UPM INTERIM REPORT Q Jussi Pesonen President and CEO 26 April 2018

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1 UPM INTERIM REPORT Q1 218 Jussi Pesonen President and CEO 26 April 218

2 Q1 218 UPM continues to grow earnings, strong customer demand in all businesses Comparable EBIT increased by 17% to EUR 355m (35m) Sales prices increased in all business areas, outweighing the impact of higher input costs Production impacted by temporary wood harvesting limitations Operating cash flow was EUR 28m (396m) Net debt decreased to EUR 41m (87m) Announced new projects focused on growing the attractive release liner business Comparable EBIT UPM

3 Q1 218 Commercially a successful quarter, operationally left room for improvement UPM BIOREFINING Good market demand. Pulp deliveries -7%, production impacted by temporary wood harvesting limitations Pulp prices significantly higher UPM SPECIALTY PAPERS Good market demand, deliveries -3%, mix improvement Price increases offset most of the variable cost increases UPM COMMUNICATION PAPERS Deliveries -4% Price increases offset most of the variable cost increases UPM RAFLATAC Good demand, deliveries -4% Price increases restored unit margins after 12 months of input cost increases UPM ENERGY Electricity deliveries +15% Higher electricity market prices Hydropower generation at a good level UPM PLYWOOD Good demand, deliveries +4% Price increases offset the variable cost increases 3 UPM

4 Comparable EBIT by business area 2 UPM Biorefining % of sales 3 12 UPM Energy % of sales 6 12 UPM Communication Papers % of sales UPM Specialty Papers % of sales UPM Raflatac % of sales 12,5 5 12,5 25 UPM Plywood % of sales ,5 3 7, ,5 1 2, UPM

5 Comparable EBIT in Q1 218 vs. Q1 217 Increased prices in all businesses Higher input costs and unfavourable currencies Production impacted by wood harvesting limitations Improvement in Biorefining and Energy, input cost mitigation in the other businesses % Prices Deliveries Fixed costs Variable costs Currency, net impact Depr., forests, plantations % % Biorefining Energy Raflatac Specialty Papers Plywood Communication Papers Other operations and eliminations % Q1/17 Q1/18 Q1/17 Q1/18 5 UPM

6 Strong cash flow and balance sheet 1 8 Operating cash flow Net debt 3 5 Net debt Net debt / EBITDA (trailing12 months) 3, UPM Free cash flow Operating cash flow 1, LTM Q1/18 operating cash flow EUR 28m Working capital increased seasonally by EUR 142m Net debt / EBITDA Net debt Q1/18 LTM 3, 2,5 2, 1,5 1,,5.,

7 Outlook for 218 UPM reached record earnings in 217 and its comparable EBIT is expected to increase further in 218 compared with 217. The fundamentals for UPM businesses in 218 continue to be favourable. Healthy demand growth is expected to continue for most UPM businesses in 218, while demand decline is expected to continue for UPM Communication Papers. Sales prices are expected to be higher in UPM businesses in 218 compared with 217. Input costs are expected to be higher in 218 compared with 217. In order to mitigate this, UPM will continue to implement measures to reduce fixed and variable costs. 218 has started with less favourable currency exchange rates than 217. Q2 218 results will be impacted by significant maintenance activity, especially in UPM Biorefining. 7 UPM

8 Timing of significant maintenance shutdowns Timing Q2 17 Q4 17 Q2 18 Q4 18 Significant maintenance shutdowns in 217 and 218 Unit Pietarsaari pulp mill Olkiluoto nuclear power plant Kymi pulp mill Fray Bentos pulp mill Kaukas pulp mill Lappeenranta biorefinery turnaround Olkiluoto nuclear power plant Pietarsaari pulp mill Maintenance shutdowns have an impact on Maintenance costs Production volumes Operational efficiency Excluding the impact of larger maintenance shutdowns, there is a seasonal pattern in UPM s fixed costs Q1, Q3 fixed costs below annual average Q2, Q4 fixed costs above annual average 8 UPM

9 UPM s current investment portfolio for earnings growth Focused growth projects Kaukas pulp mill expansion, +3kt in Q2 218, Finland Raflatac speciality label expansion, in Q4 218, Finland Chudovo plywood mill expansion, +155k m 3 in Q3 219, Russia Jämsänkoski release liner expansion, +4kt in Q4 218, Finland Nordland PM2 conversion to release liner, +11kt in Q4 219, Germany Changshu release liner expansion, +4kt in Q1 22, China 9 UPM

10 UPM s current investment portfolio for earnings growth Transformative prospects Possible new pulp mill, Uruguay Second preparation phase is proceeding. The permitting processes for the mill, rail and port, as well as rail tendering have started as agreed. Biomolecules businesses Basic engineering work regarding a potential industrial-scale biochemicals refinery, Germany Exploring next steps in biofuels, environmental impact study in Kotka, Finland 1 UPM

11 Second preparation phase for the potential new pulp mill in Uruguay proceeding Phase I Completed in Q4/17 Phase II Expected to take years Phase III Discussions with the Government of Uruguay Prerequisites for a possible pulp mill investment Investment agreement signed in Q4/17 Permitting Pre-engineering Development of infrastructure Necessary conditions Potential UPM investment decision Investment project Development of infrastructure Main items in preparation phase II: Mill permitting, pre-engineering Rail permitting, tendering, start construction Port permitting, tendering, concession Roads Labour protocols, regulation Investment regimes Regional planning and development Energy and complementary items 11 UPM

