UPM-KYMMENE ANNUAL REPORT 1996 CONTENTS The merger of Kymmene Corporation and Repola Ltd to form UPM-Kymmene Corporation took effect on 30 April 1996. This report covers the operations of the merging The year in brief 1 companies and the UPM-Kymmene Group in 1996. Remarks by the Chairman of the Board 2 President’s review 3 Overview of the Group 4 ANNUAL GENERAL MEETING Divisional reviews UPM-Kymmene Corporation will hold its Annual General Meet- Magazine papers 8 ing at 3.00 pm on Thursday, 10 April 1997 in Marina Congress Newsprint 10 Center, address Katajanokanlaituri 6, 00160 Helsinki. Partici- Fine papers 12 pants’ names will be checked and ballot slips issued beginning at Packaging materials 14 2.00 pm. Shareholders wishing to attend the Annual General Meeting Sawmilling 16 must be registered in the list of shareholders kept by Finnish Cen- Plywood 17 tral Securities Depository Ltd no later than 27 March 1997. Share- Special Product Companies 18 holders whose shares have not yet been transferred to the book Resources 20 entry system also have the right to attend the Annual General Meeting on certain conditions. Details will be given in␣ the sum- The environment 23 mons to the meeting. Research and development 24 Shareholders wishing to attend the Annual General Meeting Personnel 25 must inform the company by 12.00 noon on 8 April 1997 at Rauma Corporation 26 the␣ latest by writing to: UPM-Kymmene, Share Register, Snellmaninkatu 13, P.O. Box 203, 00171 Helsinki, or by telephon- Events in 1996 28 ing +358 (0) 204 15 0108 or (0) 204 15 0109, or telefax Accounts for 1996 29 +358␣ (0)␣ 204␣ 15 0328. Written notice of a shareholder’s intention Report of the Board of Directors 30 to attend the meeting must arrive before the deadline stated above. Proposal for the distribution of profits 33 Any letters of authorization must be submitted at the time the shareholders concerned inform the company of their intention to Consolidated profit and loss account 34 attend. Consolidated funds statement 35 Consolidated balance sheet 36 DIVIDEND Parent company profit and The Board of Directors’ proposal to the Annual General Meeting loss account 38 for the distribution of dividend, together with information on the Parent company funds statement 38 payment of dividend, can be found on page 33 of this report. Parent company balance sheet 39 Notes on the accounts 40 FINANCIAL PUBLICATIONS Key figures, 1987–96 56 During 1997, UPM-Kymmene Corporation will publish the fol- Information on shares 58 lowing financial information in Finnish, Swedish, English, Ger- Abridged IAS financial statements 62 man and French: Calculation of key indicators 64 15 May 1997 Interim Review for January–March Exchange rates 64 14 August 1997 Interim Review for January–June Auditors’ report 65 13 November 1997 Interim Review for January–September Company directors and auditors 66 Group organization 67 These publications can be ordered from UPM-Kymmene’s Head Office, address P.O. Box 203, 00171 Helsinki, Finland, Trends by 4-month period 68 tel. +358 (0) 204 15 0022 or telefax +358 (0) 204 15 110. Production plants and sales network 69 Addresses 70 UPM-Kymmene’s Internet home page: http://www.upm-kymmene.com THE YEAR IN BRIEF 1996 1995 1994 1996 1996 FIM FIM FIM USD Ecu Turnover, million 51,757 54,738 47,966 11,267 8,997 Operating profit, million 5,591 8,504 5,477 1,217 972 Profit before extraordinary items, million 3,555 6,278 3,110 774 618 Earnings per share 10.24 20.09 10.04 2.23 1.78 Dividend per share (1996: Board’s proposal) 4.50 4.50 2.19 0.97 0.78 Return on equity, % 11.1 24.5 14.1 11.1 11.1 Return on capital employed, % 10.1 16.2 10.7 10.1 10.1 Equity to assets ratio at end of period, % 41.4 39.3 32.6 41.4 41.4 Gearing ratio at end of period, % 93 102 145 93 93 Shareholders’ equity per share 96.85 89.54 74.45 20.86 16.79 Net capital expenditure, million 4,432 3,318 2,697 954 768 Adjusted figures Return on equity, % 9.3 Equity to assets ratio at end of period, % 45.7 Gearing ratio at end of period, % 78 Shareholders’ equity per share 116.50 Formulae for calculation of indicators are shown on page 64. ª The merger was completed and UPM-Kymmene Corporation was formed. ª Financial results were poorer because of the decline in printing paper deliveries and the fall in fine paper prices. ª The profitability of the packaging materials division improved. Special products and the engineering group Rauma made steady financial progress. ª The markets for sawn timber, fine paper and plywood improved towards the end of the year. ª The Group’s structure was streamlined and the equity to assets ratio