UPM THE BIOFORE COMPANY Investor presentation July 217
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 BIOCOMPOSITES UPM BIOCHEMICALS WOOD SOURCING AND FORESTRY 2 UPM
Global businesses local presence 13% North America UPM s sales by market 216 EUR 9,812 million 63% Europe 18% Asia 54 production plants in 12 countries 12, customers in 12 countries 85, shareholders in 4 countries 6% Rest of the world 19,3 employees in 45 countries 55, suppliers in 7 countries 3 UPM
UPM in transformation 28 vertically integrated paper company 216 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 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 4 UPM
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 5 UPM UPM Specialty Papers Label papers ~4% High-end office papers ~4% UPM ENERGY Electricity ~1% UPM RAFLATAC Self-adhesive labels ~4% UPM BIOREFINING Pulp ~3% Biofuels strong Timber ~2% By comparable EBIT 216 Demand trend growth, % pa
Increasing share of businesses with strong longterm fundamentals for profitability and growth Sales 216 1% 75% Sustainable growth UPM Biorefining UPM Raflatac UPM Specialty Papers UPM Plywood UPM Energy FOCUSED INVESTMENTS Pulp +7, t Pulp +1, t Pulp +17, t Label stock expansions Renewable diesel +12m litres Specialty papers +36, t Pulp mill efficiency improvement Plywood +4, m 3 Pulp +17, t Label stock expansion Specialty labels expansion Pulp +3, t 5% 25% Maintaining strong cash flow UPM Paper ENA CAPACITY CLOSURES AND DIVESTMENTS 13 14 15 16 17 18 42, t magazine 16, t fine 46, t magazine 28, t news 345, t news 195, t magazine 35, t magazine % 6 UPM
Value creation through sustainable growth and cash generation 1% Sales 216 EURm 1 Comparable EBIT % of sales 2 75% 5% UPM Biorefining UPM Raflatac UPM Specialty Papers UPM Plywood UPM Energy 8 6 4 213 214 215 216 LTM 16 12 8 Sustainable growth Commercial success Cost efficiency Focused growth investments Product mix development 25% UPM Paper ENA EURm 6 4 2 Operating cash flow Maintain strong cash flow Commercial success Cost efficiency Efficient use of assets, including restructuring % 7 UPM 213 214 215 216 LTM
Serving the increasing customer demand with the focused growth projects 8 UPM Fully contributing Pietarsaari pulp mill expansion Fray Bentos pulp mill expansion Kymi pulp mill expansion Raflatac expansion in APAC, Poland Kaukas pulp mill efficiency Contributing well in H1 217 Lappeenranta biorefinery Changshu speciality paper machine Otepää plywood mill expansion Under construction Kymi pulp mill expansion 2 Raflatac expansions in Poland and Finland Kaukas pulp mill expansion 2
Focused investments are delivering growth Sales 216 1% UPM Biorefining Pulp CAGR +3% Biofuels New business 75% Average delivery growth 211 216 UPM Raflatac UPM Specialty Papers Standard products CAGR +4% Films and specials CAGR +8% Label materials CAGR +4% Cut-size CAGR +6% 5% UPM Plywood Plywood CAGR +3% 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 12 Net debt EURm 4 5 Net debt and leverage Net debt/ EBITDA (x) 3, 1 2 Target: EBIT growth 1 Target: 1% 3 75 2,5 1 8 8 3 Policy: 2x 2, 6 2 25 1,5 6 4 4 1 5 1, 2 2 75,5 211 212 213 214 215 216 LTM 211 212 213 214 215 216 LTM 211 212 213 214 215 216 LTM, 11 UPM Comparable figures for 214 217, excluding special items for earlier years
Direction: grow businesses with strong long-term fundamentals and sustainable competitive advantage Operating model Performance Capability Capital allocation Growth Better than sum of parts Continuous improvement Foundation for opportunities Attractive returns Earnings growth and valuation Separate businesses Top performance Corporate benefits Profit focus High performing people Value-based leadership and responsibility Innovation Strong cash flow Strong balance sheet Corporate structure Attractive dividend Focused growth investments Selected larger investments Synergistic M&A Current growing businesses New bio-based businesses 12 UPM
