UPM THE BIOFORE COMPANY Investor presentation February 218
UPM today UPM BIOREFINING Pulp Biofuels Timber UPM ENERGY Electricity generation and trading UPM RAFLATAC Label materials for product and information labelling UPM SPECIALTY PAPERS Label papers, release liners, office papers and flexible packaging UPM PAPER ENA Magazine papers, newsprint and fine papers UPM PLYWOOD Plywood and veneer products UPM BIOCHEMICALS UPM BIOCOMPOSITES WOOD SOURCING AND FORESTRY 2 UPM
Global businesses local presence 13% North America UPM s sales by market 217 EUR 1,1 million 62% Europe 2% Asia 54 production plants in 12 countries 12, customers in 12 countries 89, shareholders in 35 countries 5% Rest of the world 19,1 employees in 45 countries 25, b-to-b suppliers in 75 countries 3 UPM
UPM in transformation 28 vertically integrated paper company 217 six separate businesses Operating 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 1.bn EUR 1,292m 11.9% Business performance Continuous improvement in financial, social and environmental performance Net debt Market cap EUR 4.3bn EUR 4.7bn EUR.2bn EUR 13.8bn Disciplined capital allocation Driving value creation *) excluding special items for 28, comparable figures for 217 4 UPM
UPM business portfolio today *) Competitive businesses with strong market positions Operating on healthily growing markets 5 UPM UPM PLYWOOD Plywood, veneer ~3% UPM PAPER ENA Graphic papers ~ 4% UPM Specialty Papers Label papers ~4% High-end office papers ~4% UPM RAFLATAC Self-adhesive labels ~4% UPM ENERGY Electricity ~1% Growth drivers: Private consumption Sustainability Population growth Urbanisation E-commerce Construction Transportation UPM BIOREFINING Pulp ~3% Biofuels strong Timber ~2% *) by comparable EBIT 217 Demand trend growth, % pa
CAPACITY CLOSURES AND DIVESTMENTS FOCUSED INVESTMENTS Increasing share of businesses with strong long-term fundamentals for profitability and growth Sales 217 1 Sustainable growth UPM Biorefining Pulp +7, t Pulp +1, t Pulp +17, t Pulp mill efficiency improvement Pulp +17, t Specialty labels expansion 75 UPM Raflatac Label stock expansions Renewable diesel +12m litres Specialty papers +36, t Plywood Label stock +4, m 3 expansions Specialty papers +4, t Pulp +3, t 5 UPM Specialty Papers UPM Plywood UPM Energy 13 14 15 16 17 18 19 Plywood +45, m 3 25 Maintaining strong cash flow UPM Paper ENA 42, t magazine 16, t fine 46, t magazine 345, t news 195, t magazine 28, t news 35, t magazine Hydropower 128, t magazine 6 UPM
Value creation through sustainable growth and cash generation 1 Sales 217 EURm 1 2 Comparable EBIT, growing businesses combined % of sales 2 75 5 UPM Biorefining UPM Raflatac UPM Specialty Papers UPM Plywood 1 15 8 1 6 5 UPM Energy 4 213 214 215 216 217 Sustainable growth Commercial success Cost competitiveness Attractive growth investments Product mix development 25 UPM Paper ENA EURm 6 4 2 Operating cash flow, UPM Paper ENA Strong cash flow Commercial success Cost competitiveness Efficient use of assets 7 UPM 213 214 215 216 217
