UPM Annual Report 2017

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In brief

Strategy

Businesses

Stakeholders

Governance

Research and development Growth and competitive edge

Extensive partner network UPM's extensive partner network comprises universities, research institutes, suppliers and start-up companies. Collaboration speeds up the development and launch of new solutions, particularly for new businesses. UPM is involved in the European Joint Undertaking on Bio-based Industries, BBI. The partnership programme focuses on the

UPM set up an advanced analytics team in 2017 to develop modern tools based on applied mathematics, both to support decision- making in UPM businesses and for use across the company. UPM Forecasting Platform, launched in 2017, made top-level algorithmic forecasting available throughout the company. The analytics team offers data science training for UPM employees and is involved in academic collaboration with UPM’s external networks. Solid patent portfolio UPM actively protects innovations and brands with intellectual property rights, and manages and uses its patents, trademarks and other intellectual property rights worldwide. Protected innovations and high-level risk management are an integral part of UPM’s business model. UPM is also actively seeking partners and licensing opportunities to develop new technologies and solutions for its customers. The significance of the patents and intellectual property rights protecting UPM's innovations is even more pronounced in new businesses. A solid patent portfolio boosts UPM's competitive edge and also provides an excellent basis for value creation in the future. UPM files approximately 360 patent applications around the world every year. Technical solutions and innovations that use wood, chemicals, energy and water more efficiently are being patented also in existing businesses like pulp and paper production. Research projects to enhance circular economy UPM's research into the side streams of pulp and paper mill integrates aims to find more efficient ways to utilise side streams such as sludge, ash, green liquor dregs and waste heat. A joint project with fertilizer manufacturer Yara develops recycled fertilizers for crops from sludge. Research projects have investigated many solutions for the use of green liquor dregs and ash, and some more promising development projects are currently underway in the construction sector. UPM also applies the positive results in its Zero Solid Waste project, aiming to develop intelligent and sustainable solutions for recycling surplus materials to ensure they produce added value. The China More with Biofore research programme is looking for technical solutions for UPM Changshu paper mill to decrease water consumption and emissions, save energy and utilise solid waste, for example. The mill's water consumption and energy-efficiency are already at a good level and among the best in the world, and their sulphur dioxide, nitrogen oxide and dust emissions are clearly lower than China's most stringent limit values. Aiming for bioeconomy The bioeconomy is based on the sustainable use of renewable resources. UPM's bio-based products can reduce the use of fossil raw materials and replace non-renewable materials with renewables. The bioeconomy utilises the best available techniques to consume and recycle natural resources and nutrients efficiently. Biodiversity forms the basis for a sustainable bioeconomy. One example of a research project exploring opportunities of bioeconomy is UPM's Sustainable Fibre Materials programme, which examines new ways to utilise fibre-based, value-added products and materials. The aim is to find sustainable and safe solutions that replace fossil alternatives and are environmentally sound and versatile. The starting point for the development work is UPM's ecodesign thinking, covering the impacts of the entire lifecycle. Special attention is paid to the biodegradability of products. Business Finland supports this programme. Fibre-based materials are being developed for growing end-uses such as tissue, hygiene, nonwovens, flexible packaging, labels and biocomposites. New solutions will be developed in collaboration with UPM's businesses, research organisations and customers.

development of bioeconomy, bio-based products and their production, as well as on strengthening their competitiveness in Europe. The members of the programme represent several industries. UPM is a shareholder in the Finnish CLIC Innovation company whose research programmes focus on bioeconomy and cleantech research, as well as energy and environmental research, thus supporting UPM's own R&D efforts.

Innovations and R&D programmes are essential in the development of new products. These development programmes aim to create new technologies and products and to ensure the competitiveness of UPM's businesses. In 2017, UPM spent EUR 58 million (46 million) on research and development, making up approximately 3.7% (2.7%) of UPM’s operating cash flow. The focus was on new technologies and developing businesses. On top of the direct R&D expenditure of approximately EUR 51 million (40 million), the figures include negative operating cash flow and capital expenditure in developing businesses. A global network of research centres supports UPM's new and existing businesses. Progress in sustainable biochemical business UPM Biochemicals focuses on three product categories: biochemicals, biomedical products and lignin products. Biochemicals can replace oil-based chemicals. The products using UPM's biochemicals can be converted into various industrial products and everyday consumer goods. In 2017, UPM announced that it was going to evaluate the potential of building a biorefinery in the Frankfurt-Höchst Chemical Park in Germany. This brand new industrial- scale biorefinery would produce 150,000 tons of bMEG (bio- monoethylene glycol), bMPG (bio-monopropylene glycol) and lignin from hardwood. UPM continues to develop biomedical products in collaboration with researchers at Biomedicum in Helsinki, Finland. GrowDex hydrogel is suitable for cell culturing, and medical research is finding more new applications for it. One example is FibDex, a new wound dressing product that is expected to be launched soon. Lignin can be used in resins employed as binders in wood-based products, as well as in plastics, foams and coatings. In 2017, UPM Plywood launched WISA BioBond, a gluing technology for plywood manufacturing where fossil-based phenol is replaced with lignin. Formed as a side stream in the pulp production process, lignin has traditionally been burned to generate energy, but the new technology turns it into a high-quality product that can replace fossil raw materials. The gluing technology is based on lignin technology developed and patented by UPM Biochemicals. Developing new end uses and feedstocks in biofuels Made from a renewable raw material, crude tall oil, UPM BioVerno naphtha is an excellent biocomponent for gasoline. It also works exceptionally well as a raw material for producing bioplastics. UPM Biofuels announced that it is testing a sequential crop of Brassica carinata in Uruguay and Brazil as part of biofuels future development. Carinata is an oilseed crop specially developed for sustainable production of biofuels. New biocomposite materials for indoor and outdoor uses UPM Biocomposites develops innovative and sustainable composite products for various outdoor uses and consumer products. The patented UPM ProFi production process is a good example of circular economy: cellulose fibres and polymers from self-adhesive label waste is used to create high-quality decking systems. UPM Formi composite material, made from cellulose fibres and polymers, is suitable for a variety of applications from furniture to consumer electronics. UPM Formi complies with the requirements set by the EU for reinforced plastics in relation to circular economy, and its carbon footprint is up to 50% lower compared to traditional plastics. Advanced analytics for efficient decision-making UPM utilises advanced analytics to significantly improve the optimisation of sales, production, logistics and inventory management, as well as risk management. Analytics provide a competitive edge and added value quickly and cost-efficiently.

