UPM THE BIOFORE COMPANY Investor presentation February 217
UPM in transformation 28 vertically integrated paper company 216 six separate businesses Business model Promotes value creation Sales 1 % 8 % 6 % 4 % 2 % Paper Plywood Raflatac Sawmilling 1 % 8 % 6 % 4 % 2 % Paper ENA Plywood Energy Specialty Papers Raflatac Biorefining Others Business portfolio Increasing share of businesses with strong long-term fundamentals for profitability and growth % % Sales EBIT *) ROE *) EUR 9.5bn EUR 513m 3.5% EUR 9.8bn EUR 1,143m 1.9% Business performance Continuous improvement in financial, social and environmental performance Net debt Market cap EUR 4.3bn EUR 4.7bn EUR 1.1bn EUR 12.5bn Disciplined capital allocation Driving value creation *) excluding special items for 28, comparable figures for 216 2
UPM business portfolio today *) Competitive businesses with strong market positions Operating on healthily growing markets UPM PLYWOOD Plywood, veneer ~3% UPM PAPER ENA Graphic papers ~ 4% Growth drivers: Private consumption Sustainability Population growth Urbanisation E-commerce Construction Transportation UPM BIOREFINING Pulp ~3% Biofuels strong Timber ~2% 3 UPM Specialty Papers Label papers ~4% High-end office papers ~4% UPM ENERGY Electricity ~1% UPM RAFLATAC Self-adhesive labels ~4% * ) by comparable EBIT 216 Demand trend growth, % pa
Increasing share of businesses with strong longterm fundamentals for profitability and growth 1% Sales 216 Sustainable growth 75% UPM Biorefining UPM Raflatac UPM Specialty Papers UPM Plywood UPM Energy 5% Maintaining strong cash flow 25% UPM Paper ENA % 4
Value creation through sustainable growth and cash generation Sales 216 1% 75% 5% UPM Biorefining UPM Raflatac UPM Specialty Papers UPM Plywood UPM Energy EURm 1 8 6 4 Comparable EBIT 213 214 215 216 % of sales 2 16 12 8 Sustainable growth Commercial success Cost efficiency Focused growth investments Product mix development 25% UPM Paper ENA EURm 6 4 Operating cash flow Maintain strong cash flow Commercial success Cost efficiency % 5 2 213 214 215 216 Efficient use of assets, including restructuring
Focused growth investments contributed significantly to 216 results Fully contributing in 216 Pietarsaari pulp mill expansion Fray Bentos pulp mill expansion Kymi pulp mill expansion Raflatac expansion in APAC, Poland Further optimisation potential Lappeenranta biorefinery Changshu speciality papers 8% run-rate of the EUR 2m EBITDA target achieved in 216 Ramp-up in progress Otepää plywood mill expansion Kaukas pulp mill efficiency 6 Under construction Kymi pulp mill expansion Raflatac expansion in Poland
Focused investments are delivering growth Sales 216 Average delivery growth 211 216 1% 75% 5% UPM Biorefining UPM Raflatac UPM Specialty Papers UPM Plywood Pulp CAGR +3% Biofuels New business Standard products CAGR +4% Films and specials CAGR +8% Label materials CAGR +4% Cut-size CAGR +6% Plywood CAGR +3% 25% % 7
New long-term financial targets Business area returns Group earnings growth Increased return targets for each business area Earnings growth through focused topline growth and margin expansion ROCE, FCF/CE Comparable EBIT Capital structure and shareholder returns Efficient capital structure, investment grade rating and attractive shareholder returns Net debt / EBITDA ROE % Dividend policy 8
New long-term financial targets Business area targets UPM group targets Business area Return target UPM Energy ROCE 6% UPM Biorefining ROCE 14% UPM Specialty Papers ROCE 14% UPM Paper ENA FCF/CE 14% UPM Plywood ROCE 18% UPM Raflatac ROCE 2% Comparable EBIT growth through focused top-line growth and margin expansion Comparable ROE: 1% Net debt / EBITDA: around 2x or less Dividend policy: 3-4% of operating cash flow per share 9
New business area long-term targets compared with realised returns UPM Energy UPM Biorefining UPM Specialty Papers UPM Paper ENA UPM Plywood UPM Raflatac 3 28 ROCE % * ) 3 28 ROCE % 3 28 ROCE % 3 28 FCF/CE % 3 28 ROCE % 3 28 ROCE % 26 26 26 26 26 26 24 24 24 24 24 24 22 22 22 22 22 22 2 2 2 2 2 2 18 18 18 18 18 18 16 16 16 16 16 16 14 14 14 14 14 14 12 12 12 12 12 12 1 1 1 1 1 1 8 8 8 8 8 8 6 6 6 6 6 6 4 4 4 4 4 4 2 2 2 2 2 2 * ) shareholdings in UPM Energy valued at fair value Long-term return target 1
