UPM Annual Report 2018

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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

SPEARHEADS FOR GROWTH

UNIQUE VALUE-CREATION OPPORTUNITIES IN THE COMING YEARS

SPECIALTY PACKAGING MATERIALS

HIGH VALUE FIBRE

MOLECULAR BIOPRODUCTS

UPM Raflatac UPM Specialty Papers

UPM Pulp

UPM Biofuels UPM Biochemicals

UPM BUSINESSES

Demand growth driven by global consumer megatrends

Climate commitments and replacing fossil materials open large growing markets Unique solutions to decarbonise traffic and provide consumers with sustainable products Unique value chain position with sustainable feedstocks, right technology and IPR Exploring scaling up in biofuels: potential biorefinery in Finland Exploring market entry in biochemicals: potential biorefinery in Germany Strong growth potential

STRONG LONG-TERM FUNDAMENTALS

Sustainable and safe solutions for global consumer demand, e.g. labelling, packaging, wrapping

Fibre-based products provide sustainable solutions for global consumer demand, e.g. tissue, hygiene, packaging, specialty

SUSTAINABLE SOLUTIONS

UPM has selected three focus areas where it seeks significant growth in the coming years.

SIGNIFICANCE • Long-term earnings growth requires margin improvement and top-line growth • UPM’s growing businesses have higher margins than its mature businesses • Molecular bioproducts represent large new growth markets

+4%

+3%

MARKET GROWTH

Technically demanding segments, where UPM has leading market position, expertise and innovation

Competitive greenfield pulp operations have high requirements (wood supply, location, infrastructure, capital) Studying the potential of building a new world-scale pulp mill in Uruguay: preparation phase 2 under way

COMPETITIVE ADVANTAGE

High value fibre – transformative growth prospect in Uruguay Demand growth for market pulp is supported by global consumer megatrends and the need to find more sustainable alternatives in many end uses for fossil-based materials. The requirements for competitive greenfield pulp operations are difficult to meet and provide a sustainable competitive advantage. Over the past years, UPMPulp has thrived through focused growth projects, increasing production capacity of its existing pulp mills by more than 500,000 tonnes. UPM is studying the potential of building a new world-class pulp mill in Uruguay. The possible pulp mill would have an annual capacity of approximately 2 million tonnes of eucalyptus market pulp. The preliminary estimate for a pulp mill investment on site is approximately EUR 2 billion. Two preparation phases need to be successfully completed before UPMwould be in a position to initiate its regular process of analysing and preparing an investment decision. (Read more on the right). Molecular bioproducts – transformative new businesses For years, UPMhas been developing technologies to produce sustainable drop-in alternatives for fossil fuels and fossil-based chemicals. New large value creation opportunities may open by decarbonising traffic and providing consumers with more sustainable products. UPMBiofuels has successfully entered the market with its renewable diesel and naphtha UPM BioVerno (page 21). UPMLappeenranta Biorefinery has proven its proprietary technology, product quality and sustainability, and has achieved commercial success. Now, UPM is exploring opportunities to scale up the business by studying a potential larger biorefinery in Finland (page 34). UPMBiochemicals is studying entering the market on a commercial scale. UPM is conducting a basic engineering study of a potential biorefinery in Germany (page 21). Specialty packaging materials – focused growth projects and innovation Global consumer megatrends are driving demand for appealing and functional, but at the same time sustainable and safe, labelling and packaging solutions. UPM grows in the attractive specialty paper and self-adhesive label materials segments, expanding its current production units and customer reach, and continuously developing its product portfolio. UPM’s strong position and innovations in these technically demanding and fast-growing niche segments of the packaging value chain continue to provide attractive growth opportunities.

Focused growth projects Product portfolio development

PROSPECTS UNDER STUDY OR CURRENT PROJECTS

TARGET • Earnings growth • Attractive returns

Planning for future growth in Uruguay

OUR WAY • Focused growth projects to maintain and grow earnings • Transformative prospects for significant earnings growth • Sustainable and safe solutions for growing global consumer demand • Sustainable competitive advantage • Talent attraction

UPM is studying the potential of building a new world-class pulp mill in Uruguay. The site of the potential mill would be close to the town of Paso de los Toros in central Uruguay.

Preparing a competitive operating environment

Positive impacts on local society The Environmental and Social Impact Assessment, presented in September 2018, concludes that there are solutions to mitigate all identified possible negative impacts of the potential newmill. These include proper planning for the construction period, compliance with best available techniques (BAT) and implementation of the planned actions concerning the quality of the Rio Negro river. When in operation, the potential mill, forestry and related activities would employ 8,000 additional people across its full value chain. It is estimated that the mill would increase GDP by approximately 2% in Uruguay and its operations would have a significant positive impact on the central and north-eastern regions of the country.

Sustainable eucalyptus plantations

In November 2017, UPM and the government of Uruguay signed an investment agreement which outlines the local prerequisites for a potential new pulp mill. The agreement details the roles, commitments and timeline for both parties as well as the relevant items to be agreed upon, with infrastructure development and a stable and predictable operating environment among the key prerequisites. The government is committed to developing the rail and road network and promoting concession for a terminal with rail access and specialising in pulp at the Montevideo port. UPMwill carry out an engineering study and permitting process for a new world-class pulp mill. A successful project would also require off-site investments.

Uruguay offers excellent natural conditions for eucalyptus plantations, and UPMhas significantly invested in wood quality. UPM has consistently increased its plantation base in Uruguay for the potential newmill. To grow rawmaterial for pulp, sustainable eucalyptus plantations have been established in Uruguayan grasslands, creating totally new carbon sinks. When in operation, the mill would utilise the annual growth of the established plantations for its rawmaterial needs, and the harvested area will be replanted.

HIGH VALUE FIBRE

THE KEY FACTORS the spearheads have in common are significant growth potential and UPM's competitive advantage based on deep knowhow and high barrier to entry. UPM is investing also in UPM Plywood and UPM Energy, while maintaining consistently strong cash flow and earnings in UPM Communication Papers.

SPECIALTY PACKAGING MATERIALS

MOLECULAR BIOPRODUCTS

Labels Specialty papers

Forests Pulp

Biofuels Biochemicals