UPM Annual Report 2023

ACCOUNTS FOR 2023

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

Report of the Board of Directors UPM introduction and business model As a biomaterials growth company in forest industry, UPM provides renewable alternatives for fossil-based materials 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. 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. At the same time, UPM is developing new innovation-driven and wood-based growth businesses in biochemicals and biofuels, for example. 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 • Group-wide continuous improvement programmes in commercial strategies, variable costs, working capital, site and maintenance costs, safety and environmental performance • Technology development and intellectual property rights • A global business platform • Disciplined and effective capital allocation • Compliance, UPM Code of Conduct and strong UPM brand Market environment in 2023 Global real GDP growth is projected at 2.7% in 2023. Rising interest rates and the war in Ukraine continued to weigh on economic activity. Global inflation fell to 5.6%, driven by the decline in food and energy prices. However, inflation was still above pre-pandemic levels and core inflation remained persistent, driven by the services sector and labour markets remaining relatively tight. Global trade in goods declined in 2023, while trade in services expanded. Persistent regional conflicts and geopolitical tensions have been increasingly fragmenting the global economy and affecting global trade. The Russia-Ukraine conflict continued to pose a significant geopolitical risk in 2023 and the international community took proactive measures to prevent escalation. Multiple sectors of the Russian economy are now sanctioned by Western nations, with the oil, financial and technology sectors being the most affected. Furthermore, the conflict in the Middle East increased risks to supply chains and global commodity markets, though the impact of the conflict remained limited in 2023. Following robust post-pandemic expansion in 2022, economic growth in Europe is projected at 0.6%. Private consumption stagnated due to a high cost of living, and nominal wage growth lagged behind inflation. Weak external demand, monetary tightening by the European Central Bank, and inflation, though declining, further limited economic growth. The euro area industry confidence indicator reflected the low levels of manufacturing activity since May. Nevertheless, production expectations improved slightly at the end of the year with signs of recovery in the unprecedented inventory cycle. The EU labour market showed strong performance with low unemployment, despite the slowdown in economic growth.

Impact of Russia's war in Ukraine In response to Russia´s attack on Ukraine, the European Union as well as the United States, the United Kingdom, and other countries imposed extensive sanctions on Russia, the breakaway regions of Donetsk and Luhansk and the oblasts of Zaporizhzhia and Kherson, and Belarus. Since 21 February 2022, these measures have included for example asset freezes and travel restrictions on individuals and entities, economic sanctions targeting sectors of the Russian and Belarusian economies, and diplomatic restrictions. Russia has also implemented several countermeasures affecting especially foreign companies’ operations within Russia and with Russian counterparties. While the sanctions primarily target Russia’s ability to finance its military operations in Ukraine and cause economic and political costs on the people responsible for them, there are limited signs of a peaceful resolution to the war in Ukraine. Economic and geopolitical uncertainty and inflation have accelerated around the world. Impact on UPM businesses The economic sanctions and Russia’s countermeasures have rendered it unviable for UPM to continue operations in Russia or trade with Russian counterparties. UPM businesses suspended deliveries to Russia as well as wood sourcing in and from Russia. In Q1 2023 UPM completed a full withdrawal of its businesses from Russia by selling all its Russian operations, including the Chudovo plywood mill. The full impact of the current and potential new sanctions, countersanctions and market development will only become known as the situation evolves. UPM has implemented mitigation plans to contain and reduce the negative consequences for its employees, customers, vendors, and other stakeholders as well as for the operations affected by sanctions and the war in Ukraine in general. The potential further impacts for UPM are likely to differ by business and by the pace, scope and duration of sanctions, market price reactions, development of supply chains, and the length of the war in Ukraine and whether there is any geographic escalation of the war. UPM is monitoring the situation closely and preparing plans to adjust its operations in different scenarios accordingly.