Group financial performance EURm Comparable EBIT % Comparable ROE Net debt EURm Net debt and leverage Net debt/ EBITDA (x) 1 4 12 4 5 3, 1 2 Target: EBIT growth 1 Target: 1% 3 75 2,5 1 8 3 2, 8 Policy: 2x 6 2 25 1,5 6 4 1 5 1, 4 2 2 75,5 Net Debt 211 212 213 214 215 216 211 212 213 214 215 216 211 212 213 214 215 216, 11 Comparable figures for 215 and 214, excluding special items for earlier years
Disciplined capital allocation Focused growth projects and attractive dividends financed from operating cash flow Attractive dividend Consistently strong balance sheet Focused investments Strong cash flow Top performance Industry-leading balance sheet 12
Record strong cash flow and balance sheet EURm 1 8 Operating cash flow 1,686 Net debt EURm 4 Net debt Net debt / EBITDA (trailing12 months) 4, 1 6 3 5 3,5 1 4 1 2 1 8 6 4 2 Cash flow after investing activities Operating cash flow 1,185 Working capital decreased by EUR 195m in 216 3 2 5 2 1 5 1 5 Net debt / EBITDA 2,1 Net debt 1,131 3, 2,5 2, 1,5 1,.73x,5 211 212 213 214 215 216 211 212 213 214 215 216, 13
Dividend proposal EUR per share 1,,9,8,7,6,5,4,3,2,1.6.6.6 Dividend.7.75.95 Dividend policy UPM aims to pay an attractive dividend, 3 4% of operating cash flow per share Board s dividend proposal for 216 EUR.95 (.75) per share, totalling EUR 57m 3% of 216 operating cash flow of EUR 1,686m, 211 212 213 214 215 216 14
Low investment needs in existing assets allow growth projects with modest total capex Capital expenditure Focused growth investments Good returns and fast payback 1 2 Low implementation risk 1 Myllykoski acquisition Financed from operating cash flow 8 6 4 Uruguay acquisition Strategic investments Depreciation Low replacement investments Asset quality in all businesses, e.g. large competitive pulp mills 486 UPM Paper ENA 2 Operational investments 28 29 21 211 212 213 214 215 216217E Modest total capex, attractive returns and continuously strengthening balance sheet 15
Growth projects contributed significantly and cost efficiency measures continued on a strong track EURm Comparable EBIT 216 vs. 215 1 4 1 2 1 8 916 9.% Fixed costs Deliveries Paper ENA Deliveries other BAs Currency Other 1,143 11.6% 6 Prices Variable costs 4 2 215 216 16
Comparable EBIT in Q4 216 vs. Q4 215 Heavy maintenance activity, normalised hydropower volume and increase in forest and plantation values. Heavy maintenance and lower prices in Biorefining, lower hydropower and prices in Energy. Solid improvement in other businesses. EURm 35 EURm 35 3 25 2 15 247 9.6% Prices Deliveries Fixed costs Variable costs Currency, net impact Forests, plantations, depr. 283 11.4% 3 25 2 15 247 9.6% Biorefining Energy Raflatac Specialty Papers Paper ENA Plywood Other operations and eliminations 283 11.4% 1 1 5 5 Q4/15 Q4/16 Q4/15 Q4/16 17
Comparable EBIT by business area EURm 15 UPM Biorefining % of sales 25 EURm 8 UPM Energy % of sales 6 EURm 5 UPM Raflatac % of sales 1 12 2 6 45 4 8 9 6 15 1 4 3 3 2 6 4 3 5 2 15 1 2 EURm 5 UPM Specialty Papers EURm UPM Paper ENA % of sales EURm UPM Plywood % of sales % of sales 12,5 125 1 25 2 4 1 1 8 2 16 3 7,5 75 6 15 12 2 5 5 4 1 8 1 2,5 25 2 5 4 18-25 -2
Outlook for 217 UPM s profitability improved significantly in 216 and is expected to remain on a good level in 217. Demand growth is expected to continue for most of UPM s businesses, while demand decline is expected to continue for UPM Paper ENA. The focused growth projects continue to contribute gradually to UPM s performance. Following a deflationary environment in recent years, 217 is expected to show modest input cost inflation. UPM will continue measures to reduce fixed and variable costs to mitigate this. 217 starts with lower pulp prices and lower availability of hydropower than in the beginning of 216. 19
Responsibility is good business Creating value through products and innovation Creating competitive advantage and long-term value by efficiency "We believe that customers, investors and other stakeholders value responsible operations that keep risks under control and add to our business opportunities, thereby increasing the company value. Risk mitigation by responsible value chain and production UPM Annual Report 215 2
Creating competitive advantage and long-term value by engagement Per million hours Safety Index Employee engagement EUR million Productivity 25 9,6 2 15 Lost-time accident frequency 8 7 Manager effectiveness,55,5,45 Sales per employee 1 6 5 Employee engagement,4,35 5 4,3,25 3,2 5-year change: 77% 5-year change: +11 5-year CAGR: +5% 21
