UPM Annual Report 2017

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Strategy

In brief

Businesses

Stakeholders

Governance

Accounts

UPM’s current investment portfolio for earnings growth

Moving forward

Six strong business areas UPM consists of six separate business areas. The business areas are competitive, with strong market positions and a leading financial and sustainability performance. Five of these business areas operate in healthily growing markets. UPM corporate benefits The UPM group creates value for its businesses and stakeholders with: • Competitive and sustainable wood sourcing, forestry and plantation operations • Value adding, efficient and responsible global functions • Continuous improvement (Smart) programmes • Technology and intellectual property rights • A global platform to build on • Disciplined and effective capital allocation • Compliance with applicable laws and regulations and corporate policies Decision-making at the right level Each business area is responsible for executing its own strategy and achieving its own targets. Group direction and support from global functions enable the businesses to reap the benefits fromUPM’s brand, scale and integration while navigating a complex operating environment. Capital allocation decisions are made at group level. Transformation continues UPM businesses provide sustainable and safe solutions for the growing global consumer demand, both now and in the future. This provides the company with a wealth of future opportunities to grow and create innovative new products, businesses and solutions. The focus on performance continues, supported by a culture of continuous improvement and innovation.

UPMuses focused investments to grow its businesses. These are typically small to medium-sized projects with attractive returns. UPM is well positioned for transformative projects. The current investment portfolio for earnings growth is shown on the right. The share of businesses with strong long-term fundamentals for profitability and growth continues to increase, while strong cash flow is maintained in the competitive graphic paper business. In 2017, 58% of UPM’s revenues and 82% of UPM’s comparable EBIT originated from growing businesses. Disciplined and effective capital allocation Over the past five years (2013-2017), UPM generated cumulatively EUR 6.4 billion of operating cash flow. 30% of this was allocated to dividends, 30% to investments and 40% to debt reduction. The focused growth projects proved a great success, with returns exceeding the target returns. At the end of 2017, UPMhad achieved a truly industry-leading balance sheet, with net debt / EBITDA ratio of 0.11. See page 14 for our return targets and leverage policy. In the coming years, UPM can allocate more capital to growing and transforming the company while simultaneously increasing distribution to shareholders and maintaining headroom in the strong balance sheet. UPM invests in projects with attractive and sustainable returns, supported by a clear competitive advantage.

Focused growth projects Completed by the end of 2017 • Kymi pulp mill expansion, Finland • Raflatac expansion, Poland Construction stage • Kaukas pulp mill expansion, Finland • Raflatac expansion, Finland

• Jämsänkoski label papers expansion, Finland • Chudovo plywood mill expansion, Russia Feasibility study • Nordland PM2 conversion from fine papers to label papers, Germany Transformative prospects Possible new pulp mill, Uruguay • UPM and the Government of Uruguay signed an agreement on local prerequisites for a possible new pulp mill. Infrastructure projects and the pre-engineering of the mill in progress. Biomolecules businesses • Basic engineering study started regarding a potential industrial-scale biochemicals refinery, Germany • Exploring next steps in biofuels

UPM aims higher with continued transformation and earnings growth.

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

SALES 2017, %

100

UPM Biorefining Other operations

EURm Comparable EBIT, growing businesses combined % of sales

Pulp +70,000 t

Pulp +100,000 t

Pulp mill efficiency improvement

Pulp +170,000 t

Specialty labels expansion

Pulp +170,000 t

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

5-year average delivery growth (CAGR) 2–6% excluding UPM Energy

1,000

Label stock expansions

Renewable diesel +120m litres

Specialty papers +360,000 t

Plywood +40,000 m 3

Label stock expansion

Specialty papers +40,000 t

800

Pulp +30,000 t

New business: Biofuels

UPM Raflatac

600

400

FOCUSED

Plywood +45,000 m 3

200

UPM Specialty Papers UPM Plywood UPM Energy

INVESTMENTS

14 15 16 17

UPM Paper ENA operating cash flow

UPM Paper ENA

STRONG CASH FLOW • UPM Paper ENA

5-year average annual operating cash flow

420,000 t magazine 160,000 t fine

460,000 t magazine 345,000 t news

280,000 t news

305,000 t magazine

128,000 t magazine

EURm

600 500 400 300 200 100 0

195,000 t magazine

328m

Hydropower

EUR

CAPACITY CLOSURES AND DIVESTMENTS