UPM annual report 2014

A year of progress

Good earnings momentum in 2014

Outlook UPM has a versatile business portfolio and many growth businesses. The improved profit- ability achieved in 2014 is expected to continue in 2015 and we have potential to improve fur- ther. Our profitability is underpinned by the EUR 150 million profit improvement programme as well as the first positive impacts from the com- pany’s growth projects. In the beginning of the year, profitability is affected by lower publica- tion paper prices and lower electricity sales prices. The current weakened euro and lower oil price are supportive for the company’s earnings. Our goal is to enhance the value of UPM businesses further. The versatile use of forest biomass, competi- tiveness and being at the forefront of develop- ments will also advance UPM’s Biofore strategy in 2015. With good performance in our businesses, strong cash flow and leading balance sheet in the industry, we are in a unique position to simultaneously distribute an attractive divi- dend, implement focused growth projects and act on strategic opportunities.

for the 2014 dividend is EUR 0.70 per share. The proposal indicates confidence in UPM’s stable outlook and its ability to continue on its journey of transformation. Overall, the company performance has progressed as planned and I would like to thank all UPM employees for a good 2014. Responsibility brings a competitive advantage Our target is sustainable operations that will bring us competitive advantages and future growth in various businesses. To enhance transparency towards our stake- holders, we use the Global Reporting Initiative (GRI) reporting framework. With this report, we also want to highlight the value our busi- nesses create in terms of the economic, social and environmental success of the company and throughout value chain. Furthermore in 2014, UPM’s consistent work in the area of responsibility received third-party recognition. The company was listed in the Dow Jones Sustainability Indices for the third time in a row. The companies that perform better against sustainability criteria than their competitors are selected in the indices. 2014 was also a year where UPM made strong progress in its efforts to make the com- pany a safer place to work. The Step Change in Safety initiative has reduced the lost-time acci- dent frequency by 70% in just three years. Every UPM employee can take pride in creating a safer working culture within UPM.

UPM showed good performance throughout 2014. Our operating profit improved by 24% year-on-year thanks to the successful profit improvement actions. Return on equity exclud- ing special items was 8.3% for the full year and cash flow per share was EUR 2.33. I’m especially pleased with our excellent cash flow. Following the consistently strong cash flow, our balance sheet at the end of 2014 was the strongest ever in the company’s history. We were able to reduce our net debt by EUR 639 million through the course of the year. All six UPM businesses performed well in 2014 and four of them reached or exceeded their long-term return targets. UPM Plywood, UPM Energy and UPM Paper Asia deserve special recognition for con- sistent improvement and strong results. Thanks to cost savings, UPM Paper ENA (Europe & North America) also succeeded in improving profitability and generating strong cash flow in very difficult market conditions. UPM Biorefining’s profitability was impact- ed by lower hardwood pulp prices, but benefited from improved efficiency in production. UPM Raflatac showed volume growth and stable results, but did not fully reach its market potential. UPM’s Board of Directors decided on a new dividend policy targeting an attractive dividend of 30–40% of UPM operating cash flow per share. Based on this policy, the board’s proposal

UPM made good progress in 2014. We advanced both our profitability improvement as well as our growth projects.

The year was the first full year of operation for UPM’s new business structure. The structure – based on six business areas – brought clarity and focus to implementing UPM’s agenda for each of the businesses. It sharpened our opera- tions in the customer interface. At the same time, we were able to carry out the short term profitability improvement programme in an efficient manner. Target savings of EUR 200 million were achieved earlier than expected and a new target of EUR 150 million was set for the year 2015. In addition the growth projects progressed well during the year: The Lappeenranta biore- finery started commercial production of advanced renewable diesel in Finland in the beginning of January 2015 – a historic mile- stone after eight years of R&D, piloting and construction. The pulp expansion projects progressed in Finland and in Uruguay, and investments were made in labelling materials, woodfree speciality paper and self-adhesive labels in China and Poland. Through these projects, we target an EBITDA impact of EUR 200 million. The projects will be completed in 2015 and we expect to see the first financial results of the growth projects as the year progresses.

Jussi Pesonen President and CEO

DRIVING PERFORMANCE AND TRANSFORMATION

RESOURCE EFFICIENCY – UPM’S CORNERSTONE

+18% Usage of recovered paper

The UPM transformation continues to ensure long-term sustainable value creation. UPM’s structure of six separate businesses promotes top performance as well as enables implementation of business portfolio changes.

More with Biofore describes how UPM aims to create more with less in all its operations. Have a look at the development we have achieved over the last ten years.

–20% Electricity consumption per tonne of paper

More recycling Efficient processes Product lifetime optimisation End-of-life systems

–25% Process wastewater volume per tonne of paper

Less energy Systematic energy management Energy efficient processes and technologies Less air emissions

GROUP DIRECTION

IMPLEMENTATION IN BUSINESSES

OUTCOMES

Less water usage Water management optimisation Advanced technologies Less effluent

Vision and values Portfolio strategy Business targets Capital allocation Code of Conduct Responsibility targets

Business area strategies Commercial excellence Growth projects Profitability improvement programmes Innovation

Top performance Competitive advantage Value creation Shared value with stakeholders License to operate

–32% Total amount of solid waste to landfills

Less waste Waste and sidestream utilisation Efficient technologies

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UPM Annual Report 2014

UPM Annual Report 2014