UPM-Kymmene Corporation Jussi Pesonen CEO UBS Global Paper and Forest Products Conference New York September 19, 2006
Contents UPM in brief Business environment UPM's positions for sustainable profitability Investments in competitive units and growth businesses Summary UPM 2
UPM IN BRIEF
UPM IN BRIEF Sales 9,348 million in 2005 Wood Products 13% Other 5% Converting 14% Magazine papers 32% Fine and Speciality papers 23% Newsprint 13% Papers 68% UPM 4
UPM IN BRIEF UPM's market positions Businesses UPM's market positions Europe Global Paper Magazine papers 1 1 Newsprint 2 5 Fine papers 3 5 Label papers 1 1 Packaging papers 3 Converted products Label materials 2 2 Industrial wrappings 1 Wood products Plywood 1 Sawn timber 4 UPM 5
UPM IN BRIEF Cost structure 2005 (excl. depreciation) Other costs19% Personnel expenses 19% Other raw materials 11% Recovered paper 3% Energy 10% Logs and pulpwood 13% Delivery of own products12% Chemicals and fillers 13% Costs and expenses, total 8,057 million UPM 6
UPM IN BRIEF Raw material market prices vs. UPM's cost development Index 2004=100 220 190 160 Electricity (EEX) Coating materials Chemical pulp Electricity (Nordpool) Bleaching chemicals 130 100 UPM Paper divisions* 70 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 * Cost/delivered paper ton (rolling 12months) UPM 7
UPM IN BRIEF EBITDA* margin of paper divisions 2002 H1 2006 % 30 25 20 15 10 5 0 02 03 04 05 H1 06 Magazine papers Newsprint Fine and speciality papers 22,7 16,2 12,5 Profitability improving but still weak Average paper prices declined Raw material prices increased USD/EUR exchange rate development unfavourable for exports Paper capacity closed in previous years Capacity still under utilized * EBITDA is operating profit before depreciation, amortization and impairment charges and excluding non-recurring items UPM 8
UPM IN BRIEF EBITDA* margin of Converting 2002 H1 2006 % 18 15 12 9 6 3 0 02 03 04 05 H1 06 8,5 Restructurings carried out in Raflatac and Walki Wisa have had a positive impact on profitability Siliconized papers' business, Loparex, was sold in 2005 * EBITDA is operating profit before depreciation, amortization and impairment charges and excluding non-recurring items UPM 9
UPM IN BRIEF EBITDA* margin of Wood products 2002 H1 2006 % 18 15 12 9 6 3 0 02 03 04 05 H1 06 8,0 Restructuring of Wood products in 2004 has improved its profitability Exit from building materials retail business (sale of Brooks Group and Anco Trae 2004, Puukeskus 2006) * EBITDA is operating profit before depreciation, amortization and impairment charges and excluding non-recurring items UPM 10
UPM IN BRIEF Operating profit* % of Other operations 2002 H1 2006 % 40 35 30 25 20 15 10 5 0 02 03 04 05 H1 06 30,8 High self-sufficiency in resources 70% self sufficiency in electricity 90% self sufficiency in chemical pulp including associated companies Own forests represent 10% of wood procurement moderate cost development supports Group's profits * excluding non-recurring items and H1 06 excluding a decrease of 102 million in the fair value of biological assets and wood harvested UPM 11
UPM IN BRIEF Cumulative cash flow 2002-2006H1 million Cash from operations 4,960-2,738 Capital expenditure -183 Sales of fixed assets -2,101-394 -927 Shares and company acquisitions 1,383 Share repurchases and dividends paid Other Debt -3000-2000 -1000 0 1000 2000 3000 4000 5000 UPM 12
UPM IN BRIEF Gearing ratio and net interest-bearing liabilities Gearing ratio Net interest-bearing liabilities %, million 120 100 80 60 40 20 Target: maximum 100% 66 69 7 000 6 000 5 000 4 000 3 000 2 000 1 000 4836 4812 0 02 03 04 05 June30 06 0 02 03 04 05 June30 06 Ratings: Moody s Baa2 (stable), latest change October 20, 2005 S&P BBB (stable), latest change May 16, 2003 UPM 13