12 Summary Customer demand is strong and sales prices increased in all business areas in Q1 218 Q1 218 comparable EBIT grew by 17%, driven by strong business performance Comparable EBIT is expected to increase in 218 compared with 217 Next focused growth projects announced in the attractive release liner business Transformative prospects in Uruguay and in biomolecules businesses are proceeding 12 UPM

13 WELCOME TO UPM S CAPITAL MARKETS DAY! LIMITLESS OPPORTUNITIES OF BIOECONOMY London 31 May May dinner with a keynote speech by the Chairman of the Board 31 May presentations and discussion with the CEO and the UPM management team Register by More information: ir@upm.com

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15 Establishing a competitive operating platform in Uruguay we are now in preparation phase II Current operations Plantation base in West Uruguay Fray Bentos pulp mill 1.3 million tonnes ~1 km of river barging for outbound logistics Sea port in Nueva Palmira loading half vessels Ocean vessels to pulp markets Uruguay prospect Plantation base in Central and North Eastern Uruguay Potential new pulp mill about 2 million tonnes, on-site investment estimate EUR 2bn Railway with high technical standards Deep sea port in Montevideo loading full vessels Ocean vessels to pulp markets 15 UPM

16 Disciplined capital allocation 5-year cumulative cash flow ( ) Strong operating cash flow EUR 6.4bn Focused investments EUR 1.9bn Deleveraging Attractive dividend EUR 2.6bn EUR 1.9bn Industry-leading balance sheet Net debt /EBITDA.11x 16 UPM

17 Illustrative capital allocation ( * for next 5 years, assuming the Uruguay pulp mill investment Performance focus Strong cash flow Attractive dividend EUR ~3-4bn Industry-leading balance sheet High return investments EUR ~3-4bn Net debt /EBITDA < 2x Maintain headroom 17 UPM ( * This is not a forecast

18 Business area long-term targets compared with realised returns UPM Energy ROCE % * ) UPM Biorefining ROCE % UPM Specialty Papers 3 ROCE % UPM Communication Papers 3 3 FCF/CE % UPM Plywood ROCE % UPM Raflatac ROCE % * ) shareholdings in UPM Energy valued at fair value Long-term return target 18 UPM

19 Group financial performance 1 6 Comparable EBIT % Comparable ROE 14 Net debt 4 5 Net debt and leverage Net debt/ EBITDA (x) 3, Target: EBIT growth Target: 1% Policy: 2x 2,5 2, , , ,5 19 UPM LTM Comparable figures for , excluding special items for earlier years LTM Q1/18 LTM,

20 Low investment needs in existing assets allow growth projects with modest total capex 1 2 Capital expenditure Estimate 1 8 Myllykoski acquisition 6 Uruguay acquisition Depreciation 4 Strategic investments Operational investments E 2 UPM

21 UPM s main currency exposures Key currency exposures USD, GBP and JPY Policy to hedge an average of 5% of the estimated net currency cash flow for the next 12 months Estimated annual foreign currency net cash flow, before hedging USD GBP JPY Others UPM

22 Maturity profile and liquidity Liquidity Committed credit facilities Liquidity on 31 March 218 was EUR 1.1bn (cash and unused credit facilities) Bilateral committed credit facilities EUR 522 million for general financing purposes 6 Maturity profile of outstanding debt 6 Committed credit facilities maturities UPM

23 UPM Biorefining Demand-supply drivers of pulp market 23 UPM Demand Supply Short term Re- and destocking of inventories Maintenance stoppages Production issues End use demand Capacity closures Conversions New mill starts Debottleneck investments Regulation and product standards e.g. RCP Sustainable, renewable and recyclable Food product safety Replacing plastics Decline of graphic paper production and scarcity of recycled fibre Long term Population growth Urbanisation Middle class expansion Aging demography Availability of competitive mill locations E-commerce Plantations, sustainable wood raw material Water availability Infrastructure

24 UPM Biorefining Chemical pulp market prices EUR/tonne 1 Pulp market prices, EUR USD/tonne 12 Pulp market prices, USD BHKP, Europe, EUR BHKP, China, EUR NBSK, Europe, EUR NBSK, China, EUR BHKP, Europe BHKP, China NBSK, Europe NBSK, China 24 UPM Sources: FOEX Indexes Ltd, ECB

25 UPM Energy Cost efficient generation enables robust profitability in challenging market environment MWh Market electricity prices vs UPM sales price Helsinki Front Year System Front Year UPM average sales price UPM Energy profitability Comparable EBIT, Q % of sales UPM

26 UPM Communication Papers Graphic paper prices EUR/t 1 Europe USD/t 11 North America USD/t 13 China News SC LWC WFC WFU News SC LWC WFC WFU WFC r (1% chemical pulp) Uncoated Woodfree Reels (1% chemical pulp) Sources: PPI, RISI 26 UPM

27 UPM Communication Papers Paper price vs. cash cost of marginal cost producer EUR/t Price Cash cost of a marginal producer UPM Sources: PPI, RISI, Pöyry

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