WITH BIOFORE ANNUAL REPORT 2016 CONTENTS Contents UPM Group 2 UPM in brief 4 Year 2016 in brief 6 Review by the President and CEO 8 UPM in transformation Strategy 10 Grow with Biofore – UPM’s strategic focus areas 12 Performance improvement and transformation continued in 2016 14 Responsibility is good business 16 UPM as an investment 17 UPM renewed its long-term financial targets 18 Operations are guided by the Biofore strategy 20 Changing operating environment 22 Risks and opportunities Businesses 24 UPM Biorefining 28 UPM Energy 30 UPM Raflatac 32 UPM Specialty Papers 34 UPM Paper ENA 36 UPM Plywood 38 Innovation and R&D Stakeholders 40 Our people 44 Driving continuous improvement in safety 46 Our stakeholders 52 Continuous dialogue and collaboration with customers 54 UPM’s value creation also generates tax revenues 56 Product stewardship 58 Sustainable forestry 59 Responsible sourcing throughout the entire supply chain 62 Resource-efficient production 64 Responsible water use 66 Climate actions and energy efficiency 68 Circular economy at UPM 70 Value creation Governance 72 Our governance 82 Board of Directors 84 Group Executive Team 86 GRI content index – short version 88 Independent Practitioner’s Assurance Report Accounts for 2016 89 Contents 166 Financial information 2007–2016 168 More on resposibility 170 Competitive businesses, strong market positions 173 Addresses 175 Annual General Meeting In brief Strategy Businesses Stakeholders Governance Accounts Sales 2016 Comparable EBIT 2016 Capital employed 31 Dec 2016 EUR 9,812 million EUR 1,143 million EUR 10,657 million Other operations 3% Other operations 1% UPM Plywood 4% UPM Plywood 5% Other operations 14% UPM Biorefining 20% UPM Biorefining UPM Plywood 3% UPM Paper UPM Biorefining 31% UPM integrates bio and forest industries and builds a sustainable future UPM Energy 3% ENA 25% 36% UPM Paper ENA UPM Paper ENA across six business areas. Our products are made of renewable raw UPM Raflatac 17% 45% 13% materials and are recyclable. UPM Specialty UPM Specialty UPM Specialty Papers 11% UPM Energy 10% Papers 9% UPM Energy 21% Papers 12% UPM Raflatac 12% UPM Raflatac 5% Unconsolidated VALUES Trust and be trusted Achieve together Biofore Renew with courage Company UPM UPM UPM UPM UPM UPM OTHER BIOREFINING ENERGY RAFLATAC SPECIALTY PAPER ENA PLYWOOD OPERATIONS PAPERS UPM Biorefining consists of pulp, UPM Energy creates value UPM Raflatac manufactures UPM Specialty Papers serves UPM Paper ENA is the world’s UPM Plywood offers plywood Wood Sourcing and Forestry timber and biofuels businesses. through cost competitive, self-adhesive label materials growing global markets with leading producer of graphic and veneer products, mainly for secures competitive wood and UPM Pulp offers versatile range low-emission electricity gener- for product and information label papers and release liners, papers, offering an extensive construction, vehicle flooring and biomass for UPM businesses and of sustainably produced pulp ation and through physical labelling for label printers office papers in Asia and flexible product range for advertising, LNG shipbuilding as well as other manages UPM-owned and grades suitable for a wide range electricity and financial trading. and brand owners in the food, packaging in Europe. With magazine and newspaper manufacturing industries. With privately owned forests in North of end-uses such as tissue, spe- UPM Energy is an active share- personal care, pharmaceutical extensive distribution network publishing as well as home and production facilities in Finland, Europe. In addition, UPM offers cial ty papers, graphic papers holder in major Finnish electric - and retail segments, for example. and strong brands, UPM office uses. UPM Paper ENA Estonia and Russia, UPM Plywood a wide range of forestry services and board. UPM Timber offers ity companies. UPM’s power Specialty Papers is the market has 15 efficient paper mills in is the leading supplier in to forest owners and forest certified sawn timber for construc- generation capacity consists leader in labelling materials Europe and the United States as demanding end-use segments. investors. UPM Biocomposites tion and furniture, for example. of hydropower, nuclear power globally and in office paper in well as a global sales network and UPM Biochemicals business UPM Biofuels produces wood- and condensing power. Asia Pacific region. with excellent service. units are also included in Other based renewable diesel that is operations. suitable for all diesel engines. HIGH-END ANNUAL MARKET GROWTH PULP TIMBER ELECTRICITY SELF-ADHESIVE LABELS LABEL PAPERS OFFICE PAPERS GRAPHIC PAPERS PLYWOOD, VENEER 3% 2% 1% 4% 4% 4% –4% 3% BIOFUELS STRONG GROWTH CONTENTS 2 UPM Annual Report 2016 UPM Annual Report 2016 3 In brief Strategy Businesses Stakeholders Governance Accounts 2016 Global businesses – local presence UPM’s sales by market 2016 12,000 Financial performance EUR 9,812 million customers in 120 countries 54 Top performance Strong cash flow Attractive dividend production plants in 12 countries 