BUSINESS ENVIRONMENT
BUSINESS ENVIRONMENT Traditional markets have become mature World printing and writing paper demand in mature markets 1980-2020 mill. tons Forecast -2020 200 150 100 Japan 50 West Europe North America Mature markets growth 0,5 % /year 0 '80 '85 '90 '95 '00 '05 '10 '15 '20 Source and copyright: Jaakko Pöyry UPM 15
BUSINESS ENVIRONMENT Growth in paper demand is shifting to emerging markets World printing and writing paper demand in emerging markets 1980-2020 Forecast -2020 mill. tons 100 Others Latin America 50 Rest of Asia China Emerging markets growth 4,1% /year 0 East Europe '80 '85 '90 '95 '00 '05 '10 '15 '20 Source and copyright: Jaakko Pöyry UPM 16
BUSINESS ENVIRONMENT Ctd mechanical and ctd woodfree papers capacity and demand estimate 2006 22,6 16,9 0,1 10,7 11,7 N. America 1,3 0,2 0,6 Europe 0,2 0,9 8,6 7,5 Oth. Asia 0,3 7,1 6,6 Japan 0,2 Capacity 50,8 mill. tons Demand 45,2 mill. tons 0,8 1,4 L. America 0,2 0,3 Africa 0,3 0,8 0,8 Oceania 0,8 0,3 Source: Cepiprint, PPPC, Jaakko Pöyry UPM 17
BUSINESS ENVIRONMENT Ctd mechanical and ctd woodfree papers capacity* and demand in Europe mill. tons 25 20 15 16,9 2006-'07 capacity reductions in Europe - 915'000 t UPM Kymi 150' IIQ 06 UPM Voikkaa 400' IIQ 06 SE Corbehem 250' 2006 UPM Jämsänkoski 115' IQ/07 1,9 Exports 1,4 Overcapacity 1,5 0,9 19,3 10 European Demand N. Am & L. Am Asia European Capacity Source: Cepi, PPPC, EMGE, RISI, Jaakko Pöyry * 2006 estimate UPM 18
BUSINESS ENVIRONMENT Printing and writing papers demand in Europe 3 800 3 600 3 400 '000 tons '06 vs. '05 3 200 3 000 2 800 2 600 2 400 Source: Cepiprint/fine Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 6 5 6-5 6 5 4 Jan-July '06 vs. Jan-July '05 News SC Ctd m WFC* WFU* 2006 2005 2004 *) Imports not included 4% 9% 3% 4% 3% 4 UPM 19
BUSINESS ENVIRONMENT Printing and writing papers demand in North America 3 800 3 600 3 400 '000 tons 3 200 3 000 2 800 2 600 Jan-July '06 vs. Jan-July '05 News SC Ctd m WFC WFU -5% -7% -2% 7% -1% '06 vs. '05 2 400 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0-3 -2-3 0 0-1 2006 2005 2004-1 Source: Cepiprint, PPPC UPM 20
UPM'S POSITIONS FOR SUSTAINABLE PROFITABILITY
UPM'S POSITIONS FOR SUSTAINABLE PROFITABILITY Target profitable at all times % 18 15 12 9 6 3 0 17,1 16,3 13,5 14,1 7,6 8,7 4,6 4,3 4,5 4,6 4,2 4,3 5,6 5,3 00 01 02 03 04 05 H106 * Operating Profit % (excl. non-recurring items) ROCE (excl. non-recurring items) *Operating profit % required to cover cost of capital is about 11-12% UPM 22
UPM'S POSITIONS FOR SUSTAINABLE PROFITABILITY Target position itself as the lowest cost producer Cost level 2005/I /ton Difference about 250 /t + low costs - high costs 9. 11. 10. Delivered costs to Frankfurt* 9. Voikkaa PM18 10. Voikkaa PM11 11. Jämsänkoski PM4 0 500 1 000 1 500 2 000 2 500 3 000 3 500 4 000 4 500 5 000 5 500 6 000 6 500 - Cumulative capacity, 1 000 t/y *All LWC 57g/m2 Source: Jaakko Pöyry, UPM UPM 23
UPM'S POSITIONS FOR SUSTAINABLE PROFITABILITY Global coated magazine paper machinery comparison After the closures/conversions of Voikkaa mill and Jämsänkoski PM4 the average size of UPM's coated magazine paper machines will be 278 000 tonnes (industry average 206 000 tonnes) 500 400 300 200 100 Weighted average capacity 206 000 t/a Oji - Weighted average PM capacity, 1 000 t/a - Weighted average technical age 15 years Bowater New Page IP Myllykoski UPM Stora Enso STRONG M-real Burgo-Marchi Norske Skog 0 WEAK 30 25 20 15 10 5 0 - Technical age, years - Source: Jaakko Pöyry 04/2006 UPM 24
