UPM corporate presentation Balance between supply and demand 2011-2014 SHB Materials Seminar Jussi Vanhanen President, Engineered Materials Business Group 10 March, 2011
Contents UPM's strategy and financials Paper markets Pulp markets Label markets Summary
STRATEGY AND FINANCIALS Restructuring has been a prerequisite for improved profitability and UPM s renewal 1996-2003 2004-2010 2009- Growth & Internationalisation Restructuring & securing the platform UPM renewal Acquisitions - Europe - North America - China Greenfield investments First biomass boilers Restructuring - Mill closures - Cost cutting - Internal efficiency Platform building - Divestments - Greenfield investments Biofore vision Market driven organization Acquisitions - Uruguay - Myllykoski Opportunities and priorities - Biofuels - Changshu paper mill expansion - Expansion in chemical pulp - Investments in European cost efficiency - OL4 - Product renewal
STRATEGY AND FINANCIALS Heading there % of sales Operating profit excluding special items 16 14 14,1 12 Target over 10% 10 8 6 4 9,2 4,4 4,8 6,0 7,2 8,3 5,4 3,5 8,2 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 4 UPM
STRATEGY AND FINANCIALS Longer perspective cash flow over a full cycle million Cash flow, trailing 12 months 1 400 1 200 Operating cash flow 1 000 982m 800 741m 600 400 200 0-200 5 UPM Q104 Q204 Q304 Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Cash flow after capex ( * Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 * ) excluding acquisitions and divestments
STRATEGY AND FINANCIALS UPM's asset base provided strong cash flow through the recession Net debt, million 5 500 Net debt / EBITDA (trailing 12 months) 4,5 Net debt, million Gearing % 5 500 90 5 000 4 500 Net debt / EBITDA 3.5 4,0 3,5 5 000 4 500 Gearing 80 70 4 000 3,0 4 000 56 60 3 500 2,5 2.4 3 500 50 46 3 000 Net debt 2,0 3 000 Net debt 40 2 500 1,5 2 500 30 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 6 UPM
STRATEGY AND FINANCIALS Modern assets mean low investment needs on existing capacity million 1 000 800 600 Capital expenditure and estimate for 2011 Estimate 720 Low operational capex requirements Large scale pulp mills and paper machines Modern machines require less maintenance than old 400 200 0 7 UPM 05 06 07 08 09 10 11e Depreciation excl. amortization of goodwill 257 300 ( * Strategic investments Operational investments Uruguay and PVO acquisitions Few must-do investments No pulp mill rebuilds UPM capex is discretionary * ) excluding acquisitions
Outlook for 2011 ( * Guidance for operating profit excluding special items - 2011 to improve from 2010 - H1 2011 to improve clearly from H1 2010 Variable cost inflation expected to moderate from 2010 Business area drivers for 2011 vs. 2010 2011 vs. 2010 Prices Deliveries Energy Pulp Sawn timber Paper Label Plywood UPM average 8 UPM ( * See complete wording of the "Outlook" in the Financial Review 2010
MYLLYKOSKI ACQUISITION
MYLLYKOSKI ACQUISITION UPM acquires Myllykoski UPM has signed an agreement to acquire Myllykoski Corporation and Rhein Papier GmbH Enterprise value EUR 900 million Financing - UPM issues 5 million shares - UPM raises bank loans of EUR 800m The agreement subject to customary closing conditions, incl. approvals from competition authorities expected to close in the Q3 2011 Main rationale is to improve profitability and cost efficiency in UPM European paper business 10 UPM All figures apart from the number of shares are approximates
MYLLYKOSKI ACQUISITION Summary of the financial impacts Earnings impact Estimated annual synergies over EUR 100 million materialising from 2012 Cash flow enhancing immediately after closing Earnings per share enhancing in 2012 Other UPM will book a one-off gain of approximately EUR 300 million Estimated restructuring costs and investments total EUR 100-150m Balance sheet impact Net debt increases by approximately EUR 800 million Gearing estimated to increase by 8 percentage points Group's assets increase by about EUR 1.6 billion 11 UPM
