UPM FINANCIAL REVIEW 2011 · Q4/11 FINANCIALS EBITDA decreased by 9% in Q4 2011 from Q3 2011 Pulp Paper Other operations Forest and Timber Energy Label 331 12.7%12.7% Plywood 0 50

UPM FINANCIAL REVIEW 2011

Jussi Pesonen

President and CEO

1 February, 2012

| © UPM

Weaker economy towards the end of 2011,

continuous progress according to strategy

2011: EBITDA and operating cash flow improved from last year

• Succeeded in raising prices to cover substantial variable cost increases

• Board’s dividend proposal EUR 0.60 (0.55) per share

Q4 2011: EBITDA decreased by 5% from last year

• Weaker demand especially in Europe, prices flat except in pulp

• Raw material market prices started to decline, but costs were still at peak

• Strong operating cash flow at EUR 310m

Consolidation, restructuring and renewal of business portfolio

• Myllykoski acquisition, the associated restructuring and

Schongau energy investment to improve cost competitiveness

• Divesting packaging papers and RFID businesses

• First wood-based biodiesel project in the world

1

| © UPM

FINANCIALS

Q4 2011 – delivery volumes decreased while

costs remained at their peak

Operating cash flow

EUR 1,041 m +59 m

Gearing

48% +2 pp

EBITDA

EUR 1,383 m +40 m

Net debt

EUR 3,592 m +306 m

2

Sales

EUR 2,686 m +14%

EBITDA

EUR 301 m -5%

Operating profit (*

EUR 147 m -31%

EPS (*

EUR 0.16 -41%

*) excluding special items

Q4/2011 vs. Q4/2010 2011 vs. 2010

| © UPM

3

50

60

70

80

90

100

110

120

2007 2008 2009 2010 2011

FINANCIALS

Q4 2011 deliveries decreased in most businesses

from last year – prices increased in publication

papers, fine papers, Label and Plywood

Delivery volumes, indexed Q107 = 100

*) publication paper development in Q4

and Q3 pro forma, including Myllykoski

*)

Change in

deliveries, %

Q411/

Q410

Q411/

Q311 2011/

2010

Label 0 -4 2

Pulp 3 0 3

Publication papers (*

-10 -2 -1

Fine and spec. papers

-9 -3 -7

Timber -3 -2 -3

Plywood -8 -5 3

| © UPM 4

0

50

100

150

200

250

300

350

400

450

500

EBITDA

Q3/11

EBITDA

Q4/11

FINANCIALS

EBITDA decreased by 9% in Q4 2011

from Q3 2011

Pulp

Paper

Other

operations

Forest

and

Timber

Energy

Label

331 12.7%

Plywood

0

50

100

150

200

250

300

350

400

450

500

EBITDA

Q3/11

EBITDA

Q4/11

EUR million

Prices,

currency

Fibre

costs

Other Fixed

costs

Deliveries

Energy

costs

301 11.2%

331 12.7%

Seasonally high fixed costs in Q4,

partly due to maintenance.

Variable costs still high EUR million

Lower pulp prices and weaker

sawn timber markets affected

Q4 EBITDA vs. Q3 2011

301 11.2%

| © UPM

0

200

400

600

800

1000

1200

1400

2006 2007 2008 2009 2010 2011

FINANCIALS

Strong cash flow continued

5

Operating cash flow

Cash flow

after investing

activities

EUR million Cash flow

• Q4 2011 operating cash

flow was EUR 310m (343m)

• Cash flow after investing

activities was EUR 910m

in 2011

• Fast digestion of the

additional debt from the

Myllykoski acquisition

• Room for strategic actions

• Cash flow-based dividend

| © UPM

0,20

0,30

0,40

0,50

0,60

0,70

0,80

0,90

0

200

400

600

800

1 000

1 200

1 400

2006 2007 2008 2009 2010 2011

FINANCIALS

Dividend proposal for 2011

Cash flow,

EUR million

EUR per

share

0.40

0.45

0.55

Actual / proposed dividend

6

Dividend policy

• at least 1/3 of net cash flow from operating activities less operational capital expenditure

• net cash flow calculated as an average over three years

Minimum dividend for 2011 according to dividend policy

• EUR 0.58 per share

Board’s dividend proposal

• EUR 0.60 (0.55) per share

Operational capex

Minimum dividend by the dividend policy

Cash flow after operational capex

0.75 0.60

| © UPM

FINANCIALS

Strong balance sheet – net debt increased

by EUR 306m from last year

7

2 500

3 000

3 500

4 000

4 500

5 000

5 500

2008

2009

2010

2011

1,5

2,0

2,5

3,0

3,5

4,0

4,5

Net debt, EUR million Net debt / EBITDA (trailing 12 months)

