Review by the President and CEO - UPM...Demand decline is expected to continue for UPM Communication...

Review by the President and CEOJussi Pesonen

President and CEO

4 April 2019

| © UPM| © UPM| © UPM

Record earnings and value creation in 2018

2

Fossil CO2 emission

were –4% lower

Sales

grew by +5%

EBIT

increased by +17%

Preparations continued in our

strategic transformative prospects

Dividend proposal

+13%

Net debt fell below zero

to EUR –311 million

Improvement in safety,

LTAF –18%


Content

• UPM today

• Record earnings 2018

• Growth driven by global megatrends

• UPM strategy

• Efficient capital allocation

3


UPM today

4 | © UPM| © UPM| © UPM


99,600 shareholders in 32 countries

24,000 75 countries

54 12 countries

b-to-b-

suppliers in

production

plants in

12%North America

62%Europe

6%Rest of the world

20%Asia

Global businesses – local presence

UPM’s sales by market

EUR 10,483 million

19,000 employees in 46 countries

12,600 customers in 110 countries

5


LABEL MATERIALSfor food packaging, drink bottles and for communicating information

SPECIALTY PAPERSfor food packaging

WOOD MATERIALSfor construction and design features

TIMBERfor construction

ELECTRICITYeverywhere

PULP AND BIOFUEL BASED MATERIALSfor packaging, transport, storage and hygiene products

PUBLICATION PAPERSfor reading and advertising

OFFICE PAPERSfor printingWOOD

MATERIALSfor furniture and the home

LABELSfor food products

Sustainable and safe products for everyday use

6 | © UPM| © UPM| © UPM

Driven by sustainable solutionsfor a future beyond fossils

ELECTRICITY

everywhere

BIOCOMPOSITES

for various outdoor and

building material uses

LABEL MATERIALS

for information and

product labelling

RENEWABLE BIOFUELS

for all diesel engines

PULP AND

SPECIALTY PAPERS

for packing materials

PLYWOOD

for vehicle flooring

GRAPHIC AND

OFFICE PAPERS

for advertising and

home and office uses

PLYWOOD

AND SAWN TIMBER

for construction and

industrial applications

7 | © UPM| © UPM| © UPM


Operating on healthily growing markets

8

UPM PLYWOOD

Plywood, veneer ~3%Comparable EBIT by

business area 2018

EUR 1,513m

UPM BIOREFINING

Pulp ~3%

Biofuels strong

Timber ~2%

UPM COMMUNICATION PAPERS

Graphic papers ~ –5%

UPM SPECIALTY PAPERS

Label papers, high-end

office papers ~4%

UPM RAFLATAC

Self-adhesive labels ~4%

UPM ENERGY

Electricity ~1%Market demand trend growth, %


Record earnings2018

9 | © UPM| © UPM| © UPM


UPM delivered record earnings in 2018, in a strong position for 2019

10

EBITDA

EUR 1,823m +192m

Comparable EBIT

EUR 1,513m +221m

2018 vs. 2017:

Net debt

EUR –311m –485m

Operating cash flow

EUR 1,391m –167m

Comparable EPS

EUR 2.24 +0.36 Net debt / EBITDA

–0.17x –0.28x

Sales

EUR 10,483m 5%Comparable ROE

12.9% +1.0pp


Sales prices increased in all business areas, outweighing the impact of higher input costs