still require significant additional finance and collective action to support developing countries in transitioning to clean energy and implementing their national climate plans. To enact the focus of halting and reversing biodiversity loss and promoting the recovery of nature by 2030, the UN Climate Conference affirmed the need to implement the Kunming-Montreal Global Biodiversity Framework, which was agreed at the UN Biodiversity Conference (COP15) in 2022. To ensure that progress is made, it is crucial that adequate methods of implementation are in place, such as financial resources, as well as planning, monitoring, reporting and review mechanisms. Both COP processes are influencing regulations globally. Especially in EU also other ESG related regulations have been formulated lately or are expected to come in force in the near future. Various conflicts have highlighted the need to acknowledge human rights everywhere. In 2023, the business environment for UPM’s products was unprecedented due to low economic activity, especially in Europe. Market deliveries of products were further held back by destocking in most of the product value chains. However, the second half of the year saw gradual recovery in demand for many of UPM’s products. Margin management was successful. Apart from the wood costs in the Nordic region, most input costs declined compared to 2022. The global demand for chemical pulp in 2023 was solid. After reaching all-time highs in 2022, the average market prices for both northern bleached softwood kraft (NBSK) and bleached hardwood kraft pulp (BHKP) fell to bottom-of the-cycle levels in all markets. Market prices started to recover in H2 2023. UPM’s new world-class pulp mill in Uruguay, UPM Paso de los Toros, was ramped up since April 2023. The mill, which will have highly competitive cash costs once fully ramped-up and optimised, is set to be profitable in different market scenarios and will grow UPM’s pulp business by more than 50%. The energy crisis in Europe eased in 2023. Electricity prices were still high in Europe and significant volatility in prices has become the new normal. Increased supply and lower industrial consumption led to lower power prices in Finland. Electricity self-sufficiency improved significantly in Finland with the OL3 nuclear power plant unit beginning commercial production in April 2023. Market demand for self-adhesive label materials declined in Europe and North America due to unprecedented destocking and low consumer demand. Subsequent recovery started to be visible only towards the end of the year. Tight margin management continued, with capacity and resources adjusted to reflect lower market demand. The global demand growth for label, release and packaging papers was soft and market prices decreased compared to the previous year. Fine paper demand was impacted by the slower than expected recovery of the Chinese economy. Market prices for office papers in the Asia-Pacific region decreased compared to 2022. Demand for graphic papers in Europe decreased by 24% compared to 2022. Market prices decreased for all paper grades. Demand for spruce plywood and veneer declined due to low activity in the renovation and construction industry. Demand for birch plywood in panel trading and industrial applications was good in H1 2023 but moderated towards the end of the year. Market prices increased. In the timber business, market demand was weak due to low activity in the construction industry. Market prices were at low level. Demand for advanced biofuels was good and markets benefited from climate targets. The revised RED III Directive came into force at the end of 2023 with the European 2030 target for the share of advanced biofuels in energy used in transport being increased. Prices of advanced biofuels declined towards the end of the year.

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. This enables agility in a fast-changing business environment, higher efficiency, differentiated commercial strategies, optimal sourcing, the right incentives, wider product development opportunities and effective capital allocation. Corporate responsibility is an integral part of all of our operations and a source of competitive advantage and value creation. 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.

While a recession was expected at the beginning of the year in the United States, the US economy progressed at a significant pace over the course of 2023, driven by strong consumer spending, a resilient labour market and growing real wages. Manufacturing investment also reached historic highs. Economic growth in the US is projected at 2.4%. Inflation decelerated throughout the year mainly due to supply chains healing. The US dollar appreciated against the euro. On a negative note, trade tensions between the US and China continued to raise concerns regarding geopolitics. The Asia-Pacific region remained a key driver of global growth in 2023, in spite of tighter monetary policies and global demand rotating from goods to services. The Chinese economy is projected to grow by 5.4%, reflecting a post-pandemic rebound. The Chinese government continued to make investments to meet GDP growth targets and China’s debt ratio increased further. The gradual recovery of consumer spending, the weakness in the property sector and subdued external demand continued to hinder growth to some extent. Energy and climate change remained politically polarising issues, with notably lacking progress being made globally regarding the climate transition. At the same time, the need to take decisive climate action has never been more critical as the global mean temperature for 2023 was the highest on record. The UN Climate Conference (COP28) set out ambitious targets to keep the aim of limiting the rise in global temperature to 1.5°C within reach and made the historic decision to accelerate climate action with nearly 200 countries pledging to move away from fossil fuels in energy systems. Furthermore, climate finance continued to be at the centre of climate action. However, mitigating climate change and adapting and responding to climate impacts will

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UPM ANNUAL REPORT 2023

UPM ANNUAL REPORT 2023

UPM FINANCIAL REPORT 2023

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UPM FINANCIAL REPORT 2023

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