UPM Annual Report 2017

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

2.2 Sales

2.3 Operating expenses and other operating income Operating expenses Operating expenses excluding forest assets fair value change, wood harvested and share of results of associates and joint ventures are presented below.

Accounting policies Revenue from UPM’s product sales is recognised when the customer takes title and assumes the risks and rewards of ownership. The timing of revenue recognition is largely dependent on delivery terms. Group terms of delivery are based on Incoterms 2010, the official rules for interpretation of trade terms issued by the International Chamber of Commerce. Revenue is recorded when the product is delivered to the destination point for terms designated Delivered Duty Paid (“DDP”) or Delivered at Place (“DAP”). For sales trans­ actions designated Free on Carrier (“FCA”), Carriage paid to (“CPT”) or Carriage and Insurance Paid to (“CIP”), revenue is recorded at the time of shipment. UPM sells energy to NordPool electricity market. Revenue is recognised when electricity is transmissed. UPM provides forest expertise and contracting services to woodland and forestry owners. Revenues from services are recorded when the service has been performed. Sales are recognised net of indirect sales taxes, discounts, rebates and cash flow hedging results of sales in foreign currency as well as hedges of energy sales.

UPM generates revenue mainly from the sale of several types of products. UPM sells a proportion of its products to several major customers. The largest customer in terms of sales represented approximately 3% of UPM’s sales in 2017 and 2016, and the ten largest customers represented approximately 15% (16%) of such sales.

Auditor’s fees

EURm

2017

2016

Audit fee

2.3 0.1 0.3 0.5 3.2

2.3 0.1 0.7 0.5 3.6

Audit related services

» Refer Note 2.1 Business areas for information on UPM products.

Tax services Other services

EURm

2017

2016

Costs and expenses Raw materials, consumables and goods

Total

Sales by business area

5,471 1,265

5,376 1,246

Employee costs 1)

In 2017, auditor's fees include EUR 0.0 million related to tax services and EUR 0.3 million related to other services paid to PwC Oy.

EURm

2017 2,531

2016 CHANGE

Other operating costs and expenses 2) Delivery costs and other external charges

869 888

884 859

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

2,206

15% –11%

Total

8,492

8,365

317

357

Research and development costs The research and development costs included in operating expenses were EUR 51 million (40 million) in 2017. The focus was on new technologies and developing businesses. Government grants In 2017, government grants recognised as deduction of operating expenses totalled to EUR 6 million (8 million) of which EUR 5 million (6 million) relates to Finland, EUR 1 million (2 million) to UK and China. In addition, the group received emission rights from governments amounting to EUR 14 million (16 million) of which EUR 7 million (8 million) relates to Finland, EUR 5 million (6 million) to Germany, EUR 1 million (1 million) to Austria and EUR 1 million (1 million) to UK.

1,495 1,336 4,615

1,437 1,273 4,818

4% 5%

1) » Refer Note 3. Employee rewards, for further information.

–4%

484 281

444 285

9%

2) Distribution of other operating costs and expenses EURm

–1%

2017

2016

Eliminations

–1,048 –1,009

–

Total

10,010

9,812

2%

Rents and lease expenses

42

48

Emission expenses

4 2

9 3

Losses on sale of non-current assets

Credit losses

–

10

Effect of a 10% change in prices on operating profit for the year

Maintenance and other operating expenses 1)

820 869

815 884

Total

1) Other operating expenses include, among others, energy as well as expenses related to services and group’s administration.

EURm

2017

2016

Papers in UPM Paper ENA

452

471

Fine and specialty papers in UPM Specialty Papers

Other operating income

110 149

106 144

Label materials in UPM Raflatac

Cost structure 2017

EURm

2017

2016

Plywood

44 31 52

41 30 33

Gains on sale of non-current assets

55 14 14 14

59 16 16 28

Delivery of own products 10%

Sawn timber

Other fixed costs 10% Employee costs 15%

Rental income

Chemical pulp (net effect)

Emission rights received

Derivatives, non-qualifying hedges Exchange rate gains and losses

Wood and fibre 29%

–30

6

The biggest factor affecting UPM’s financial results is the sales price of paper. A change in the volume delivered has less than half of the effect of the same percentage change in sale prices.

Other Total

16 83

16

Other variable costs 18%

140 In 2017, gains on sale of non-current assets includes EUR 33 million income relating to sale of hydropower assets in Austria and the United States and EUR 16 million income relating to sale of land assets in Finland. In 2016, gains on sale of non-current assets includes EUR 47 million related to sale of Schwedt mill assets. Emission rights The group has recognised in Other operating income of EUR 14 million (16 million) income and under Other operating costs and expenses of EUR 4 million (9 million) expenses relating to CO 2 emissions. The liability to cover the obligation to return emission rights amounted to EUR 9 million (9 million) and is recognised in provisions. The emission rights recognised in intangible assets are specified below.

Energy 7%

Fillers, coating and chemicals 11%

Cost structure 2016

Delivery of own products 10%

Other fixed costs 10% Employee costs 15%

Wood and fibre 29%

Other variable costs 17%

EURm

2017

2016

Energy 8%

Fillers, coating and chemicals 11%

Carrying value, at 1 January

45 14

52 14

Emission rights received and purchased

Deliveries and disposals

–22

–14

Impairment

6 –

–7 –1 45 52 –7 45

Translation differences

Carrying value, at 31 December

44 45 –1 44

Accumulated costs

Accumulated impairments

Carrying value, at 31 December

CONTENTS

ACCOUNTS

122

123

UPM Annual Report 2017

UPM Annual Report 2017