Creating competitive advantage and long-term value by efficiency Case: UPM Changshu mill in China Water 6% Per tonne of paper COD in effluent 75% Per tonne of paper water intake water discharge Energy SO 2 emission 3% Per tonne of paper 9% Per tonne of paper Waste to landfill 6% Per tonne of paper Certified fibre 85% In 215 215 compared to 25 Source: UPM 22
Consistent long-term work receives external recognition UPM in sustainability indices Sustainable and Responsible (SRI) investors form a significant part of UPM s shareholders 3 SRI, % of total institutional shareholders 25 2 15 1 5 UPM Industrials & Materials Europe Source: Nasdaq, October 215 23
UPM Biorefining Pulp is used in products we all use daily 24
UPM Biorefining Market pulp consumed in growing end-uses supply of alternative white fibres declines Global paper and board production Specialty Tissue Market pulp consumption in growing end-uses Cartonboard Stressed supply of white recycled fibre Graphic papers Containerboard Mixed collection crowding out white recycled fibre 25
UPM Biorefining Case: Market pulp consumption in growing end-uses Fibre consumption in tissue, cartonboard and specialty end-uses White integrated pulp White market pulp 1 3 +1.5 5% demand increase in tissue, cartonboard and specialty end-uses Increase in market pulp consumption Other fibres (RCP, mechanical pulps ) 85 Million tonnes Source: Pöyry, Hawkins Wright, UPM 26
UPM Biorefining Case: Stressed supply of white recycled paper 5% fall in global graphic paper production -2 +3 +1-7 Fall in market pulp demand Market pulp to replace fall in white recycled paper supply Net increase in market pulp demand 125 Million tonnes Source: Pöyry, UPM 27
UPM Biorefining Case: Mixed collection crowding out white recycled fibre White RCP grades 75 5%-point increase in mixed collection share Mixed RCP 49 62 +4 Market pulp to replace fall in white recycled paper Old corrugated boxes 135 Million tonnes Source: Pöyry, UPM 28
UPM Biorefining Summary of pulp demand outlook Increase in end use will drive fibre demand in coming decades Mt 6 Mt 6 5 4 3 Decline in Graphic papers Healthy growth in other White Papers & Boards 5 4 3 Growth in Market pulp vs. decline in Integrated pulp Declining White RCP 2 1 21 22 23 Strong growth in Containerboards (brown fibre) 2 1 21 22 23 Demand of Brown fibre may overwhelm the supply Newsprint WF Spec. & other Container-boards WC Tissue & fluff Carton-boards WF: Wood-free graphical papers WC: Wood-containing graphical papers (magazine grades) RCP Brown Non-wood RCP White Market pulp Unbleached pulp Mechanical pulp Integrated pulp Estimated growth of White RCP + Integrated Pulp + Market Pulp is still conservative (~1 Mt/a) Source: UPM, Pöyry, RISI 29
Total Capacity Exits Net Capacity Change UPM Biorefining White fibres in different stages of life-cycle; 64 Mt capacity closed within 2 215 Mt/a, cumulative 4 2-2 2 25 21 215 Mt/a, cumulative -2-4 -6-8 2 25 21 215 Hardwood pulp capacity has experienced strong net growth after 2 and is expected to continue growing. Softwood has faced closures as much as hardwood. New demand in China is turning decline into a slow growth. White RCP was the fastest-growing fibre in Europe and NA in early 199 s. After recession capacity has been in decline due to very high collection rates and diminishing supply of graphic paper. Mechanical pulp continues to decline along with graphic papers. Non-wood pulps consumed mostly in China are under pressure due to environmental reasons. Sulphite has been in decline for decades. Note: Including both market and integrated pulp Source: Pöyry 3
Chemical pulp market Q4 NBSK pulp price remained stable from Q3 Q4 BHKP pulp price decreased 2% from Q3 USD/tonne 1 1 Days of supply 65 Pulp inventories 1 9 NBSK 6 55 5 Hardwood inventories 8 7 BHKP 45 4 6 35 5 4 3 25 2 Softwood inventories 3 28 29 21 211 212 213 214 215 216 217 15 28 29 21 211 212 213 214 215 216 Source: FOEX Indexes Ltd. Source: PPPC World-2 statistics 31
UPM Biorefining Large modern assets allow growth through debottlenecking with high pay-off at low risk Pietarsaari pulp mill expansion 7,t Kymi pulp mill expansion 17,t Kaukas pulp mill efficiency improvement, paper and pulp decoupling completed Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Q4 217 Fray Bentos pulp mill expansion 1,t Capacity increase since 213 more than 5, tonnes with investments of ~ EUR 35m Kymi pulp mill expansion 17,t 32
