UPM annual report 2015

IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

Performance improvement

Global Compact LEAD

and transformation continued in 2015

UPM in transformation UPM has made significant changes in business portfolio and simultaneously improved its performance in most KPIs.

Responsibility is good business We believe that customers, investors and other stakeholders value responsi- ble operations that keep risks under control and add to our business oppor- tunities, thereby increasing the company value. Over the course of the year we paid special attention to the implementa- tion of UPM’s Code of Conduct in our businesses. The Code has also been updated to better reflect the current operating environment. To enhance transparency for our stakeholders, we use the Global Report- ing Initiative (GRI) reporting framework. With this report, we also want to highlight the value our businesses create in terms of the economic, social and environmental success of the company and throughout the value chain. Furthermore in 2015, UPM’s consistent work in the area of corporate responsibility received third-party recognition. The company was listed in the Dow Jones Sustainability Indices for the fourth time in a row. The com- panies that perform better against sustainability criteria than their competi- tors are selected in the indices. United Nations invited UPM to participate in the Global Compact LEAD forum. LEADmembers include the 50most advanced companies in terms of sustainability across geographical regions and industry sectors. UPM is the first forest industry company and also the first Finnish company ever to receive such an invitation. Outlook UPMhas a versatile business portfolio and five growing business areas. UPM’s profitability improved in 2015 and the improvement is expected to continue in 2016. The business performance is underpinned by the com- pany’s growth projects and continuous cost-efficiency measures. Despite the somewhat uncertain environment in the beginning of the year, we are confident about our prospects for 2016. We are starting the year with a stronger balance sheet than ever. Our investment levels are decreas- ing and earnings and cash flow from growth projects are starting to material- ise. We will maintain cost competitiveness and strive to achieve top perfor- mance in our businesses. The versatile use of forest biomass and focus on competitiveness and being at the forefront of developments will also con- tinue to advance UPM’s Biofore strategy this year. With good performance in our businesses, strong cash flow and leading balance sheet in the industry, we are in a unique position to simultaneously distribute an attractive dividend, implement focused growth projects and act on strategic opportunities.

2003

2008

2015

Sales

EUR 9.8bn

EUR 9.5bn

EUR 10.1bn

EUR 429m EUR 513m EUR 898m

EBIT *)

Net debt

EUR 4.9bn

EUR 4.3bn

EUR 2.1bn

Market cap

EUR 7.9bn

EUR 4.7bn

EUR 9.2bn

Personnel

34,500

25,000

19,600

* ) excluding special items. EUR 265 million forest fair value increase in 2015 excluded for comparability

Integrated paper company Business portfolio, sales %

Towards market-driven businesses Business portfolio, sales %

Six separate businesses Business portfolio, sales %

100

100

100

In 2015, we made good progress with our strategy. All business areas sharpened their operations, our profit improvement programme exceeded its target and our growth projects started to deliver earnings. Our strong cash flow drove net debt down to a new record-low level. All in all, UPM’s transformation progressed well and our business model showed its capability to deliver. We were able to successfully implement the short term profitability improve- ment programme. By the end of the year, target savings were exceeded by 10 %with the annualised variable and fixed cost reduction impact totalling EUR 165 million. Key growth projects were completed during the year and I am very pleased to see that they already contribute to our cash flow. The Lappeenranta biorefinery started commercial production of advanced renewable diesel in Finland in January. UPMBiofuels picked up steam as the year went on and reached a break-even level during the last quarter. The UPMKymi pulp mill expansion was a success and we achieved record-high pulp production in December. UPMRaflatac’s investments in Poland, Malaysia and China were already visible in our earnings during the second half of the year. Also the UPMChangshu’s speciality paper machine ramp-up got off to a good start in December. We will reap the benefits of these projects in 2016 and beyond. Good earnings momentum UPM showed good performance throughout 2015. Much of the good performance was driven by our own actions. Out of our six business areas, UPMBiorefining, UPM Plywood and UPMEnergy exceeded their long-term return targets, and UPM Raflatac showed good improvement, getting very close to its target. Both UPM Paper ENA and UPMPaper Asia were able to offset the pressures of the challenging market environment with their own actions. Our operating profit improved by 37% year-on-year thanks to the successful profit improvement actions. Return on equity excluding special items was 12.1 % for the full year and cash flow per share was EUR 2.22. I am especially pleased with the reduction of our net debt. Following the consist- ently strong cash flow, our balance sheet at the end of 2015 was the strongest ever in the company’s history. We were able to reduce our net debt by EUR 301 million throughout the course of the year. UPM’s Board of Directors has proposed an increased dividend for 2015 of EUR 0.75 per share which is 34%of the operating cash flow per share. The Board´s proposal reflects confidence inUPM’s ability to generate growth in earnings and cash flow. Overall, the company performance has progressed as planned and I would like to thank all UPM employees for an excellent 2015.

UPM aims to generate value based on forest biomass in multiple ways: cost efficient operations, selected growth projects, innovations and reshaping the business portfolio to increase the long-term value of the company.

80

80

80

60

60

60

40

40

40

20

20

20

0

0

0

2003

2008

2015

■ Sold units ■ Paper ■ Plywood ■ Raflatac ■ Sawmilling

■ Sold units ■ Paper ■ Plywood ■ Raflatac ■ Sawmilling

■ Paper ENA ■ Plywood ■ Energy ■ Paper Asia ■ Raflatac ■ Biorefining ■ Other operations

Top performance lays foundation for strategy execution

Jussi Pesonen President and CEO

Attractive dividend

Strong cash flow

Focused investments

Top performance

Industry leading balance sheet

contents

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UPM Annual Report 2015

UPM Annual Report 2015