UPM'S POSITIONS FOR SUSTAINABLE PROFITABILITY Global woodfree* paper machinery comparison After the closure of Kymi PM7 the average size of UPM's coated and uncoated woodfree paper machines will be 350 000 tonnes (industry average 170 000 tonnes) 500 400 300 200 100 - Weighted average PM capacity, 1 000 t/a - Weighted average technical age 17 years Oji Weyerhauser IP Sappi M-real Nippon APP Mondi UPM Stora Enso STRONG Weighted average capacity 170 000 t/a 0 30 WEAK 25 20 15 10 5 0 * Including C2S, C1S, UWF and specialties - Technical age, years - Source: Jaakko Pöyry 04/2006 UPM 25
UPM'S POSITIONS FOR SUSTAINABLE PROFITABILITY Roadmap to sustainable profitability Change structure Operate differently Consolidate in mature markets Profitable growth Grow in emerging markets Restructure production portfolio Strengthened competitive position Manage supply based on demand Close uncompetitive capacity Improved cost base Improve operating efficiency UPM 26
UPM'S POSITIONS FOR SUSTAINABLE PROFITABILITY Improve operating efficiency Finland Personnel reduction 2,557 by the end of 2008 1,885 early retirement 672 notice given France, Germany and Austria Personnel reductions 549 in total Other countries Negotiations for streamlining and personnel reduction ongoing Outsourcing negotiations continue UPM 27
UPM'S POSITIONS FOR SUSTAINABLE PROFITABILITY Close uncompetitive capacity Closures and conversions Closure of Voikkaa paper mill in Q3/2006 - Closed in June Closure of Kymi PM 7 in Q3/2006 - Closed in June Closure of Tervasaari PM 6 and the oldest pulp line during Q2/2007 Jämsänkoski PM 4 will be converted to produce label face paper in the beginning of 2007 UPM 28
UPM'S POSITIONS FOR SUSTAINABLE PROFITABILITY Sources of improved profitability Estimated annual savings in fixed costs 200 million at the end of the programme. + + + + + + 200 million Efficiency improvements Savings in variable costs Savings in fixed costs Asset impairment 2006 2007 2008 2009 Provision for personnel costs UPM 29
INVESTMENTS IN COMPETITIVE UNITS AND GROWTH BUSINESSES
INVESTMENTS IN COMPETITIVE UNITS AND GROWTH BUSINESSES Capital expenditure, million 1200 1000 New production lines and units 800 600 400 200 0 298 02 03 04 05 Jan-Jun 06 Change of line of production Maintenance and replacement expenditure Depreciation excl. amortization of goodwill UPM 31
INVESTMENTS IN COMPETITIVE UNITS AND GROWTH BUSINESSES UPM Raflatac expands in North America UPM Raflatac's investment: Pressure sensitive labelstock factory in Dixon, Illinois New state-of-the-art factory Investment USD 109 million Start up: Q1 2008 UPM 32
INVESTMENTS IN COMPETITIVE UNITS AND GROWTH BUSINESSES UPM Raflatac in North America Dixon factory: New growth platform for the Midwest market Location completes UPM Raflatac's service network for labelstock and RFID tag and inlays in North America Ontario, CA Toronto, ON Dixon, IL Wilkes-Barre, PA Fletcher, NC All major customers will be within 48 hour service range Pressure sensitive label stock factory RFID factory Slitting terminal UPM 33
INVESTMENTS IN COMPETITIVE UNITS AND GROWTH BUSINESSES UPM Raflatac's sales 1996-2005 Europe Film Production USA Dixon, mill. USA CM2 China Changshu 1000 Australia South- Africa 800 Malaysia China USA CM1 600 400 200 0 96 97 98 99 00 01 02 03 04 05 06E 07E 08E UPM 34
INVESTMENTS IN COMPETITIVE UNITS AND GROWTH BUSINESSES UPM Raflatac Number 2 in the world Jyväskylä, Finland Scarborough, UK Dixon, IA Fletcher, NC Barcelona, Spain Tampere, Finland Nancy, France * Shanghai, China ** Changshu, China Johor, West Malaysia UPM Raflatac labelstock factories UPM Rafsec RFID manufacturing UPM Raflatac factories under construction or expansion Slitting terminals Durban, South Africa Melbourne, Australia * start-up 1/2007 ** until 2007 UPM 35