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2 000

2 200

2 400

2017 2018

EURm

Prices

Variable

costs Fixed

costs

Deliveries

1,29212.9%

1,51314.4%

Currency,

net impact

Depr.,

forests,

plantations

Comparable EBIT

11


0,0

2,5

5,0

7,5

10,0

12,5

15,0

0

50

100

150

200

250

300

2014 2015 2016 2017 2018

0,0

2,5

5,0

7,5

10,0

12,5

15,0

0

50

100

150

200

250

300

2014 2015 2016 2017 2018

EURm % of sales

UPM Communication Papers

Comparable EBIT by business area

0,0

2,5

5,0

7,5

10,0

12,5

15,0

0

50

100

150

200

250

300

2014 2015 2016 2017 2018

0

5

10

15

20

25

30

0

150

300

450

600

750

900

2014 2015 2016 2017 2018

0,0

2,5

5,0

7,5

10,0

12,5

15,0

0

50

100

150

200

250

300

2014 2015 2016 2017 2018

EURm % of salesUPM Specialty PapersEURm % of salesUPM Biorefining

0

10

20

30

40

50

60

0

50

100

150

200

250

300

2014 2015 2016 2017 2018

% of salesUPM RaflatacEURm % of salesUPM Plywood EURmEURm % of salesUPM Energy

12


Business area returns and long-term targets

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30ROCE%

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30ROCE % *)

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

0

2

4

6

8

10

12

14

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18

20

22

24

26

28

30ROCE %

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30ROCE %

*) shareholdings in UPM Energy

valued at fair valueLong-term return target

UPMSpecialty Papers

UPMCommunication

PapersUPM

Plywood UPM RaflatacUPM

EnergyUPM

Biorefining

FCF/CE %

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30ROCE %

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-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

-750

0

750

1 500

2 250

3 000

3 750

4 500

2013 2014 2015 2016 2017 2018

Net debt/EBITDA (x)

Net debt and leverage

Net debtEURm

Group financial performance

14

0

200

400

600

800

1 000

1 200

1 400

1 600

2013 2014 2015 2016 2017 2018

EURm Comparable EBIT

0

2

4

6

8

10

12

14

2013 2014 2015 2016 2017 2018

% Comparable ROE

Target: 10%

Target: EBIT growth

Policy: ≤ 2x


Development also in non-financial indicators

15

0

5

10

15

20

25

Work safety EURm

0,20

0,25

0,30

0,35

0,40

0,45

0,50

0,55

0,60

Productivity

Lost-time

accident

frequency

Sales per

UPMer

Million hours worked

Growth in 10 years:

+4% per annumChange in 10 years:

−87%

30

40

50

60

70

80

90

Employee Engagement

Change in 10 years:

+45%

Index

Employee

engagement


Dividend proposal: 13% increase

16

0

10

20

30

40

50

60

70

80

0,00

0,20

0,40

0,60

0,80

1,00

1,20

1,40

1,60

2013 2014 2015 2016 2017 2018

EUR per share

% of operating cash flow per share

Long term dividend policy

• UPM aims to pay an attractive dividend,

30–40% of operating cash flow per share

Dividend proposal for 2018

• EUR 1.30 (1.15) per share,

totalling EUR 693m

• 50% of 2018 operating cash flow


Outlook for 2019

The global economic growth is estimated to continue in 2019, albeit at a slower pace than in 2018. There are,

however, significant uncertainties related to this, including trade negotiations between China and the US, growth

in China, the undefined nature of Brexit and political uncertainties in several countries. These issues may have

an impact on the global economic growth and on UPM’s product and raw material markets during 2019.

UPM reached record earnings in 2018. UPM’s business performance is expected to continue at a good level in 2019.

In 2019, favorable demand is expected to continue for most UPM businesses.

Demand decline is expected to continue for UPM Communication Papers.

In the beginning of the year 2019, pulp prices are expected to be lower and graphic paper prices in Europe

are expected to be higher than in Q4 2018.

Input costs are expected to stabilise after the significant increases seen in 2018.

UPM will continue measures to reduce both variable and fixed costs.

Fair value increases of forest assets are not expected to contribute meaningfully to comparable EBIT in 2019.

