UPM Annual Report 2020

Report of the Board of Directors UPM introduction and business model 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 • 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 Market environment in 2020 The COVID-19 pandemic and the related containment measures led to significant uncertainty, a sharp decline in global output and a severe global recession. Global real GDP growth is projected at -4.0% in 2020. The effects of the pandemic varied across industry sectors and caused significant fluctuations in consumer spending. Recovery in China in the second half of the year was robust but at the same time many countries were forced to slow reopening processes, while some even had to reinstate lockdowns. The pandemic highlighted the urgent need for health and economic policy action. The global trade tensions between major economic regions such as the US and China continued with lower focus in 2020 and Brexit plans remained uncertain throughout the year. The UK-EU Free Trade Agreement was announced just before the UK’s year-long transition out of the EU ended at the end of 2020. In Europe, economic growth is projected at around -6.7% in 2020. The containment measures to prevent the spread of the virus severely impacted the economy and brought about a reduction in consumption. Meanwhile, massive economic policy measures protected businesses somewhat and softened the rise in unemployment. Economic growth in the US is projected at around -3.6% in 2020. The US failed to keep the spread of COVID-19 under control and the rate of unemployment was weaker than anticipated. However, the financial markets remained resilient and US stocks repeatedly hit record highs as historically large US stimulus packages raised optimism surrounding economic recovery. In China, economic growth slowed to 2.1%. China managed to suppress the COVID-19 pandemic well. Key industries benefited from strong export. Still, the rebound was unbalanced as private consumption remained weaker and fiscal deficit continued to climb. Even as the world focused on the pandemic in 2020, seizing the sustainability opportunity continued. As governments took urgent actions

The growth of global demand for self-adhesive label materials was strong in the first half of the year, especially in consumer goods and e commerce-driven labelling due to COVID-19-related lockdowns and changes in consumer behaviour. In the second half of the year the demand normalised somewhat due to destocking in the customer value chain. However, demand resumed growth partly driven by the second wave of the pandemic towards end of the year. The growth in demand for label, release and packaging papers was strong and driven by consumable goods and e-commerce. Demand for office paper in the Asia-Pacific region decreased in the first half of the year but improved in the second half. Market prices in China were lower than in the previous year but improved towards the end of the year. Market demand for plywood in Europe slowed down in 2020. Demand for spruce plywood was good and birch plywood-related industrial applications were modest. Uncertainties in the global economy and intense competition impacted market prices. Impact of COVID-19 pandemic The COVID-19 pandemic and the related containment measures around the world continue to represent significant uncertainty in 2021. Global economy The COVID-19 pandemic and the related containment measures resulted in a sharp decline in the global economy in 2020. In the first phase of the recession, the pandemic containment measures and lockdowns around the world severely limited or temporarily stopped significant parts of the economy. It is uncertain how potent the following recovery will be and how long it will take for the world economy to reach the pre-pandemic level of activity. Despite the start of vaccinations, additional waves of the epidemic in different parts of the world remain possible. Safety and business continuity UPM has implemented extensive precautions to protect the health and safety of its employees and to ensure business continuity and progress of its strategic projects during the pandemic. Despite these efforts, the operation of one or more units or the supply chain and logistics could be temporarily disrupted during the pandemic and the related lockdown measures. In these circumstances some units would need to limit operations or be temporarily shut down. So far UPM has been able to protect its employees and business continuity well. Demand for UPM products Many of UPM products serve essential everyday needs and may therefore see relatively resilient demand during the crisis. These products include pulp, specialty papers and self-adhesive label materials. Even in these businesses, demand is influenced by general economic activity, however. Demand for graphic papers, plywood and timber is more prone to be impacted by the lockdowns and the recession. The lockdowns limit a wide range of consumer-driven services and retail, as well as work at the office. This has had a negative impact on printed advertising and graphic paper demand during the pandemic. The lockdowns and the level of economic activity may also affect demand for electricity. In Q2 2020, graphic paper demand in Europe decreased by 32% from the previous year, as particularly advertising-driven paper