MYLLYKOSKI ACQUISITION Paper operations to be acquired Mills Grade Cap. 1,000 t Personnel Q3/2010 Myllykoski Paper LWC, SC 600 469 MD Albbruck MWC/LWC 320 544 Lang Paper News, SC 600 413 MD Plattling LWC 400 387 Madison Paper SC 220 229 Plattling Papier (RP) SC 380 114 Hûrth (RP) News 310 102 North America Madison TOTAL 2,830 2,600 *) Myllykoski Paper Source: Myllykoski * ) incl. non-mill personnel Invested recently over EUR 700m on new capacity Plattling PM 1 (2007); 380,000 t/a of SC paper Hürth (2002); 310,000 t/a of newsprint Rhein Papier Albbruck Lang Plattling UPM mills Myllykoski mills 12 UPM
MYLLYKOSKI ACQUISITION Achieve sustainable cost structure through consolidation Price Transaction Margin squeeze Declining real price trend needed for print media competitiveness Costs Sustainable profitability Restructuring costs and investments to gain synergies Continuous potential for cost savings in a large production portfolio 13 UPM
PAPER MARKETS
PAPER Graphic papers demand improved in all regions in 2010 '000 tonnes 70 000 Europe North America '000 tonnes '000 tonnes 70 000 70 000 Asia 65 000 65 000 65 000 +3% 60 000 60 000 60 000 5% 55 000-1% 55 000 55 000 50 000 50 000 50 000 45 000 40 000 35 000 4% 45 000 40 000 35 000-7% 45 000 40 000 35 000 30 000 30 000 2% 30 000 25 000 2004 2005 2006 2007 2008 2009 2010e 25 000 2004 2005 2006 2007 2008 2009 2010e 25 000 2004 2005 2006 2007 2008 2009 2010e W. Eur demand E. Eur demand Capacity NA demand Capacity Asia demand Capacity Source: Cepiprint, Cepifine, PPPC, PPI 15 UPM
PAPER Graphic papers demand is shifting to growth markets million tons 150 1990-2010 CAGR 2.0% p.a. 2011-2020 CAGR 0.6% p.a. 150 100 5% 9% 0% Others China Japan 3% 4% 100 50-1% North America -2% -3% 50 2% Europe -1% 0 '90 '95 '00 '05 '10e '15e '20e 0 Source: JP, PPPC, RISI, BCG, UPM 16 UPMU
PAPER Graphic papers 1) trade flow changes 2006-2010 net exports from Europe are declining 50 40 36 2006 -> 2010p 3.4 -> 2.6 38 2006 -> 2010p 0.3 -> 0.5 66 61 Net exports Europe 2.7 -> 1.8 Net exports Europe 3.3 -> 3.2 0.7 -> 0.8 3.6 -> 3.7 N. America & L. America Capacity 158 mill. tons Demand 137 mill. tons 1) Maga, News and Fine grades 2) Excl. WFU special Europe 2) 2006 -> 2010p 1.3 -> 1.6 N. America Net exports 0.1 -> 0.6 1.2 -> 1.0 2 3 Africa Asia & Oceania Source: Cepiprint, PPPC, RISI, JP, UPM 17 UPM
PAPER Net capacity reduction by company 6.6 million tonnes (12%) in Europe in 2005 2011e Stora Enso M-Real UPM Norske Skog Sappi Mat. & Forest Int. Paper AbitibiBowater Burgo Arctic Paper PSM Paperalia S.A. Holmen P. de Voiron/Vertaris Myllykoski Perlen Papier Palm Group Portucel Others UPM has closed 1.8m tonnes in total, including North America + Source: Pöyry, UPM, public sources 18 UPM -2000-1500 -1000-500 0 500 1000 net changes '000 tons decided changes included
PAPER UPM has completed major restructuring in 2006-2009 person 18 000 Personnel in Paper business area tons/ person 1000 Capacity and deliveries per employee 17 000 16 000 Closed units -2 300 900 15 000 Deliveries per employee 14 000 800 13 000 12 000 700 11 000 10 000 9 000 Continuing operations -2 800 (-20%) 600 Capacity per employee 8 000 2003 2004 2005 2006 2007 2008 2009 2010 500 2003 2004 2005 2006 2007 2008 2009 2010 19 UPM Note: no significant outsourcing
PAPER Fibre prices squeezing paper makers' margins WFU / LWC /ton 950 Hardwood pulp (BHKP) /ton Newsprint /ton RCP (ONP) /ton 800 600 200 850 BHKP 700 550 Newsprint 150 WFU 750 600 LWC 500 100 650 500 RCP 550 400 450 50 450 300 400 0 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 WFU LWC PIX BHKP News 45 g/m² RCP Source: FOEX Indexes Ltd., PPI, RISI 20 UPM
