UPM Annual Report 2017

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

Report of the Board of Directors

Key figures

2017

2016 9,812 1,560

2015

Sales, EURm

10,010

10,138 1,350

Comparable EBITDA, EURm

1,631

% of sales

16.3

15.9

13.3

Operating profit, EURm Comparable EBIT, EURm

1,259 1,292

1,135 1,143

1,142

916

% of sales

12.9

11.6

9.0

Profit before tax, EURm

1,186 1,218

1,080 1,089

1,075

UPM introduction and business model

Clear roles and responsibilities

Comparable profit before tax, EURm

849 916 734 1.72 1.38 11.9

Profit for the period, EURm

974

880 879 1.65 1.65 10.9 10.9 10.5 10.6

Comparable profit for the period, EURm

1,004

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

UPM leads the forest-based bioindustry into a sustainable and innovation-driven future across six business areas: UPM Biorefining, UPM Energy, UPM Raflatac, UPM Specialty Papers, UPM Paper ENA and UPM Plywood. The business areas are competitive, with strong market positions. Five of them are operating in healthily growing markets. UPM provides sustainable and safe solutions to the growing global consumer demand. Products are made of renewable materials and they are recyclable. UPM group creates value to its stakeholders by operating separate businesses with a focus on: • Competitive and sustainable wood sourcing, forestry and plantation operations • Value adding, efficient and responsible global functions

Earnings per share (EPS), EUR Comparable EPS, EUR Return on equity (ROE), %

1.82 1.88 11.5 11.9 12.5 12.8

Comparable ROE, %

9.5

Return on capital employed (ROCE), %

10.3

Comparable ROCE, %

8.3

Operating cash flow, EURm

1,558

1,686

1,185 2.22 14.89 11,010 2,100

Operating cash flow per share, EUR Equity per share at end of period, EUR Capital employed at the end of period, EURm

2.92

3.16

16.24 9,777

15.43

10,657

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 from UPM’s brand, scale and integration, while navigating the complex operating environment. Capital allocation decisions take place at the group level. Corporate responsibility is an integral part of all operations and a source of competitive advantage. UPM is committed to continuous improvement in economic, social and environmental performance. UPM promotes responsible practices throughout the value chain and is active in finding sustainable solutions in co-operation with its customers, suppliers and partners.

Net debt, EURm

174 0.11

1,131 0.73

Net debt to EBITDA

1.56

Personnel at the end of period

19,111

19,310

19,578

» Refer Note 10.2 Alternative performance measures, in financial statements for definitions of key figures.

• 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, UPM Code of Conduct and corporate policies

Results 2017 compared with 2016

Financing and cash flow

In 2017, cash flow from operating activities before capital expenditure and financing totalled EUR 1,558 million (1,686 million). Working capital decreased by EUR 91 million (decreased by EUR 195 million) during the period. A dividend of EUR 0.95 per share (totalling EUR 507 million) was paid on 12 April 2017, for the 2016 financial year. UPM prepaid EUR 523 million of its debt in Q4 2017 and EUR 40 million in Q2 2017 due to good liquidity situation. Net debt decreased to EUR 174 million at the end of the period (1,131 million). The gearing ratio as of 31 December 2017 was 2% (14%). Net debt to EBITDA ratio, based on the latest 12 months’ EBITDA, was 0.11 at the end of the period (0.73). On 31 December 2017, UPM’s cash funds and unused committed credit facilities totalled EUR 1.4 billion. In 2017, capital expenditure totalled EUR 329 million, 3.3% of sales (325 million, 3.3% of sales), or EUR 303 million (325 million) excluding investment in shares. Total capital expenditure in 2018, excluding investments in shares, is estimated to be approximately EUR 350 million. In July 2016, UPM announced it was to invest EUR 98 million in UPM Kymi pulp mill in Finland to further strengthen its position as a supplier of bleached chemical pulp for growing consumer and industrial end-use segments like tissue and speciality paper as well as packaging papers and board. The investment was completed in Q4 2017 and it increased Kymi’s annual pulp production capacity to 870,000 tonnes of bleached northern softwood and birch pulp. The investment will further improve UPM Kymi’s cost competitiveness and environmental performance. Capital expenditure