consumption and office paper demand were impacted by the lockdowns across Europe. In Q3 2020, there was some recovery in demand, but graphic paper demand remained 18% lower than in the previous year. In Q4 2020, a second wave of COVID-19 was under way in Europe, with gradual introduction of new lockdowns in various countries. Graphic paper demand was 14% lower than in the previous year. Pulp demand held up relatively well, supported by good demand for tissue and hygiene products as well as for some packaging and specialty paper products. Pulp consumption in graphic paper production decreased. Demand grew for self-adhesive label materials and specialty papers during the lockdowns, as consumers shifted some of their spending from away-from-home categories to packaged daily consumer goods. E ‑ commerce continued to grow, supporting some labelling and specialty paper applications. In Q2, demand for self-adhesive labels in Europe grew by 10% from the previous year. In Q3 2020, demand for self adhesive labels in Europe was 3% lower than in the previous year, driven by destocking in the customer value chain. In Q4 2020, demand for self-adhesive labels resumed 7% growth year-on-year, partly impacted by the re-established lockdowns. Adjusting to different scenarios The potential impacts to UPM are likely to differ by business and by the phase of the pandemic, lockdown measures, changes in consumer behaviour, the recession and recovery. UPM is using shift arrangements, temporary layoffs, or reduced working hours as required to adjust its operations in different scenarios. During Q3 2020, the company also announced plans to permanently reduce graphic paper production capacity and other plans to improve cost efficiency in different businesses and functions. Projects and maintenance shutdowns The pandemic and the required health and safety measures add challenge to large investment projects and maintenance shutdowns. UPM's transformative pulp project in Uruguay and biochemicals project in Germany are proceeding with strict health and safety controls. Despite these efforts, some changes to the detailed timeline of the projects are possible during the pandemic and the related containment measures. Currently the projects proceed in line with the planned start up timeline. In April TVO announced that fuel loading into the OL3 reactor would not happen as planned in June 2020, TVO announced an updated schedule in August 2020. UPM rescheduled two pulp mill maintenance shutdowns from Q2 2020 to Q4 2020 due to the pandemic. The two shutdowns were successfully completed in Q4 with strict health and safety controls. Financing UPM’s financial position is strong. UPM's net debt was EUR 56 million at the end of Q4 2020. Cash funds and unused committed credit facilities totalled EUR 3.2 billion at the end of Q4 2020. This includes the sustainability-linked five-year EUR 750 million revolving credit facility signed during Q1 2020, the EUR 550 million of bilateral committed credit facilities signed during Q2 2020 and EUR 158 million equivalent rolling overdraft facility. During Q4 2020, UPM successfully issued a EUR 750 million Green Bond under its EMTN (Euro Medium Term Note) programme. The facilities and UPM's outstanding debt have no financial covenants.

Clear roles and responsibilities

Group

Businesses Business area strategies

Outcomes

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

Portfolio strategy Capital allocation Business targets Code of Conduct Responsibility targets

Commercial excellence Operational excellence Cost efficiency measures Focused growth project Innovation

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. and laid the foundations for financial, economic and social recovery, they increasingly integrated climate action into their development plans and pledged support for climate-related investments. Inflation in advanced economies remained low and below pre pandemic levels in 2020. However, despite the global economic recession, commodity prices increased in response to supply disruptions and the anticipation of a recovery in 2021. Oil markets were hit by the pandemic and the Russia-Saudi Arabia oil price war. UPM’s input costs were lower in comparison with the previous year, especially in fibre. The US dollar weakened against the euro and other key currencies during 2020. Overall, the impact from changing currencies to UPM’s businesses was moderate throughout 2020. Market demand for UPM’s products was both negatively and positively influenced by the COVID-19 pandemic, the related containment measures and the economic recession. Demand for graphic papers was the most severely affected. In Europe, demand for graphic papers was 18% lower than in the previous year. Prices decreased for all paper grades throughout the year. Global demand growth for chemical pulp continued good in 2020 and market pulp shipments improved from the weak comparison year 2019. Growth was mainly driven by China. Pulp prices decreased significantly from the previous year and were low relative to marginal producers’ cash cost levels. However, pulp prices started to improve towards end of the year. Demand for advanced renewable diesel and naphtha continued to evolve positively, driven by climate change mitigation targets, stricter environmental standards and sustainability. Finland’s electricity consumption was volatile in 2020. Hydropower generation levels were good and above normal at the end of the year. The annual generation of nuclear power was somewhat lower than in the previous year. Electricity sales prices in Finland were lower.

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UPM ANNUAL REPORT 2020

UPM ANNUAL REPORT 2020 UPM FINANCIAL REPORT 2020

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