UPM current investment portfolio for earnings growth Focused growth projects Completed in Q4/17 Kymi pulp mill expansion, Finland Raflatac expansion, Poland Construction stage Kaukas pulp mill expansion, Finland Raflatac expansion, Finland Jämsänkoski label papers expansion, Finland Chudovo plywood mill expansion, Russia Feasibility study Nordland PM2 conversion from fine papers to label papers, Germany Transformative prospects Possible new pulp mill, Uruguay UPM and the Government of Uruguay signed an agreement on local prerequisites for a possible new pulp mill. Infrastructure projects and the preengineering of the mill in progress. Biomolecules businesses Basic engineering study started regarding a potential industrial-scale biochemicals refinery, Germany Exploring next steps in biofuels 8 UPM
Focused investments are delivering growth Sales 217 1% UPM Biorefining Pulp CAGR +3% Biofuels New business 75% Average delivery growth 213 217 UPM Raflatac UPM Specialty Papers Standard paper labels CAGR +5% Films and specials CAGR +7% Label materials CAGR +15% Cut-size CAGR +6% 5% UPM Plywood Plywood CAGR +2% 25% % 9 UPM
Business area long-term targets compared with realised returns 3 28 26 24 22 2 18 16 14 12 1 8 6 4 2 UPM Energy ROCE % * ) 3 28 26 24 22 2 18 16 14 12 1 8 6 4 2 UPM Biorefining ROCE % UPM Specialty Papers 3 ROCE % 28 26 24 22 2 18 16 14 12 1 8 6 4 2 3 28 26 24 22 2 18 16 14 12 1 8 6 4 2 UPM Paper ENA FCF/CE % 3 28 26 24 22 2 18 16 14 12 1 8 6 4 2 UPM Plywood ROCE % 3 28 26 24 22 2 18 16 14 12 1 8 6 4 2 UPM Raflatac ROCE % * ) shareholdings in UPM Energy valued at fair value Long-term return target 1 UPM
Group financial performance EURm 1 4 Comparable EBIT % Comparable ROE 14 Net debt EURm 4 5 Net debt and leverage Net debt/ EBITDA (x) 3, 1 2 Target: EBIT growth 12 Target: 1% 3 75 2,5 1 8 1 8 3 Policy: 2x 2, 2 25 1,5 6 6 4 4 1 5 1, 2 2 75,5 211 212 213 214 215 216 217 211 212 213 214 215 216 217 211 212 213 214 215 216 217, 11 UPM Comparable figures for 214 217, excluding special items for earlier years
5-year cumulative cash flow (213-217) disciplined capital allocation in action 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 12 UPM
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 13 UPM ( * This is not a forecast
Strong cash flow and balance sheet EURm 1 8 1 6 1 4 1 2 1 Free cash flow Operating cash flow 1,558 Net debt EURm 3 5 3 2 5 2 Net debt Net debt / EBITDA (trailing12 months) 3,5 3, 2,5 Net debt / EBITDA 2, 8 1 5 1,5 6 4 2 Operating cash flow 212 213 214 215 216 217 1 5 1, 174 Net debt,5.11x, 212 213 214 215 216 217 14 UPM
Dividend proposal: 21% increase EUR per share 1,4 1,2 1,,8,6,4,2 % of operating cash flow per share 7 6 5 4 3 2 1 Dividend policy UPM aims to pay an attractive dividend, 3 4% of operating cash flow per share Dividend proposal for 217 EUR 1.15 (.95) per share, totalling EUR 613m 39% of 217 operating cash flow, 212 213 214 215 216 217 15 UPM
Low investment needs in existing assets allow growth projects with modest total capex EURm 1 2 1 8 6 4 Uruguay acquisition Capital expenditure Myllykoski acquisition Strategic investments Depreciation 33 Estimate 35 Focused growth investments Good returns and fast payback Low implementation risk Financed from operating cash flow Low replacement investments Asset quality in 486 all businesses, e.g. large competitive pulp mills UPM Paper ENA 2 Operational investments 29 21 211 212 213 214 215 216 217218E Modest total capex and attractive returns 16 UPM
