UPM Annual Report 2019

Growth

SPEARHEADS FOR GROWTH

VALUE-CREATION OPPORTUNITIES IN THE COMING YEARS

SIGNIFICANCE • UPM’s product markets offer significant growth potential, driven by global consumer megatrends • UPM is in a unique position to open new large markets by offering sustainable solutions to replace fossils

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

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 bio-based products

STRONG LONG-TERM FUNDAMENTALS

We have selected three focus areas where we are seeking significant growth in the coming years.

TARGETS • Earnings growth • Attractive returns

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

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

SOLUTIONS

opportunities may open by decarbonising traffic and providing consumers withmore sustainable products. UPMBiofuels has successfully entered the market with its renewable diesel and naphtha UPMBioVerno. UPM Lappeenranta Biorefinery has proven its proprietary technology, product quality and sustainability, and has achieved commercial success. We are now exploring opportunities to scale up the business by studying a potential larger biorefinery in Finland, with a wider range of sustainable feedstocks. UPMBiochemicals has been studying entering the market on a commercial scale. In 2019, we completed a basic engineering study of a potential biorefinery and assessed two alternative industrial parks in Germany. The investment decision was made in January 2020 (readmore on the right). 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. We continue to grow in the attractive specialty paper and self-adhesive label materials segments. We focus on expanding

High-value fibre — transformative growth project in Uruguay Global consumer megatrends and the need to findmore sustainable alternatives for fossil-basedmaterials support demand growth for market pulp. The requirements for competitive greenfield pulp operations are difficult to meet, providing a sustainable competitive advantage. Over the past few years, UPMPulp has thrived through focused growth investments. it has increased production capacity by more than 500,000 tonnes at its existing four pulp mills. In 2019, UPMdecided to build a new world-class pulpmill in Uruguay, near the town of Paso de los Toros. The mill will have an annual capacity of 2.1 million tonnes of eucalyptus market pulp. The USD 2.7 billion investment will raise our pulp production capacity by more than 50% and significantly contribute to future earnings. The mill is scheduled to start up in the second half of 2022. In addition, UPMwill invest in port operations inMontevideo and housing near the mill. 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

OUR WAY • Focus areas for growth: high-value fibre, specialty packaging materials and molecular bioproducts • Clear return targets • Focused growth projects and transformative projects for earnings growth • Talent attraction developing their product portfolio. Our strong position and innovations in these technically demanding and fast-growing niche segments of the packaging value chain provide attractive growth opportunities. In 2019, UPM rebuilt paper machine 2 at UPMNordland, Germany fromfine paper to specialty paper production. At the UPM Changshumill in China, we installed a second supercalender on paper machine 3, expanding our release liner base paper capacity.

MARKET GROWTH

+4%

+3%

Strong growth potential

Technically demanding segments, where UPM has a leading market position, expertise and innovation Focused growth investments in Germany and China Product portfolio development

Competitive greenfield pulp operations have high requirements (wood supply, location, infrastructure, capital) A new world-scale pulp mill in Uruguay, capacity of 2.1 million tonnes, investment of USD 2.7 billion

Unique value chain position with sustainable feedstocks, the right technology and IPR Exploring scaling up in biofuels: potential biorefinery in Finland Entering to wood-based biochemicals business by building a biorefinery in Germany

COMPETITIVE ADVANTAGE

CURRENT PROJECTS OR PROSPECTS UNDER STUDY

CASE

UPM CREATES A COMPLETELY NEW BUSINESS IN BIOCHEMICALS

The product range offers unique customer value and is expected to achieve a good cost position, comparable to the fossil-based alternatives. Once the facility is fully ramped up and optimised, it is expected to achieve the ROCE target of 14%. We help our customers to make their businesses more sustainable. Currently the supply of biochemicals is very limited. Due to this, high-quality sustainable alternatives are priced at a premium in the markets. The combination of sustainable wood supply, a unique technology concept, integration into existing infrastructure at Leuna and the proximity of customers will ensure competitiveness of operations. The safety and sustainability of the value chain will be based on our high standards.

UPM is taking the next transformative growth step and entering the biochemicals business by investing in a biorefinery in Leuna, Germany. The biorefinery will produce a range of 100% wood-based biochemicals that enable a switch from fossil raw materials to sustainable alternatives in various consumer-driven end-uses. The investment opens up totally new markets for UPM with large growth potential for the future. UPM will invest EUR 550 million in an industrial scale biorefinery to convert solid wood into next-generation biochemicals: bio-monoethylene glycol (BioMEG) and lignin-based renewable functional fillers. In addition, the biorefinery will produce bio-monopropyleneglycol (BioMPG) and industrial sugars. The total annual capacity of the biorefinery will be 220,000 tonnes. The facility is scheduled to start up by the end of 2022.

Uruguay pulp mill project on page 38 and upm.uy/growth Renewable biofuels and naphtha on page 52 Biochemicals development on page 53

their current production units and customer reach, and continuously

Application areas for glycols include textiles, PET bottles, packaging, de-icing fluids, composites, pharma, cosmetics and detergents. The market supply is almost entirely based on fossil raw materials: oil, natural gas and coal. Lignin-based renewable functional fillers are used in various rubber applications as a sustainable alternative to carbon black and silica. Besides climate benefits they will provide additional benefits such as lighter weight and high purity. Being the European centre for chemicals industry excellence and located in the middle of the markets, Germany provides an attractive location for the biorefinery. The region also offers good availability of sustainably sourced hardwood. Wood sourcing will be based on forest thinning and the residues from regional sawmills.

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

Label materials

Specialty papers

Forests  Pulp

Biofuels  Biochemicals

Communication papers

Plywood

Energy

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OUR STRATEGY

OUR STRATEGY

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS