Annual Report 2006 Printed on Paper Granted the EU Ecolabel , FI/11/1

Annual Report 2006 Printed on paper granted the EU Ecolabel , FI/11/1. UPM ANNUAL REPORT 2006 . Printer: Lönnberg Print. . Printer: Lönnberg 2 . Other pages: UPM Finesse premium silk, 135 g/m . Other pages: UPM Finesse 2 . Accounts: UPM Fine, 90 g/m Accounts: UPM Fine, . 2

www.upm-kymmene.com premium silk, 250 g/m UPM Finesse Cover: WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Contents

Key ﬁ nancial information 1997–2006 2 UPM in brief 4 Review by the President 6 Annual General Meeting UPM-Kymmene Corporation will hold its Annual General UPM – Group proﬁ le 8 Meeting on Tuesday, 27 March 2007, beginning at 2:30pm at the Helsinki Fair Centre, at Messuaukio 1, 00520 Helsinki. Strengths 12 Instructions for participation will be given in the summons to Goals 13 the meeting and can also be found on the company’s web Sensitivity analysis and risk factors 14 pages at www.upm-kymmene.com. Divisional reviews 18

Business drivers and operating environment 20 Dividend Magazine papers 24 The Board of Directors has decided to propose to the Annual Newsprint 26 € General Meeting that a dividend of 0.75 per share be paid Fine and speciality papers 28 in respect of the 2006 fi nancial year. To receive dividends, Converting 30 shareholders must be registered in the list of shareholders kept Wood products 32 by Finnish Central Securities Ltd. on 30 March 2007, the Other operations 34 record date for dividend payment. The Board of Directors will propose to the Annual General Meeting that dividend be paid Resources and support functions 36 on 10 April 2007. Fibre supply 38 Wood procurement 40 Energy 42 Financial information in 2007 Capital expenditure 44 During the 2007 fi nancial period, UPM-Kymmene Corpora- Research and development 47 tion will publish the following fi nancial information in Finnish, Environment 48 Swedish and English: Personnel 50 Events in 2006 52 24 April Interim Report for January – March 2007 26 July Interim Report for January – June 2007 Accounts and Report of the Board for 2006 54 30 October Interim Report for January – September 2007 Report of the Board of Directors 56 These reports are available on the company’s web pages at Proposal for the distribution of profi ts 62 www.upm-kymmene.com. The publications can also be ordered Consolidated fi nancial statement (IFRS) from UPM’s Head Offi ce, P.O. Box 380, FI-00101 Helsinki, Income statement 63 tel. +358 204 15 0020, fax +358 204 15 110, or via the Balance sheet 64 company’s web pages. Statement of changes in equity 65 Cash fl ow statement 66 UPM will publish a separate Environmental and Corporate Notes 67 Social Responsibility Report for 2006. Parent company fi nancial statements (FAS) Profi t and loss account 101 Funds statement 101 Stock exchange listings Balance sheet 102 Notes 103 UPM’s shares are listed on the Helsinki and New York stock Information on shares 107 exchanges. On the New York Stock Exchange, trading is in American Depository Receipts (ADRs). One UPM ADR is equi- Key fi gures 1997–2006 111 valent to one share in the company. Quarterly fi gures 2005–2006 113 Calculation of key indicators 114 Helsinki Stock Exchange: Trading code UPM1V Auditor’s report 115 New York Stock Exchange: Trading code UPM Corporate governance 116

Board of Directors 120 Executive Team 122 UPM Investor Relations Production plants and sales network 124 Tel. +358 204 15 0033 Glossary of terms 126 Fax +358 204 15 0303 Addresses 127 E-mail: [email protected]

Corporate Communications Tel. +358 204 15 0020 Fax +358 204 15 0308 E-mail: [email protected]

UPM ANNUAL REPORT 2006 1 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ key financial information

Key financial Sales Profit before tax Return on equity

information %m %m % 10,000 2,000 25 1997–2006 8,000 1,600 20 6,000 1,200 15

4,000 800 10

2,000 400 5

0 0 0 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06

Businesses disposed of Non-recurring items Non-recurring items Figures for 2002–2006 are reported Current businesses in accordance with International Return on capital Capital expenditure Cash flow from Financial Reporting Standards employed excluding acquisitions operating activities (IFRS), while ﬁ gures for previous % %m %m 25 1,000 2,000 years are based on Finnish 20 800 1,600 Accounting Standards (FAS). 15 600 1,200

10 400 800

5 200 400

0 0 0 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06

Non-recurring items

Shareholders’ equity Net interest-bearing Gearing ratio liabilities

%m %m % 7,500 7,500 125

6,000 6,000 100

4,500 4,500 75

3,000 3,000 50

1,500 1,500 25

0 0 0 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06

Equity per share Earnings per share Dividend per share (2006: proposal)

% % % 15 2.5 1.25

12 2.0 1.00

9 1.5 0.75

6 1.0 0.50

3 0.5 0.25

0 0.0 0.00 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06

Non-recurring items Extra dividend

2 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ the year in brief

The year in brief

Execution of the proﬁ tability improvement programme was the main focus during the year. Our ﬁ nancial results improved but did not reach the targeted level.

2006 2005 2004

Sales, €m 10,022 9,348 9,820 EBITDA, €m 1,678 1,428 1,435 Operating profi t, €m 536 318 685 excl. non-recurring items, €m 725 558 470 Profi t before tax, €m 367 257 556 Earnings per share, € 0.65 0.50 1.76 excl. non-recurring items, € 0.80 0.54 0.49 Cash fl ow from operating activities per share, € 2.32 1.63 1.90 Return on equity, % 4.6 3.5 12.6 Dividend per share (2006: Board’s proposal), € 0.75 0.75 0.75 Shareholders’ equity per share at end of period, € 13.90 14.01 14.46 Gearing ratio at end of period, % 56 66 61 Capital expenditure and acquisitions, €m 699 749 686

Sales by division Operating profit by division (excluding non-recurring items) Em Em

Magazine papers 32% Magazine papers

Newsprint 14% Newsprint

Fine and speciality papers 24% Fine and speciality papers

Converting 12% Converting

Wood products 13% Wood products

Other operations 5% Other operations

0 600 1,200 1,800 2,400 3,000 3,600 0 50 100 150 200 250 300 Operating Share of results of 2006 profit assoociated companies 2005 2006 2006 2005 2005

UPM ANNUAL REPORT 2006 3 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ in brief

UPM in brief

Papers

Magazine papers Newsprint Fine and speciality papers UPM is the world’s leading producer of mag- UPM is one of Europe’s biggest newsprint UPM is among Europe’s leading fi ne paper azine papers, with approximately 20% of the manufacturers, with approximately 15% of manufacturers. In China, it is one of the larg- global market. UPM manufactures coated and the market. UPM has seven newsprint mills, est producers of uncoated and coated fi ne pa- uncoated magazine paper at 12 mills, located located in Finland, Germany, Great Britain, pers. Within speciality papers, UPM is the in Finland, Germany, Great Britain, France, France and Austria. Including both standard world’s biggest manufacturer of label papers Austria, the United States and Canada. Their and speciality newsprint, their combined an- and among the leading producers of packag- combined production capacity is 5.2 million nual capacity is roughly 2.8 million tonnes. ing papers in Europe. Fine paper is made at tonnes a year. Sales to markets outside Eu- Recycled fi bre accounts for over 70% of the four mills in Finland, Germany, France and rope represent about a third of total sales. fi bre raw material used. Thanks to the loca- China. Production capacity for fi ne papers is Magazine paper is used to produce both tions of its mills, UPM enjoys a strong posi- 3.3 million tonnes a year, and that for label general and special-interest magazines, news- tion as a local supplier in Europe’s biggest and packaging papers is 0.8 million tonnes a paper supplements, printed advertising mate- markets. Exports to countries outside Europe year. rial and sales catalogues. UPM’s most impor- represent roughly 10% of annual sales. Uncoated fi ne paper is used for products tant markets are Europe and the United States. Aside from newspapers, newsprint is used such as copier and non-impact printing paper, The customers are mainly publishers and to produce telephone directories, mail order while coated fi ne paper is used for direct printing houses. catalogues, inserts and supplements. The advertising products, magazines and high- main customers are publishers and printers. quality printed products. UPM’s fi ne paper customers include merchants, printers, publishers and converters. Speciality papers include label papers and packaging papers. They are supplied to industrial converters.

Share of Share of Share of Magazine Papers 2006 Group Newsprint 2006 Group Fine and Speciality Papers 2006 Group Sales, €m 3,354 32% Sales, €m 1,436 14% Sales, €m 2,560 24% Capital employed on 31 Dec., €m 3,743 30% Capital employed on 31 Dec., €m 1,905 15% Capital employed on 31 Dec., €m 2,666 21% Personnel on 31 Dec. 6,869 24% Personnel on 31 Dec. 3,204 11% Personnel on 31 Dec. 6,283 22%

4 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ in brief

Converted products Wood products Other operations

The converting units UPM Rafl atac and Walki UPM is Europe’s biggest plywood producer UPM’s other operations comprise wood pro- Wisa manufacture technically sophisticated and the fourth largest producer of sawn tim- curement and company forests, the energy de- special products. UPM Rafl atac is the world’s ber. Production is located in Finland, Russia, partment, logistics, group staff functions, second largest producer of self-adhesive la- Estonia and Austria. shares of associated companies, and certain belstock. It has production facilities in Fin- The plywood and veneer mills, sawmills other ownerships and functions. UPM’s own land, Spain, Great Britain, France, the United and processing facilities manufacture prod- and associated energy and chemical pulp sup- States, Australia, China, Malaysia and South ucts under the WISA brand, the main market ply, as well as wood raw material from its own Africa. Its customers are printers, converters being Europe. In addition to highly processed forests to a large degree, ensure that these key and the packaging industry. UPM Rafl atac is products especially for the building and vehi- resources are available at competitive prices. also a world leader in the development and cle industries, the WISA range also includes manufacture of tags and inlays based on radio products for numerous special applications. frequency identifi cation (RFID) technology. WISA plywoods offer solutions from The industrial wrappings manufacturer building to interior decoration and from Walki Wisa is the European market leader transportation and construction to specifi c in- in its fi eld. Walki Wisa produces wrappings dustry needs. The veneer range includes birch for manufacturers of paper, wood and steel face veneers, especially for the furniture in- products as well as composite materials for dustry but also spruce veneers for the parquet the packaging industry and for technical ap- industry. The WISA timber range offers sawn plications. and further processed timber products for different end uses from construction to joinery.

Share of Share of Share of Converting 2006 Group Wood Products 2006 Group Other Operations 2006 Group Sales, €m 1,274 12% Sales, €m 1,321 13% Sales, €m 571 5% Capital employed on 31 Dec., €m 503 4% Capital employed on 31 Dec., €m 554 4% Capital employed on 31 Dec., €m 3,282 26% Personnel on 31 Dec. 3,560 12% Personnel on 31 Dec. 5,577 20 Personnel on 31 Dec. 3,211 11%

UPM ANNUAL REPORT 2006 5 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ review by the president

Review by the President

In 2006, UPM made its operations more effi cient, closed down unprofi table capacity and invested in cost-effi ciency and growth to improve long-term competitiveness.

6 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ review by the president

Dear Reader, extensive “From Job to Job” programme with year. At the same time, the construction of a the aim of facilitating retraining and reloca- power plant utilising biofuel was commenced In 2006, UPM’s operating profi t improved tion to a new job. UPM directed special sup- at the Caledonian mill in Scotland. considerably from the previous year, and the port to Voikkaa during this diffi cult transition The company made a groundbreaking de- profi tability of all divisions developed favour- period. The tangible measures included in the cision to be involved in the production of next ably. The balance sheet strengthened, and “From Job to Job” programme are introduced generation biodiesel. UPM is currently devel- UPM is one of the least indebted companies in UPM’s Environmental and Corporate So- oping the business concept and related tech- in the forest industry. The gearing ratio was cial Responsibility Report. It has been very nical solutions. The production of biofuels is 56% at the end of the year. The return on important for UPM to succeed in these meas- a good fi t for a company whose core business equity was 5.7% (2005: 3.8%). The earnings ures. is wood processing. We strive to utilise the per share were € 0.65 (0.50). The Board of With the profi tability programme, UPM biomass raw material to the full and aim to Directors proposes that the dividend be main- reduced its coated magazine capacity in Eu- become a signifi cant producer of biofuels. tained at its current level of € 0.75 per share. rope by 17% and its coated fi ne paper capac- The demand outlook for this year is largely Although profi tability still fell short of the ity by 12%. It also decided to end the produc- positive across the board. Demand for and de- target, 2006 was a turning point for UPM. tion of brown sack paper in the summer of liveries of printing papers are expected to The company was able to improve its effi - 2007. The transfer of customer orders from grow somewhat from last year, with the ex- ciency and got off to a good start on the road the closed paper machines to UPM’s other ception of North America. The average price to sustainable profi tability. machines went smoothly. The productivity of of paper was slightly higher in the beginning By the beginning of 2006, it became clear paper mills increased during the year, as UPM of the year than in the last quarter of 2006. that the business environment of the forest in- is able to utilise its capacity more effi ciently The demand for self-adhesive labelstock is dustry had permanently changed. There was and profi tably. expected to grow in all markets and prices are structural overcapacity in coated papers in The savings targets and the adoption of forecast to remain stable. In wood products Europe, and the traditional paper markets new practices were taken seriously in the dif- the demand for plywood and sawn timber is were mature. The increase in demand was not ferent locations of UPM. The personnel unexpected to remain good. enough to eliminate the overcapacity, and derstand the need to adapt to the new busi- It is estimated that the Group’s profi ts will therefore the prices remained low especially ness environment. And, although the year has grow this year. I am pleased that at UPM we in Europe. The real price of paper has been on been challenging, UPM’s personnel have done have been able to take the measures necessary a downward trend already for a longer period their daily work extremely responsibly and to improve the profi tability, and that this has of time. professionally. Our clients, too, have under- been done without delay. Now people at UPM In contrast, the cost of production inputs stood the current situation in the industry and can also start planning how to develop the had increased rapidly and they continued to the need for change. company further. rise. New competitors have entered the short- The profi tability programme includes not With investments at their current level, fi bre pulp market, challenging fi bre produc- only cost savings but also investments in the UPM can both develop existing production tion in the northern hemisphere. competitiveness of those units that are esti- and invest in expanding businesses. Changes in the company’s practices were mated to have the best potential in the future. Our objective is to make UPM a profi table, necessary to guarantee cost-effi ciency and The € 325 million investment in the Kymi renewing and global company in the future. long-term competitiveness. In March, UPM pulp mill recovery plant is the biggest single Effi ciency is crucial to future success. Cost launched a three-year programme to restore investment started in 2006. management and actions to secure long-term its profi tability. The programme covers the UPM has areas and products that display competitiveness will be continued at UPM in entire Group. The company decided to close excellent growth. In line with its strategy accordance with the existing programme. down unprofi table capacity – including the UPM continued to invest in its self-adhesive Voikkaa paper mill – and to enhance effi cien- labelstock business, UPM Rafl atac, with the cy throughout the organisation. It is estimated aim of achieving a strong global position. that the annual fixed cost savings will be During the year UPM invested strongly in de- approx imately € 200 million at the end of the veloping the self-adhesive business in Eu- programme. In addition to this, the result will rope, China and the United States. be strengthened by increased effi ciency of the During the year, the company strived to mills and management of variable costs. further improve its long-term competitiveness The headcount reductions, altogether 3,600 by increasing its self-suffi ciency in energy employees, concern all divisions and are dis- and by increasing the use of biofuels. Produc- tributed over three years. In order to alleviate tion was started at the new boiler plant in the Jussi Pesonen the effects on personnel, UPM launched the Shotton paper mill in Wales at the end of the President & CEO

UPM ANNUAL REPORT 2006 7 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM group profile

UPM – Group proﬁ le

UPM is one of the world’s leading forest products groups. Its main products are magazine papers, newsprint, ﬁ ne and speciality papers, converted products and wood products. Sales in 2006 were € 10.0 billion. UPM has production plants in 15 countries and employs 28,700 people. UPM’s shares are listed on the Helsinki and New York stock exchanges. The company has approximately 64,000 registered shareholders.

8 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ group profile

UPM – Group profile

UPM is a global forest products UPM is a global forest products group whose and initiative. The company strives to take group whose core businesses core businesses are printing papers, speciality into account fi nancial, social and environ- papers, converted products and wood prod- mental issues in its activities. A companywide are printing papers, speciality ucts. Operations are backed by the company’s Code of Conduct guides UPM employees in papers, converted products and own resources, which include chemical pulp, their ethical business conduct. energy and forests. The target is to be profi t- wood products. able at all times and to be the best and most attractive company in the industry. Products Sales in 2006 were € 10.0 billion. UPM UPM’s paper grades are magazine papers, has production plants in 15 countries and its newsprint, fi ne papers, and label and packag- products are sold worldwide. The biggest ing papers. The annual capacity is 12.2 million markets are Europe, which accounts for some t/a. All UPM’s paper grades enjoy strong posi- three-quarters of sales, and North America, tions in their main markets. In magazine pa- which represents about 13% of sales. Most of pers, UPM is the world’s leading producer. UPM’s products are sold through its own sales The Converting Division’s products are network. The most important customers are self-adhesive labelstock, industrial wrappings magazine and newspaper publishers, printers, and RFID tags. The converting units hold a retail chains, paper merchants, paper convert- signifi cant market position in their product ers and the building industry. segments. The main markets are in Europe UPM’s shares are quoted on the Helsinki and the United States, but the role of Asia is (UPM1V) and New York (UPM) stock ex- growing rapidly. changes. At the end of the year the company UPM is Europe’s biggest plywood produc- had 64,000 registered shareholders. er and the fourth biggest producer of sawn UPM has 28,704 employees, about 52% of timber. The main markets for these products them based in Finland. are in Europe. UPM has a single set of management principles and its core values are openness, trust

Sales by market, 2006 Capital employed by area Personnel by area, 31.12.2006, X 10,022 million 31.12.2006, %11,634 million 28,704 M% M% Germany 16% Finland 45% Finland 52% Great Britain12% Germany 22% Germany 14% Finland 9% Great Britain 4% Great Britain 6% France 7% France 4% France 5% Other EU 22% Other EU 5% Other EU 5% Other Europe 7% Other Europe 1% Other Europe 5% United States 11% United States 4% United States 4% Canada 1% Canada 6% Canada 3% Asia 10% Asia 7% Asia 5% Rest of World 5% Rest of World 2% Rest of World 1% 0 500 1,000 1,500 2,000 2,500 0 1,500 3,000 4,500 6,000 7,500 0 4,000 8,000 12,000 16,000 20,000

10 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ group profile

Renewable raw material The UPM Group owns several power World’s biggest paper manufacturers The main raw material for UPM’s products is plants and together with its associated compa- Capacity: 1,000 t/a wood and wood fi bre, which represent a renew- nies is 70% self-suffi cient in electrical energy. Stora Enso able natural resource. Recycled fi bre accounts In Finland the self-suffi ciency is 100%. Most International Paper for more than 25% of all fi bre raw material electricity is consumed in the production of UPM used. paper and mechanical pulp. The use of bio- Georgia-Pacific On average, about 10% of the wood used fuels such as forest-based fuels and deinking Oji Weyerhaeuser annually comes from UPM’s own forests or sludge, in the generation of electricity and Nippon Paper from forests where the company has felling heat has been steadily increased, and they ac- Asia Pulp & Paper rights. The UPM Group owns more than one count for more than half of the total. Smurfit Kappa million hectares of forest, most of it in Fin- Smurfit-Stone land, where UPM is the biggest private forest 0 4,000 8,000 12,000 16,000 20,000 owner. Printing papers Other papers and board

Source: Jaakko Pöyry, UPM

Average capacity of printing paper machines 1,000 t/a MARKET POSITIONS OF UPM’S MAIN PRODUCTS UPM Nordic countries Other Western Europe Machines Capacity European Global Canada Papers no. (1,000 t/a) position position United States Japan Magazine papers Asia–Pacific region LWC 12 3,350 Average SC 8 1,890 0 60 120 180 240 300 Magazine papers, total 20 5,240 1 1 Source: Jaakko Pöyry Newsprint 12 2,830 2 5 Fine papers UPM’s production capacities by mill in January 2007 uncoated 9 1,715 Capacity: 1,000 t/a coated 1,595 Nordland, DE Fine papers, total 9 3,310 3 5 Rauma, FI Printing papers, total 41 11,380 Jämsänkoski, FI Label papers 4 510 1 1 Changshu, CN Packaging papers 2 290 3 – Kymi, FI Speciality papers, total 6 800 – – Schongau, DE Total 47 12,180 2 3 Kaipola, FI Kajaani, FI Kaukas, FI Augsburg, DE Shotton, GB European Global Steyrermühl, AT Converting position position Miramichi, CA Tervasaari, FI Self-adhesive labelstock 2 2 Chapelle, FR Industrial wrappings 1 – Blandin, US Schwedt, DE Caledonian, GB Stracel, FR Capacity European Wisapaper, FI Docelles, FR Wood products (1,000 m3/a) position

0 300 600 900 1,200 1,500 1,800 Plywood 1,100 1 Sawn timber 2,500 4 LWC paper SC paper Newsprint Uncoated fine paper Coated fine paper Label papers Packaging papers

UPM ANNUAL REPORT 2006 11 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ group profile

Strengths Global activities Comprehensive logistics network UPM has production plants in 15 countries. UPM operates a highly effi cient worldwide The most important of these are in Finland, logistics network backed up by modern IT Low cost production and good Germany, France, Great Britain, Austria, the management systems. The high proportion of United States, Canada and China. shipments made by sea ensures competitive customer relations are key attributes deliveries. for UPM. Through these the company Long-term customer relations The company enjoys close relations with its Clear business focus and strong aims to achieve profi table growth. customers, both local and global. Quality of market shares products combine with a long-term commit- UPM has focused its activities by investing in ment to make UPM a reliable and attractive its core businesses and by divesting non-core partner. assets and activities. In its main product areas, UPM is among the leading manufacturers in Skilled personnel the most important markets. One of UPM’s key competitive advantages is its skilled and motivated workforce. It is peo- Strong vertical integration ple who lay the foundations for quality, conti- UPM’s activities are based on close inte- nuous learning and renewal. gration of raw materials, energy and production. The company is largely self-suffi cient in Effective production facilities terms of chemical pulp and electrical power. The company’s production facilities rank with Wood raw material supplies are secured partly the world’s best in terms of production capac- by the company’s own forests. UPM’s produc- ity and competitiveness. A high level of tech- tion plants make proper and effi cient use of nical expertise forms the basis for cost leader- their wood raw material. ship and reliability as a supplier.

12 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ group profile

Achievement of ﬁ nancial targets

2006 2005 2004 2003 2002

Return on equity, % Min. target 9.0 8.2 8.7 9.3 9.3 Return on equity, % Achieved 4.6 3.5 12.6 4.4 6.8 excluding non-recurring items Achieved 5.7 3.8 3.4 3.6 7.1

Target Achieved

Gearing ratio, % <100 56 66 61 69 71 Dividend per share, € 1) Steady, growing 0.75 0.75 0.75 0.75 0.75 Dividend to earnings ratio, % >33 115.4 150.0 42.6 125.0 78.1

1) Board’s proposal for 2006.

Goals UPM’s businesses focus on printing papers, Financial objectives selected speciality papers, converting and The aim is a return on equity of at least fi ve wood products. percentage points above the yield of a risk-free UPM’s goal is to be the best and most In order to secure its leading market posi- investment such as the Finnish government’s tions in selected core business areas, UPM is 10-year euro-denominated bonds. At the end attractive company in the industry. prepared to grow through both investments of 2006, the minimum target for return on and acquisitions, particularly in the emerging equity, as defi ned above, was 9.0%. To ensure markets of Asia, South America and Eastern suffi cient fi nancial fl exibility, the aim is to Europe. In European and North American keep the gearing ratio well below the maxi- markets the main focus of UPM’s interest is mum acceptable level of 100%. on improving its production and service structure. Dividend policy In terms of investments, priority is given to It is UPM’s policy to distribute a dividend improving cost-competitiveness, the use of aver aging more than one-third of the profi t new technology and product development. for the fi nancial period. The aim is to provide UPM seeks to be the industry’s most at- shareholders with a steady, growing annual tractive company. Achieving this goal requires dividend. an extensive product range and cost-competitive global production. A high level of customer satisfaction is achieved through skilled employees and customer-oriented product and service development. UPM wants to remain a fi nancially sound company, as only this will ensure its long-term development. The aim is to create added value for the company’s shareholders and to do it by means of socially and ecologically sustainable practices.

UPM ANNUAL REPORT 2006 13 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ group profile

UPM tries to analyse and manage threats relating to the business operations.

Sensitivity analysis and risk factors

Fluctuations in sales prices and costs have a Sensitivity analysis Cost structure marked impact on the company’s fi nancial re- The company’s biggest cost items are its per- sults. UPM has analysed the risks associated Changes in sales prices sonnel expenses and the cost of fi bre raw with its operating environment and oper- The biggest factor affecting UPM’s fi nancial mate rial. Delivering products to customers ations. Assuming that the risks identifi ed were results is the sales price of paper. A change worldwide is also a major cost factor. to materialise, the fi nancial implications and in the volume delivered has less than half of Crude oil, one of the most important world other consequences cannot be completely the effect of the same percentage change in market priced products, has little direct im- avoided. sales prices. pact on the company. The effect on fi nancial Paper and forest products markets are in- results of a change of USD 5/barrel in the fluenced by factors such as consumer Exchange rate risk price of oil is less than € 10 million over behaviour, business cycle, advertising vol- Changes in exchange rates over a prolonged 12 months. The indirect effects, for example umes, construction activity, changes in pro- period also have a marked impact on fi nancial on freight and oil-based raw materials, are duction capacity and prices of key raw mate- results. About half of the Group’s net foreign greater. rials. Changes in sales prices and variations in currency exposure is in US dollars and about delivery volumes resulting from business one fourth is in pounds sterling. For example, cycles have a major impact on UPM’s fi nan- a 10% change in the value of the euro against Risk factors cial results. the dollar has a profound effect on pre-tax profi t: around € 50 million over the fi rst 12 The main risk factors that can materially af- months and around € 100 million a year there- fect the company’s business and fi nancial re- after. It is the company’s policy to hedge an sults are set out below. They have been classi- average of 50% of its net currency exposure fi ed as strategic risks, operational risks, fi nan- for 12 months ahead. cial risks and hazard risks.

14 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ group profile

Effect of a 10% change in Costs, excluding depreciation prices on operating proﬁ t for the year (based on 2006 sales) % 2006 2005

Personnel expenses 19 19 €m Logs and pulpwood 14 13 Delivery of own products 12 12 Magazine paper 340 Fillers, coating pigments and Newsprint 140 other chemicals 14 13 Fine paper 190 Energy 11 10 Speciality paper 60 Recovered paper 3 3 Plywood 60 Other raw materials 12 11 Sawn timber 50 Other costs 15 19 Total 100 100

Costs totalled € 8.5 billion in 2006 and € 8.1 billion in 2005.

Strategic risks aging and label materials and other similar which UPM might enter into or make could uses have become both more demanding and involve risks, including those concerning the Competition more diverse. The trend towards a greater use ability to successfully integrate and manage The paper and forest products markets are of computers and electronic media is also acquired operations and personnel, as well as highly competitive. UPM has, from time to having an effect on consumption patterns for to successfully achieve the economies of scale time, experienced price pressures from compe- paper now and will in the future. The ability or synergies sought. To minimise such risks, titors in its main business areas and geo- to continue to meet the shifting demands of the company has a merger and acquisitions graphic markets and has experienced particu- consumers depends upon a variety of factors, process, in which there is expertise in all dif- larly large fl uctuations in operating margins including the ability to foresee and/or identify ferent steps of M&A activity, from valuation due to this competitive environment. Al- changes in consumer preferences, requiring to integration. though the company’s fi nancial position is alteration of strategies, the technical capabili- currently sound in relation to many other in- ties of manufacturing facilities, the speed of, Suitability of business portfolio dustry players, there can be no assurance that and the costs associated with, the shifting of Although UPM believes that its product port- UPM will have suffi cient fi nancial resources production at such facilities and the success folio and geographic spread is currently quite to respond to these competitive pressures. of various research and development pro- suited for profi table business, demand and over- grammes. all business conditions for its main products in Shifts in consumer preferences major markets may change. Changes may take including the trend toward a greater Mergers and acquisitions place as a consequence of the changing con- use of electronic media The paper and forest products industry has in sumer behaviours. We cannot therefore be cer- Over the last several decades, consumer the past and could in future experience a fur- tain that our current portfolio will ensure ade- expec tations with respect to paper used for ther wave of consolidation, driven, in part, by quate returns in the future. such items as books, catalogues, magazines, a desire to achieve economies of scale and newspapers, advertising, direct mail, pack- synergies. The mergers and acquisitions

UPM ANNUAL REPORT 2006 15 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ group profile

Political risks UPM has manufacturing operations in certain emerging markets, including, among others, China and Russia. The political, economic and legal systems in these countries may be less predictable than those in countries with more established and sustained institutional structures. Investments in these countries may also be subject to other risks and uncertainties such as unfavourable taxation treatment, trade restrictions, inﬂ ation, currency regulations and nationalisation. Emerging markets represented approximately 16% of the company’s sales of € 10.0 billion in 2006.

Operational risks

Cyclicality of the markets and pricing fl uctuations The markets for paper and forest products are cyclical, being characterised by periods of imbalance between supply and demand during which prices of paper and forest products can fl uctuate signifi cantly. These demand-supply imbalances may be caused by such factors as economic growth and advertising, capacity investments, inventory build-up and changes in end-use patterns. There can be no assurance that current price levels for paper and forest products will be maintained, that any additional price increases will be achieved or that the industry will not add new capacity.

Availability and price of major inputs In 2006, third-party suppliers accounted for Signifi cance of the largest customers Environmental regulations more than 85% of UPM’s wood requirements UPM sells a signifi cant proportion of its prod- UPM is subject to various environmental laws and approximately 30% of electric power ucts to several major customers, including and regulations. Its environmental processes needs. Other production inputs, such as chemi- certain signifi cant printing houses and mer- and management are based on full compliance cals, fi llers and recovered paper, are obtained chant distributors, which resell the products. with such laws and regulations, and environ- from third-party suppliers. Disruptions in the Although not dependent on any specifi c cus- mental investments, audits and measurements supply of key inputs would impact our manu- tomer or group of customers the loss of one are carried out on a continuing basis. The com- facturing operations, examples being interrup- or more of our signifi cant customers, if not pany is currently not involved in any major tion or downscaling of production or change in replaced on similar terms, could have an ad- legal proceedings concerning environmental the product mix, or increased costs resulting verse effect on the company’s results. The ten matters. However, the risk of substantial envi- from price increases of critical inputs. largest customers accounted for approximate- ronmental costs and liabilities is inherent in ly 15% of our sales in 2006 - i.e., € 1.5 billion industrial operations. - and our largest customer accounted for approximately 3% - i.e., € 0.3 billion.

16 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ group profile

Ability to recruit and retain skilled Hazard risks employees To meet the challenges of sustaining growth Insurance cover and retaining the effectiveness of operations, UPM operates a signifi cant number of manu- a skilled workforce is necessary. UPM is facturing facilities all over the world, mostly contin uously evaluating its recruitment, com- owned, and is also the largest private owner of pensation and career development policies forestland in Finland. There is a programme and taking measures to attract and retain in place consisting of a number of different skilled personnel. There is no assurance that insurance policies that cover property damage shortages of suffi cient numbers of appropri- and losses due to the interruption of our busi- ately skilled personnel in the future would not nesses, subject to applicable insurance condi- exist. tions. However, there can be no assurance that the company’s insurance programme would be suffi cient to cover potential damages aris- Financial control procedures ing from catastrophes, such as war, terrorism Effective internal control procedures are nec- or natural disasters. essary for providing reliable and accurate fi - nancial reporting. Inability to prevent fraud or provision of reliable fi nancial reports could have material effect on fi nancial results.

Financial risks

Changes in exchange and interest rates Currency risk exposure primarily affects export operations to the extent when sales are denominated in currencies other than those in which manufacturing costs are incurred. A signifi cant portion of UPM’s sales are denominated in currencies (consisting primarily of the US dollar and the British pound sterling) other than the euro. To manage exposure to such exchange rate fl uctuations, close monitoring of the exposure to currency risks is taking place simultaneously with hedging of such risks using certain fi nancial instruments, including forward foreign exchange agreements and currency swaps, is done. Further, changes in interest rates may have a considerable impact on the values of the company’s assets (biological assets for example), which are valued on a discounted cash fl ow model.

Payment defaults There is a risk of non-payment or non-performance by the company’s customers in connection with the sale of products. UPM has various programmes in place to monitor and mitigate customer credit risk and insurance policies cover most of our trade receivables.

UPM ANNUAL REPORT 2006 17 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ divisional reviews

Divisional reviews

Due to somewhat higher paper prices and improved effi ciencies, the profi tability of our paper business areas improved. However, returns were behind the targeted levels. In the Converting Division, especially in the Labelstock Business, the result was good. The profi tability of the Wood Products Division improved.

18 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ business drivers and operating environment

Paper demand dynamics are changing as print media are press- ed to ﬁ nd new business models to serve customers. Although annual paper demand growth has been 1 to 2% in the last couple of years, structural overcapacity in the main European markets was still persistent for coated paper grades.

Business drivers and operating environment

Economy sibilities offered by electronic media, have be- Customer actions World economic growth accelerated relative come factors explaining the changes in paper The changes in reading habits and consumers’ to the previous year. The fastest growth took demand. Self-adhesive labelstock markets, in information sourcing guided the actions of place in Asia, driven by the strong growth in turn, benefi t from the increased popularity of several newspaper and magazine publishers China. In Eastern Europe the growth was paper and fi lm-based labelling, and demand is in mature markets. To counterbalance the solid as well. In UPM’s main market, the Euro- growing rather strongly. Demand for wood evolution of electronic media, a number of pean Union, GDP grew by more than 2.5% products is primarily dependent on construc- new print innovations were launched espe- (1.7%). The correlation between economic tion and renovation activity, which has also cially for young readers. Alternative, on-line growth and paper demand, however, still been lively in Europe. channels for information distribution were weakened in the United States. founded and publishers invested in electronic Structural overcapacity media. Cost savings related to paper were Demand dynamics One characteristic of the recent operating en- sought by decreasing pagination and page World paper markets are twofold: in mature vironment especially in Europe has been that sizes. Classifi ed ads and directories continued markets demand growth is weak or in some paper markets are oversupplied and prices are to be transferred to the Internet. Analysis of cases even declining, while in emerging mar- low in historical comparison. Simultaneously, especially young consumers’ habits intensi- kets, especially in China, consumption of paper the cost of production inputs, such as fi bre, fi ed, as the competitiveness of print media is growing rapidly. In North America, for ex- energy, labour and chemicals, has increased. relative to the overall media time consump- ample, overall printing and writing paper de- Therefore, the paper industry has generated tion has suffered, especially in mature mar- mand decreased by approximately 1% in 2006, subdued fi nancial returns. To respond to these kets. while that in Europe grew by approximately challenges, several companies have conduct- 2%. In addition to the traditional GDP growth ed and are carrying out restructuring efforts, Advertising and advertising volume, the younger genera- to lower costs and decrease production capac- Together with the accelerated economic growth tion’s consumption of print media, and the pos- ity through paper machine closures. the money spent on advertising, including print

20 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ business drivers and operating environment

UPM paper divisions Sales by market in 2006 Global demand for printing papers in 2006

Magazine Newsprint Fine and Magazine Newsprint Fine €m papers % % spec. % papers papers

Europe 2,187 65 1,290 90 1,696 66 million t/a USA and Canada 770 23 50 3 141 6 Europe 11.5 13.7 19.9 Rest of World 397 12 96 7 723 28 USA and Canada 8.4 13.3 18.2 3,354 100 1,436 100 2,560 100 Rest of World 4.2 18.3 39.6 Total 24.1 45.4 77.7

kg per capita/a Europe 15.6 18.7 27.2 USA and Canada 25.4 40.2 54.9 Rest of World 0.8 3.4 7.3 Total 3.7 7.0 11.9

media, also grew. Advertising in electronic media, including Internet advertising, continued to grow rapidly and the share of newspaper and magazine advertising fell. The share of print media among total advertising expenditure was approximately 60% in Europe and 55% in North America. Direct mail advertising also continued to develop favourably. In Europe, advertising pages in news papers grew slightly. Growth in magazine ad pages was not as robust as in the past. Circulation of paid newspapers declined, but the popularity of free newspapers continued to increase. New special-interest magazines were launched onto the market but overall the circulation of magazines in mature markets was stable. In North America, print newspaper readership continued to fall. Magazine advertising showed healthy increase, but magazine advertising page volumes were subdued. In China, where the advertising market as a whole is less than one tenth of that in Eu-

UPM ANNUAL REPORT 2006 21 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ business drivers and operating environment

rope, the growth in advertising expenditure has averaged about 15% per annum during recent years. Print media advertising grew similarly and this represents slightly less than 50% of the total advertising expenditure. Newspaper and magazine publishing grew strongly in China, with new launches and increased circulation. The readership of newspapers and magazines also increased in East- ern Europe.

Paper markets The demand for printing and writing papers in Europe grew by approximately 2% compared to the previous year. The growth in newsprint was backed up by the growth in Eastern Europe and the popularity of free newspapers. Magazine paper demand grew due to the good demand for uncoated grades, caused partly by the transition from coated grades. With regard to fi ne paper the demand for copy papers was strong, but demand grew also for coated fi ne papers. In the United States the demand for paper declined by about 1%. The newsprint market continued to contract rather strongly. Also the demand for both coated and uncoated magazine paper decreased. The market for uncoated fi ne paper declined for the second year in a row. Coated fi ne paper was the only major grade where demand grew. In other markets, especially in China and Eastern Europe, the demand for paper developed more favourably. Paper prices in Europe were similar to those in 2005, with the exception of newsprint, whose contract prices rose by approximately 5% from the year before. Compared to the average prices over the last 10 years, paper prices in Europe were more than 10% lower in 2006. In North America, the average prices of all major grades increased from the previous year with prices, however, beginning to pla- teau during the year. Average prices in 2006 were approximately 7% higher than prices during the last 10 years. In Asia, average prices of fi ne papers were slightly higher than the year before.

Converted products markets Global self-adhesive labelstock markets continued their strong growth. The popularity of paper and ﬁ lm-based labelstock increased.

22 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ business drivers and operating environment

This was driven by the increased usage of Demand for industrial wrappings in Eu- Asia and North America kept the plywood labelstock in food, beverage, cosmetics and rope suffered from the effects of savings pro- trade ﬂ ows favourable from Europe’s perspec- medical applications. Demand growth in de- grammes in the paper industry, the most signif- tive. Average prices of plywood rose. Also veloping markets in China, India, Russia and icant customer segment. The weak demand sawn wood and wood-based component de- Eastern Europe was 15–25%. Also in other for paper industry wrappings was partly mand grew in Europe. New sawmilling ca- Southeast Asian countries and in South compensated by the growth in demand for pacity was commissioned mainly in Eastern America the growth averaged more than protective wrappings, technical products and Europe. The growth in demand for wood raw 10%. In Europe and North America, which products used for insulation. Although the material led to the increase of average prices. together accounted for nearly 70% of the prices for raw materials increased, ﬁ erce com- world market, the demand growth was clear- petition made it impossible to transfer raw ly higher than GDP - i.e., approximately 5%, material cost increases to end products. with Europe showing particularly healthy growth. During the year the average prices of self-adhesive labelstock increased slightly. Wood products markets The markets for RFID tags in terms of vol- As a result of lively construction and interior ume grew markedly as certain large retail and renovation activity, the demand for plywood logistics chains adopted the technology, espe- continued to grow in Europe. Also the de- cially in the USA. As unit prices decreased, mand for plywood products used in the the monetary market growth was slower. transpor tation industry developed well. The Major commercialisation has not taken place demand for birch plywood was stronger than yet. that for spruce plywood. Solid demand in

UPM ANNUAL REPORT 2006 23 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ magazine papers

Magazine publishers have become more global while expanding their offerings and services to other channels, like electronic media. They have entered growing markets with print products, strengthening the position of paper suppliers with a global reach.

Magazine Papers

Profitability Markets Capital expenditure and Operating profit, excluding non-recurring In Europe, coated magazine paper demand restructuring items, for Magazine Papers increased from was fl at. Uncoated magazine paper demand As part of the profi tability programme, in € 97 million to € 197 million. Sales in- increased by 7% from the previous year. In June, UPM closed the Voikkaa paper mill, creased from € 3,094 million to € 3,354 North America, demand for coated magazine which had an annual capacity of 410,000 million. The paper delivery volume was paper increased slightly while the uncoated tonnes of coated magazine paper. In the fi rst 4,761,000 tonnes (4,486,000 tonnes). magazine paper fi gure decreased by 3%. In quarter of 2007, UPM will stop the produc- Profitability of magazine papers im- other markets, especially in Asia, demand for tion of coated magazine paper on Jämsän- proved from the previous year. Larger de- magazine papers continued its rapid growth. koski paper machine 4, which has an annual liveries and higher average prices improved Average market prices for magazine papers in capacity of 120,000 tonnes. With a € 45 mil- profitability, while the lower US dollar Europe and North America were about the lion investment, the paper machine will be exchange rate had a negative effect. The same as last year. converted to produce label papers. The con- Voikkaa magazine paper mill was closed at version is scheduled for completion in the the end of June, and its production was second quarter of 2007. At the Jämsänkoski transferred to UPM’s other mills, improv- mill, € 38 million will be invested in the qual- ing their utilisation of capacity. The Mira- ity of uncoated magazine paper. The invest- michi magazine paper mill experienced a ment will be completed in the second quarter three-month shutdown in the first half of of 2008. A new power plant using biofuels the year. Translated into euros, average will be built at the Caledonian mill in Irvine, prices for magazine papers were slightly Scotland – the investment cost, net, is approx- higher than those for 2005. imately € 72 million and start-up is projected for the third quarter of 2009.

24 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ magazine papers

Magazine papers Magazine Papers, key ﬁ gures

2006 2005 2004 For end uses ranging from magazines, catalogues, magazine covers, advertising Sales, €m 3,354 3,094 3,308 material, annual reports, brochures, direct EBITDA, €m 1) 570 507 497 mail advertising, inserts and supplements % of sales 17.0 16.4 15.0 to manuals and books. Depreciation, amortisation and impairment charges, €m –604 –566 –535 Operating proﬁ t, €m –56 –76 –67 % of sales –1.7 –2.5 –2.0 UPM Finesse UPM Satin Non-recurring items, €m 2) –253 –173 –104 UPM Star UPM Matt Operating proﬁ t excl. non-recurring items and amortisation of UPM Ultra UPM Cat goodwill, €m 197 97 95 UPM Cote UPM Lux % of sales 5.9 3.1 2.9 UPM Max Capital employed (average), €m 4,010 4,397 4,749 UPM Eco ROCE (excl. non-recurring items and amortisation of goodwill), % 4.9 2.2 2.0 Deliveries, 1,000 t 4,761 4,486 4,940 Capital expenditure and acquisitions, €m 155 177 149 Personnel on 31 Dec. 6,869 8,087 8,590

1) EBITDA is operating proﬁ t before depreciation, amortisation and impairment charges and excluding non-recurring items. 2) Non-recurring items in 2006 include personnel charges of € 28 million related to the proﬁ tability programme, impairment charges of € 116 million related to the closure of the Voikkaa paper mill, impairment charges of € 115 million for Miramichi, and other items related primarily to the capital gain on the sale of Rauma power plant. Non-recurring items in 2005: impairment charge of € 151 million for Miramichi, € 5 million in non-recurring depreciation at Augsburg, and € 17 million provision for pension costs at Miramichi. The division comprises the Group’s magazine paper machines, and Kaukas pulp mill (see Fibre Supply, p. 38).

World’s biggest magazine Magazine paper production capacities in Magazine paper prices in Europe paper manufacturers Western Europe and total deliveries

Capacity 1,000 t/a 1,000 t `/t 6,000 12,500 1,000

4,800 10,000 900

3,600 7,500 800

2,400 5,000 700

1,200 2,500 600

0 0 500 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06 kog UPM Burgo SCA M-real Bowater LWC capacity SC capacity LWC offset 60 g SC roto 56 g Stora EnsoMyllykoski Norske S Verso Paper Abitibi-Cons. LWC deliveries SC deliveries

LWC SC Source: Jaakko Pöyry Source: CEPIPRINT Source: PPI

UPM ANNUAL REPORT 2006 25 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ newsprint

Despite declining circulations of paid daily newspapers, newsprint markets in Europe were supported by continuous growth of free newspapers and an increasing number of print innovations. In addition, demand growth in Eastern Europe was strong.

