UPM-Kymmene Corporation Interim Report January- March 2007 Jussi Pesonen President and CEO April 24, 2007
Q1 2007 IN BRIEF UPM's result consistently improved Improved efficiency visible in the results All divisions contributed to higher operating profit Operating profits, million, million 963 250 1000 221 800 725 200 185 600 150 400 100 200 50 0 2002 2003 2004 2005 2006 *Excluding special items 0 Q1 06 Q1 07 UPM 2
BUSINESS DRIVERS
BUSINESS DRIVERS Printing and writing papers' demand in Europe 3 800 '000 tons '07 vs. '06 3 600 3 400 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 4 2 UPM Estimate** -1 Jan-Mar '07 vs. Jan-Mar '06 News** SC** Ctd m** WFC* WFU* 2007 2006 2005 **UPM Estimate *) Imports not included -1% 6% 3% 1% 1% 1 2 1 05 vs. 04 06 vs. 05 UPM 4
BUSINESS DRIVERS Printing and writing papers' demand in North America 3 800 3 600 '000 tons 3 400 3 200 3 000 2 800 2 600 UPM Estimate* Jan-Mar '07 vs. Jan-Mar '06 News* SC* Ctd m* WFC* WFU* -11% 5% -1% -1% -7% -3-1 05 vs. 04 06 vs. 05 2 400 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec '07 vs. '06-5 -5-4* Source: Cepiprint/fine, PPPC 2007 2006 2005 *UPM Estimate -5* UPM 5
FINANCIALS JANUARY-MARCH 2007
FINANCIALS JANUARY-MARCH 2007 Key figures Q1 2007 Operating profit excluding special items increased by 20%. EPS excluding special items increased from 0.21 to 0.25. EBITDA% increased from 15.7% to 16.6% Q1 2007 Q1 2006 Change Sales, M 2,519 2,460 59 EBITDA % 16.6 15.7 Operating profit, M 221 170 51 Special items, net - -15 Operating profit excl. special items, M 221 185 36 EPS excluding special items, 0.25 0.21 0.04 Paper deliveries, 1,000 tonnes 2,753 2,633 120 Personnel at the end of period 28,578 31,305-2,727 UPM 7
FINANCIALS JANUARY-MARCH 2007 EBITDA* margin % 24 20 16 16.6% 2007 2006 Q1 16.6% 15.7% Q2 16.0% Q3 17.1% Q4 18.1% 12 8 97 98 99 00 01 02 03 04 05 06 * EBITDA is operating profit before depreciation, amortization and impairment charges and excluding special items UPM 8
FINANCIALS JANUARY-MARCH 2007 Magazine papers Operating profit increased. Fixed costs were lower and efficiency improved. Paper deliveries increased by 5%. Average price for all magazine paper deliveries decreased., million '000 tonnes 80 1400 60 1200 1000 1,098 1,155 40 20 2.1% 16 3.4% 27 800 600 400 200 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Operating profit Excluding special items 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Paper deliveries UPM 9
FINANCIALS JANUARY-MARCH 2007 Newsprint Profitability improved, main contributor higher price of newsprint Deliveries about 4% less than a year ago Average price for all newsprint deliveries almost 5% up, million '000 tonnes 60 800 50 12.6% 44 600 654 630 40 30 7.2% 25 400 20 200 10 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Operating profit Excluding special items Paper deliveries UPM 10
FINANCIALS JANUARY-MARCH 2007 Fine and speciality papers Operating profit increased slightly due to better operating efficiency. Deliveries increased in both in Europe and Asia Price increases materialised in uncoated cut size sheets., million '000 tonnes 80 1200 70 60 1000 881 968 50 40 30 20 4.2% 27 4.6% 32 800 600 400 10 200 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Operating profit Excluding special items Paper deliveries UPM 11
FINANCIALS JANUARY-MARCH 2007 Label materials Profitability continued to be good Delivery volumes grew in Europe, North America and Asia Sales increased by 4%, million 25 20 15 6.8% 17 6.9% 18, million 300 250 200 251 261 150 10 100 5 50 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Operating profit Excluding special items 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Sales UPM 12
