UPM Annual Report 2019

Report of t he Bo ard of Directors

Market demand for plywood in Europe slowed down in 2019. Demand for spruce plywood and birch plywood-related industrial applications became weaker. Competition remained intense in the birch-trading business. Demand continued to grow for construction-

driven sawn timber, albeit at lower level. Uncertainties in the global economy and destocking in the value chain continued to impact market prices.

UPM introduction and business model

Clear roles and responsibilities Group Businesses

Outcomes

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 Communication Papers and UPM Plywood. These business areas are competitive, with strong market positions. UPM provides sustainable and safe solutions to the growing global consumer demand. Products are made from renewable materials and 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

Top performance Competitive advantage Value creation Stakeholder and societal value License to operate

Business area strategies Commercial excellence Operational excellence Cost efficiency measures Focused growth project Innovation

Portfolio strategy Capital allocation Business targets Code of Conduct Responsibility targets

Key figures

2019

2018

2017

Sales, EURm

10,238

10,483

10,010 1,677

Comparable EBITDA, EURm 1)

1,851

1,868

% of sales 1)

18.1

17.8

16.8

Operating profit, EURm Comparable EBIT, EURm

1,344 1,404

1,895 1,513

1,259 1,292

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 of our operations and a source of competitive advantage. UPM is committed to continuous improvement in financial, 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. decreasing during the year 2019. Fibre and energy costs were lower in comparison with the previous year. Market demand for UPM’s products was influenced by slower global economic growth. Nevertheless, demand continued to grow for most of UPM’s businesses in 2019, albeit at a modest pace. Sales prices started the year on generally good levels, but in many products decreased over the course of the year. Global demand growth for chemical pulp continued in 2019, although uncertainties in the global economy and above-average producer inventory levels impacted global market pulp shipments during the year. Pulp prices decreased throughout the year from the record levels in 2018, to marginal producers’ cash cost levels. Demand for advanced renewable diesel and naphtha continued to be strong, driven by climate change mitigation targets, stricter environmental standards and sustainability. In 2019, the Finnish Parliament approved a law that sets a gradually increasing 30% biofuel use target for 2030. Furthermore, the law introduced a world- leading advanced biofuel use target of 10% for 2030. Finland’s electricity consumption fell, mainly due to the milder weather at the beginning and near the end of 2019. Nordic hydrological balance improved, getting closer to normal levels in H2 of 2019 after a weak H1. Electricity sales prices in Finland were lower. Global demand growth for self-adhesive label materials continued in 2019, although at a slower pace than in the previous year. Demand growth for label, release and packaging papers was healthy. Demand was driven by e-commerce growth and private consumption. After a slow start in the Asia-Pacific region, demand for office paper in 2019 was good, and market prices in China increased. In Europe, demand for graphic paper grades was 9% lower than in the previous year. The decline in demand was driven by lower economic growth and a decline in advertising spend. However, prices increased for all paper grades in the beginning of the year and started to decrease in the second half of the year.

% of sales

13.7

14.4

12.9

Profit before tax, EURm

1,307 1,367 1,073

1,839 1,457 1,496 1,194

1,186 1,218

Comparable profit before tax, EURm

Profit for the period, EURm

974

Comparable profit for the period, EURm

1,119 1.99 2.07 10.7 11.2 12.3 12.8

1,004

• 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

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

2.80 2.24 16.2 12.9 18.4 14.6

1.82 1.88 11.5 11.9 12.5 12.8

Comparable ROE, %

Return on capital employed (ROCE), %

Comparable ROCE, %

Operating cash flow, EURm 1)