PAPER UPM's paper prices in 2011 UPM has increased paper prices in the beginning of 2011. Examples in Europe: - Magazine papers about + 5-8% - Newsprint about + 20% - Fine and speciality papers no material changes The average price for UPM's paper deliveries is expected to increase by about 6% in the beginning of the year from Q4 2010 Publication paper prices return broadly to 2009 level Raw material costs have increased substantially from 2009 21 UPM
PULP MARKETS 22 UPM
PULP Chemical pulp demand is growing driven by various end-uses 000 tonnes 70 000 60 000 Market pulp demand development 2003-2014 Forecast Packaging Other Publication Papers 50 000 40 000 Fine Papers, mature markets 30 000 20 000 Tissue 10 000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e BHKP BSKP UKP Sulphite Fine Papers, growth markets Source: PPPC, Pöyry, UPM 23 UPM
PULP Capacity growth is focused on regions with increasing wood availability and cost efficient plantation operations 8 000 Chemical market pulp capacity growth by region 2.4% 2009-2014 '000 tonnes 6 000 4.7% 4 000 2 000 4.3% 1.2% 1.8% 0.2% 0 Total Source: PPPC 24 UPM Latin Asia North Eastern Western America America Europe Europe Wood availability Increasing Stable / decreasing Source: Pöyry
PULP UPM s cost competitive pulp capacity 3.2 million tons is produced at four modern mills /t 750 650 Market pulp producers' delivered cash costs to Frankfurt, EUR/t UPM Finland UPM Uruguay Metsä-Botnia Finland 550 450 350 Increased share of plantation based pulp 250 150 World softwood market pulp World hardwood market pulp 0 10 000 20 000 30 000 40 000 50 000 60 000 Source: Pöyry estimate Q4/2010 25 UPM Cumulative capacity, 1000 t/a
LABEL MARKETS
LABEL Development from cost cutting to renewal provides long-term profitability for Label 2010 2009-10 2000-08 Growth through large scale investments Changshu, Dixon, Wroclaw Cost cutting for sustainable profitability LAB ~450 employees Focus on renewal but maintaining cost efficiency Special products, investments in emerging markets 27 UPM 27
LABEL Labelstock is a ~6 bn EUR growing business globally, UPM has the #2 position in most markets 2001-2010 annual growth estimations: US & Canada Western Europe ~2% ~3% Eastern Europe Japan & Korea Greater China 1-2% 12-15% UPM Raflatac Avery Dennison Other main competitor Other competitors Latin America 7-9% Sub-Saharan Africa 3-5% South of Asia 15-20% South East Asia 10-12% Oceania 2-4% Sources: UPM Raflatac estimates, FINAT, TLMI 28 UPM Asia including only high & medium quality segment
LABEL Mastering product complexity deriving out of customers' specialized needs is key to a profitable labelstock operation MENU: Customer chooses face/adhesive/backing combinations Standard END-USE: Products for specific end-use needs, e.g. pharma, security Specials TAILORED: Products engineered or modified for customer's specific needs Volume Added value # of products # of products 29 UPM
SUMMARY 30 UPM
Summary UPM is committed to real profitability and cost efficiency improvement Strong cash flow and balance sheet give means to realise growth opportunities in the future UPM is leading paper consolidation in Europe enables efficiency improvement and sustainable cost structure UPM is well positioned to benefit from growing chemical pulp and label markets 31 UPM
Vision UPM The Biofore Company As the frontrunner of the new forest industry UPM leads the integration of bio and forest industries into a new, sustainable and innovation-driven future. We reshape markets through cost leadership, change readiness and leading innovation. Purpose We create value from renewable and recyclable materials by combining expertise and technologies within fiber based, energy-related and engineered materials businesses. 32 UPM
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