UPM Annual Report 2021

STRATEGY

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

ACCOUNTS FOR 2021

ENSURING PERFORMANCE We aim for continuous improvement in financial performance through the agile operating model, performance culture, continuous improvement programmes and effective capital allocation. In 2021, our comparable EBIT grew by 55%.

Currently, our transformation is in an intensive phase, with growth investments totalling EUR 3.6 billion scheduled to be completed by the end of 2023. For these investments, our ROCE target is 14% and we aim to achieve higher profitability than in the growing businesses on average. Strong balance sheet and ROE An Investment Grade rating is an import ant element in our financing strategy. Our financial policy on leverage is to maintain a net debt/EBITDA ratio of 2 or less. At the end of 2021, the net debt/EBITDA ratio was 0.35. UPM aims for a 10% return on equity. ROE also takes into account the financing, taxation and capital structure of the group. In 2021, the comparable ROE was 11.7%. IMPACT • Top performance enables investments in growth, innovation and responsibility • Effective capital allocation drives the company transformation and enhances long-term value creation TARGETS • Continuous improvement • Top performance in each business • Growth in comparable EBIT • Attractive returns • Strong balance sheet OUR WAY • Agile operating model • High-performing people • Commercial excellence • Cost efficiency • Efficient use of assets and capital • Capitalise on corporate benefits and synergies Creating shareholder value on page 18 2030 responsibility targets on page 32 Spearheads for growth on page 24 Financial Statements on page 151

• 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 attractive returns. In addition, our growing businesses have on average offered more than three times higher comparable EBIT margins than the mature communication paper business over the same period.

• Cost-competitiveness: agility, efficiency and optimal sourcing • Growth and mix: wider business oppor tunities At the business area level, we are targeting top performance in the respectivemarkets.We have also set long-termreturn targets (ROCE %, on the left) for the six business areas. The return targets apply over business and invest ment cycles. In 2021, five out of six business areas exceeded the targeted returns. Capturing corporate synergies We build on corporate synergies, adding val ue to our businesses and stakeholders with: • Competitive and sustainable wood sourc ing, forestry and plantation operations • Value-adding, efficient and responsible global functions • Group-wide continuous improvement programmes in commercial strategies, variable costs, working capital, site and maintenance costs, safety and environ mental performance • Technology development and intellectual property rights

With regards to the global economy, there was a clear recovery in 2021 from the deep downturn caused by the COVID-19 pandemic in 2020. Demand for most of UPM’s products was strong and sales prices of our products increased across the board. Variable costs increased rapidly as well, and global logistics and supply chains expe rienced bottlenecks. We continued to implement measures to ensure performance during such an uncertain business environment. We achieved an annualised fixed cost savings impact of EUR 160 million by the end of 2021.

In 2021, our comparable EBIT grew by 55% to EUR 1,471 million (948 million). We also succeeded in maintaining progress in the transformative growth projects in Uru guay and Germany. The agile 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

11.7% 15.0% Comparable ROE Comparable EBIT of sales

BUSINESS AREA RETURNS AND LONG-TERM TARGETS

ROCE %* ) UPM Biorefining

EURm Comparable EBIT

FCF/CE %** ) UPM Communication Papers

EURm Net debt and leverage

20 ROCE %* ) UPM Specialty Papers

EBITDA (x)

22

39

10 15 20 25 30

40

4

4,000

1,200 1,500

27

17

16

Target

13

15

30

3

3,000

18

18

24

16

300 600 900

10

Target

19

10

20

2

2,000

15

Target

10

5

10

1

1,000

5

0 5

0

0

20 21 12 13 14 15 16 17 18 19 0

0

0

17

19

20

21

18

17

18

19

20

21

17

19

20

21

18

12 13 14 15 16 17

20 21

18 19

Net debt Net debt/EBITDA

Comparable ROE %

ROCE %* ) UPM Raflatac

25 ROCE %* ) UPM Plywood 23

ROCE %* ) UPM Energy*** )

40

40

25

11

12

40

12

Target

20

Target

18

9

30

27

8

9

24

7

22

15

Target

Target

5

6

20

11

11

6

4

10

3

10

3

5

0

0

0

0

17

19

21

20

18

17

19

20

21

18

17

19

20

21

18

12 13 14 15 16 17 18 19

20 21

* ) 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.

26

27

UPM ANNUAL REPORT 2021

UPM ANNUAL REPORT 2021