Newsprint

Profitability Markets Capital expenditure and Operating profit, excluding non-recurring In Europe, demand for standard and improved restructuring items, for Newsprint increased from € 82 mil- newsprint showed a 2% increase compared At the Shotton paper mill in Wales, the new lion to € 155 million. Sales amounted to with the year before. In Europe, standard sludge boiler entered production use at the € 1,436 million, 10% higher than in 2005. newsprint market prices were, on average, 5% end of the year. The biofuel-fi red power plant Paper deliveries were 2,677,000 tonnes higher. Also in the other markets, with the ex- investment for the Chapelle Darblay mill in (2,592,000 tonnes). ception of North America, growth in demand France is proceeding according to plan, with The main contributor to the improved increased. completion scheduled for the fi rst quarter of profi tability was the higher price of news- 2007. The investments will further improve print. Average prices for standard and im- the mills’ energy self-suffi ciency and increase proved newsprint were about 6% higher than the use of biofuels. in 2005, when translated into euros. Capacity was in good use. Higher energy prices in Cen- tral Europe and Great Britain negatively affected results. The average price of the most important raw material, recycled paper, was about the same as in 2005.

26 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ newsprint

Newsprint and Mechanical Newsprint, key ﬁ gures Speciality Papers 2006 2005 2004

For a variety of end uses: newspapers, Sales, €m 1,436 1,308 1,304 inserts, supplements, directories and EBITDA, €m 1) 345 275 229 advertising material. % of sales 24.0 21.0 17.6 Depreciation, amortisation and impairment charges, €m –190 –198 –224 UPM Matt Operating proﬁ t, €m 148 77 7 UPM Brite % of sales 10.3 5.9 0.5 UPM Opalite Non-recurring items, €m 2) –7 –5 2 UPM Color Operating proﬁ t excl. non-recurring items and amortisation of UPM News goodwill, €m 155 82 33 % of sales 10.8 6.3 2.5 Capital employed (average), €m 1,921 1,900 2,002 ROCE (excl. non-recurring items and amortisation of goodwill), % 8.1 4.3 1.6 Deliveries, 1,000 t 2,677 2,592 2,719 Capital expenditure and acquisitions, €m 145 135 74 Personnel on 31 Dec. 3,204 3,395 3,451

1) EBITDA is operating proﬁ t before depreciation, amortisation and impairment charges and excluding non-recurring items. 2) The non-recurring cost booked for 2006 relates mainly to the proﬁ tability programme, and for 2005 is due to one-time depreciation at Augsburg. The division comprises the Group’s newsprint machines.

Europe’s biggest newsprint manufacturers Newsprint production capacities in Newsprint* prices in Europe Western Europe and total deliveries

Capacity 1,000 t/a 1,000 t `/t 3,500 15,000 800

2,800 12,000 700

2,100 9,000 600

1,400 6,000 500

700 3,000 400

0 0 300 en est sk 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06 UPM kog koski SCA Palm Holm st-W Stora Enso ylly O Solikam Norske S KondopogaM Capacity * 45 g Source: PPI Deliveries Source: CEPIPRINT Source: Jaakko Pöyry 2004–2006 including also speciality grades

UPM ANNUAL REPORT 2006 27 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ fine and speciality papers

Expanding use of offi ce computer technology and growth in end-use markets is raising fi ne paper consumption especially in Asia. Simultaneously, local producers have expanded capacity, changing the global fi ne paper trade fl ows.

Fine and Speciality Papers

Profitability papers translated into euros were slightly A decision was made to rebuild the re- Operating profit, excluding non-recurring down from last year. covery plant at the Kymi pulp mill. The total items, for Fine and Speciality Papers was investment cost is € 325 million and it is € 149 million (€ 93 million). Sales were Markets planned for completion in the summer of € 2,560 million (€ 2,234 million). Paper In Europe, demand for coated fi ne papers in- 2008. A € 25 million investment will be made deliv eries increased from 3,060,000 tonnes creased by 2% and for uncoated fi ne papers in bleached pulp production at the Tervasaari to 3,550,000 tonnes. by 1% compared with the previous year. For mill, where a new bleaching line is scheduled Energy and raw material costs increased label and packaging papers, the good demand to start up in autumn 2007. from the last year but the negative impact of continued. In Asia, demand for coated and The modernisation of Tervasaari release those was partially offset by improved oper- uncoated fi ne papers increased. Market prices paper machine 8 was completed at the end of ating effi ciency. The Kymi paper machine 7 for coated and uncoated fi ne papers in Europe February. This investment increased annual was closed at the end of June. Its production decreased by about 2%. In Asia, fi ne paper production capacity by 45,000 tonnes to was transferred to other machines at the prices were higher than a year ago. 175,000 tonnes and further improved the Kymi and Nordland Papier mills, due to quality of the paper. In September, at the which their capacity utilisation improved. Capital expenditure and restructuring Nordland and Docelles paper mills, the re- Speciality paper capacity was in good use. As part of the profi tability programme, in builds of two paper machines were complet- The new paper machine, started up in May June, UPM closed Kymi paper machine 7, ed. These investments substantially improved 2005 in China, contributed to the volume in- with an annual capacity of 150,000 tonnes of product quality and effi ciency of the produc- crease. Average prices for fi ne and speciality coated fi ne paper. tion lines.

28 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ fine and speciality papers

Fine papers Fine and Speciality Papers, key ﬁ gures

2006 2005 2004 Coated and uncoated graphic papers for advertising material, annual reports, direct Sales, €m 2,560 2,234 2,286 mail, brochures, magazines and maps. Offi ce EBITDA, €m 1) 368 309 367 papers for copying and printing, papers for % of sales 14.4 13.8 16.1 digital and preprint applications, and a wide Depreciation, amortisation and impairment charges, €m –237 –224 –199 range of envelope papers. Operating profi t, €m 108 85 171 % of sales 4.2 3.8 7.5 UPM Finesse UPM Offi ce UPM Preprint Non-recurring items, €m 2) –41 –8 3 UPM Fine Yes UPM DIGI Operating profi t excl. non-recurring items and amortisation of Future UPM Mail goodwill, €m 149 93 173 % of sales 5.8 4.2 7.6 Capital employed (average), €m 2,760 2,843 2,640 ROCE (excl. non-recurring items and amortisation of goodwill), % 5.4 3.3 6.6 Speciality papers Deliveries, 1,000 t 3,550 3,060 3,074 Label papers for self-adhesive labelstock, both Capital expenditure and acquisitions, €m 189 265 345 face papers and base papers. Personnel on 31 Dec. 6,283 6,708 6,831 1) EBITDA is operating profi t before depreciation, amortisation and impairment charges and excluding non-recurring items. Packaging papers for several end uses - e.g. 2) In 2006, non-recurring items include personnel and impairment charges related to the profi tability programme. In 2005, one-time depreciation was booked for the rebuild of Nordland’s paper machine. fl our and sugar bags, high-performance sacks, The division comprises the Group’s paper machines producing fi ne and speciality papers, and Kymi, Wisaforest and Tervasaari pulp mill fashion and carrier bags, envelopes, industrial (see Fibre Supply, p. 38). converting for various heavy duty and technical applications, fl exible packaging.

World’s biggest fine paper manufacturers Fine paper production capacities in Fine paper prices in Europe Western Europe and total deliveries

Capacity 1,000 t/a 1 000 t `/t 7,500 12,500 1,250

6,000 10,000 1,100

4,500 7,500 950

3,000 5,000 800

1,500 2,500 650

0 0 500 ji 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06 PP PM per O tar Paper A Sappi U -real om M erhaeuser D Int'l Stora Enso ippon pa ey Uncoated Coated A4 copier paper Coated N W capacity capacity 100 g reels Uncoated fine paper Coated fine paper deliveries deliveries Source: PPI

Source: Jaakko Pöyry Source: CEPIPRINT

UPM ANNUAL REPORT 2006 29 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ converting

The strong growth in demand for of self-adhesive labelstock continued globally. UPM Raﬂ atac’s sales grew to almost one billion euros.

Converting

Profitability Self-adhesive labelstock plant and further strengthened UPM Rafl atac’s Converting’s operating profi t, excluding non- The profi tability of UPM Rafl atac’s self-ad- position in the growing fi lmic labelstock mar- recurring items, increased to € 64 million hesive labelstock improved and was good. ket. UPM Rafl atac’s new production plant in from € 44 million. The division’s sales came Volumes were higher, and sales increased by China started commercial production, ahead to € 1,274 million (€ 1,347 million). The 15% to € 987 million. Notable growth took of the original schedule, in December. Loparex Group, with approximately € 340 place in North America and Europe but also million in annual sales, was sold in August in Asia. Sales growth in Asia Pacifi c acceler- Industrial wrappings 2005. ated toward the end of the year, led by good The profi tability of Walki Wisa’s industrial development in China. Prices of raw materi- wrappings improved, mainly as a result of in- Markets als remained largely unchanged. The growth ternal measures. Sales amounted to € 287 Demand for self-adhesive labelstock grew in in sales volume for RFID tags accelerated to- million, 7% higher than for 2005. North America, Europe and Asia. Average ward the end of the year. Walki Wisa’s converting plant in China prices for self-adhesive labelstock were UPM will markedly expand its operations started its operations in March. The new plant slightly higher. The demand for industrial in North America through an investment in a serves the increasing demand for wrapping wrappings continued to be strong, at the pre- new self-adhesive labelstock plant in Dixon, materials in the Chinese paper industry. vious year’s level; however, competition re- Illinois, in the United States. The value of this mained fi ery as well. Prices were unchanged. investment is approximately USD 109 million, and the new plant is slated for comple- Capital expenditure and restructuring tion in the fi rst quarter of 2008. The division’s investments were focused Completed in September, the modernisa- primar ily on expanding the self-adhesive lation investment for the fi lm lamination line at belstock business in North America, Europe the Tampere labelstock plant doubled the and Asia. fi lmic self-adhesive labelstock capacity of the

30 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ converting

Converting units and main Converting, key ﬁ gures products 2006 2005 2004

UPM Rafl atac Sales, €m 1,274 1,347 1,414 • Self-adhesive labelstock for product EBITDA, €m 1) 102 89 122 and information labelling. % of sales 8.0 6.6 8.6 • Production plants in Finland, Spain, Great Depreciation, amortisation and impairment charges, €m –38 –45 –53 Britain, France, the United States, Australia, Operating profi t, €m 64 70 71 Malaysia, China and South Africa. % of sales 5.0 5.2 5.0 • RFID tags and inlays. Non-recurring items, €m 2) –262 • Production plants in Finland and the United Operating profi t excl. non-recurring items and amortisation of States goodwill, €m 64 44 74 % of sales 5.0 3.3 5.2 Walki Wisa Capital employed (average), €m 489 603 654 • Wrappings for the paper, steel and wood ROCE (excl. non-recurring items and amortisation of goodwill), % 13.1 7.3 11.3 products industries Capital expenditure and acquisitions, €m735232 • Composite materials for the packaging Personnel on 31 Dec. 3,560 3,435 4,676 industry and technical purposes 1) EBITDA is operating profi t before depreciation, amortisation and impairment charges and excluding non-recurring items. • Production plants in Finland, Germany, 2) Non-recurring items in 2005 include a gain of € 26 million from the sale of Loparex. Great Britain and China

Converting Division: Sales by business unit Sales by market 2006, %1,274 million €m 2006 2005 2004 M%

Finland 5% 62 UPM Raﬂ atac 987 860 784 Other Europe 65% 831 Walki Wisa 287 269 299 Units sold – 224 337 USA and Canada 20% 256 Internal sales ––6–6

Rest of world 10% 125 1,274 1,347 1,414

0 250 500 750 1,000

Converting Division: Personnel by business unit on 31.12.2006

UPM Raflatac 73% 2,592

Walki Wisa 27% 968

0 750 1,500 2 ,250 3,000

UPM ANNUAL REPORT 2006 31 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ wood products

European wood products markets were in good balance throughout the year. The proﬁ tability of plywood was good and the operating proﬁ t of sawmilling turned positive.

Wood Products

Profitability Markets Capital expenditure and The division’s operating profit, excluding Birch and spruce plywood demand continued restructuring non-recurring items, increased to € 61 million to be strong in all markets. Plywood prices The Loulay plywood mill in France was sold (€ 38 million). Sales came to € 1,321 million increased slightly from their 2005 levels. in March. The annual sales of the mill were (€ 1,290 million). Plywood production was Markets for veneers and further processed approximately € 28 million and it employed 955,000 cubic metres (916,000 cubic metres) goods were solid. Redwood and whitewood 193 people. In August, UPM sold its Finnish and sawn timber production 2,214,000 cubic sawn timber markets improved, and prices in- building materials merchant Puukeskus Oy to metres (2,017,000 cubic metres). creased. The supply of logs tightened, causing the private equity investor Triton and Puu - Plywood enjoyed good profi tability. Saw- upward pressure on prices. keskus’s management. Puukeskus had annual milling improved in profi tability, and operat- sales of approximately € 400 million and em- ing profi t turned positive due to higher prices ployed approximately 600 people. and increased deliveries. Sawn timber pro- An investment of € 6 million in plywood duction was higher than in 2005, mainly as a manufacturing at the Chudovo and Heinola result of the increased volumes from the Pes- mills has been completed. Investments to im- tovo sawmill in Russia. prove production effi ciency and product quality were completed at the Jyväskylä plywood mill in December and a similar project is scheduled for completion at the Savonlinna plywood mill in the second quarter of 2007. The total value of these investments is € 8 million.

32 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ wood products

Wood products Wood Products, key ﬁ gures

Plywoods and veneers 2006 2005 2004 • WISA plywoods and veneers, mainly for building, interiors and transport equipment Sales, €m 1,321 1,290 1,492 • 12 production plants in Finland, EBITDA, €m 1) 104 86 80 1 in Estonia and 2 in Russia % of sales 7.9 6.7 5.4 Depreciation, amortisation and impairment charges, €m –43 –75 –73 € Sawn timber Operating proﬁ t, m 144 6 111 • WISA products ranging from standard % of sales 10.9 0.5 7.4 Non-recurring items, €m 2) 83 –32 83 products to complete components and Operating proﬁ t excl. non-recurring items and amortisation of mouldings, mainly for the building and goodwill, €m613828 joinery industries % of sales 4.6 2.9 1.9 • 7 sawmills and 6 processing facilities in Production, plywood 1,000 m3 955 916 969 Finland, 1 sawmill in Austria and Production, sawn timber 1,000 m3 2,214 2,017 2,276 1 in Russia Capital employed (average), €m 616 660 748 ROCE (excl. non-recurring items and amortisation of goodwill), % 9.9 5.8 3.7 Capital expenditure and acquisitions, €m395130 Personnel on 31 Dec. 5,577 6,362 6,851

1) EBITDA is operating proﬁ t before depreciation, amortisation and impairment charges and excluding non-recurring items. 2) Non-recurring items in 2006 include a loss of € 10 million from the sale of the Loulay plywood mill, a capital gain of € 93 million on the sale of Puukeskus. Non-recurring items in 2005 include impairment charges of € 25 million relating to the Group’s Finnish sawmills and a provision of € 7 million relating mainly to restructuring of the sales network.

Export prices for Finnish plywood Sales by business area Sales by market `/m3 1,000 €m 2006 2005 2004 €m 2006 % 800

600 Plywood 578 546 573 Finland 458 35 400 Sawmilling 529 452 498 Other EU countries 659 50 Units sold 300 394 519 Other European countries 46 3 200 Other and internal sales –86 –102 –98 North America 12 1 0 97 98 99 00 01 02 03 04 05 06 1,321 1,290 1,492 Rest of World 146 11 Coniferous plywood Birch plywood 1,321 100

Source: Finnish Forest Industries Federation

Export prices for Finnish sawn timber* Europe’s biggest plywood producers Europe’s biggest sawn timber producers

`/m3 Capacity 1,000 m3/a Capacity 1,000 m3/a 300 1,250 7,500

250 1,000 6,000

200 750 4,500

150 500 3,000

100 250 1,500

50 0 0 97 98 99 00 01 02 03 04 05 06 UPM UPM SCA Redwood Whitewood * All grades Sveza Sonae Södra Pfeifer Zhesart Parfinsky Klausner Metsäliitto Syktyvkar Manturovo Stora EnsoMetsäliitto Klenk Holz Source: Finnish Forest Industries Federation Atcon Group Setra Group Latvijas Finieris Mayr-Melnhof

Source: Jaakko Pöyry Source: Jaakko Pöyry

UPM ANNUAL REPORT 2006 33 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ other operations

Other Operations

The results of Other Operations were affected by the decrease in the fair value of biological assets and the lower availability of hydropower.

34 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 DIVISIONS ■ other operations

Other Operations, key ﬁ gures

2006 2005 2004

Sales 1) 571 517 538 EBITDA 190 160 138 Depreciation, amortisation and impairment charges –26 –22 –38 Operating profi t Forestry –19 64 66 Energy Department, Finland 94 135 118 Other and eliminations –8 –84 150 Operating profi t, total 67 115 334 Non-recurring items 2) 29 –57 219 Operating profi t, excluding non-recurring items 38 172 115 Capital employed at end of period (including associated companies) 3,282 3,501 3,355 Capital expenditure and acquisitions, €m986956 Personnel on 31 Dec. 3,211 3,535 3,034

Associated companies and joint ventures Share of results after tax, €m 3) Metsä-Botnia 69 36 56 Pohjolan Voima –14 – –5 Other 657 Total 61 41 58

1) Includes sales outside the Group. 2) Non-recurring items in 2006 include the capital gain of € 41 million of the Group head ofﬁ ce real estate, and the donation of € 5 million to a UPM-Kymmene Cultural Foundation, and in 2005 they include a ﬁ ne of € 57 million imposed by the European Commission. 3) In 2005 share of results of associated companies includes non-recurring income of € 9 million related to the valuation of the assets of Pohjolan Voima.

The biggest units within UPM’s Other Opera- Excluding non-recurring items, the operat- logical assets was mainly due to an increase tions are the Forestry Department and the ing profi t for Other Operations was € 38 mil- of half a percentage point, to 7.5%, in the dis- Finnish Energy Department. Other Operations lion (€ 172 million). Sales totalled € 571 mil- count rate applied in forest valuation. also includes logistics companies that handle lion (€ 517 million). The cost of wood raw The operating profi t of the Energy Depart- the forwarding, storage and export transport of material harvested from the Group’s own for- ment in Finland was € 94 million (€ 135 mil- UPM’s products, the biggest of which are ests was € 107 million (€ 34 million). The de- lion). Availability of hydropower was signifi - Rauma Stevedoring, UPM-Kymmene Seaways crease in the fair value of biological assets cantly lower than in the comparison period and Botnia Shipping. Also the Real Estate Unit (growing trees) was € 19 million (increase of and costs of energy increased. Average energy in Finland, Group Head Offi ce and shares of € 68 million). prices in Nord Pool were substantially higher. the results of associated companies and joint Fellings from the Group’s own forests in- UPM’s capital investment in Metsä-Bot- ventures are part of Other Operations. From creased as planned to compensate transient nia’s pulp mill, currently being built in Uru- the beginning of 2006 the results of associated shortage in wood supply stemming from the guay, was € 56 million (€ 21 million). companies and joint ventures are reported in change in Finnish forest taxation. Addition- operating profi t. Comparative years’ fi gures ally, during the fourth quarter there were diffi - have been revised accordingly. The most im- culties in reaching the felling sites in Finland portant associated companies are Oy Metsä- and Russia, due to unusually warm and rainy Botnia Ab and Poh jolan Voima Oy. weather. The decrease in the fair value of bio-

UPM ANNUAL REPORT 2006 35 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ resources and support functions

Resources and support functions

Fibre and energy are the two key ingredients in papermaking, and UPM continued to develop its integrated assets in these ﬁ elds.

36 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ fibre supply

The price of pulp increased markedly during the year, as old capacity was closed and new capacity entering the market was limited.

Fibre supply

Chemical pulp in Europe averaged USD 675/t (610/t) and During the year under review, recovered paper UPM’s aim is a high degree of self-suffi cien- prices for bleached short-fi bre (eucalyptus) prices in Europe were steady and availability cy in chemical pulp, which helps to avoid the pulp USD 638/t (470/t). was rather good. impact on its fi nancial results of fl uctuations UPM’s own pulp production increased by in market pulp prices. At present, its self-suf- 14% from the previous year. Comparison is Botnia fi ciency is about 95% and the ratio will grow made diffi cult due to the seven-week labour UPM owns 47% of Botnia (Oy Metsä-Botnia following the start-up of the Uruguayan pulp dispute in Finland during the summer of Ab), which is one of Europe’s biggest pulp mill in autumn 2007. This includes both 2005. UPM’s pulp mills had a total capacity producers. The other owners are the Metsä- UPM’s own production and its entitlement to of 2.3 million tonnes at the end of 2006. The liitto Group company M-real Corporation the production of its associated company Oy total production capacity of UPM’s associated (30%) and Metsäliitto Cooperative (23%). Metsä-Botnia Ab (Botnia). company Botnia was 2.7 million tonnes, of Botnia produces softwood and birch pulps Global pulp markets were fairly tight dur- which UPM’s entitlement was 1.1 million at fi ve mills in Finland. In 2006, Botnia had ing the year under review, especially in the tonnes. sales of € 1,311 million, operating profit case of softwood. Demand continued to grow, of € 212 million and at the end of the year especially in Asia, but deliveries to Europe in- 1,895 employees. Pulp production was creased as well. Old softwood pulp capacity Recovered paper 2,519,956 tonnes. During the year under re- in North America was closed and hardwood UPM is one of the world’s leading consumers view Botnia commissioned a 200,000 m3 pulp capacity entering the market towards the of recovered paper: in 2006 the company used sawmill in Russia, which is part of its interna- end of the year came mainly from Chile. Both a record 3.0 million tonnes (2.9) of recovered tionalisation strategy and also supports wood producer and consumer inventories were paper with the utilisation increasing at the fi bre procurement for Finnish pulp mills. below average throughout the year. company’s European newsprint mills. About Botnia’s most signifi cant investment is the Pulp prices increased steadily throughout half of this paper is purchased under long- USD 1.1 billion pulp mill in Uruguay. The the year. Prices for bleached long-fi bre pulp term contracts, usually for a year at a time. construction of the approximately one million

38 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ fibre supply

Pulp production capacity Pulp production and consumption January 1,000 t/a 2007 1,000 t/a 2006 2005 2004

Kaukas 740 Pulp production Wisaforest 800 Chemical pulp Kymi 540 own production 2,095 1,840 2,241 Tervasaari 240 from associated company 403 466 568 Own production capacity, total 2,320 Mechanical pulp 2,897 2,635 2,902 Recycled ﬁ bre pulp 2,343 2,259 2,257 Entitlement to associated company’s Total 7,738 7,200 7,963 capacity corresponding to UPM’s shareholding 1,150 Pulp consumption Chemical pulp 3,429 3,089 3,290 Total 3,470 Mechanical pulp 2,934 2,649 2,948 Recycled ﬁ bre pulp 2,344 2 261 2 259 The Kaukas pulp mill is part of the Magazine Papers division, and the Kymi, Wisaforest and Tervasaari pulp mills belong to the Fine Total 8,707 7,999 8 497 and Speciality Papers division.

t/a mill has proceeded on schedule and the Europe’s biggest producers of deinked pulp * Market pulp prices – bleached pine pulp start-up is projected to take place during the third quarter of 2007. This competitive mill Capacity 1,000 t 3,500 1,000 improves the pulp self-sufﬁ ciency of UPM, as 850 the majority of the eucalyptus pulp produced 2,800 in Uruguay is used in ﬁ ne paper production in 2,100 700 Europe and China by the owner companies. 1,400 550

700 400

0 250 97 98 99 00 01 02 03 04 05 06 PM en A U olm SC Palm LEIPA issue yllykoskiH & Forest Stora Ensoorske SkogM etsä T USD/t EUR/t N ière M Matuss * Including ongoing Source: Finnish Forest Industries Federation investment projects Source: Jaakko Pöyry Market price of recovered paper in Germany

/t 250 `

200

150

100

0 97 98 99 00 01 02 03 04 05 06

Source: VDP

UPM ANNUAL REPORT 2006 39 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ wood procurement

UPM signiﬁ cantly increased its fellings from its own forests to balance the supply disruptions of domestic and imported wood.

Wood procurement

The Group consumed 26.1 million m3 (22.9 mass for energy plants was high, increasing Minnesota, several board mills (OSB) were million) of wood raw material. UPM also the competition and prices for wood. UPM closed due to the poor market. The closures procures and supplies wood to outside cus- Forest Central Europe increased deliveries decreased the competition for wood in the tomers to secure supplies of suitable wood of wood to other forest companies and power region. for its mills. plants. Forest wood for energy production equiv- In Finland, besides supplying UPM’s own In Great Britain, following the conversion alent to 1,680 GWh was supplied to the mills, UPM Forest supplied 4.4 million m3 of UPM Shotton to recovered fi bre, a bio- company’s power plants in Finland (1,582) of wood to associated companies and other mass boiler was successfully commissioned. and 358 GWh to outside customers (218). outside customers (4.0 million). Wood sup- Deliveries of biomass to the boiler started in UPM also started deliveries of biomass for ply from private forests was very low in Fin- the autumn. The deliveries of wood from energy production in the UK and in Central land during the fi rst half of the year. The Great Britain to UPM mills in Finland were Europe. availability of wood improved during the 0.4 million m3 (0.4 million). Issues of particular interest to customers second half. However, it did not reach the In Russia the authorities raised export du- were forest certifi cation and the legality and normal level. All in all, the Finnish private ties for softwood. Plans for further increases origin of wood. UPM monitors the origins of non-industrial forest owners sold about 10% created instability among the companies ex- the wood it uses and has developed chain of less wood than normally. At the same time porting and importing wood from Russia. custody systems for all forest regions. especially the prices for sawlogs increased. UPM Forest Russia exported 4.2 million m3 Forest certifi cation and a chain of custody Felling in company forests mitigated the im- (4.3 million) of wood from Russia to Finland for wood together ensure that the wood used pacts of the low supply and the price in- in addition to the wood they delivered to the comes from sustainably managed forests. At creases of wood. Pestovo sawmill and Chudovo plywood and the same time, the legality of the wood can In Estonia, UPM-Kymmene Forest AS veneer mills. be verifi ed. supplied a total of 0.9 million m3 of wood In Canada, wood procurement at Miram- In 2005, UPM bought a Russian harvest- from the Baltic states to Finland (0.5 mil- ichi was affected by the three-month closure ing company, Tikhvinsky Lespromkhoz, lion) in addition to the wood they delivered of the paper mill. Despite that, the wood- with a license for 185,000 hectares of for- to the Otepää plywood mill. lands department was able to fulfi l the liabil- ests. In 2006, UPM focused on developing In continental Europe the demand for bio- ities to the forest licenses. In the US in the company. As a result of the development

40 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ wood procurement

UPM’s wood consumption Forests owned or managed by UPM

Own Managed/ 1,000 m3 2006 2005 2004 1,000 hectares forests leased forests

Finland 21,700 18,860 21,480 Finland 920 260 Austria 1,010 890 900 Great Britain 3 180 Germany 650 630 560 United States 79 – France 490 450 500 Canada 17 953 Russia 640 660 380 Russia – 185 Great Britain 250 310 300 Estonia 40 60 40 Canada 830 560 2,140 United States 490 510 410 Total 26,100 22,930 26,710

work in December, Tikhvinsky Lesprom- Monthly stumpage prices for pulpwood in Finland Monthly stumpage prices for logs in Finland khoz successfully passed an FSC forest man- 3 `/m3 `/m 55 agement certificate audit for the forests 25 leased by the company. The auditor provides 22 50 recommendations to FSC decision-making 19 45 bodies to granting of the certiﬁ cate. 16 40 All forests owned by the UPM Group 13 35 have been certiﬁ ed. 10 30 97 98 99 00 01 02 03 04 05 06 97 98 99 00 01 02 03 04 05 06

Pine Spruce Birch Pine logs Spruce logs Birch logs

Source: Finnish Forest Industries Federation Source: Finnish Forest Industries Federation

UPM ANNUAL REPORT 2006 41 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ energy

The market price of electricity increased strongly during the year in all market areas, but the company’s high self- sufﬁ ciency, approximately 70%, mitigated the effects of the price rise on ﬁ nancial results.

Energy

In 2006, UPM procured 20.0 TWh of elected by thermomechanical pulping totalled UPM has announced that it will strongly tricity (19.2). The Group’s own industrial 37.2 TWh (34.5). increase its stake in second-generation bio- consumption was 18.4 TWh (17.3) and 1.6 The energy generated from forest biofuels diesel and prepare to become a signifi cant TWh was sold to third parties (1.9). Energy rose to a record 1.68 TWh (1.59). Renewable producer of biofuels. UPM is developing the prices were at a high level throughout the fuels accounted for 57% of total fuel procure- business concept and corresponding technical world. Average price on the Nordic electric- ment (56%). solutions, with the aim to invest in the fi rst ity exchange in 2006 was 48.6 euros/MWh, Energy self-sufficiency was further in- commercial-scale production plant within the 66% higher than a year ago. Strong demand, creased by investing in mill site energy plants: next few years. The plant will be located adja- low water levels in reservoirs and the shut a new biofuel boiler plant was constructed at cent to one of UPM’s paper mills in Finland, downs in Swedish nuclear power production Shotton paper mill in the UK with the start-up France, Germany or Great Britain. were behind the rise in electricity prices. in November 2006. Adjacent to the plant, a The emissions trading market was volatile UPM’s own electricity generating capaci- back-pressure turbine for electricity generation during the year. The publicly quoted price of ty, plus that leased and available through in- was added. PVO constructed a new € 75 mil- one tonne of carbon dioxide varied between terests in associated companies, totalled lion biofuel combined heat and power plant at € 7 and € 31. Emissions trading does not have around 2,540 MW at the end of the year. the Rauma mill, completed at the end of 2006. any material impact on UPM’s results. This fi gure includes the power generating A similar € 75 million renewable fuel-fi red capacity of the mills’ combined heat and power plant was also built at the Chapelle Dar- power plants. The most important associated blay mill in France. The plant was completed at Pohjolan Voima (PVO) company is Pohjolan Voima Oy (PVO). UPM the beginning of 2007. UPM owns 42.19 % of PVO, which generates also owns 19.0% of Kemijoki Oy’s hydro- Increasing the use of renewable fuels, to- and procures around 20,000 GWh of electri- power shares. gether with greater reliance on nuclear power, city and heat annually, mainly for its indus-

Heat generated from fuels procured by is reducing the company’s speciﬁ c CO2 emis- trial shareholders on a cost basis. Electricity UPM, plus purchased heat and heat genera- sions. supplied by PVO covers roughly 35% of

42 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ energy

Electricity procurement and Sources of thermal energy consumption

TWh 2006 2005 2004 TWh 2006 2005 2004

Procurement Black liquor 11.7 10.0 12.2 Hydropower shares 2.7 3.1 3.2 Bark and other biofuels 8.0 7.7 8.8 Back-pressure power 4.7 4.4 4.9 Heat recovered from Nuclear power shares 4.5 4.4 4.4 TMP production 2.3 2.1 2.2 Thermal energy shares 2.2 0.9 2.7 Peat 1.4 1.1 1.5 Purchased electricity 5.9 6.4 5.8 Purchased heat 0.6 0.8 0.8 Total 20.0 19.2 21.0 Natural gas 8.6 8.9 9.9 Oil 0.9 0.9 1.4 Consumption Coal 3.7 3.0 2.4 Mills in Finland 11.2 10.3 11.6 Total 37.5 34.5 39.2 Mills outside Finland 7.2 7.0 6.9 Sales 1.6 1.9 2.5 Total 20.0 19.2 21.0

UPM’s total electricity requirement. Most of this is hydropower and nuclear power. In 2006, PVO had sales of € 775 million. It employed 1,008 people at the year end. Pohjolan Voima Oy is also a majority shareholder in Teollisuuden Voima Oy, one of Finland’s two nuclear power companies, Teollisuuden Voima Oy, which is owned 57.7% by PVO, began construction of a 1,630 MW nuclear power plant at Olkiluoto, Finland, in 2004. The construction has been delayed from the original schedule. The latest estimate is that the new power unit will be in operation during 2010. UPM has reserved, through PVO, a 468 MW share, representing approximately 29% of the new plant’s output.

UPM ANNUAL REPORT 2006 43 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ capital expenditure

The biofuel-ﬁ red power plants were taken into use at the Shotton and Rauma mills. The power plant at the Chapelle mill was completed during the ﬁ rst quarter 2007.

Capital expenditure

Capital expenditure, excluding acquisitions gramme at the Nordland and Docelles mills. and share purchases, was € 631 million, 6.3% The biofuel-fi red power plants were taken of sales (2005: € 705 million and 7.5%). A into use at the Shotton mill and, built by PVO, total of € 68 million (€ 44 million) was used at the Rauma mills. The power plant at the for acqui sitions and share purchases. Chapelle mill is due to be completed in the Maintenance and repair investments in ex- fi rst quarter of 2007. isting production machinery totalled € 370 In 2006, UPM made a decision to rebuild million (€ 346 million), while € 261 million the recovery island of the Kymi pulp mill. (€ 359 million) was invested in machine con- This project is the biggest ongoing investment versions and in new production units and project, worth to € 325 million. The construc- lines. tion is planned to be completed in summer Sales of shares and other assets totalled 2008. Additionally, UPM decided to invest € 357 million (€ 573 million). The most no- USD 109 million in UPM Rafl atac’s new mill table were the sale of the Finnish building in the USA to be completed during the fi rst supplies merchant Puukeskus and the Group quarter of 2008. UPM Rafl atac’s USD 35 mil- Head Offi ce real estate. lion mill in China made its fi rst commercial The main projects completed during the deliveries at the end of December. year were the investments related to fi ne paper quality and the effi ciency improvement pro-

44 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ capital expenditure

Capital expenditure and acquisitions by country Capital expenditure and depreciation €m 2006 2005 2004 2003 2002 1,000 Em

800 Finland 255 242 329 427 396 Germany 123 116 49 40 41 600

Great Britain 52 62 43 73 40 400 Canada 14 14 20 15 12 200 United States 32 29 12 15 32 0 China 45 146 188 52 14 97 98 99 00 01 02 03 04 05 06 Austria 10 14 7 6 10 Maintenance and replacement investments Russia 4 20 9 37 20 Change of line of production Other European countries 75 59 20 29 26 New production lines and units Rest of World 89 47 9 26 29 Depreciation Total 699 749 686 720 620

Main ongoing investment projects

Cost in 2006, €m Total cost, €m Due for completion

Pulp mill rebuild, Kymi 25 325 June 2008 New mill, UPM Raﬂ atac, Dixon 8 88 March 2008 New bioboiler, Caledonia – 72 September 2009 PM5 quality upgrade, Jämsänkoski – 38 June 2008 PM4 rebuild, Jämsänkoski 11 45 May 2007

UPM ANNUAL REPORT 2006 45 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ research and development

The number of customer- oriented research projects increased in 2006.

Research and development

In 2006, UPM spent altogether approximately The printing team, working in close co - ganisation ISO approved the Gen2 standard, € 44 million (€ 50 million) on research and oper ation with customers, supports the cus- which has accelerated the introduction of ap- development projects, or 0.4% (0.5%) of the tomers and takes part in the development and plications based on RFID technology and im- Group’s turnover. marketing of UPM Paper Services R&D serv- proved the growth prospects of the industry. In 2005, UPM reformed its research and ice packages. UPM has actively participated in the interna- development model. The aim has been to bet- The main objective of the production sup- tional standardisation work, which is a pre- ter take into account the customers’ needs. port team is to improve paper machine run- requisite for the large-scale commercialisa- The new concept clearly increased the number nability and process stability. tion of the technology. of customer-oriented projects in 2006. UPM has committed itself to the principles Walki Wisa’s development work has fo- The key areas of research and development of sustainable development. The aim of re- cused on biodegradable and compostable in the paper divisions are fi bres and fi bre raw search is to reclaim waste flows, such as consumer package materials. materials and new, and cost effi cient process deinking waste and fl y ash, and to reduce Research conducted by the Wood Prod- and raw material solutions, as well as custom- solid waste. ucts Division is directed mainly at overlaying er support and technical services. In the Converting Division, the research and gluing techniques, the properties of dif- The objective of fi bre research is to fi nd within UPM Rafl atac aims at improving the ferent wood species, production support and the best process solutions for chemical and quality of fi lmic self-adhesive labelstocks and the environment. For its customer segments, mechanical pulp and recycled fi bre, and to at producing thinner self-adhesive label- UPM has its own product development teams optimise the use of fi bres in production pro- stocks. Over the past few years, one impor- that work to harness the potential offered by cesses. tant area for development has been labels for different technologies to serve the needs of In paper and coating research, the compa- the beverage industry. the market. ny seeks to develop the quality competiti- In RFID business, research has focused on veness of its papers and to enhance their per- the development of Gen2 compatible prod- formance. ucts. In 2006, the International Standards Or-

46 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ research and development

Corporate Ventures seeks to generate new The owners of KCL together with other business for UPM by monitoring and devel- companies and research institutes signed a oping products and processes based largely letter of intent to establish Metsäklusteri Oy on new technologies. to co-ordinate European and national re- UPM’s research centres employed approx- search. imately 290 people in total at year-end 2006. The company co-operates with, among The Lappeenranta research centre focuses on others, VTT (Technical Research Centre of fi bres and fi bre raw materials, papers, coating Finland), YKI (Ytkemiska Institutet, Sweden), and printing, as well as production support PTS (Papiertechnische Stiftung, Germany) and the environment. Recycled fi bre research and CTP (Centre Technique du Papier, is centred in Augsburg, Germany, and support France). for North American operations in Grand UPM co-operates with universities through Rapids, Minnesota. joint research programmes. In addition, every A new research centre was opened in year it sponsors several graduate and post- China in March 2007. The objective of fi bre graduate research projects related to UPM’s research is to learn about the potential of local products and technologies. wood and non-wood fi bres in paper production. In addition, UPM holds 39% of Oy Keskus- laboratorio Ab (KCL), which is the joint pulp and paper research centre of the forest industry in Finland.

UPM ANNUAL REPORT 2006 47 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ environment

Questions from customers concerned mostly climate change, the origin of wood and the use of chemicals

Environment

The handling of environmental matters is an assessments, and the mills report any devi- During the year, cross-audits were initiated integral part of management and operations ations immediately to the authorities and in- at the pulp mills for continuous reduction of in UPM at the various levels of the organi- ternally within the Group. Continuous moni- environmental risks. These audits will con- sation. Almost all of UPM’s manufacturing toring of emissions aims at avoiding failure to tinue in 2007 at the paper mills. operations are included in environmental meet the permit conditions and being able to management systems certifi ed in accordance start corrective action without any delay. Eco-label for fine paper with the ISO 14001 standard. UPM is com- Despite the precautions, in 2006 there were Questions from our customers concerned mitted to continuous improvement of envi- occasions when UPM slightly and briefl y ex- mostly climate change, the origin of wood ronmental matters, too. It wants to be one of ceeded some of the limits set by the environ- and the use of chemicals. UPM has continued the leading actors in its fi eld of business. mental permit conditions. to increase the use of renewable fuels. We The operation of the mills is controlled by The principal means for reducing the envi- have also made progress in the confi rmation UPM’s own, internally specifi ed objectives ronmental load include good planning, care- of the origin of wood, and the deliveries of and their monitoring as well as the use of best ful selection of raw materials and internal certifi ed wood to UPM mills have increased. practices. The starting point is that mills have process management. Water circulates in the Fine papers sold under UPM’s own trade- to meet the permit conditions set by the au- processes several times, and it is treated be- mark were granted the European Eco-label, thorities. In the EU, mills have an integrated fore being released into the watercourse. The or the EU Flower, in autumn 2006. Also the permit, which defi nes mill-specifi c limits for objective is also to maximise the reuse of UPM Eco magazine paper produced at the emissions into water, air and soil. Outside solid waste as material or energy. The amount Schongau mill in Germany started using the Europe, the mills comply with the national of process waste water from the pulp mills EU Flower in 2006. and local permit conditions. Compliance with per tonne produced fell by about 6 per cent in the permit conditions is monitored by regular 2006.

48 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ environment

Volume of process Volume of process Fossil carbon dioxide (CO2) wastewater wastewater emissions from paper from paper mills from pulp mills and pulp production m3/ton of paper m3/ton of pulp kg/ton of paper 20 50 500

16 40 400

12 30 300

8 20 200

4 10 100

0 0 0 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06

Chemical oxygen demand Chemical oxygen demand Landfill waste from (COD) of wastewater from (COD) of wastewater from paper and pulp paper production 1) chemical pulp production production 2) kg/ton of paper kg/ton of pulp kg/ton of paper 5 30 50

4 24 40

3 18 30 1) Figures for Augsburg, Blandin and Caledonian not 2 12 20 included. COD is not measured at Blandin. Wastewater at Augsburg and Caledonian is 1 6 10 treated in municipal treatment plants. 0 0 0 2) Waste also includes building and demolition waste. 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06

Focus on environmental risk Environmental protection management investments The environmental performance, risks, in- UPM’s environmental protection investments structions and practices of all UPM mills have in 2006 amounted to € 33 million (€ 38 mil- been examined during the period 2004–2006. lion). The most important investments includ- The aim of the campaign was to promote en- ed enhancement of operational reliability at vironmental awareness, decrease emissions water treatment plants and sludge treatment. and improve risk management. Operating costs in environmental protection, including depreciation, were € 108 million (€ 114 million). More information on the environmental impact of our activities is available in UPM’s Environmental and Social Responsibility Re- port and online at www.upm-kymmene.com.

UPM ANNUAL REPORT 2006 49 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ personnel

HR management focused on planning and implementing the company’s proﬁ tability programme in a responsible manner.

Personnel

In 2006, UPM had an average of 31,039 em- Due to the closure of the Voikkaa mill, 678 to IBM. In addition, certain operations relat- ployees (32,949 in 2005 and 34,815 in 2004). people were left without work.To support re- ing to services and maintenance were out- At the beginning of the year the number of employment, the company launched an exten- sourced both at production plants and in cen- employees was 31,522 and at the end of the sive programme called “From job to job”. By tral administration. Outsourcing affected 165 year 28,704, a decrease of 2,818 persons. Of year-end, 404 Voikkaa employees had found a people in all during 2006. this, a decrease of 2,206 was due to the clo- new job or were training for a new job. In addi- sures of production lines and rationalisation tion, pension arrangements were made for 73 Learning and leadership development of operations, 165 due to outsourcing, and people. Start-up aid for launching a business UPM has defi ned new management principles 608 due to the sale of Puukeskus. In UPM was granted to 20 applicants. Production at the and, using them as the basis, new skills sets Rafl atac, the number of employees increased mill was terminated in the summer, but salaries for the senior managers. The Learning to by 161. were paid until the end of the term of notice in Lead’ knowledge development model was December 2006.More information about the prepared to support business change manage- Effects of the profi tability programme “From job to job” programme is available in ment. Various models for learning at work and In March, UPM published a broad programme UPM’s Environmental and Corporate Social learning together targeted at senior managers for restoring profitability that covers the Responsibility Report (page 31). at UPM serve to strengthen the company’s whole company and extends to the end of UPM will consolidate its fi nancial admin- leadership culture. A new training programme 2008. The programme includes closing the istration services with global service centres for top management was launched, along with least competitive paper capacity and strongly in Tampere, Finland and Changshu, China, a module-based learning path for middle man- improving the effi ciency of the operations of and to some extend in Singapore. The plan is agement. all divisions, units and functions. to reduce the number of personnel employed In the development of professional skills, The programme is expected to decrease the in economic and fi nancial services from the the focus was on the mill staff and on master- number of employees by 3,600 within three current 730 by about 150 in a total of 30 ing the centralized functions of the company. years. In Finland, workforce reductions will countries during 2007–2008. New development programmes were launched amount to 2,557, with 1,885 people going UPM has continued outsourcing its non- for the personnel in, for example, sales, data through different retirement schemes and 672 core business activities. administration, procurement and the fi nancial being laid off. The layoffs mostly concerned Sales and logistics solution management organisation. the Voikkaa mill, which was closed down. was outsourced to IBM as part of the organi- The redundancies of 1,043 outside Finland sational change in data administration com- Occupational health and safety will mainly target operations in France, Ger- menced in 2005. As a consequence, 40 people Absences due to accidents and illness have re- many and Austria. in UPM’s data administration were transferred mained at the same level as in the previous

50 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ personnel

Key indicators Employees’ years of service with UPM

persons 2006 2005 2004 10,000

8,000 Sales per person, € 323,000 284,000 282,000 Value added per person, € 132,000 123,000 124,000 6,000 Remunerations based on incentives, €m20394,000 € Training costs, m2019222,000 Average no. of days spent in training 2.2 2.6 2.3 0 Personnel turnover, % 6.4 5.1 4.4 <1 1–5 6–10 11–20 21–30 >30 No. of man-days lost through strikes 9,000 161,000 14,700 2002, total 35,579 No. of man-days lost through lock-outs – 214,000 – 2003, total 34,482 2004, total 33,433 2005, total 31,522 Calculation of key indicators: 2006, total 28,704 Sales per person = Sales / average no. of employees Value added per person = Sales – materials and services / average number of employees Training costs = Training costs incl. salaries and indirect employee costs Average no. of days spent in training = No. of days of training / average no. of employees Personnel turnover, % = No. of persons leaving / average no. of employees x 100

year. In Finland, however, absences are still in 2006 as the previous year: an incentive sys- frequent, and actions have been planned at tem for salaried employees combining profi t Personnel by country both national and unit level to reduce them. targets and personal performance targets, and That said, the level of occupational health and a profi t-sharing scheme based on the return on 31 Dec. 2006 2005 2004 safety has improved in several units. A good on capital employed for employees outside example is the Stracel paper mill in France, the incentive system. In both systems, the in- Finland 14,946 17,322 18,720 where there were no accidents over the course centives are only paid if the return on capital Germany 4,097 4,272 4,311 of one year. The frequency of work accidents employed exceeds a pre-set minimum target. Great Britain 1,622 1,685 1,852 at UPM has by and large remained at last The total for incentive bonuses and rewards France 1,463 1,707 1,712 year’s level, following a long positive trend. paid was € 20 million (€ 3 million). Russia 1,361 1,407 750 Austria 679 672 678 The frequency of work accidents has in- In addition, the company has had mill-spe- Spain 269 272 277 creased in Finland especially. But, overall, the cifi c incentive schemes based on productivity Estonia 172 186 179 development is such that the goals set for oc- and effi ciency. Italy 86 86 83 cupational health and safety at UPM have not The short-term incentive system was mod- Poland 66 46 45 been met. In 2006, an employee was killed at ernised in the autumn of 2006. All of UPM’s Hungary 52 52 46 the Blandin mill groundwood plant in the personnel come under a unifi ed system com- Sweden 46 51 58 USA in a work accident. In December, an ac- bining profi t and personal or team targets as Belgium 42 75 74 cident at the Changsu paper mill in China led of the beginning of 2007. The key indicator is The Netherlands 34 39 166 to the death of a subcontractor. the EBITDA margin. Denmark 23 36 41 The Group has a global OHS co-operation Other Europe 76 76 66 network whose objective is the development Long-term incentives China 1,302 1,167 1,109 of good operating models and seeking agree- Share and share option based incentive pro- United States 1,024 1,013 1,571 ment on common practices. Nearly all mills grammes for key personnel were continued in Canada 909 939 1,296 have an occupational health and safety sys- accordance with decisions made in 2005. For Malaysia 147 141 151 tem, most of which are also certifi ed (OHSAS 2006, share reward incentives will be paid out Australia 95 107 104 18001). to approximately 70 persons. A total of South Africa 92 86 81 approximately 2,600,000 2005G options will Rest of world 101 85 63 Incentive systems be distributed, to approximately 520 key per- Total 28,704 31,522 33,433 Short-term incentives sons. The same short-term incentives were in place

UPM ANNUAL REPORT 2006 51 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ events in 2006

Events in 2006

January March April

19 Rafl atac and UPM Rafsec merge to 8 UPM begins an extensive three-year 7 UPM announces it has started paying form a new labelstock business enti- programme to restore its profi tability for energy wood in Finland to secure ty, UPM Rafl atac, within UPM’s Con- in the new business environment. Effi - a steady supply of wood for the verting Division. ciency improvement will involve all Group’s power plants. divisions and functions and will re- 23 UPM announces expansion of its Re- duce the Group’s total headcount by UPM sells its French plywood mill, search and Development function by approximately 3,600. Annual cost UPM-Kymmene Loulay S.A., to French establishing a new Asia Research saving is estimated to be approxi- industrial group Green Recovery Center in China, adjacent to the mately € 200 million. SAS. Changshu paper mill. The centre will be opened at the end of March Production at UPM’s Voikkaa paper 26 UPM announces investments in wood 2007. mill and Kymi paper machine 7 products manufacture at Chudovo, ceased in June. Customer orders and Russia and at Heinola, Finland. The products were successfully trans- new birch plywood production line ferred to other UPM production lines at Chudovo starts in December February during spring and summer 2006. 2006.