2017 sales were EUR 10,010 million, 2% higher than the 2016 total of EUR 9,812 million. Sales grew in UPM Biorefining, UPM Raflatac, UPM Specialty Papers and UPM Plywood, but decreased in UPM Paper ENA and UPM Energy. Comparable EBIT increased by 13% to EUR 1,292 million, 12.9% of sales (1,143 million, 11.6%). Comparable EBIT increased mainly due to higher delivery volumes and lower depreciation. Changes in sales prices in UPM’s product range had a clear positive net impact on the comparable EBIT. Variable costs, including the impact of UPM’s cost efficiency measures, increased by similar magnitude. Fixed costs were slightly lower. Changes in currencies had a negative impact on comparable EBIT. Depreciation, excluding items affecting comparability, totalled EUR 447 million (510 million). The increase in the fair value of forest assets net of wood harvested was EUR 103 million (88 million). Operating profit totalled EUR 1,259 million (1,135 million). Items affecting comparability in operating profit totalled charges of EUR 33 million (charges of EUR 7 million). This included gains of EUR 33 million from selling hydropower facilities in Austria and the US, net restructuring charges of EUR 38 million related to UPM Paper ENA, and charges of EUR 30 million related to reorganisation of pension schemes in UPM Biorefining. Net interest and other finance costs were EUR 57 million (49 million). The exchange rate and fair value gains and losses resulted in a loss of EUR 12 million (loss of EUR 7 million). Income taxes totalled EUR 212 million (200 million). Items affecting comparability in taxes totalled EUR 2 million (11 million). Profit for 2017 was EUR 974 million (880 million) and comparable profit was EUR 1,004 million (879 million).

Market environment in 2017 A synchronised global growth was underway in 2017. Global economic growth accelerated in both advanced economies and emerging markets, compared with the previous year. In Europe, growth was broad-based, supported by robust private consumption, stronger global demand and decreasing unemployment. In addition, investment activity also improved. Growth accelerated in the US, whereas solid growth continued in China. Improving growth prospects and anticipation of slowing monetary stimulus strengthened the euro against the US dollar, which was also impacted by the uncertainty about fiscal policy following the US presidential election. The British pound weakened as economic momentum slowed and the UK continued with the Brexit negotiations. The euro also strengthened against the Japanese yen. In spite of robust global economic growth and continued loose monetary policy, overall inflation showed only modest signs of picking up in 2017. However, prices of many commodities increased during the year, e.g. the price of oil. Costs for UPM’s main inputs, such as wood, recycled fibre, chemicals, adhesives, films and logistics increased in comparison to 2016. For UPM's businesses and products, the market environment was mostly favourable in 2017. Good market demand enabled healthy growth in UPM’s delivery volumes. Furthermore, sales prices increased in many businesses over the course of the year. The pulp market balance tightened due to strong demand in 2017. Demand growth was recorded primarily in Asia, particularly in

China. Supply was restricted due to the delayed start-up of new capacity and significant production outages in the industry. Pulp prices increased significantly throughout the year. Demand for advanced biofuels continued to be strong, driven by sustainability and stricter environmental standards. Electricity consumption in Finland increased slightly, mainly due to increased commercial and industrial activity. Hydrological balance in the Nordic market started the year below normal levels and ended the year above normal levels. Electricity market prices in Finland increased slightly compared to the previous year. Demand for both self-adhesive label materials and label and release papers increased, particularly in Asia. Demand growth remained stable in Europe and North America. Office paper demand continued to grow in Asia and prices increased. In Europe, demand for graphic paper grades was 3% lower than in the previous year. The strengthened economic activity in Europe lessened the decline in demand to an extent. Fine paper prices increased during the year, whereas publication paper prices remained slightly lower than in 2016. The market environment for plywood was favourable in Europe. Demand growth was driven by further improvements in the building and construction industry. Demand for plywood-related industrial applications such as vehicle floors and LNG carrier insulation material was good. In addition, demand for construction driven sawn timber was good.

CONTENTS

ACCOUNTS

94

95

UPM Annual Report 2017

UPM Annual Report 2017