17

Growth driven byglobal megatrends

18 | © UPM| © UPM| © UPM


We respond to megatrends that shape the future of consumer demand globally

19

Population growth

Urbanisation

Higher living standards

Digitalisation

Food and water

Hygiene & personal care

E-commerce, marketing

Packaging

Mobility

Energy

Living and construction

+2 billionmiddle class

consumers

19 | © UPM


Sustainability is the only solid foundation for long term value creation

20

Resource scarcity

Climate change

UPM solutions

Sustainable forestry and land use

Renewable materials

Replacing fossil materials

Decarbonising traffic and energy

Resource efficiency

Circular economy

2020 | © UPM

Sustainable choices,

tightening regulation

| © UPM

Bioeconomy offers a sustainable alternative to fossil-based economy

Biomass use is not increasing

CO2 to carbon cycle

Wood for

energy

Biofuels and

biochemicals

Wood fiber for

pulp and paper

production

Timber and

plywood

Use of fossil resources

increases CO2 amount

Energy from

fossil resources

Use of fossils has increased

global CO2 -emissions

0

5

10

15

20

25

30

35

40

18

45

18

57

18

69

18

81

18

93

19

05

19

17

19

29

19

41

19

53

19

65

19

77

19

89

20

01

GtC

O2/

year

Fossil fuels, cement andflaring

Forestry and other landuse

Source: IPCC AR5

21


Production

CO2 emissions

low emission energy,

energy efficiency

Products

Product substitution

replacing fossils,

recyclability, carbon

storages

Forests

Carbon sinks and

storages

maintenance, forestation,

renewal

Comprehensive approach to climate

change mitigation

22 | © UPM| © UPM| © UPM

Sustainable forestry preserves forests and increases carbon sinks

trees in a year

100 50 million

WE PLANT

trees per minute

WE PLANT

23 | © UPM


UPM’s forest ownership and carbon sequestration in Finland

• UPM owns 512,000 hectares of land in Finland

and is the second biggest private forest owner

in Finland

• UPM owned forests in Finland are carbon

sinks of 0.5 million tonnes CO2, equivalent

to yearly average emissions of 170 000 cars

• UPM owned forests are a carbon storage

of 360 million tonnes of CO2, which represents

over six years’ emissions from Finland

360 million tons

CO2 storage

20 million

seedlings yearly

24


UPM’s economical footprint is large

Taxes* EUR 36m *

Energy taxes EUR 6.75m– tax refund EUR –4.5 m

– ETS compensation EUR –0.9 m

Employees 1,023 pers**

Indirect employment 1,046 pers

Daily contractors 386 pers

Consumption effect, local EUR 50m

Consumption effect, FIN EUR 102m

25

Wood sourcing

EUR 850 m/a

Production units 27Wages over

EUR 450 m/aTaxes and expenses

EUR 660 m/a

10,000 service and

materials providers

Case example

UPM Kaukas, Lappeenranta

Finland

12% of sea exports * incl. Real estate tax, local taxes and corporate

income tax

** incl. summer workers

Sources: ETLA, UPM

| © UPM

Responsible

operations and

value chainCircular economy

Sustainable and safe solutions

for global consumer demand

High

performing

people

Sustainable

forestry

2020

2030

Innovation

Limitless opportunities

of bioeconomy

A FUTURE BEYOND FOSSILS


UPM strategy

27 | © UPM| © UPM| © UPM


Biofore strategy

28

PERFORMANCE GROWTH INNOVATION RESPONSIBILITY

WE CREATE VALUE BY SEIZING THE LIMITLESS

POTENTIAL OF BIOECONOMY

| © UPM

STRONG LONG-TERM FUNDAMENTALS FOR DEMAND GROWTH

AND HIGH BARRIERS TO ENTRY


Spearheads for growth

29


Renewal creates growth potential in Uruguay – pulp is the raw material for the future

Potential new pulp mill

• 2 million tonnes of eucalyptus pulp

• The estimate for a pulp mill investment

approximately EUR 2 billion

Competitive advantage

• High barriers to entry: sustainable and

competitive wood supply, location,

infrastructure and capital

• Stable transparent democracy

Outcomes

• Sustainable products for growing

consumer demand

• Positive impacts on local society

30


Second preparation phase for the potential new pulp mill in Uruguay proceeding

31

• Labour protocols, regulation

• Investment regimes

• Regional planning and development

• Energy and complementary items

• Mill permitting, pre-engineering

• Rail permitting, tendering, start construction

• Port permitting, tendering, concession

• Roads

Phase ICompleted in Q4/17

Phase IIExpected to take 1.5–2 years

Phase III

Discussions with the

Government of Uruguay

Prerequisites for a possible

pulp mill investment

Investment project

Development

of infrastructure

Main items in preparation phase II:

Investment agreement signed in

Q4/17

Permitting

Pre-engineering

Development

of infrastructure

Necessary conditions

PotentialUPM

investmentdecision


Positive impacts of a potential new pulp mill to Uruguay

• Approx. EUR 2 bn investment project creates

diverse economic activity

• Permanent increase of approx. +2% of GDP

• Approx. +12% increase in exports for the country

• USD +120 m tax collection and USD +200 m

in salaries through the value chain per year

• About 80% of Uruguayans have a positive or

neutral opinion, according to public polls during

recent years

32

Source: Economic Impact of UPM’s Operations in Uruguay

(CPA Ferrere, May 2016)

10 public opinion polls 2016–2018 (Equipos Mori, 2019)


Specialty packaging materials for growing global consumer demand

Growth strategy

in Raflatac and Specialty Papers

• Focused growth projects, e.g.

UPM Nordland and UPM Changshu

• Product portfolio development


• Technically demanding segments,

where UPM has leading market position,

expertise and innovation

Outcomes

• Sustainable and safe solutions for

labelling, packaging and wrapping

33


We innovate for a future beyond fossils

Patents filed in 2018

200Researchers globally

370 106EURm

Spend on research and

development in 2018

34 | © UPM| © UPM| © UPM


Driving cleaner traffic with biofuels

35

Transformative prospect

• Potential new biorefinery in Finland

• 500,000 tonnes of advanced biofuels


• High barriers to entry and unique

value chain position

• Technology and IPR

• Certification ISCC and RSB

Outcomes

• Sustainable solutions

to decarbonise traffic

• Replace fossil fuels


Growth with biochemicals in consumer products

36

Transformative prospect

• Potential biorefinery in Germany

• 150,000 tonnes of biochemicals


• High barriers to entry and unique

value chain position

• Technology and IPR

Outcomes

• Sustainable solutions for consumers

• Replace fossil-based chemicals


Spearheads for growth

37

| © UPM

UPM Energy increases its CO2-free electricity generation significantly

Growth projects

• Olkiluoto 3 (UPM’s share about 31%)

• Refurbishment of Kuusankoski

hydropower plant


• Cost-competitive, reliable and low-

emission electricity generation

Outcomes

• Low-emission electricity for climate

change mitigation

• Flexible power supply for the system

38


Sustainability-driven end-use growth in plywood

39

Profitable growth

• Chudovo plywood mill expansion in

Russia

• Strengthen market position in

selected businesses


• End-use, market and customer insight

• Leading reliability of supply, quality

• Strong brand

Outcomes

• Safe, certified and carbon-storing

products for construction, vehicle

flooring and LNG shipping


Consistent performance and cash flow in paper, maintaining strong competitiveness

Strategy

• Customer-driven development of

business and product portfolio

• Maintaining a strong, profitable market

position

• Capacity management and increasing

the efficiency of operations


• Maintain and improve cost

competitiveness in all market situations

• Trusted long-term paper supplier

• High product and service quality

40


5-year cumulative cash flow (2014–2018)– efficient capital allocation in action

42

Net debt/

EBITDA

~ 0x

Industry-leading

balance sheetDeleveraging

EUR 3.0bn

Strong operating cash flow

EUR 7.1bn

Attractive dividend

EUR 2.2bn

Focused investments

EUR 1.9bn


Illustrative capital allocation *) for the next 5 years,assuming the Uruguay pulp mill investment

43

Performance focus

Strong cash flowAttractive dividend

EUR ~3–4bn

High return

investments

EUR ~3–4bn Maintain headroom

Net debt/

EBITDA

< 2x

Industry-leading

balance sheet

*) This is not a forecast


UPM transformation, performance and efficient capital allocation are reflected in shareholder value

-2 000

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

18 000

20 000

EURm

Enterprise value and dividend

44 | © UPM| © UPM| © UPM

*) Market cap 29 March 2019

Cumulative dividend

Market capitalisation

Net debt

Review by the President and CEO - UPM...Demand decline is expected to continue for UPM Communication...

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