UPM Annual Report 2020

ENSURING PERFORMANCE

and functions. The measures, implemented or announced during the second half of 2020, are expected to reduce our annual fixed costs by EUR 130 million. The right operating model Our businesses in various parts of the bio and forest industry value chain operate as separate market-facing businesses, both in terms of customers and suppliers. Our model offers several benefits: • Transparency and accountability: target setting, incentives, commercial strategies and benchmarking • Cost-competitiveness: agility, efficiency and optimal sourcing • Growth and mix: wider business opportunities At the business area level, we are 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 busi ness and investment cycles. In 2020, four out of six business areas met or exceeded the targeted returns. Capturing corporate synergies We build on corporate synergies, 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 programmes in commercial strategies, variable costs, working capital, site andmaintenance costs, safety and environmental performance • Technology development and intellectual property rights • Global business platform • Disciplined and effective capital allocation • Compliance, UPMCode of Conduct and strong UPMbrand 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 attractive returns that meet our targets both in the short and long term.

Over the past five years, our investments have offered highly attractive returns. In addition, our growing businesses have on average offered three times higher com parable EBIT margins than the mature communication paper business over the same period. Strong balance sheet and ROE An Investment Grade rating is an important element in our financing strategy. UPM’s financial policy on leverage is based on a net debt/EBITDA ratio of 2 or less. At the end of 2020, the net debt/EBITDA ratio was 0.04. UPM aims for a 10% return on equity. ROE also takes into account the financing, taxation and capital structure of the group. In 2020, the comparable ROE was 7.5%.

The COVID-19 pandemic and the related lockdowns impacted demand for our products in different ways, with graphic paper markets particularly affected. We implemented significant measures to ensure cost-competitiveness.

We aim for continuous improvement in financial performance through the right operating model, performance culture, continuous improvement programmes and effective capital allocation. At the group level, our target is to grow comparable EBIT over the long term. In 2020, our successful health and safety measures during the COVID-19 pandemic enabled uninterrupted business operations and progress in our trans formative growth projects in Uruguay and

Germany. However, graphic paper markets suffered significantly from the related con tainment measures. While pulp demand continued to be healthy, pulp prices remained low. Self-adhesive labelling and specialty paper markets benefited from the increase in daily consumer product demand and e-commerce. Our comparable EBIT decreased by 32% to EUR 948 million (1,404 million). To ensure performance, we reduced capacity and streamlined several businesses

−32% Comparable EBIT 7.5% Comparable ROE

Creating shareholder value on page 20 2030 responsibility targets on page 22 Spearheads for growth on page 30 Financial statements on page 146

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 drives the company transformation and further enhances long-term value creation TARGETS • Continuous improvement • Top performance in each business • 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

BUSINESS AREA RETURNS AND LONG-TERM TARGETS

ROCE %* ) UPM Biorefining

20 ROCE %* ) UPM Specialty Papers

FCF/CE %** ) UPM Communication Papers

22

EURm Comparable EBIT

EURm Net debt and leverage

10 15 20 25 30

39

27

40

17

EBITDA (x)

31

Target

15

30

18

4

4000

12

1200 1200 1500

24

16

13

Target 13

10

19

10

20

15

3

3000

Target

5

5

10

0 5

2

2000

300 900

0

0

16

18

19

20

17

16

18

19

20

17

1

1000

16

17

18

19

20

19 20 11 12 13 14 15 16 17 18 0

0

0

11 12 13 14 15 16 17

20

ROCE %* ) UPM Raflatac

25 ROCE %* ) UPM Plywood 23

ROCE %* ) UPM Energy*** )

18

19

Net debt Net debt/EBITDA

8

40

8

40

23

7

Comparable ROE %

Target

20

Target

18

6

30

27

26

5

5

24

22

15

Target

4

4

20

11

11

12

Target

10

2

10

9

5

0

0

0

6

16

18

20

19

17

16

18

19

20

17

16

18

19

20

17

3

* ) ROCE % = Return of capital employed excluding items affecting comparability. ** ) Free cash flow after investing activities and restructuring costs. *** ) Shareholdings in UPM Energy valued at fair value.

0

11 12 13 14 15 16 17 18

19 20

28

29

UPM ANNUAL REPORT 2020

UPM ANNUAL REPORT 2020