FINANCIALS JANUARY-MARCH 2007 Wood products Profitability of plywood continued to be good. Clear improvement in profitability of sawmilling. Excluding Puukeskus Oy, sales increased from the first quarter of 2006., million 35 30 25 10.2% 32, million 400 300 346 314 20 15 4.0% 14 200 10 100 5 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Operating profit Excluding special items 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Sales UPM 13
FINANCIALS JANUARY-MARCH 2007 Impact of export tax on wood form Russia UPM's wood consumption in Finland 21,7 million m³ (2006) UPM's wood imports from Russia Wood imports from Russia 4.3 million m³, 20% of the total Based on 2006 imports, the announced increase of export tax would increase UPM's costs in 2007 by about 13 million UPM prepares sourcing alternatives to ensure cost competitive wood raw material UK France 0.6 million m³ Finland Baltic 0.9 Germany million m³ Czech Austria Russia 4.3 million m³ UPM 14
FINANCIALS JANUARY-MARCH 2007 Value creation % 24 20 16 12 8 4 8.9% 6.2% ROCE ex.spec. 2007 2006 Q1 7.9% 6.4% Q2 2.7% Q3 7.1% Q4 8.7% 0 98 99 00 01 02 03 04 05 06 -- WACC pre tax -- ROCE excl. special items -- ROCE as reported UPM 15
FINANCIALS JANUARY-MARCH 2007 Gearing ratio and net interest-bearing liabilities Gearing ratio Net interest-bearing liabilities %, million 120 100 80 60 40 20 0 Target: maximum 100% 56 57 03 04 05 06 Mar31 07 March 31, 06 67 7 000 6 000 5 000 4 000 3 000 2 000 1 000 0 4048 4023 03 04 05 06 Mar31 07 Ratings: Moody s Baa2 (negative), latest change April 17, 2007 S&P BBB (stable), latest change May 16, 2003 UPM 16
FINANCIALS JANUARY-MARCH 2007 Capital expenditure, million 1000 800 New production lines and units 600 Change of line of production 400 200 0 193 03 04 05 06 Q1 07 Maintenance and replacement expenditure Depreciation excl. amortization of goodwill UPM 17
INVESTMENTS
INVESTMENTS Modernization of Otepää plywood mill in Estonia Birch plywood production line's modernization and capacity increase by 10,000 m³ Enables manufacturing of further processed products, mainly for use of transport industry EUR 9.5 million investment Completion, autumn 2008 Mill capacity after the investment 35,000 m³ UPM is a leading producer of birch plywood products in Europe. Production plants are located in Finland, Russia and Estonia UPM 19
INVESTMENTS Kajaani to start using innovative pulping method for pine UPM has developed a new innovative method for using pine for mechanical pulping. The objective is to diversify the mill's raw material base and create cost savings without affecting paper quality and paper machine runnability. A mill scale application of ozone treatment at the Kajaani mill will start early 2008. Investment cost is EUR 11 million. UPM's partner in the pilot project has been ITT Wedeco. UPM 20
Investments UPM Label Division New self-adhesive label materials factory in Poland
INVESTMENTS UPM LABEL DIVISION UPM expands in Europe - New self-adhesive label materials factory in Poland Supplies paper and film label products Hot-melt and water-based acrylic adhesive technologies Approximately EUR 90 million investment Start up Q4 2008 UPM 22
INVESTMENTS UPM LABEL DIVISION New factory in Poland centrally located UPM 23
INVESTMENTS UPM LABEL DIVISION World-class label material operation Centrally located state-of-the-art production and logistics centre in the eastern part of Central Europe Expands capabilities to better serve the growing eastern European markets Completes UPM Raflatac's service network for self adhesive label materials and RFID tag and inlays in Europe UPM 24