20 The US Department of Justice Anti- Along with the profitability pro- trust Division informs UPM that it will gramme, UPM announces investment not bring criminal charges against in the production effi ciency of Kymi’s May the company with respect to the crim- pulp mill as well as in converting the inal investigation of antitrust and re- Jämsänkoski mill’s paper machine 4 5 UPM’s Miramichi mill in Canada lated offences in the US labelstock for label paper production. The total starts up after a three-month shut- industry. value of the investments is € 370 mil- down. During the layoff a new cost lion. reduction and profi t enhancement The US Department of Justice grants programme was compiled. UPM a conditional full immunity in 22 The Annual General Meeting agrees connection with possible price fi xing to donate to UPM-Kymmene’s new 12 UPM’s profi tability programme ad- activity in the magazine paper indus- Cultural Foundation a collection of vances from planning to implementa- try. valuable art property in UPM’s pos- tion. session as well as 162,000 own 23 UPM Tervasaari paper machine 8, shares held by the company, plus In order to minimise the impact of re- producing release paper, starts cash amounting to approximately dundancy UPM launches a ”From successfully after modernisation. € 200,000. The purpose of the Cul- Job to Job” programme, supporting tural Foundation is to preserve and re-employment, retraining and relo- manage UPM’s cultural heritage. cation.

16 UPM Walki Wisa inaugurates tthe new converting plant at Changshu in China.

52 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ events in 2006

June October

1 UPM announces investment in 31 UPM announces it will strongly in- 5 UPM announces it will build a new bleached pulp production at the crease its stake in second-generation power plant at the Caledonian mill in Tervasaari mill in Finland. The new biodiesel in the next few years. The Irvine, Scotland. The new boiler will bleaching line is scheduled to start Group prepares to become a signi- utilize biomass and site-derived resi- up at the mill in autumn 2007. fi cant producer of biofuels. Decisions dues as its primary fuel. to invest in the fi rst commercial-scale 22 UPM announces it is to sell Finnish production plant can be expected 21 The Finnish Competition Authority’s building materials merchant Puu- within the next few years. (FCA) announces that it will not pro- keskus Oy to the private equity inves- pose a fi ne for UPM after investiga- tor Triton and Puukeskus’s manage- tion of wood procurement in Finland. ment. The sale is completed on 31 The FCA proposes imposing fi nes of July 2006. November altogether € 50 million on the other parties. FCA started its investigations 29 The US Department of Justice Anti- 9 UPM announces it has made a of raw wood procurement in spring trust Division informs UPM that no € 500 million offer to M-real Corpo- 2004 after UPM had contacted the charges will be brought against ration to buy Metsä-Botnia shares authority. UPM’s former CEO. representing 15% of Metsä-Botnia. M-real rejected the offer on 31 Janu- 28 UPM buys the Kuusankoski, Keltti ary 2007. and Voikkaa hydropower plants located on the Kymijoki River in Fin- July 16 The European Commission compe- land from Varma Mutual Pension In- tition authority informs UPM of its de- surance Company for a total of 3 UPM announces the sale of its Group cision to close the investigations into € 126 million. Head Offi ce real estate in Helsinki newsprint, magazine paper, label to the German Allianz Lebensver- paper and self-adhesive labelstock sicherungs-AG. markets. The fi ne paper investigation was closed by the Commission in Au- gust 2006.

27 UPM announces expansion of its label stock business in the United States. UPM Raﬂ atac will build a new December mill in Dixon for a start-up the ﬁ rst quarter of 2008. 1 UPM announces investment in the quality of uncoated magazine paper by modernizing mechanical pulp production at its Jämsänkoski mill in September Finland.

11 UPM announces it is exploring the possibility of restructuring forestry work in Finland to improve cost-efﬁ - ciency.

UPM ANNUAL REPORT 2006 53 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ accounts and report of the board for 2006

Accounts and Report of the Board for 2006

Earnings per share for 2006 were € 0.65 (0.50 for 2005), and excluding non-recurring items € 0.80 (0.54). Operating proﬁ t for the year was € 536 million (318 million in 2005), and excluding non- recurring items € 725 million (558 million). Proﬁ t before taxes was € 367 million (257 million), and excluding non-recurring items € 550 million (399 million).

54 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group Report of the Board of Directors

The market in 2006 nel expenses and other restructuring charges, in total € 196 million Demand for printing and writing papers in Europe remained good, were reported as non-recurring charges. An impairment of € 115 mil- showing an increase of 2% from the previous year, while in North lion was made from the production facilities at the Miramichi maga- America, demand for printing and writing papers decreased by 1%. zine paper mill in Canada, mainly due to the negative currency In other markets – most notably in Asia – demand for printing and impact on the profi tability. In addition, a loss of € 10 million from writing papers continued to grow rapidly. the sale of the UPM-Kymmene Loulay S.A. plywood mill in France, Spending on advertising globally increased from the previous a charge for a donation of € 5 million to UPM-Kymmene Cultural year. While spending on printed advertising increased, it decreased as Foundation and other charges of € 7 million were reported as non- a proportion of total advertising. Of the various types of printed recurring charges. advertising, direct-mail advertising showed the strongest growth. Reported as non-recurring gains were a capital gain of € 41 mil- Average market prices for magazine papers in Europe and North lion on the sale of Group Head Offi ce real estate, a € 93 million tax- America were about the same as last year. Standard newsprint market exempt capital gain on the sale of the Finnish building materials mer- prices in Europe were on average 5% higher, but prices for coated chant Puukeskus Oy and a gain of € 10 million on the sale of the and uncoated fi ne papers decreased by about 2%. In Asia, fi ne paper Rauma power plant to Pohjolan Voima Oy. prices increased from last year. The profi tability of all divisions improved from last year. Transfer Demand for self-adhesive labelstock grew in the main markets: of production from the closed production lines to UPM’s other paper North America, Europe and Asia. Average prices for self-adhesive machines improved capacity utilization. Energy prices, especially in labelstock were slightly higher than in the previous year. Demand for Central Europe and in the UK, were higher. Limited availability of industrial wrappings remained at the previous year’s level. Prices wood raw material in Finland due to unusual weather conditions in were unchanged. the autumn put upward pressure on wood procurement costs. The inc- In wood products, birch plywood demand continued to be strong rease in UPM’s net costs was, however, moderate partly due to the in all markets. Spruce plywood markets maintained a good balance. high self suffi ciency in chemical pulp and electricity. Plywood prices increased slightly in comparison to last year. Also, The fair value of biological assets decreased by € 126 million the markets for veneer and further processed goods were solid. Red- (increase of € 34 million) mainly due to an increase of half a percen- wood and whitewood sawn timber markets improved and prices tage point in the discount rate, to 7.5%, applied in forest valuation, increased. The supply of logs tightened, exerting upward pressure on and higher fellings from own forests. costs. Deliveries of magazine papers were higher, and average prices increased slightly. Newsprint deliveries increased and average prices Changes in reporting classifications were higher than a year ago. Also fi ne paper deliveries increased. From the beginning of 2006, the share of results of associated com- Average prices of fi ne papers were slightly down from last year. In panies and joint ventures related to business operations is reported in the Converting division, profi tability of UPM Rafl atac’s self-adhes ive operating profi t. In previous years, the results were reported after labelstock improved, and was good. Also Walki Wisa’s profi tability operating profi t. Also from the beginning of 2006, part of the results improved. The profi tability of plywood was good. Sawmilling impro- of derivative instruments relating to cash fl ow hedges are allocated to ved its profi tability, and operating profi t turned positive due to higher the respective division. Comparative years have been revised accord- prices and increased deliveries. The Operating profi t of Other Opera- ingly. tions was lower than a year ago the main reason being a decrease in the fair value of biological assets and lower availability of hydropo- Earnings wer. Deliveries and results in 2005 were affected by the labour dispute in The share of the results of associated companies and joint ven- Finland during the second quarter of 2005. tures was € 61 million (€ 41 million). Sales for 2006 were € 10,022 million (€ 9,348 million in 2005 Profi t before tax was € 367 million (€ 257 million) and excluding and € 9,820 million in 2004) showing an increase of 7% from the non-recurring items € 550 million (€ 399 million). A gain of € 6 mil- previous year’s fi gure. Paper deliveries were 10,988,000 tonnes lion on the sale of shares was reported after operating profi t as a non- (10,172,000 tonnes). recurring gain. Interest and other fi nance costs were € 185 million Operating profi t was € 536 million (€ 318 million in 2005 and (€ 147 million) net. The average interest rate on borrowings inc- € 685 million in 2004), 5.3% of sales (3.4% in 2005 and 7.0% in reased; on the other hand, net interest-bearing liabilities decreased. 2004). Operating profi t excluding non-recurring items was € 725 Exchange rate and fair value gains and losses resulted in a gain of million, 7.2% of sales (€ 558 million, 6.0% of sales in 2005 and € € 18 million (loss of € 4 million). 470 million, 4.8% in 2004). Operating profi t for 2006 includes non- Income taxes were € 29 million (€ 4 million positive). Taxes recurring gains of € 144 million and charges of € 333 million, for a include, as a negative item, a reduction of € 22 million in the defer- net fi gure of € 189 million in charges (net fi gure of € 240 million in red tax assets of Miramichi due to a decrease in the income tax rate charges in 2005 and net fi gure of € 215 million in income in 2004). in Canada, and as positive items € 20 million from the increase in Due to the profi tability programme announced in March 2006, deferred tax assets related to the change in the Group’s structure in an impairment of € 135 million mostly attributable to the closure of Canada, and € 28 million from a receivable arising from the change the Voikkaa paper mill, and a provision of € 61 million from person- in German tax legislation.

UPM ANNUAL REPORT 2006 56 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

The effective tax rate was 7.8% (positive 1.6%). Excluding the ure, confl icts of interest, gifts and bribes, respecting and promoting effect of non-recurring items, the effective tax rate was 24.4% human rights, human resources practices and environmental practices. (29.0%). It is complemented as needed by more detailed rules and guidelines Profi t for the year was € 338 million (€ 261 million in 2005 and approved by the Executive team, divisions and functions. € 920 million in 2004) and earnings per share were € 0.65 (€ 0.50 in UPM publishes a separate Environmental and Corporate Social 2005 and € 1.76 in 2004). Earnings per share excluding non-recurring Respons ibility report. The report is not audited. items were € 0.80 (€ 0.54 in 2005 and € 0.49 in 2004). Operating cash fl ow per share was € 2.32 (€ 1.63 in 2005 and € 1.90 in 2004). Research and development Return on equity was 4.6% (3.5% in 2005 and 12.6% in 2004) and In 2006, UPM spent approximately € 44 million on research and return on capital employed 4.7% (3.4% in 2005 and 6.0% in 2004). development projects, 0.4% of sales (€ 50 million, 0.5% in 2005 and Excluding non-recurring items, the respective fi gures were 5.7% € 47 million, 0.5% in 2004). (3.8% in 2005 and 3.4% in 2004) and 6.2% (4.5% in 2005 and 4.3% In the paper divisions, the key areas of research and development in 2004). were fi bres and fi bre raw materials, new and cost effi cient process and raw material solutions, as well as customer support and technical Deliveries services. Paper deliveries for the year were 10,988,000 tonnes (10,172,000 The research within UPM Rafl atac focused on improving the tonnes). Magazine paper deliveries were 4,761,000 tonnes quality of fi lmic self-adhesive labelstock and producing thinner self- (4,486,000 tonnes), newsprint 2,677,000 tonnes (2,592,000 tonnes) adhesive labelstock. One important area for development was labels and fi ne and speciality papers 3,550,000 tonnes (3,060,000 tonnes). for the beverage industry. In RFID business, research focused on the Plywood production was 955,000 cubic metres (916,000 cubic development of Gen2 compatible products. Walki Wisa’s develop- metres) and sawn timber production 2,357,000 cubic metres ment work focused on biodegradable and compostable consumer (2,147,000 cubic metres). package materials. Research conducted by the Wood Products was directed mainly Financing at overlaying and gluing techniques, the properties of different wood Cash fl ow from operating activities, before capital expenditure and species, production support and the environment. fi nancing, was € 1,215 million (€ 853 million in 2005 and € 997 In March 2007, a new research centre will be opened in China. million in 2004). The decrease in net working capital amounted to The objective of the research of the new centre is to learn about the € 21 million (increase of € 234 million in 2005 and increase of € 114 potential of local wood and non-wood fi bres in paper production. million in 2004). UPM holds 39% of Oy Keskuslaboratorio Ab, which is the joint The gearing ratio as of 31 December was 56% (66% on 31 pulp and paper research centre of the forest industry in Finland. In December 2005 and 61% on 31 December 2004). Net interest- 2006, the owners of Keskuslaboratorio, together with other compa- bearing liabilities at the end of the year came to € 4,048 million nies and research institutes, signed a letter of intent to establish Met- (€ 4,836 million in 2005 and € 4,617 million in 2004). In Decem- säklusteri Oy to coordinate research within the forest industry. ber 2006, UPM bought back three leased hydropower plants loca- In October 2006, UPM announced its aim to increase its stake in ted on the Kymijoki river in Finland from the mutual pension second-generation biodiesel and prepare to become a signifi cant pro- insurance company Varma for a total of € 126 million with no ducer of biofuels in the future. UPM is developing the business con- impact on UPM’s balance sheet. The average maturity of borro- cept and the respective technical solutions. wings at year end was 7.1 years (7.5 years in 2005 and 7.6 years in 2004). Capital expenditure In 2006, UPM’s credit ratings were unchanged. At the end of the In 2006, capital expenditure, excluding acquisitions and share pur- year, the ratings for UPM’s public bonds were BBB from S&P and chases, was € 631 million, 6.3% of sales (€ 705 million, 7.5% of Baa2 from Moody’s. sales in 2005 and € 645 million, 6.6% of sales in 2004). Including acquisitions and share purchases, capital expenditure was € 699 Personnel million, 7.0% of sales (€ 749 million, 8.0% in 2005 and € 686 mil- In 2006, UPM had an average of 31,039 employees (32,949 in 2005 lion, 7.0% in 2004). and 34,815 in 2004). At the beginning of the year the number of In 2006, acquisitions and share purchases consisted mainly of an employees was 31,522 and at the end of the year 28,704, a decrease investment in shares of the Metsä-Botnia pulp mill in Uruguay for of 2,818 persons. Of this, a decrease of 2,371 was due to the clos ures € 56 million (€ 21 million in 2005 and € 0 million in 2004). of production lines and rationalisation of operations and 608 due to In 2006, a decision was made to rebuild the recovery plant at the the sale of Puukeskus. In UPM Rafl atac, the number of employees Kymi pulp mill. The total investment cost is € 325 million and it is plan- increased by 161. ned for completion in the summer of 2008. At the Jämsänkoski mill, € The total amount of salaries and fees paid in 2006 was € 1,218 45 million will be invested to convert coated magazine paper machine 4 million (€ 1,192 million in 2005 and € 1,325 million in 2004). The to produce label papers. The conversion is scheduled for completion in number of man-days lost in labour disputes was 9,200 (375,000 in the second quarter of 2007. The investment plan announced in August 2005 and 14,700 in 2004). 2005 to build an uncoated magazine paper machine in Continental In May 2006 the Board of Directors approved UPM Code of Con- Europe was postponed. At the plywood mills in Savonlinna and Jyväs- duct. The Code forms the baseline for all company operations and kylä, € 8 million will be invested to improve production effi ciency and sets out standards of behaviour for each individual at UPM. The Code product quality. The investments are scheduled for completion by the defi nes the way of operating in areas of legal compliance and disclos- end of the fi rst quarter of 2007.

UPM ANNUAL REPORT 2006

57 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

A € 25 million investment will be made in bleached pulp pro- Profitability programme duction at the Tervasaari mill, where a new bleaching line is In March 2006, UPM announced an extensive programme for 2006– scheduled to start up in autumn 2007. An investment of € 6 million 2008 to restore its profi tability. The profi tability programme includes will be made in plywood manufacturing at the Chudovo and Heinola a reduction of approximately 3,600 employees over the three year mills. period and closures of uncompetitive paper production capacity. A new self-adhesive labelstock factory will be built in Dixon, When fi nalized, the programme is estimated to result in annual cost Illinois, in the United States. The value of this investment is approxi- savings of approximately € 200 million. The annual cost savings in mately USD 109 million, and the new factory is slated for comple- 2007 are estimated to amount to € 110 million. tion in the fi rst quarter of 2008. At the Jämsänkoski mill, € 38 mil- As part of the programme, in June UPM closed the Voikkaa lion will be invested in the quality of uncoated magazine paper. The paper mill, which had an annual capacity of 410,000 tonnes of investment will be completed in the second quarter of 2008. coated magazine paper, and Kymi paper machine 7, with an annual A new power plant using biofuels will be built at the Caledonian capacity of 150,000 tonnes of coated fi ne paper. In the fi rst quarter of mill in Irvine, Scotland – the investment cost, net, is approximately 2007, UPM will stop the production of coated magazine paper on the € 72 million and start-up is projected for the third quarter of 2009. Jämsänkoski paper machine 4, which has an annual capacity of The modernisation of Tervasaari release paper machine 8 was 120,000 tonnes of coated magazine paper. The paper machine will be completed at the end of February 2006. This investment increased converted to produce label papers in the third quarter of 2007. UPM annual production capacity by 45,000 tonnes to 175,000 tonnes and will close Tervasaari paper machine 6, with an annual capacity of further improved the quality of the paper. Walki Wisa’s converting 115,000 tonnes of brown sack paper and semi-alkaline pulp (SAP) factory in China started its operations in March 2006. In September, line, with an annual capacity of 60,000 tonnes during the fi rst half of at the Nordland and Docelles paper mills, the rebuilds of two paper 2007. machines were completed. These investments substantially improved Most employee negotiations relating to the profi tability pro- product quality and effi ciency of the production lines. Completed in gramme were completed in July 2006. September, the modernisation investment for the fi lm lamination line at the Tampere labelstock factory doubled the fi lmic self-adhes ive Shares labelstock capacity of the factory and further strengthened UPM The company has one series of shares. There are no specifi c terms re- Rafl atac’s position in the growing fi lmic labelstock market. At the lated to the shares except for the redemption clause which is present- Shotton paper mill in Wales, the new sludge boiler entered produced in the Consolidated Financial Statements (Note 27). tion use at the end of the year. The investment further improved the The company is a party to certain agreements conserning its mill’s energy self-suffi ciency and increased the use of biofuels. UPM resource-related businesses which contain provisions as to the Rafl atac’s new production plant in China started commercial produc- change of control in the company. The company has entered into tion, ahead of the original schedule, in December. service contracts with its President and CEO, and Executive Team The biofuel-fi red power plant investment for the Chapelle members which include provisions regarding a change of control due Dar blay mill in France is proceeding according to plan, with comple- to a public tender offer. The service contracts have been presented in tion scheduled for the fi rst quarter of 2007. In Uruguay, UPM’s asso- the Consolidated Financial Statements (Note 7). ciated company, Metsä-Botnia is constructing a pulp mill with an Information of the authority of the Board of Directors in regard annual capacity of 1 million tonnes. The construction project began to the issuance and buy back own shares, and regulations to amend in 2005 and is on schedule for a Q3/2007 start-up. The governments the Articles of Association is disclosed in the Consolidated Financial of Uruguay and Argentina are engaged in a dispute over the environ- Statements (Note 27). mental impact of the mill. I n 2006, UPM shares worth, in total, € 16,021 million were traded on the Helsinki Stock Exchange (€ 11,358 million). The highest Changes in the Group’s structure per share quotation was € 20.91 in March and the lowest € 15.36 in In March 2006, in connection with the Uruguayan pulp mill project, June. On the New York Stock Exchange, the company’s shares were UPM sold its shares in the Uruguayan forestry company Compañia traded to a total value of USD 310 million (USD 338 million). Forestal Oriental S.A. to Metsä-Botnia for € 36 million. Control over The Annual General Meeting held on 22 March 2006 approved Wisapower Oy was transferred from UPM to PVO in April. The a proposal by the Board of Directors to buy back a minimum of transaction decreased the Group’s assets net by € 152 million from 100 and a maximum of 49,825,000 own shares. The meeting aut- those held on 31 December, 2005. The Group Head Offi ce real estate horised the Board to decide on the disposal of shares so pur- was sold for € 77 million in June, which generated a € 41 million chased. No shares were purchased based on this authorisation in capital gain. UPM will continue to occupy the premises under a lease 2006. The meeting also authorised the Board of Directors to don- contract. In August, UPM sold its Finnish building materials mer- ate 162,000 own shares held by the company to a cultural founda- chant Puukeskus Oy to the private equity investor Triton and tion to be established. Subsequently, the company does not hold Puukeskus’s management. The sale resulted in a € 93 million capital any own shares. gain. Puukeskus had annual sales of approximately € 400 million and Additionally the meeting authorised the Board of Directors to employed 600 people. Also, UPM sold the Rauma power plant to decide on an increase in the share capital, disapplying the pre-emp- Pohjolan Voima Oy in December. The sale had no material impact on tive rights of shareholders, by issuing new shares and/or convertible the Group’s assets and liabilities. bonds in one or more issues. On the basis of such issues of new sha- Information of the subsidiary mergers is disclosed in the res or convertible bonds, the share capital can be increased by a Accounts of the parent company (Note 5). maximum of € 169,405,000, representing no more than 99,650,000 new shares having a book value of € 1.70 per share.

UPM ANNUAL REPORT 2006 58 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

In 2006, 4,300 shares were subscribed for through exercising of Strategic risks outstanding share options. The number of shares entered in the Trade Competition. The paper and forest products markets are highly com- Register on 31 December 2006 was 523,259,430. Through the issu- petitive. UPM has, from time to time, experienced price pressures ance authorisation and share options, the number of shares may inc- from compe-titors in its main business areas and geographic markets rease to a maximum of 647,101,130. and has experienced particularly large fl uctuations in operating mar- Apart from the above, the Board of Directors has no current aut- gins due to this competitive environment. Although the company’s horization to issue shares, convertible bonds or share options. fi nancial position is currently sound in relation to many other indus- The company has received following notifi cations from sharehol- try players, there can be no assurance that UPM will have suffi cient ders: On 15 December 2006, the Capital Group Companies Inc. held fi nancial resources to respond to these competitive pressures. 51,660,753 shares representing 9.78 per cent of share capital, of Shifts in consumer preferences including the trend toward a which shares it held voting rights representing 7.86 per cent of the greater use of electronic media. Over the last several decades, con- share capital of UPM-Kymmene Corporation. On 7 March 2005, the sumer expectations with respect to paper used for such items as Franklin Templeton Group and its affi liated investment advisers of books, catalogues, magazines, newspapers, advertising, direct mail, Franklin Resources held 10.11% of the voting rights of UPM-Kym- packaging and label materials and other similar uses have become mene Corporation. both more demanding and more diverse. The trend towards a greater The listing of UPM 2005F share options commenced on use of computers and electronic media is also having an effect on 2 October 2006. consumption patterns for paper now and will in the future. The ability to continue to meet the shifting demands of consumers depends Company directors upon a variety of factors, including the ability to foresee and/or iden- Under the Companies Act, a general meeting of shareholders elects tify changes in consumer preferences, requiring alteration of strate- members of the Board of Directors. gies, the technical capabilities of manufacturing facilities, the speed The Annual General Meeting of 22 March 2006 elected Ms of, and the costs associated with, the shifting of production at such Ursula Ranin, LLM, B.Sc. (Econ.), a former General Counsel of facilities and the success of various research and development pro- Nokia Corporation, as a new member to the Board of Directors. In grammes. addition, Mr Martti Ahtisaari, former President of the Republic of Mergers and acquisitions. The paper and forest products industry Finland; Mr Michael C. Bottenheim, LLM, MBA; Mr Berndt Bru- has in the past and could in future experience a further wave of con- now, President and CEO of Oy Karl Fazer Ab; Mr Karl Grotenfelt, solidation, driven, in part, by a desire to achieve economies of scale LLM, Chairman of the Board of Directors of Famigro Oy; Dr. Georg and synergies. The mergers and acquisitions which UPM might enter Holzhey, former Executive Vice President of UPM and Director of into or make could involve risks, including those concerning the abil- Haindl’sche Papierfabriken KGaA; Ms Wendy E. Lane, Chairman of ity to successfully integrate and manage acquired operations and per- American Investment fi rm Lane Holdings, Inc; Mr Jorma Ollila, sonnel, as well as to successfully achieve the economies of scale or Chairman and CEO of Nokia Corporation; Ms Françoise Samper- synergies sought. To minimise such risks, the company has a merger mans, BA Psych, Publishing Consultant and Mr Vesa Vainio, LLM and acquisitions process, in which there is expertise in all different were re-elected to the Board of Directors. steps of M&A activity, from valuation to integration. At the Board of Directors’ assembly meeting, Mr Vesa Vainio Suitability of business portfolio. Although UPM believes that its was re-elected as chairman. Mr Jorma Ollila and Mr Berndt Brunow product portfolio and geographic spread is currently quite suited for were elected as vice chairmen. In addition, the Board of Directors profi table business, demand and overall business conditions for its elected from its independent members an Audit Committee, with Mr main products in major markets may change. Changes may take Michael C. Bottenheim as chairman and Ms Wendy E. Lane and Ms place as a consequence of the changing consumer behaviours. We Ursula Ranin as members. A Human Resources Committee was cannot therefore be certain that our current portfolio will ensure ade- elected with Mr Berndt Brunow as chairman, and Mr Georg Holzhey quate returns in the future. and Ms Françoise Sampermans as members. Furthermore, a Nomi- Signifi cance of the largest customers. UPM sells a signifi cant nation and Corporate Governance Committee was elected with Mr proportion of its products to several major customers, including cer- Jorma Ollila as chairman and Mr Karl Grotenfelt and Mr Georg tain signifi cant printing houses and merchant distributors, which Holzhey as members. resell the products. Although not dependent on any specifi c customer or group of customers the loss of one or more of our signifi cant cus- Risks tomers, if not replaced on similar terms, could have an adverse effect Risk management on the company’s results. The ten largest customers accounted for UPM regards risk management as a systematic and proactive means approximately 15% of our sales in 2006 - i.e.,€ 1.5 billion - and our to analyse and manage opportunities and threats relating to the busi- largest customer accounted for approximately 3% - i.e., € 0.3 billion. ness operations. The Board of Directors has approved the overall Environmental regulations. UPM is subject to various environ- objectives of risk management for the Group and confi rmed its prin- mental laws and regulations. Its environmental processes and man- ciples and implementation. agement are based on full compliance with such laws and regula- In 2006, UPM reviewed the Group’s system to map out and prio- tions, and environmental investments, audits and measurements are ritise potential risks. The risks were reassessed, and both the risk carried out on a continuing basis. The company is currently not management policy and the risk reporting model were updated. involved in any major legal proceedings concerning environmental The main risk factors that can materially affect the company’s matters. However, the risk of substantial environmental costs and business and fi nancial results are set out below. They have been clas- liabilities is inherent in industrial operations. sifi ed as strategic risks, operational risks, fi nancial risks and hazard Political risks. UPM has manufacturing operations in certain risks. emerging markets, including, among others, China and Russia. The

UPM ANNUAL REPORT 2006

59 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

political, economic and legal systems in these countries may be less Hazard risks predictable than those in countries with more established and sus- Insurance cover. UPM operates a signifi cant number of manufactur- tained institutional structures. Investments in these countries may ing facilities all over the world, mostly owned, and is also the largest also be subject to other risks and uncertainties such as unfavourable private owner of forestland in Finland. There is a programme in place taxation treatment, trade restrictions, infl ation, currency fl uctuations consisting of a number of different insurance policies that cover and nationalisation. Emerging markets represented approximately property damage and losses due to the interruption of our businesses, 16% of the company’s sales of € 10.0 billion in 2006. subject to applicable insurance conditions. However, there can be no assurance that the company’s insurance programme would be suffi - Operational risks cient to cover potential damages arising from catastrophes, such as Cyclicality of the markets and pricing fl uctuations. The markets for war, terrorism or natural disasters. paper and forest products are cyclical, being characterised by periods of imbalance between supply and demand during which prices of The environment paper and forest products can fl uctuate signifi cantly. These demand- UPM’s environmental management is based on internally defi ned supply imbalances may be caused by such factors as economic goals, measuring the realisation of these, as well as on developing growth and advertising, capacity investments, inventory build-up and and implementing best practices in the whole value chain. UPM changes in end-use patterns. There can be no assurance that current measures and assesses continuously both the direct and the indirect price levels for paper and forest products will be maintained, that any environmental loads and impacts of its operations and strives to additional price increases will be achieved or that the industry will manage these systematically in accordance with the principle of not add new capacity. continuous improvement. The environmental loads and impacts Availability and price of major inputs. In 2006, third-party sup- related to product life cycle result from sourcing of raw materials, pliers accounted for more than 85% of UPM’s wood requirements production, distribution of products and product recovery and dis- and approximately 30% of electric power needs. Other production posal. UPM assesses its suppliers systematically and regularly also inputs, such as chemicals, fi llers and recovered paper, are obtained from the perspective of environmental and social responsibility. from third-party suppliers. Disruptions in the supply of key inputs UPM has systematically invested capital resources in environ- would impact our manufacturing operations, examples being inter- mental compliance with laws and regulations and in monitoring and ruption or downscaling of production or change in the product mix, reducing the environmental loads. In 2006 the operating expenses or increased costs resulting from price increases of critical inputs. (including depreciation) attributable to environmental protection Ability to recruit and retain skilled employees. To meet the chal- were € 108 million (€ 114 million in 2005 and € 112 million in 2004) lenges of sustaining growth and retaining the effectiveness of opera- and the respective capital expenditure on environmental protection tions, a skilled workforce is necessary. UPM is continuously evaluat- was € 33 million (€ 38 million in 2005 and € 55 million in 2004). ing its recruitment, compensation and career development policies At present, all of UPM’s paper and pulp mills; the plywood mills and taking measures to attract and retain skilled personnel. There is and sawmills in Finland; the sawmill in Russia; the hydroelectric no assurance that shortages of suffi cient numbers of appropriately power plants in Finland and the forestry departments in Finland, skilled personnel in the future would not exist. France, the United Kingdom, Germany, Austria, the US and Canada Financial control procedures. Effective internal control proce- have ISO 14001 certifi ed environmental management systems in dures are necessary for providing reliable and accurate fi nancial place. In addition, fi ve of the Converting Division’s plants also have reporting. Inability to prevent fraud or provision of reliable fi nancial certifi ed systems. All of UPM’s pulp and paper mills in Finland and reports could have material effect on fi nancial results. most of those elsewhere in Europe have also received approval for their systems under the EU’s Eco-Management and Audit Scheme Financial risks (‘EMAS’). For Finland, Germany and North America the paper mills Changes in exchange and interest rates. Currency risk exposure published respective joint EMAS or other externally verifi ed envi- primarily affects export operations to the extent when sales are de- ronmental statements. nominated in currencies other than those in which manufacturing UPM has adopted a policy of not purchasing wood from pro- costs are incurred. A signifi cant portion of UPM’s sales are denomi- tected forestlands or from any other areas designated by local forest nated in currencies (consisting primarily of the US dollar and the or environmental authorities as being of special ecological impor- British pound sterling) other than the euro. To manage exposure to tance. All suppliers of imported wood are required to provide proof such exchange rate fl uctuations, close monitoring of the exposure to of the origins of their wood. To that purpose UPM continued the currency risks is taking place simultaneously with hedging of such work to gain chain of custody (‘CoC’) certifi cation as verifi cation of risks using certain fi nancial instruments, including forward foreign legal and sustainable raw wood material supply. In 2006, approx- exchange agreements and currency swaps, is done. Further, changes imately 65% (64% in 2005 and 67% in 2004) of the wood used was in interest rates may have a considerable impact on the values of the from certifi ed forests. In 2005, a generic chain of custody model, company’s assets (biological assets for example), which are valued on a discounted cash fl ow model. covering the main forest certifi cation schemes, was implemented at Payment defaults. There is a risk of non-payment or non-perfor- those forest departments and mills using wood from more than one mance by the company’s customers in connection with the sale of forest certifi cation scheme. Since June 2006, all of UPM’s pulp and products. UPM has various programmes in place to monitor and mit- paper mills have had a third party audited chain of custody in place. igate customer credit risk and insurance policies cover most of our To ensure sustainable commercial use of forests, UPM provides trade receivables. extensive environmental training to its forestry department’s entire Additional information of fi nancial risks and of maturity of long fi eld personnel. term debt is disclosed in the Consolidated Financial Statements UPM continued to improve the effi ciency of the production pro- (Notes 3 and 31). cesses and the use of energy for those processes. In 2006, paper pro-

UPM ANNUAL REPORT 2006 60 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006 duction increased 9% (decreased 6% in 2005, and increased 6% in in several of its Member States, Canada and certain other countries 2004). The average effl uent amount of paper mills per produced have granted UPM conditional full immunities with respect to cer- paper ton decreased approximately 9% (3% in 2005 and 6% in tain conducts disclosed to the authorities. 2004), and the corresponding chemical oxygen demand (COD) of During 2006, the investigations of the U.S. labelstock industry discharges decreased approximately 4% (13% in 2005 and 2% in and European fi ne paper, newsprint, magazine paper, label paper and 2004). The total fossil carbon dioxide emissions of mill power plants self-adhesive labelstock markets were closed by the U.S. Department increased 5% (decreased 5% in 2005 and remained about the same in of Justice and the European Commission competition author ity. In 2004). The total solid waste primarily ash from mill power plants, to December 2006, the Finnish Competition Authority decided not to landfi lls increased approximately 25% (increased 8% in 2005 and propose a fi ne for UPM in its investigation of raw wood procurement decreased 26% in 2004) due to UPM’s increased use of biofuels. in Finland. Biofuels presently account for approximately 57% of all fuels used UPM has been named as a defendant in multiple class-action in heat and electricity generation at the mills. UPM has continued to lawsuits against labelstock and magazine paper manufacturers in the invest in biofuel-fi red power plants. United States. The remaining litigation matters may last several EU-wide trading of carbon dioxide emissions allowances started years. No provisions have been made in relation to these investiga- on the 1 January, 2005. Carbon dioxide emission permits were tions. granted to all UPM units which are subject to the scheme. In 2006 In March 2006, UPM paid a fi ne of € 56.55 million imposed by and 2005, UPM used fewer allowances than were granted. the European Commission concerning antitrust activities in the mar- Consistent efforts have been taken to increase the share of ket for plastic sacks but has appealed the decision. re cycled fi bre in the raw material base. UPM is the largest user of recovered paper for printing papers in Europe and the second largest Events after the balance sheet date in the world, with a consumption of 3.0 million tonnes in 2006 (2.9 On 30 January 2007, M-real announced to sell 9% of Metsä-Bonia’s in 2005 and 2.8 in 2004). Today, 27% of the total fi bre usage for shares to its parent company Metsäliitto for € 240 million. Conse- paper production is gained from recovered paper. quently, M-real reject UPM’s offer made in November 2006 to buy In 2006, UPM announced that it will use the following third- 15% of Metsä-Botnia’s shares for € 500 million. party certifi ed environmental labels: European Eco-label (EU Flo- The Group’s management is not aware of any other signifi cant wer), PEFC and FSC. The EU Flower label proves that the paper ful- events occurring after 31 December 2006 which would have had an fi ls certain environmental criteria i.e., production has a lower envi- impact on the fi nancial statements. ronmental impact, including selection of raw materials, use of chemicals , use of fi bre and energy, emissions from operations and Outlook for 2007 waste management. The PEFC and FSC labels prove that wood raw Demand for printing papers is forecast to grow somewhat from last material originates from certifi ed and well-managed forests and the year. In North America weak demand is expected to continue. The wood is legally logged and does not come from protected areas. strongest growth in demand will be in emerging markets. UPM UPM is included in the sustainability index DJSI STOXX for expects its paper deliveries to increase from last year. UPM’s average 2006/2007. Companies being components of the Dow Jones Sustai- paper price for the fi rst quarter of 2007 is slightly higher than that of nability Indexes are assessed via an extensive third-party screening the fourth quarter of 2006. to be industry leaders in economical, ecological and social sustaina- Demand for self-adhesive labelstock is forecast to grow in all bility. In 2003–2006, UPM share has been a component of both DJSI markets. Labelstock prices are forecast to be stable. Demand for World and STOXX and was an industry group leader in 2005 and industrial wrappings is expected to grow somewhat. 2006. In wood products, demand for plywood and sawn timber will UPM publishes a separate Environmental and Corporate Social remain good. Responsibility report. The report is not audited. Wood, raw material and energy prices continue to rise. As a result of expected cost savings from the ongoing profi tability pro- Litigation gramme, the increase in the company’s overall costs is expected to The competition authorities are continuing investigations into alleged remain at the level of 1-2%. antitrust activities with respect to various products of the company. Capital expenditure is forecast to be about the same as in 2006. The US Department of Justice, the EU authorities and the authorities The Group expects its profi ts to increase from last year.

UPM ANNUAL REPORT 2006

61 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

Board of Directors’ proposal for the distribution of profits

The Board of Directors proposes to the Annual General Meeting that The Board of Directors proposes that the dividend be paid on a dividend of € 0.75 per share be paid on the shares outstanding at 10 April 2007. the record date and the remainder being retained. The distributable funds of the parent company are On 1 February 2007, there are 523,259,430 outstanding shares € 3,325,188,639.79. No material changes have taken place in respect and the corresponding amount to be paid in dividends is EUR 392.4 of the company’s ﬁ nancial position after the balance sheet date. The million. liquidity of the company is good and in the opinion of the Board of Directors proposed distribution of proﬁ t does not risk the liquidity of the company.

Signatures of the annual accounts and the report of Board of Directors for the year 2006

Helsinki, 1 February 2007

Vesa Vainio Jorma Ollila Berndt Brunow Chairman

Martti Ahtisaari Michael C. Bottenheim Karl Grotenfelt

Georg Holzhey Wendy E. Lane Ursula Ranin

Françoise Sampermans Jussi Pesonen President & CEO

UPM ANNUAL REPORT 2006 62 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006 Consolidated income statement 1.1. – 31.12. 2005 2004 €m Note 2006 (As revised*) (As revised*)

Sales 4 10,022 9,348 9,820 Other operating income 6 231 117 168 Costs and expenses 7 –8,514 –8,092 –8,254 Change in fair value of biological assets and wood harvested 8 –126 34 15 Share of results of associated companies and joint ventures 9614158 Depreciation, amortization and impairment charges 10 –1,138 –1,130 –1,122 Operating proﬁ t 4 536 318 685

Gains on available-for-sale investments, net 11 –2 90 1 Exchange rate and fair value gains and losses 12 18 –4 48 Interest and other ﬁ nance costs, net 12 –185 –147 –178 Proﬁ t before tax 367 257 556

Income taxes 13 –29 4 364 Proﬁ t for the period 338 261 920

Attributable to: Equity holders of parent company 340 263 919 Minority interest –2 –2 1 338 261 920

Earnings per share for proﬁ t attributable to the equity holders of the parent company Basic earnings per share, € 14 0.65 0.50 1.76 Diluted earnings per share, € 14 0.65 0.50 1.75

*) Reﬂ ects the retrospective application of new and revised International Financial Reporting Standards and changes in reporting principles. The notes are an integral part of these ﬁ nancial statements.

UPM ANNUAL REPORT 2006

63 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group Consolidated balance sheet 31.12. €m Note 2006 2005

ASSETS Non-current assets Goodwill 16 1,514 1,514 Other intangible assets 17 461 535 Property, plant and equipment 18 6,500 7,316 Investment property 19 30 35 Biological assets 20 1,037 1,174 Investments in associated companies and joint ventures 21 1,177 1,034 Available-for-sale investments 22 127 153 Non-current ﬁ nancial assets 23 74 170 Deferred tax assets 28 362 352 Other non-current assets 24 73 38 11,355 12,321 Current assets Inventories 25 1,255 1,256 Trade and other receivables 26 1,657 1,653 Income tax receivables 328 Cash and cash equivalents 199 251 3,114 3,188

Assets held for sale 21 – 32 Total assets 14,469 15,541

31.12. €m Note 2006 2005

EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital 890 890 Share premium reserve 826 826 Treasury shares ––3 Translation differences –89 –34 Fair value and other reserves 278 233 Retained earnings 5,366 5,415 27 7,271 7,327 Minority interest 18 21 Total equity 7,289 7,348

Non-current liabilities Deferred tax liabilities 28 790 887 Retirement beneﬁ t obligations 29 427 429 Provisions 30 187 190 Interest-bearing liabilities 31 3,353 4,326 Other liabilities 32 13 13 4,770 5,845 Current liabilities Current interest-bearing liabilities 31 992 976 Trade and other payables 33 1,399 1,364 Income tax payables 19 8 2,410 2,348 Total liabilities 7,180 8,193

Total equity and liabilities 14,469 15,541

The notes are an integral part of these ﬁ nancial statements.

