UPM annual report 2015

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IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

Managing headwinds

UPM Paper ENA

Paper consulting meets customers’ needs

In 2015, UPM piloted a new paper consulting model to meet the cost efficiency needs of customers. UPM experts work together with publishers and review their entire range of printed products to find a suitable UPM paper grade for each magazine, advert, brochure or other printed publication. The aim is to decrease the number of different paper grades and grammages used by publishers. The consulting service is based on trust and good co-operation between UPM and the customer. The consultation process does not bind customers in any way, but the open dialogue provides a good basis for growing partnerships. UPM’s sales and technical sales experts work closely together to provide customers with the best possible service. As a result of the project, the publisher achieves significant savings without compromising the quality or the brand of their printed products. UPM in turn is able to optimise its production and make better use of its paper machines. Everybody wins: the publisher, the printing house, UPM, and the readers.

OUR DIRECTION • Improve profitability and maximise cash flow through a simplified customer- focused sales strategy • Make use of optimisation opportunities in the extensive low-cost operations OUR STRENGTHs • Extensive low-cost operations providing continuous opportunities for optimisation • Reliable supplier with consistently high quality, excellent service as well as a wide product palette • Scale and skills in responsible sourcing and manufacturing • Environmental and technical expertise, consistent product development

Business performance Operating profit decreased mainly due to higher euro-denominated pulp costs and lower publication paper prices in Europe. The positive impact of favourable currency development on export prices was moderated by a significant negative impact from currency hedging. Cash flow return on capital employed decreased and fell short of the long-term target. Business development The year 2015 was characterised by significant capacity reductions and measures to manage the business in a continuously challenging market environment. In November 2014, UPM announced plans to reduce approximately 800,000 tonnes of publication paper capacity of which 345,000 tonnes was newsprint and 460,000 tonnes was magazine paper capacity. InMarch 2015, UPMPaper ENA closed down paper machine 2 at UPMKaukas and paper machine 5 at UPM Jämsänkoski in Finland and, in February, paper machine 1 at UPM Shotton in the UK. In June 2015, UPM closed down paper machine 3 at UPMChapelle Darblay in France. Machine closures were vital given the challenging market conditions. Paper demand decreased and sales margins were squeezed particularly due to lower news- print prices and higher euro-denominated pulp costs. Overcapacity continued to plague the European paper markets, especially during the first half of 2015. With the machine closures, UPMPaper ENA adapted its production to meet profitable customer demand and to improve operating rates of its remaining produc- tion assets. UPMPaper ENA’s production strategy is based on interchangeability and its extensive geographical coverage enabled machine closures without endangering customer deliveries. From the business point of view, the measures taken were neces- sary to improve profitability. The fixed cost reduction related to the capacity closures was EUR 65 million. A lean organisation based on strategic business units (SBUs) with responsibility for profit and loss as well as continuous focus on efficiency enabled UPMPaper ENA to improve its performance. The SBU specific commercial strategies paid off, resulting in a strengthened mar- ket position and customer loyalty. The next step in the digital service channel devel- opment enables internet-based ordering of paper, making both customer’s and UPM Paper ENA’s processes more streamlined. The paper consultancy model was piloted with selected customers in Finland and Scandinavia. Measures to reduce variable costs were successfully implemented with meaningful savings achieved in energy, rawmaterials and logistics costs as well as consumption.

The strengthened USD improved profitability on certain export markets. UPM is an established supplier in the US and aims to enhance its customer relationships on themarket. In November, UPM announced a study of a potential sale and conversion of UPM Schwedt mill into liner production to LEIPA Georg Leinfelder GmbH. Markets and drivers • Graphic paper demand is driven by advertising spending in printed media and in tar- geted and unaddressed direct marketing, magazine and newspaper circulations and titles as well as home and office paper consumption. • Following the increased use of digital media in the consumer market, paper consump- tion has been in structural decline in mature markets in Europe and North America since 2007-08. Despite the overall decline, however, there are still growth opportuni- ties in certain end-use and market segments. • In Europe, demand for graphic papers decreased by 4% in 2015. The decline was steeper in newsprint and magazine paper, while uncoated fine paper demand decline was more moderate. Demand development by country also varies. The German market is experiencing slower decline than, for example, the UK or the Nordic market. • InNorth America, demand for magazine paper decreased by 7% in 2015. Also inNorth America, the uncoated fine paper demand was holding up better than that of the other grades.