UPM Annual Report 2018

UPM AT A GLANCE

STRATEGY

BUSINESSES

SOCIETY AND ENVIRONMENT

GOVERNANCE AND COMPLIANCE

REPORT OF THE BOARD OF DIRECTORS

FINANCIAL STATEMENTS

AUDITOR’S REPORT

OTHER FINANCIAL INFORMATION

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 Research and development costs

Emission rights The group participates in the European Emissions Trading Scheme aimed at reducing greenhouse gas emissions. Emission rights received from governments free of charge to emit a fixed tonnage of carbon dioxide in a fixed period of time give rise to an intangible asset for the emission rights, a government grant and a liability for the obligation to deliver emission rights equal to the emissions that have been made during the compliance period. Emission rights are initially recognised as intangible assets based on market value at the date of initial recognition. Emission rights are not amortised. If the market price of emissions rights at the balance sheet date is less than the recognised costs, any surplus emission rights that are not required to cover actual and estimated emissions during the financial year, are impaired to the market price. Government grants are recognised as deferred income in the balance sheet at the same time as emission rights and are recognised in other operating income in the income statement, systematically, over the compliance period to which the corresponding emission rights relate. The liability to deliver emission rights is recognised based on actual emissions. The emissions realised are expensed under other operating costs and expenses in the income statement and presented as a provision in the balance sheet. The liability is settled using emission rights on hand, measured at the carrying amount of those emission rights. Emission rights and associated provisions are derecognised when disposed. Any profit or loss represents the costs of purchasing additional rights to cover excess emissions, the sale of unused rights in the case realised emission are under emission rights received free of charge or the impairment of unused emission rights.

Research and development costs are expensed as incurred, except for certain development costs, which are capitalised as they generate future economic benefits, and UPM can the measure the cost reliably. Capitalised development costs are amortised on a systematic basis over their expected useful lives, usually not exceeding five years. Government grants Government grants are recognised at fair value where there is a reasonable assurance that the grant will be received and the group will comply with the attached conditions. Government grants relating to the purchase of property, plant and equipment are deducted from the acquisition cost of the asset and accordingly directly reduce the annual depreciation of the underlying asset. Other government grants are recognised in the income statement in the period necessary to match them with the costs they are intended to compensate. Other operating income Other operating income mainly includes gains on the disposal of non-current assets and rental income. Further, other operating income includes foreign exchange gains and losses in respect of UPM’s normal business activities. Gains and losses on derivatives not qualifying hedge accounting are also recognised in other operating income.

Auditor’s fees

EURm

2018

2017

Audit fee

2.4 0.0 0.3 0.5 3.2

2.3 0.1 0.3 0.5 3.2

Audit related services

Tax services Other services

EURm

2018

2017

Costs and expenses Raw materials, consumables and goods

Total

5,723 5,471 1,194 1,265

In 2018, auditor's fees include EUR 0.0 (0.0) million related to tax services and EUR 0.5 (0.3) million related to other services paid to PwC Oy.

Employee costs 1)

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

902 891

869 888

Research and development costs The research and development costs included in operating expenses were EUR 52 million (51 million) in 2018. The focus was on new technologies and developing businesses. Government grants In 2018, government grants recognised as deduction of operating expenses totalled to EUR 5 million (6 million) of which EUR 4 million (5 million) relates to Finland. In addition, the group received emission rights from governments amounting to EUR 34 million (14 million) of which EUR 20 million (7 million) relates to Finland, EUR 10 million (5 million) to Germany, EUR 1 million (1 million) to Austria and EUR 1 million (1 million) to UK.

Total

8,710 8,492

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

2) Distribution of other operating costs and expenses EURm 2018 2017 Rents and lease expenses 37 42 Emission expenses 1) –7 4 Losses on sale of non-current assets 2 2 Credit losses 9 – Maintenance and other operating expenses 2) 861 820 Total 902 869

1) Emission expenses include gains on sales of emission rights EUR 22 (4) million.

Other operating income

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

EURm

2018

2017

2.4 Earnings per share and dividend According to UPM dividend policy, the company aims to pay an attractive dividend amounting to 30-40% of the group annual operating cash flow per share. The dividend paid in 2018 were EUR 613 million (EUR 1.15 per share) which is 39% of the operating cash flow per share and in 2017 EUR 507 million (EUR 0.95 per share). The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 693,3 million, EUR 1.30 per share, will be paid in respect of 2018. The proposed dividend represents 50% of UPM’s operating cash flow per share for the year 2018.

Gains on sale of non-current assets

49 14 34

55 14 14 14

EUR Earnings and dividend per share

Rental income

Cost structure 2018

Emission rights received

3.00

Derivatives, non-qualifying hedges Exchange rate gains and losses

–11 –10

2.40

Delivery of own products 10%

–30

Other fixed costs 9%

Other Total

12 87

16

1.80

Employee costs 14%

Emission rights The group has recognised EUR 34 million (14 million) of income in Other operating income and EUR 7 million of income (4 million expense) under Other operating costs and expenses relating to CO 2 emissions. The liability to cover the obligation to return emission rights amounted to EUR 14 million (9 million) and is recognised in provisions. The emission rights recognised in intangible assets are specified below: 83 In 2018, gains on sale relating to sale of non-current assets includes EUR 30 million income relating to sale of hydropower facilities in Germany and EUR 17 million income relating to sale of land areas in Finland. 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 areas in Finland.

1.20

Wood and fibre 32%

0.60

Other variable costs 16%

0

14 ■ Earnings per share ■ Dividend per share (2018: proposal)

15 16 17 18

Energy 8%

Fillers, coating and chemicals 11%

Accounting policies

Earnings per share

Earnings per share Earnings per share (EPS) is the amount of profit for the period attributable to each ordinary share. The basic earnings per share are computed using the weighted average number of shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of shares outstanding during the period plus the dilutive effect of share options. The group did not have share-option schemes at the end of 2018 and 2017. Dividend Dividend distribution to the owners of the parent company is recognised as a liability in the group’s consolidated financial statements in the period in which the dividends are approved by the parent company’s shareholders.

Cost structure 2017

2018

2017

Profit attributable to owners of the parent company, EURm Weighted average no. of shares (1,000)

Delivery of own products 10%

1,495

973

Other fixed costs 10% Employee costs 15%

533,324 533,415

EURm

2018

2017

Basic earnings per share, EUR Diluted earnings per share, EUR

2.80 2.80

1.82 1.82

Wood and fibre 29%

Carrying value, at 1 January

44 33

45 14

Emission rights received and purchased

Other variable costs 18%

Deliveries and disposals

–31

–22

Impairment

–

6

Energy 7%

Carrying value, at 31 December

45 47 –1 45

44 45 –1 44

Fillers, coating and chemicals 11%

Accumulated costs

Accumulated impairments

Carrying value, at 31 December

136

137

CONTENTS

ACCOUNTS

UPM ANNUAL REPORT 2018

UPM ANNUAL REPORT 2018