UPM ANNUAL REPORT 2006 64 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006 Consolidated statement of changes in equity

Attributable to equity holders of the parent

Share Fair value Share Share premium Treasury Translation and other Retained Minority Total €m capital issue reserve sharesdifferences reserves1) earnings1) Total interest equity

Balance at 1 January 2004 (as revised) 890 – 737 – –42 263 5,149 6,997 32 7,029

Transactions with equity holders Share options exercised 1 1 8 – – – – 10 – 10 Share-based compensation – – – – – 12 – 12 – 12 Divided paid –––––––393 –393 – –393 Business combinations –––––– – – –7 –7 Income and expenses recognised directly in equity Translation differences – – – – –13 – – –13 – –13 Other items – – – – – 1 1 2 – 2 Cash fl ow hedges recorded in equity, net of tax – – – – – 31 – 31 – 31 transferred to income statement, net of tax – – – – – –19 – –19 – –19 Available-for-sale investments gains/losses arising from fair valuation, net of tax – – – – – 13 – 13 – 13 transferred to income statement, net of tax – – – – – – – – – – Revision of profi t on valuation of available-for-sale investments –––––27 –27–27 Profi t for the period (as revised) ––––––919 919 1 920 Balance at 31 December 2004 (as revised) 891 1 745 – –55 328 5,676 7,586 26 7,612

Transactions with equity holders Share options exercised 12 –1 68 – – – – 79 – 79 Acquisition of treasury shares – – – –151 – – – –151 – –151 Reissuance of treasury shares – – – 11 – – – 11 – 11 Cancellation of treasury shares –13 – 13 137 – – –137 – – – Share-based compensation – – – – – 8 – 8 – 8 Divided paid – – – – – – –387 –387 – –387 Business combinations – – – – – – – – –3 –3 Income and expenses recognised directly in equity Translation differences – – – – 25 – – 25 – 25 Net investment hedge, net of tax – – – – –4 – – –4 – –4 Cash ﬂ ow hedges recorded in equity, net of tax – – – – – –63 – –63 – –63 transferred to income statement, net of tax – – – – – –2 – –2 – –2 Available-for-sale investments gains/losses arising from fair valuation, net of tax – – – – – 51 – 51 – 51 transferred to income statement, net of tax – – – – – –89 – –89 – –89 Proﬁ t for the period – – – – – – 263 263 –2 261 Balance at 31 December 2005 890 – 826 –3 –34 233 5,415 7,327 21 7,348

Transactions with equity holders Reissuance of treasury shares – – – 3 – – 1 4 – 4 Share-based compensation – – – – – 7 – 7 – 7 Divided paid – – – – – – –392 –392 – –392 Business combinations – – – – – – – – –1 –1 Income and expenses recognised directly in equity Translation differences – – – – –63 – – –63 – –63 Other items – – – – – –2 2 – – – Net investment hedge, net of tax – – – – 8 – – 8 – 8 Cash ﬂ ow hedges recorded in equity, net of tax – – – – – 45 – 45 – 45 transferred to income statement, net of tax – – – – – –5 – –5 – –5 Available-for-sale investments gains/losses arising from fair valuation, net of tax – – – – – – – – – – transferred to income statement, net of tax – – – – – – – – – – Proﬁ t for the period – – – – – – 340 340 –2 338 Balance at 31 December 2006 890 – 826 – –89 278 5,366 7,271 18 7,289

1) Reﬂ ects the retrospective application of new and revised International Financial Reporting Standards. The notes are an integral part of these ﬁ nancial statements.

UPM ANNUAL REPORT 2006

65 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group Consolidated cash ﬂ ow statement 1.1. – 31.12. 2004 €m 2006 2005 (As revised*)

Cash fl ow from operating activities Profi t for the period 338 261 920 Adjustments to profi t for the period 1) 1,195 1,125 419 Interest received 91539 Interest paid –187 –156 –189 Dividends received 16 21 39 Other fi nancial items, net –18 –86 –45 Income taxes paid –159 –93 –72 Change in working capital 2) 21 –234 –114 Net cash provided by operating activities 1,215 853 997

Cash fl ow from investing activities Acquisition of subsidiary shares, net of cash (Note 5) – –6 –1 Acquisition of shares in associated companies –68 –5 –40 Acquisition of available-for-sale investments – –22 –1 Capital expenditure –635 –690 –630 Proceeds from disposal of subsidiary shares, net of cash (Note 5) 203 200 185 Proceeds from disposal of shares in associated companies 52 16 25 Proceeds from disposal of available-for-sale investments 3 284 –41 Proceeds from sale of fi xed assets 108 47 29 Proceeds from long-term receivables 23 25 20 Increase in long-term receivables – –7 –12 Other investing cash fl ow ––– Net cash used in investing activities –314 –158 –466

Cash fl ow from fi nancing activities Proceeds from long-term liabilities 415 178 – Payments of long-term liabilities –574 –641 –224 Proceeds from (payment of) short-term borrowings, net –398 262 –102 Share options exercised –7810 Dividends paid –392 –388 –393 Purchase of own shares – –151 – Other fi nancing cash fl ow –2 74 –1 Net cash used in fi nancing activities –951 –588 –710

Change in cash and cash equivalents –50 107 –179

Cash and cash equivalents at the beginning of year 251 142 338 Foreign exchange effect on cash –2 2 –17 Change in cash and cash equivalents –50 107 –179 Cash and cash equivalents at year-end 199 251 142

Notes to the consolidated cash fl ow statement 1) Adjustments to profi t for the period Taxes 29 –4 –364 Depreciation, amortization and impairment charges 1,138 1,130 1,122 Share of results in associated companies and joint ventures –61 –41 –58 Profi ts and losses on sale of fi xed assets and investments –157 –48 –138 Gains on available-for-sale investments, net 2 –90 –1 Finance costs, net 167 151 130 Rosenlew cartel fi ne –57 – – Change in the Finnish pension system – – –269 Other adjustments 134 27 –3 1,195 1,125 419 2) Change in working capital Inventories –60 –124 –26 Current receivables –69 –130 –203 Current non-interest bearing liabilities 150 20 115 21 –234 –114 *) Refl ects the retrospective application of new and revised International Financial Reporting Standards. The notes are an integral part of these fi nancial statements.

UPM ANNUAL REPORT 2006 66 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006 Notes to the Consolidated Financial Statements

(In the notes all amounts are shown in millions of euros unless otherwise stated.)

1 ACCOUNTING POLICIES directly attributable to the acquisition. Identifi able assets acquired The principal accounting policies to be adopted in the preparation of and liabilities and contingent liabilities assumed in a business com- the consolidated fi nancial statements are set out below: bination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess Principal Activities of the cost of acquisition over the fair value of the Group’s share of UPM is a global paper and forest products company engaged in the the identifi able net assets of the subsidiary acquired is recorded as production of paper, with an emphasis on the manufacture and sale goodwill. If the cost of acquisition is less than the fair value of the of printing and writing papers. The Group is vertically integrated Group’s share of the net assets of the subsidiary acquired, the differ- with operations that are organized through fi ve divisions: Magazine ence is recognized directly in the income statement (see ”Intangible Papers, Newsprint, Fine and Speciality Papers, Converting and Assets” for the accounting policy on goodwill). Subsidiaries Wood Products. The biggest units of UPM’s Other Operations are acquired during the year are included in the consolidated fi nancial forestry departments, and energy department in Finland. The statements from the date on which control is transferred to the Group’s activities are centred in the European Union countries and Group, and subsidiaries sold are included up to the date that control North America, and Asia with production facilities in 15 countries. is relinquished. Where necessary, the accounting policies of subsidiaries have been adjusted to ensure consistency with the policies Basis of preparation adopted by the Group. These consolidated fi nancial statements of UPM-Kymmene Corpo- All intercompany transactions, receivables, liabilities and unre- ration, a Finnish limited liability company, domiciled in Helsinki in alized profi ts, as well as intragroup profi t distributions, are elimi- the Republic of Finland, are prepared in accordance with Interna- nated. tional Financial Reporting Standards as adopted by the EU (IFRS). These Group consolidated fi nancial statements were authorized for Associated companies and joint ventures issue by the Board of Directors on 1 February 2007. Associated companies are entities over which the Group generally The fi nancial statements have been prepared under the historical holds between 20% and 50% of the voting rights, or over which the cost convention as modifi ed by the revaluation of biological assets, Group has signifi cant infl uence but not control. Joint ventures are available-for-sale fi nancial assets and certain other fi nancial assets entities over which the Group has contractually agreed to share the and fi nancial liabilities. Share-based payments are recognized at fair power to govern the fi nancial and operating policies of that entity value on the grant date. with another venturer or venturers. The preparation of fi nancial statements requires the use of Interests in associated companies and joint ventures are accounting estimates and assumptions that affect the reported accounted for using the equity method of accounting. Under this amounts of assets and liabilities, the disclosure of contingent assets method the Group’s share of the associated company’s and joint and liabilities at the date of the fi nancial statements, and the venture’s profi t or loss for the year is recognized on the income reported amounts of revenues and expenses during the reporting statement and its share of movements in reserves is recognized in periods. Accounting estimates are employed in the fi nancial state- reserves. The Group’s interest in an associated company and joint ments to determine reported amounts, including the realizability of venture is carried on the balance sheet at an amount that refl ects its certain assets, the useful lives of tangible and intangible assets, share of the net assets of the associated company and joint venture income taxes and others. Although these estimates are based on together with goodwill on acquisition (net of any accumulated management’s best knowledge of current events and actions, actual impairment loss), less any impairment in the value of individual results may ultimately differ from those estimates. The preparation investments. Gains and losses on transactions between the Group of fi nancial statements also requires management to exercise its and its associated companies and joint ventures are eliminated to the judgement in the process of applying the Group’s accounting poli- extent of the Group’s interest in the associated company and joint cies. venture. Associated company and joint venture accounting policies have been changed where necessary to ensure consistency with the Consolidation principles policies adopted by the Group. Equity accounting is discontinued Subsidiaries when the carrying amount of the investment in an associated com- The consolidated fi nancial statements of UPM include the fi nancial pany or interest in a joint venture reaches zero, unless the Group has statements of the parent company, UPM-Kymmene Corporation, incurred or guaranteed obligations in respect of the associated com- and its subsidiaries. Subsidiaries are those entities in which UPM- pany or joint venture. Kymmene Corporation either owns, directly or indirectly, over fi fty percent of the voting rights, or otherwise has the power to govern Minority interests their operating and fi nancial policies. The profi t or loss attributable to the parent shareholders and minor- Acquisitions of subsidiaries are accounted for using the pur- ity interests is presented on the face of the income statement. chase method of accounting. The cost of an acquisition is measured Minority interests are presented in the consolidated balance sheet as the fair value of the assets given, equity instruments issued and within equity, separately from the parent shareholders’ equity. liabilities incurred or assumed at the date of exchange, plus costs

UPM ANNUAL REPORT 2006

67 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

Foreign currency transactions tion is ultimately recognized in the income statement. However, if a Items included in the fi nancial statements of each subsidiary in the committed or forecasted transaction is no longer expected to occur, Group are measured using the currency of the primary economic the cumulative gain or loss that was reported in equity is immedi- environment in which the subsidiary operates (”the functional cur- ately transferred to the income statement. rency”). The consolidated fi nancial statements are presented in Hedges of net investments in foreign operations are accounted euros, which is the functional and presentation currency of the for similarly to cash fl ow hedges. The fair value changes of the parent company. forward exchange contracts that refl ect the change in spot exchange Foreign currency transactions are translated into the functional rates are deferred in equity and included in cumulative translation currency using the exchange rates prevailing at the dates of the differences. Any gain or loss relating to the interest portion of the transactions. Receivables and liabilities in foreign currencies are forward exchange contracts is recognized immediately in the translated into the functional currency at the exchange rates prevail- income statement under fi nancial items. Gains and losses accumu- ing on the balance sheet date. Foreign exchange gains and losses lated in equity are included in the income statement when the for- resulting from the settlement of such transactions and from the eign operation is partially disposed of or sold. The Group has termi- translation at year-end exchange rates of monetary assets and liabili- nated in 2006 hedging of net investment in a foreign operation. ties denominated in foreign currencies are recognised in the income Certain derivative transactions, while providing effective eco- statement, except when deferred in equity as qualifying cash fl ow nomic hedges under the Group Financial Policy, do not qualify for hedges and qualifying net investment hedges. Foreign exchange hedge accounting under the specifi c rules in IAS 39. Such deriva- differences arising in respect of operating business items are tives are classifi ed held for trading, and changes in the fair value of included in operating profi t in the appropriate income statement any derivative instruments that do not qualify for hedge accounting account, and those arising in respect of fi nancial assets and liabili- under IAS 39 are recognized immediately in the income statement ties are included as a net amount in fi nance costs. as other operating income or under fi nancial items. Income and expenses for each income statement of subsidiaries At the inception of the transaction the Group documents the that have a functional currency different from the Group’s presenta- relationship between hedging instruments and hedged items, as well tion currency are translated into euros at quarterly average exchange as its risk management objective and strategy for undertaking vari- rates. Assets and liabilities for each balance sheet presented are ous hedge transactions. This process includes linking all derivatives translated at the closing rate at the date of that balance sheet. All designated as hedges to specifi c assets and liabilities or to specifi c resulting translation differences are recognized as a separate compo- fi rm commitments or forecast transactions. The Group also docu- nent of equity. When a foreign entity is partially disposed of, sold or ments its assessment, both at the hedge inception and on an ongoing liquidated, such translation differences are recognized in the income basis, as to whether the derivatives that are used in hedging transac- statement as part of the gain or loss on sale. tions are highly effective in offsetting changes in fair values or cash fl ows of hedged items. Derivative financial instruments Fair values of derivative fi nancial instruments have been esti- Derivatives are initially recognized on the balance sheet at cost and mated as follows: Interest forward rate agreements and futures thereafter revalued at their fair value. The method of recognizing the contracts are fair valued based on quoted market rates on the bal- resulting gain or loss is dependent on the nature of the item being ance sheet date; forward foreign exchange contracts are fair valued hedged. On the date a derivative contract is entered into, the Group based on the contract forward rates in effect on the balance sheet designates certain derivatives as either hedges of the fair value of a date; foreign currency options are fair valued based on quoted mar- recognized asset or liability (fair value hedge), a hedge of a fore- ket rates on the balance sheet date; interest and currency swap casted transaction or of a fi rm commitment (cash fl ow hedge), or agreements are fair valued based on discounted cash fl ow analyses; hedges of net investments in foreign operations (net investment and commodity derivatives are fair valued based on quoted market hedge). rates on the balance sheet date. Changes in the fair value of derivatives that are designated and In assessing the fair value of non-traded derivatives such as qualify as fair value hedges and that are highly effective both pro- embedded derivatives the Group uses valuation methods that are spectively and retrospectively are recorded in the income statement based on market conditions existing at each balance sheet date. under fi nancial items, along with any changes in the fair value of the Embedded derivatives that are identifi ed and are monitored by the hedged asset or liability that are attributable to the hedged risk. Group and the fair value changes are reported in other operating Changes in the fair value of derivatives that are designated and income in the income statement. qualify as cash fl ow hedges and that are highly effective both prospectively and retrospectively are recognized in equity (at the spot Segment reporting rate difference). Amounts deferred in equity are transferred to the Business segments provide products or services that are subject to income statement and classifi ed as revenue or an expense in the risks and returns that are different from those of other business same period during which the hedged fi rm commitment or fore- segments. Geographical segments provide products or services casted transaction affects the income statement (for example, when within a particular economic environment that is subject to risks and the forecasted external sale to the Group that is hedged takes place). returns that are different from those of components operating in The period when the hedging reserve is released to sales after each other economic environments. derivative has matured is approximately 1 month. The accounting policies of the segments and Other Operations When a hedging instrument expires or is sold, or when a hedge are the same as those of the Group. The costs and revenues as well no longer meets the criteria for hedge accounting under IAS 39, any as assets and liabilities of the segments are allocated on a symmetri- cumulative gain or loss existing in equity at that time remains in cal basis. All inter-segment sales are based on market prices, and all equity and is recognized when the committed or forecasted transac- inter-segment sales are eliminated on consolidation.

UPM ANNUAL REPORT 2006 68 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

Non-current assets held for sale and joint ventures, except where the timing of the reversal of the tempo- discontinued operations rary difference is controlled by the Group and it is probable that the Non-current assets (or disposal groups) are classifi ed as assets held temporary difference will not reverse in the foreseeable future. for sale and stated at the lower of carrying amount and fair value Deferred income tax assets are recognized to the extent that it is less costs to sell if their carrying amount is recovered principally probable that future taxable profi t will be available against which the through a sale transaction rather than through a continuing use. temporary differences can be utilized. Non-current assets classifi ed as held for sale, or included within a disposal group that is classifi ed as held for sale, are not depreciated. Intangible assets A discontinued operation is a component of an entity that either Amortization of intangible assets with fi nite lives is based on the has been disposed of, or that is classifi ed as held for sale, and repre- following expected useful lives: sents a separate major line of business or geographical area of operations, is a part of a single co-ordinated plan to dispose of a separate Computer software 3–5 years major line of business or geographical area of operations, or is a Other intangible assets 5–10 years subsidiary acquired exclusively with a view to resale. The post-tax profi t or loss from discontinued operations is shown as a separate Goodwill and other intangible assets that are deemed to have an single item in the consolidated income statement. indefi nite life are not amortized.

Revenue recognition Goodwill Sales are recognized when it is probable that future economic bene- Goodwill represents the excess of the cost of acquisition over the fi ts will fl ow to the entity, the associated costs and the amount of fair value of the Group’s share of the net identifi able assets of the revenue can be measured reliably and the following criteria are met: acquired subsidiary, associated company or joint venture at the date persuasive evidence of an arrangement exists, delivery has occurred of acquisition. Goodwill on acquisitions of subsidiaries is included or services have been rendered, our price to the buyer is fi xed or in intangible assets. Goodwill on acquisitions of associated compa- determinable, and collectibility is reasonably assured. Delivery is nies and joint ventures is included in investments in associated not considered to have occurred until the customer takes title and companies and joint ventures and is tested for impairment as part of assumes the risks and rewards of ownership and the Group has the overall balance. Goodwill is initially recognised as an asset at neither continuing managerial involvement with the goods, nor a cost and is subsequently measured at cost less any accumulated continuing right to dispose of the goods, nor effective control of impairment losses. those goods. The timing of revenue recognition is largely dependent Cash-generating units to which goodwill has been allocated are on delivery terms. Group terms of delivery are based on Incoterms tested for impairment annually, or more frequently when there is an 2000, the offi cial rules for interpretation of trade terms issued by indication that the unit may be impaired. If the recoverable amount International Chamber of Commerce. Revenue is recorded when the of the cash-generating unit is less than the carrying amount of the product is delivered to the destination point for terms designated unit, the impairment loss is allocated fi rst to reduce the carrying Delivered Duty Paid (“DDP”). For sales transactions designated amount of any goodwill allocated to the unit and then to other assets Free on Board (“FOB”) or Cost, Insurance and Freight (“CIF”), of the unit pro-rata on the basis of the carrying amount of each asset revenue is recorded at the time of shipment. in the unit. An impairment loss recognised for goodwill is not Revenues from services are recorded when the service has been reversed in a subsequent period. performed. Sales are recognized net of indirect sales taxes, dis- The gain or loss on disposal of an entity includes the carrying counts, rebates and exchange differences on sales in foreign cur- amount of goodwill related to the entity sold. rency. The costs of distributing products sold are included in costs and expenses. Research and development Research and development costs are expensed as incurred, except Income taxes for certain development costs, which are capitalised when it is prob- The Group’s income taxes include income taxes of Group compa- able that a development project will generate future economic bene- nies based on taxable profi t for the fi nancial period, together with fi ts, and the cost can be measured reliably. Capitalised development tax adjustments for previous periods and the change of deferred costs are amortised on a systematic basis over their expected useful income taxes. future lives, not exceeding fi ve years. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of Computer software assets and liabilities and their carrying amounts in the consolidated Costs associated with maintaining computer software programs and fi nancial statements. However, the deferred income tax is not costs related to the preliminary project phase of internally devel- accounted for if it arises from initial recognition of an asset or lia- oped software are recognized as an expense as incurred. Develop- bility in a transaction other than a business combination that at the ment costs relating to the application development phase of inter- time of the transaction affects neither accounting nor taxable profi t nally developed software are capitalized as intangible assets. Direct or loss. Deferred income tax is determined using tax rates (and costs include external direct costs of material and services and staff laws) that have been enacted or substantially enacted by the balance costs of the software development team. Computer software devel- sheet date and are expected to apply when the related deferred opment costs recognized as assets are amortized using the straight- income tax asset is realized or the deferred income tax liability is line method over their useful lives. settled. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associated companies and

UPM ANNUAL REPORT 2006

69 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

Other intangible assets Government grants Acquired patents, trademarks and licenses with a fi nite useful life Government grants relating to the purchase of property, plant and are recognized at cost less accumulated amortization and impair- equipment are deducted from the acquisition cost of the asset and ment. Amortization is calculated using the straight-line method to recognized as a reduction to the depreciation charge of the related allocate the cost over their estimated useful lives. Other intangible asset when it is practicable to determine that the eligibility condi- assets that are deemed to have an indefi nite life are not amortized tions attached to the grant will be met and the grant will be received. and are tested annually for impairment. Other government grants are recognised in the income statement in the period necessary to match them with the costs they are intended Emission allowances to compensate when the reimbursement is received or when it is The Group participates in government schemes aimed at reducing practicable to determine the amount and eligibility for the grant. greenhouse gas emissions. Allowances received from the governments free of charge are initially recognized as intangible assets Investment property based on market value at the date of initial recognition. Allowances Investment property includes real estate investments such as fl ats are not amortized but are recognised at amount not exceeding the and other premises occupied by third parties. market value at the balance sheet date. Government grants are Investment property is treated as a long-term investment and is recognised as deferred income in the balance sheet at the same time stated at historical cost. Depreciation is calculated on a straight-line as the allowances and recognised in the income statement systemati- basis and the carrying value is adjusted for impairment charges, if cally over the compliance period to which the corresponding emis- any. Useful lives are the same as for property, plant and equipment. sion rights relate. Emission rights and associated provisions are The balance sheet value of investment property refl ects the cost less derecognised when delivered or sold. Any profi t or loss on disposal accumulated depreciation and any impairment charges. is taken to the income statement. Biological Assets Property, plant and equipment Biological assets (i.e. living trees) are measured at their fair value Property, plant and equipment acquired by Group companies are less estimated point-of-sale costs. The fair value of biological assets stated at historical cost. Assets of acquired subsidiaries are stated at other than young seedling stands is based on discounted cash fl ows fair value at the date of acquisition. Depreciation is calculated on a from continuous operations. The fair value of young seedling stands straight-line basis and the carrying value is adjusted for impairment is the actual reforestation cost of those stands. Continuous opera- charges, if any. The carrying value of the property, plant and equip- tions, the maintenance of currently existing seedling stands and the ment on the balance sheet represents the cost less accumulated felling of forests during one rotation, are based on the Company’s depreciation and any impairment charges. forest management guidelines. The calculation takes into account Borrowing costs incurred for the construction of any qualifying the growth potential and environmental restrictions and other reser- assets are capitalized during the period of time that is required to vations of the forests. Felling revenues and maintenance costs are complete and prepare the asset for its intended use. Other borrowing calculated on the basis of actual costs and prices, taking into costs are expensed. account the Company’s projection of future price development. Land is not depreciated, but otherwise depreciation is based on Periodic changes resulting from growth, felling, prices, discount the following expected useful lives: rate, costs and other premise changes are included in operating profi t on the income statement. Buildings 25–40 years Heavy machinery 15–20 years Financial assets Light machinery and equipment 5–15 years Financial assets have been classifi ed into fi nancial assets at fair value through profi t or loss (including fi nancial assets held for trad- Expected useful lives of assets are reviewed at each balance sheet ing), loans and receivables and available-for-sale categories. date and, where they differ signifi cantly from previous estimates, Loans and receivables are non-derivative fi nancial assets with depreciation periods are changed prospectively. fi xed or determinable payments that are not quoted in an active Subsequent costs are included in the asset’s carrying amount or market. They are included in non-current assets unless they mature recognized as a separate asset, as appropriate, only when it is proba- within 12 months of the balance sheet date. Loan receivables origi- ble that the future economic benefi t associated with the item will nated by the company that have a fi xed maturity are measured at fl ow to the Group and the cost of the item can be measured reliably. amortized cost using the effective interest method, and those that do The carrying amount of the replaced part is derecognised. All other not have a fi xed maturity are measured at cost. Loan receivables are repairs and maintenance are charged to the income statement during impaired if the carrying amount is greater than the estimated recov- the fi nancial period in which they are incurred. Major renovations erable amount. are depreciated over the remaining useful life of the related asset or Available-for-sale investments are included in non-current assets to the date of the next major renovation, whichever is sooner. unless they are intended to be disposed of within 12 months of the Gains and losses on disposals are determined by comparing the balance sheet date. Purchases and sales of fi nancial investments are disposal proceeds with the carrying amount and are included in recognized on the settlement date, which is the date that the asset is operating profi t. Assets to be disposed of are reported at the lower of delivered to or by the Group. Investments are initially recognized at the carrying amount and the fair value less selling costs. cost, including transaction costs, and subsequently carried at fair value. The fair values of listed investments are based on quoted prices. Unlisted equity securities, for which fair values cannot be measured

UPM ANNUAL REPORT 2006 70 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006 reliably, are recognized at cost less impairment. Leases where the lessor retains substantially all the risks and Unrealized gains and losses arising from changes in the fair rewards of ownership are classifi ed as operating leases. Payments value of securities classifi ed as available-for-sale are recognized in made under operating leases are charged to the income statement on equity. When securities classifi ed as available-for-sale are sold or a straight-line basis over the period of the lease. impaired, the accumulated fair value adjustments in equity are included in the income statement as gains and losses from available- Inventories for-sale investments. Inventories are stated at the lower of cost and net realizable value. The Group assesses at each balance sheet date whether there is Cost is determined by the method most appropriate to the particular objective evidence that a fi nancial asset or a group of fi nancial nature of inventory, the fi rst in, fi rst out (FIFO) or weighted average assets is impaired. In the case of equity securities classifi ed as avail- cost. The cost of fi nished goods and work in progress comprises raw able for sale, a signifi cant or prolonged decline in the fair value of materials, direct labour, other direct costs and related production the security below its cost is considered in determining whether the overheads (based on normal operating capacity) but excludes bor- securities are impaired. If any such evidence exists for available-for- rowing costs. Net realizable value is the estimated selling price in sale fi nancial assets, the cumulative loss – measured as the differ- the ordinary course of business, less the costs of completion and ence between the acquisition cost and the current fair value, less any selling expenses. impairment loss on that fi nancial asset previously recognized in profi t or loss – is removed from equity and recognized in the income Trade receivables statement. Impairment losses recognized in the income statement on Trade receivables are carried at their anticipated realizable value, equity instruments are not subsequently reversed through the which is the original invoice amount less an allowance for doubtful income statement. accounts. An allowance for doubtful accounts is made when there is objective evidence that the Group will not be able to collect all Impairment of non-financial assets amounts due according to the original terms of the receivables. Assets that have an indefi nite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject Cash and cash equivalents to depreciation (or amortization) are reviewed for impairment when- Cash and cash equivalents comprise cash in hand, deposits held at ever events or changes in circumstances indicate that the carrying call with banks and other short-term highly liquid investments with amount may not be recoverable. An impairment loss is recognized original maturities of three months or less. Bank overdrafts are for the amount by which the asset’s carrying amount exceeds its included within borrowings in current liabilities on the balance recoverable amount. The recoverable amount is the higher of an sheet. asset’s fair value less costs to sell and value in use. The value in use is determined by reference to discounted future cash fl ows expected Treasury shares to be generated by the asset. For the purposes of assessing impair- Where any Group company purchases the Company’s equity share ment, assets are grouped at the lowest levels for which there are capital (treasury shares), the consideration paid, including any separately identifi able cash fl ows (cash-generating units). directly attributable incremental costs (net of income taxes), is Non-fi nancial assets other than goodwill that suffered an impair- deducted from equity attributable to the Company’s equity holders ment are reviewed for possible reversal of the impairment at each until the shares are cancelled or reissued. Where such shares are reporting date. Where an impairment loss subsequently reverses, the subsequently reissued, any consideration received, net of any carrying amount of the asset is increased to the revised estimate of directly attributable incremental transaction costs and the related its recoverable amount, but so that the increased carrying amount income tax effects, is included in equity attributable to the Compa- does not exceed the carrying amount that would have been deter- ny’s equity holders. mined had no impairment loss been recognized for the asset in prior years. Interest-bearing liabilities An impairment loss recognized for goodwill is not reversed in a Interest-bearing liabilities are classifi ed as originated loans and are subsequent period. recognized initially at fair value, net of transaction costs incurred. In subsequent periods, interest-bearing liabilities are stated at amor- Leases tized cost using the effective interest method; any difference Leases of property, plant and equipment where the Group has sub- between proceeds (net of transaction costs) and the redemption stantially all the risks and rewards of ownership are classifi ed as value is recognized in the income statement over the period of the fi nance leases. Finance leases are recognized as assets and liabilities interest-bearing liabilities. in the balance sheet at the commencement of lease term at the lower Most long-term interest-bearing liabilities are designated as of the fair value of the leased property and the present value of the hedged items in a fair value hedge relationship. Fair value variations minimum lease payments. Each lease payment is apportioned resulting from the hedged interest rate risk are recorded to adjust the between the liability and fi nance charges. The corresponding rental carrying amount of the hedged item and reported on the income obligations, net of fi nance charges, are included in other long-term statement under fi nance income and expenses. If the hedge account- interest-bearing liabilities. The interest element of the fi nance cost is ing is discontinued, the carrying amount of the hedged item is no charged to the income statement over the lease period so as to pro- longer adjusted for fair value changes attributable to the hedged risk duce a constant periodic rate of interest on the remaining balance of and the cumulative fair value adjustment recorded during the hedge the liability for each period. Property, plant and equipment acquired relationship is amortized based on a new effective interest recalcula- under fi nance leases are depreciated over the shorter of the asset’s tion through the income statement under fi nance income and useful life and the lease term. expenses.

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71 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

Interest-bearing liabilities are classifi ed as non-current liabilities program for its executive management. These compensation plans unless they are due to be settled within twelve months after the are recognized as equity-settled or cash-settled share-based payment balance sheet date. transactions depending on the settlement. The fair value of the granted options and shares are recognized as indirect employee Employee benefits costs over the vesting period. The fair values of the options granted are determined using the Black- Scholes valuation model on the Pension obligations grant date. Non-market vesting conditions are included in assump- The Group operates a mixture of pension schemes in accordance tions about the number of options that are expected to vest. The with the local conditions and practices in the countries in which it estimates of the number of the exercisable options are revised quar- operates. Such benefi t plans vary according to the customary benefi t terly and the impact of the revision of original estimates, if any, is plans prevailing in the country concerned. These programs include recognized in the income statement and equity. defi ned benefi t pension schemes with retirement, disability and Based on the share ownership program, the executive manage- termination benefi ts. The retirement benefi ts are generally a function ment is compensated with shares depending on Group’s fi nancial of years of employment and fi nal salary with the Company. Gener- performance. Shares are valued using the market rate on the grant ally, the schemes are either funded through payments to insurance date. The settlement is a combination of shares and cash. The Group companies or to trustee-administered funds as determined by peri- can obtain the necessary shares by using its treasury shares or pur- odic actuarial calculations. In addition, the Group also operates chase shares from the market. defi ned contribution pension arrangements. Most of Finnish pension arrangements are defi ned contribution plans. Provisions For defi ned benefi t plans, the liability recognized in the balance Provisions are recognized when the Group has a present legal or sheet in respect of defi ned benefi t pension plans is the present value constructive obligation as a result of past events, and it is probable of the defi ned benefi t obligation at the balance sheet date less the that an outfl ow of resources will be required to settle the obligation, fair value of plan assets, together with adjustments for unrecognized and a reliable estimate of the amount can be made. Where the Group actuarial gains or losses and past service cost. The defi ned benefi t expects a provision to be reimbursed, for example under an insur- obligation is calculated annually by independent actuaries using the ance contract, the reimbursement is recognized as a separate asset projected unit credit method. The present value of the defi ned bene- but only when the reimbursement is virtually certain. fi t obligation is determined by discounting the estimated future cash outfl ows using interest rates of high-quality corporate bonds that are Restructuring provisions denominated in the currency in which the benefi ts will be paid, and Restructuring provisions are recognized in the period in which the that have terms to maturity approximating to the terms of the related Group becomes legally or constructively committed to payment. pension liability. The cost of providing pensions is charged to the Employee termination benefi ts are recognized only after either an income statement so as to spread the regular cost over the service agreement has been made with the appropriate employee representa- lives of the employees. Actuarial gains and losses arising from tives on the terms of redundancy and the numbers of employees experience adjustments and changes in actuarial assumptions in affected, or after employees have been advised of the specifi c terms. excess of the greater of 10% of the value of plan assets or 10% of Costs related to the ongoing activities of the Group are not provi- the defi ned benefi t obligation are charged or credited to income over sioned in advance. the expected average remaining service lives of the employees concerned. Past service costs are recognized immediately in income, Environmental remediation provisions unless the changes to the pension plan are conditional on the Expenditures that result from remediation of an existing condition employees remaining in service for a specifi ed period of time (the caused by past operations and do not contribute to current or future vesting period). In this case, the past-service costs are amortized on revenues are expensed. The recognition of environmental remedia- a straight-line basis over the vesting period. tion provisions is based on current interpretations of environmental For defi ned contribution plans, contributions are paid to pension laws and regulations. Such provisions are recognized when it is insurance companies. Once the contributions have been paid, there likely that the liability has been incurred and the amount of such are no further payment obligations. Contributions to defi ned contri- liability can be reasonably estimated. Amounts provisioned do not bution plans are charged to the income statement in the period to include third-party recoveries. which the contributions relate.

Emission allowances Other post-retirement obligations Emission obligations are recognised in provisions when the liability Some Group companies provide post-retirement healthcare benefi ts to deliver emission allowances is incurred based on emissions made. to their retirees. The entitlement to these benefi ts is usually conditional on the employee remaining in service up to retirement age The liability to deliver allowances is recognised based on the carry- and the completion of a minimum service period. The expected ing amount of allowances on hand, if the liability is expected to be costs of these benefi ts are accrued over the period of employment, settled by those allowances, or if excess emissions are incurred, at using an accounting methodology similar to that for defi ned benefi t the market value of the allowances at the balance sheet date. pension plans. Valuations of these obligations are carried out by independent qualifi ed actuaries. Dividends Dividend distribution to the Company’s shareholders is recognized Share-based compensation as a liability in the Group’s fi nancial statements in the period in The Group has granted share options to top management and key which the dividends are approved by the Company’s shareholders. personnel. In addition, the Group has established a share ownership

UPM ANNUAL REPORT 2006 72 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

Comparatives quently measured at the higher of the unamortized balance of the Where necessary, comparative fi gures have been reclassifi ed to related fees received and deferred, and the expenditure required to conform to changes in presentation in the current year. In addition, settle the commitment at the balance sheet date. These amendments comparative fi gures have been revised, where necessary, to refl ect do not have any impact on the Group’s fi nancial statements in cur- the impact of the adoption of a number of new and revised IFRS- rent or prior years. standards. IFRIC 4 Determining whether an Arrangement contains a Lease is effective for annual periods beginning on or after 1 January 2006. Earnings per share The Group has reviewed its contracts whether they are required to The basic earnings per share are computed using the weighted ave- be accounted as leases in accordance with IAS 17 Leases. This rage number of shares outstanding during the period. Diluted earn- interpretation does not have any impact on the Group’s fi nancial ings per share are computed using the weighted average number of statements in current or prior years. shares outstanding during the period plus the dilutive effect of convertible bonds and share options. Revision to fi nancial statements presentation and reporting Operating profi t for 2005 and 2004 has been revised to correspond Adoption of new or revised with the current reporting format. The share of results of associated International Financial Reporting Standards companies and joint ventures, related to business operations, previously reported after operating profi t, is now included in operating Standards, interpretations and amendments to published standards profi t. As a consequence of this change the operating profi t was In 2006, the Group has adopted all of the standards, interpretations increased by € 41 million and € 58 million in 2005 and 2004, and amendments to published standards issued by the International respectively. In addition from the beginning of 2006, part of the Accounting Standards Board (the IASB) that are relevant to its results of derivative instruments relating to cash fl ow hedges are operations and effective for accounting periods beginning on 1 allocated to the respective division. Comparative years have been January 2006. The adoption has resulted in changes to the Group’s revised accordingly. accounting policies or the amounts reported for the current or prior years in the following areas: Amendment to IAS 19 Employee Benefi ts - Actuarial Gains and Standards, interpretations and amendments to published standards Losses, Group Plans and Disclosures is effective for annual periods that are not yet effective. beginning on or after 1 January 2006. As the Group decided to Certain standards, interpretations and amendments to existing stan- retain its former accounting policy regarding the recognition of dards have been published that are mandatory for accounting peri- actuarial gains and losses, adoption of this amendment has only ods beginning on 1 January 2007 or later but which the Group has impacted format and extent of disclosures presented in fi nancial not early adopted: statement (Note 29). IFRS 7 Financial Instruments: Disclosures, and a complemen- IFRIC 8 Scope of IFRS 2 is effective for annual periods begin- tary amendment to IAS 1 Presentation of Financial Statements - ning on or after 1 May 2006. IFRS 2 applies to share based payment Capital Disclosures are effective for annual periods beginning on or transactions in which the entity receives or acquires goods or ser- after 1 January 2007. IFRS 7 introduces new disclosures to improve vices. IFRIC 8 includes into the scope of IFRS 2 the transactions the information about fi nancial instruments. The amendment to IAS where the entity, when granting its own shares, cannot identify the 1 introduces disclosures about how an entity manages its capital. goods or services received. The Group early adopted IFRIC 8 as of The Group will apply IFRS 7 and the amendment to IAS 1 from the beginning of 2006 resulting in a charge in other costs and annual periods beginning on 1 January 2007. Adoption of IFRS 7 expenses of € 3 million in 2006. and the amendment to IAS 1 will expand disclosures presented in Amendment to IAS 39 Financial Instruments: Recognition and the fi nancial statements. Measurement - The Fair Value Option is effective for annual periods IFRS 8 Operating Segments is effective for annual periods beginning on or after 1 January 2006. The amendment changes the beginning on or after 1 January 2009. IFRS 8 replaces IAS 14 Seg- defi nition of fi nancial instruments classifi ed at fair value through ment Reporting and requires the amount reported for each segment profi t or loss and restricts the ability to designate fi nancial instru- item to be the measure reported to the chief operating decision ments as part of this category. This amendment does not have any maker for the purposes of allocating resources to that segment and impact on the classifi cation and designation of the Group’s fi nancial assessing its performance. The Group is currently evaluating the instruments classifi ed as at fair value through profi t or loss in cur- effects of implementing this standard. rent or prior years. IFRIC 7 Applying the Restatement Approach under IAS 29 Amendment to IAS 21 The Effects of Changes in Foreign Financial Reporting in Hyperinfl ationary Economies is effective for Exchange Rates - Net Investment in a Foreign Operation is effective annual periods beginning on or after 1 March 2006. The interpreta- for annual periods beginning on or after 1 January 2006. The tion provides guidance on how to apply the requirements of IAS 29 amendment has broadened and clarifi ed the defi nition of a net in a reporting period in which an entity identifi es the existence of investment. This amendment does not have any impact on the hyperinfl ation in the economy of its functional currency, when that Group’s fi nancial statements in current or prior years. economy was not hyperinfl ationary in the prior period. The Group Amendments to IAS 39 Financial Instruments: Recognition and does not expect the interpretation to be relevant for the Group. Measurement and IFRS 4 Insurance Contracts - Financial Guarantee IFRIC 9 Reassessment of Embedded Derivatives is effective for Contracts are effective for annual periods beginning on or after 1 annual periods beginning on or after 1 June 2006. The interpretation January 2006. The amendments require issued fi nancial guarantees, concluded that an entity generally should not reassess its conclusion other than those previously asserted by the entity to be insurance as to whether an embedded derivative needs to be separated from contracts, to be initially recognised at their fair value and subse- the hybrid contract after it is initially recognised. The Group

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believes that this interpretation should not have a signifi cant impact discount rate, expected return on plan assets and changes in future on the reassessment of embedded derivatives as the Group already compensation. Statistical information used may differ materially assess if embedded derivative should be separated using principles from actual results due to changing market and economic condi- consistent with IFRIC 9. tions, changes in service period of plan participants or changes in IFRIC 10 Interim Financial Reporting and Impairment is effec- other factors. Actual results that differ from assumptions and the tive for annual periods beginning on or after 1 November 2006. The effects of changes in assumptions are accumulated and charged or interpretation concludes that an impairment loss recognised in a pre- credited to income over the expected average remaining service vious interim period in respect of goodwill or an investment in lives of the employees to the extent that these exceed 10% of the either an equity instrument or a fi nancial asset carried at cost should higher of the pension plan assets and defi ned benefi t obligation. not be reversed in subsequent interim fi nancial statements or in Signifi cant differences in actual experience or signifi cant changes in annual fi nancial statements. The Group believes that this interpreta- assumptions may materially affect the future amounts of the defi ned tion should not have an impact on the Group’s accounts. benefi t obligation and future expense. IFRIC 11 IFRS 2 – Group and Treasury Share Transactions is effective for annual periods beginning on or after 1 March 2007. Environmental provisions The Interpretation addresses how to apply IFRS 2 Share-based Operations of the Group are based on heavy process industry which Payment to share-based payment arrangements involving an entity’s requires large production facilities. In addition to basic raw materi- own equity instruments or equity instruments of another entity in als, considerable amount of chemicals, water and energy is used in the same group (e.g. equity instruments of its parent). The Group processes. The Group’s operations are subject to several environ- believes that this interpretation should not have an impact on the mental laws and regulations. The Group aims to operate in compli- Group’s accounts. ance with regulations related to the treatment of waste water, air IFRIC 12 Service Concession Arrangements is effective for emissions and landfi ll sites. The Group has provisions for normal annual periods beginning on or after 1 January 2008. The Interpreta- environmental remediation costs. Unexpected events occurred du- tion addresses the accounting by private sector operators involved in ring production processes and waste treatment could cause material the provision of public sector infrastructure assets and services. The losses and additional costs in the Group’s operations. Group does not expect the interpretation to be relevant for the Group. Income taxes Management judgement is required for the calculation of provision for income taxes and deferred tax assets and liabilities. The Group 2 CRITICAL JUDGEMENTS IN APPLYING ACCOUNTING reviews at each balance sheet date the carrying amount of deferred POLICIES AND KEY SOURCES OF ESTIMATION UNCER- tax assets. The Group considers whether it is probable that the sub- TAINTY sidiaries will have suffi cient taxable profi ts against which the unused tax losses or unused tax credits can be utilized. The factors used in estimates may differ from actual outcome which could lead to sig- Impairment of non-current assets nifi cant adjustment to deferred tax assets recognized in the income Goodwill, intangible assets not yet available for use and intangible statement. assets with indefi nite useful lives are tested at least annually for impairment. Other long-lived assets are reviewed when there is an indication that impairment may have occurred. Estimates are made Legal contingencies of the future cash fl ows expected to result from the use of the asset Management judgement is required in measurement and recognition and its eventual disposal. If the balance sheet carrying amount of of provisions related to pending litigation. Provisions are recorded the asset exceeds its recoverable amount, an impairment loss is when the Group has a present legal or constructive obligation as a recognized. Actual cash fl ows could vary from estimated discounted result of past event, an unfavourable outcome is probable and the future cash fl ows. The long useful lives of assets, changes in esti- amount of loss can be reasonably estimated. Due to inherent uncer- mated future sales prices of products, changes in product costs and tain nature of litigation, the actual losses may differ signifi cantly changes in the discount rates used could lead to signifi cant impair- from the originally estimated provision. ment charges. Details of the impairment tests are provided in Note 16. 3 FINANCIAL RISK MANAGEMENT Biological assets The Group owns about 1 million hectare of forest land. Biological Financial risks assets (i.e. living trees) are measured at their fair value at each bal- The objective of fi nancial risk management is to protect the Group ance sheet date. The fair value of biological assets is determined from unfavourable changes in fi nancial markets and thus help to based among other estimates on growth potential, harvesting, price secure profi tability. The objectives and limits for fi nancing activities development and discount rate. Changes in any estimates could lead are defi ned in the Group Treasury Policy approved by the company’s to recognition of signifi cant fair value changes in income statement. Board of Directors. In fi nancial risk management, various fi nancial instruments are Employee benefits used within the limits specifi ed in the Group Treasury Policy. Only The Group operates a mixture of pension and other post-employ- such instruments whose market value and risk profi le can be contin- ment benefi t schemes. Several statistical and other actuarial assump- uously and reliably monitored are used for this purpose. tions are used in calculating the expense and liability related to the Financial services are provided and fi nancial risk management plans. These factors include, among others, assumptions about the carried out by a central treasury department (Group Treasury). The

UPM ANNUAL REPORT 2006 74 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006 centralization of Treasury functions enables effi cient fi nancial risk that, on average, yield curves will be positive. This approach thus management, cost-effi ciency and effi cient cash management. reduces interest costs in the long term. The duration may deviate between 3 and 12 months. At 31 December 2006, the average dura- Foreign currency risks tion of the net debt portfolio was 6 months (31.12.2005: 6 months). Management of foreign currency exposure is divided into two parts: Most of the long-term loans and the interest rate derivatives related that relating to foreign currency fl ows and that relating to balance to them meet the IFRS hedge accounting requirements. Changes in sheet items denominated in foreign currency. the fair value of any derivative instruments that do not qualify for The fi rst concerns mainly the 12-month forecasted commercial hedge accounting are recognized immediately in the income state- foreign currency fl ows and contracts longer than 12 months. Hedg- ment. ing of 50% of the net foreign currency fl ow for the 12 months ahead is considered neutral. Most of the forwards made to hedge highly Liquidity and refinancing risks probable foreign currency fl ows meet the IFRS hedge accounting The Group seeks to maintain adequate liquidity under all circum- requirements. The table below shows the nominal values of the stances by means of effi cient cash management and restricting hedging instruments at 31 December 2006. investments to those that can be readily converted into cash. In addition to cash funds of € 199 million (€ 251 million), at 31 Nominal values of hedging instruments December 2006 the Group had committed credit facilities amount- Currency €m ing to € 2.7 billion (at 31 December 2005: € 2.7 billion). As of 31 USD 543 December 2006, these facilities were unused (used € 80 million at GBP 384 31 December 2005.) JPY 61 Refi nancing risks are minimized by ensuring that the loan portfolio AUD 164 has a balanced maturity schedule and that loans have suffi ciently SEK 52 long maturities. The average loan maturity at 31 December 2006 CAD -77 was 7.1 years (7.5 years at 31 December 2005). NOK 32 DKK 40 The most important fi nancial programs in use at present are: Others 19 • Domestic commercial paper program, € 1.0 billion Total 1,218 • Belgian commercial paper program, € 400 million • Medium Term Note program, € 5.0 billion The Group’s fi nancial results and competitiveness are also affected • Revolving Credit Facility, € 1.2 billion (matures 2008) indirectly by changes in the values of the domestic currencies of its • Revolving Credit Facility, € 1.5 billion (matures 2010) main competitors, principally the US dollar, the Canadian dollar, and the Swedish krona. Exposure to these risks is not hedged. How- Counterparty risk ever, the company’s own production in the United States and Canada Counterparty risk is defi ned as the risk that a counterparty will be reduces this risk. unable to fulfi ll its contractual obligations. According to the Group The balance sheet position comprises foreign currency denomi- Treasury Policy, derivative instruments and investments of cash nated debts and receivables. According to the Group Treasury Pol- funds may be made only with a counterparty who meets a certain icy, the aim is a fully hedged position. At 31 December 2006 the standard of creditworthiness. Creditworthiness of counterparties is balance sheet position was € 11 million (at 31 December 2005: € 27 monitored by Group Treasury. million). Also the net of accounts receivable and accounts payable is hedged. Foreign currency risks associated with the shareholders’ Credit risk equity of foreign subsidiaries are not hedged. In 2006, the Group Potential concentrations of credit risk with respect to trade and other has terminated the hedging of a net investment in a Canadian sub- receivables are limited due to the large number and geographic sidiary. dispersion of companies that comprise the Group’s customer base. Customer credit limits are established and monitored, and on-going Interest rate risks evaluations of customers’ fi nancial condition are performed. Most The Group’s net debt per currency corresponds to the parent compa- of the receivables are covered by credit risk insurances. The Group ny’s and subsidiaries’ loan portfolios in their home currencies. considers that no signifi cant concentration of credit risk exists. The nominal values of the Group’s interest-bearing net debts (including derivatives) by currency at 31 December 2006 were as Derivatives related to commodity price risk management follows: The Group’s manufacturing process requires a signifi cant amount of electricity and recycled fi bre. The procurement and sales of electric- Currency Amount €bn ity (mainly to own mills) is managed and optimized by Group. The EUR 3.4 Group uses electricity forward contracts to manage price risks asso- USD 0.3 ciated with the Group’s electricity exposure, which is the difference CNY 0.5 between the Group’s electricity consumption and production. Recy- Total 4.2 cled paper price risk management includes the use of recycled fi bre derivatives. Management of interest rate risks is based on the 6-month average duration of the net debt portfolio as defi ned in the Group Treasury Policy. This relatively short duration is based on the assumption

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4 SEGMENT INFORMATION Fine and Speciality Papers Division This division produces a complete range of coated and uncoated The Group is organised on a worldwide basis into the following wood-free papers for graphic use and ofﬁ ce communication. Fine primary business segments: papers are used for copying, non-impact printing, facsimile, direct mail advertising, brochures, and special interest magazines, while • Magazine Papers Division speciality papers include label papers and packaging papers. • Newsprint Division • Fine and Speciality Papers Division Converting Division • Converting Division This division produces self-adhesive labelstock, RFID tags and • Wood Products Division industrial wrappings.

