UPM Annual Report 2020

Other operations

Risks Risk management

geopolitical tensions. UPM is also exposed to the impacts of certain governmental protection and trade protection measures that safeguard domestic industries and other changes affecting international trade. Restrictions on import and export and other national interests may affect the availability of necessary raw materials, and changes in the international trade agreements. COVID ‑ 19 related containment measures and the economic downturn or global power struggles continue to cause high uncertainty to global trade, geopolitics or trajectories of economies. UPM is especially exposed to the economic and political conditions in countries in which UPM has significant production operations and ongoing investment projects, such as Finland, Uruguay and Germany. UPM also has significant production operations in a number of developing markets, such as China and Russia, where the lack of transparency and predictability of the political, economic and legal systems may lead to an increasing uncertainty and risk level when investing in or operating in them. Cyclical and highly competitive markets In all markets UPM operates in, the price level is determined by a combination of demand and supply and an imbalance between them could cause the prices of UPM’s products to fluctuate significantly. Imbalances in demand and supply may be caused by factors such as decreases or increases in the end-use demand, changes in customer preferences or a new production capacity entering the market or an old production capacity being closed, all of which may affect both the volume and price level of UPM’s products. Competitor behaviour may also influence the market price development. UPM may, from time to time, experience price pressures from competitors in its main business areas and geographic market areas as well as particularly large fluctuations in operating margins due to this competitive environment. The majority of UPM’s revenue comes from sales of graphic and specialty papers, pulp and label materials, and UPM principally competes with several large multinational paper and forest product companies as well as with numerous regional or more specialised competitors. Changes in consumer behaviour Demand for UPM’s products may be affected by the introduction of substitute or alternative products. The demand for graphic papers in the mature markets is forecast to continue to decline. This will likely increase the pressure on UPM’s graphic paper deliveries and sales prices as well as the scarcity of recycled fibre. The COVID ‑ 19 pandemic may further amplify the speed of changes adopted by consumers in consuming and communicating information. Changes in demand could also cause overcapacity in some of UPM’s products, affecting the sales prices and deliveries of such products. Depending on the product area, the shifts in consumer demand may either have a positive or an adverse effect on the consumption of UPM’s products. For example, UPM expects that there will continue to be a growing need for renewable and recyclable solutions, which creates various opportunities for UPM and drive demand growth for most of UPM’s products. At the same time digitalisation and e-commerce have changed consumer behaviour and resulted in decline in demand for graphic papers for various end uses. Changes in legislation UPM is exposed to a wide range of laws and regulations globally. The performance of UPM’s businesses, for example the paper, energy, and biofuels businesses, are to a high degree dependent on the regulatory framework for these areas. Changes in regulation, direct and indirect

Comparable EBIT EURm

UPM regards risk management as a systematic and proactive means to analyse and manage opportunities and threats related to its business operations. This also includes risks that can be avoided through careful planning and evaluation of future projects and business environments. Risk management is an integral part of UPM’s management system as risk taking is a normal part of business operations. While executing strategies, UPM and its business areas, functions and manufacturing units are exposed to a number of risk and opportunities. Each business area, function and unit is responsible for identifying, measuring and managing of risks related to its own operations, and for reporting on risk exposures, risk management activities and results to its own management team and to the Risk Management function. The Risk Management Committee, chaired by the CFO, is responsible for recommending risk tolerances and profile to the President and CEO and the Strategy Team. The Strategy Team is responsible for aligning risk management priorities, business and risk management strategies and policies. The Board of Directors, assisted by the Audit Committee, monitors and assesses the effectiveness of the company’s risk management systems and oversees the assessment and management of risks related to the company’s strategy and operations. The Audit Committee oversees that risk management activities are aligned with the Risk Management Policy, and that risk assessments are used to guide internal audit activities. UPM seeks to transfer insurable risks through insurance arrangements for any risks that exceed the defined tolerance. UPM strives to ensure compliance with the UPM Code of Conduct and other corporate policies. To enhance compliance and mitigate risks, UPM performs risk assessments, training and monitoring at regular intervals. UPM has developed and implemented a comprehensive internal control system that covers business and financial reporting processes. Internal control is aimed at ensuring that the company’s operations are efficient and reliable, and in compliance with statutory requirements, and that the company’s financial reporting is accurate and reliable, and reflects operational results. Internal control pertaining to financial reporting is described in the Corporate Governance Statement available in the corporate website. The main risk factors that can materially affect the company’s business, financial results and non-financial performance are set out below. They have been classified as strategic risks, operational risks, and financial risks. Risks may also arise from legal proceedings incidental to UPM’s operations. Strategic risks Uncertainties in the economic and political operating environment The main short-term uncertainties in UPM’s earnings relate to sales prices and delivery volumes of its products, as well as to changes in the main input cost items and currency exchange rates, most of which are affected by uncertainty in the global, regional or local economic and political conditions. Political developments are causing uncertainties to the global economy. Such uncertainties also affect UPM’s customers influencing the demand for UPM’s products. Examples of such developments are the trade tensions between the United States, the EU and China, the nature of the relationship between the EU and the UK after its exit from the EU as well as increased

