ANNUAL REPORT 2010 CONTENTS Contents UPM GROUP 1 Vision, purpose, values 2 In Brief 4 Key financial information 2010 6 Review by the president and CEO 8 UPM – The Biofore Company 10 Strategy 11 Financial targets and dividend policy 12 RIsk management BUSINESS AREAS BIOFORE IN ACTION 16 Energy 20 UPM refurbishes its hydropower plants 22 Pulp 21 UPM and partners set best practices in sustainable harvesting 28 Forest and Timber 26 Pulp as a Biofore product 34 Paper 27 UPM Foundation acts closely with local communities 42 Label 32 UPM was recognised in the UN’s International Year of Biodiversity 2010 46 Plywood 33 Safety in working environment 39 Responsible sourcing puts focus on the supply chain Success factors 40 Focus on energy efficiency improvements 41 UPM committed to responsible water use 52 Responsibility in action 45 Bringing people together 54 People 49 UPM Plywood has developed a new composite technology 58 Environmental performance 57 Renewing company values 63 R&D and developing businesses 61 UPM Shotton has zero waste in its sights 66 Main events in 2010 65 Converting biomass to biofuels CORPORATE GOVERNANCE 69 Corporate governance 74 Corporate governance statement 78 Board of Drectors 80 Group Executive Team and Group Executive Team ACCOUNTS FOR 2010 82 Contents 155 Glossary of terms 158 Key financial information 2001–2010 160 Production plants and sales network 162 Addresses UPM does not publish a separate environmental and corporate responsibility report but has integrated the contents into this annual report. www.upm.com UPM – ThE BIOFORE company As the frontrunner of the new forest industy, UPM leads the vision integration of bio and forest industries into a new, sustainable an innovation-driven future. We reshape markets through cost leadership, change readiness and leading innovation. We create value from renewable and recyclable materials by purpose combining our expertise and technologies within fibre-based, energy-related and engineered materials businesses. Trust and be trusted. values Achieve together. Renew with courage. 1 IN BRIEF UPM IS ThE BIOFORE COMPANY AND CREATES VALUE FROM RENEWABLE AND RECYCLABLE MATERIALS. In 2010, UPM’s sales totalled EUR 8.9 billion. UPM has production plants in 15 countries and a global sales network. UPM employs approximately 22,000 employees world- wide. UPM shares are listed on the NASDAQ energy & pulp OMX helsinki stock exchange. UPM is a significant generator of low-emission energy and a leading producer of chemical pulp with its modern pulp mills. It seeks growth in cost competitive pulp, low-emission energy and biofuels. The business group is also responsible for forestry services and biomass sourcing for the whole com- pany. Market presence UPM’S SALES BY MARKET 2010 EUR 8,924 MILLION €m paper ■ Germany 15% ■ United Kingdom 11% UPM is the world’s leading producer of graphic papers. ■ Finland 9% Its large and cost competitive paper mills are located in ■ France 6% ■ Other EU 22% Europe, China and the USA. The Paper business group aims ■ Other Europe 6% ■ North America 12% for competitive advantage with cost efficiency, sustainable ■ Asia 14% products, reliability and innovative customer services. ■ Rest of the world 5% UPM’S PERSONNEL BY AREA 31.12.2010 21,869 €m ■ Finland 43% ■ Germany 17% engineered materials ■ United Kingdom 7% ■ France 6% The Engineered materials business group comprises of high ■ Other EU 7% value-added growth businesses which are based on UPM’s ■ Other Europe 5% ■ North America 5% proprietary materials know-how. UPM is the second-largest ■ Asia 8% ■ Rest of the world 2% producer of self-adhesive label materials globally and the largest supplier of plywood in Europe. 2 Energy Share of Group1) • The Energy business area generates low-emission energy and Sales, EURm 567 3% operates on the Nordic and Central European energy markets. Capital employed on 31 Dec., EURm 886 8% Personnel on 31 Dec. 72 0% • The Pulp business area produces chemical pulp for the global market. Pulp Share of Group1) Sales, EURm 1,698 4% • The Forest and Timber business area is responsible for the Capital employed on 31 Dec., EURm 2,455 21% company forests and forestry services as well as producing Personnel on 31 Dec. 1,413 7% sawn timber products. It also sources forest biomass for the 1) Group. Forest and Timber Share of Group Sales, EURm 1,521 8% • Wood, the primary raw material, is renewable. Biodiversity Capital employed on 31 Dec., EURm 1,799 16% is an integral part of UPM’s sustainable forest management. Personnel on 31 Dec. 2,735 13% 1) Sales % represents share of external sales • The Paper business area offers a wide range of papers including magazine papers and newsprint as well as fine and speciality papers. Paper Share of