UPM Annual Report 2022

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ACCOUNTS FOR 2022

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

Report of the Board of Directors UPM introduction and business model As a frontrunner in forest industry, UPM provides sustainable solutions to the growing global consumer demand. UPM’s large product range covers pulp, graphic papers and specialty papers, self-adhesive labels, wood-based renewable diesel and naphtha, electricity as well as plywood and timber products. Products are made from renewable materials and are recyclable replacing fossil-based materials in various end-uses. UPM invests in sustainable growth and innovates for a future beyond fossils across six business areas: UPM Fibres, UPM Energy, UPM Raflatac, UPM Specialty Papers, UPM Communication Papers and UPM Plywood. The business areas are competitive with strong market positions. 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 programmes in commercial strategies, variable costs, working capital, site and maintenance costs, safety and environmental performance • Technology and intellectual property rights • A global business platform • Disciplined and effective capital allocation • Compliance with applicable laws and regulations, UPM Code of Conduct and corporate policies Market environment in 2022 The global economy slowed down during 2022, while inflation rose to approximately 9% — the highest level in decades. Global real GDP growth is projected at 3.0% in 2022. Geopolitical tensions, tightening financial conditions in most regions, Russia’s war in Ukraine, disrupted global energy and food supplies, high energy prices, rising interest rates and the lingering COVID-19 pandemic caused economic growth to slow down. Still, global trade volumes continued to grow throughout 2022 and, together with the efforts to build a green world economy, they showed resilient demand for environmentally sustainable products. Russia’s war in Ukraine posed a geopolitical shock to Europe. Western sanctions on Russia and Belarus, and Russia’s attempts to weaponise energy supplies against Western countries led to increasing geopolitical tensions, weaker macroeconomic conditions, and disrupted supply chains for certain commodities and products. This forced Western countries to intensify their focus on managing potential threats to global security and deal with fiscal pressures due to additional spending in energy and defence and simultaneous tightening of monetary policy of the European Central Bank. In Europe, economic growth is projected at 3.6% in 2022. The economy continued to grow despite global uncertainty and the energy crisis. Domestic demand was good and H1 was strong, as a result of COVID-19-driven pent-up consumption which continued to drive demand for consumer services. Successful energy savings and measures to secure natural gas from alternative markets enabled countries to avoid short-term gas shortages caused by declining Russian supply. The economy was further stabilised by the labour market seeing record low unemployment. Simultaneously, inflation saw record high rates, driven by accelerating energy and food prices and continuing global supply

objectives, governments focused on energy savings and investments in low-emission energy supply to tackle the current energy crisis. A new set of goals and a framework to guide global actions to halt and reverse biodiversity loss by 2030 was agreed at the UN Biodiversity Conference (COP15) in 2022. The participants of COP15 also agreed to increase financing for biodiversity, driving funds toward sustainable investments and reducing harmful government subsidies. Market demand for UPM’s sustainable and renewable products was good, particularly in Europe and North America. Sales prices increased in all businesses, offsetting the impact of increased variable costs. UPM’s input costs were significantly higher compared to 2021, most notably in energy. The global demand for chemical pulp in 2022 was good. The average market prices for both northern bleached softwood (NBSK) and bleached hardwood kraft pulp (BHKP) increased in Europe and in China. Energy prices and volatility in Europe reached unprecedented levels and the rise in energy futures increased the liquidity needs of energy industry companies. Electricity sales prices in Finland were at a record high, although prices on average stayed lower than in many other European markets. Optimised hydropower generation helped to stabilise the volatile markets. The first nuclear power test volumes generated from the new OL3 unit improved Finland’s electricity self sufficiency. In Q1-Q3 2022, the demand for self-adhesive label materials was solid in Europe (excl. Russia) and North America while the markets were somewhat impacted by supply constraints. However in Q4, the demand declined in Europe and North America due to significant destocking in the value chain. In Asia, demand was relatively soft. Market prices increased in all main markets. The global demand growth for label, release and packaging papers was good though demand became softer towards the end of the year. Market prices increased. Fine paper demand was impacted by the COVID-19 lockdowns and containment measures in China. Market prices for office papers in the Asia-Pacific region increased compared to 2021. Demand for graphic papers in Europe decreased by 12% compared to 2021. Market prices increased significantly for all paper grades. In H1 2022, demand for spruce plywood in Europe was strong. In H2, demand was softening due to reduced activity in the building and construction industry. Demand for birch plywood was strong in panel trading and industrial applications. Market prices increased in all end uses. The timber business benefited from high levels of construction activity in H1 2022, and market prices saw record highs. In H2, the demand supply balance weakened, and market prices fell under the peak level. Strong demand for advanced renewable fuels continued to be driven by climate targets. Market prices were at a high level. Impact of the COVID-19 pandemic The COVID-19 pandemic, the related containment measures around the world and the rapid changes in the global economy impacted the operating environment also in 2022 and continue to represent uncertainty. Global economy The COVID-19 pandemic and the related containment measures resulted in a sharp decline in the global economy in 2020. In 2021, the global economy started to recover, but it is uncertain how long-lasting the recovery will be. Despite progress with vaccinations, additional waves of the pandemic in different parts of the world remain possible.