1,847

1,330

1,460

Market environment in 2019 The global economic growth experienced a synchronised slowdown in 2019. This was impacted by trade tensions particularly between the US and China, prolonged political uncertainties and a sharp decline in global manufacturing activity. Global real GDP growth is estimated to have decreased to 2.6% in 2019, its lowest percentage since the global financial crisis. In Europe, economic growth is estimated to have slowed to around 1.4%. Growth slowed the most in manufacturing-intensive economies such as Germany. However, employment held up well and inflation continued to remain at about 1%. The Brexit process was a continuous source of uncertainty, the UK’s departure from the EU was repeatedly delayed, finally being set for January 2020. The 2.3% US economic growth rate in 2019 reflected lower industrial confidence and a weaker outlook for investment and exports, impacted by the trade war. Private consumption was supported by strong consumer confidence, high employment and lower interest rates. In China, economic growth slowed to 6.2%. China’s imports declined, export growth was weaker, and investment activity remained modest. The slower growth in China and the effects of the geopolitical tensions on global value chains also impacted growth in emerging Asia. While trying to find solutions to avoid any further weakening of the global economy and escalation of the trade tensions between the US and China, the world’s leaders also collaborated to address the global climate change. Climate policy concerns were discussed with increasing frequency. Progress in coordinated global policy response remained modest. The US dollar strengthened slightly against most other currencies during 2019. Overall, impact from changing currencies to UPM’s businesses was relatively small during 2019. Overall inflation remained low in 2019. The commodity cycle shifted downwards. Oil prices were volatile and driven by crude output and price disruptions due to geopolitical tensions. UPM’s input costs stabilised after the significant increase seen in 2018 and started

Operating cash flow per share, EUR 1) Equity per share at the end of period, EUR Capital employed at the end of period, EURm

3.46

2.49

2.74

18.87 11,474

18.36 10,575

16.24 9,777

Net debt, EURm

-453 -0.24

-311 -0.17

174

Net debt to EBITDA 1)

0.10

Personnel at the end of period 19,111 1) 2018 comparative figures have been restated due to accounting policy change of forest renewal costs. » Refer Note 1.5 Changes in accounting policies. 18,742 18,978

» Refer Other financial information Alternative performance measures for definitions of key figures.

Adoption of IFRS 16 Leases UPM adopted the IFRS 16 Leases standard on 1 January 2019 without restating prior years. The change in lease accounting has resulted in a reduction in operating costs (and therefore an increase in EBITDA), higher depreciation expenses and positive impact on operating profit. In addition, interest expenses have increased slightly. Cash generation was not impacted by the adoption of the standard. However, operating cash flow is positively impacted by it, given that a large part of the payments in relation to leases is now reported as financing cash flow (lease liability repayments). As a consequence of the adoption of IFRS 16, 2019 operating costs have been EUR 83 million lower (driving the increase in EBITDA by the same amount), depreciation expenses have been EUR 65 million higher and interest expenses have been EUR 12 million higher. The increase in leased assets on 1 January 2019 was EUR 493 million and the increase in financial debt amounted to EUR 491 million. Leased assets are not included in the measure of Capital expenditure.

Results 2019 compared with 2018

In 2019, sales were EUR 10,238 million, 2% lower than the EUR 10,483 million for 2018. The decrease in sales was mainly due to lower pulp sales prices and lower deliveries of graphic papers. Sales grew in UPM Raflatac and UPM Energy, and decreased in UPM Biorefining, UPM Communication Papers, UPM Plywood and UPM Specialty Papers. Comparable EBIT decreased by 7% to EUR 1,404 million, 13.7% of sales (1,513 million, 14.4%). Development in sales prices and variable costs differed between businesses. At the group level, the negative impact of lower sales prices was larger than the positive impact of lower variable costs. Fixed costs decreased by EUR 65 million. Without the adoption of the IFRS 16 Leases standard fixed costs would have been EUR 57 million higher (i.e. decreased by EUR 8 million). Delivery volumes decreased in UPM Communication Papers and UPM Plywood, remained unchanged in UPM Specialty Papers and grew in UPM Biorefining, UPM Raflatac and UPM Energy. Depreciation, excluding items affecting comparability, totalled EUR 477 million (422 million) including depreciation of leased assets totalling EUR 72 million (7 million). The change in the fair value of forest assets net of wood harvested, excluding items affecting comparability, was EUR 26 million (63 million).

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UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

REPORT OF THE BOARD OF DIRECTORS

REPORT OF THE BOARD OF DIRECTORS