INVESTMENTS UPM LABEL DIVISION UPM Raflatac's global growth history Mill. EUR Acquiring global presence Strong organic development 1000 Fletcher RFID Fletcher Dixon Poland 800 Polinya Changshu 600 400 RFID Jyväskylä South Africa Fletcher CM2 200 China Australia Malaysia 0 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 UPM-Kymmene Corp. Label division UPM Raflatac 8 UPM-Kymmene Corp. Raflatac UPM-Kymmene Corp. UPM Raflatac UPM 25
INVESTMENTS UPM LABEL DIVISION Strong global growth platform Tampere, Finland * Scarborough, UK Nancy, France Dixon, IL Fletcher, NC Jyväskylä, Finland Poland ** Barcelona, Spain Changshu, China UPM Raflatac labelstock factories UPM Raflatac RFID manufacturing UPM Raflatac factories under construction Slitting terminals UPM Johor, West Malaysia Durban, South Africa Melbourne, Australia * start-up 1/2008 ** start-up 4/2008 26
INVESTMENTS UPM's major ongoing investments Ongoing investments Pulp mill investments: Tervasaari new bleaching line, Kymi recovery plant Paper machine investments: Jämsänkoski (PM4 conversion, magazine quality), Kajaani (usage of pine in mechanical pulping) Energy investments: Chapelle, Caledonian Self-adhesive label materials investments: Dixon, USA, a new factory Poland, a new factory Wood products' investments: Savonlinna, Jyväskylä, Chudovo, Heinola, Otepää Value 350 mill. 94 mill. 147 mill. USD 109 mill. 90 mill. 23 mill. Estimated completion 2007, 2008 2007, 2008 2007, 2009 2008 2008 2007, 2008 UPM 27
SUMMARY
Summary for the first quarter 2007 Clear and consistent profit improvement continued during the beginning of the year. Major investments in self-adhesive label materials. Exit from the Walki Wisa industrial wrappings business. Market outlook for the second quarter of 2007 In Europe, the good demand for paper continues, and deliveries are expected to increase from last year. Average price for UPM's all paper deliveries remains about the same as in the first quarter of the year. In uncoated fine papers price increases were implemented earlier in April. In self-adhesive label materials good growth and stable pricing environment is expected to continue. In wood products strong demand continues. UPM 29
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 30
UPM 31
BUSINESS DRIVERS
BUSINESS DRIVERS 2006 Demand, capacity and prices in Europe '000 tonnes 60000 Paper capacity and demand in Europe +0,5% 900 Paper prices in Europe 55000 800 50000 45000 40000 +0,9% +6% 700 600 35000 +0% 500 30000 2002 2003 2004 2005 2006 W. Eur demand E. Eur demand Capacity 400 02 03 04 05 06 07 News 45 g/m² SC rg 56 g/m² LWC off 60 g/m² WFCr 100 g/m² WFUr 80 g/m² Source: Cepiprint, Cepifine, PPI UPM 33
BUSINESS DRIVERS 2006 Demand, capacity and prices in North America '000 tonnes 60000 55000 Paper capacity and demand in North America USD 1100 1000 Paper prices in USA 50000 45000 40000 35000 30000-4% -2% 2002 2003 2004 2005 2006 NA demand Capacity 900 800 700 600 500 400 02 03 04 05 06 07 News 48,8 g/m² SC 51,8 g/m² LWC 59,2 g/m² WFCr 88,8 g/m² WFUr off 74 g/m² Source: Cepiprint, Cepifine, PPPC, RISI UPM 34
BUSINESS DRIVERS 2006 Demand, capacity and prices in Asia '000 tonnes 60000 55000 Paper capacity and demand in Asia +5% USD 1100 Example of paper prices in China imported 50000 +4% 1000 45000 900 domestic 40000 35000 800 30000 2002 2003 2004 2005 2006 Asia demand Capacity 700 2002 2003 2004 2005 2006 WFU s 80-120 g WFC s 128-157 g Source: PPI UPM 35
BUSINESS DRIVERS Paper market price development in Europe EUR/ton 900 800 Jan-Mar '07 vs. Jan-Mar '06 News SC LWC WFC WFU 4 % 0 % -2 % 1 % 4 % 700 600 500 400 02 03 04 05 06 07 Source: PPI News 45 g/m² SC rg 56 g/m² LWC off 60 g/m² WFCr 100 g/m² WFUr 80 g/m² UPM 36