The recovery of the global economy from the deep downturn in 2020, combined with the ongoing pandemic created tightness and disruptions globally in many supply chains, including logistics and energy. This caused rising costs and uncertainty about the price and availability of many raw materials and energy. China adopted a zero covid policy that held back its economic growth through 2022. However, it opened up restrictions in December. This represents uncertainties regarding surging infections in the country, but also represents the potential to increase economic activity. Safety and business continuity UPM has implemented extensive precautions to protect the health and safety of its employees and to ensure business continuity and the progression 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, the related lockdown measures, or the following economic recovery. In these circumstances some units may need to limit operations or be temporarily shut down. So far UPM has been able to protect its business continuity well. Demand for UPM products Many of UPM's products serve essential everyday needs and have therefore seen resilient demand during the crisis. These products include pulp, specialty papers and self-adhesive label materials. However, even in these businesses, demand is influenced by general economic activity, and any re- or destocking cycles in product value chains. Demand for graphic papers is more prone to be impacted by lockdowns and economic cycles. 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. Lockdowns and the level of economic activity may also influence demand for electricity, plywood and sawn timber. Adjusting to different scenarios The potential impacts on UPM are likely to differ by business and phase and waves of the pandemic, lockdown measures, changes in consumer behaviour, and the recession and recovery thereof. UPM has used shift arrangements, temporary lay-offs, or reduced working hours as required The pandemic and the required health and safety measures add challenges 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 and costs of such projects are possible during the pandemic, the related containment measures, or due to tight global logistics and supply chains. Financing UPM’s financial position is strong. UPM's net debt was EUR 2,374 million at the end of 2022. Net debt has been impacted by energy hedging derivative market value payments, which are driven by the increase in energy futures prices and volatility in the energy markets. Cash funds and unused committed credit facilities totalled EUR 6.4 billion at the end of 2022. The total amount of committed credit facilities was EUR 5.7 billion of which EUR 4.5 billion maturing in 2024, EUR 300 million maturing in 2025 and EUR 950 million maturing in 2027. The facilities and UPM's outstanding debt have no financial covenants. to adjust its operations in different scenarios. Projects and maintenance shutdowns

Clear roles and responsibilities

Group

Businesses

Outcomes

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

Business area strategies

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.

chain disruptions. As a result of high inflation followed by the interest rate hikes and the tightening household real incomes, consumer sentiment fell to its lowest level in H2 2022, and industry confidence fell. The US economy remained strong with a tight labour market, a historically low unemployment rate and a growing economy driven by good consumer spending. Economic growth in the US is projected at 2.0% in 2022. The US economy was resilient to the Federal Reserve’s interest rate hikes to manage the rapid rise in inflation. The US dollar strengthened to record highs against the euro and other major world currencies. On a negative note, trade tensions between the US and China intensified and raised increasing concerns regarding geopolitics and impacts on global trade. China’s economy faced the weakest growth on record, projected at 2.8% in 2022 as COVID-19 restrictions led to prolonged disruption in China’s economic activity. Turmoil in international markets, lower net exports and the crisis in the Chinese property sector continued to slow down growth. China’s debt ratio reached an all-time high, growth in retail sales continued to lag and household savings reached a new record high. The year ended with COVID-19 restrictions being lifted and a surge in COVID-19 cases, but with expectations of improving consumer confidence and a sustainable recovery of the economy. Calls for further action in the energy, industry, transport and buildings sectors, as well as in the food and financial systems, to tackle climate change continued. In line with the COP26 and COP27 meetings, additional net-zero commitments and capital towards a net zero world continued to be prioritised with a target to limit global warming to 1.5°C. Furthermore, in line with climate change mitigation