UPM Annual Report 2017

Strategy

In brief

Businesses

Stakeholders

Governance

Accounts

UPM aims higher with renewed long-term financial targets

UPM as an investment

EURm Comparable EBIT

1,500

Target: EBIT growth

UPM has consistently improved its financial performance since adopting the current business model of six separate businesses in 2013. With renewed long-term financial targets, UPM aims higher.

1,200

900

600

300

0

12 13 14 15 11 Comparable figures for 2014–2017, excluding special items for earlier years

17 16

IN THE NEW TARGETS: • the business area return targets and the comparable ROE target have been increased • comparable EBIT growth has been introduced as a new group-level target • a new financial policy on leverage based on net debt/EBITDA has been introduced • the cash flow-based dividend policy remains unchanged At the business area level, UPM targets top relative performance in their respective markets compared with key peers. UPMhas increased the long-term return targets (below) for five of the six business areas. The new return targets reflect UPM’s increased ambition for business performance over both business and investment cycles. Group earnings growth On the group level, UPM introduced a new target. UPM aims to grow its comparable EBIT over the long term. In 2017, comparable EBIT increased by 13% to EUR 1,292 million (1,143 million). Business area long-term return targets increased

UPM aims to grow its businesses with strong long-term fundamentals. Earnings growth is prioritised over top-line growth. UPMwill invest in projects with attractive and sustainable returns, supported by a clear competitive advantage. The company also aims to capture opportunities to develop its business and product mix and further improve its cost competitiveness. Strong balance sheet and attractive return on equity UPM aims to maintain a strong balance sheet. Investment grade rating is an important element in UPM’s financing strategy. UPM’s new financial policy on leverage is based on net debt/EBITDA ratio of approximately 2 times or less. At the end of 2017, net debt/EBITDA was 0.11 times. The previous maximum gearing limit of 90% has been discontinued as redundant. At the end of 2017, gearing ratio was 2%. UPMhas increased its ROE target, now aiming for a 10% return on equity. ROE also takes into account the financing, taxation and capital structure of the group. In 2017, comparable ROE was 11.9%. The previous target was variable: 5 percentage points over a ten-year risk-free investment such as the Finnish government’s euro-denominated bonds.

Dividend proposal +21% Share price 2017 +11%

% Comparable ROE Target: 10%

UPM AIMS TO INCREASE LONG-TERM SHAREHOLDER VALUE

12 10

1 2 3 4 5

UPM is committed to continuous improvement in its financial, social and environmental performance. At the business area level, UPM aims for top performance in its respective markets compared with peers. UPM invests to grow businesses with strong long-term fundamentals and sustainable competitive advantage. The company has clear long-term return targets for its businesses. Earnings growth is prioritised over top-line growth. UPM’s expertise in renewable and recyclable materials, low-emission energy and resource efficiency is the key to developing new, sustainable businesses with high added value and unique competitive advantage. UPM’s responsible operations and value chain, and drive in finding new sustainable solutions mitigate risks, create competitive advantages, open new growth opportunities and help in answering some of the global challenges. Increasing the share of sustainable growth businesses improves the company’s long-term profitability and boosts the value of the shares.

PERFORMANCE

8 6 4 2 0

Strong cash flow enables focused growth investments, focused M&A, new business development as well as attractive dividends to UPM shareholders. An industry-leading balance sheet mitigates risks and enables UPM to accelerate its business portfolio transformation, if the opportunity and timing are right. Attractive dividend UPM aims to pay an attractive dividend, 30- 40% of the company’s annual operating cash flow per share.

GROWTH

11

12 13 14 15

17 16

INNOVATION

EURm Net debt and leverage

EBITDA (x)

4,500 3,750 3,000 2,250 1,500 750 0

3.0 2.5 2.0 1.5 1.0 0.5 0

Policy: ≤ 2x

RESPONSIBILITY

PORTFOLIO

11

12 13 14 15

17 16

■ Net debt

Business area returns and long-term targets

5-YEAR SHARE PERFORMANCE AND VALUATION MULTIPLES 2017

EUR per share Cash flow-based dividend

ROCE %* ) UPM Energy*** )

ROCE %* ) UPM Biorefining

UPM Specialty Papers

FCF/CE %** ) UPM Paper ENA

UPM Plywood ROCE %* )

UPM Raflatac ROCE %* )

2016 2015 2014 2013 23.34 17.23 13.62 12.28 1.65 1.38 1.20 0.91 0.95 0.75 0.70 0.60 3.16 2.22 2.33 1.39

%

ROCE %* )

31.0

1.15 *)

25.91

Share price at 31 Dec, EUR Comparable EPS, EUR 1) Dividend per share, EUR

1.2 1.0 0.8 0.6 0.4 0.2 0

120 100

27.2

25.5

24.3

1.88

23.1

22.6

20.9

1.15 *)

80 60 40 20 0

18.2

17.6

17.2

16.5

15.0 14.1

14.6

2.92

Operating cash flow per share, EUR

12.9

12.6

12.6

12.1

10.6

4.4

Effective dividend yield, %

4.1

4.4

5.1

4.9

9.1

7.6

7.3

6.9 6.5 6.7

5.5

5.0 4.0

14.2 1.60

P/E ratio

14.1 10.0 14.2 19.5 1.51 1.16 0.97 0.87

4.6

4.7

P/BV ratio 2)

11

12 13 14 15

17 16

13

14 15 16 17

13

14 15 16 17

13

14 15 16 17

13

14 15 16 17

13

14 15 16 17

13

14 15 16 17

8.6

EV/EBITDA ratio 3 )

8.7

8.4

7.5

8.3

% of operating cash flow per share * ) 2017: Board’s proposal

■ Long-term return target

■ Long-term return target

■ Long-term return target

■ Long-term return target

■ Long-term return target

Comparable return on equity 11.9% ■ Long-term return target

13,818

Market capitalisation, EUR million

12,452 9,192

7,266 6,497

* ) ROCE % = Return of capital employed excluding items affecting comparability. ** ) Free cash flow after investing activities (investments and/or divestments) and restructuring costs. *** ) Shareholdings in UPM Energy valued at fair value.

*) 2017: Board’s proposal 1) Comparable EPS for 2014–2017; EPS, excl. special items for 2013 2) P/BV ratio = Share price at 31.12./Equity per share 3) EV/EBITDA ratio = (Market capitalisation + Net debt)/EBITDA

CONTENTS

UPM Annual Report 2017 14

UPM Annual Report 2017 15