INVESTMENTS IN COMPETITIVE UNITS AND GROWTH BUSINESSES Changshu platform for growth in Asia Finished goods storage PM 2 Converting plant PM 2 (1999) building PM 1 (2005) building Power plant Water treatment facility Coal yard Pier Raflatac (2007) Pulp storage Walki Wisa (2006) UPM 36
INVESTMENTS IN COMPETITIVE UNITS AND GROWTH BUSINESSES Investment in Kymi integrate Kymi fine paper integrate 2008 900,000 tn paper 550,000 tn pulp Kymi pulp mill investment One new recovery line replaces two old lines Improved energy efficiency and decreasing of emissions Cost 325 MEUR Start up Q4/2008 Project employs up to 900 people UPM 37
INVESTMENTS IN COMPETITIVE UNITS AND GROWTH BUSINESSES Botnia's pulp mill project in Uruguay Capacity 1.000.000 t/a UPM's share about a half of the capacity Based on the Best Available Technology (BAT) Planned start up Q3 2007 project proceeds according to plan Current situation: The governments of Argentina and Uruguay are engaged in dispute over environmental impact of the mill Conclusion of the International Court: circumstances are not such as to require to suspend the pulp mill construction UPM 38
INVESTMENTS IN COMPETITIVE UNITS AND GROWTH BUSINESSES Energy investments Self-sufficiency of electricity generation Finland 100% UPM in total 70% CO2 free energy sources dominate the portfolio Current investments Sludge boiler investments in Shotton and Chapelle Darblay paper mills Rauma mill power plant Indirect participation in PVO/TVO nuclear power plant investment UPM 39
Summary To reach sustainable profitability, we close uncompetitive capacity streamline all our operations invest in the most competitive units and growth businesses We are well positioned for growth in the emerging markets in fast growing label materials business We have resources high self-sufficiency in fibre and energy strong balance sheet UPM 40
Forward-looking statement It should be noted that certain statements herein which are not historical facts, including, without limitation those regarding expectations for market growth and developments; expectations for growth and profitability; and statements preceded by "believes", "expects", "anticipates", "foresees", or similar expressions, are forward-looking statements. Since these statements are based on current plans, estimates and projections, they involve risks and uncertainties which may cause actual results to materially differ from those expressed in such forward-looking statements. Such factors include, but are not limited to: (1) operating factors such as continued success of manufacturing activities and the achievement of efficiencies therein, continued success of product development, acceptance of new products or services by the Group's targeted customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by the Group's patents and other intellectual property rights, the availability of capital on acceptable terms; (2) industry conditions, such as strength of product demand, intensity of competition, prevailing and future global market prices for the Group's products and the pricing pressures thereto, financial condition of the customers and the competitors of the Group, the potential introduction of competing products and technologies by competitors; and (3) general economic conditions, such as rates of economic growth in the Group's principal geographic markets or fluctuations in exchange and interest rates. UPM 41
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