Q4 217 Excellent finish to the record-strong year 217 Comparable EBIT increased by 29% to EUR 366m (283m) EURm 4 Comparable EBIT 366 Operating cash flow was EUR 47m (45m) Net debt decreased to EUR 174m (1,131m) 35 3 283 Agreement with the Government of Uruguay on local prerequisites for a possible pulp mill Started basic engineering study of a possible biochemicals refinery 25 2 15 Announced focused growth projects in Plywood and Specialty Papers 1 5 Kymi pulp mill expansion and the Raflatac expansion in Poland were completed 17 UPM
Q4 217 Strong market environment UPM BIOREFINING Good demand, pulp deliveries +6%, strong growth in biofuels Pulp prices higher UPM Kymi pulp mill investment shutdown UPM SPECIALTY PAPERS Good demand, deliveries flat Significant progress in product mix, higher release liner deliveries Input cost increases mitigated UPM PAPER ENA Graphic paper deliveries -4% Newsprint contract manufacturing at the Schwedt mill ended Fibre costs higher UPM RAFLATAC Good demand globally, deliveries +6% driven in particular by developing markets Input cost increases impacted sales margins UPM ENERGY Electricity deliveries +4% Hydropower generation increased above normal level UPM PLYWOOD Good demand, deliveries +11% Modest input cost increases impacted sales margins 18 UPM
Comparable EBIT by business area EURm 18 UPM Biorefining % of sales 3 EURm 12 UPM Energy % of sales 6 EURm 12 UPM Paper ENA % of sales 12 15 25 1 5 1 1 12 2 8 4 8 8 9 15 6 3 6 6 6 1 4 2 4 4 3 5 2 1 2 2-2 -2 EURm 5 UPM Specialty Papers % of sales EURm UPM Raflatac % of sales 12,5 5 12,5 EURm 25 UPM Plywood % of sales 2 4 1 4 1 2 16 3 7,5 3 7,5 15 12 2 5 2 5 1 8 1 2,5 1 2,5 5 4 19 UPM
Comparable EBIT in Q4 217 vs. Q4 216 EURm 5 45 4 35 3 25 2 15 1 5 Prices increased more than variable costs. Growth in deliveries. Less maintenance. Currencies had a negative impact. 283 11.4% Prices Deliveries Fixed costs Variable costs Currency, net impact Depr., forests, plantations 366 14.2% EURm Pulp prices and deliveries increased in Biorefining. Good deliveries and successfully offset input cost increases in other businesses. 5 45 4 35 3 25 2 15 1 5 283 11.4% Biorefining Energy Raflatac Specialty Papers Paper ENA Plywood Other operations and eliminations 366 14.2% Q4/16 Q4/17 Q4/16 Q4/17 2 UPM
Outlook for 218 21 UPM UPM reached record earnings in 217. Fundamentals for UPM businesses in 218 continue to be favourable. Healthy demand growth is expected to continue for most of UPM s businesses in 218, while modest demand decline is expected to continue for UPM Paper ENA. Sales prices are expected to increase in most of UPM s businesses, compared with 217. Input costs are expected to continue increasing in 218, compared with 217. UPM will continue measures to reduce fixed and variable costs to mitigate this. 218 starts with less favourable currencies than 217. Q1 218 results are expected to be impacted by temporary wood harvesting limitations in Northern Europe caused by unusually warm and wet weather in late 217 and the beginning of 218.