Financial performance in 216 disciplined capital allocation in action Top performance Comparable EBIT EUR 1,143m +25% Comparable ROE 1,9% +1,4%pp Strong cash flow Operating cash flow EUR 1,686m +42% Attractive dividend Dividend EUR 57m +27% Net debt reduction EUR 969m, -46% Industry-leading balance sheet 5/6 business areas achieved their financial targets 13 UPM Focused investments Capital expenditure EUR 325m Attractive returns reached 8% of the EUR 2m EBITDA target set for the first wave of growth projects Net debt/ EBITDA,73x
Strong cash flow and balance sheet EURm 1 8 1 6 Operating cash flow 1,576 Net debt EURm 4 3 5 Net debt Net debt / EBITDA (trailing12 months) 4, 3,5 1 4 1 2 1 8 6 4 2 Free cash flow Operating cash flow Q2/17 operating cash flow EUR 269m Working capital increased by EUR 59m 3 2 5 2 1 5 1 5 Net debt / EBITDA 1,46 Net debt 3, 2,5 2, 1,5 1,.68x,5 14 UPM 211 212 213 214 215 216 Q2/17 LTM 211 212 213 214 215 216 Q1/17 LTM,
Dividend EUR per share 1,,9,8,7,6.6.6.6 Dividend.7.75.95 Dividend policy UPM aims to pay an attractive dividend, 3 4% of operating cash flow per share Dividend for 216,5,4 EUR.95 (.75) per share, totalling EUR 57m,3,2 3% of 216 operating cash flow of EUR 1,686m,1, 211 212 213 214 215 216 15 UPM
Low investment needs in existing assets allow growth projects with modest total capex EURm 1 2 1 8 Capital expenditure Myllykoski acquisition Focused growth investments Good returns and fast payback Low implementation risk Financed from operating cash flow 6 Uruguay acquisition Depreciation Low replacement investments 4 Strategic investments Asset quality in all businesses, 486 e.g. large competitive pulp mills 2 UPM Paper ENA Operational investments Modest total capex and attractive returns 16 UPM
Q2 217 Good performance and favourable market demand continued Comparable EBIT increased by 2% to EUR 27m (264m) 3 Temporarily higher fixed costs and lower operational efficiency due to high 25 maintenance activity: 2 EUR -2m compared with Q2 216 EUR -45m compared with Q1 217 15 Q2 217 operating cash flow was EUR 1 269m (434m) 5 Net debt decreased to EUR 1,46m (1,876m), net debt/ebitda to.68x (1.25x) EURm 35 Comparable EBIT 264 27 17 UPM
Q2 217 Good market demand, high maintenance activity UPM BIOREFINING Good demand, pulp deliveries +2%, strong growth in biofuels Pulp prices higher Pietarsaari pulp mill maintenance Kaukas investment decision UPM PAPER ENA Graphic paper deliveries 2% Seasonally high fixed costs, including maintenance Fibre costs higher UPM ENERGY Electricity deliveries 17% Hydropower generation below average and prolonged maintenance at Olkiluoto nuclear power plant UPM SPECIALTY PAPERS Significant progress in product mix, higher release liner deliveries Good demand Pulp costs higher, sales prices higher UPM RAFLATAC Good demand, deliveries +6% Variable costs higher Specialty label investment decision, Tampere UPM PLYWOOD Good demand, deliveries +4% Variable costs higher, sales prices higher 18 UPM
Comparable EBIT by business area EURm 15 UPM Biorefining % of sales 25 EURm 12 UPM Energy % of sales 6 EURm 12 UPM Paper ENA % of sales 12 12 2 1 5 1 1 9 6 15 1 8 6 4 4 3 2 8 6 4 8 6 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 Q2 217 vs. Q2 216 High maintenance activity in Q2/17 resulted in temporarily higher fixed costs and lower operational efficiency. Prices increased. Higher maintenance activity in Biorefining and Energy. Pulp prices increased. Mix improvement in Specialty Papers. EURm 35 EURm 35 3 25 2 264 1.8% Prices Deliveries Fixed costs Variable costs Currency, net impact Depr., forests, plantations 27 11.% 3 25 2 264 1.8% Biorefining Energy Raflatac Specialty Papers Paper ENA Plywood Other operations and eliminations 27 11.% 15 15 1 1 5 5 Q2/16 Q2/17 Q2/16 Q2/17 2 UPM
Outlook for 217 UPM s profitability improved significantly in 216 and is expected to continue 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. 21 UPM Q3 217 is expected to include significantly less maintenance activity than Q2 217 in UPM Biorefining, UPM Paper ENA and UPM Energy.