Group1) • The main customers are publishers and printers as well as Sales, EURm 6,269 68% merchants and paper converters. Capital employed on 31 Dec., EURm 5,284 46% Personnel on 31 Dec. 11,901 54% • UPM paper is a sustainable choice. In paper production 1) Sales % represents share of external sales UPM uses mostly bioenergy and nearly one third of fibre raw material is recycled fibre. • The Label business area provides self-adhesive label Label Share of Group1) materials for product and information labelling. Sales, EURm 1,100 12% 504 4% • The Plywood business area offers WISA plywood and Capital employed on 31 Dec., EURm 2,543 12% veneer, mainly for construction and transport equipment. Personnel on 31 Dec. • In addition to the well established businesses, UPM has Plywood Share of Group1) developed products such as RFID tags and inlays and UPM Sales, EURm 347 4% ProFi composite products. Capital employed on 31 Dec., EURm 242 2% Personnel on 31 Dec. 2,737 12% 1) Sales % represents share of external sales 3 UPM ¬ key financial information 2010 ¬ KEY FINANCIAL INFORMATION 2010 The year 2010 was characterised by recovering demand and global commodity price inflation. With higher delivery volumes UPM was able to take full benefit of its early efficiency improve- ments and bring profitability back to pre-recession level. Cash flow continued strong and the company was able to reduce its net debt by EUR 444 million. SALeS, neT DeBT, eUR MiLLiOn eUR MiLLiOn 2010 8,924 +16% 2010 3,286 -12% 2009 7,719 2009 3,730 Delivery volumes increased in all businesses Strong cash flow enabled net debt reduction eBiTDA, geARing, eUR MiLLiOn % 2010 1,343 +26% 2010 46 -10 2009 1,062 2009 56 percentage points Main driver higher delivery volumes in all businesses OPerating PROfiT, MARKeT CAPiTALiSATiOn, eUR MiLLiOn* eUR MiLLiOn 2010 731 +171% 2010 6,874 +59% 2009 270 2009 4,326 * excluding special items Recovered from recession lows ePS, DiviDenD, eUR eUR* 2010 1.08 +227% 2010 0.55 +22% 2009 0.33 2009 0.45 * 2010: proposal by the Board 4 UPM ¬ key financial information 2010 ¬ KeY FIGUReS 2008–2010 2010 2009 2008 Sales, EURm 8,924 7,719 9,461 Operating profit, EURm 755 135 24 excl. special items, EURm 731 270 513 Profit (loss) before tax, EURm 635 187 –201 Earnings per share, EUR 1.08 0.33 –0.35 excl. special items, EUR 0.99 0.11 0.42 Operating cash flow per share, EUR 1.89 2.42 1.21 Return on equity, % 8.2 2.8 neg. Dividend per share (2010: Board’s proposal), EUR 0.55 0.45 0.40 Shareholders’ equity per share at end of period, EUR 13.64 12.67 11.74 Gearing ratio at end of period, % 46 56 71 Capital expenditure, EURm 257 913 551 SALES BY BUSINESS AREA1) OPERATING PROFIT BY BUSINESS AREA (EXCLUDING SPECIAL ITEMS) ENERGY 3% EURm ENERGY EURm PULP 4% PULP FOREST AND TIMBER 8% FOREST AND TIMBER PAPER 68% PAPER LABEL 12% LABEL PLYWOOD 4% PLYWOOD OTHER 1% OTHER 0 2,000 4,000 6,000 8,000 -200 0 200 400 600 ■ Sales 2010 ■ Sales 2010, internal ■ 2010 ■ Sales 2009 ■ Sales 2009, internal ■ 2009 1) % of external sales 5 UPM ¬ review by the president and CEO ¬ DEAR ShAREhOLDER, At the end of 2010, UPM is well positioned both in terms of strategy as well as the business cycle. Now that internal restructuring has been completed, we have excellent prerequisites to benefit from the recovering markets. Our Uruguay operations and the consolidation in the paper industry are tangible actions which create opportunities for future growth. Economic indicators point to continued economic growth, and our view of 2011 is positive. 6 ¬ ¬ UPM review by the president and CEO The most important strategic opportunity for UPM in 2010 was the acquisition of Myllykoski and Rhein Papier, which was announced in December. UPM operating profit for 2011 is expected to improve from last year. For UPM, the year 2010 was a year of The target is to close the transaction Biofore vision but the new working culture solid recovery. It was characterised by during the second quarter of 2011. in the company. recovering demand and global commodity Addressing the challenging situation in As for our outlook for 2011, we stand price inflation. With higher production the European paper business is our top pri- clearly positive. Stable demand and moder- volumes we were able to take full benefit ority. Demand growth is shifting to mar- ating cost inflation provide a good founda- of our early efficiency improvements and kets outside of Europe. The currently inef- tion for further profit improvement. bring profitability back to pre-recession ficient European paper industry clearly Economic indicators point to continued levels. needs consolidation to be able to improve economic growth, although in the mature Our Pulp, Energy and Label businesses its cost structure and competitiveness.