Sustainable and safe solutions for growing global consumer demand 23 22 Limitless opportunities of bioeconomy Responsible operations and value chain Innovation Circular economy High performing people Sustainable forestry UPM
Creating competitive advantage and long-term value by engagement Per million hours Safety Index Employee engagement EUR million Productivity 25 9,6 2 15 1 5 Lost-time accident frequency 8 7 6 5 4 Manager effectiveness Employee engagement,55,5,45,4,35,3,25 Sales per employee 3,2 5-year change: 37% 5-year change: +8 5-year CAGR: +2% pa 23 UPM
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 3% Per tonne of paper SO 2 emission 9% Per tonne of paper Waste to landfill 6% Per tonne of paper Certified fibre 85% In 215 215 compared to 25 Source: UPM 24 UPM
Consistent long-term work receives external recognition UPM in sustainability indices Sustainable and Responsible (SRI) investors form a significant part of UPM s shareholders SRI, % of total institutional shareholders CDP s Climate Change Program: A- score 16 14 12 1 8 6 4 2 UPM Industrials & Materials Europe 25 UPM Source: Nasdaq, October 217
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 26 UPM
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 5% demand increase in tissue, cartonboard and specialty end-uses +1.5 Increase in market pulp consumption Other fibres (RCP, mechanical pulps ) 85 Million tonnes Source: Pöyry, Hawkins Wright, UPM 27 UPM
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 28 UPM
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 29 UPM
UPM Biorefining Summary of pulp demand outlook Increase in end use will drive fibre demand in coming decades Mt 6 Mt 6 5 4 Decline in Graphic papers 5 4 Growth in Market pulp vs. decline in Integrated pulp 3 Healthy growth in other White Papers & Boards 3 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) Market pulp RCP White Non-wood RCP Brown Integrated pulp Mechanical pulp Unbleached pulp Estimated growth of White RCP + Integrated Pulp + Market Pulp is still conservative (~1 Mt/a) Source: UPM, Pöyry, RISI 3 UPM
UPM Biorefining White fibres in different stages of life-cycle; 64 Mt capacity closed within 2 215 31 UPM
UPM Biorefining Demand-supply drivers of pulp market 32 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 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
UPM Biorefining Chemical pulp market prices EUR/tonne 9 Pulp market prices, EUR USD/tonne 11 Pulp market prices, USD 8 1 9 7 8 6 7 5 6 5 4 4 3 3 BHKP, Europe, EUR BHKP, China, EUR NBSK, Europe, EUR NBSK, China, EUR BHKP, Europe BHKP, China NBSK, Europe NBSK, China 33 UPM Sources: FOEX Indexes Ltd, ECB
Potential pulp mill in Uruguay could be a competitive alternative time schedule is several years The ongoing second preparation phase is expected to take 1.5 2 years Investment Agreement signed Potential UPM Investment Decision Phase I Phase II Phase III 34 UPM
Establishing a competitive operating platform in Uruguay Current operations Uruguay prospect 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 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 35 UPM
UPM Biorefining UPM Biofuels in existing and future end-use Fuel retail Dedicated green fleets Marine/Aviation 36 UPM
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 37 UPM
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 38 UPM
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 39 UPM
UPM Energy UPM Energy power generation assets UPM Energy s power generation MW EURm Hydropower holdings 565 723 Nuclear power OL1 and OL2 58 1,31 Nuclear power OL3 under construction (5) 178 Condensing power 19 8 Illustration Cost of sourced electricity from shareholdings UPM Energy s shareholdings in total, valued at fair value 1,335 1,94 UPM own hydropower assets 16 UPM Energy s in total (excl. OL3) 1,495 UPM Energy capital employed 2,267 In addition to its own power generation, UPM Energy sources electricity from part owned energy companies at full cost (cost-price principle) Sales Opex Depreciation Interest and Contribution to finance costs EBITDA from shareholdings EBITDA from UPM ow n hydropow er assets UPM Energy EBITDA 4 UPM
UPM Energy Cost efficient generation enables robust profitability in challenging market environment MWh Market electricity prices vs UPM sales price 5 4 3 2 1 212 213 214 215 216 217 Helsinki Front Year System Front Year UPM average sales price UPM Energy profitability 212 213 214 215 216 217 Comparable EBIT, EURm 217 186 22 181 116 91 % of sales 45. 39.9 43.5 43.6 32.7 28.8 41 UPM