Responsibility is good business Creating value through products and innovation Creating competitive advantage and long-term value by efficiency Risk mitigation by responsible value chain and production "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. UPM Annual Report 215 22 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 2 3 UPM 5-year change: 76% 5-year change: +9 5-year CAGR: +4% pa
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 25 2 15 1 5 UPM Industrials & Materials Europe Source: Nasdaq, September 216 25 UPM
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
Chemical pulp market Q2 NBSK pulp price increased by 5% from Q1 Q2 BHKP pulp price increased by 15% from Q1 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 28 29 21 211 212 213 214 215 216 217 3 25 2 Softwood inventories 15 28 29 21 211 212 213 214 215 216 217 Source: FOEX Indexes Ltd. Source: PPPC World-2 statistics 32 UPM
UPM Biorefining Potential pulp mill in Uruguay could be a competitive alternative time schedule is several years Conversation with Government of Uruguay on local prerequisites Development of infrastructure and permitting est. 1.5 2 years Potential UPM investment decision Investment project development of Infrastructure est. 2.5 years Phase I Phase II Phase III 33 UPM
UPM Biorefining UPM Biofuels in existing and future end-use Fuel retail Dedicated green fleets Marine/Aviation 34 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 35 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 36 UPM
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 4% reduction in road transport emissions vs. reference year 25 6 5 4 3 2 22 mandated biofuel volume Additional need of sustainable drop-in biofuels by 24 1 B7 E1 22 225 23 235 24 37 UPM * 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 world-class availability performance 38 UPM
Cost efficient power generation enables robust profitability also 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 H117 Comparable EBIT, EURm 217 186 22 181 116 34 % of sales 45. 39.9 43.5 43.6 32.7 23.4 39 UPM
UPM Raflatac Self-adhesive labels in end-use 4 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 41 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 42 UPM
UPM Specialty Papers Focus on global Labelling materials, Packaging in Europe and Office paper in APAC LABELLING MATERIAL PACKAGING OFFICE PAPER APAC 43 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 44 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 % 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 Tapes 13 % Source: AWA 45 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 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 1 Mt Direct marketing Steady decline in Magazine Publishing circulation and pagination, however number of titles increasing Publishers still rely heavily on the revenues from print 7 Mt Magazine publishing Newspaper publishing being historically the most vulnerable to structural changes but remarkable differences between countries 6 Mt Newspaper publishing Monetizing digital circulation for Magazines and Newspapers continue to be challenging Source: Euro-Graph 46 UPM
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 47 UPM
Demand-supply balance in European graphic paper is visible in margins EUR/t Price Cash cost of a marginal producer 48 UPM 24 25 26 27 28 29 21 211 212 213 214 215 216 217 Sources: PPI, RISI, Pöyry
Graphic paper prices EUR/t 1 Europe USD/t 11 North America USD/t 11 China 9 1 1 8 9 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 49 UPM
UPM Plywood UPM Plywood in end-use Construction Vehicle flooring LNG shipbuilding 5 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 51 UPM
UPM Plywood Selected focus end-uses provide further growth potential Industrial applications Share of sales Building and construction end-uses The recovery of the European construction sector is driving demand (annual growth 2 3% p.a.) 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 order book for plywood based LNGC ~9 vessels) 52 UPM 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 Life science prod. e.g. cell culturing and medical care Performance chemicals e.g. resin for plywood manufacturing Terrace materials New applications, e.g. acoustics pr. 1 kt renewable diesel Market entry Scale up 53 UPM
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 UPM
Partial overlap with fossil-based value chains in chemicals Feedstocks Key Intermediates Chemical Building Blocks Final products Petrochemical feedstocks Oil Gas Coal Refinery Cracker Coal-toolefins C1: Syngas C2: Ethylene C3: Propylene C4: Butadiene C6: Benzene C7: Toluene C8: Xylene 6 Mtons Biomass C5 Xylose C6 Glucose 1 Mtons 55 UPM