Net debt

Net debt / EBITDA

2.6 2.5

2 500

3 000

3 500

4 000

4 500

5 000

5 500

2008

2009

2010

2011

30

40

50

60

70

80

90

Net debt, EUR million Gearing %

Net debt

Gearing

48 46

| © UPM

FINANCIALS

Outlook for 2012 (*

(* See complete wording of the "Outlook"

in the Financial Statements Release 2011

• Operating profit excluding special items in H1/2012 is expected to be at around the same level as in H2/2011

• Mild recession is expected in Euro zone in early 2012, sovereign debt crisis introduces uncertainty

• In UPM’s businesses, market conditions are estimated to have stabilised, taking into account seasonal variations

• Costs are expected to decrease in Q1/2012 from Q4/2011, both due to lower variable costs and materialising Myllykoski synergies

• Price outlook is broadly stable in Q1/2012 from Q4/2011

− Average paper price in euros in Q1/2012 at about the same level as in Q4/2011

− Pulp prices are expected to have reached the bottom by the end of 2011

8

STRATEGIC ACTIONS CONSOLIDATION, RESTRUCTURING AND PORTFOLIO RENEWAL

| © UPM

CONSOLIDATION AND COST EFFICIENCY

Myllykoski integration and the associated cost

competitiveness actions proceed on schedule

• Target is to improve cost efficiency and profitability in Magazine

papers, while improving customer offer

• UPM has closed down a total of 1 million tonnes of paper capacity

– Myllykoski mill (600,000 tonnes of magazine papers) and

Ettringen PM3 (110,000 tonnes of newsprint) in December 2011

– Albbruck mill (320,000 tonnes of magazine papers) in January 2012,

sheeting line transfer to Plattling mill in process

– Stracel mill (280,000 tonnes of magazine papers) sales process continues

• Restructured overlapping paper sales networks

• Social plans implemented in order to alleviate the

effects of personnel reductions in a responsible way

• New combined heat and power plant in Schongau mill

to reduce energy costs (EUR 85m investment) 10

| © UPM

CONSOLIDATION AND COST EFFICIENCY

Myllykoski acquisition cost synergies on track

11

Estimated timing and sources of

planned EUR 200m cost synergies

H2

2011

H1

2012

H2

2012

H1

2013

• Cost synergies started

materialising in Q4/2011

• Actions implemented already

for 65% of the total

EUR 200m cost synergy

• More than EUR 100m is

expected to be visible in 2012

• Full run-rate of EUR 200m

expected in 2013

Fixed

costs

Variable

costs

| © UPM

CONSOLIDATION AND PORTFOLIO RENEWAL

UPM divests its packaging paper assets

• UPM sells its packaging paper production to Billerud AB for an

enterprise value of EUR 130m

– Pietarsaari PM 1 and Tervasaari PM 7, total capacity of approx. 300,000 tonnes,

pro forma 2011 sales was EUR 220m and EBITDA EUR 18m

– Mill real estates and infrastructure stay in UPM’s possession

– The companies have agreed on long-term market-based raw material and

services agreements

– 185 employees transfer to Billerud as old employees

– UPM will report a one-off gain of approximately EUR 50m

– Closing of the deal is expected during Q2/2012 (*

• Consolidation in the packaging papers business,

Billerud is a solid leading producer

• Part of UPM paper business transformation,

UPM is primarily focusing on graphic papers 12

*) subject to regulatory approval

| © UPM

PORTFOLIO RENEWAL AND GROWTH

UPM invests in wood-based biodiesel

production in Lappeenranta

• UPM invests in the world’s first advanced wood

based biodiesel production in Lappeenranta, Finland

• Main product is advanced, 2nd generation biodiesel

– very close to fossil diesel EN590 standard quality, compatible

with current diesel motors and fuel distribution network

– 80% reduction in greenhouse gas emissions of transport

• Raw material is sustainably produced crude tall oil,

a residue from pulp production

• Technology is based on UPM’s innovations and

long-term development work

• First step towards becoming a significant producer

of advanced biofuels

13

| © UPM


UPM Lappeenranta biorefinery

14

• Commercial scale industrial investment

− Total investment of approximately EUR 150m

− Production 100,000 tonnes/a of advanced biodiesel

− Production starts in 2014

− Employs approximately 200 persons directly and indirectly

• Profitable investment

− Know-how and volumes in raw material procurement and logistics

− Mill integrate synergies in energy and infrastructure

− High quality product with genuine reduction in CO2 emissions

− UPM’s innovative technology (technology partner Haldor Topsøe)

• Demand is growing fast

| © UPM


Demand for biofuels is growing fast

15

(Mtonnes)

+7%

22

15

DEMAND OF BIODIESEL IN EU

• Global demand is expected to exceed supply in the next few years

• Demand in EU is expected to grow by about 7% p.a.

