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

AIMING HIGHER IN PERFORMANCE

Shareholder value at the core

Over the coming years, we can allocate more capital to growing and transforming the company, while distributing an attractive dividend and maintaining a strong balance sheet.

UPM is aiming higher in its financial performance. This can be achieved through the right operating model, continuous improvement programmes and effective capital allocation.

EURm Comparable EBIT

1,800

Target: EBIT growth

Business areas target attractive returns At the business-area level, UPM is targeting top relative performance in the respective markets, compared with key peers. UPMhas also set long-term return targets (ROCE %, below) for the six business areas. The return targets apply over business and investment cycles. They have been set at a level that is both ambitious but also enables value-creating growth investments. In 2018, four out of six business areas met or exceeded the targeted returns. Group targets earnings growth At the group level, UPM is targeting comparable EBIT growth over the long term. In 2018 comparable EBIT increased by 17% to EUR 1,513 million (1,292 million). The company is striving to continuously improve its cost competitiveness and develop its business and product mix. UPM aims to grow its businesses with strong long-term fundamentals. UPMwill invest in projects with attractive returns, supported by a sustainable competitive advantage. In 2018, UPM’s growing businesses were three times more profitable on average than the mature graphic paper business, based on the comparable EBITmargin. Strong balance sheet and attractive ROE UPM aims to maintain a strong balance sheet. Investment grade rating is an important element in UPM’s financing strategy. UPM’s financial policy on leverage is based on a net debt/EBITDA ratio of approximately 2 or less. At the end of 2018, the net debt/EBITDA ratio was -0.17. UPM aims for a 10% return on equity. ROE also takes into account the financing, taxation and capital structure of the group. In 2018, the comparable ROE was 12.9%.

1,500

SIGNIFICANCE • Top performance drives value creation and mitigates risks related to the business environment • Top performance enables investments in growth, innovation and responsibility TARGET • Growth in comparable EBIT • Attractive returns • Strong balance sheet • Top performance in each business area OUR WAY • Right operating model with separate business areas • Commercial excellence • Cost efficiency • High-performing people • Efficient use of assets and capital

1,200

900

300

+13% –15% Dividend proposal Share price 2018

0

13 14 15 16 12 Comparable figures for 2014–2018, excluding special items for earlier years

18 17

% Comparable ROE

1 2 3 4 5

15

UPM is committed to continuous improvement in its financial and sustainability performance. At a business area level, UPM is aiming for attractive returns and top performance compared with its peers.

AIMING HIGHER IN PERFORMANCE

12

Target: 10%

Strong cash flow enables high-return growth investments, new business development as well as attractive dividends to UPM shareholders.

9

6

UPM invests to expand its businesses with strong long-term fundamentals and a sustainable competitive advantage. Earnings growth is prioritised over top-line growth.

CAPTURING GROWTH OPPORTUNITIES INNOVATION FOR GROWTH AND COMPETITIVENESS

3

0

12

13 14 15 16

18 17

An industry-leading balance sheet

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 a unique competitive advantage.

mitigates risks and enables UPM to accelerate its transformation, when 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.

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

UPM's responsible operations and value chain, along with its drive to find new sustainable solutions, mitigates risks, creates competitive advantages, opens up new growth opportunities and helps to answer the global challenges. Increasing the share of sustainable growth businesses with higher margin improves the company’s long-term profitability and boosts the value of the shares.

VALUE FROM RESPONSIBILITY

Policy: ≤ 2x

DEVELOP BUSINESS PORTFOLIO

12

13 14 15 16

18 17

■ Net debt

Net debt/EBITDA

BUSINESS AREA RETURNS AND LONG-TERM TARGETS

UPM Communication Papers

5-YEAR SHARE PERFORMANCE AND VALUATION MULTIPLES 2018

ROCE %* ) UPM Energy *** )

ROCE %* ) UPM Biorefining

UPM Specialty Papers ROCE %* )

UPM Plywood ROCE %* )

UPM Raflatac ROCE %* )

EUR per share Cash flow-based dividend

2017 2016 2015 2014 25.91 23.34 17.23 13.62 1.88 1.65 1.38 1.20 1.15 0.95 0.75 0.70

FCF/CE %** )

%

100

1.5

31.0

27.2

26.6

22.15 2.24 1.30 *)

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

25.5

1.30* )

24.3

23.6

23.1

22.6

80

1.2

20.9

18.2

18.4

17.6

17.2

16.5

60

0.9

15.3

15.0

14.6

12.9

12.6

12.6

2.61

12.1

Operating cash flow per share, EUR

2.92

3.16 2.22 2.33

10.1

40

0.6

7.6

5.9 7.9

Effective dividend yield, %

4.4

4.1

4.4

5.1

6.9 6.7

5.5

5.0 4.0 5.3

4.7

20

0.3

P/E ratio

14.2

14.1 10.0 14.2

0

0

1.21

P/BV ratio 1)

1.60 1.51

1.16 0.97

14 15 16

18 17

14 15 16

18 17

14 15 16

18 17

14 15 16

18 17

14 15 16

18 17

14 15 16

18 17

12

13 14 15 16

18 17

6.3

EV/EBITDA ratio 2 )

8.6

8.7

8.4

7.5

■ Long-term return target

■ Long-term return target

■ Long-term return target

■ Long-term return target

■ Long-term return target

■ Long-term return target

% of operating cash flow per share * ) 2018: Board’s proposal

11,813

Market capitalisation, EUR million

13,818 12,452 9,192

7,266

Comparable EBIT increase in 2018

Comparable ROE

* ) 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.

*) 2018: Board’s proposal 1) P/BV ratio = Share price at 31.12/Equity per share 2) EV/EBITDA ratio = (Market capitalisation + Net debt)/EBITDA

+17%

12.9%

16

17

CONTENTS

UPM ANNUAL REPORT 2018

UPM ANNUAL REPORT 2018