R&D’s role in different businesses

BUSINESS AREA

DESCRIPTION

UPM Biorefining UPM Pulp

In 2017, the focus was on operational efficiency. UPM Pulp focused especially on integrating the information on wood available for pulp mills. In mill-process-related development work, the emphasis was on consistent quality of the end product and the cost efficiency and capacity utilisationof the mills. The main focus of the research programme for eucalyptus wood in Uruguay was on plantation development and the need for both current and new genetic material. Programmes relating to solid waste treatment were completed with industrial consortia. Work has begun to utilise the research results for business development opportunities both in Finland and Uruguay. UPM’s R&D experts developed UPM Pulp’s technical customer service process and produced new added-value services for selected Pulp customers. Renewable UPM BioVerno diesel and naphtha were successfully distributed to the Nordic market throughout the year. In January, the Bioeconomy Panel of the Nordic Council of Ministers chose UPM BioVerno diesel among 25 unique example cases of bioeconomy. In May, the world's first RSB (Roundtable on Sustainable Biomaterials) certificate for wood-based fuels was awarded to UPM Biofuels. In June, UPM launched BioSata, an initiative to make Helsinki's regional traffic cleaner, with buses and the majority of the city's machinery and trucks switching to waste- and residue-based biofuels. As well as HSL (Helsinki Regional Transport Authority), Stara and UPM Biofuels, the Ministry of Economic Affairs and Employment, the Finnish Petroleum and Biofuels Association, the VTT Technical Research Centre of Finland and several energy companies operating in Finland are also involved in the project. The initiative is a part of the Smart & Clean project, which has the objective of making the Helsinki region the world's most attractive area for emission-free transportation. In June, UPM Biofuels announced that it is testing a new feedstock concept by growing Brassica Carinata in winter in South America, outside of its main cultivation period. The Carinata crop produces non-edible oil suitable for biofuels' feedstock and protein for animal feed. The winter cultivation concept is a part of the plan for the future of biofuels. UPM Biofuels won the Bioenergy Industry Leadership award at the Platts Global Energy Awards in December 2017. The focus was on improving the cost competitiveness and environmental performance of hydro and biomass-based energy production assets and developing competencies and business operations related to the optimisation of industrial power consumption and demand-side management. UPM Energy participated in several research programmes and undertook development work with the aim of improving UPM's operations relating to energy generation and consumption in a changing energy market. Research centres in four locations (Finland, Poland, China, USA) support the product development of paper, film and special products in the global self-adhesive labelling business operations. Cost efficiency and product customisation requirements for various end-use segments are taken into account during customer-orientated development. Sustainable alternatives and product safety have increased their role alongside these requirements. Continuous quality development still remains an essential part of product and process development. UPM Specialty Papers focused its research and development on supporting growing businesses, growth initiatives, responsibility and operational efficiency. The China More with Biofore research programme has progressed well and new approaches have been devised to further improve the environmental performance of the UPM Changshu mill. UPM research centres in Lappeenranta, Finland and Changshu, China support local production and global business operations. Research and development in UPM Paper ENA focuses on supporting profitable operations and a competitive product portfolio with the state-of-the-art competencies of a professional R&D organisation. Agile R&D operations in co-operation with business stakeholders; quick field tests and application of the results; benchmark analysis; effective troubleshooting; asking the right questions and challenging the old ways are key factors in successful R&D support for printing papers. UPM research centres in Lappeenranta, Finland and Augsburg, Germany support global production and business operations. The key focus areas for research and development include providing superior technical expertise and support for customers, creating competitive products within selected end-use areas, developing processes within their own production environment and supporting the commercialisation of newly developed products and applications. WISA® BioBond gluing technology, based on UPM's own lignin technology, was introduced. In this new technology, 50% of the fossil-based raw material (phenol) is replaced with lignin, a residue of the pulping process. A new fire-retardant product, WISA-SpruceFR, for end use in construction was developed and introduced to the market. The piloting of WISA® Bonded Floor technology was continued with selected customers. New products were developed for applications in concreting and transportation end use to complement the current portfolio.

UPM Biofuels

UPM Energy

UPM Raflatac

UPM Specialty Papers

UPM Paper ENA

UPM Plywood

CONTENTS

ACCOUNTS

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UPM Annual Report 2017

UPM Annual Report 2017