• EU’s target by 2020 is – to cut greenhouse gas

emissions by 20%

– to have 10% of renewable fuels in road transport (Finland 20%)

• UPM’s markets are in the EU

11

National action plans (NREAPs)

Consensus area

50

40

30

20

10

0 2010 2015 2020

Source: Hart Global Biofuels Outlook 2010 – 2020

| © UPM 16

1

2

3

4

5

6

RESEARCH CENTRE

BIOREFINERY

SAW MILL

PAPER MILL

BIOENERGY PLANT

PULP MILL

Growing UPM Kaukas mill site in Lappeenranta

1

2

3

4

5

6

| © UPM

Low needs for major investments to maintain

existing assets

17

0

200

400

600

800

1 000

1 200

06 07 08 09 10 11 12e

€ million

Operational investments

350

Capital expenditure

Strategic investments

Depreciation

Uruguay

acquisition

17

Estimate

Myllykoski

acquisition

340

SUMMARY

| © UPM

Summary

• 2011 EBITDA and operating cash flow improved from 2010

• Market conditions weakened and quarterly earnings decreased during H2/2011, but are estimated to have stabilised

• Market outlook is stable for the early part of 2012 and costs are expected to decrease from Q4/2011

• Board proposes an increased dividend of EUR 0.60 (0.55)

• UPM continues to implement its strategy and reshape its portfolio

− Myllykoski integration and synergy implementation on track

− Divestment of packaging papers and RFID businesses represent consolidation in their markets and portfolio renewal for UPM

− First advanced wood-based biodiesel project announced

19

BUSINESS DRIVERS

| © UPM

-25

-20

-15

-10

-5

0

5

10

15

20

-15,0

-12,0

-9,0

-6,0

-3,0

0,0

3,0

6,0

9,0

12,0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Paper demand growth (% trailing 3 month)

Sources: Cepiprint, Cepifine, OECD

Euro zone composite leading indicator (Y/Y %)

Graphic paper demand growth

Euro zone composite leading indicator

BUSINESS DRIVERS

Economic outlook turned weaker and is affecting

demand for UPM’s products

21

| © UPM

22

8 000

8 500

9 000

9 500

10 000

10 500

11 000

Q1

08

Q2

08

Q3

08

Q4

08

Q1

09

Q2

09

Q3

09

Q4

09

Q1

10

Q2

10

Q3

10

Q4

10

Q1

11

Q2

11

Q3

11

1 500

2 000

2 500

3 000

3 500

4 000

4 500

Q1

08

Q2

08

Q3

08

Q4

08

Q1

09

Q2

09

Q3

09

Q4

09

Q1

10

Q2

10

Q3

10

Q4

10

Q1

11

Q2

11

Q3

11

Source: Cepiprint/fine, PPPC

Graphic papers demand

in Europe -4% YTD Magazine and WFC papers demand

in North America -5% YTD

-9%

-7%

BUSINESS DRIVERS

Graphic papers demand

'000 tonnes '000 tonnes

| © UPM

23 23

300

400

500

600

700

800

900

1000

'03 '04 '05 '06 '07 '08 '09 '10 '11

News 45 g/m² SC rg 56 g/m²

LWC off 60 g/m² WFCr 100 g/m²

WFUr 80 g/m²

€/t

Europe

400

500

600

700

800

900

1000

1100

1200

1300

'03 '04 '05 '06 '07 '08 '09 '10 '11

News 48,8 g/m² SC 51,8 g/m²

LWC 59,2 g/m² WFCr 88,8 g/m²

WFUr off 74 g/m²

USD/t

400

500

600

700

800

900

1000

1100

1200

1300

'03 '04 '05 '06 '07 '08 '09 '10 '11

WFU s 80-120 g WFC s 128-157 g

USD/t

China North America

imported

domestic

Source: PPI, RISI

BUSINESS DRIVERS

Graphic paper prices

| © UPM

15

20

25

30

35

40

45

50

55

60

65

2008 2009 2010 2011

24

Source: PPPC World-20 statistics

BUSINESS DRIVERS

Chemical pulp market

Producer inventories of

softwood pulp are still high, but

hardwood pulp inventories are low Days of

supply

300

400

500

600

700

800

900

1 000

1 100

2008 2009 2010 2011

USD/tonne Pulp prices decreased during Q4

BHKP

NBSK

Hardwood

inventories

Softwood

inventories

Source: FOEX Indexes Ltd.

