UPM annual report 2015

IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

Risks and opportunities

1

2

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4

performance

growth

PORTFOLIO

innovation

order to avoid risks and capture opportunities. The organisation and governance model of risk management at UPM are described in the Corporate Governance Statement. The Report of the Board of Directors (page 79) includes further discussion on risks and risk management.

The operating environment exposes UPM to a number of risks and opportunities. While executing strategies, UPM and its business areas, functions and production plants are exposed to a number of risks and opportunities.

UPM regards risk management as a systematic and proactive means to analyse and manage the opportunities and threats related to its business operations. It also includes careful planning and evaluation of future projects and the business environment in

Read more: www.upm.com/governance

Changes in sales prices The biggest factor affecting UPM’s financial results is the sales price of paper. A change in the volume delivered has less than half of the effect of the same percentage change in sales prices.

Strategic FOCUS areas INVOLVED

Risk description

Impact

Management

Opportunity

Global economic cycles

Impacts the demand and sales prices of various UPM products and main input costs items, as well as currency exchange rates. UPM’s main earnings sensitivities are presented on next page. Increased pressure on UPM’s graphic paper deliveries and sales prices

Industry leading balance sheet. Continuous improvement in competitiveness, resource efficiency and customer offering. Business portfolio development. Continuous improvement in competitiveness. Focus on more attractive paper end-use segments. Adjust paper production capacity to profitable customer demand. Business portfolio development.

UPM’s strong balance sheet and focus on competitiveness mitigate risks and may present strategic opportunities (incl. M&A) in an economic downturn. UPM’s large paper production platform provides continuous optimisation opportunities. Reliable supplier of high quality products and customer service merits customer loyalty. Share of UPM businesses in declining markets is decreasing.

1 2 3

Faster than expected decline in demand for graphic paper

Effect of a 10% change in prices on operating profit for the year

1 3

EURm

501

Papers in UPM Paper ENA

Overcapacity in some of UPM’s products due to changes in demand or supply

Temporarily impacts sales prices and deliveries of the product in question

Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development.

UPM’s diverse business portfolio, focus on competitiveness and strong balance sheet mitigate risks and may present strategic opportunities (incl. M&A) in a cyclical downturn of a business.

97

Fine and speciality papers in UPM Paper Asia

1 2 3

141

Label materials

41 30 21

Plywood

Significant moves in currency exchange rates relevant for UPM

Impacts UPM’s earnings and cash flow directly and competitive- ness indirectly. UPM’s main currency exposures are presented on next page. Impacts trade flows and short-term market balances and may directly or indirectly impact sales prices and deliveries of UPM products.

Continuous hedging of net currency exposure. Hedging the balance sheet. Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development. Monitoring through international trade associations. Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development. Monitoring for early signals for regulation changes. Communicate the impacts of such policies on employment and creation of value-added clearly. Continuous improvement in competitiveness, materials and energy efficiency. Leading environmental perfor- mance. Innovation and selected investments in value added renewable products and energy. Business portfolio development. Continuously improving resource efficiency. Long-term supply contracts and relying on alternate suppliers. Selected ownership of forest land and long-term forest management contracts. Programmes for savings in variable and fixed costs. Culture and track record of continuous improvement in productivity and resource efficiency. Product and service development. Disciplined selection, planning, project management and follow-up processes. Ensuring that contractual obligations are met by both parties. Arbitration proceedings have been initiated by both parties. Disciplined acquisition preparation to ensure the strategic fit, right valuation and effective integration. Disciplined selection, development and commercialisation processes for innovations. Collaboration and partnerships in R&D and commercialisation. Business model development. Governance, compliance procedures, Code of Conduct, Supplier Code, audits, whistleblowing channel, training

UPM’s diverse business portfolio and geographical presence, focus on competitiveness and strong balance sheet mitigate risks and may present strategic opportunities in changing currency environment. UPM’s diverse business portfolio and geographical presence mitigate risks and may present opportunities for optimisation in case of trade barriers in some products and locations. May drive market growth for sustainable products and energy. Resource efficiency, circular economy and renewability are increasingly important sources of competitive advantage. In electricity markets, hydropower is an increasingly important and competitive form of power generation. Increasing relative competitiveness improves profitability and mitigates risks related to the external business environment (above). Carefully selected and implemented growth projects improve UPM’s profitability and ROCE. UPM’s financial targets are presented on page 12. The investment provides a competitive, safe and CO 2 free electricity supply for the long term. UPM’s strong balance sheet and cash flow enable value- enhancing M&A when timing and opportunity are right. Existing products and services redesigned to bring more value. New value-added products to replace oil-based materials may be a significant source of value creation and growth for UPM. Good governance mitigates risks and promotes best practices. High responsibility standards are a differentiating factor and create long term value. Responsible sourcing practices mitigate risks and provide competitive advantage. emission- UPM’s continuous improvement in resource efficiency and circular economy mitigate risks and offer competitive advantages.