Activities outside the segments are reported under Other Opera- Wood Products Division tions. This division includes plywood manufacturing and sawmilling.

Magazine Papers Division Other Operations Magazine papers have a high mechanical pulp content and are gen- This includes forestry departments, and energy department in Fin- erally used in magazines, newspaper supplements, catalogues and land, logistics operations and real estate units, as well as the new direct mailings. The division manufactures both coated and ventures business unit. It also includes the share of net earnings of uncoated papers. Coated magazine papers are mainly used in the associated companies (mainly Oy Metsä-Botnia Ab and Pohjolan manufacture of high-quality, multi-coated printed products, includ- Voima Oy) and the central administrative functions for the Group. ing magazines, catalogues, brochures, direct mail advertising and The sales of Other Operations comprise only sales outside the other advertising materials. Uncoated papers are mainly used for Group. magazines, weekend newspaper supplements, catalogues, and ﬂ yers.

Newsprint Division This division produces standard newsprint and machine-ﬁ nished uncoated papers. The end-uses include daily newspapers, direct mail, telephone catalogues and books.

UPM ANNUAL REPORT 2006 76 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

Primary reporting format – Segment data for the year ended 31 December 2006

Fine and Other Magazine Speciality Wood Oper- €m Papers Newsprint Papers Converting Products ations1) Eliminations Group

External sales 3,237 1,433 2,315 1,240 1,226 571 – 10,022 Internal sales 117 3 245 34 95 – –494 – Total sales 3,354 1,436 2,560 1,274 1,321 571 –494 10,022

Share of results of associates and joint ventures – – – – – 61 – 61

Operating proﬁ t 2) –56 148 108 64 144 128 – 536 Gains on available-for-sale investments, net –2 Finance costs, net –167 Income taxes 3) –29 Proﬁ t for the period 338

Assets 4) 3,964 2,033 2,903 671 631 2,256 –207 12,251 Associates and joint ventures 4) – – – – – 1,177 – 1,177 Unallocated assets – – – – – – – 1,041 Total assets 14,469

Liabilities 5) 221 129 237 168 77 151 –207 776 Unallocated liabilities – – – – – – – 6,404 Total liabilities 7,180

Other items Depreciation and amortization 376 190 218 37 43 26 – 890 Impairment charge 228 – 19 1 – – – 248 Capital expenditure 155 145 189 73 39 98 – 699 Capital employed, 31 December 6) 3,743 1,905 2,666 503 554 3,282 –1,019 11,634 Capital employed, average 4,010 1,921 2,760 489 616 – – 12,142 Return on capital employed, % 7) –1.4 7.7 3.9 13.1 23.4 – – 4.7 1) Sales include only sales outside the Group. Internal sales to segments amount to € 1,534 million, consisting mainly of raw wood sales and the Energy Department in Finland. 2) The operating profi t of the Magazine paper segment includes personnel charges of € 28 million related to the profi tability programme, impairment charges of € 116 million related to the closure of the Voikkaa paper mill, impairment charges of € 115 million for Miramichi, and other income net of € 6 million, primarily including a capital gain of € 10 million on the sale of Rauma power plant. Related to the profi tability programme, the operating profi t of the Newsprint segment and Fine and Speciality Papers segment includes restructuring charges of € 7 million, and personnel and impairment charges of € 41 million, respectively. In Wood Products segment, the operating profi t includes a loss of € 10 million from the sale of the Loulay plywood mill and a capital gain of € 93 million on the sale of Puukeskus. The operating profi t in Other Operations includes a capital gain of € 41 million of the Group head offi ce real estate, a donation of € 5 million and restructuring charges of € 7 million. 3) Income taxes comprise a charge of € 22 million related to the decrease of deferred tax assets due to the reduction of income tax rate in Canada, a € 20 million income due to an increase in deferred tax assets related to the change in the Group’s structure in Canada, a € 28 million income due to the change in German tax legislation. 4) Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables. 5) Segment liabilities include trade payables and advances received. 6) Capital employed is segment assets less segment liabilities. Other Operations includes the Forestry Department: € 1,369 million and the Energy Department in Finland: € 1,110 million. Eliminations include unallocated assets and unallocated non-interest bearing liabilities. 7) The formula for calculation of the return on capital employed; segments: Operating profi t/Capital employed (average) x 100, the Group: Profi t before tax + interest expenses and other fi nance costs/Balance sheet total – non-interest-bearing liabilities (average) x 100.

UPM ANNUAL REPORT 2006

77 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

Primary reporting format – Segment data for the year ended 31 December 2005

Fine and Other Magazine Speciality Wood Oper- €m Papers Newsprint Papers Converting Products ations1) Eliminations Group

External sales 3,010 1,304 2,003 1,313 1,201 517 – 9,348 Internal sales 84 4 231 34 89 – –442 – Total sales 3,094 1,308 2,234 1,347 1,290 517 –442 9,348

Share of results of associates and joint ventures – – – – – 41 – 41

Operating proﬁ t 2) –76 77 85 70 6 156 – 318 Gains on available-for-sale investments, net 90 Finance costs, net –151 Income taxes 3) 4 Proﬁ t for the period 261

Assets 4) 4,424 2,000 3,145 615 734 2,614 –219 13,313 Associates and joint ventures 4) – – – – – 1,034 – 1,034 Unallocated assets 1,194 Total assets 15,541

Liabilities 5) 214 122 220 148 100 147 –219 732 Unallocated liabilities 7,461 Total liabilities 8,193

Other items Depreciation and amortization 407 192 216 44 48 22 – 929 Impairment charge 159 6 8 1 27 – – 201 Capital expenditure 177 135 265 52 51 69 – 749 Capital employed, 31 December 6) 4,210 1,878 2,925 467 634 3,501 –965 12,650 Capital employed, average 4,397 1,900 2,843 603 660 – – 12,801 Return on capital employed. % 7) –1.7 4.1 3.0 11.6 0.9 – – 3.4

1) Sales include only sales outside the Group. Internal sales to segments amount to € 1,457 million, consisting mainly of raw wood sales and the Energy Department in Finland. 2) The operating profi t of the Magazine Papers segment includes impairment charges of € 151 million, as well as expenses of € 17 million relating to a new collective labour agreement at the Miramichi mill, and one-time depreciation of € 5 million at Augsburg. The operating profi t of the Newsprint segment includes a € 5 million share of the Augsburg write-offs. The operating profi t of the Fine and Speciality Papers segment includes one-time depreciation of € 8 million relating to the Nordland paper machine rebuild. The operating profi t of the Converting segment includes a capital gain of € 26 million from the sale of the Loparex Group, and the operating profi t of the Wood Products segment includes an impairment charge of € 25 million in respect of sawmills in Finland and an expense of € 7 million relating mainly to restructuring of the sales network. The operating profi t from Other Operations includes a € 57 million fi ne imposed by the EU Commission concerning antitrust activities in the plastic industrial sacks market. 3) Taxes include income of € 58 million relating to the change in deferred tax assets arising from the Miramichi mill’s losses and depreciation difference, and a € 16 million expense relating to an associated company due to a change in tax law. 4) Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables. 5) Segment liabilities include trade payables and advances received. 6) Capital employed is segment assets less segment liabilities. Other Operations includes the Forestry Department: € 1,580 million and the Energy Department in Finland: € 1,013 million. Eliminations include unallocated assets and unallocated non-interest bearing liabilities. 7) The formula for calculation of the return on capital employed; segments: Operating profi t/Capital employed (average) x 100, the Group: Profi t before tax + interest expenses and other fi nance costs/Balance sheet total – non-interest-bearing liabilities (average) x 100.

UPM ANNUAL REPORT 2006 78 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

Primary reporting format – Segment data for the year ended 31 December 2004

Fine and Other Magazine Speciality Wood Oper- €m Papers Newsprint Papers Converting Products ations1) Eliminations Group

External sales 3,217 1,293 2,001 1,373 1,398 538 – 9,820 Internal sales 91 11 285 41 94 – –522 – Total sales 3,308 1,304 2,286 1,414 1,492 538 –522 9,820

Share of results of associates and joint ventures – – – – – 58 – 58

Operating proﬁ t 2) –67 7 171 71 111 392 – 685 Gains on available-for-sale investments, net 1 Finance costs, net –130 Income taxes3) 364 Proﬁ t for the period 920

Assets 4) 4,673 2,016 2,871 777 737 2,527 –203 13,398 Associates and joint ventures 4) – – – – – 1,047 – 1,047 Unallocated assets 1,382 Total assets 15,827

Liabilities 5) 197 111 197 142 90 219 –203 753 Unallocated liabilities 7,462 Total liabilities 8,215

Other items Depreciation and amortization 460 224 197 53 52 38 – 1,024 Impairment charge 75 – 2 – 21 – – 98 Capital expenditure 149 74 345 32 30 56 – 686 Capital employed, 31 December 6) 4,476 1,905 2,674 635 647 3,355 –739 12,953 Capital employed, average 4,749 2,002 2,640 654 748 – – 12,882 Return on capital employed, % 7) –1.4 0.3 6.5 10.9 14.8 – – 6.0

1) Sales include only sales outside the Group. Internal sales to segments amount to € 1,464 million, consisting mainly from the Forestry Department and Energy Department in Finland.

2) The operating profi t of the Magazine Papers segment includes expenses of € 110 million relating to the closure of Miramichi pulp mill as well as income of € 6 million from a change in the Finnish pension system. The change in the pension system resulted in income of € 2 million being booked to Newsprint, € 3 million to Fine and Speciality Papers, and € 2 million to Converting. The operating profi t of the Wood Products segment includes a capital gain of € 110 million from the sale of Brooks Group, expenses totalling € 34 million from restructuring arrangements made at Finnish sawmills and plywood mills, and income of € 7 million from the change in the pension system. Other Operations includes income of € 249 million arising from the change in Finland’s TEL employee pension scheme, a € 11 million provision for group restructuring expenses and a € 19 million provision for long-term wood procurement agreements in Great Britain 3) Taxes include a tax benefi t of € 235 million due to a change in Finnish tax legislation and a benefi t of € 284 million resulting from a decrease in the German tax liability. 4) Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables. 5) Segment liabilities include trade payables and advances received. 6) Capital employed is segment assets less segment liabilities. Other operations includes the Forestry Department: € 1,412 million and the Energy Department in Finland: € 1,011 million. Eliminations include unallocated assets and unallocated non-interest-bearing liabilities. 7) The formula for calculation of the return on capital employed; segments: Operating profi t/Capital employed (average) x 100, the Group: Profi t before tax + interest expenses and other fi nance costs/Balance sheet total – non-interest-bearing liabilities (average) x 100.

UPM ANNUAL REPORT 2006

79 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

Personnel (average) by segment 5 ACQUISITIONS AND DISPOSALS Year ended 31 December 2006 2005 2004 In 2006, no acquisitions were made. In 2005 and 2004, the acquisitions Magazine Papers 7,869 8,464 8,861 amounted to € 6 million and € 10 million respectively. Newsprint 3,361 3,471 3,631 In November 2005 the Group acquired 99 % of the shares of the Fine and Speciality Papers 6,680 6,933 6,933 Russian wood procurement company ZAO Tikhvinsky Komplexny Converting 3,607 4,374 4,751 Lespromkhoz. € 3 million of the acquisition price was allocated to Wood Products 6,158 6,633 7,503 intangible assets in respect of felling rights. Other Operations 3,364 3,074 3,136 No signifi cant arrangement fees or corresponding expenses were Total 31,039 32,949 34,815 paid in connection with acquisitions in the years 2004-2005. In June 2006, UPM sold the Group Head Offi ce real estate for € 77 Personnel at year end 28,704 31,522 33,433 million, which generated a pre-tax capital gain of € 41 million. In August 2006, UPM sold its Finnish building merchant Puukeskus Oy, Secondary reporting format part of the Wood Products segment, to the private equity investor Triton € External sales by destination and Puukeskus’s management. A tax exempt capital gain of 93 million was recognised on the sale. Year ended 31 December €m 2006 2005 2004 In August 2005, UPM sold Loparex Group, a part of the Converting division, for € 200 million (€ 230 million of cash consideration less € 30 Germany 1,587 1,475 1,543 million of net liabilities). A capital gain of € 26 million was recognized Great Britain 1,223 1,166 1,295 Finland 920 951 1,029 on the sale. France 661 627 710 In August 2004, UPM sold Brooks Group Limited, the Irish build- Other EU countries 2,247 2,091 2,291 ing material merchant, for € 213 million. A pre-tax capital gain of € 110 Other European countries 661 498 422 million was recognized on the sale. United States 1,124 1,173 1,323 None of these disposals are classifi ed as discontinued operations. Canada 126 123 143 China 526 290 226 Rest of world 947 954 838 Assets and liabilities arising from the acquisition Total 10,022 9,348 9,820 Year ended 31 December €m 2006 2005 2004 Cash and cash equivalents – – 9 Total external assets by country Other intangible assets – 5 1 As at 31 December Property, plant and equipment – 1 – €m 2006 2005 2004 Inventories – 1 8 Receivables – 1 14 Germany 3,028 2,926 2,958 Borrowings and other liabilities – –2 –22 Great Britain 702 707 668 Fair value of net assets acquired – 6 10 Finland 6,779 7,636 8,088 Goodwill – – – France 612 600 624 Total purchase price – 6 10 Other EU countries 682 863 940 Other European countries 131 127 107 Less: United States 660 671 738 Cash and cash equivalents in subsidiary Canada 735 870 838 acquired – – –9 China 909 922 678 Cashfl ow on acquisition – –6 –1 Rest of world 231 219 188 Total 14,469 15,541 15,827

Capital expenditure by country Year ended 31 December €m 2006 2005 2004 Germany 123 115 49 Great Britain 52 61 43 Finland 255 245 329 France 74 58 11 Russia 4 20 9 Other European countries 11 15 9 North America 46 43 32 China 45 146 188 Rest of world 89 46 16 Total 699 749 686

UPM ANNUAL REPORT 2006 80 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

Net assets and liabilities of disposals Year ended 31 December Year ended 31 December €m 2006 2005 2004 €m 2006 2005 2004 Pension costs-defi ned contribution plans 170 134 149 Cash and cash equivalents 6 10 28 Other post-employment benefi ts (Note 29) 4 3 2 Other intangible assets 2 5 – Share-based payments (Note 36) 7 8 12 Goodwill – 49 – Other indirect employee costs 3) 175 168 178 Property, plant and equipment 63 80 19 356 313 341 Shares 1 1 – Other operating costs and expenses Inventories 36 42 31 Rents and lease expenses 56 66 62 Receivables 55 98 70 Emission expenses (Note 6) 10 29 – Accounts payable and other liabilities –42 –42 –45 Losses on sale of non-current assets 15 2 4 Borrowings and other liabilities –36 –59 – Other operating expenses 4) 1,149 1,194 1,281 85 184 103 1,230 1,291 1,347 Gain/loss on disposal 124 26 110 Total consideration 209 210 213 Costs and expenses, total 8,514 8,092 8,254 1) External services comprise mainly distribution costs of products sold. Satisfi ed by cash and cash equivalents 209 210 213 2) Changes were made to Finland’s TEL employee pension scheme in 2004. This Cash and cash equivalents in subsidiary resulted in a decrease of € 269 million in the pension liability. disposed –6 –10 –28 3) Other indirect employee expenses include primarily other statutory social Net cash infl ow arising from disposals 203 200 185 expenses, excluding pension expenses. 4) Other operating expenses include, among others, energy and maintenance expenses as well as expenses relating to services and the company’s administra- 6 OTHER OPERATING INCOME tion. The 2005 fi gure includes a fi ne of € 57 million imposed by the European Commission Year ended 31 December €m 2006 2005 2004 The research and development costs included in costs and expenses 1) Gains on sale of non-current assets 172 50 142 were € 44 million (2005: € 50 and 2004: € 47 million). Rental income, investment property 12 13 16 Rental income, other 8 7 6 Remuneration paid to the members of the Board of Directors and Emission allowances received (Note 7) 18 40 – Other 21 7 4 the Executive Team 231 117 168 Shareholdings (no of shares) and fees of the Board of Directors 1) Year 2006 includes a capital gain of € 41 million on the sale of Group Head Offi ce Shareholding Year ended 31 December. real estate and a capital gain of € 93 million on the sale of Puukeskus Oy. Year 2005 € 1,000 31.12.2006 2006 2005 2004 includes a capital gain of € 26 million on the sale of the Loparex Group, and year 2004 includes a capital gain of € 110 million on the sale of the Brooks Group. Board members Vesa Vainio, Chairman 14,073 160 160 164 Berndt Brunow, Vice Chairman 264,613 110 110 89 Jorma Ollila, Vice Chairman 34,193 110 110 114 7 COSTS AND EXPENSES Martti Ahtisaari 7,790 85 85 89 Year ended 31 December Michael C. Bottenheim 8,401 110 110 89 € m 2006 2005 2004 Karl Grotenfelt 10,767 85 85 85 Change in inventories of fi nished goods and Georg Holzhey 433,546 85 85 89 work in progress –92 –45 –36 Wendy E. Lane 2,078 85 85 – Production for own use –24 –44 –44 Ursula Ranin 1,140 85 – – –116 –89 –80 Françoise Sampermans 4,767 85 85 85 Materials and services Former Board members Raw materials, consumables and goods Gustaf Serlachius – – 39 114 Purchased during the period 4,997 4,667 4,737 Carl H. Amon III – – – 4 Change in inventories 42 –74 –29 Donna Soble Kaufman – – – 4 External services 1) 745 753 820 Total 781,368 1,000 954 926 5,784 5,346 5,528 of which in company shares – – 382 356 Personnel expenses Salaries and fees In accordance with the decision made by the 2006, 2005 and 2004 Salaries of boards of directors and Annual General Meetings, the Chairman of the Board of Directors managing directors 16 15 15 received a fee of € 160,000 for the year, the Vice Chairmen of the Board Other salaries 1,202 1,177 1,310 of Directors and the Chairman of the Audit Committee a fee of 1,218 1,192 1,325 € 110,000, and the members of the Board of Directors a fee of € 85,000. Of this fee in 2005 and 2004, 60 per cent was paid in cash and 40 per Indirect employee costs cent in the form of company shares purchased on the members’ behalf. Pension costs-defi ned benefi t plans (Note 29) € Pension expenses 42 39 62 Additionally, in 2004, the members were paid 4,000 for attendance Change in the Finnish pension system 2) – – –269 allowances. 42 39 –207

UPM ANNUAL REPORT 2006

81 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

Executive team remuneration Audit fees Year ended 31 December Year ended 31 December € 1,000 2006 2005 2004 €m 2006 2005 2004 President and CEO Jussi Pesonen Audit fees 4.9 3.1 2.9 Remuneration Audit related fees 1.6 2.1 0.8 Salaries 883 742 544 Tax consulting fees 1.3 1.1 1.2 Incentives – 240 90 Total 7.8 6.3 4.9 Benefi ts 16 30 31 Total 899 1,012 665 Pension costs 8 CHANGE IN FAIR VALUE OF BIOLOGICAL ASSETS Finnish TEL scheme 161 178 127 AND WOOD HARVESTED Voluntary pension plan 154 84 – Year ended 31 December Total 315 262 127 €m 2006 2005 2004 Biological assets harvested during the The former President and CEO Juha Niemelä received termination period –107 –34 –42 benefi ts amounting to € 490 thousand (2005: € 735 and 2004: € 306 Fair value change of biological assets –19 68 57 Total –126 34 15 thousand). The combined value of his salary and fringe benefi ts in 2004 was € 467 thousand. Contributions paid to the voluntary pension plan amounted to € 1,883 thousand in 2006 (2005: € 0 and 2004: € 116 9 SHARE OF RESULTS OF ASSOCIATED COMPANIES thousand), and the expenses recognized with respect to pension costs AND JOINT VENTURES arising from the Finnish TEL scheme totalled € 89 thousand in 2004. The 14 (2005: 14 and 2004: 13) members of the Executive Team, Year ended 31 December €m 2006 2005 2004 including President and CEO, were paid salaries and fringe benefi ts totalling € 5.5 (2005: € 6.4 and 2004: € 4.6) million, of which € 0.3 Oy Metsä-Botnia Ab 69 36 56 (2005: € 1.0 and 2004: € 0.4) million were paid as bonuses. The remu- Pohjolan Voima Oy –14 – –5 Others 6 5 7 nerations paid are based on the performance of the Executive Team 61 41 58 members in the previous year. According to the company’s pay scheme, CEO can be paid an 18 months’ maximum reward, and the other executives can be paid a performance-related reward amounting to not more than twelve months’ 10 DEPRECIATION, AMORTIZATION AND salary. In addition to salaries and bonuses the members of the Executive IMPAIRMENT CHARGES Team are also entitled to participate in the company’s stock option plans Year ended 31 December and share ownership plan. The expenses recognized in respect of share- €m 2006 2005 2004 based payments were € 0.8 (2005: € 1.2 and 2004: € 2.2) million. Depreciation on property, plant and The retirement age of President and CEO Jussi Pesonen is 60 years. equipment Depending on the service contracts, the retirement age of the other Buildings 101 108 104 members of the Executive Team is 62-63 years. The target pension is Machinery and equipment 671 703 717 60% of the average indexed earnings from the last ten years. The costs Other tangible assets 32 34 36 of lowering the retirement age or supplementing statutory pension 804 845 857 security are generally covered by voluntary pension insurance. The Depreciation on investment property expenses of the Executive team members’ defi ned benefi t pension plans Buildings 1 2 1 in 2006 were € 0.9 (2005: € 1.5 and 2004: € 0.4) million, and the € € expenses of their defi ned contribution plans were 0.8 (2005: 0.9 and Amortization of intangible assets 2004: € 0.8) million. Intangible rights 16 15 11 Members of the Executive Team have certain benefi ts in the event of Goodwill – – 100 their service contracts being terminated prior to the expiration date Other intangible assets 69 67 56 stated in them. If UPM-Kymmene Corporation gives notice of termina- 85 82 167 tion to Jussi Pesonen, the President and CEO, a severance compensation Impairment charges on property, of 24 months’ basic salary will be paid, in addition to the six months’ plant and equipment salary for the notice period. For other members of the Executive team, Buildings 62 61 18 the period for additional severance compensation is 12 months in addi- Machinery and equipment 177 137 78 Other tangible assets 4 3 1 tion to the six months’ salary for the notice period. 243 201 97 The President and CEO is appointed by the Board of Directors. Impairment of intangible assets If there is a change of control in UPM-Kymmene Corporation as Other intangible assets 5 – – defi ned in the service contracts, each member of the Executive Team 5–– may terminate such service contract within one month or, in the case of Jussi Pesonen within three months, from the date of the event that trig- Depreciation, amortization and gered the change of control, and shall receive compensation equivalent impairment charges, total 1,138 1,130 1,122 to 24 months’ basic salary.

UPM ANNUAL REPORT 2006 82 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

In 2006, impairments of fi xed assets include € 135 million impairment The aggregate foreign exchange gains and losses charges in respect of production capacity close-downs and restructuring included in the consolidated income statement measures in Finland, and a € 115 million impairment charge relating to Year ended 31 December the Miramichi paper mill in New Brunswick in Cananda. €m 2006 2005 2004 In 2006, UPM started a programme to restore its profi tability. The Sales –25 31 11 programme covers all of the company’s activities and includes both Costs and expenses 20 4 2 streamlining of operations and closures of uncompetitive production Net fi nancial items –8 –16 48 capacity. As part of the programme, UPM closed, in the Magazine Total –13 19 61 Papers segment, a total of 410,000 t/a of coated magazine paper capacity at the Voikkaa paper mill, and in the Fine and Speciality Papers segment, a total of 150.000 t/a of coated fi ne paper capacity at the Kymi 13 INCOME TAXES mill. In addition, in 2007, related to the profi tability programme, UPM Year ended 31 December € will close 115,000 t/a of sack paper capacity at the Tervasaari mill m 2006 2005 2004 belonging to the Fine and Speciality Papers segment. Major components of tax expenses In 2006 relating to the Miramichi paper mill, which belongs to Current tax expense 187 91 118 Magazine Paper Segment’s, UPM recognized an impairment charge of Change in deferred taxes (Note 28) –158 –95 –482 € 115 million mainly due to the negative currency impact. The cash fl ow Income taxes, total 29 –4 –364 of Miramichi mill has remained weak especially due to the strengthened Canadian dollar in relation to the US dollar. The mill’s recoverable Income tax reconciliation statement amount was determined based on value in use and using a pre-tax dis- Profi t before tax 367 257 556 count rate of 9.96%. Computed tax at Finnish statutory rate In 2005, impairments of fi xed assets include € 151 million relating of 26 % (2005: 26%, 2004: 29 %) 95 67 161 to the Miramichi paper mill in Canada, € 10 million relating to the Difference between Finnish and foreign rates –2 –17 –20 Augsburg mill in Germany, € 8 million relating to the Nordland mill in Non-deductible expenses and Germany and € 25 million relating to Finnish sawmills. Miramichi tax exempt income –20 –25 1 mill’s recoverable amount was determined based on value in use and Non-deductible purchase price difference – – 37 Tax loss with no tax benefi t1939 using discount rate of 10.14%. In Wood Products segment, the recover- Results of associated companies –16 –11 –15 able amount of Finnish sawmills was determined based on value in use Change in tax legislation –5 – –246 and using discount rate of 8.70%. Other –24 –27 –321 € In 2004, impairments of fi xed assets included 75 million relat- Income taxes, total 29 –4 –364 ing to the closure of the Magazine Papers segment’s Miramichi pulp mill in Canada and € 21 million relating to restructuring of the wood Effective tax rate 7.8 % –1.6 % –65.5 % product industry in Finland. Income taxes for 2006 include tax expense of € 22 million due to a decrease in the income tax rate in Canada and a tax income of € 28 11 GAINS ON AVAILABLE-FOR-SALE INVESTMENTS, NET million from a tax receivable arising from the change in German tax legislation. Other items include a tax income of € 20 million due to an Year ended 31 December €m 2006 2005 2004 increase in deferred tax assets related to the change in the Group’s structure in Canada. Profi t before taxes for 2006 includes tax-exempt Fair value gains and losses on disposals –2 90 1 capital gains totalling € 93 million. Total –2 90 1 Income taxes for 2005 include tax income of € 58 million relating to In 2005, the gain relates to the sale of shares of Metso Corporation. the change in deferred tax assets arising from the losses and depreciation difference of Canadian operations, and tax expense of € 16 million relating to an associated company due to a change in tax law. Profi t € 12 FINANCE COSTS before taxes for 2005 includes tax-exempt capital gains totalling 126 million. Taxes for 2004 include tax benefi t of € 235 million due to a Year ended 31 December € €m 2006 2005 2004 change in Finnish tax legislation and tax benefi t of 284 million resulting from a decrease in the German deferred tax liability (included in Interest expenses –190 –161 –202 Other items). Interest income 7 15 32 Dividend income from available-for-sale investments – 1 7 Exchange gains and losses –8 –16 48 Fair value gains and losses on derivative fi nancial instruments 1) 26 12 – Gains and losses on sale of associated companies and joint ventures shares 10 11 –6 Other fi nancial income – 1 7 Other fi nancial expenses –12 –14 –16 Total –167 –151 –130

1) The fair value hedge ineffectiveness, net was € 19, € 19 and € 12 million in 2006, 2005 and 2004, respectively.

UPM ANNUAL REPORT 2006

83 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

14 EARNINGS PER SHARE Impairment tests Year ended 31 December The company prepares impairment test calculations annually. The key 2006 2005 2004 assumptions for calculations are those regarding the business growth Profi t attributable to the parent company’s outlooks, product prices, cost development, and the discount rate. shareholders, €m 340 263 919 Business growth outlooks are based on general forecasts for the Average weighted number of shares businesses in question. Ten-year forecasts are used in the calculations as (1,000) 523,220 522,029 523,641 the nature of the company’s business is long-term due to its capital Basic earnings per share, € 0.65 0.50 1.76 intensity, and exposed to cyclical changes. In estimates of product prices and cost development, the budgets prepared by management for the next For the diluted earnings per share the year and estimates made for the following nine years are taken into number of shares is adjusted by the effect consideration. The company’s recent profi tability trend is taken into of the share options account in the forecasts. In addition, when preparing estimates, consideration is given to the investment decisions made by the company as Profi t attributable to the parent company’s well as the profi tability programmes that the Group has implemented shareholders, €m 340 263 919 and the views of knowledgeable experts of the industry on the long-term Adjustments to the profi t–––development of demand and prices. Discount rate is estimated using the Profi t used to determine diluted costs of debt on the calculation date as well as risks specifi c to busi- earnings per share, €m 340 263 919 nesses in question. The pre-tax discount rates used in 2006 for Maga- zine Papers, Newsprint and Fine Papers were 8.72 %, 9.60 % and Average weighted number of shares 9.14 % (2005: 8.08 %, 8.42 % and 8.68 %), respectively. (1,000) 523,220 522,029 523,641 The recoverable amount of groups of cash generating units is deter- Effect of options 2,821 1,623 2,606 mined based on value in use calculations. Average weighted number of shares for No impairments were recognised based on goodwill tests prepared diluted earnings per share (1,000) 526,041 523,652 526,247 in 2006 and 2005. Diluted earnings per share, € 1) 0.65 0.50 1.75 The estimated product prices are the most important assumptions in impairment tests. A hypothetic 4% decrease in product prices used in impairment tests would lead to a recognition of impairment loss against 1) 7.3 million shares exercisable with options (2005: 10.2 million and 2004: 7.3 mil- goodwill approximately by € 300 million in Magazine Papers and lion) were excluded from the calculation of diluted earnings per share as they were not approximately by € 300 million in Newsprint. In Fine Papers, a hypo- dilutive. thetic decrease of 2 % in product prices used in impairment test would lead to an impairment of the entire goodwill of € 102 million. Group 15 DIVIDEND PER SHARE believes that any reasonably possible change in the other key assumptions on which recoverable amount is based would not cause the aggre- The dividends paid in 2006 and 2005 were € 392 million (€ 0.75 per gate carrying amount to exceed the aggregate recoverable amount of share) and € 387 million (€ 0.75 per share). The Board of Directors cash-generating units. proposes to the Annual General Meeting that a dividend of € 392 million (€ 0.75 per share) will be paid in respect of 2006. 17 OTHER INTANGIBLE ASSETS As at 31 December 16 GOODWILL IMPAIRMENT TESTS €m 2006 2005 As at 31 December Intangible rights €m 2006 2005 Acquisition cost at 1 Jan. 394 362 Additions 2 21 Acquisition cost at 1 Jan. 1,514 2,024 Disposals –2 –2 Transfer of accumulated amortization – –464 Reclassifi cations 19 4 Additions – 3 Acquisitions through business combinations – 5 Disposals – –49 Translation differences –2 4 Carrying value at 31 Dec. 1,514 1,514 Acquisition cost at 31 Dec. 411 394

Accumulated amortization at 1 Jan. – –464 Accumulated amortization and impairment at 1 Jan. –110 –95 Transfer of accumulated amortization – 464 Amortization –16 –16 Accumulated amortization and impairment at 31 Dec. – – Disposals 2 1 Accumulated amortization and impairment at 31 Dec. –124 –110 Carrying value at 1 Jan. 1,514 1,560 Carrying value at 31 Dec. 1,514 1,514 Carrying value at 1 Jan. 284 267 Carrying value at 31 Dec. 287 284 The carrying value of goodwill is divided among the following groups of cash generating units: As at 31 December €m 2006 2005 Magazine Papers 915 915 Newsprint 475 475 Fine Papers 102 102 Others 22 22 1,514 1,514

UPM ANNUAL REPORT 2006 84 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

As at 31 December 18 PROPERTY, PLANT AND EQUIPMENT €m 2006 2005 As at 31 December €m 2006 2005 Other intangible assets 1) Acquisition cost at 1 Jan. 508 445 Land and water areas Additions 6 33 Acquisition cost at 1 Jan. 357 362 Disposals –34 –2 Additions 14 10 Reclassifi cations 33 28 Disposals –11 –17 Translation differences –2 4 Reclassifi cations 2 1 Acquisition cost at 31 Dec. 511 508 Translation differences –1 1 Acquisition cost at 31 Dec. 361 357 Accumulated amortization and impairment at 1 Jan. –326 –261 Amortization –69 –67 Accumulated depreciation and impairment at 1 Jan. –4 –11 Impairment charges –4 –1 Disposals – 7 Disposals 30 1 Impairment –3 – Reclassifi cations 4 5 Accumulated depreciation and impairment at 31 Dec. –7 –4 Translation differences 1 –3 Accumulated amortization and impairment at 31 Dec. –364 –326 Carrying value at 1 Jan. 353 351 Carrying value at 31 Dec. 354 353 Carrying value at 1 Jan. 182 184 Carrying value at 31 Dec. 147 182 Buildings Acquisition cost at 1 Jan. 3,062 3,092 Advance payments and construction in progress Additions 45 22 Acquisition cost at 1 Jan. 33 68 Acquisitions through business combinations – 1 Additions 16 3 Disposals –182 –129 Disposals – –6 Reclassifi cations 36 22 Reclassifi cations –38 –32 Translation differences –20 54 Acquisition cost at 31 Dec. 11 33 Acquisition cost at 31 Dec. 2,941 3,062

Carrying value at 1 Jan. 33 68 Accumulated depreciation and impairment at 1 Jan. –1,382 –1,316 Carrying value at 31 Dec. 11 33 Depreciation –101 –109 Impairment –59 –62 Disposals 87 105 Emission allowances Reclassifi cations 2 19 Acquisition cost 1 Jan. 36 – Translation differences 6 –19 Additions 2) 19 40 Accumulated depreciation and impairment at 31 Dec. –1,447 –1,382 Disposals and settlements –39 –4 Acquisition cost 31 Dec. 16 36 Carrying value at 1 Jan. 1,680 1,776 Carrying value at 31 Dec. 1,494 1,680 Carrying value at 1 Jan. 36 – Carrying value at 31 Dec. 16 36 Machinery and equipment Other intangible assets, total 461 535 Acquisition cost at 1 Jan. 12,911 12,856 Additions 315 178 1) Other intangible assests consist primarily of capitalized software assets. Acquisitions through business combinations – 4 2) Additions include allowances received free of charge. Disposals –732 –618 Reclassifi cations 167 230 Translation differences –116 261 Water rights Acquisition cost at 31 Dec. 12,545 12,911 Intangible rights include € 189 million (2005: € 178 million) in respect of the water rights of hydropower plants belonging to the Other Opera- Accumulated depreciation and impairment at 1 Jan. –8,181 –7,840 € tions segment. In 2006, 0 million (2005: 123 million) of water rights Depreciation –667 –710 was acquired under fi nance lease agreements. The water rights of power Impairment –174 –138 plants are deemed to have an indefi nite useful life as the company has a Disposals 565 554 contractual right to exploit water resources in the energy production of Reclassifi cations 26 99 power plants. The values of water rights are tested annually for impair- Translation differences 54 –146 ment. Accumulated depreciation and impairment at 31 Dec. –8,377 –8,181

Carrying value at 1 Jan. 4,730 5,016 Carrying value at 31 Dec. 4,168 4,730

UPM ANNUAL REPORT 2006

85 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

As at 31 December Capitalized borrowing costs €m 2006 2005 The borrowing costs capitalized as part of non-current assets amounted € € Other tangible assets to 6 million in 2006 and 9 million in 2005. Amortization of capita- Acquisition cost at 1 Jan. 874 845 lized borrowing costs was € 10 million in 2006 (2005: € 13 million and Additions 21 17 2004: € 16 million). In 2006, 2005 and 2004 there were no capitalized Acquisitions through business combinations – 1 borrowing costs associated with sold assets. Disposals –9 –17 The average interest rate used was 3.9 % (2005: 3.5 %), which Reclassiﬁ cations –1 19 represents the costs of the loan used to ﬁ nance the projects. Translation differences –6 9 Acquisition cost at 31 Dec. 879 874

Accumulated depreciation and impairment at 1 Jan. –649 –622 19 INVESTMENT PROPERTY Depreciation –32 –34 As at 31 December € Disposals 16 14 m 2006 2005 Reclassifi cations –1 – Acquisition cost at 1 Jan. 81 82 Impairment –3 –2 Additions 3 5 Translation differences 3 –5 Disposals –5 –7 Accumulated depreciation and impairment at 31 Dec. –666 –649 Reclassifi cations –5 1 Acquisition cost at 31 Dec. 74 81 Carrying value at 1 Jan. 225 223 Carrying value at 31 Dec. 213 225 Accumulated depreciation and impairment at 1 Jan. –46 –44 Depreciation –1 –2 Advance payments and construction in progress Disposals 3 1 Acquisition cost at 1 Jan. 328 255 Reclassifi cations – –1 Additions 209 446 Accumulated depreciation and impairment at 31 Dec. –44 –46 Disposals –25 –12 Reclassifi cations –238 –392 Carrying value at 1 Jan. 35 38 Translation differences –3 31 Carrying value at 31 Dec. 30 35 Acquisition cost at 31 Dec. 271 328 The fair value of investment property is determined annually on 31 Carrying value at 1 Jan. 328 255 December by the Group. Fair value is based on active market prices, Carrying value at 31 Dec. 271 328 adjusted, if necessary, for any difference in the nature of the specifi c asset. Property, plant and equipment, total 6,500 7,316 Investment property in Finland includes investments in fl ats and other premises occupied by third parties. The fair value of these fl ats at In 2006, additions include assets of € 0 million (2005: € 4 million) 31 December 2006 was € 55 million (2005: € 28 million). At 31 Decem- acquired under fi nance lease arrangements. ber 2006 approximately 85 % (2005: 84 %) of the fl ats were state- subsidized buildings, for which certain restrictions for sale apply. The Finance lease arrangements fair value of other premises at 31 December 2006 was € 5 million Property, plant and equipment includes property that is acquired under (2005: € 10 million). The fair value of investment property in other fi nance lease and sale and leaseback contracts: countries at 31 December 2006 was € 13 million (2005: € 14 million).

As at 31 December €m 2006 2005 The amounts recognized on the income statement: Land and water areas Year ended 31 December Acquisition cost – 1 €m 2006 2005 2004 Accumulated depreciation – – Carrying value at 31 Dec. – 1 Rental income 12 13 16 Direct operating expenses arising from investment properties that generate Buildings rental income 6 7 8 Acquisition cost – 28 Accumulated depreciation – –10 Carrying value at 31 Dec. – 18 There were no contractual obligations for future repair and maintenance or purchase of investment property. Machinery and equipment All assets under investment property are leased to third parties Acquisition cost 77 202 under operating leasing contracts. Accumulated depreciation –45 –59 Carrying value at 31 Dec. 32 143

Leased assets, total 32 162

There is no property, plant and equipment leased to third parties under operating lease contracts.

