average price for UPM’s paper deliveries in euros decreased by 2% in 2016 compared to the previous year, partly impacted also by less favourable development in markets outside the euro area. UPMPaper ENA’s deliveries decreased by 4% compared to the previous year. This was offset by operational efficiencies being on high levels and lower variable and fixed costs. Cash flow was successfully released, primarily as a result of the improved profitability, but also due to asset sales and a reduction in working capital. Efficient use of production assets UPMPaper ENA continued adapting its production to meet profitable customer demand. Timely closures in 2015 and before, combined with additional actions in 2016, improved the asset utilisation rates even further. To secure a leading position as a reliable supplier, machine closures were implemented without endangering UPM’s customer deliveries. In 2016, UPMPaper ENA took several actions to optimise its operations and keep the production efficient. Benefits may extend into 2017 and under pin a continued good performance. InMay, paper production was ceased at the Madison mill in the US. With the closure, UPMPaper ENA reduced 195,000 tonnes of magazine paper capacity and continued to supply profitable demand from the company’s European mills. In July, UPM sold its Schwedt mill. As part of the transaction, the parties entered into a contract manufacturing agreement for newsprint for a transition period which will be ceased at the end of third quarter in 2017. The machine will be converted by the new owner into liner production. The mill’s capacity is 280,000 tonnes of newsprint. UPMPaper ENA will continue newsprint production on its remaining newsprint paper machines. In November, UPM announced plans to permanently close paper machine 3 at UPM Steyrermühl, Austria and paper machine 2 at UPMAugsburg, Germany. With the closures decided in February 2017, UPMwill permanently reduce 305,000 tons of its magazine paper capacity. Paper production continues on the remaining cost competitive paper machines at the mill sites. In 2016, demand for graphic papers decreased by 4% in Europe, a rate of decline that falls well in line with the level in recent years. However, despite the overall decline in demand, the market offers opportunities in certain end uses and segments. UPMPaper ENA’s differentiated commercial strategies paid off with solid growth in certain niches and new products sales in 2016. The business area strengthened its market position and improved customer loyalty. UPMPaper ENA is also an established supplier in the US and enhanced its customer relationships on the market. Responsible fibre Paper is a true Biofore product. It is a completely renewable material and can be recycled efficiently. Products are sustainable over their entire lifecycle, from forest to recycling. UPMPaper ENA has the most comprehensive offering of papers carrying the EU Ecolabel in the industry. To further promote responsible practices, UPM launched its first Responsible Fibre™ product family in 2016, that ensures the products comply with industry‘s most demanding responsibility criteria. The wood fibre rawmaterial is sourced from sustainably managed forests. UPM embeds biodiversity as part of modern forest management. Production process complies with the occupational and product safety requirements and minimises impacts, waste and consumption of water and energy.

TRADEMARK FOR RESPONSIBLE FIBRE “New Future” is the first range of papers to carry the new “Responsible Fibre” trade- mark adopted by UPM. The new trademark innovatively combines UPM’s environmental and social responsibility into one cohesive philosophy, which is adhered to throughout the product lifecycle. The criteria cover the following four focus areas: climate, water, biodiversity and social responsibility. The trademark shows that the products carrying the trademark comply with the industry’s most demanding responsibility criteria. At the same time, the branding on the “New Future” product packages has been given an attractive facelift. The technical properties of the paper were also modified to better meet today’s printing needs.

• Capital intensive process industry • Engaged high performing people • Community involvement and local presence • Virgin fibre from certified sources • Recycled fibre • Low-emission energy

CAPITALS

Significant performance improvement

UPM PAPER ENA VALUE CREATED

OUR DIRECTION • Maximise cash flow using differentiated commercial strategies and disciplined performance management • Make use of optimisation opportunities in the extensive low-cost operations OUR STRENGTHS • Reliable supplier with consistently high quality, excellent service as well as a wide product range • Extensive low-cost operations providing continuous opportunities for optimisation • Scale and skills in responsible sourcing and manufacturing • Environmental and technical expertise, consistent product development

Common operational platform for production, supply chain and sales Customer focus and offerings, wide product range Leading and reliable supplier

Efficient and cost-competitive production Environmental and technical expertise