Sawn timber

1 2 3

Chemical pulp (net effect)

Exchange rate risk Changes in exchange rates can have a marked impact on finan- cial results. It is the company’s policy to hedge an average of 50% of its estimated net risk currency cash flow for 12 months ahead. At the end of 2015, UPM’s estimated net risk currency flow for the coming 12 months was EUR 1,930 million. The US dollar represented the biggest exposure, at EUR 1,010 million. Changing exchange rates can also have indirect effects, such as change in relative competitiveness between currency regions.

International trade barriers, e.g. antidumping duties

1 2 3

Changes in regulation, subsidies, taxation, e.g. related to climate policies

OPERATING ENVIRONMENT May distort markets, e.g. for energy or wood raw material. May change relative competitiveness of energy forms. May create additional competition for wood raw material.

2 1 4 3

Availability and price of major production inputs like chemicals, wood and fibre

Increased cost of raw materials and potential production interruptions. UPM’s cost structure is presented on next page.

1 3

Foreign NET RISK currency flow

Weakening relative competitiveness impacts profitability and increases risks related to the external business environment (above). Material cost overruns. Inopportune timing. Return on investment does not meet targets Loss of profit and cost overruns. Inopportune timing. Return on investment does not meet targets Cost of acquisition proves high and/or targets for strategic fit and integration are not met. Return on investment does not meet targets. Return on investment does not meet targets. Lost opportunity.

Continuous improvement in competitiveness

EURm

1 4

1,010

USD GBP

Selection and execution of investment projects

600 230

2

JPY

90

Others, total

OL3 nuclear plant start-up

2

Cost structure The company’s biggest cost items are the cost of fibre raw material and personnel expenses.

Selection and execution of M&A

3

Developing and commercialising innovations and new businesses

1 4

Costs, excluding depreciation %

Compliance risks; competition law, anti-corruption, human rights

Damage to reputation. Loss of business. Fines and damages. May impact the value of the company.

2015

2014

1 2 3

10 29

10 31

Delivery of own products

Wood and fibre

Supply chain reputation risks

OPERATIONS AND STRATEGY Damage to reputation. Sanctions. Direct costs to clean up and repair potential damages to production plant. Loss of production. Harm to employees and damage to reputation. Damage to assets or loss of production. Damage to reputation. Loss of business. Loss of competitive position. May impact the value of the company.

Code of Conduct, Supplier Code, supplier audits, certification

1 2 3

9

9

Energy

11 17 14 10

11 14 15 10

Fillers, coating and chemicals

Environmental risks; a leak, spill or explosion

Best available techniques (BAT). Maintenance, internal control and reports. Certified environmental management systems (ISO 14001, EMAS). Occupational health and safety systems. Loss prevention activities and systems. Emergency and business continuity procedures.

Industry-leading environmental performance, provides competitive advantage, including efficiency gains.

1 2 3

Other variable costs Personnel expenses Other fixed costs

Physical damage to the employees or property

Leading health and safety performance strengthens the brand as an employer, as well as improving engagement, efficiency and productivity. Engaged high-performing people enable the implementation of the Biofore strategy, as well as commercial success.

1

Total

100

100

Ability to retain and recruit skilled personnel

Business planning and execution impaired, affecting long-term profitability

Competence development. Incentive schemes. Workplace safety. Acting on employee engagement and management effectiveness.

Costs totalled EUR 8.8 billion in 2015 (2014: 8.7 billion)

2 1 4 3

Availability and security of information systems

Interruptions in critical information systems cause a major interruption to UPM’s business. Damage to reputation. Loss of business.

Technical, physical and process improvements to mitigate availability and security risks.

Sophisticated IT systems enable efficient operations, optimised performance as well as new customer services and data security.

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contents

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UPM Annual Report 2015

UPM Annual Report 2015