UPM ANNUAL REPORT 2006 86 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

20 BIOLOGICAL ASSETS Group holding As at 31 December percentage % Carrying value 2006 2005 2006 2005 €m 2006 2005 Joint ventures At 1 Jan. 1,174 1,143 Kainuun Voima Oy, FI 50.00 50.00 6 6 Purchases during the period 3 4 66 Sales during the period –12 –7 Harvested during the period –107 –34 Associated companies and Gains and losses arising from changes in fair values –19 68 joint ventures at 31 Dec. 1,177 1,034 Translation differences –2 – 1) The Group’s share of the voting right in Powest Oy is 0.61% (2005: 0.64%). The At 31 Dec. 1,037 1,174 Group is entitled to 51.22% (2005: 51.11%) of the respective dividends of Powest Oy. The discount rate used in determing the fair value in 2006 was 7.50 % 2) Oy Metsä-Botnia South America S.A. is a subsidiary of UPM’s associated company (2005: 7.0 %). A 1 % decrease (increase) in discount rate would Oy Metsä-Botnia Ab increase (decrease) the fair value of biological assets by approximately € 120 million. Pohjolan Voima Oy (“PVO”) holds a 57.72 % shareholding in Teollisu- uden Voima Oy (“TVO”), which owns and operates nuclear powers plants in Olkiluoto, Finland. The operation of a nuclear power plant 21 INVESTMENTS IN ASSOCIATED COMPANIES involves potential costs and liabilities related to decommissioning and AND JOINT VENTURES dismantling of the nuclear power plant and storage and disposal of spent fuel, and is governed by international, European Union and local As at 31 December €m 2006 2005 nuclear regulatory regimes. Pursuant to the Finnish Nuclear Liability Act, the operator of a nuclear facility is strictly liable for damage result- At 1 Jan. 1,034 1,047 Increases 126 15 ing from a nuclear incident at the operator’s installation or occurring in Decreases –8 –21 the course of transporting nuclear fuels. Shareholders of power compa- Share of results after tax 61 41 nies that own and operate nuclear power plants are not subject to liabil- Dividens received –16 –20 ity under the Nuclear Liability Act. In Finland, the future costs of condi- Reclassifi ed as assets held for sale – –32 tioning, storage and fi nal disposal of spent fuel, management of low and Translation differences –20 4 intermediate-level radioactive waste and nuclear power plant decommis- At 31 Dec. 1,177 1,034 sioning are the responsibility of the operator. Reimbursements of the operators’ costs related to decommissioning and dismantling of the Investments in associated companies at 31 December 2006 include power plant and storage and disposal of spent fuel are provided for by goodwill of € 51 million which relates to Pohjolan Voima Oy’s shares state-established funds funded by annual contributions from nuclear (2005: € 36 million). power plant operators. Pursuant to PVO and TVO shareholders’ agreements, the Group bears its proportionate share of the costs related to As at 31 December decommissioning and dismantling of the nuclear power plant and stor- €m 2006 2005 age and disposal of spent fuel through the price of electricity acquired from PVO. The contributions to such funds are intended to be suffi cient Sale and leaseback contracts included in investments in associated companies to cover estimated future costs. If the actual costs deviate from fund Acquisition cost 13 13 provisions, the Group would be affected accordingly. Contributions to Accumulated increases 5 7 the fund are recognized in accordance with IFRIC 5 “Rights to Interests Carrying value at 31 Dec. 18 20 Arising from Decommissioning, Restoration and Environmental Reha- bilitation Funds”. Associated companies and joint ventures The Group’s share of the results of its principal associates and joint- ventures equity accounted for, all of which are unlisted, and its share of Group holding percentage % Carrying value the assets, liabilities and sales are as follows: 2006 2005 2006 2005 Associated companies 2006 Profi t/ €m Assets Liabilities Sales Loss Austria Papier Recycling Ges.m.b.H.. AT 33.30 33.30 – – Associated companies and joint ventures Oy Metsä-Botnia Ab, FI 1,038 410 627 69 Oy Keskuslaboratorio- Centrallaboratorium Ab. FI 38.65 38.65 1 1 Pohjolan Voima Oy, FI 1,125 618 327 –14 Others 248 206 270 6 Oy Metsä-Botnia South America S.A.. Uruguay 2) 12.40 – 70 – Total 2,411 1,234 1,224 61 Oy Metsä-Botnia Ab. FI 47.00 47.00 558 518 2005 Profi t/ Paperinkeräys Oy. FI 22.98 22.98 3 3 €m Assets Liabilties Sales Loss Pohjolan Voima Oy. FI 42.19 40.90 509 478 Associated companies and joint ventures Powest Oy. FI 1) 9.98 9.98 18 16 Oy Metsä-Botnia Ab, FI 775 257 445 36 RETS Timber Oy Ltd. FI 50.00 50.00 1 1 Pohjolan Voima Oy, FI 1,003 525 219 – Steveco Oy. FI 34.32 34.32 8 6 Others 260 222 259 5 Others 3 5 Total 2,038 1,004 923 41 31.12. 1,171 1,028

UPM ANNUAL REPORT 2006

87 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

The amounts representing the Group’s share of the assets and liabilities 22 AVAILABLE-FOR-SALE INVESTMENTS (NON-CURRENT) and sales and results of the joint ventures that have been accounted for using the equity method are presented in the table below. Year ended 31 December €m 2006 2005 Year ended 31 December At 1 Jan. 153 366 €m 2006 2005 Additions 5 27 The amount of assets and liabilities Disposals –8 –290 related to investments in joint ventures Changes in fair values 1 50 Non-current assets 32 33 Transferred to associated companies –20 – Current assets 2 3 Other changes (impairment) –4 – Non-current liabilities –23 –25 At 31 Dec. 127 153 Current liabilities –4 –4 Net assets 7 7 Available-for-sale investments comprise of investments in unlisted The income and expenses related equity shares and equity securities in listed companies. Equity securities to investments in joint ventures in listed companies are fair valued. Certain unlisted equities, where the Sales 14 12 fair value cannot be measured reliably are carried at cost, less impair- Expenses –14 –12 ment. The fair value of the shares in Kemijoki Oy cannot be realibly Profi t––measured as the redemption clause in the articles of association of the company limits fair market transactions. The average number of employees The fair value of equity investments traded in active markets is € 2 in the joint ventures 44 46 million in 2006 and 2005. The fair value of equity investments traded in active markets is determined by using quoted prices. Transactions and balances with associates and joint ventures Year ended 31 December Principal available-for-sale investments €m 2006 2005 Group Number of holding Carrying value Sales to associates and joint ventures 61 43 shares percentage 2006 2005 Purchases from associates and joint ventures 448 438 Kemijoki Oy 100,797 4.13 106 106 Non-current receivables from associates and Listed companies 2 2 joint ventures – 4 Other 19 45 Receivables from associates and joint ventures 20 21 Payables to associates and joint ventures 23 19 Carrying value of available-for- sale investments at 31 Dec. 127 153 Loan receivables from associates and joint ventures 1) At 1 Jan. 11 14 23 NON-CURRENT FINANCIAL ASSETS Loans granted – 9 As at 31 December Repayments –5 –12 €m 2006 2005 At 31 Dec. 6 11 Loans to associates and joint ventures – 4 1) Loans to associated companies and joint ventures include current and non-current Other loan receivables 8 7 loan receivables. Derivative fi nancial instruments 66 159 At 31 Dec. 74 170 Assets held for sale In 2005, assets held for sale include the Group’s share of Compañia The carrying value is considered to approximate the fair value. Forestal Oriental S.A, a forest company based in Uruguay. The carrying value on the balance sheet is based on preliminary agreement relating to There were no loans granted to the Executive Team or managing direc- the pulp mill building in Uruguay. Before reclassifi cation to assets held tors at 31 December 2006 or 2005. for sale the Group’s share of Compañia Forestal Oriental S.A. was included in investments in joint ventures. The sale was realised in March 2006. 24 OTHER NON-CURRENT ASSETS As at 31 December €m 2006 2005 Defi ned benefi t plans (Note 29) 45 37 Other non-current assets 28 1 At 31 Dec. 73 38

UPM ANNUAL REPORT 2006 88 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

25 INVENTORIES Doubtful accounts receivable As at 31 December Trade receivables are recorded net of the following allowances €m 2006 2005 for doubtful accounts: Raw materials and consumables 485 544 As at 31 December €m 2006 2005 Work in progress 63 51 Finished products and goods 667 623 At 1 January 2 2 Advance payments 40 38 Additions 6 5 At 31 Dec. 1,255 1,256 Deductions –5 –5 At 31 Dec. 3 2

26 TRADE AND OTHER RECEIVABLES Main items included in prepayments and accrued income As at 31 December €m 2006 2005 As at 31 December €m 2006 2005 Trade receivables 1,349 1,377 Personnel expenses 3 11 Loan receivables 13 39 Interest income – 1 Other receivables 142 138 Indirect taxes 31 24 Derivative ﬁ nancial instruments 73 15 Other items 46 48 Prepayments and accrued income 80 84 At 31 Dec. 80 84 At 31 Dec. 1,657 1,653 The carrying value of trade and other receivables is considered to approximate the fair value.

27 EQUITY AND RESERVES

Share capital and share premium reserve Number of shares Share Share €m (1,000) capital premium reserve Total At 1 Jan. 2005 524,320 891 745 1,636 Exercise of share options 1) 6,935 12 68 80 Treasury shares declared void –8,000 –13 13 – 31.12.2005 523,255 890 826 1,716 Exercise of share options 4 – – – At 31 Dec. 2006 523,259 890 826 1,716 1) Includes 130 020 shares subscribed for in 2004 and entered into the Trade Register of Finland in 2005.

Share capital During 2006, the company did not buy any of its own shares under Under UPM-Kymmene Corporation’s Articles of Association, the com- the authorizations from the 2005 and 2006 Annual General Meetings. pany’s issued share capital may be not less than € 750,000,000 and not The Annual General Meeting of 22 March 2006 approved a proposal to more than € 3,000,000,000. The issued share capital may be increased buy back a minimum of 100 and a maximum of 49,825,000 own shares or decreased between these limits without amendment to the Articles of using funds available for the distribution of proﬁ t. Association. At 31 December 2006, the company’s fully paid-in share capital was € 889,541,031.00 and the number of shares was Authorizations to increase the share capital 523,259,430. Each share, which has an equivalent value of € 1.70, The Annual General Meeting of 22 March 2006 authorized the Board of carries one vote. The shares are kept in a computerized book entry Directors to decide to increase the company’s share capital by issuing system. new shares and/or convertible bonds in one or more issues. The number of the company’s new shares carrying the equivalent value of € 1.70 per Treasury shares share made available for subscription under this authorization may not At the beginning of the year, the company held 162,000, representing exceed 99,650,000 and the share capital may be increased by a maxi- 0.031% of share capital, of its own shares. These shares have been mum total amount of € 169,405,000.00. Under the same authorization, bought in 2005 based on the decision of the Annual General Meeting of the number of shares at the end of the year may rise by 19.04%. The 31 March 2005 with an acquisition cost of € 2.5 million, on average share issue authorization was not used during the year. € 15.50 per share. The Annual General Meeting held on 22 March 2006 In 2006, a total of 2,150 E options issued in 2002 were exercised to authorized the Board to donate these shares to a Cultural Foundation to subscribe 4,300 shares. be established.

UPM ANNUAL REPORT 2006

89 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

If all the remaining 3,800,000 2002D share options and all ciated voting rights shall, at the request of other shareholders, be liable 3,795,850 2002E share options are exercised to subscribe all 15,191,700 to redeem in the manner prescribed in § 12 their shares and any securi- shares and all 3,000,000 2005F share options, 3,000,000 2005G share ties that, under the Companies Act, carry the right to such shares. options and 3,000,000 2005H share options authorized in 2005 are A resolution of general meeting of shareholders to amend or delete exercised to subscribe all 9,000,000 shares, the number of the compa- this redemption clause must be carried by shareholders representing not ny’s shares will increase by a total of 24,191,700, i.e. by 4.62%. less than three-quarters of the votes cast and shares represented at the The shares available for subscription under the Board’s share issue meeting. authorization and through the exercise of options may increase the total number of the company’s shares by 23.67%, i.e. by 123,841,700 shares, Fair value and other reserves to 647,101,130 shares, and the share capital by € 210,530,890 to As at 31 December € 1,100,071,921.00. €m 2006 2005 Fair value reserve of available-for-sale investments 1 1 Redemption clause Hedging reserve 19 –21 Under § 12 of UPM-Kymmene Corporation’s Articles of Association, a Legal reserve 225 227 shareholder who alone or jointly with another shareholder owns 33 1/3 Share-based compensation 33 26 percent or 50 percent or more of all the company’s shares or their asso- At 31 Dec. 278 233

28 DEFERRED INCOME TAXES

Reconciliation of the movements of deferred tax asset and liability balances during the period As at Charged to As at 1 Jan. the income Charged to Translation Acquisitions 31 Dec. €m 2006 statement equity differences and disposals 2006 Deferred tax assets Retirement beneﬁ t and other provisions 108 6 – –3 – 111 Intercompany proﬁ t in inventory 14 –3 – – – 11 Book over tax depreciation 215 28 – –22 – 221 Tax losses and tax credits carried forward 210 23 – –6 – 227 Other temporary differences 31 –27 – – –1 3 Deferred tax assets, total 578 27 – –31 –1 573

Deferred tax liabilities Tax over book depreciation 772 –75 – 2 –1 698 Fair value adjustments of net assets acquired and biological assets 317 –51–––266 Other temporary differences 24 –5 18 – – 37 Deferred tax liabilities, total 1,113 –131 18 2 –1 1,001

The amounts recognised in the balance sheet Assets 352 42 – –31 –1 362 Liabilities 887 –116 18 2 –1 790 Deferred tax liabilities, less deferred tax assets 535 –158 18 33 – 428

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same ﬁ scal authority.

UPM ANNUAL REPORT 2006 90 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

Reconciliation of the movements of deferred tax asset and liability balances during the period As at Charged to As at 1 Jan. the income Charged to Translation Acquisitions 31 Dec. €m 2005 statement equity differences and disposals 2005 Deferred tax assets Retirement beneﬁ t and other provisions 90 18 – – – 108 Intercompany proﬁ t in inventory 15 –1 – – – 14 Book over tax depreciation 115 74 – 26 – 215 Tax losses and tax credits carried forward 212 –3 – 2 –1 210 Other temporary differences 59 –24 – – –4 31 Deferred tax assets, total 491 64 – 28 –5 578

Deferred tax liabilities Tax over book depreciation 812 –36 – – –4 772 Fair value adjustments of net assets acquired and biological assets 320 –4 – – 1 317 Other temporary differences 45 9 –23 –1 –6 24 Deferred tax liabilities, total 1,177 –31 –23 –1 –9 1,113

The amounts recognised in the balance sheet Assets 246 83 – 28 –5 352 Liabilities 932 –12 –23 –1 –9 887 Deferred tax liabilities, less deferred tax assets 686 –95 –23 –29 –4 535

The deferred income tax charged to equity during the years: No deferred tax liability has been recognised for the undistributed €m 2006 2005 profi ts of Finnish subsidiaries and associated companies as, in most Cash fl ow hedges 15 –23 cases, such earnings are transferred to the Group without any tax conse- Net investment hedge 3 – quences. Total 18 –23 In addition the Group does not recognise a deferred tax liability in respect of undistributed earnings of non-Finnish subsidiaries to the extent that such earnings are intended to be permanently reinvested in At 31 December 2006, the net operating loss carry-forwards for which those operations. the Group has recorded a deferred tax asset amounted to € 639 million In 2005, the Group has recorded additional deferred tax assets of (2005: € 568 million), of which € 274 million (2005: € 243 million) was € 58 million relating to net operating losses and book over tax deprecia- attributable to German subsidiaries, € 212 million (2005: € 139 million) tion in Canada due to a clarifi cation of a tax ruling. to a Canadian subsidiary and € 56 million (2005: € 73 million) to French subsidiaries. In Germany and France net operating loss carry- 29 RETIREMENT BENEFIT OBLIGATIONS forwards do not expire. In other countries net operating loss carry- The Group operates a number of defi ned benefi t and contribution plans forwards expire at various dates and in varying amounts. The net operat- all over the world. ing loss carry-forwards for which no deferred tax asset is recognized The most signifi cant pension plan in Finland is the statutory Finnish due to uncertainty of their utilization amounted to € 38 million in 2006 employee pension scheme (TEL), according to which benefi ts are (2005: € 120 million). These net operating loss carry-forwards are directly linked to the benefi ciary’s earnings. The TEL pension scheme is mainly attributable to Canadian and Chinese subsidiaries. The capital mainly arranged with pension insurance companies. loss carry-forwards for which no deferred tax asset is recognized due to As a consequence of changes made in the Finnish TEL scheme, the € uncertainty of their utilization amounted to 63 million in 2006 (2005: disability pensions arranged with insurance companies changed from € 74 million). The Group does not believe that it will be possible to use being a defi ned benefi t to a defi ned contribution plan on 1 January 2006. these losses in the future as reductions of qualifying taxable income. As the change was enacted in 2004 the Company’s pension liability In 2006, the Group has recorded additional deferred tax assets of decreased by € 246 million in 2004. The pension liability also decreased € 20 million relating to the change in Group’s structure in Canada. On by € 23 million in 2004 due to other changes in the TEL pension 31 December 2006 the Group had deferred tax assets of € 203 million scheme. (2005: € 206 million) relating to book over tax depreciation in Canada In Finland, the pensions of less than 10 % of employees are which do not expire. The Group has implemented a prudent and feasible arranged through Group’s own pension funds. All schemes managed tax planning strategy to utilize deferred tax assets in Canada. The tax by the pension funds are classifi ed as defi ned benefi t plans. planning strategy intends to generate suffi cient taxable income against The foreign plans include both defi ned contribution and defi ned which the deferred tax assets may be utilized. benefi t plans.

UPM ANNUAL REPORT 2006

91 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

Defi ned benefi t plans Changes in the fair value of plan assets As at 31 December As at 31 December €m 2006 2005 €m 2006 2005 Defi ned benefi t pension plans 327 341 Fair value of plan assets as of beginning of year 625 511 Other post-employment benefi ts (medical) 23 24 Expected return on plan assets 41 38 Net liability 350 365 Actuarial gains and losses 20 21 Contributions by plan participants 4 3 Other long-term employee benefi ts 32 27 Contributions by the employer 54 49 Overfunded plan shown as asset (Note 24) 45 37 Disposals – –26 Total liability in balance sheet 427 429 Settlements – –2 Other adjustments 2 40 Benefi ts paid –49 –45 DEFINED BENEFIT PENSION PLANS Transfers from inside the plan – 2 The amounts recognised in the balance sheet Translation difference –16 34 As at 31 December Fair value of plan assets of end of the year 681 625 €m 2006 2005 The Group expects to contribute € 75 million to its defi ned benefi t Present value of funded obligations 806 770 Present value of unfunded obligations 388 375 pension plans in 2007. 1,194 1,145 The major categories of plan assets as a percentage of total plan assets Fair value of plan assets –681 –625 As at 31 December Unrecognized actuarial gains and losses –185 –177 2006 2005 Unrecognized past service costs –1 –2 Equity securities 45 % 43 % Net liability 327 341 Debt securities 35 % 38 % Real estate 6 % 6 % Money market 3 % 1 % The amounts recognised in the income statement Bonds 11 % 12 % Year ended 31 December Total 100 % 100 % €m 2006 2005 2004 Current service cost 23 20 35 In Finland, the pension plan assets include ordinary shares issued by the Interest cost 51 54 61 company with a fair value of € 3 million (2005: € 7 million) and a loan Expected return on plan assets –41 –38 –32 receivable of € 168 million issued to the company (2005: € 185 million) Net actuarial gains and losses recognized during by the company’s own fund. The interest paid on the loan in 2006 was the year 7 –3 –4 € 7 million (2005: € 6 million and 2004: € 6 million ). Transfers from inside the plan – –2 – Past service cost 2 14 –26 Settlements – –6 8 OTHER POST-EMPLOYMENT BENEFITS (MEDICAL) Curtailment – – –249 Total included in personnel expenses (Note 7) 42 39 –207 The Group also funds certain other post-employment benefi ts in North America relating to retirement medical and life insurance programmes. The actual return on plan assets was € 61 million in 2006 (2005: € 59 million and 2004: € 40 million). The amounts recognised in the balance sheet As at 31 December Changes in the present value of defi ned benefi t obligations €m 2006 2005 As at 31 December Present value of unfunded obligations 33 37 € m 2006 2005 Unrecognized actuarial gains and losses –10 –13 Defi ned benefi t obligation as of beginning of year 1,145 963 Net liability 23 24 Current service cost 23 20 Interest costs 51 54 The amounts recognised in the income statement Contributions by plan participants 4 3 Year ended 31 December Actuarial gains and losses 32 86 €m 2006 2005 2004 Past service costs 1 15 Disposals – –27 Current service cost 1 1 1 Curtailments and settlements – –9 Interest cost 2 2 1 Net acturial gains and losses recognized Other adjustments 10 35 during the year 1 – – Benefi ts paid –49 –45 Total included in personnel expenses (Note 7) 4 3 2 Translation differences –23 50 Defi ned benefi t obligation as of end of the year 1,194 1,145

UPM ANNUAL REPORT 2006 92 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

Changes in the present value of defi ned benefi t obligations Changes in the fair value of plan assets As at 31 December 31.12. €m 2006 2005 M€ 2006 2005 Defi ned benefi t obligation as of beginning of year 37 24 Fair value of plan assets of beginning of year – – Current service cost 1 1 Contributions by plan participants 2 2 Interest costs 2 2 Contributions by the employer 3 2 Contributions by plan participants 2 2 Benefi ts paid –5 –4 Actuarial gains and losses – 9 Fair value of plan assets as of end of the year – – Benefi ts paid –5 –4 Translation differences –4 3 The Group expects to contribute € 3 million to its other post- Defi ned benefi t obligation as of end of the year 33 37 employment benefi ts plans in 2007.

POST-EMPLOYMENT BENEFITS (PENSION AND MEDICAL)

Post-employment beneﬁ ts: the principal actuarial assumptions used as at 31 December Finland Canada Germany USA Great Britain Other 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 Discount rate % 4.25 4.25 5.20 5.00 4.25 4.25 5.19 5.10 5.13 4.79 4.30 4.25 Expected return on plan assets % 6.15 5.93 7.50 7.50 N/A N/A 4.50 4.50 7.07 7.03 3.87 4.25 Future salary increases % 3.75 3.75 2.05 2.01 2.50 2.50 N/A N/A 4.14 3.75 2.55 2.62 Future pension increases % N/A N/A 1.22 1.19 1.50 1.50 N/A N/A 3.06 2.54 0.86 0.83 Expected average remaining working years of staff 12.3 12.2 11.3 12.1 14.5 14.8 10.2 10.3 17.0 17.9 13.0 13.9

For foreign plans, the assumption for the weighted average expected The assumed health care cost trend rate used in measuring the return on plan assets is based on target asset allocation of each plan, accumulated post-retirement beneﬁ t obligation for U.S. plans was 10.0 historical market performance, relevant forward-looking economic % in 2006, 11.0 % in 2005, declining to 5 % by the year 2011 and analyses, expected returns, variances, and correlations for different asset remaining at that level thereafter. A one-percentage-point increase and categories held. For domestic plans, the overall expected return on plan decrease in assumed health care cost trend rates in the USA would effect assets is based on the weighted average of the expected returns on the post employment beneﬁ t obligation by € 2 million and € –2 million, different asset categories held. correspondingly.

The amounts of pension and other post-employment beneﬁ t plans recognised in the balance sheet as at 31 December 2006 Great Finland Canada Germany USA Britain Other Total Present value of funded obligations 233 208 – 31 322 12 806 Present value of unfunded obligations – 21 322 29 – 49 421 Fair value of plan assets –235 –172 – –30 –234 –10 –681 Unrecognized actuarial gains and losses –42 –14 –40 –9 –85 –5 –195 Unrecognized past service costs – –1 – – – – –1 Net liability –44 42 282 21 3 46 350

The amounts of pension and other post-employment beneﬁ t plans recognised in the balance sheet as at 31 December 2005 Great €m Finland Canada Germany USA Britain Other Total Present value of funded obligations 199 235 – 36 289 11 770 Present value of unfunded obligations – 24 306 33 – 49 412 Fair value of plan assets –218 –168 – –35 –198 –6 –625 Unrecognized actuarial gains and losses –15 –34 –29 –11 –92 –9 –190 Unrecognized past service costs – –2 – – – – –2 Net liability –34 55 277 23 –1 45 365

UPM ANNUAL REPORT 2006

93 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

Amounts for the current and previous periods As at 31 December €m 2006 2005 Present value of deﬁ ned beneﬁ t obligations –1,227 –1,182 Fair value of plan assets 681 625 Funded status –546 –557

Experience adjustments on plan liabilities –20 13 Experience adjustments on plan assets 20 21

30 PROVISIONS Closure and Environ- Reforesta- Actual restructuring mental Termination tion Tax emissions, Other €m provisions provisions provisions provisions provisions provision provisions Total At 1 Jan. 2005 29 19 61 4 23 – 41 177 Translation difference 2 – 3 – – – 1 6 Additional provisions and increases to existing provisions 7 10 12 – 1 31 6 67 Utilized during year –13 –1 –22 –1 –1 – –16 –54 Unused amounts reversed – – – – –5 – –1 –6 At 31 Dec. 2005 25 28 54 3 18 31 31 190

At 1 Jan. 2006 25 28 54 3 18 31 31 190 Translation difference –1 –1 – – – – – –2 Additional provisions and increases to existing provisions 7 1 56 8 1 8 3 84 Utilized during year –17 –3 –21 –2 – –25 –12 –80 Unused amounts reversed – – –5 – – – – –5 At 31 Dec. 2006 14 25 84 9 19 14 22 187

Provisions 31.12. Closure and restructuring provisions include charges related primarily to €m 2006 2005 dismantling of closed mills. Environmental provisions include expenses Non-current provisions 125 120 relating to old mill sites and the remediation of industrial landfi lls. Current provisions 62 70 Termination provisions are concerned with operational restructuring as Total 187 190 well as unemployment arrangements and disability pensions primarily in Finland. 31 INTEREST-BEARING LIABILITIES In 2006, UPM started programme to restore its profi tability. The 31.12. € programme covers all of the company’s operations and includes both m 2006 2005 streamlining of operations and closures of uncompetitive production Non-current Interest-bearing liabilities capacity. The programme seeks to achieve a reduction of approximately Bonds 2,244 2,766 3,600 employees. A provision amounting to € 35 million relating to Loans from fi nancial institutions 550 556 unemployment, early retirement and termination arrangements was Pension loans 213 406 Trade payables 10 11 recognised in 2006. Finance lease liabilities 115 329 The company takes part in government programmes aimed at reduc- Derivative fi nancial instruments 98 95 ing greenhouse gas emissions. In 2006, the Group has recognised a Other liabilities 123 163 provision amounting to € 14 million (2005: € 31 million) to cover 3,353 4,326 the obligation to return emission allowances. The company possesses emission allowances worth of € 16 million (2005: € 36 million) as Current Interest-bearing liabilities intangible assets. Current portion of long-term debt 521 182 In 2005, mainly restructuring expenses relating to the US and Euro- Short-term loans 105 78 pean sales network for wood products were recognized in closure and Derivative fi nancial instruments 117 66 Other liabilities 1) 249 650 restructuring provisions. 992 976

Total interest-bearing liabilities 4,345 5,302

1) Includes issued commercial papers of € 203 million in 2006 (2005: € 599 million).

UPM ANNUAL REPORT 2006 94 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

Maturity of non-current interest-bearing liabilities €m 2007 2008 2009 2010 2011 2012+ Total Bonds 280 87 249 58 2 1,848 2,524 Loans from ﬁ nancial institutions 59 145 43 26 39 297 609 Pension loans 172 148 42 15 8 – 385 Trade payables 1 1 – 1 1 7 11 Finance lease liabilities 5 5 11 4 84 11 120 Derivative ﬁ nancial instruments – – 1 – 1 96 98 Other liabilities 4 7 3 4 3 106 127 521 393 349 108 138 2,365 3,874

Current portion of long-term debt –521 Non-current interest-bearing liabilities , 3,353

Bonds in interest-bearing liabilities The interest rate ranges of interest-bearing liabilities Interest Currency Nominal As at 31 Dec. As at 31 December rate of value issued 2006 2005 % 2006 2005 € € % bond m m m Loans from fi nancial institutions 3.55–5.77 2.33–5.70 Fixed rate Pension loans 3.65–7.50 3.65–7.50 1997–2007 6.875 USD 215 159 182 Finance lease liabilities 2.70–6.90 2.20–6.90 1997–2007 6.625 EUR 102 105 107 1997–2027 7.450 USD 375 300 349 Fair values of non-current liabilities 1999–2009 6.350 EUR 250 250 263 2000–2030 3.550 JPY 10,000 14 32 As at 31 December €m 2006 2005 2001–2006 0.962 JPY 2,000 – 14 2001–2007 6.875 USD 10 7 9 Carrying Fair Carrying Fair value value value value 2002–2007 0.869 JPY 2,000 12 14 2002–2012 6.125 EUR 600 603 642 Bonds 2,524 2,829 2,779 2,928 2002–2014 5.625 USD 500 350 399 Loans from fi nancial institutions 609 623 631 646 2002–2017 6.625 GBP 250 361 380 Pension loans 385 383 482 500 2003–2018 5.500 USD 250 179 204 3,518 3,835 3,892 4,074 2,340 2,595 Fair values of long-term loans, including the current portion and Floating-rate accrued interests, have been estimated as follows: 2002–2008 4.528 EUR 39 39 39 2002–2008 4.348 EUR 50 50 50 The fair value of the quoted bonds is based on the quoted market 2002–2010 4.350 EUR 59 59 59 value as of December 31. The fair value of fi xed rate and market-based 2002–2012 4.155 EUR 25 25 25 fl oating rate loans is estimated using the expected future payments 2002–2012 4.748 EUR 11 11 11 discounted at market interest rates. 184 184 Bonds, total 2,524 2,779 Interest rate swaps - current portion –280 –13 The Group uses interest rate swap agreements to hedge the interest rate Bonds, long-term portion 2,244 2,766 risk relating to long-term loans. At 31 December, 2006 the fi xed interest rates varied from 0.87% to 7.45 (0.87% to 8.0% in 2005) and the fl oating rates varied from 2.48% Fair value hedge of the long-term interest-bearing liabilities to 7.09% (1.12% to 6.28% in 2005). Fair value hedge accounting in accordance with IAS 39 results in a cumulative fair value adjustment totalling € 90 million (2005: € 59 million), which has decreased (2005: increased) the carrying amounts of the liabilities. Accordingly, the positive fair value of the hedging instruments excluding accrued interest amounts to € 68 million (2005: € 161 million) in assets, and negative fair value of € 98 million in liabilities (2005: € 61 million). The carrying amounts of the hedged liabilities and the fair values of the hedging instruments are included in the net interest bearing liabilities. The effect of the fair value hedge ineffectiveness on the income statement was € 19 million (2005: € 19 million).

UPM ANNUAL REPORT 2006

95 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

NET INTEREST-BEARING LIABILITIES 32 OTHER LIABILITIES As at 31 December As at 31 December €m 2006 2005 €m 2006 2005 Derivative fi nancial instruments 2 – Interest-bearing liabilities, total 4,345 5,302 Other 11 13 13 13 Interest-bearing fi nancial assets Non-current Loan receivables 5 4 33 TRADE AND OTHER PAYABLES Available-for-sale investments (listed shares) 2 2 As at 31 December Derivative fi nancial instruments 66 159 €m 2006 2005 Other receivables 7 9 Advances received 15 10 80 174 Trade payables 727 691 Current Amounts due to associates and joint ventures 23 19 Loan receivables 6 28 Accrued expenses and deferred income 451 408 Trade receivables – 2 Derivative fi nancial instruments 53 38 Other receivables 6 9 Fine imposed by the EU Commission 1) –57 Derivative fi nancial instruments 6 2 Other current liabilities 130 141 Cash and cash equivalents 199 251 1,399 1,364 217 292 1) € Interest-bearing fi nancial assets 297 466 In November 2005 The European Commission has imposed UPM a fi ne of 56.55 million concerning antitrust activities in the market for plastic industrial sacks. Rosenlew’s plastic industrial sack business was sold in December 2000. Net interest-bearing liabilities 4,048 4,836

Finance lease liabilities Main items included in accrued expenses In December 2006, the Group exercised its option and redeemed Kymi and deferred income River power plants which resulted in a decrease of lease liability by As at 31 December € 126 million. After that the Group has two power plants acquired under €m 2006 2005 sale and leaseback agreement. The Group uses the electrical power Personnel expenses 193 169 generated by this plant in its own production. Payments of this power Interest expenses 28 26 plant are due by the end of 2011. Indirect taxes 21 18 In April 2006, the control over Wisapower Oy was transferred from Other items 1) 209 195 UPM to Pohjolan Voima Oy, decreasing the lease liability by € 85 mil- 451 408 lion. 1) Consists mainly of customer rebates. In addition the Group leases certain tangible assets under long-term The carrying value of trade and other payables is considered to approxi- arrangements. mate the fair value.

Finance lease liabilities – minimum lease payments As at 31 December €m 2006 2005 34 DERIVATIVE FINANCIAL INSTRUMENTS Not later than 1 year 12 28 1–2 years 12 27 Derivative fi nancial instruments are recorded on the balance sheet at fair 2–3 years 17 27 value, which is defi ned as the monetary amount for which the instru- 3–4 years 10 153 ments could be exchanged between willing parties in a current trans- 4–5 years 89 15 action, other than in a liquidation or forced sale. Later than 5 years 11 181 The fair values of such fi nancial items have been estimated on the 151 431 following basis: Future fi nance charges –31 –89 Interest forward rate agreements are fair valued based on quoted Finance lease liabilities – the present value market rates on the balance sheet date. of minimum lease payments 120 342 Forward foreign exchange contracts are fair valued based on the contract forward rates in effect on the balance sheet date. Finance lease liabilities – the present value of minimum lease payments Foreign currency options are fair valued based on quoted market As at 31 December rates on the balance sheet date. €m 2006 2005 Interest and currency swap agreements are fair valued based on Not later than 1 year 11 26 discounted cash fl ow analyses. 1–2 years 11 25 Commodity derivatives are fair valued based on quoted market rates 2–3 years 14 23 on the balance sheet date. 3–4 years 8 124 4–5 years 68 12 Later than 5 years 8 132 120 342

UPM ANNUAL REPORT 2006 96 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

Net fair values of derivative fi nancial instruments Group As at 31 December Name of the subsidiary, country of incorporation holding % €m 2006 2006 2006 2005 UPM-Kymmene AB, SE 100,00 Positive Negative fair Net fair Net fair UPM-Kymmene AG, CH 99,80 fair values values values values UPM-Kymmene AS, NO 100,00 UPM-Kymmene Asia Pacifi c Pte Ltd., SG 100,00 Interest rate swaps 1) 120 –18 102 205 UPM-Kymmene Austria GmbH, AT 100,00 Forward foreign exchange contracts 2) 69 –69 – –37 UPM-Kymmene A/S, DK 100,00 Interest rate options – – – – UPM-Kymmene B.V., NL 100,00 Cross currency swaps 3) 1 –185 –184 –138 OOO UPM-Kymmene Chudovo, RU 100,00 Commodity contracts 3 – 3 1 UPM-Kymmene Forest AS, EE 100,00 193 –272 –79 31 OOO UPM-Kymmene Forest Russia, RU 100,00 UPM-Kymmene France S.A.S., FR 100,00 1) The fair value of interest rate swaps designated for fair value hedges of long-term UPM-Kymmene Inc., US 100,00 € € borrowings was 102 million as at 31 December 2006 ( 208 million as at 31 UPM-Kymmene Japan K.K., JP 100,00 December 2005) and they mature together with the hedged borrowings. UPM-Kymmene Miramichi Inc., CA 100,00 2) The fair value of forward foreign exchange contracts designated as future cash UPM-Kymmene NV/SA, BE 99,60 fl ow hedges was € 13 million at 31 December 2006 (€ –29 million at 31 Decem- UPM-Kymmene Otepää AS, EE 100,00 ber 2005) and they are reported in fair value and other reserves, net of tax, as € 18 OOO UPM-Kymmene Pestovo, RU 100,00 million (€ –21 million at 31 December 2005) from which they are transferred to UPM-Kymmene Papier GmbH & Co. KG, DE 100,00 income statement at various dates up to 1 year from the Balance sheet date. UPM-Kymmene Sales GmbH, DE 100,00 The fair value of forward foreign exchange contracts designated as hedges of net UPM-Kymmene Seven Seas Oy, FI 100,00 investments in foreign units was € 0 million at 31 December 2006 (€ –5 million at UPM-Kymmene Sp.z o.o., PL 100,00 31 December 2005). They are reported in Translation differences of the Group’s UPM-Kymmene S.r.l., IT 100,00 equity, net of tax, as € 4 million at 31 December 2006 (€ –4 million at 31 Decem- UPM-Kymmene S.A., ES 100,00 ber 2005). UPM-Kymmene Wood AB, SE 100,00 3) The fair value of cross currency swaps designated for fair value hedges of long- UPM-Kymmene Wood A/S, DK 99,93 term borrowings was € –157 million as at 31 December 2006 (€ –105 million as at UPM-Kymmene Wood B.V., NL 100,00 31 December 2005) and they mature together with the hedged borrowings. UPM-Kymmene Wood GmbH, DE 100,00 UPM-Kymmene Wood Ltd, GB 100,00 UPM-Kymmene Wood Oy, FI 100,00 Positive and negative fair values of fi nancial instruments are shown UPM-Kymmene Wood S.A., ES 100,00 under non-current fi nancial assets, trade and other receivables, interest- UPM-Kymmene Wood S.A., FR 99,99 bearing liabilities and trade and other payables. UPM-Kymmene Wood S.r.l., IT, 100,00 UPM-Kymmene (Changshu) Paper Industry Co. Ltd, CN 100,00 Notional amounts of derivative fi nancial instruments UPM-Kymmene (Shanghai) Trading Co., CN 100,00 As at 31 December UPM-Kymmene (UK) Ltd, GB 100,00 €m 2006 2005 UPM Rafl atac Canada Inc., CA 100,00 Interest rate swaps 2,566 2,856 UPM Rafl atac CZ s.r.o., CZ 100,00 Forward foreign exchange contracts 4,293 4,552 UPM Rafl atac GmbH, DE 100,00 Currency options 30 – UPM Rafl atac Iberica S.A., ES 100,00 Cross currency swaps 570 588 UPM Rafl atac Inc., US 100,00 Commodity contracts 29 54 UPM Rafl atac Italia S.r.l., IT 100,00 Interest rate forward contracts 2,500 2,609 UPM Rafl atac Kft., HU 100,00 UPM Rafl atac Ltd, GB 100,00 UPM Rafl atac Mexico S.A. de C.V., ME 100,00 35 PRINCIPAL SUBSIDIARIES AS AT 31 DECEMBER 2006 UPM Rafl atac Oy, FI 100,00 Group UPM Rafl atac Polska Sp.z o.o., PL 100,00 Name of the subsidiary, country of incorporation holding % UPM Rafl atac South Africa (Pty) Ltd, ZA 100,00 UPM Rafl atac S.A.S., FR 100,00 Blandin Paper Company, US 100,00 UPM Rafl atac Sdn. Bhd., MY 100,00 Oy Botnia Shipping Ab, FI 100,00 UPM Rafl atac Pty Ltd, AU 100,00 Lignis GmbH & Co. KG, DE 74,90 UPM Rafl atac Co., Ltd, TH 100,00 Nordland Papier GmbH, DE 100,00 Walki Wisa Converfl ex AB, SE 51,60 NorService GmbH, DE 100,00 Walki Wisa GmbH, DE 100,00 nortrans Speditionsgesellschaft mbH, DE 100,00 Walki Wisa Ltd, GB 100,00 Rafl atac Shanghai Co Ltd, CN 100,00 Walki Wisa Oy, FI 100,00 Oy Rauma Stevedoring Ltd, FI 100,00 Walki Wisa Packaging Paper (Changshu) Co, CN 100,00 STAG-SCA Frischholz GmbH, AT 66,67 Werla Insurance Company Ltd, GB 100,00 Steyrermühl Sägewerksgesellschaft m.b.H. Nfg KG, AT 100,00 ZAO Tikhvinsky Komplexny Lespromkhoz, RU 99,36 The table includes subsidiaries with sales exceeding € 2 million. Tilhill Forestry Ltd, GB 100,00 UPM-Asunnot Oy, FI 100,00 UPM Sähkönsiirto Oy, FI 100,00 UPM Tehdasmittaus Oy, FI 100,00

UPM ANNUAL REPORT 2006

97 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Group

36 SHARE-BASED PAYMENTS The subscription price for 2005F share options is the average trade- weighted price for the company’s share on the Helsinki Stock Exchange between 1 January and 28 February 2005 plus 10 %, i.e. € 18.23 per Share options granted to key personnel share. The subscription price for 2005G options is the average trade- As authorized by the Annual General Meeting of 19 March 2002, D and weighted share price between 1 January and 28 February 2006 plus 10 E options have been issued to key personnel. Of these, 3,800,000 are %, i.e. € 18.65 per share, and that for 2005H options the average trade- designated 2002D and 3,800,000 are designated 2002E. Each option weighted share price between 1 January and 28 February 2007 plus 10 entitles the holder to subscribe two UPM-Kymmene Corporation shares. %. The share subscription prices will be reduced by the amount of The subscription period for 2002D options is 1 April 2004 to 30 April dividend conﬁ rmed after the end of the subscription price determination 2007 and that for 2002E options 1 April 2005 to 30 April 2008. period and before the date of share subscription, in each case on the The share subscription price is € 43.90 per two shares for 2002D options record date for dividend distribution. Share subscriptions based on and € 14.27 per share for 2002E options. The share subscription prices 2005F, 2005G and 2005H options may raise the share capital by a total will be reduced by the amount of dividend conﬁ rmed after the end of maximum of € 15,300,000. the subscription price determination period and before the date of share subscription, in each case on the record date for dividend distribution. Share subscriptions based on these options may raise the share capital Equity-based rewards scheme by a maximum of € 25,840,000. Key personnel of the Group who fall within the scope of the equity- The Annual General Meeting held on 31 March 2005 approved the based rewards scheme may be rewarded with UPM-Kymmene shares Board of Directors’ proposal to issue share options to the Group’s key annually in the calendar years 2005, 2006 and 2007. The reward will be personnel. The number of share options is 9,000,000 and these can be paid at the end of each year as a combination of shares and cash. Alto- exercised to subscribe a maximum total of 9,000,000 UPM-Kymmene gether not more than 1,046,400 shares will be given to key personnel on Corporation shares. A total of 3,000,000 of the share options are desig- the basis of the scheme. The amount to be paid in cash may be not more nated 2005F, 3,000,000 2005G and 3,000,000 2005H. The subscription than 1.5 times the value of the shares given. The amount of the reward is periods are 1 October 2006 to 31 October 2008 for 2005F options, 1 tied to the achievement of set performance targets. For 2006, no deci- October 2007 to 31 October 2009 for 2005G options, and 1 October sion for rewards has been made. No rewards were given for 2005. 2008 to 31 October 2010 for 2005H options.

Changes in the numbers of share options granted 2006 2005 2004 Weighted average Number of share Weighted average Number of share Weighted average Number of share exercise price, € options exercise price, € options exercise price, € options 1 Jan. 16.55 10,348,700 16.16 10,792,029 16.55 11,071,700 Share options granted 16.73 6,500 17.48 2,970,500 13.52 330,200 Share options forfeited 16.73 –47,500 17.48 –7,500 16.24 –174,200 Share options exercised 12.02 –2,150 11.47 –3,402 429 11.42 –435,671 Share options expired – – 10.30 –3,900 – – 31 Dec. 15.80 10,305,550 16.55 10,348,700 16.16 10,792,029 Exercisable share options 10,305,550 7,385,700 7,033,829

Weighted average remaining contractual life was 13, 26 and 29 months as at 31 December 2006, 2005 and 2004, respectively.

Outstanding share option plans as at 31 December 2006

Plan/Distribution Exercise price 1) Total number of Number of share Vesting of share options Class at 1 Jan. at 31 Dec. share options options granted Exercise period schedule 2005 F 17.48 16.73 3,000,000 2,922,000 1.10.2006–31.10.2008 Vested 2002/2003 E 12.77 12.02 3,800,000 3,754,050 1.4.2005–30.4.2008 Vested 2002/2002 D 39.40 37.90 3,800,000 3,629,500 1.4.2004–30.4.2007 Vested 10,600,000 10,305,550 1) The exercise price for class D options is for two shares.