UPM Biorefining Uruguay could be a competitive alternative time schedule is several years UPM Investment Decision Phase I Phase II Phase III 33
UPM Biorefining UPM Biofuels in existing and future end-use Fuel retail Dedicated green fleets Marine/Aviation 34
UPM Biorefining UPM Biofuels business evolving Technology and Business case proven Commercial start 215 UPM enters Biofuels Investment decision 212 Biocrude concept shaping Evaluate technologies, define business case Build Lappeenranta Biorefinery and Biofuels organization Establish Bioverno as a benchmark product and brand in biofuels Start evaluation of future growth opportunities 21 22 35
UPM Biorefining Significant emission cuts needed in transportation sector EU s greenhouse gas reduction targets cannot be met without significant emission cuts in transport actions needed in all sectors 8% by 25 EU s overall GHG reduction targets 4% by 23 25% of total emissions in Europe from transport Marine 14% Aviation 13% Road transport, heavy-duty 18% Road transport, light-duty 55% Drop-in biofuels are a solution for GHG reduction in all transport sectors Electric vehicles can be applied in light-duty road transport 6% by 24 Transport emissions by sector 36
UPM Biorefining All energy and technology options needed Decarbonizing European transport requires effective use of all energy and technology options renewable drop-in fuels a fast-lane solution GHG reduction gained by projected fuel economy improvement** GHG reduction by high electric vehicle adoption* 1 9 8 7 GHG emissions %, reference year 25 Fossil share in fuel pool 22 mandated biofuel volume 4% reduction in road transport emissions vs. reference year 25 Additional need of sustainable drop-in biofuels by 24 22 225 23 235 24 B7 E1 6 5 4 3 2 1 37 * Calculated based on Global EV sales outlook to 24 by Bloomberg New Energy Finance * Assuming EV s represent 38% of new car sales in Europe by 24 + EV s are fully emission free ** Assuming annual energy efficiency improvement of 2% in light-duty,,5% in heavy-duty
UPM Energy Cost competitive and flexible asset base Power generation breakdown Condensing power Flexible hydro production with optimisation opportunities Nuclear as reliable base load with worldclass availability performance 38
Cost efficient generation enables robust profitability also in challenging market environment MWh 5 Market electricity prices vs UPM sales price 4 3 2 1 212 213 214 215 216 Helsinki Front Year System Front Year UPM average sales price UPM Energy profitability 212 213 214 215 216 Comparable EBIT, EURm 217 186 22 181 116 % of sales 45. 39.9 43.5 43.6 32.7 39
UPM Raflatac Self-adhesive labels in end-use 4
UPM Raflatac Leading position in a growing market The self adhesive labelstock market > EUR 8bn global market ~ 4% p.a. growth Private consumption driven UPM Raflatac market shares EMEIA Americas APAC 15 % 1 % 25 % UPM Raflatac 75 % 85 % 9 % #2 globally Business in 12 countries > 8, customers 3, people in six continents 41
UPM Raflatac Continuing growth 1. Capturing the market growth in the current markets and product areas 2. Increased distribution coverage and customer reach 3. Wider product portfolio 4. M&A when opportunities emerge Enabled by scalable operating platform & efficient investments Tailored marketing Producitivity Single households Reliability Population growth Consumerism Packaged food Ease of use Private consumption Label demand Urbanisation E-commerce Sustainablity Retailing changes Higher standard of living Product safety Differentation Regulation Shelf-appeal 42
UPM Specialty Papers Focus on Labeling materials, Packaging and Office paper in Asia LABELING MATERIAL PACKAGING OFFICE PAPER ASIA 43
UPM Specialty Papers Our end use markets are growing LABELING MATERIAL PACKAGING OFFICE PAPER ASIA CASE: Siliconized release liner market, 44 Bn m 2 44 6 CAGR 5% 9% 3% Paper flexpack, k tonnes 2 37 2 72 CAGR 2% 5% % Asian cut size market, million tonnes 5.2 4 6 OTH AUS SEA KOR JPN CAGR 2.5% 6% -2% 3% 1%.6% -,5% 214 22E 2.5% 4% 4% 215 22E 3% 2% CHN 215 22E 5% ~$12 Bn ~$4 Bn ~$58 Bn Mkt value 44 Asia North America Europe South America MEA
