UPM Annual Report 2016

Strategy In brief Transformation Businesses Stakeholders

Governance

Accounts

Transforming the business portfolio UPM’s top-line has been nearly constant at EUR 10 billion over recent years. However, sales in the graphic paper business UPMPaper ENA have decreased, while the five other business areas have grown significantly through focused investments.

Transforming performance UPMhas achieved a clear improvement in its financial performance. Profitability has improved, shareholder returns have increased and the balance sheet has strengthened. At the same time, social and environmental performance has also improved. Read more on long-term financial and responsibility targets on pages 17-19.

Over the past years, UPM has been transforming its business model, business portfolio and business performance. The change process started in 2008, and 2016 showed many of the benefits achieved. UPM’s transformation continues.

Vertically integrated paper company

Six separate businesses

2016 COMPARED WITH 2008

Business portfolio, sales %

Business portfolio, sales %

100

100

+123 % Comparable EBIT

+7.4 pp Comparable ROE

–74 % Net debt / EBITDA

Business model

80

80

60

60

Decision making on the right level Each business area is responsible for executing its own strategy and achieving targets. Group direction and support from global functions enable the businesses to capture benefits fromUPM’s brand, scale and integration, while navigating the complex operating environment. Capital allocation decisions take place on the group level.

Six separate business areas UPMhas changed its business model from a vertically integrated forest industry model into a company with six separate business areas. The business areas are competitive, with strong market positions. Five of them are operating on healthily growing markets. The business model change has yielded benefits: 1. Transparency and accountability – commercial strategies, benchmarking, target setting, incentives 2. Cost competitiveness – agility, improved efficiency, optimised sourcing 3. Growth – focused investments with attractive returns and clear competitive advantage Capturing corporate benefits UPM group aims to add value to its separate businesses and thereby to its stakeholders with: • Competitive and responsible wood sourcing, forestry and plantation operations • Value adding, efficient and responsible global functions, compliance • Continuous improvement (Smart) programmes

■ Paper ENA ■ Plywood ■ Energy ■ Specialty Papers ■ Raflatac ■ Biorefining ■ Other operations

40

40

■ Paper ■ Plywood ■ Raflatac ■ Sawmilling

IMPROVED FINANCIAL PERFORMANCE

20

20

-83 %

+20 pp +34 %

0

0

08

16

Safety: LTAF

Employee engagement

Productivity: Sales/employee

CLEAR ROLES AND RESPONSIBILITIES

IMPROVED SOCIAL PERFORMANCE

Disciplined capital allocation • UPM aims to pay an attractive dividend • UPM aims to maintain a strong balance sheet to mitigate risks and enable strategic opportunities to be captured • UPM invests in projects with attractive and sustainable returns, supported by clear competitive advantage • In UPMPaper ENA, UPM aims for strong cash flow and releasing capital

Group Portfolio strategy Capital allocation Business targets Code of Conduct Responsibility targets

Businesses Business area strategies Commercial excellence Operational excellence Cost efficiency measures Focused growth projects Innovation

Outcomes Top performance Competitive advantage Value creation Stakeholder and societal value License to operate

–14 % Electricity consumption/ tonne of paper

–13 % Effluent flow/ product

–19 % Waste to landfills

EFFICIENCY

IMPROVED RESOURCE

• Global platform to build on • Disciplined capital allocation

+280 %

+13 pp

+18 pp

Share of certified fibre

Patent applications

Share of ecolabelled products

INCREASING SHARE OF BUSINESSES WITH STRONG LONG-TERM FUNDAMENTALS FOR PROFITABILITY AND GROWTH

INNOVATION AND

PRODUCT STEWARDSHIP

Read more: UPM’s strategic focus areas p. 10

SALES 2016, %

100

Pulp +70,000t

Pulp +100,000t

Pulp mill efficiency improvement

Pulp +170,000t

UPM Biorefining

EURm Combined comparable EBIT % of sales

Pulp +170,000t

SUSTAINABLE EARNINGS GROWTH • UPM Biorefining • UPM Raflatac • UPM Specialty Papers • UPM Plywood • UPM Energy

5-year average delivery growth (CAGR) 3–4% excluding UPM Energy

1,000

20

Label stock expansions

Plywood +40,000 m3

Label stock expansion

Specialty papers +360,000t

Renewable diesel +120m litres

800

16

75

UPM Raflatac

New business: Biofuels

600

12

400

8

UPM Specialty Papers UPM Plywood UPM Energy

FOCUSED

200

4

INVESTMENTS

0

0

13

14 15 16

50

13

14

15

16

17

18

UPM Paper ENA operating cash flow

MAINTAIN STRONG CASH FLOW • UPM Paper ENA

4-year average annual operating cash flow

420,000t magazine 160,000t fine

460,000t magazine 345,000t news

280,000t news

305,000t magazine

UPM Paper ENA

EURm

600 500 400 300 200 100 0

195,000t magazine

321m

25

EUR

CAPACITY CLOSURES AND DIVESTMENTS

0

13

14 15 16

CONTENTS

8

9

UPM Annual Report 2016

UPM Annual Report 2016