UPM Raflatac Self-adhesive labels in end-use PHARMACEUTICALS WINE, SPIRITS & CRAFT BEVERAGE FOOD HOME & PERSONAL CARE DURABLES TRANSPORT & LOGISTICS RETAIL, OIL & INDUSTRIAL A4 & CUT-SIZE SECURITY & BRAND PROTECTION TYRE 42 UPM
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 25 % Americas 15 % APAC 1 % UPM Raflatac 75 % 85 % 9 % #2 globally Business in 12 countries > 8, customers 3, people in six continents 43 UPM
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 Population growth Productivity Single households Reliability Consumerism Packaged food Private consumption Label demand Urbanisation E-commerce Sustainability Differentiation Retailing changes Regulation Shelf-appeal Higher standard of living Product safety Ease of use 44 UPM
UPM Specialty Papers Focus on global Labelling materials, Packaging in Europe and Office paper in APAC LABELLING MATERIAL PACKAGING OFFICE PAPER APAC 45 UPM
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% 214 22E 2.5% 4% 4% 215 22E -,5% 3% 2% CHN 215 22E 5% ~$12 Bn ~$4 Bn ~$58 Bn Mkt value Asia North America Europe South America MEA 46 UPM
UPM Specialty Papers Global release liner market: Applications Medical 3 % Graphic film 5 % Food & bakery 5 % Envelope 2 % Others 3 % Hygiene 9 % Industrial 11 % 48.6 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 Tapes 13 % 47 UPM Source: AWA
UPM Paper ENA Paper demand by end use different trends 32 Mt Europe 216 28 1 Mt 24 6 Mt 2 11 Mt 16 12 8 6 Mt 4 6 Mt Source: Euro-Graph, UPM 48 UPM Book & Directories Home & Office Direct marketing Magazine publishing Newspaper publishing 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. So far only a moderate decline has taken place in Direct marketing end use. Paper based marketing still forming a big part of retailers advertising budget. Steady decline in Magazine Publishing end use in the recent history. Publishers still rely heavily on the revenues from print. Digital revenues accelerating, but mostly from digital advertising. Monetizing digital circulation has been challenging. Newspaper publishing being historically the most vulnerable to structural changes but remarkable differences between countries. Digital revenues continue to grow, but still represent a small part of overall newspaper revenue.
UPM Paper ENA Paper price vs. cash cost of marginal cost producer EUR/t Price Cash cost of a marginal producer 24 25 26 27 28 29 21 211 212 213 214 215 216 217 49 UPM Sources: PPI, RISI, Pöyry
Graphic paper prices EUR/t 1 Europe USD/t 11 North America USD/t 12 China 9 1 11 8 9 1 9 7 8 8 6 7 7 5 6 6 4 5 5 News SC LWC WFC WFU News SC LWC WFC WFU WFC r (1% chemical pulp) Uncoated Woodfree Reels (1% chemical pulp) Sources: PPI, RISI 5 UPM
UPM Plywood UPM Plywood in end-use Construction Vehicle flooring LNG shipbuilding 51 UPM
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 Global plywood market ~84 Mm 3 Europe is net importer of plywood Imports focus mainly on standard products in mid-low ranges Non-footprint markets Source: FEIC; FAOSTAT; UPM 52 UPM
EVOLUTION OF WOOD USAGE Biofuels and biochemicals are natural evolutionary steps in wood based value creation BIOMOLECULE Biofuels Biochemicals FIBER Pulp, Paper and Packaging Label Biocomposite LOG Sawn goods Plywood 53 UPM TREE PUU Energy
Biochemicals biorefinery targeting to produce bio- MEG, bio-mpg and lignin from hardwood BIOREFINERY PROCESS 4% Cellulose STEP 1: SUGAR PULPING Disintegrating wood into sugars, lignin and green energy STEP 2: CHEMICAL CONVERSION Conversion of sugars into targeted biochemicals Bio-Monoethylene glycol (MEG) 3% Hemicellulose BIOMASS 2 % SUGARS Bio-Monopropylene glycol (MPG) 25% Lignin Lignin GREEN ENERGY 54 UPM
Biochemicals products are sustainable and competitive drop-in alternatives for brand owners bmeg Mono Ethylene Glycol Existing fossil-based market Market demand > 26 mio tons CAGR >3% Application examples: bmpg Mono Propylene Glycol Existing fossil-based market Market demand >2 mio tons Monopropylene glycol CAGR >5% Application examples: Lignin Performance chemical Application driven Monopropylene glycol Strong IP position Application examples: Textiles Composites Wood resins Bottles & Packaging Pharma & Cosmetics Plastics Deicing fluids Detergents Foams & Coatings 55 UPM