BUSINESS DRIVERS Paper market price development in USA USD/ton Jan-Mar '07 1 100 vs. Jan-Mar '06 1 000 900 News SC LWC WFC WFU -4 % -3 % -12 % +2 % +11 % 800 700 600 500 400 02 03 04 05 06 07 Source: RISI News 48,8 g/m² SC 51,8 g/m² LWC 59,2 g/m² WFCr 88,8 g/m² WFUr off 74 g/m² UPM 37
BUSINESS DRIVERS Example: Paper market price development in China USD/ton 1 100 imported 900 domestic 700 500 2002 2003 2004 2005 2006 2007 WFU s 80-120 g WFC s 128-157 g Source: PPI UPM 38
BUSINESS DRIVERS Coated magazine paper price in Euro, development in Germany and USA /metric ton 1 200 1 000 800 600 21 400 94 95 96 97 98 99 00 01 02 03 04 05 '06 '07 '08 Source: PPI Germany USA UPM 39
BUSINESS DRIVERS Raw material market prices vs. UPM's cost development Index 2004=100 220 Electricity (EEX) 190 160 130 100 Oil Chemical pulp Coating materials Bleaching chemicals Electricity (Nordpool) Electricity (EEX) 70 Q1/04 Q2/04 Q3/04 Q4/04 Q1/05 Q2/05 Q3/05 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06 Q1/07 UPM Paper divisions* * Cost/delivered paper ton (rolling 12months) UPM 40
BUSINESS DRIVERS Global chemical pulp market price USD USD/ton 800 USD 772/t 700 600 USD 672/t 500 400 300 '00 '01 '02 '03 '04 '05 '06 '07 PIX NBSK (Northern Bleached Softwood Kraft) PIX BHKP (Northern Bleached Hardwood Kraft) Source: FOEX April 17, 2007 UPM 41
BUSINESS DRIVERS Global chemical pulp market price EUR EUR/ton 800 700 600 EUR 570/t 500 400 EUR 497/t 300 '00 '01 '02 '03 '04 '05 '06 '07 PIX NBSK (Northern Bleached Softwood Kraft) PIX BHKP (Northern Bleached Hardwood Kraft) Source: FOEX April 3, 2007 UPM 42
BUSINESS DRIVERS Recycled paper price EUR/ton in Germany 150 130 110 90 EUR 83/t 70 50 '00 '01 '02 '03 '04 '05 '06 '07 Source: EUWID UPM 43
BUSINESS DRIVERS Price comparison: uncoated fine paper and short fibre hardwood pulp /ton 1 000 900 800 700 698/t 02-03 600 avg difference -06 330 500 BHKP 400 504/t 300 '00 '01 '02 '03 '04 '05 '06 '07 Uncoated fine paper avg difference 169 WFU (Woodfree uncoated) PIX BHKP (Northern Bleached Hardwood Kraft) Source: FFIF April 3, 2007, PPI UPM 44
BUSINESS DRIVERS Advertising in printed media * Asia North America Europe Increase -% from the previous year 12 10 8 6 4 2 0 1999 2000 2001 2002 2003 2004 2005 2006e 2007e -2-4 *Asia excluding direct mail Source: ZenithOptimedia December 2006 North America Europe Asia UPM 45
BUSINESS DRIVERS Advertising expenditure in printed media Growth % from previous year 14 12 10 8 6 4 2 0-2 -4-6 -8 00 01 02 03 04 05 06E 07E Newspapers, Zenith December 06 Magazines, Zenith December 06 Direct Mail Source: ZenithOptimedia, Direct mail: North America and Europe only, Wilkofsky Gruen Associates and Zenith UPM 46
BUSINESS DRIVERS Advertising pages and advertising expenditure Consumer magazines Q1 2007 vs. Q12006, % USA +1% +7% UK +1% +2% Germany -5% +1% Newspapers Q1 2007 vs Q1 2006, % UK Germany -10-5 0 5 10 +3% +3% +5% +6% -10-5 0 5 10 Sources: PIB, VZD, Nielsen Ad pages Ad expenditure UPM 47
BUSINESS DRIVERS Consumer magazine advertising pages in Germany, UK and USA Year on year monthly growth % 14 12 10 8 6 4 2 0-2 -4-6 -8 2005 2006 2007 Germany USA UK Source: PZD, Secodip, PIB UPM 48
CHANGED BUSINESS ENVIRONMENT Overcapacity gets to be addressed sustainability of exports is a challenge 25 20 mill. tons 15 Closures 2006 0,9 European capacity* 21,5 Announced closures 2007 0,7 Exports & Slack 1,5 Asia & Other 2,1 N. Am. & Lat. Am. 0,5 Supply/demand of coated magazine and fine papers Announced capacity closures will improve the market balance Large share of exports together with excess capacity imposes a threat to the market balance in Europe European demand 16,7 Part of exports is unprofitable 10 Sources: Cepi, PPPC, EMGE, RISI, Jaakko Pöyry * 2007 estimate UPM 49