UPM ANNUAL REPORT 2006 98 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Group ACCOUNTS FOR 2006

The Black-Scholes valuation model and the following weighted average provided on an arm’s-length basis and upon terms that the Group assumptions are used in measuring the fair value of share options. believes to be customary within the industry and generally no less favourable than would be available from independent third parties. 2006 2005 2004 The Group purchases raw materials from certain associated compa- Share price, € 16.81 16.02 16.03 nies, the most signifi cant of which is Paperinkeräys Oy, a Finnish com- Exercise price, € 16.73 17.48 13.52 pany engaged in the procurement, processing and transport of recovered Volatility 1) 28 % 35 % 32 % paper in which the Group has a 22.98 % interest. The total value of raw Risk-free interest rate 3.03 % 2.26 % 3.28 % material purchases from associated companies was € 15 million in 2006, Assumed annual dividend yield – – – € 17 million in 2005 and € 15 million in 2004. Recovered paper is sold Expected option life, year 3 3 4 to the Group and other shareholders of Paperinkeräys Oy at a contract- based price that takes into account paper recycling expenses and the 1) Volatility is a measure of price changes expressed in terms of the standard devia- world market prices for recovered paper. In Austria, the Group has a tion of the price of the security in question over the period of analysis. In the calculations the volatility is based on three- and four-year periods. Volatility is similar arrangement concerning recovered paper which is purchased reported as an annual percentage fi gure. from Austria Papier Recycling G.m.b.H., a company in which the Group owns a 33.3 % equity interest. The total value of recovered paper pur- Assumed forfeiture used in 2006 was 0%, 2005 5% and 2004 8 %. chases was € 12 million in 2006, € 14 million in 2005 and € 12 million in 2004. 37 RELATED PARTY TRANSACTIONS In Finland, UPM has a pension foundation (Kymin Eläkesäätiö) which is a separate legal entity. The pensions of about 9 % of the The Group holds a 47 % interest in Oy Metsä-Botnia Ab (“Metsä- Group’s Finnish employees are arranged through the foundation. The Botnia”), a joint venture between M-real Oyj (“M-real”) and Metsäliitto contributions paid by UPM to the foundation amounted to € 17 million Group. M-real is a Finnish paper producer, and Metsäliitto Group is a in 2006 (€ 16 million in 2005 and € 19 million in 2004). The foundation co-operative organization of Finnish forest owners. Metsäliitto Group is manages and invests the contributions paid to the plan. The fair value of also the controlling shareholder of M-real. Chemical pulp produced by the foundation’s assets at 31 December 2006 was € 206 million, of Metsä-Botnia is sold to the Group and to M-real at the market price less which 84 % was in the form of loans to the company and 16 % invested certain transportation and other costs. In 2006, 2005 and 2004 the in equities and property. Group’s chemical pulp entitlement with respect to the production of The pensions of about 68% of the Group’s employees in Great Metsä-Botnia was 1.1 million tonnes per year. Total purchases of chemi- Britain are arranged through the Pension Funds. UPM-Kymmene UK cal pulp from Metsä-Botnia amounted to € 197 million in 2006, € 201 Pension Scheme is a separate legal entity. The contributions paid by the million in 2005 and € 238 million in 2004. Metsä-Botnia is currently Group to this fund amounted to GBP 5 million in 2006 (GBP 6 million building a new pulp mill in Uruguay. The total cost of the project is in 2005 and GBP 3 million in 2004). The fair value of the fund’s assets about USD 1.1 billion. The annual capacity of the mill will be approxi- at 31 December 2006 was GBP 131 million, of which 68 % is invested mately one million tonnes of bleached eucalyptus pulp. UPM will invest in equities and 32 % in debt instruments and property. USD 99 million in the pulp mill project. In 2006, related to the pulp mill project. UPM sold its shares in the Uruguayan forestry company, Com- pañia Forestal Oriental S.A. to Metsä-Botnia for € 36 million. 38 COMMITMENTS AND CONTINGENCIES The Group obtains most of the energy for its production units in Contingent liabilities Finland from the Group’s owned and leased power plants, as well as The Group is a defendant or plaintiff in a number of legal proceedings through ownership in power companies which entitles it to receive incidental to its operations. These lawsuits primarily involve claims electricity and heat from those companies. A signifi cant proportion of arising out of commercial law issues. the Group’s electricity procurement comes from Pohjolan Voima Oy, a The competition authorities are continuing investigations into Finnish energy producer in which the Group holds a 42.19 % equity alleged antitrust activities with respect to various products of the com- interest, and from Kemijoki Oy, a Finnish hydropower producer in pany. The US Department of Justice, the EU authorities and the authori- which the Group holds a 4.13 % equity interest. Pohjolan Voima Oy is ties in several of its Member States, Canada and certain other countries also a majority shareholder in Teollisuuden Voima Oy, one of Finland’s have granted UPM conditional full immunities with respect to certain two nuclear power companies. The combined total of these energy conducts disclosed to the authorities. € € € purchases was 194 million in 2006, 166 million in 2005 and 198 During 2006, the investigations of the U.S. labelstock industry and million in 2004. In accordance with the articles of association of the European fi ne paper, newsprint, magazine paper, label paper and self- power companies and with related shareholder agreements, the prices adhesive labelstock markets were closed by the U.S. Department of paid by the Group to the power companies are based on production Justice and the European Commission competition author ity. In Decem- costs, which are generally lower than market prices. Internal sales to the ber 2006, the Finnish Competition Authority decided not to propose a Group’s segments are based on the prevailing market price. fi ne for UPM in its investigation of raw wood procurement in Finland. Approximately 10 to 15 % of the Group’s research and development UPM has been named as a defendant in multiple class-action law- work is conducted by Oy Keskuslaboratorio-Centrallaboratorium Ab suits against labelstock and magazine paper manufacturers in the United (the Finnish Pulp and Paper Research Institute or “FPPRI”), in which States. The remaining litigation matters may last several years. No the Group is one of four corporate owners with a 38.65 % interest. provisions have been made in relation to these investigations. Ownership of FPPRI provides the Group with fundamental research In March 2006, UPM paid a fi ne of € 56.55 million imposed by the information regarding the Group’s main raw materials, major manufac- European Commission concerning antitrust activities in the market for turing processes and key product attributes. In addition to joint research plastic sacks but has appealed the decision. at FPPRI, the Group also utilizes the institute for contract research in connection with product and process development. These services are

UPM ANNUAL REPORT 2006

99 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Parent Company

Commitments Commitments related to associated companies and In the normal course of business, UPM-Kymmene Corporation and joint ventures some of its subsidiaries enter into various agreements providing fi nan- As at 31 December € cial or performance assurance to third parties on behalf of those subsidi- m 2006 2005 aries. These agreements are entered into primarily to support or enhance the creditworthiness of subsidiaries so that they can accomplish their Proportionate interest in joint ventures’ commitments 22 22 intended business purposes. The maximum amount of future payments Contingent liabilities relating to the Group’s interest for which UPM-Kymmene Corporation is liable on behalf of its subsid- in the joint ventures 10 11 iaries are disclosed in the table below under “Other commitments”. Share of associated companies contingent liabilities 141 169 The Group has also entered into various agreements to provide Operating lease commitments fi nancial or performance assurance to third parties on behalf of certain companies in which the Group has a minority interest. These agree- – where a Group company is the lessee The Group leases offi ce, manufacturing and warehouse space under ments are entered into primarily to support or enhance the creditworthi- various non-cancellable operating leases. Certain contracts contain ness of these companies. The Group has no collateral or other recourse renewal options for various periods of time. provisions related to these guarantees. The maximum amounts of future payments by UPM-Kymmene Corporation on behalf of its associated companies under these guarantees are disclosed in the table below under The future costs for contracts exceeding one year “Guarantees on behalf of associated companies”. It is the Group’s policy and for non-cancellable operating lease contracts not to give guarantees on behalf third parties, and the commitments As at 31 December included under the caption “Guarantees on behalf of others” in the table €m 2006 2005 relate mainly to companies that have been sold. less than 1 year 23 25 In the normal course of business, certain subsidiaries of UPM 1–2 years 25 31 Kymmene Corporation, especially in Germany, grant commercial guar- 2–3 years 17 11 antees to their customers to help them purchase goods from the subsidi- 3–4 years 15 7 ary. The Group has no liability with respect to these commercial guaran- 4–5 years 14 5 tees, but they are covered by its credit risk insurance. These guarantees over 5 years 23 16 mature within one year. The maximum potential amount of future pay- 117 95 ments under these guarantees amounted to € 10 million at 31 December 2006 and € 6 million at 31 December 2005 They are included in the amounts disclosed in the table under “Other commitments”. Capital commitments at the balance sheet date but not recognized in the fi nancial statements; Commitments major commitments under construction listed below As at 31 December Commitment as at €m 2006 2005 31 December On own behalf €m Total cost 2006 2005 Mortgages 92 94 Pulp mill rebuild, Kymi 325 300 – New mill in USA, Rafl atac 88 80 – On behalf of associated companies and New bioboiler, Caledonia 72 72 – joint ventures PM5 quality upgrade, Jämsänkoski 38 38 – Guarantees 12 18 PM4 rebuild, Jämsänkoski 45 34 – On behalf of others Guarantees 6 8 39 EVENTS AFTER THE BALANCE SHEET DATE Other commitments, own Operating leases, due within 12 months 23 25 On 30 January 2007, M-real announced to sell 9% of Metsä-Bonia’s Operating leases, due after 12 months 94 70 shares to its parent company Metsäliitto for € 240 million. Conse- Other commitments 69 61 quently, M-real reject UPM’s offer made in November 2006 to buy 15% Total 296 276 of Metsä-Botnia’s shares for € 500 million. The Group’s management is not aware of any other signifi cant events Mortgages 92 94 occurring after 31 December 2006 which would have had an impact on Guarantees 18 26 the fi nancial statements. Operating leases 117 95 Other commitments 69 61 Total 296 276

Property under mortgages given as collateral for own commitments include industrial estates and forest land.

UPM ANNUAL REPORT 2006 100 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Parent Company ACCOUNTS FOR 2006

Parent company accounts (Finnish Accounting Principles, FAS) PROFIT AND LOSS ACCOUNT FUNDS STATEMENT 1.1.–31.12., €m Note 2006 2005 €m 2006 2005

Turnover (1) 4,499 4,025 Operating activities Increase or decrease in fi nished goods 36 69 Operating profi t 264 445 Production for own use 18 42 Adjustments to operating profi t a) 504 129 Other operating income (2) 226 259 Change in working capital b) 98 –211 Raw materials and services Interest paid –187 –167 Raw materials and consumables Dividends received 115 21 Purchases during the fi nancial period –2,204 –2,136 Interest received 95 125 Increase or decrease in stocks –49 44 Other fi nancial items –172 33 External services –333 –287 Taxes paid c) –96 –65 –2,586 –2,379 Net cash from operating activities 621 310 Personnel expenses Wages and salaries (3) –475 –448 Investing activities Social security expenses Pension expenses –117 –79 Investments in tangible and intangible assets –314 –185 Other social security expenses –50 –44 Income from sales of tangible and intangible assets 68 16 –642 –571 Investments in shares and holdings –24 –778 Depreciation and value adjustments (4) Income from sales of shares and holdings 352 395 Depreciation according to plan –353 –359 Increase in other investments –15 –39 Value adjustments to goods held as Decrease in other investments 39 803 non-current assets –133 –5 Net cash used in investing activities 106 212 –486 –364 Other operating costs and expenses –801 –636 Cash fl ow before fi nancing 727 522 Operating profi t 264 445 Financing activities Financial income and expenses Increase in non-current liabilities 350 80 Income from investments held as non-current assets Decrease in non-current liabilities –366 –400 Income from Group companies 100 – Increase or decrease in current receivables –22 –184 Income from participating interest companies 15 21 Increase or decrease in current liabilities –354 377 Interest income from Group companies 39 51 Dividends paid –392 –387 Interest income from other companies 12 Group contributions, received and paid 13 30 Other interest and fi nancial income Other interest income from Group companies 51 61 Purchases of treasury shares – –151 Other interest income from other companies 410Income from exercise of share options –78 Other fi nancial income from Group companies – 203 Net cash used in fi nancing activities –771 –557 Other fi nancial income from other companies 85 – Interest and other fi nancial expenses Cash and cash equivalents Interest expenses paid to Group companies –38 –46 Increase or decrease in cash funds –44 –35 Interest expenses paid to other companies –152 –123 Cash fl ow from merged companeis 2 – Other fi nancial expenses paid Cash and cash equivalents at 1 Jan. 158 193 to Group companies –79 – Cash and cash equivalents at 31 Dec. 116 158 Other fi nancial expenses paid to other companies –6 –253 20 –74 a) Adjustments to operating profi t Profi t before extraordinary items 284 371 Depreciation 353 359 Gains and losses on sale of non-current assets 18 –235 Extraordinary items (5) Value adjustments on non-current assets 133 5 Extraordinary income 52 26 Total 504 129 Extraordinary expenses –14 – 38 26 b) Change in working capital Profi t before appropriations and taxes 322 397 Stocks 8 –122 Appropriations Current non-interest-bearing receivables 73 –118 Increase or decrease in accumulated Current non-interest-bearing liabilities 17 29 depreciation difference 217 102 Total 98 –211 Income taxes (6) –151 –63 Profi t for the fi nancial period 388 436 c) Taxes stemming from extraordinary items and sales of non-current assets are reported here on a net basis.

UPM ANNUAL REPORT 2006

101 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Parent Company

BALANCE SHEET €m Note 31.12.2006 31.12.2005 €m Note 31.12.2006 31.12.2005

ASSETS EQUITY AND LIABILITIES Non-current assets Shareholders’ equity (11) Intangible assets (7) Share capital 890 890 Intangible rights 64Share premium reserve 776 776 Other capitalized expenditure 220 139 Revaluation reserve 552 554 Advance payments 832Legal reserve 187 187 234 175 Retained earnings 2 937 2,893 Profi t for the fi nancial period 388 436 Tangible assets (8) 5,730 5,736 Land and water areas 1,042 1,039 Buildings 523 566 Appropriations Machinery and equipment 1 600 1,757 Accumulated depreciation difference 1,211 1,427 Other tangible assets 47 52 Advance payments and construction Provisions (12) in progress 98 102 Provisions for pensions 60 33 3,310 3,516 Other provisions 28 18 88 51 Investments (9) Holdings in Group companies 4,078 4,465 Liabilities Receivables from Group companies 985 1,054 Non-current (13) Holdings in participating interest companies 630 654 Bonds 2,324 2,630 Receivables from participating interest Loans from fi nancial institutions 338 198 companies –4Pension loans 205 391 Other shares and holdings 177 181 Payables to Group companies 31 31 Other receivables 724Other liabilities 134 151 5,877 6,382 3,032 3,401 9,421 10,073 Current (14) Current assets Bonds 184 14 Stocks Loans from fi nancial institutions 212 Raw materials and consumables 194 243 Pension loans 167 71 Finished products and goods 266 229 Advances received 42 Advance payments 40 36 Trade payables 218 201 500 508 Payables to Group companies 804 780 Payables to participating interest Receivables companies 22 17 Current (10) Other liabilities 287 749 Trade receivables 54 145 Accruals and deferred income 243 220 Receivables from Group companies 1,827 1,678 1,931 2,066 Receivables from participating interest companies 99 4,963 5,467 Loan receivables –8 Other receivables 44 54 Prepayments and accrued income 21 48 1,955 1,942

Cash and cash equivalents 116 158 2,571 2,608

Total assets 11,992 12,681 Total equity and liabilities 11,992 12,681

UPM ANNUAL REPORT 2006 102 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Parent Company ACCOUNTS FOR 2006 Notes to the parent company ﬁ nancial statements (All amounts in millions of euros unless otherwise stated.)

1 TURNOVER 6 INCOME TAXES Owing to the corporate structure of the Group, the turnover of the pa- €m 2006 2005 rent company has not been broken down by division and market. Taxes on business income for the ﬁ nancial period 151 64 Income taxes from previous periods – –1 151 63 2 OTHER OPERATING INCOME €m 2006 2005 Gains on sale of non-current assets 207 245 Deferred tax liabilities and assets Income from rents 10 10 Deferred tax liabilities and receivables for the parent company are not Sales of emission allowances 1) 83re cord ed on the balance sheet. Other 1 1 Deferred tax liability comprises mainly depreciation differences, for 226 259 which the deferred tax liability at 31 December 2006 was € 315 million (371 million). 1) Emissions trading rights are accounted for on a net basis. Deferred tax liability is not stated separately for revaluations. Applying a tax rate of 26%/ to the amount of the revaluations, the poten- 3 PERSONNEL EXPENSES tial tax li a bil i ty arising from the sale of revalued assets is € 185 million €m 2006 2005 (185 million). Wages and salaries Managing director and members of the Board of Directors 2) 227 INTANGIBLE ASSETS Other wages and salaries 473 446 €m 2006 2005 475 448 Intangible rights 2) See notes to the consolidated accounts, note 7. Acquisition cost at 1 Jan. 11 11 Increases 9 – Loans to company directors Decreases –6 – At 31 December 2006, the company’s Managing Director and members Acquisition cost at 31 Dec. 14 11 of the Board of Directors had no loans out stand ing from the company or Accumulated depreciation at 1 Jan. –7 –6 its subsidiaries. Depreciation for the period –1 –1 Accumulated depreciation at 31 Dec. –8 –7 Book value at 31 Dec. 6 4 4 DEPRECIATION ACCORDING TO PLAN AND VALUE ADJUSTMENTS Other capitalized expenditure €m 2006 2005 Acquisition cost at 1 Jan. 275 237 Depreciation according to plan Increases 112 38 Intangible rights 1 1 Decreases –24 –5 Other capitalized expenditure 31 29 Transfers between balance sheet items 5 5 Buildings 38 38 Acquisition cost at 31 Dec. 368 275 Machinery and equipment 276 284 Accumulated depreciation at 1 Jan. –136 –109 Other tangible assets 7 7 Accumulated depreciation on decreases and transfers 23 5 353 359 Depreciation for the period –31 –29 Value adjustments and their cancellations –4 –3 Value adjustments Accumulated depreciation at 31 Dec. –148 –136 Non-current assets 133 5 Book value at 31 Dec. 220 139 486 364

Advance payments 5 EXTRAORDINARY ITEMS Acquisition cost at 1 Jan. 32 67 Decreases –20 –31 €m 2006 2005 Transfers between balance sheet items –4 –4 Extraordinary income Book value at 31 Dec. 8 32 Group contributions 51 26 Gains on mergers 1 - 52 26

Extraordinary expenses Losses on mergers –14 –

38 26 During the period, Jämsänkosken Voima Oy, Kokemäenjoen Voima Oy and Tyrvään Voimaosakeyhtiö have been merged to the parent company.

UPM ANNUAL REPORT 2006

103 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Parent Company

8 TANGIBLE ASSETS 9 INVESTMENTS €m 2006 2005 €m 2006 2005 Land and water areas Holdings in Group companies Acquisition cost at 1 Jan. 492 486 Acquisition cost at 1 Jan. 4,744 3,967 Increases 5 7 Increases 27 772 Decreases –2 –1 Decreases –186 –21 Acquisition cost at 31 Dec. 495 492 Transfers between balance sheet items – 26 Revaluations at 1 Jan. 547 547 Acquisition cost at 31 Dec. 4,585 4,744 Revaluations at 31 Dec. 547 547 Accumulated depreciation at 1 Jan. –281 –281 Book value at 31 Dec. 1,042 1,039 Value adjustments and their cancellations –226 – Accumulated depreciation at 31 Dec. –507 –281 Buildings Revaluations at 1 Jan. 2 2 Acquisition cost at 1 Jan. 1,104 1 100 Reversal of revaluation 1.1.-31.12 –2 – Increases 27 8 Revaluations at 31 Dec. – 2 Decreases –75 –10 Book value at 31 Dec. 4,078 4,465 Transfers between balance sheet items 12 6 Acquisition cost at 31 Dec. 1,068 1,104 Receivables from Group companies Accumulated depreciation at 1 Jan. –538 –510 Acquisition cost at 1 Jan. 1,054 1,753 Accumulated depreciation on decreases and transfers 63 10 Increases 16 60 Depreciation for the period –38 –38 Decreases –85 –786 Value adjustments and their cancellations –32 – Transfers between balance sheet items – 27 Accumulated depreciation at 31 Dec. –545 –538 Book value at 31 Dec. 985 1,054 Book value at 31 Dec. 523 566 Holdings in participating interest companies Machinery and equipment Acquisition cost at 1 Jan. 551 574 Acquisition cost at 1 Jan. 5,660 5,672 Increases 12 5 Increases 175 69 Decreases –36 –23 Decreases –448 –119 Transfers between balance sheet items – –5 Transfers between balance sheet items 72 38 Acquisition cost at 31 Dec. 527 551 Acquisition cost at 31 Dec. 5,459 5,660 Revaluations at 1 Jan. 103 103 Accumulated depreciation at 1 Jan. –3,903 –3,732 Revaluations at 31 Dec. 103 103 Accumulated depreciation on decreases and transfers 414 115 Book value at 31 Dec. 630 654 Depreciation for the period –276 –284 Value adjustments and their cancellations –94 –2 Receivables from participating interest companies Accumulated depreciation at 31 Dec. –3,859 –3,903 Acquisition cost at 1 Jan. 4 11 Book value at 31 Dec. 1,600 1,757 Increases – 32 Transfers between balance sheet items –4 –39 Other tangible assets Book value at 31 Dec. – 4 Acquisition cost at 1 Jan. 172 169 Increases 2 3 Other shares and holdings Decreases –10 – Acquisition cost at 1 Jan. 120 242 Transfers between balance sheet items 3 – Increases – 1 Acquisition cost at 31 Dec. 167 172 Decreases –4 –123 Accumulated depreciation at 1 Jan. –120 –113 Acquisition cost at 31 Dec. 116 120 Accumulated depreciation on decreases and transfers 10 – Revaluations at 1 Jan. 61 61 Depreciation for the period –7 –7 Revaluations at 31 Dec. 61 61 Value adjustments and their cancellations –3 – Book value at 31 Dec. 177 181 Accumulated depreciation at 31 Dec. –120 –120 Book value at 31 Dec. 47 52 Other receivables Acquisition cost at 1 Jan. 24 47 Advance payments and construction in progress Decreases –21 –23 Acquisition cost at 1 Jan. 102 58 Transfers between balance sheet items 4 – Increases 84 89 Book value at 31 Dec. 7 24 Transfers between balance sheet items –88 –45 Book value at 31 Dec. 98 102 The principal subsidiaries are listed in the Consolidated Financial State- mets (Note 35).

UPM ANNUAL REPORT 2006 104 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Parent Company ACCOUNTS FOR 2006

10 CURRENT RECEIVABLES €m 2006 2005 M€ 2006 2005 Trade receivables 539 582 Receivables from Group companies Loan receivables 1,278 1,250 Trade receivables 478 431 Other receivables 44 54 Loan receivables 1,276 1,240 Prepayments and accrued income 94 56 Prepayments and accrued income 73 7 1,955 1,942 1,827 1,678

Main items included in current Receivables from participating interest companies prepayments and accrued income Trade receivables 7 6 Personnel expenses 2 9 Loans receivables 2 2 Interest income 17 17 Prepayments and accured income – 1 Currency derivatives 66 – 99 Income taxes – 18 Others 9 12 94 56

11 SHAREHOLDERS’ EQUITY Share Sharehold ers’ Share Share premium Revaluation Legal Retained equity, €m capital issue reserve reserve reserve earnings total

Balance sheet value, 1 Jan. 2005 891 1 695 554 187 3 420 5 748 Share options 12 –1 68 – – – 79 Treasury shares 1) –13 – 13 – – –140 –140 Dividends paid – – – – – –387 –387 Proﬁ t for the period – – – – – 436 436 Balance sheet value, 31 Dec. 2005 890 – 776 554 187 3 329 5 736

Revaluations – – – –2 – – –2 Dividends paid – – – – – –392 –392 Proﬁ t for the ﬁ nancial period – – – – – 388 388 Balance sheet value, 31 Dec. 2006 890 – 776 552 187 3 325 5 730

1) See notes to the consolidated accounts, note 27.

13 NON-CURRENT LIABILITIES €m 2006 2005 €m 2006 2005 Distributable funds at 31 Dec. Bonds 2,324 2,630 Retained earnings 2,937 2,893 Loans from fi nancial institutions 338 198 Profi t for the fi nancial period 388 436 Pension loans 205 391 Distributable funds at 31 Dec. 3,325 3,329 Other liabilities 165 182 3,032 3,401 12 PROVISIONS €m 2006 2005 Payables to Group companies Provisions for pensions 60 33 Other liabilities 31 31 Environmental provisions 12 15 31 31 Provisions for closures and restructurings 12 – Other provisions 4 3 Long-term loans and their repayment schedule 88 51 In 2007–2010 / 2006–2009 Bonds 398 676 Loans from fi nancial institutions 80 133 Pension loans 205 196 Payables to Group companies 31 31 714 1,036 In 2011 / 2010 or later Bonds 1,926 1 954 Loans from fi nancial institutions 258 65 Pension loans – 195 Other liabilities 134 151 2,318 2,365

Total at 31 Dec. 3,032 3,401

UPM ANNUAL REPORT 2006

105 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Parent Company

Bonds 15 CONTINGENT LIABILITIES Initial amount €m 2006 2005 Interest, % million 2006 2005 Mortgages 1) Fixed-rate As security against own debts 60 62 1997–2007 6.875 USD 215 163 182 1997–2027 7.450 USD 375 285 318 Guarantees 1999–2009 6.350 EUR 250 250 250 Guarantees for loans 2000–2030 3.550 JPY 10,000 64 72 On behalf of Group companies 1,049 1,109 2001–2006 0,962 JPY 2,000 - 14 On behalf of participating 12 18 2001–2007 6.875 USD 10 7 9 Other guarantees 2002–2007 0.869 JPY 2,000 13 14 On behalf of Group companies 87 92 2002–2012 6.125 EUR 600 600 600 On behalf of others 2 3 2002–2014 5.625 USD 500 380 424 2002–2017 6.625 GBP 250 372 365 Leasing commitments 2) 2003–2018 5.500 USD 250 190 212 Commitments for next year 2 4 2,324 2,460 Commitments for subsequent years 9 14

Floating-rate 2002–2008 4,538 EUR 39 39 39 1) 2002–2008 4,348 EUR 50 50 50 The mortgages given relate mainly to reborrowing of statutory employment pension contributions. 2002–2010 4,350 EUR 59 59 59 2002–2012 4,155 EUR 25 25 25 2) UPM-Kymmene Corporation has also leased certain power plants under long-term 2002–2012 4,748 EUR 11 11 11 agreements and uses the electrical power generated by these plants in its produc- 184 184 tion. The company has the right, but not the obligation, to purchase these power plants or shares therein. Leasing commitments are € 6 million in 2007 and sub- Bonds, total 2,508 2,644 sequently € 22 million up to 2011. UPM-Kymmene estimates that the market value – current portion –184 –14 of these agreements exceeds the above commitments. Bonds, long-term portion 2,324 2,630 Directors’ pension commitments The Managing Director’s agreed retirement age is 60 years. 14 CURRENT LIABILITIES €m 2006 2005 Derivate contracts Bonds 184 14 Interest rate derivatives are included under interest expenses during the Loans from fi nancial institutions 2 12 Pension loans 167 71 period of validity of the contracts. Currency derivates are included in Advances received 7 2 the fi nancial result at market value except for those relating to net cur- Trade payables 292 268 rency fl ows, which are entered in the profi t and loss account as the cash Other liabilities 917 1,357 fl ow is credited or debied. The outcomes of other derivates are entered Accruals and deferred income 362 342 in the profi t and loss account as the cash fl ow is credited or debited. Fair 1 931 2,066 values and notional values are disclosed in the consolidated Financial Statements (Note 34). Main items included in current accruals and deferred income Emission allowances Personnel expenses 86 82 Interest expenses 17 17 The actual tonnage of emissions was less than the emission allowances Income tax 5 – received as of 31 December 2006, so the corresponding off-balance- Currency derivatives 244 231 sheet asset was € 1 million (€ 3 million). Others 10 12 362 342

Payables to Group companies Advances received 3 – Trade payables 52 50 Other liabilities 630 608 Accruals and deferred income 119 122 804 780

Payables to participating interest companies Trade payables 22 17 22 17

UPM ANNUAL REPORT 2006 106 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Information on shares UPM Information on shares

Changes in number of shares and share capital, 1 January 2002 – 31 December 2006

Number of Share shares capital, €

2001 Share capital at 31 Dec. 2001 259,893,223 441,818,479.10

2002 Own shares declared void –1,175,398 –1,998,176.60 Exchanged under convertible bond issue (1994) 1,398,150 2,376,855.00 Share capital at 31 Dec. 2002 260,115,975 442,197,157.50

2003 Exchanged under convertible bond issue (1994) 1,673,490 2,844,933.00 Bonus share issue (1:1) 261,789,465 445,042,090.50 Share capital at 31 Dec. 2003 523,578,930 890,084,181.00

2004 Options exercised 741,322 1,260,247.40 Share capital at 31 Dec. 2004 524,320,252 891,344,428.40

2005 Options exercised 6,934,878 11,789,292.60 Own shares declared void –8,000,000 –13,600,000.00 Share capital at 31 Dec. 2005 523,255,130 889,533,721.00

2006 Options exercised 4,300 7,310,00 Share capital 31 Dec. 2006 523,259,430 889,541,031,00

Stock exchange trading sponding ﬁ gures for 2005 were USD 338 million and 16.5 million The company’s shares are listed on the Helsinki and New York stock shares.The company’s shares are also traded on SEAQ International exchanges. in London, and in Germany on the Freier Markt in Frankfurt, Berlin A total of 876.0 million UPM-Kymmene Corporation shares and Munich. were traded on the Helsinki Stock Exchange in 2006 (697.2 million in 2005). This represented 167.4% (133.6%) of the total number of Directors’ interest at 31 December 2006 shares. The highest quotation was € 20.91 in March and the lowest € At the end of the year, the members of the Board of Directors and the 15.36 in June. The total value of shares traded was € 16,021 million President and CEO owned a total of 801,382 shares UPM-Kymmene in 2006 (€ 11,358 million in 2005). During the year, 10.0 million Corporation shares (1,015,242 in 2005), including those held by 2002D share options were traded for € 27.3 million (1.1 million and underage children or by organisations or foundations of which the € 1.7 million) and 3.8 million 2002E options for € 51.9 million (1.5 holder has control. These represent 0.15% of the share capital million and € 13.6 million). A total of 0.2 million share options (0.19%) and 0.15% of the voting rights (0.19%). At the end of the 2005F were traded for € 0.9 million as of the beginning of the listing year, President and CEO Jussi Pesonen owned 170,000 share op- of 1 October 2006. tions. Exercise of these options would increase the number of the Trading in the company’s shares on the New York Stock companys’s shares by 290,000, which at 31 December 2006 would Exchange was USD 310 million (13.7 million shares). The corre- have represented 0.06% of the company’s share capital and voting rights.

UPM ANNUAL REPORT 2006

107 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM Information on shares

Biggest registered shareholders at 31 December 2006

Shares at % of % of 31 Dec. 2006 shares votes

Holzhey/Bischoff group (representing 10 shareholders) 9,647,704 1.84 1.84

IImarinen Mutual Pension Insurance Company 8,803,144 1.68 1.68

Gustaf Serlachius (representing 5 shareholders) 6,309,811 1.21 1.21

Svenska litteratursällskapet i Finland 3,544,070 0.68 0.68

Varma Mutual Pension Insurance Company 3,499,540 0.67 0.67

The State Pension Fund 3,150,000 0.60 0.60

Etera Mutual Pension Insurance Company 2,122,700 0.41 0.41

Mutual Insurance Company Pension Fennia 2,027,316 0.39 0.39

Kymin Osakeyhtiön 100-vuotissäätiö 1,885,482 0.36 0.36

The Finnish Cultural Foundation 1,743,816 0.33 0.33

Nominees & registered foreign owners 361,054,994 69.00 69.00 (including Holzhey/Bischoff) (370,702,698) (70.84) (70.84)

Others 119,470,853 22.83 22.83

Total 523,259,430 100.00 100.00

The company has received following notiﬁ cations from shareholders: On 15 December 2006, the Capital Group Companies Inc. held 51,660,753 shares representing 9.78 per cent of share capital, of which shares it held voting rights representing 7.86 per cent of the share capital of UPM-Kymmene Corporation. On 7 March 2005, the Franklin Templeton Group and its afﬁ liated investment advisers of Franklin Resources held 10.11% of the voting rights of UPM- Kymmene Corporation.

UPM ANNUAL REPORT 2006 108 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Information on shares UPM

Share price in 2006 Market capitalization Monthly average share price and shares traded 1–12/2006

` M% % % of all shares 22 22 10,000 30 30

20 20 8,000 25 25 20 20 18 18 6,000 15 15 16 16 4,000 10 10 14 2,000 14 5 5

12 12 0 0 0 1 2 3 4 5 6 7 8 9 10 11 12 02 03 04 05 06 1 2 3 4 5 6 7 8 9 101112

Monthly average share price, % Shares traded, %

Share price 2002–2006 Earnings and dividend Shareholders’ equity per share per share

` ` ` 25 25 2.5 15

20 20 2.0 12

15 15 1.5 9

10 10 1.0 6

5 5 0.5 3

0 0 0.0 0 2002 2003 2004 2005 2006 02 03 04 05 06 02 03 04 05 06

UPM share price at end of month Earnings per share MSCI (Morgan Stanley Capital International) Dividend per share (2006: proposal) Forest Products & Paper World Index

Shares traded on Helsinki Stock Exchange 2002–2006 Dividend per share (`) and dividend to earnings ratio (%)

M` % ` % 3,500 30 1.25 150

2,800 25 1.00 120

2,100 20 0.75 90

1,400 15 0.50 60

700 10 0.25 30

0 5 000 0 2002 2003 2004 2005 2006 02 03 04 05 06

Monthly trading in UPM shares on Helsinki Stock Exchange, `m Dividend per share (2006: proposal) Trading in UPM shares as % of total number of shares Dividend to earnings ratio, %

UPM ANNUAL REPORT 2006

109 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM Information on shares

Distribution of shareholders at 31 December 2006

Number of % of Number of % of Size of shareholding shareholders shareholders shares, million shares

1 – 100 13,675 21.33 0.8 0.2 101 – 1,000 35,866 55.95 14.8 2.8 1,001 – 10,000 13,218 20.62 36.9 7.0 10,001 – 100,000 1,204 1.88 29.9 5.7 100,001 – 139 0.22 74.0 14.2 Total 64,102 100.00 156.4 29.9

Nominee-registered 366.7 70.1 Not registered as book entry units 0.2 0.0 Total 523.3 100.0

Shareholder breakdown by sector at 31 December, %

2006 2005 2004 2003 2002

Companies 1,8 2,8 3,1 4,4 2,5 Financial institutions and insurance companies 2,1 3,5 2,8 3,2 4,8 Public bodies 5,2 5,8 6,4 6,9 6,0 Non-proﬁ tmaking organizations 6,1 6,7 7,0 6,8 6,3 Households 13,5 15,4 15,6 15,3 13,2 Non-Finnish nationals 71,3 65,8 65,1 63,4 67,2 Total 100,0 100,0 100,0 100,0 100,0

UPM’s share option programmes

Redemption price per share Number of Number of at date of issue at 31.12.2006 Options exercised Options options shares €* €* Subsciption period 2006

2002 D 3,800,000 7,600,000 21.95 18.95 1.4.2004–30.4.2007 – 2002 E 3,800,000 7,600,000 14.27 12.02 1.4.2005–30.4.2008 2,150 2005 F 3,000,000 3,000,000 18.23 16.73 1.10.2006–31.10.2008 –

* corrected for 2003 bonus issue

UPM ANNUAL REPORT 2006 110 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Key indicators ACCOUNTS FOR 2006 Key ﬁ gures 1997–2006

Adjusted share-related indicators 1997–2006 1) 6)

2006 2005 2004 2003 2002 2001 2000 1999 1998 1997

Earnings per share, € (diluted 2006: 0.65) 0.65 0.50 1.76 0.60 0.96 1.93 2.38 1.88 1.91 1.31 Shareholders’ equity per share, € 13.90 14.01 14.46 13.36 13.85 13.09 11.72 10.23 9.48 8.20 Dividend per share, € 4) 3) 0.75 0.75 0.75 0.75 0.75 0.75 0.75 1.08 0.55 0.46 Dividend to earnings ratio, % 4) 115.4 150.0 42.6 125.0 78.1 39.0 31.4 57.0 28.6 35.4 Effective dividend yield, % 4) 3.9 4.5 4.6 5.0 4.9 4.0 4.1 5.4 4.6 5.0 P/E ratio 29.4 33.1 8.9 24.8 15.9 9.7 7.7 10.6 6.3 7.0 Cash ﬂ ow from operations per share, € 2.32 1.63 1.90 2.40 2.73 3.32 3.19 2.39 – – Dividend distribution, €m 4) 3) 392 392 393 393 390 388 371 557 290 249 Share price at 31 Dec., € 19.12 16.56 16.36 15.12 15.30 18.63 18.28 20.00 11.94 9.17 Market capitalization, €m 10,005 8,665 8,578 7,917 7,960 9,681 9,502 10,663 6,630 4,957 Shares traded, €m 5) 16,021 11,358 9,731 9,11710,827 7,645 6,157 4,834 3,374 3,125 Shares traded (1,000s) 876,023 697,227 625,950 645,988 597,078 443,240 400,822 316,874 294,070 302,108 Shares traded, % of all shares 167.4 133.6 119.5 123.4 115.1 88.1 77.2 59.0 53.4 56.2 Lowest quotation, € 15.36 15.05 14.44 11.05 12.61 14.00 12.46 11.00 8.41 7.91 Highest quotation, € 20.91 18.15 17.13 17.10 22.25 19.93 22.45 21.25 14.63 12.82 Average quotation for the period, € 18.29 16.29 15.55 14.11 18.13 17.24 15.36 15.25 11.47 10.34 Number of shares, average (1,000s) 523,220 522,029 523,641 523,130 518,935 495,784 513,634 528,035 539,445 537,775 Number of shares at end of period (1,000s) 523,259 523,093 524,450 523,579 520,232 517,436 501,295 518,062 529,688 540,778

Share prices and shares traded are based on trading on the Helsinki Stock Exchange.

Notes to the tables on pages 111–112 1) Figures for 2002–2006 are reported in accordance with International Financial Reporting Standards (IFRS) and for 1997–2001 in accordance with Finnish Accounting Standards (FAS). More information on the effects of the transition on the balance sheet and income statement is given in the bulletin released on 24.3.2004. The bulletin is available on UPM’s Internet pages at www.upm-kymmene.com.

2) Includes the Rauma engineering group and Simpele’s board and packaging unit.

3) Proposal.

4) The 1999 ﬁ gure includes an extra dividend payment of € 0.45.

5) Trading on the Helsinki Stock Exchange. Own shares bought by the company are included in shares traded.

6) Figures reported in Finnish markka for the years 1997–1998 have been converted into euros using the ofﬁ cial conversion rate, 1 euro = 5.94573 markka.

UPM ANNUAL REPORT 2006

111 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Key indicators

Financial indicators 1997–2006 1) 6)

€m 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997

Sales 10,022 9,348 9,820 9,787 10,417 9,918 9,583 8,261 8,365 7,776 Sales, businesses disposed of 2) – – – – –––––702 Sales, total 10,022 9,348 9,820 9,787 10,417 9,918 9,583 8,261 8,365 8,478 EBITDA 1,678 1,428 1,435 1,442 1,957 2,055 2,081 1,576 1,629 1,374 % of sales 16.7 15.3 14.6 14.7 18.8 20.7 21.7 19.1 19.5 16.2 Operating profi t, excluding non-recurring items 725 558 470 429 963 1,394 1,560 976 1,067 877 % of sales 7.2 6.0 4.8 4.4 9.2 14.1 16.3 11.8 12.8 10.3 Operating profi t 536 318 685 368 861 1,614 1,860 1,573 1,620 1,242 % of sales 5.3 3.4 7.0 3.8 8.3 16.3 19.4 19.0 19.4 14.7 Profi t before tax 367 257 556 425 710 1,333 1,859 1,398 1,437 937 % of sales 3.7 2.7 5.7 4.3 6.8 13.4 19.4 16.9 17.2 11.1 Profi t for the period 338 261 920 312 500 955 1,366 994 1,029 703 % of sales 3.4 2.8 9.4 3.2 4.8 9.6 14.3 12.0 12.3 8.3 Exports from Finland and foreign operations 9,102 8,397 8,791 8,697 9,475 8,948 8,563 7,165 7,219 6,522 Exports from Finland 4,644 4,006 4,301 4,539 4,759 4,635 5,216 4,873 4,571 4,152

Non-current assets 11,355 12,321 12,802 13,509 14,336 12,874 10,163 8,741 8,802 8,530 Inventories 1,255 1,256 1,138 1,144 1,224 1,289 1,184 1,008 1,054 1,047 Other current assets 1,859 1,964 1,887 1,938 2,064 2,368 1,766 1,831 1,593 1,827 Assets, total 14,469 15,541 15,827 16,591 17,624 16,431 13,113 11,580 11,449 11,404

Shareholders’ equity and minority 7,289 7,348 7,612 7029 7,237 6,838 6,175 5,558 5,335 4,565 Non-current liabilities 4,770 5,845 5,943 7,322 8,104 5,992 4,564 3,830 3,731 3,872 Current liabilities 2,410 2,348 2,272 2,240 2,283 3,601 2,374 2,192 2,383 2,967 Equity and liabilities, total 14,469 15,541 15,827 16,591 17,624 16,431 13,113 11,580 11,449 11,404

Capital employed at year end 11,634 12,650 12,953 12,811 13,689 13,519 10,448 9,004 9,319 9,371 Return on equity, % 4.6 3.5 12.6 4.4 6.8 15.5 21.9 19.2 21.8 16.6 Return on capital employed, % 4.7 3.4 6.0 5.1 7.4 15.6 20.2 17.6 18.0 13.4 Equity to assets ratio, %, % 50.4 47.3 48.2 42.5 41.1 41.5 46.0 47.0 45.3 40.1 Gearing ratio, % 56 66 61 69 71 89 69 55 74 93 Net interest-bearing liabilities 4,048 4,836 4,617 4,874 5,135 6,041 4,071 2,940 3,739 4,252 Gross capital expenditure 699 749 686 720 620 3,850 2,175 609 696 1,418 % of sales 7.0 8.0 7.0 7.4 6.0 38.8 22.7 7.4 8.3 16.7 Gross capital expenditure excluding acquisitions 631 705 645 703 568 827 571 548 539 578 % of sales 6.3 7.5 6.6 7.2 5.5 8.3 6.0 6.6 6.4 6.8 Personnel at year end 28,704 31,522 33,433 34,482 35,579 36,298 32,755 30,963 32,351 33,814

Production

Papers, total (1,000 t) 11,151 10,223 10,886 10,232 10,046 8,298 8,285 7,494 7,499 7,198 Plywood (1,000 m3) 955 916 969 936 905 786 793 729 698 710 Sawn timber (1,000 m3) 2,357 2,147 2,409 2,408 2,201 2,035 2,117 1,911 2,104 2,050 Pulp (1,000 t) 2,095 1,840 2,243 2,027 2,102 2,038 1,965 1,846 1,913 1,963

Formulaes for calculating indicators are given on page 114.

