UPM Annual Report 2019
Performance
Comparable ROE
EURm Comparable EBIT 1,500
EURm Net debt and leverage 2,000
%
EBITDA (x) 2.0
12
1,200
9
1,500
1.5
TOP PERFORMANCE
900
6
1,000
1.0
600
3
0.5
500
300
0
0
0
0
15
16
17
18
19
15
16
17
18
19
15
16
17
18
19
Net debt Net debt/EBITDA
Target: 10%
Target: EBIT growth
Policy ≤2x
UPM aims for continuous improvement in its financial performance through the right operating model, performance culture, continuous improvement programmes and effective capital allocation.
Continuous improvement UPMaims for continuous improvement in its financial performance. At the group level, our target is to grow comparable EBIT over the long term. In 2019, comparable EBIT decreased by 7% to EUR 1,404million (1,513 million) mainly due to decreased sales prices of UPM’s products. In the past five years, comparable EBIT has grown by 62%. The right operating model UPMoperates in the bio and forest industry value chain. Our businesses in various parts of the value chain operate as separate market-facing businesses, both in terms of customers and suppliers. Compared with the traditional vertically integrated operating model in our industry, our model gives several benefits: • Transparency and accountability: target setting, incentives, commercial strategies and benchmarking • Cost competitiveness: agility, efficiency and optimal sourcing • Growth: wider opportunities for attractive growth investments Business area targets At the business area level, UPM is targeting top performance in the respective markets. We have also set long-term return targets (ROCE%, on the left) 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 2019, four out of six business areas met or exceeded the targeted returns. Capturing corporate benefits UPMbuilds on corporate synergies and benefits, thereby adding value to our businesses and stakeholders with: • Competitive and sustainable wood sourcing, forestry and plantation operations • Value-adding, efficient and responsible global functions • Group-wide continuous improvement (Smart) programmes in commercial strategies, variable costs, working capital, site and maintenance costs, safety and environmental performance • Technology development and intellectual property rights • Global business platform • Disciplined and effective capital allocation • Compliance with applicable laws and regulations and corporate policies Effective capital allocation Capital allocation is key to attractive long-term returns, as well as developing the business portfolio in areas with the best long-term value creation potential. At UPM, capital allocation decisions take place at the corporate level. We invest in sustainable businesses with strong long-term fundamentals for demand growth and a clear competitive advantage or high barriers to entry. With careful preparation, we aim to secure
SIGNIFICANCE • Top performance drives value creation and mitigates risks related to the business environment • Top performance enables investments in growth, innovation and responsibility • Effective capital allocation and the right choice of businesses enhance long-term value creation further TARGETS • Continuous improvement • Top performance in each business area • Growth in comparable EBIT • Attractive returns • Strong balance sheet OUR WAY • Operating model with separate business areas • High-performing people • Commercial excellence • Cost efficiency • Efficient use of assets and capital • Capitalise on corporate benefits and synergies attractive returns that meet our targets both in the short and long term. Over the past five years, UPM’s investments have offered highly attractive returns. In addition, UPM’s growing businesses have on average offered three times higher comparable EBITmargins than the mature graphic paper business over the same period. financing strategy. UPM’s financial policy on leverage is based on a net debt/EBITDA ratio of 2 or less. At the end of 2019, the net debt/ EBITDA ratio was –0.24. UPMaims for a 10% return on equity. ROE also takes into account the financing, taxation and capital structure of the group. In 2019, the comparable ROE was 11.2%. Strong balance sheet and attractive ROE An Investment Grade rating is an important element in our
BUSINESS AREA RETURNS AND LONG-TERM TARGETS
UPM Energy *** )
ROCE %* ) UPM Biorefining
ROCE %* ) UPM Specialty Papers
ROCE %* )
20
8
30
8
27
−7% 11.2% Comparable ROE Comparable EBIT decrease in 2019
17
7
Target
25
Target
15
6
5
5
20
18
12
13
16
10
4
15
Target
15
10
4
13
10
5
5
2
5
0
0
0
15
16
17
18
19
15
16
17
18
19
15
16
17
18
19
* ) shareholdings in UPM Energy valued at fair value FCF/CE %** ) UPM Communication Papers
ROCE %* ) UPM Plywood
ROCE %* ) UPM Raflatac
39
25
40
30
23
27
23
26
21
24
25
31
20
18
22
Target
30
Target
20
24
15
* ) 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.
18
Spearheads for growth on page 20 Creating shareholder value on page 30 Our 2030 responsibility targets on page 60 Accounts for 2019 on page 118
15
20
11
15
Target
10
10
10
5
5
5
0
0
0
15
16
17
18
19
15
16
17
18
19
15
16
17
18
19
18
19
OUR STRATEGY
OUR STRATEGY
UPM ANNUAL REPORT 2019
UPM ANNUAL REPORT 2019
CONTENTS
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