| © UPM

60

80

100

120

140

160

180

ONP/OMG 1.11

30

35

40

45

50

55

60

65

70

75

2004

2005

2006

2007

2008

2009

2010

2011

2012

Spruce Pine Birch

25

10

12

14

16

18

20

22

24

26

2004

2005

2006

2007

2008

2009

2010

2011

2012

Spruce Pine Birch

BUSINESS DRIVERS

Wood, RCP and electricity prices are declining

€ / m³ Log prices in Finland € / m³ Pulpwood prices in Finland

Source: Metla, FOEX Indexes Ltd, NordPool, EEX

0

10

20

30

40

50

60

70

80

90

100

2006 2007 2008 2009 2010 2011

EEX (Germany) NordPool (Nordic)

Electricity 1-year forward prices EUR/MWh € / tonne RCP prices in Europe

FINANCIALS 2011

| © UPM

27

Q4 2011

Q4 2010

2011 2010

Sales, €m 2,686 2,357 10,068 8,924

Sales growth (%) 14% 13%

EBITDA, €m 301 318 1,383 1,343

% of sales 11.2 13.5 13.7 15.0

Operating profit, excl. special items, €m 147 212 682 731

EPS excl. special items, € 0.16 0.27 0.93 0.99

Net cash from operating activities, €m 310 343 1,041 982

FINANCIALS Key financials

| © UPM

28

Reported

1-12/2011

Adjustments Pro forma

1-12/2011

Sales, €m 10,068 780 10,848

EBITDA, €m 1,383 40 1,423

Operating profit, €m

‒ excl. special items, €m

459

682

-8

-8

451

674

Profit before tax, €m

‒ excl. special items, €m 417

572

-25

-25

392

547

Profit for the period 457 -18 439

FINANCIALS – MYLLYKOSKI ACQUISITION

Pro forma financials – Group

| © UPM

0

200

400

600

800

1 000

1 200

1 400

1 600

EBITDA

2010

EBITDA

2011

29

FINANCIALS

2011 EBITDA increased by 3%, higher prices offset

the rise in costs, improvement in Paper

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2 000

EBITDA

2010

EBITDA

2011

EUR million Prices,

currency

Fibre

costs Energy

costs

Fixed

costs

Deliveries Other

variable

costs

1,343 15.0%

1,383 13.7%

EUR million

1,343 15.0%

Pulp

Forest

and

Timber

Label Other

operations

Paper

1,383 13.7%

Energy

Plywood

| © UPM

FINANCIALS

Q4 2011 EBITDA decreased from last year due

to higher variable costs

30

0

4

8

12

16

20

0

100

200

300

400

500

EUR million EBITDA

301 11.2% 318

13.5%

362 17.2%

178 7.7%

% of sales

| © UPM

FINANCIALS

Operating profit decreased in H2 2011 as

demand weakened and costs were at the peak

31

-100

-50

0

50

100

150

200

250

300

EUR million

147 5.5%

212 9.0% 186

8.8%

Operating profit excluding special items

-46 -2.0%

| © UPM

32

FINANCIALS Cash flow

€ million Q4/11 Q4/10 2011 2010

EBITDA 301 318 1,383 1,343

Cash flow before change in working capital 263 332 1,249 1,301

Change in working capital 91 98 -73 -139

Finance costs and income taxes -44 -87 -135 -180

Net cash from operating activities 310 343 1,041 982

Capital expenditure -93 -91 -286 -241

Asset sales and acquisitions 18 1 155 46

Cash flow after investing activities 235 253 910 787

| © UPM

FINANCIALS

Balance sheet

33

2 500

3 000

3 500

4 000

4 500

5 000

04 05 06 07 08 09 10 11

4846

0

20

40

60

80

100

04 05 06 07 08 09 10 11

Gearing ratio

Net debt

% EUR million

Target: maximum 90%

Liquidity was EUR 1.9bn

repayments EUR 0.9bn in 2012

3,286

3,592

| © UPM

FINANCIALS

Maturity profile and liquidity

34

0

100

200

300

400

500

600

700

800

900

1 000

2012

2013

2014

2015

2016

2017

2018

2019-2

026

2027

2028

2029

2030

2030

EUR million

0

100

200

300

400

500

600

700

800

900

1 000

2012

2013

2014

2015

2016

2017

2018

2019-2

026

2027

2028

2029

2030

EUR million

Liquidity

Liquidity on 31 December 2011 was € 1.9bn

(cash and unused credit facilities)