UPM ANNUAL REPORT 2006 112 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Key indicators ACCOUNTS FOR 2006

Quarterly ﬁ gures 2005–2006 €m Q4/06 Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05 Q1–Q4 /06 Q1–Q4 /05 Q1–Q4 /04

Sales by segment Magazine Papers 905 861 817 771 928 726 697 743 3,354 3,094 3,308 Newsprint 380 360 351 345 379 296 320 313 1,436 1,308 1,304 Fine and Speciality Papers 667 626 627 640 626 574 495 539 2,560 2,234 2,286 Converting 323 312 316 323 297 343 346 361 1,274 1,347 1,414 Wood Products 287 310 378 346 331 302 343 314 1,321 1,290 1,492 Other Operations 162 143 126 140 133 111 136 137 571 517 538 Internal sales –141 –117 –131 –105 –120 –109 –84 –129 –494 –442 –522 Sales, total 2,583 2,495 2,484 2,460 2,574 2,243 2,253 2,278 10,022 9,348 9,820

Operating profi t by segment Magazine Papers 75 –62 –85 16 –99 35 –43 31 –56 –76 –67 Newsprint 39 50 34 25 20 27 12 18 148 77 7 Fine and Speciality Papers 44 50 –13 27 20 36 –17 46 108 85 171 Converting 16 12 17 19 8 36 6 20 64 70 71 Wood Products 14 104 22 4 –23 –2 14 17 144 6 111 Other Operations 50 1 –37 53 2 33 40 40 67 115 334 Share of results of associated companies and joint ventures 9 18 8 26 14 15 –19 31 61 41 58 Operating profi t (loss), total 247 173 –54 170 –58 180 –7 203 536 318 685 % of sales 9.6 6.9 –2.2 6.9 –2.3 8.0 –0.3 8.9 5.3 3.4 7.0 Gains on available-for-sale investments, net –2 – – – – – 1 89 –2 90 1 Exchange rate and fair value gains and losses 4 –3 5 12 – 14 –15 –3 18 –4 48 Interest and other fi nance costs, net –46 –41 –52 –46 –33 –45 –29 –40 –185 –147 –178 Profi t (loss) before tax 203 129 –101 136 –91 149 –50 249 367 257 556 Income taxes –8 18 –2 –37 14 –38 72 –44 –29 4 364 Profi t (loss) for the period 195 147 –103 99 –77 111 22 205 338 261 920

Basic earnings per share, € 0.37 0.29 –0.20 0.19 –0.15 0.21 0.05 0.39 0.65 0.50 1.76 Diluted earnings per share, € 0.38 0.28 –0.20 0.19 –0.15 0.21 0.05 0.39 0.65 0.50 1.75 Average number of shares basic (1,000) 523,258 523,256 523,256 523,108 523,105 523,115 521,617 520,281 523,220 522,029 523,641 Average number of shares diluted (1,000) 526,416 525,938 525,874 525,936 524,703 524,710 522,131 523,065 526,041 523,652 526,247

Non-recurring items in operating profi t Magazine Papers 6 –126 –133 – –156 –17 – – –253 –173 –104 Newsprint –2 – –5 – –5 – – – –7 –5 2 Fine and Speciality papers –3 –2 –36 – –8 – – – –41 –8 3 Converting – – – – 1 25 – – – 26 2 Wood Products – 93 – –10 –32 – – – 83 –32 83 Other Operations –6 –1 41 –5 –57 – – – 29 –57 219 Share of results of associated companies and joint ventures –––––3––12– 910 Non-recurring items in operating profi t, total –5 –36 –133 –15 –260 8 – 12 –189 –240 215 Non-recurring items reported after operating profi t 6–––9––89698– Non-recurring items reported in taxes 35 20 –29 – –16 – 58 – 26 42 519 Non-recurring items, total 36 –16 –162 –15 –267 8 58 101 –157 –100 734

Operating proﬁ t, excl. non-recurring items 252 209 79 185 202 172 –7 191 725 558 470 % of sales 9.8 8.4 3.2 7.5 7.8 7.7 –0.3 8.4 7.2 6.0 4.8 Proﬁ t before tax, excl. non-recurring items 202 165 32 151 160 141 –50 148 550 399 341 % of sales 7.8 6.6 1.3 6.1 6.2 6.3 –2.2 6.5 5.5 4.3 3.5 Earnings per share, excl. non-recurring items, € 0.30 0.25 0.04 0.21 0.22 0.19 –0.07 0.20 0.80 0.54 0.49 Return on equity, excl. non-recurring items, % 8.7 7.2 1.1 6.1 5.9 5.3 neg. 5.6 5.7 3.8 3.4 Return on capital employed, excl. non-recurring items, % 8.7 7.1 2.7 6.4 6.5 6.0 neg. 6.1 6.2 4.5 4.3

UPM ANNUAL REPORT 2006

113 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 ACCOUNTS FOR 2006 Key indicators Calculation of key indicators

Formulae for calculation Formulae for calculation of financial indicators of adjusted share-related indicators

Return on equity, %: Earnings per share: Profi t before tax 2) – income taxes x 100 Profi t for the period attributable to equity holders Shareholders’ equity (average) of parent company 3) Adjusted average number of shares during the pe- Return on capital employed, %: riod excluding own shares Profi t before tax 2) + interest expenses and other fi nancial expenses x 100 Shareholders’ equity per share: Balance sheet total – non-interest-bearing Shareholders’ equity attributable to equity holders liabilities (average) of parent company Adjusted number of shares at end of period Equity to assets ratio, %: Shareholders’ equity – own shares 1) x 100 Dividend per share: Balance sheet total – advances received Dividend distribution – own shares 1) Adjusted number of shares at end of period

Net interest-bearing liabilities: Dividend to earnings ratio, %: Interest-bearing liabilities – interest-bearing assets Dividend per share – listed shares x 100 Earnings per share

Gearing ratio, %: Effective dividend yield, %: Net interest-bearing liabilities x 100 Adjusted dividend per share Shareholders’ equity – own shares 1) x 100 Adjusted share price at 31.12

EBITDA: P/E ratio: Operating profi t + depreciation + amortization Adjusted share price at 31.12 of goodwill + impairment +/– change in value of biological assets +/– share of results of associated Earnings per share companies +/– non-recurring items Market capitalization: Return on capital employed (ROCE) for the divisions Total number of shares x striking price at end of (operating capi tal), %: period Operating profi t x 100 Non-current assets + stocks + trade Adjusted share price at end of period: receivables – trade payables (average) Share price at end of period Share issue coeffi cient

1) Own shares were shown in the balance sheet in 1998– Adjusted average share price: 2001. Total value of shares traded 2) 1997–2001: Proﬁ t/loss before extraordinary items and Adjusted number of shares traded during period tax. Cash from operating activities per share: 3) 1997–2001: Proﬁ t/loss before extraordinary items and tax – income tax +/– minority interest. Cash from operating activities Adjusted average number of shares during the period excluding own shares

Key exchange rates for the euro at end of period 31.12.2006 30.9.2006 30.6.2006 31.3.2006 31.12.2005 30.9.2005 30.6.2005 31.3.2005

USD 1.3170 1.2660 1.2713 1.2104 1.1797 1.2042 1.2092 1.2964 CAD 1.5281 1.4136 1.4132 1.4084 1.3725 1.4063 1.4900 1.5737 JPY 156.93 149.34 145.75 142.42 138.90 136.25 133.95 138.44 GBP 0.6715 0.6777 0.6921 0.6964 0.6853 0.6820 0.6742 0.6885 SEK 9.0404 9.2797 9.2385 9.4315 9.3885 9.3267 9.4259 9.1430

UPM ANNUAL REPORT 2006 114 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Parent Company ACCOUNTS FOR 2006 Auditor’s report

To the shareholders of UPM-Kymmene Corporation

We have audited the accounting records, the report of the Board of Consolidated fi nancial statements Directors, the fi nancial statements and the administration of UPM- In our opinion the consolidated fi nancial statements, prepared in Kymmene Corporation for the period 1 January – 31 December accordance with International Financial Reporting Standards as 2006. The Board of Directors and the Managing Director have pre- adopted by the EU, give a true and fair view, as defi ned in those pared the consolidated fi nancial statements, prepared in accordance standards and in the Finnish Accounting Act, of the consolidated with International Financial Reporting Standards as adopted by the results of operations as well as of the fi nancial position. EU, as well as the report of the Board of Directors and the parent company’s fi nancial statements, prepared in accordance with prevail- Parent company’s fi nancial statements report of the Board of ing regulations in Finland, containing the parent company’s balance Directors and administration sheet, income statement, cash fl ow statement and notes to the fi nan- In our opinion the parent company’s fi nancial statements have been cial statements. Based on our audit, we express an opinion on the prepared in accordance with the Finnish Accounting Act and other consolidated fi nancial statements, as well as on the report of the applicable Finnish rules and regulations. The parent company’s fi nan- Board of Directors, the parent company’s fi nancial statements and cial statements give a true and fair view of the parent company’s the administration. result of operations and of the fi nancial position. We conducted our audit in accordance with Finnish Standards on In our opinion the report of the Board of Directors has been pre- Auditing. Those standards require that we perform the audit to obtain pared in accordance with the Finnish Accounting Act and other reasonable assurance about whether the report of the Board of Direc- applicable Finnish rules and regulations. The report of the Board of tors and the fi nancial statements are free of material misstatement. Directors is consistent with the consolidated fi nancial statements and An audit includes examining on a test basis evidence supporting the the parent company’s fi nancial statements and gives a true and fair amounts and disclosures in the report and in the fi nancial statements, view, as defi ned in the Finnish Accounting Act, of the result of oper- assessing the accounting principles used and signifi cant estimates ations and of the fi nancial position. made by the management, as well as evaluating the overall fi nancial The consolidated fi nancial statements and the parent company’s statement presentation. The purpose of our audit of the administra- fi nancial statements can be adopted and the members of the Board of tion is to examine whether the members of the Board of Directors Directors and the Managing Director of the parent company can be and the Managing Director of the parent company have complied discharged from liability for the period audited by us. The proposal with the rules of the Companies Act. by the Board of Directors regarding the disposal of distributable funds is in compliance with the Companies Act.

Helsinki 23 February 2007

PricewaterhouseCoopers Oy Authorised Public Accountants

Merja Lindh Authorised Public Accountant

UPM ANNUAL REPORT 2006

115 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ corporate governance

Corporate Governance

UPM-Kymmene Corporation complies with General meeting of ciation. The Board of Directors establishes the recommendations of the Helsinki Stock shareholders the principles of the strategy, organisation, Exchange, the Central Chamber of Commerce The Annual General Meeting is held annually accounting and fi nancial control of the com- and the Confederation of Finnish Industries by the end of June. The general meeting of pany, and appoints the President and CEO, concerning the governance of publicly listed shareholders is the company’s supreme deci- who acts in accordance with the orders and companies. As a company listed on the New sion-making body. Under the Companies Act, instructions of the Board of Directors. The York Stock Exchange (NYSE), UPM- the following issues, among others, are decid- Board of Directors’ other duties include: Kymmene also complies with the Sarbanes- ed upon at a general meeting of shareholders: Oxley (SOX) Act and the NYSE’s regulations • defi ning the company’s dividend policy and for foreign companies insofar as Finnish legis- • amendment of the Articles of Association making a proposal to the general meeting of lation allows. The Board of Directors has • adoption of the accounts shareholders for the annual payment of div- adopted corporate governance guidelines for • the payment of dividend idends the company. They are available on UPM’s • the granting of freedom from liability to the • establishment and evaluation of the strategic website www.upm-kymmene.com and can President and CEO and the Board of Direc- direction of the company also be obtained in print by any shareholder tors • approving the company’s plans of operation who requests them. • the procurement and disposal of treasury and budget annually There are no signifi cant ways in which the shares • establishment of annual ranges and/or indi- corporate governance practices adopted by the • share option programmes vidual limits for capital expenditures, in- company differ from those laid down by the • election of members of the Board of Direc- vestments and divestitures and financial NYSE for companies in the United States. The tors and their fees commitments not to be exceeded without exception is that, under Finnish regulations, • election of the company’s auditors and their Board approval the Human Resources Committee, and Nomi- fees. • appointing the members of the Executive nating and Corporate Governance Committee, Team based on the proposal by the Human may include non-independent members of the A shareholder is entitled to have a matter that Resources Committee Board of Directors. Also, according to the is specifi ed in the Companies Act as a subject • scrutinising the annual fi nancial statements Finnish regulations the Annual General Meet- to be decided upon by the general meeting of and the Report of the Board of Directors ing, not the Audit Committee, elects the audi- shareholders be put before a general meeting, • setting up committees and adopting charters tors and decides on the remuneration to be provided that he/she requests this in writing setting forth the purposes, goals and respon- paid to the auditors. Pursuant to the provisions from the Board of Directors in good time so sibilities of the committees of Finland’s Companies Act and UPM’s Arti- that the matter can be included in the sum- • assessing the performance of management. cles of Association, the company’s control and mons to the meeting. governance is divided among the shareholders The right to attend a general meeting of The Board of Directors makes an annual evalu- represented at the annual general meeting of shareholders shall apply to any shareholder ation of its performance and working methods. shareholders, the Board of Directors and the who is registered as a shareholder of the com- President and CEO. The President and CEO is pany ten days prior to the meeting. Composition of the Board of assisted by the company’s Executive Team. Directors The Annual General Meeting elects at least Board of Directors fi ve but not more than 12 members to sit on the Board of Directors. The Annual General Duties of the Board of Directors Meeting held on 22 March 2006 elected ten The Board of Directors is responsible for the members to the Board of Directors. Members governance of the company and for the prop- of the Board of Directors are elected for a er organisation of its activities in accordance term of one year that begins at the end of the with the legislation and the Articles of Asso- general meeting of shareholders at which they

116 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ corporate governance

are elected and ends at the conclusion of the The Board of Directors has determined President and CEO next Annual General Meeting. Michael C. Bottenheim and Wendy E. Lane to The Board of Directors elects a President Members of the Board of Directors report be ”audit committee fi nancial experts” under and CEO for the company in accordance to the Board of Directors all matters that may SOX regulations. The Audit Committee works with the Companies Act. The President and be signifi cant with respect to the assessment in line with pre-approval policy, according to CEO is respon sible for the day-to-day man- of their competence and independent status. which it must approve auditing fees and fees agement of the company’s affairs. The Presi- The Board has determined all of the Board for other services rendered by public account- dent and CEO ensures that the company’s members to be independent as defi ned in the ants. Those represented at the committee’s book-keeping conforms with the law and Finnish rules and regulations as well as the meetings also include the company’s external that the company’s fi nancial administration New York Stock Exchange’s listing standards auditor, the head of internal auditing, the and management is reliably organised. Meas- with the exception of Georg Holzhey who President and CEO, the Chief Financial Of- ures that are not within the ordinary course held a position in the company until the end fi cer, the Senior Vice President, Group Ac- of the company’s business may be taken by of April 2004. A member of the Board of Di- counting and Reporting, and other manage- the President and CEO only if approved by rectors is not independent of the company if, ment represen tatives as and when necessary. the Board of Directors, unless the time re- amongst other reasons, he or she has had an The Audit Committee met 6 times during the quired to obtain such approval would cause employment relationship with or held a posi- year. the company to suffer a substantial disad- tion in the company during the last three years Matters pertaining to the appointment, as- vantage. In the latter case, the Board of Di- prior to becoming a member of the Board. sessment, salaries, fees and other remunera- rectors must be informed as soon as possible The Board of Directors elects from among tions or benefi ts of senior management are of the measures taken. its members a Chairman and two Vice Chair- handled by the Human Resources Committee, A Service Contract has been drawn up for men for a term of one year. The Board of Di- which comprised Berndt Brunow (Chairman) the company’s President and CEO. The Board rectors has a quorum when more than half of and members Georg Holzhey and Françoise of Directors prepares a written assessment of its members are present and one of them is Sampermans. The Human Resources Com- the work of the President and CEO once a either the Chairman or a Vice Chairman. mittee met 7 times during the year. year. The Board of Directors may consult exter- Meetings of the aforementioned commit- nal experts. tees may be attended by all members of the The Board of Directors met 11 times dur- Board of Directors. The decisions on propos- ing 2006. On average, the members attended als made by these committees are made by Executive Team and other 99% of the meetings. the Board of Directors. management groups The Board of Directors has also appointed Committees of the Board of from among its members a Nominating and The Executive Team assists the President and Directors Corporate Governance Committee, which in CEO in running the company. It prepares mat- The Board of Directors has set up committees 2006 comprised Jorma Ollila (Chairman) ters that are to be put before the Board of Di- composed of its members and has elected and members Karl Grotenfelt and Georg rectors for decision-making. Examples of such chairmen for them. It has also adopted char- Holzhey. The tasks of the committee include matters include the Group’s strategies, budgets ters for the committees, which are available preparing nominations for membership of and policies, as well as signifi cant investments, on the company’s website www.upm- the Board of Directors for consideration by acquisitions and divestitures. The Executive kymmene.com and can also be obtained in the general meeting of shareholders and re- Team also handles matters relating to report- print by any shareholder who requests them. viewing the corporate governance of the ing, external and internal communication, The Audit Committee was chaired by company. The Nominating and Corporate human resources development, employee Michael C. Bottenheim and its members were Governance Committee held seven meetings compensation and the management of investor Wendy E. Lane and Ursula Ranin. The mem- during the year. relations. The members of the Executive Team bers of the committee are required to have ad- are the President and CEO, the presidents of equate knowledge of accounting. The commit- Fees of the Board of Directors the business divisions and the executive vice tee assists the Board of Directors in scrutinis- In accordance with the decision made by the presidents responsible for the corporate func- ing: 2006 Annual General Meeting, the Chairman tions. of the Board of Directors received a fee of € The divisions have their own management • the contents of the company’s annual fi nan- 160,000 for the year, the Vice Chairmen of groups, the purpose of which is to assist the cial statements the Board of Directors and the Chairman of presidents of their respective divisions. In ad- • the company’s internal control and risk the Audit Committee a fee of € 110,000, and dition, there are also local management groups management the members of the Board of Directors a fee in which the company’s employees are repre- • the company’s internal auditing of € 85,000. The compensation and share- sented. • the competence of external auditors, their holding of each of the Board members is independent status and their work specifi ed in the Notes to the Financial State- • compliance with legislation and regulations ments on page 81. within the company.

UPM ANNUAL REPORT 2006 117 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ corporate governance

Shares and options held by the members of the Executive Team, 31 December 2006

Options Name Shares DEF

Jussi Pesonen 20,014 50,000 70,000 50,000 Harald Finne 350 – 16,900 21,500 Pirkko Harrela 5,770 13,200 37,000 21,500 Pauli Hänninen 1,460 13,000 – 21,500 Matti Lievonen 1,000 18,000 37,000 21,500 Matti J. Lindahl – 33,000 37,000 21,500 Heikki Malinen – 13,200 22,000 21,500 Jyrki Ovaska 3,300 33,000 37,000 21,500 Heikki Pikkarainen 8,000 – – 21,500 Jyrki Salo 6,100 – – 21,500 Riitta Savonlahti – – 35,000 21,500 Hans Sohlström 3,492 – – 21,500 Markku Tynkkynen 3,600 33,000 37,000 21,500 Hartmut Wurster – – 24,000 21,500 Total 53,086 206,740 352,900 329,500

Share ownership also includes shares held by under-age children and by organizations or foundations of which the person has control.

Reward schemes The salaries, fees and other benefi ts paid to isation of its business activities. The holdings Under the rules of the short-term incentive the President and CEO and the members of the of the primary insiders are public information scheme for senior management, an amount Executive Team are shown in the Notes to the and are available in the Finnish Central Secu- equivalent to up to 18 months’ salary may be Financial Statements on page 82. rities Depositary and on the company’s web- paid to the CEO, and an amount equivalent to site. The company sets closed window, when up to 12 months’ salary to the other members Insider guidelines trading is not allowed, applicable to perma- of the Executive Team. The amount is based The Board of Directors has adopted an insider nent insiders. These are the four-week periods on the earnings per share / return on capital policy for the Group, which sets up rules gov- preceding and including the disclosure date employed matrix, customer satisfaction, erning the insiders of the company. It is the of the annual or quarterly results of the com- achievement of personal targets, and compar- policy of the company to comply with the pany. In 2006 the closed windows were 1 Jan- ison with competitors. securities laws and regulations applicable to uary - 1 February (relating to the 2005 fi nan- The company’s long-term incentive pro- the company including i.a. the Insider Guide- cial review), and 1–26 April, 1–28 July and 1 grammes concern shares and share options. lines of the Helsinki Stock Exchange, the October - 1 November (relating to the 2005 Under these schemes, for 2006, the Board of Central Chamber of Commerce and the Con- interim reports). In 2007 the corresponding Directors decided in February 2007 to award federation of Finnish Industries published on periods are 4 January - 1 February (relating to CEO Jussi Pesonen 14,500 shares, and the 9 December 2005 (see www.omxgroup.com). the 2006 fi nancial review) and 27 March - 24 other Executive Team members a total of UPM’s permanent insiders from 1 January April, 28 June - 26 July and 2 October - 30 56,544 shares. A total of 70 employees are 2006 are the members of the Board of Direc- October (relating to the 2007 interim reports). awarded UPM’s shares. Again, in February tors, the President and CEO, the auditor with When necessary, insider registers will be 2007, a decision was made to distribute principal responsi bility for auditing the com- drawn up for individual projects and trading 100,000 G2005 share options to Jussi Pesonen pany’s accounts and other members of the restrictions will be imposed. Persons possess- and a total of 470,000 G2005 share options to company’s senior management who regularly ing inside information are not allowed to trade the other Executive Team members. A total of receive insider information and who have the in the company’s securities. approximately 2,600,000 G2005 share options authority to make decisions affecting the are distributed to some 520 employees. company’s future development and the organ-

118 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ corporate governance

Jussi Pesonen, President & CEO

Magazine Papers Newsprint Fine and Wood Products Converting/ Converting/ Speciality Papers Labelstock Speciality Coatings

Jyrki Ovaska Hartmut Wurster Matti Lievonen Harald Finne Heikki Pikkarainen Matti J. Lindahl Jyrki Salo President President President President President President President EVP and CFO

Heikki Malinen EVP Strategy

Markku Tynkkynen EVP Resources

Pirkko Harrela EVP Communications

Hans Sohlström EVP Marketing

Pauli Hänninen EVP Technology

Riitta Savonlahti EVP Human Resources

Auditors The Executive Team has confi rmed the risk Code of Conduct The Annual General Meeting elects an audi- management guidelines drawn up according The Board of Directors has adopted a code of tor to scrutinise the company’s governance to principles approved by the Board of Direc- conduct applicable to directors, offi cers and and accounts. The elected auditor must be a tors. The company’s business units are re- employees. The code of conduct addresses top- fi rm of public accountants authorised by the sponsible for the identifi cation of risks and ics such as conflicts of interest, corporate Central Chamber of Commerce. The AGM their management in practice. The Executive oppor tunities, confi dentiality, fair dealing, pro- elected PricewaterhouseCoopers Oy to act as Team monitors changes in risks and risk con- tection and proper use of company assets, com- the company’s auditor, where Merja Lindh, centrations. pliance with laws, rules and regulations and APA, was responsible for the audit. The fees The Group’s internal audit function assists encouraging the reporting of any illegal or un- paid to the auditors were € 7.8 million (6.3 the Board of Directors to discharge its super- ethical behaviour. The code contains compli- million), – a breakdown of the fees is shown visory responsibility by ensuring that the ance standards and procedures to facilitate the in the Notes to the Financial Statements on Group’s control is appropriately and effec- effective operation of the code and to ensure page 82. The auditor’s term of offi ce ends at tively planned. The internal audit function is prompt and consistent action against violations the conclusion of the fi rst AGM after the elec- administratively subordinate to the President of the code. The code is available on the com- tion. and CEO but reports to the Audit Committee pany’s website www.upm-kymmene.com and on the adequacy and effectiveness of the com- it can also be obtained in print by any share- Internal control, risk management pany’s internal control systems. holder who requests it. UPM has an e-mail and internal audit In 2005, a team of external assessors ex- system and standard mailing address, both The company’s Board of Directors is responsi- amined the standard of the company’s internal available on the company’s intranet and web- ble for internal control. audit. Internal auditing standards require an site, through which concerns and issues can be The company’s Executive Team has ap- assessment to be made at least once every fi ve confi dentially addressed to the company. proved internal control guidelines. In accord- years. The assessment found that the compa- ance with these guidelines, the director of each ny’s internal auditors meet the general profes- unit or function must organise the internal con- sional standards and ethical rules. trol of his or her unit or organisation.

UPM ANNUAL REPORT 2006 119 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ board of directors

Board of Directors 31.12.20 06

Vesa Vainio Chairman of the Finnish Food and Drink Indus- Investment Bank in London. From 1985 until Chairman tries’ Federation. Member of the boards of 2000 he served as a Director of Lazard Brothers Member since 1996, Vice Chairman in 1997, Lemmin käinen Oyj, Oy Nautor Ab and Cloetta & Co. Limited. From 2003 until 2005, Advisory Chairman since 2001 Fazer AB (publ.). Board of Montrose Associates, London. Independent member of the Board Born 1942 LL.M. Martti Ahtisaari* Karl Grotenfelt Member of the Board of Nokia Corporation. Member since 2000 Member since 2004 Independent member of the Board Member of the Nominating and Corporate Born 1937 Governance Committee Jorma Ollila President of the Republic of Finland 1994–2000. Independent member of the Board Vice Chairman Teacher Training College, University of Oulu. Born 1944 Member since 1997, Vice Chairman since 2004 Granted honorary doctorates by several universi- Master’s degree in Law Chairman of the Nominating and ties. Chairman of the Board of Directors of Corporate Governance Committee Chairman of the Board of Crisis Management Famigro Oy. Independent member of the Board Initiative. Positions in several international or- From 1970 until 1986, he served as A. Ahlstrom Born 1950 ganisations and foundations. Was appointed the Corporation’s lawyer, General Counsel, Adminis- M.Sc. (Eng.), M.Sc. (Pol.Sci.), M.Sc. (Econ.), Special Envoy of the UN Secretary-General for trative Director and member of the Executive Ph.D. (Pol.Sc.) h.c. and D.Sc. (Tech.) h.c. the future status process for Kosovo in November Board with responsibility for the Paper Industry. Chairman (and CEO until 1 June 2006) of Nokia 2005. Member of the boards of Fiskars Corporation Corporation, Chairman of Royal Dutch Shell plc Held several posts in Finland’s Ministry for and Ahlström Capital Oy. (as from 1 June 2006) and member of the Board Foreign Affairs and the United Nations, includ- of Directors of Ford Motor Company. He is also ing Finland’s Ambassador to Tanzania, UN Com- Chairman of the European Round Table of Indus- missioner for Namibia, Under-Secretary General Georg Holzhey trialists, Chairman of the boards of directors and for Administration and Management (UN) and Member since 2003 the supervisory boards of Finnish Business and Secretary of State at the Ministry for Foreign Member of the Human Resources Committee Policy Forum EVA and The Research Institute of Affairs. and the Nominating and Corporate Governance the Finnish Economy ETLA. Mr. Ollila is Vice Member of the Board of Directors of Elcoteq Committee Chairman of the Board of Otava Books and Network Oyj. Non-independent member of the Board Magazines Group Ltd. * not in the picture Born 1939 Dr. oec. publ. Executive Vice President and co-owner of G. Berndt Brunow Michael C. Bottenheim Haindl’sche Papierfabriken KgaA 1970–2001. Vice Chairman Member since 2001 Executive Vice President of UPM-Kymmene Member since 2002, Vice Chairman since 2005 Chairman of the Audit Committee Corporation in 2002. Chairman of the Human Resources Committee Independent member of the Board Independent member of the Board Born 1947 Born 1950 Master of Law, MBA B.Sc. (Econ.) Non-executive director of Montrose Associates, President & CEO of Oy Karl Fazer Ab. London, since 2006. Leading posts in Finnpap and UPM-Kymmene In 1972 he joined Pierson, Heldring & Pierson, Corporation. which he left in 1976 to join Citicorp’s European

120 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ board of directors

Board of Directors, from left to right: Jorma Ollila, Françoise Sampermans, Ursula Ranin, Michael C. Bottenheim, Vesa Vainio, Berndt Brunow, Wendy E. Lane, Karl Grotenfelt and Georg Holzhey.

Wendy E. Lane Ursula Ranin Françoise Sampermans Member since 2005 Member since March 2006 Member since 2004 Member of the Audit Committee Member of the Audit Committee Member of the Human Resources Committee Independent member of the Board Independent member of the Board Independent member of the Board Born 1951 Born 1953 Born 1947 Master’s degree from Harvard Graduate School LL.M., B.Sc. (Econ.) B.A. Psych. of Business Administration. Employed by Nokia Group within the legal Publishing Consultant (TJ Presse, GoYellow, Since 1992, Chairman of the American invest- function from 1984 until 2005; since 1994 Vice DATEM, AXE-MEDIA). ment ﬁ rm Lane Holdings, Inc. President and General Counsel and, since 1996, From 1984 until 2000 held executive positions at From 1977 until 1980, Investment Banker at also secretary of the Board of Directors. publishers (L’Express, le Point, Marianne, Le Goldman, Sachs & Co. and, from 1981 until Member of the Board of Finnair Plc. Nouvel Economiste), the printer Quebecor Eu- 1992, Investment Banker at Donaldson, Lufkin rope and Alcatel-Alstom Group. From 2000 until & Jenrette Securities Corp. 2003 in charge of the business unit Magazine and Board member of Laboratory Corporation of Multimedia Distribution in France at NMPP. America and board member of Willis Group Holdings Limited. Trustee of the US Ski & Snowboard Team Foundation.

UPM ANNUAL REPORT 2006 121 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ executive team

Executive team 1.1.2007

Jussi Pesonen Matti Lievonen Papers 1996–1998. Vice President, LWC Product President and Chief Executive Ofﬁ cer of UPM- President, Fine and Speciality Papers Division, Group 1998–2000. Senior Vice President, Kymmene Corporation, since January 2004 since January 2004 Business Development and Support Functions, Born 1960 Born 1958 Publication Papers 2000–2001. President, Fine & M.Sc.(Eng.) B.Sc.(Eng.), MBA Speciality Papers Division 2002–2003. Joined the company in 1987 and occupied Several posts in United Paper Mills Ltd since several posts including Production Manager at 1986, including Project Manager, Technical Heikki Pikkarainen Jämsänkoski mill, Production Unit Director at Manager and Director for TD production unit at President, Labelstock Business, since Kajaani, Kaukas and Shotton mills and Vice Kaipola mill 1994–1996. Director of Chapelle January 2005 President of Newsprint Product Group. COO of Darblay S.A. production unit in France 1997– Born 1963 the paper divisions 2001–2003. 2001. Executive Vice President, Business and M.Sc.(For.), MBA Technology Optimisation 2002–2003. Corporate Analyst with Industrialisation Fund Harald Finne of Finland, 1988–1989. Various tasks in M&A President, Wood Products Division, from Matti J. Lindahl projects, business development and corporate January 2004 President, Speciality Coatings Business, analysis with Jaakko Pöyry Consulting, 1989– Born 1952 since January 2005 1998. Director, Business Development and Vice M.Sc.(Psychology), MBA Born 1946 President of CHP business in Power and Heat Served with Oy Wilh. Schauman Ab, Pietarsaari, B.Sc.(Econ.) Division, Fortum Oyj, 1998–2000. Since 2000 as Human Resources Manager 1976–1985. Joined Finnboard in 1972 and held several with UPM in several posts of strategic develop- General Manager of Wasaplast 1986–1988. management posts in sales and marketing. ment, most recently Vice President, Strategic Vice President, Administration, of Wisaforest Oy Managing Director of Finnboard (UK) Ltd Development during 2003–2004. Ab 1988–1994. Managing Director of Oy Wisa- 1982–1990. President of Finnboard 1990–1992 pak Ab 1994–1996. UPM-Kymmene Corpora- and of Wisaforest Oy Ab 1992–1993. CEO of Jyrki Salo tion Vice President, Human Resources, 1996– Nordland Papier AG 1994–2002. President, Fine Executive Vice President and CFO, since 2001 and Executive Vice President, Human Re- Paper Division, 1997–2001. Executive Vice Pres- February 2006 sources and Information Technology 2002–2003. ident, Haindl integration, 2002. President, Con- Born 1960 verting Division, 2002–2004. M.Sc.(Econ.) Pirkko Harrela Joined IBM Corporation in 1984, various tasks Executive Vice President, Corporate Communi- Heikki Malinen in sales and market development positions in cations, from January 2004 Executive Vice President, Strategy, since Finland and Great Britain. Joined Nokia Corpo- Born 1960 January 2006 ration in 1990 holding several posts in senior M.A. Born 1962 executive positions with business and ﬁ nance & Several posts in Finnpap 1985–1996. Several M.Sc.(Econ.), MBA (Harvard) control responsibilities in Finland, Belgium, management posts in Communications for Print- Several posts in Finnpap 1988–1994, including Germany, the Netherlands and the USA. Senior ing Papers Division 1996–2002. Vice President, Director, Marketing & Sales. During 1995–1996 Vice President, Finance & Control, for Nokia’s Corporate Communications, 2003. in United Paper Mills Ltd’s employ as Director of Networks Business Group 2002–2005. Business Development. Engagement Manager Pauli Hänninen with McKinsey & Company 1997–1999. Manag- Riitta Savonlahti Executive Vice President, Technology, since ing Partner with Jaakko Pöyry Consulting 2000– Executive Vice President, Human Resources, January 2007 2001. President of Sales with UPM-Kymmene, since May 2004 Born 1948 Inc. 2002–2004. President, UPM-Kymmene Born 1964 M.Sc.(Eng.), Tech. Licentiate North America 2004-2005. M.Sc.(Econ.) In A. Ahlstrom in various production and line Held HR Specialist posts with ABB 1990–1994. management positions 1974–1989, the last posi- Jyrki Ovaska Human Resources Manager with Nokia Mobile tion as Vice President and General Manager of President, Magazine Papers Division, since Phones, Salo Operations 1995–2000. Senior Vice Kauttua paper mill 1986–1989. Director of January 2004 President, Human Resources with Raisio Group Kaipola LWC mill 1989–1993. Vice President and Born 1958 2000–2001. Senior Vice President, Human General Manager of Kajaani paper mill 1993– M.Sc.(Eng.) Resources with Elcoteq Network Corporation 2000. Vice President, Product Group Uncoated Held several posts with United Paper Mills Ltd, 2001–2004. Papers 2000–2001. Senior Vice President, Fine Jämsänkoski mill, in production, customer serv- Paper Operations 2001–2003. Executive Vice ice and business management 1984–1995. Vice President, Business Development, 2004–2006. President, Business Development, Printing

122 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ executive team

Executive Team, from left to right: Jyrki Ovaska, Pirkko Harrela, Matti J. Lindahl, Jyrki Salo, Hans Sohlström, Heikki Pikkarainen, Hartmut Wurster, Pauli Hänninen, Heikki Malinen, Harald Finne, Matti Lievonen, Riitta Savonlahti, Jussi Pesonen, Juha Mäkelä and Markku Tynkkynen.

Hans Sohlström Markku Tynkkynen Hartmut Wurster Executive Vice President, Marketing, since Executive Vice President, Business Functions President, Newsprint Division, since January March 2004 and Resources, since January 2004 2002 Born 1964 Born 1952 Born 1955 M.Sc.(Tech.), M.Sc.(Econ.) M.Sc.(Paper Eng.) D.Tech. Various tasks in business control and develop- Employed by A. Ahlstrom 1980–1982 as Produc- Several posts with Hamburger AG and Brigl & ment, procurement, planning, production and tion Engineer. Joined UPM in 1982 having sever- Bergmeister in Austria 1982–1987, including maintenance at Oy Wilh. Schauman Ab, Nord- al management posts in production, business Head of Technology Department and Production land Papier GmbH and Kymmene Oy 1984– development, sales and business management. Manager. Joined Haindl Papier GmbH & Co. KG 1989. Marketing Assistant, Finnpap, 1989–1990. Paper mill director of Stracel S.A. 1990–1993. in 1987. Head of Technology Department at Marketing Manager, Stracel S.A. 1990–1994. General Manager and Vice President of Jämsän- Augsburg mill 1987–1989. Mill Director, Augs- Mill Director, Jämsänkoski MFC and SC mills, koski proﬁ t unit 1994–1998. Vice President burg, 1989–1996, and member of the Executive 1994–1998. Management posts in sales and mar- of SC Product Group 1998–2000. Senior Board responsible for the Magazine Paper Divi- keting, Publication Papers, 1998–2002. Senior Vice President, Publication Papers Division, with sion, 1996–2001. Vice President Sales & Marketing, Magazine responsibility for product groups, technology and Paper Division, 2002–2004. mills, 2000–2001. President, Magazine Paper Juha Mäkelä Division 2002–2003. General Counsel, acts as the Secretary to the Board of Directors and the Executive Team.

The shares and options in UPM-Kymmene Corporation held by the members of the Executive Team are detailed on page 118.

UPM ANNUAL REPORT 2006 123 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ Production plants and sales network

Production plants and sales network

Production plant Sales company or agent

PRODUCTION PLANTS UPM refers to those companies whose ofﬁ cial name includes ‘UPM-Kymmene’.

Australia Finland Walki Wisa Plywood mills UPM UPM Rafl atac, Paper mills - Pietarsaari UPM - Aigrefeuille Braeside (Melbourne) UPM - Valkeakoski – Heinola - Boulogne sur Mer - Jämsänkoski – Joensuu Austria - Kaipola Sawmilling – Kaukas, Lappeenranta Germany UPM, Steyrermühl - Kajaani UPM – Lahti UPM - Kaukas, Lappeenranta - Alholma, Pietarsaari – Pellos, Ristiina - Augsburg Steyrermühl Sägewerks - Kymi, Kuusankoski - Heinola – Savonlinna - Schongau gesellschaft - Rauma - Kajaani – Säynätsalo, Jyväskylä - Schwedt - Tervasaari, Valkeakoski - Kaukas, Lappeenranta Nordland Papier, Dörpen Canada - Wisapaper, Pietarsaari - Korkeakoski, Juupajoki Veneer mills UPM, Miramichi, - Leivonmäki UPM Walki Wisa GmbH New Brunswick Pulp mills - Seikku, Pori – Kalso, Vuohijärvi - Jülich UPM – Keuruu - Steinfurt China - Kaukas, Lappeenranta Further processing – Lohja UPM, Changshu - Kymi, Kuusankoski UPM Great Britain - Tervasaari, Valkeakoski - Alholma, Pietarsaari France UPM UPM Rafl atac, Changshu - Wisapulp, Pietarsaari - Aureskoski UPM - Caledonian Paper, Irvine Walki Wisa, Changshu - Heinola – Grand-Couronne - Shotton Paper, Shotton Converting plants - Kaukas, Lappeenranta – Docelles Estonia UPM Rafl atac, - Luumäki Stracel, Strasbourg UPM Rafl atac, Scarborough UPM, Otepää - Tampere - Parkano Walki Wisa, Garstang - Jyväskylä UPM Rafl atac, Pompey (Nancy)

124 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ Production plants and sales network

SALES NETWORK (countries listed below)

Malaysia North America France Turkey Africa UPM Rafl atac, Johor Canada Germany Ukraine Algeria Mexico Great Britain Egypt Russia Panama Greece Asia Morocco UPM Chudovo United States Hungary China South Africa UPM Pestovo Iceland Hong Kong South America Ireland India Oceania South Africa Argentina Italy Indonesia Australia UPM Rafl atac, Durban Brazil Latvia Israel Chile Lithuania Japan Spain Colombia Malta Jordan UPM Rafl atac, Polinyá Peru Netherlands Lebanon (Barcelona) Norway Malaysia Europe Poland Pakistan Sweden Austria Portugal Philippines Walki Wisa, Arnäsvall Belgium Rumania Republic of Korea Bulgaria Russia Singapore United States Croatia Serbia Sri Lanka Blandin, Grand Rapids, MN Czech Republic Slovakia Syria UPM Rafl atac, Fletcher, NC Cyprus Slovenia Taiwan Denmark Spain Thailand Estonia Sweden Finland Switzerland

UPM ANNUAL REPORT 2006 125 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ glossary of terms

Glossary of terms

The following explanations are not intend- Fibre quire high-quality printing and good col- SC ed as technical definitions, but to assist The basic structural unit of paper. Fibres our reproduction. Supercalendered paper. Supercalendered the general reader to understand terms used in papermaking originate mainly paper is manufactured from mechanical used in this annual report. from the stem of softwood and hardwood Non-impact printing and chemical pulp with mineral pigments trees. A method of printing involving electro- as filler. This paper is used for printing BTL (biomass-to-liquid) photographic and ink jet printing. In this magazines, especially multi-colour maga- See Second-generation biodiesel. Fine paper method, the printing element does not zines with large circulations. Traditional Also known as writing paper, free sheet or make contact with the paper. SC paper is made for gravure printing, Coated fine paper (WFC) woodfree paper. Fine paper generally con- but other SC paper grades have also been Also known as coated woodfree paper. tains chemical pulp, with no more than PM developed to suit offset printing. Coated fine paper is used for demanding 10% mechanical pulp, and its filler con- PM, or paper machine, is a term used printing. The amount of coating and gloss tent varies between 5% and 25%. Fine when referring to individual paper manu- Second-generation biodiesel / of the paper is determined by the end-use. paper is generally highly regarded for its facturing units within a paper mill. BTL (biomass-to-liquid) diesel Top-quality coated fine papers are called strength, brightness and good archiving Liquid transportation fuel produced from art printing papers and due to excellent characteristics. Fine paper may be coated Printing paper lignocellulosic feedstock. The process printability are used for art books, bro- or uncoated. Papers used in the graphic industry and producing BTL diesel converts solid bio- chures, annual reports and similar purpos- for photocopying. Printing papers may be mass into liquid fuel via gasification and es. Other papers, with a lighter coating, Gravure printing coated or uncoated. Fischer Tropsch synthesis. Refined BTL are used for brochures, books, magazines, A printing process using a thin, quick- diesel can be used in existing diesel en- catalogues and similar purposes. drying ink applied from a cylindrical sur- Pulp gines. face that has an engraved design. Rotogra- Generic name for wood or plant-based Coated paper vure printing is the opposite of letterpress fibre masses used as raw material in pa- Self-adhesive labelstock Paper that has been coated on one or both printing, since the design areas are re- permaking. Face and base materials laminated togeth- sides with a mix of clay or carbonates and cessed into the cylinder instead of being er for manufacturers of product and infor- latex to create a high-quality printing sur- in relief. Chemical pulp mation labels. Self-adhesive labelstock is face. Generic name for wood-based fibres sepa- also known as pressure-sensitive label- Kraft paper rated from each other by “cooking” wood stock. LWC High strength packaging paper made of chips or plants in hot alkaline or acidic Lightweight coated paper. The main char- softwood pulp, which has the longest solutions of various chemicals. Siliconized paper acteristics of LWC paper are its higher fibres. Kraft paper is used primarily in Papers siliconized on one side to form gloss, brightness and smoothness relative carrier bags, pouches and wrappings. Hardwood pulp the tear-off part of speciality tapes for to uncoated supercalendered paper. Pulp obtained from deciduous trees, hygiene products, labels and industrial These properties are necessary for quality Label paper which have the advantage of shorter appli cations. printing and good colour reproduction. Face and base papers suitable for self-ad- fibres, which enhance the printability of The main uses of LWC paper are in the hesive labels. Face papers have distinct the paper. Uncoated fine paper (WFU) printing of mass-circulation magazines, printing properties and base papers have Also known as uncoated woodfree paper, catalogues and direct mail advertising. siliconizing and tear-off properties. Mechanical pulp this paper is principally used for printing Generic name for wood-based fibres sepa- and writing. It includes A4 paper used for MFC Machine-Finished Speciality rated from each other mechanically. photocopying and business form paper Machine-finished coated paper. MFC pa- (MFS) used as continuous stationery for compu- per has high brightness, opacity, bulk and Uncoated, machine-finished speciality Softwood pulp ter printouts. Uncoated fine paper, when stiffness and is used in specialised maga- paper, containing mechanical pulp and Pulp obtained from coniferous trees, pigmented or surface sized, is used for zines, catalogues, inserts, advertising mate- recycled fibre as raw material. MFS is which have the advantage of long fibres, conversion into envelopes and labels. rials and books. The soft nip calender suitable for newspaper inserts, news- which enhance the strength of the paper. Machine-glazed woodfree paper is used gives a matt finish to the paper. papers, magazines, books and directories. for wrapping and for paper bags. Recovered paper MWC Magazine paper Paper and board recovered for secondary Woodfree, free sheet or fine Medium-weight coated paper. MWC Paper used in magazines, catalogues, bro- use. paper paper has higher basis weight and conse- chures, direct mail advertising and similar Papers used by the graphic industry for quently better smoothness, brightness and printed material. Recycled fibre writing, including office papers such as gloss than LWC paper, qualities which are Fibre extracted from recovered paper. photocopying and laser printing paper. required for demanding colour repro- MG paper These papers may be coated or uncoated. duction during the printing process. The Machine-glazed paper. Paper made Release paper main uses of MWC paper are similar to smooth and glossy on one side by drying In self-adhesive labelstock, the back of a those of LWC paper. on a heated, polished metal cylinder, label that is removed and discarded. which forms part of the drying section of Deinking the machine. RFID The process of obtaining fibre that can be RFID, or Radio Frequency Identification, recycled for papermaking by removing the Newsprint is a technology that incorporates the use of ink and other non-fibrous components Uncoated paper manufactured mainly radio waves to uniquely identify an object. from recovered paper by washing or flota- from mechanical pulp or recycled paper A typical RFID system consists of a tag, a tion combined with chemical treatment. and used for newspapers and directories. reader and a host system. The advantage of Newsprint has a low basis weight and is RFID is that it does not require direct con- Face papers mainly used for printing newspapers, but tact or line-of-sight. Several objects can be Paper on which a label is printed in self- it is also used for printing magazines and identified at the same time and information adhesive labelstock. advertising publications that do not re- can be uploaded on each one.

126 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 UPM ■ addresses

Addresses www.upm-kymmene.com Staff Functions Paper Divisions Converting Division

UPM UPM UPM Eteläesplanadi 2 Magazine Papers Division Labelstock P.O. Box 380 Eteläesplanadi 2 Tesomankatu 31 FI-00101 Helsinki P.O. Box 380 P.O. Box 53 Tel. +358 204 15 111 FI-00101 Helsinki FI-33101 Tampere Fax +358 204 15 110 Tel. +358 204 15 111 Tel. +358 204 16 143 Fax +358 204 15 0509 Fax +358 204 16 8034 UPM Corporate Communications UPM UPM Eteläesplanadi 2 Newsprint Division Speciality Coatings P.O. Box 380 Georg-Haindl-Strasse 5 Georg-Haindl-Strasse 5 FI-00101 Helsinki D-86153 Augsburg D-86153 Augsburg Tel. +358 204 15 0020 Deutschland Deutschland Fax +358 204 15 0308 Tel. +49 821 31090 Tel. +49 821 31090 E-mail [email protected] Fax +49 821 3109 156 Fax +49 821 3109 156

UPM UPM Investor Relations Fine and Speciality Papers Division Wood Products Division Eteläesplanadi 2 Eteläesplanadi 2 P.O. Box 380 P.O. Box 380 UPM FI-00101 Helsinki FI-00101 Helsinki Wood Products Division Tel. +358 204 15 0033 Tel. +358 204 15 111 Niemenkatu 16 Fax +358 204 15 0303 Fax +358 204 15 0514 P.O. Box 203 E-mail [email protected] FI-15141 Lahti Tel. +358 204 15 113 Fax +358 204 15 112

UPM ANNUAL REPORT 2006 127 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 It should be noted that certain statements herein which are not historical facts, including, with out limitation those regarding expectations for market growth and developments; expectations for growth and profi tability; and statements preceded by “believes”, “expects”, “anticipates”, “foresees”, or similar expressions, are forward-looking statements. Since these statements are based on current plans, estimates and projec- tions, they involve risks and uncertainties which may cause actual results to materially differ from those expressed in such forward-looking state ments. Such factors include, but are not limited to: (1) operating factors such as continued success of manufacturing activities and the achievement of effi ciencies therein, continued success of product development, acceptance of new products or services by the Group’s targeted cus tomers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by the Group’s patents and other intellectual property rights, the availability of capital on ac cept able terms; (2) industry conditions, such as strength of product demand, intensity of com pe ti tion, prevailing and future global market prices for the Group’s products and the pricing pressures thereto, fi nancial condition of the customers and the competitors of the Group, the po tential introduction of competing products and technologies by competitors; and (3) general eco nom ic conditions, such as rates of economic growth in the Group’s principal geographic mar kets or fl uctuations in exchange and interest rates.

128 UPM ANNUAL REPORT 2006 WorldReginfo - 3cf8cff2-8ca9-46db-9841-a63f8694f869 Annual Report 2006 Printed on paper granted the EU Ecolabel , FI/11/1. UPM ANNUAL REPORT 2006 . Printer: Lönnberg Print. . Printer: Lönnberg 2 . Other pages: UPM Finesse premium silk, 135 g/m . Other pages: UPM Finesse 2 . Accounts: UPM Fine, 90 g/m Accounts: UPM Fine, . 2

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