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

BIOCHEMICALS PRODUCTS ARE SUSTAINABLE AND COMPETITIVE DROP-IN ALTERNATIVES

WOOD COMPONENTS

40% Cellulose 30% Hemicellulose 25% Lignin

Monoethylene Glycol

Monopropylene Glycol

Lignin

Existing fossil-based market Market demand >26 m tonnes Annual growth (CAGR) >3%

Existing fossil-based market Market demand >2 m tonnes Annual growth (CAGR) >5%

Performance chemical Application driven Strong IP position

APPLICATION EXAMPLES:

Textiles Bottles & Packaging Deicing fluids

Composites Pharma & Cosmetics Detergents

Wood resins Plastics Foams & Coatings

INNOVATIONS FOR GROWTH AND COMPETITIVENESS We are developing new businesses and new products based on customer needs and renewable raw materials. Our aim is to create sustainable solutions and to minimise dependency on fossil-based materials. Research and development, bioeconomy innovations and new technologies support the transformation and extend our business portfolio.

95% The share of renewable materials in UPM Formi 3D

80% UPM BioVerno renewable diesel reduces fossil CO 2 emissions compared with fossil fuels

READ MORE: upm.com/innovations upm.com/circulareconomy

fromEIA authorities is expected in early 2019. The possible Kotka biorefinery would produce approximately 500,000 tonnes of advanced fuels frommany sustainable rawmaterials, for road and marine transport and air traffic applications. The products can replace fossil-based rawmaterials also in the chemical industry. (Read more on page 34). Research on rawmaterials is based on the efficient use of different residues and by-products of the forest industry. Alongside tall oil, other waste and residue-based rawmaterial alternatives that do not compete with food production are being tested. UPMBiofuels is developing a new feedstock concept by cultivating Brassica carinata as a sequential crop in South America. The carinata crop produces non-edible oil suitable as feedstock for biofuels and its by-product is used as protein for animal feed. UPM is cultivating and testing Brassica carinata with selected local farmers in Uruguay. (Read more on page 75). Progress in the biochemical business UPMBiochemicals is developing wood-based chemicals and strong growth is expected for the market in the coming years. Biochemicals will offer renewable alternatives and mainly replace chemicals made from fossil rawmaterials. Product segments include glycols and lignin products. Development is in the pre-commercial phase. UPM is aiming for industrial-scale concepts by actively developing and testing suitable technologies. In 2018 we continued to assess the potential for building a biorefinery in Germany. This possible industrial-scale biorefinery would produce 150,000 tonnes of bMEG (bio-monoethylene glycol), bMPG (bio-monopropylene glycol) and lignin from hardwood. Potential end-use segments include textiles, bottles, packaging, de-icing products, composites and resins, among others.

We are developing new innovative and high-quality products as well as renewable, recyclable and environmentally sound materials from wood-based biomass. Wood fibre, biomolecules, residues and side streams are becoming increasingly important as the rawmaterials of the future. Our aim is to develop resource-efficient materials, improve competitiveness and expand in new end-use segments. Innovation and R&D programmes are essential in the develop­ ment of new products and technologies. They support UPM businesses in ensuring competitiveness in the future. In 2018, UPM spent EUR 106 (86) million on research and development, making up 7.6% (5.5%) of UPM’s operating cash flow. In addition to direct R&D expenditure of EUR 52 (51) million, the figure includes negative operating cash flow and capital expenditure in developing businesses, development of transformative business prospects and digitalisation projects and initiatives. The focus of research and development spend was on studying new technologies and developing businesses and processes. A global network of research centres supports UPM’s activities in R&D both in new and existing businesses. Developing biofuels An excellent example of an innovative alternative to a fossil-based product is UPMBioVerno, a wood-based renewable diesel and naphtha produced from crude tall oil, a residue of pulp production. UPMhas been producing UPMBioVerno renewable diesel and naphtha fromwood-based residues since early 2015. UPMBioVerno drop-in diesel is a unique, competitive and sustainable alternative to fossil fuels and first-generation biofuels. UPM’s renewable naphtha can be used as a biocomponent for gasoline or to replace fossil rawmaterials in bioplastics. In 2018, UPM carried out an environmental impact assessment (EIA) for a potential biorefinery in Kotka, Finland. The conclusion

SIGNIFICANCE • The demand for renewable and recyclable materials is increasing as we search for alternatives to fossil-based raw materials and increase the efficiency of the use of resources • Growing consumption in emerging markets requires sustainably produced solutions • Bioeconomy products offer sustainable solutions to the challenges of global megatrends, such as mitigating climate change

TARGETS • Renewable and responsible products and innovations that replace fossil-based solutions and create added value and growth • Utilising the limitless opportunities of bioeconomy OUR WAY • Strong expertise in forest biomass processing • Sustainability and circular economy • Resource efficiency, product stewardship and ecodesign across the entire value chain • Technological development • Leading responsible position across the entire value chain • Partnerships and networking

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CONTENTS

UPM ANNUAL REPORT 2018

UPM ANNUAL REPORT 2018