UPM Specialty Papers Global release liner market: Applications Medical 3 % Graphic film 5 % Food & bakery 5 % Envelope 2 % Others 3 % Hyiene 9 % 45.9 Bn m 2 Label 49 % Product functions: Release liner carries the adhesive and face material Prevents the adhesive from sticking permanently Important and often critical feature of a layered construction Industrial 11 % Tapes 13 % Source: AWA 45
UPM Specialty Papers Changshu mill: focus on growing end uses with a flexible swing production line Illustration: UPM Changshu Mill Quarterly Capacity Business plan 35 1, tons Accelerate growth of glassine 3 25 WFU spec Glassine WFC WFU spec Glassine Invest in the development of specialty grades end-use segments in packaging 2 15 WFU graphic WFU graphic WFC Service existing long-term customers with graphic paper grades (WFU and WFC) 1 Cut size Cut size 215 216 217 218 219 22 Continue to grow in the quality copy paper segment primarily in China 46 WFU: wood free uncoated WFC: wood free coated Source: UPM
UPM Paper ENA Paper demand by end use different trends Million tonnes 2 Mt 6 Mt Book & Directories Home & Office Historically Home & Office end-use has been the most resilient to structural changes Despite the digital alternatives personal preferences (way of working and learning), regulation (archiving) and lack of common standards have mitigated the change 1 Mt Direct marketing A moderate decline has taken place in Direct marketing end-use Paper based marketing is still recognized to be the most effective medium for retailers and cataloguers 7 Mt Magazine publishing Steady decline in Magazine Publishing circulation and pagination, however number of titles increasing Publishers still rely heavily on the revenues from print 6 Mt Newspaper publishing Newspaper publishing being historically the most vulnerable to structural changes but remarkable differences between countries Source: Euro-Graph Monetizing digital circulation for Magazines and Newspapers continue to be challenging 47
UPM Paper ENA What does it take to perform in challenging markets? 1 Assets 2 Sales 3 Cost base 4 Cash flow stringent capacity management profound customerand market understanding smart initiatives in push mode performance management and discipline 48
Demand-supply balance in European graphic paper is visible in margins EUR/t Price Cash cost of a marginal producer 24 25 26 27 28 29 21 211 212 213 214 215 216 Sources: PPI, RISI, Pöyry 49
UPM Plywood UPM Plywood in end-use Construction Vehicle flooring LNG shipbuilding 5
UPM Plywood Relevant high-end market offers meaningful growth potential Low-end markets EMEA market 12 Mm 3 Relevant market ~5 million m 3 High-end demanding applications & customers Medium range standard products EMEA region Global LNG business Europe is net importer of plywood Global plywood market ~84 Mm 3 Imports focus mainly on standard products in mid-low ranges Non-footprint markets Source: FEIC; FAOSTAT; UPM 51
UPM Plywood Selected focus end-uses provide further growth potential Share of sales The recovery of the European construction sector is driving demand (annual growth 2 3% p.a.) Industrial applications Building and constructio n end-uses The financial crisis created a backlog for trailers driving the current replacement need (average growth 4% p.a.) The LNG market is expected to remain solid as countries secure energy availability, thereby supporting the demand for LNG vessels (existing orderbook for plywood based LNGC ~9 vessels) 52 Sources: Euroconstruct, West European trailer registrations for Big 7 Countries (1985 216), LNG World Shipping
New business opportunities for UPM Biochemicals Biofuels Biorefinery Chemicals Biofibrils Lignin Biocomposites High volume products Economies of scale Drop-in applications Auxiliary for pharma R&D Industrial Applications Performance chemical New applications New material End-user product 1 kt renewable diesel Market entry 2 prod. sites 53
New separation technologies ensure best overall value capture Wood-to-Sugar-Process Sugar-to-Chemical-Process Glucose Chemical A Woody Biomass Xylose Chemical B Lignin 54
Petrochemical feedstocks Partial overlap with fossil-based value chains in chemicals Feedstocks Key Intermediates Chemical Building Blocks Final products Oil C1: Syngas C2: Ethylene Refinery C3: Propylene Gas Cracker Coal-toolefins C4: Butadiene C6: Benzene 6 Mtons Coal C7: Toluene C8: Xylene Biomass C5 Xylose C6 Glucose 1 Mtons 55