• syndicated credit facility EUR 500 million

• bilateral committed credit facilities EUR 900 million

Committed credit facilities EUR 1.4bn

Maturity profile of outstanding debt Committed credit facilities’ maturities

| © UPM

FINANCIALS

Energy 2011 vs. 2010

0

20

40

60

80

100

Q1 08

Q3 08

Q1 09

Q3 09

Q1 10

Q3 10

Q1 11

Q3 11

0

10

20

30

40

50

60

2011 452 2010 567

Sales EUR million

-45 2011 192 2010 237


€ million

Operating profit EUR million*)


EUR million

-20%

35

% of sales • Operating profit decreased mainly

due to lower sales price and

condensing power generation

• Average sales price for electricity

decreased by 6%

| © UPM

FINANCIALS

Pulp 2011 vs. 2010

-100

-50

0

50

100

150

200

Q1 08

Q3 08

Q1 09

Q3 09

Q1 10

Q3 10

Q1 11

Q3 11

-30

-15

0

15

30

45

60

-3% 2011 1,648 2010 1,698

Sales EUR million

-154 2011 423 2010 577



EUR million

€ million % of sales

36

• Operating profit decreased due to

lower sales price

• Higher wood costs had a negative

impact on profitability


| © UPM

FINANCIALS

Forest and Timber 2011 vs. 2010

-60

-40

-20

0

20

40

60

80

Q1 08

Q2 08

Q3 08

Q4 08

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Q2 10

Q3 10

Q4 10

Q1 11

Q2 11

Q3 11

Q4 11

-15

-10

-5

0

5

10

15

20

2011 1,651 2010 1,521

Sales EUR million

-131 2011 50 2010 181




EUR million


9%

37

• Operating profit decreased mainly

due to a smaller increase in the fair

value of biological assets

• The fair value of biological assets

less wood harvested increased by

EUR 57 million (147 million)

• In sawn timber wood costs were

higher and average sawn timber

prices decreased

Fair value change

| © UPM

FINANCIALS

Paper 2011 vs. 2010

-100

-50

0

50

100

150

200

Q1 08

Q3 08

Q1 09

Q3 09

Q1 10

Q3 10

Q1 11

Q3 11

-6

-3

0

3

6

9

12

2011 7,184 2010 6,269

Sales EUR million

+238 2011 −16 2010 -254




EUR million


15%

38

• Operating profit improved

significantly

• Average paper price increased

by 7%

• Variable and fixed costs increased

| © UPM

39

Reported

1-12/2011

Adjustments Pro forma 1-12/2011

Sales, €m 7,184 780 7,964

EBITDA, €m 517 40 557

Operating profit, €m

‒ excl. special items, €m

-315

-16

-8

-8

-323

-24

Paper deliveries, 1,000 t 10,615 1,261 11,876

FINANCIALS – MYLLYKOSKI ACQUISITION

Pro forma financials – Paper business area

| © UPM

FINANCIALS

Label 2011 vs. 2010

-10

-5

0

5

10

15

20

25

30

Q1 08

Q3 08

Q1 09

Q3 09

Q1 10

Q3 10

Q1 11

Q3 11

-4

-2

0

2

4

6

8

10

12

2011 1,150 2010 1,100

Sales EUR million

-19 2011 68 2010 87




5% EUR

million

40

• Operating profit decreased mainly due

to significantly higher raw material

costs

• Sales prices in local currencies

increased clearly


| © UPM

FINANCIALS

Plywood 2011 vs. 2010

-40

-30

-20

-10

0

10

20

30

Q1 08

Q3 08

Q1 09

Q3 09

Q1 10

Q3 10

Q1 11

Q3 11

-40

-30

-20

-10

0

10

20

30

2011 376 2010 347

Sales EUR million

+18 2011 0 2010 −18





8% EUR

million

41

• Profitability improved mainly due to

higher sales prices and delivery

volumes

• Deliveries increased by 3%

Documents

UPM FINANCIAL REVIEW 2011 · Q4/11 FINANCIALS EBITDA decreased by 9% in Q4 2011 from Q3 2011 Pulp Paper Other operations Forest and Timber Energy Label 331 12.7%12.7% Plywood 0 50