UPM Annual Report 2023

ACCOUNTS FOR 2023

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

Other 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 geopolitical tensions that may lead to military conflicts, such as Russia's war in Ukraine, recent emerging conflicts in the Middle East, or economic sanctions, blockades, or export and/or import restrictions that could limit or prevent UPM’s business in a country or area or cause adverse effects on energy, logistics or other main input cost items. UPM is also exposed to the impacts of certain governmental protection and trade protection measures such as foreign direct investment restrictions that safeguard domestic industries and other changes affecting international trade. Restrictions on import and export and other measures protecting national interests may affect the availability or cost of necessary raw materials, and changes in the international trade agreements. Changes in fiscal, monetary and other policies taken to respond to the economic impacts of Russia's war in Ukraine and to reduce dependency on Russian resources may cause unintended price volatility or other adverse effects on UPM. Economic downturn, global pandemics, 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 and sales in and to China 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 the country. UPM's subsidiary and employees in Ukraine are exposed to challenging and unpredictable environment stemming from Russia's war in Ukraine. 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, market adjustments to Russia's war in Ukraine, 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.

Commission’s press release on 12 October 2021, the Commission had concerns that the inspected companies in the wood pulp sector may have violated EU antitrust rules that prohibit cartels and restrictive business practices. On 15 June 2023 the Commission published a release that it had decided to close its antitrust investigation in the wood pulp sector. According to the Commission's release, it had decided to close the investigation after a thorough analysis and careful assessment of all the evidence gathered. » Refer Note 9.2 Litigation , of the consolidated financial statements 2023 for information on legal proceedings. Risks Risk management 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.

• In 2023, interest in bio-based MEG and renewable functional fillers remained strong in Europe. Strong interest in more sustainable solutions from consumers, brand owners and automotive OEMs, is driving demand for bio-based glycols and renewable functional fillers. • In 2023, market demand for biocomposites decreased in Europe, driven by the decreasing volumes in building and construction, as well as price sensitivity in consumer products. Market prices were solid and input costs stable. Long term fundamentals for sustainable and renewable materials remained solid. • For life science products, the demand is driven by the need to implement automated 3D cell based models and to replace animal models in drug development. For clinical products, hospitals continue to explore new sustainable advanced wound care dressings.

Other Operations includes UPM Forest, UPM Biofuels, UPM Biochemicals, UPM Biomedicals and UPM Biocomposites business units as well as biofuels development and 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. UPM Biofuels produces wood-based renewable diesel for all diesel engines and renewable naphtha that can be used as a biocomponent for gasoline or for replacing fossil raw materials in petrochemical industry. UPM operates one biorefinery in Finland.

Comparable EBIT EURm

100

50

0

Source: UPM

-50

Board of Directors and the Group Executive Team

22

23

2023 2022

At the Annual General Meeting held on 12 April 2023, the number of members of the Board of Directors was confirmed as nine, and Henrik Ehrnrooth, Emma FitzGerald, Jari Gustafsson, Piia-Noora Kauppi, Topi Manner, Marjan Oudeman, Martin à Porta and Kim Wahl were re elected to the Board. Pia Aaltonen-Forsell was elected as a new director to the Board. The directors’ term of office will end upon the closure of the next AGM. Henrik Ehrnrooth was elected as Chair, and Kim Wahl 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: Kim Wahl was re-elected to chair the Audit Committee, and Pia Aaltonen-Forsell and Marjan Oudeman were elected as other committee members. Martin à Porta was re-elected to chair the Remuneration Committee, and Emma FitzGerald and Topi Manner were elected as other committee members. Henrik Ehrnrooth was elected to chair the Nomination and Governance Committee, and Jari Gustafsson and Piia-Noora Kauppi were 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 121,283 (380,983) UPM-Kymmene Corporation shares. These represent 0.02% (0.07%) of the shares and 0.02% (0.07%) of the voting rights. At the end of the year, President and CEO Jussi Pesonen owned 602,771 shares. At the end of the year, the other members of the Group Executive Team owned a total of 769,272 shares. » Refer Note 3.2 Key management personnel, of the consolidated financial statements 2023 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. Legal proceedings The Group’s management is not aware of any significant litigation at the end of 2023. In October 2021, the European Commission conducted an unannounced inspection at UPM’s premises. According to the

Sales, EURm

802

634 126

Comparable EBITDA, EURm

29

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

-82

2

-2

-2

-44

-64 64 -16 81

Operating profit, EURm

-101

Items affecting comparability in operating profit, EURm 1)

-87 -14

Comparable EBIT, EURm

Capital employed (average), EURm

2,922

2,577

Comparable ROCE, %

-0.5

3.1

1) 2023 includes EUR 86 million decrease in the fair value of forest assets in Finland resulting from changes in estimates and increase in discount rate and EUR 1 million capital loss resulting from sale of Russian operations. 2022 includes EUR 20 million impairment charges of assets impacted by Russia´s war in Ukraine, EUR 8 million gain on sale of other non-current assets, EUR 3 million settlement loss from replacement of defined benefit pension plan in Finland with defined contribution plan and EUR 2 million of AMC acquisition related costs. 2023 compared with 2022 Comparable EBIT for other operations decreased. The change in the fair value of forest assets net of wood harvested was EUR -82 million (2 million). The cost of wood harvested from UPM forests was EUR 88 million (84 million). The change in the fair value of forest assets was EUR 5 million (85 million). In 2023, this amount includes EUR 86 million decrease in the fair value of forest assets resulting in changes of estimates and increase in discount rate. Biofuels sales prices decreased, weakening profitability. Market environment • The European market for advanced renewable fuels was soft in 2023, especially in Germany. High GHG reduction was achieved in the market, partly due to imported renewable fuels volumes from Asia.

132

133

UPM ANNUAL REPORT 2023

UPM ANNUAL REPORT 2023

UPM FINANCIAL REPORT 2023

132

UPM FINANCIAL REPORT 2023

133