UPM annual report 2015

UPM Annual Report 2015

contents

performance

growth

PORTFOLIO

innovation

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.

Effect of a 10% change in prices on

operating profit for the year

EURm

Papers in UPM Paper ENA

501

Fine and speciality papers in UPM Paper Asia

Label materials

141

Plywood

Sawn timber

Chemical pulp (net effect)

Foreign NET RISK currency flow

EURm

USD

1,010

GBP

600

JPY

230

Others, total

Costs, excluding depreciation

2015

2014

Delivery of own products

Wood and fibre

Energy

Fillers, coating and chemicals

Other variable costs

Personnel expenses

Other fixed costs

Total

100

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

Cost structure

The company’s biggest cost items are the cost of fibre raw

material and personnel expenses.

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.

Risk description

Impact

Management

Opportunity

Strategic FOCUS

areas INVOLVED

Global economic cycles

OPERATING ENVIRONMENT

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.

Industry leading balance sheet. Continuous improvement in

competitiveness, resource efficiency and customer offering.

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.

Faster than expected decline in

demand for graphic paper

Increased pressure on UPM’s graphic paper deliveries and

sales prices

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 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.

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.

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.

Continuous hedging of net currency exposure. Hedging the

balance sheet. Continuous improvement in competitiveness.

Disciplined planning and selection of investments. Business

portfolio development.

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.

International trade barriers, e.g.

antidumping duties

Impacts trade flows and short-term market balances and may

directly or indirectly impact sales prices and deliveries of UPM

products.

Monitoring through international trade associations. Continuous

improvement in competitiveness. Disciplined planning and selection

of investments. Business portfolio development.

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.

Changes in regulation, subsidies,

taxation, e.g. related to climate

policies

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.

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.

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.

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.

Continuously improving resource efficiency. Long-term supply

contracts and relying on alternate suppliers. Selected ownership of

forest land and long-term forest management contracts.

UPM’s continuous improvement in resource efficiency and

circular economy mitigate risks and offer competitive

advantages.

Continuous improvement in

competitiveness

OPERATIONS AND STRATEGY

Weakening relative competitiveness impacts profitability and

increases risks related to the external business environment

(above).

Programmes for savings in variable and fixed costs. Culture and

track record of continuous improvement in productivity and

resource efficiency. Product and service development.

Increasing relative competitiveness improves profitability and

mitigates risks related to the external business environment

(above).

Selection and execution of

investment projects

Material cost overruns. Inopportune timing. Return on

investment does not meet targets

Disciplined selection, planning, project management and

follow-up processes.

Carefully selected and implemented growth projects improve

UPM’s profitability and ROCE. UPM’s financial targets are

presented on page 12.

OL3 nuclear plant start-up

Loss of profit and cost overruns. Inopportune timing.

Return on investment does not meet targets

Ensuring that contractual obligations are met by both parties.

Arbitration proceedings have been initiated by both parties.

The investment provides a competitive, safe and CO

emission-

free electricity supply for the long term.

Selection and execution of M&A

Cost of acquisition proves high and/or targets for strategic

fit and integration are not met. Return on investment does not

meet targets.

Disciplined acquisition preparation to ensure the strategic fit,

right valuation and effective integration.

UPM’s strong balance sheet and cash flow enable value-

enhancing M&A when timing and opportunity are right.

Developing and commercialising

innovations and new businesses

Return on investment does not meet targets. Lost opportunity.

Disciplined selection, development and commercialisation processes

for innovations. Collaboration and partnerships in R&D and

commercialisation. Business model development.

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.

Compliance risks; competition law,

anti-corruption, human rights

Damage to reputation. Loss of business. Fines and damages.

May impact the value of the company.

Governance, compliance procedures, Code of Conduct, Supplier

Code, audits, whistleblowing channel, training

Good governance mitigates risks and promotes best practices.

High responsibility standards are a differentiating factor and

create long term value.

Supply chain reputation risks

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

Responsible sourcing practices mitigate risks and provide

competitive advantage.

Environmental risks; a leak, spill or

explosion

Damage to reputation. Sanctions. Direct costs to clean up and

repair potential damages to production plant. Loss of

production.

Best available techniques (BAT). Maintenance, internal control

and reports. Certified environmental management systems

(ISO 14001, EMAS).

Industry-leading environmental performance, provides

competitive advantage, including efficiency gains.

Physical damage to the employees

or property

Harm to employees and damage to reputation. Damage to

assets or loss of production.

Occupational health and safety systems. Loss prevention activities

and systems. Emergency and business continuity procedures.

Leading health and safety performance strengthens the brand

as an employer, as well as improving engagement, efficiency

and productivity.

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.

Engaged high-performing people enable the implementation of

the Biofore strategy, as well as commercial success.

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.

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.

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IN BRIEF

STRATEGY

BUSINESSES

GOVERNANCE

STAKEHOLDERS

ACCOUNTS

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

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.

Risks and opportunities

Read more:

www.upm.com/governance