improved through the sale of shares and businesses. Turnover by division, FIM million Operating profit by division, (% of Group total in 1996) FIM million Magazine papers 22% Magazine papers Newsprint 11 % Newsprint Fine papers 12 % Fine papers Packaging materials 10 % Packaging materials Sawmilling 6 % Sawmilling Plywood 6 % Plywood Special products 7 % Special products Chemical pulp 2 % Chemical pulp Other 5 % Other Engineering 19 % Engineering 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 0 500 1,000 1,500 2,000 2,500 3,000 1996 Intra-Group 1996 1996 1995 Intra-Group 1995 1995 1 “UPM-Kymmene’s aim is to be a profitable investment for shareholders” Following the merger last cent. The main goal in the immediate year, UPM-Kymmene future is to reduce indebtedness, which it carried out an extremely would seem has a major impact on the thorough review of its stra- company’s share prices. UPM-Kymme- tegic and economic targets ne’s balance sheet includes some assets for the future. The starting- that have been valued at well below their point for this review was current market price. Liquid listed shares the␣ company’s ultimate not connected with business operations business goal: to be a profit- account for a sizeable proportion of these able investment for its share- assets. holders. Within the limits set by the targets set To achieve this aim, the for profitability and financial solidity, company must secure its UPM-Kymmene is seeking a rate of profitability and seek con- growth in its core businesses above the trolled growth without industry average. endangering its financial The Board of Directors’ proposal for solidity. Shareholders have the right to a the distribution of profits is in line with reasonable portion of profits in the form the company’s policy of distributing at of dividend. The company’s dividend least one-third of the profit as annual policy supports the growth and stability dividend. Our aim is a steady dividend of shareholder value. that rises along with the company’s UPM-Kymmene’s prospects for profitable growth, a dividend that offers improved profitability are good. The shareholders a predictable annual return benefits derived from the merger alone on their investment. will add about two percentage points to It is proposed to distribute two-thirds the return on capital employed. The of the dividend for 1996 in the form of recently completed major investment Rauma Oy shares. This applies only to programme will also enhance the return. 1996, and is part of UPM-Kymmene’s Key factors, however, will be careful plan to reduce its interest in Rauma to consideration of future capital expendi- below 50 per cent. It is also an indication ture and allocation of investment funds. of UPM-Kymmene’s policy of focusing Efficient use of capital is being stressed increasingly on its own core businesses, at all levels of UPM-Kymmene’s organi- and will at the same time simplify the zation. One way in which it is being Group’s structure. encouraged is through the new incentive The intention in offering these shares scheme, which offers all employees to UPM-Kymmene shareholders is to give bonuses based on the return on capital Rauma a stable, more broadly based own- employed. ership. I believe the proposal will meet The management has set a long-term with the approval of UPM-Kymmene’s profitability target of 15 per cent for the shareholders, who, indirectly, are already return on capital employed by the divi- Rauma Oy shareholders. sions and their units. This aims at giving a return on equity which exceeds risk- free returns by a clear margin. The Group has set a target for its Yrjö Niskanen equity to assets ratio of at least 40 per Chairman of the Board of Directors 2 “Group operations and structure now streamlined” 1996 was UPM-Kymmene’s first year of operations, although the company was not officially formed through the merger of its predecessors until the end of April. Behind the decision to merge were the important synergy benefits obtainable by bringing together a wealth of experience and two companies that complemented each other so well. During 1996 there was a rapid general decline in the markets for forest industry products, and this hindered the process of building up the new group and deferred some of the synergy benefits accruing from the merger. Meaningful conclusions about the economic benefits of the merger will not be possible before market market. This key development area is conditions give the Group’s well-tuned giving us another strong foothold along- production machinery a chance to show side printing and writing papers.