Other Operations includes UPM Forest, UPM Biochemicals, UPM Biocomposites and UPM Biomedicals business units as well as group services. UPM Forest secures competitive wood and biomass for UPM businesses and manages UPM-owned and privately-owned forests in North Europe. In addition, UPM Forest offers forestry services to forest owners and forest investors.

0 5

-15 -10 -5

19

20

2020 compared with 2019 Comparable EBIT for other operations decreased. The change in the fair value of forest assets net of wood harvested was EUR -17 million (38 million). The increase in the fair value of forest assets was EUR 63 million (15 million). The cost of wood harvested from UPM forests was EUR 81 million (9 million).

2020 2019

225

264

Sales, EURm

34

-18

Comparable EBITDA, EURm

Change in fair value of forest assets and wood harvested, EURm Share of results of associated companies and joint ventures, EURm Depreciation, amortisation and impairment charges, EURm

-17

38

1

—

-30 -15

-27 -10

Operating profit, EURm

Items affecting comparability in operating profit, EURm 1)

-3

-4 -7

-12

Comparable EBIT, EURm

1,901

1,824

Capital employed (average), EURm

Comparable ROCE, % -0.4 1) 2020 items affecting comparability relate to restructuring charges. 2019 items affecting comparability of EUR 2 million relate to restructuring charges and EUR 2 million to capital loss on sale of Voikkaa mill site in Finland. -0.6

Board of Directors and the Group Executive Team At the Annual General Meeting held on 31 March 2020, the number of members of the Board of Directors was confirmed as 10, and Berndt Brunow, Henrik Ehrnrooth, Piia-Noora Kauppi, Marjan Oudeman, Ari Puheloinen, Veli-Matti Reinikkala, Kim Wahl and Björn Wahlroos were re-elected to the Board. Emma FitzGerald and Martin à Porta were elected as new directors to the Board. Suzanne Thoma and Jussi Pesonen stepped down from the Board. The directors’ term of office will end upon the closure of the next AGM. Björn Wahlroos was re-elected as Chair, and Berndt Brunow as Deputy Chair of the Board of Directors of UPM-Kymmene Corporation at the Board of Directors’ constitutive meeting that took place following the Annual General Meeting. In addition, the Board of Directors elected the chairs and other members to the Board committees from among its members. Piia-Noora Kauppi was re-elected to chair the Audit Committee, and Emma FitzGerald, Marjan Oudeman and Kim Wahl were elected as other committee members. Veli-Matti Reinikkala was re-elected to chair the Remuneration Committee, and Henrik Ehrnrooth and Martin à Porta were elected as other committee members. Björn Wahlroos was re elected to chair the Nomination and Governance Committee, and Berndt Brunow and Ari Puheloinen were re-elected as other committee members.

Shares held by the Board of Directors and the Group Executive Team At the end of the year, the members of the Board of Directors owned a total of 716,348 (1,162,920) UPM-Kymmene Corporation shares. These represent 0.13% (0.22%) of the shares and 0.13% (0.22%) of the voting rights. At the end of the year, President and CEO Jussi Pesonen owned 504,710 shares. At the end of the year, the other members of the Group Executive Team owned a total of 832,705 shares. » Refer Note 3.2 Key management personnel, of the consolidated financial statements 2020 for further information on remuneration and shares held by the members of the Board and the President and CEO and remuneration of the members of Group Executive Team. Litigation » Refer Note 9.2 Litigation , of the consolidated financial statements 2020 for information on legal proceedings.

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