85,000 Comparable EBIT Operating cash flow Dividend (proposal) 13% 63% shareholders Europe 18% EUR 1,143m EUR 1,686m EUR 507m North in 40 countries +25% +42% +27% America Asia Comparable ROE 10.9% 19,300 55,000 employees suppliers +1.4pp Industry-leading 6% balance sheet Rest of the world in 45 countries in 70 countries Net debt reduction EUR 969m, –46% Net debt/EBITDA 0.73x % of active employees completed Employee LTA frequency Code of Conduct training 97% engagement 69% 3.7 Focused investments Responsibility +6pp +3pp –6% Capital expenditure EUR 325m The UPM Code of Conduct lays the Engaged, high-performing people Ensuring a safe working environment performance foundation for responsible business implement the Biofore strategy and and safeguarding for employees and 5/6 operations and continuous improvement. drive short- and long-term success. everyone working for UPM. business areas Attractive returns achieved their reached 80% of financial targets the EUR 200m Share of certified Supplier Code qualified Share of ecolabelled EBITDA target set wood 84% supplier spend 80% products 69% for the first wave of growth projects Read more: +0pp +1pp –1pp www.upm.com/investors Forest certification is an excellent tool Transparent supplier requirements Ecolabels help customers and for promoting sustainable forestry. form the basis of responsible sourcing consumers to make responsible throughout the entire supply chain. choices and promote transparency. EVENTS IN 2016 2 FEBRUARY UPM Board of 18 APRIL UPM Biofuels gained 22 JUNE Antti Jääskeläinen Directors approved revised ISCC PLUS certification for bio- appointed Executive Vice Code of Conduct based applications President, UPM Raflatac 8 FEBRUARY Winfried Schaur 1 OCTOBER UPM Raflatac’s new 3 NOVEMBER UPM Paper appointed Executive Vice global operating model ENA’s plan to reduce 305,000 President, UPM Paper ENA UPM Paper Asia renamed as tonnes of graphic paper UPM Specialty Papers capacity in Europe 01 02 03 04 05 06 07 08 09 10 11 12 19 JANUARY UPM joined a group 23 MARCH 21 MAY Paper 1 JULY Sale of Schwedt A new machine unit at the Harjavalta Start-up of UPM Otepää plywood mill 15 NOVEMBER UPM Biofuels UPM Kaukas pulp mill of the world's top 50 sustainability UPM Biochemicals production ceased paper mill hydropower plant brought into use expansion and the new biomass boiler joined below50 sustainable fuels investment completed leaders in the Global Compact established an at Madison Paper Change of corporate 8 SEPTEMBER UPM as industry leader 11 OCTOBER UPM Raflatac to build coalition for low-carbon world LEAD forum innovation unit at Industries in the US structure in Finland in the Dow Jones Sustainability Europe a new coating line at the label stock the Biomedicum 21 JANUARY UPM ranked 25th on 4 JULY Index factory in Wroclaw, Poland research and UPM Kymi pulp mill the list of the 100 most sustainable investment announced 15 SEPTEMBER UPM Paper ENA’s 25 OCTOBER UPM received corporations in the world educational centre in Helsinki, Finland 13 JULY Discussions with the organisational structure renewed acknowledgement from CDP for its Government of Uruguay on climate actions the development of logistics infrastructure CONTENTS 4 UPM Annual Report 2016 UPM Annual Report 2016 5 In brief Strategy Businesses Stakeholders Governance Accounts Global Compact LEAD Enterprise value and dividend EURm 20,000 15,000 10,000 5,000 0 08 09 10 11 12 13 14 15 16 ■ Cumulative dividend ■ Market capitalisation Aiming ■ Net debt higher 2016 demonstrated the results of our transformation and set the stage for UPM Raflatac factory in Poland are in full swing. Our negotiations with Shareholder value at the core Shareholder value our future. It is fair to say that the foundations for our success were laid a the Government of Uruguay on the prerequisites for long­term industrial Creating shareholder value is at the core of our strategy and we decade ago when UPM stated that the graphic paper markets had perma­ development in the country have progressed in positive spirit and are believe that this also benefits our other stakeholders in the long term. nently changed and that we needed to find a new focus and new ways of continuing. We also continue to study new opportunities in biofuels and Our transformation and the continued improvement in terms of at the core working to be competitive. biochemicals. financial and responsibility performance were reflected in positive In 2008, we started to turn pulp and energy into market­driven At the same time, our continuous improvement programmes share price performance. Our share price increased by 35% during businesses, and in 2009 we introduced UPM as the future­oriented Biofore delivered results in terms of significant savings in variable and fixed costs. the year. Company with an increasing focus on innovation. The restructuring of UPM's graphic paper business continued in order UPM’s Board of Directors proposed a dividend of EUR 0.95 per In 2013, we changed our business structure to ensure agile and market­ to adjust capacity to profitable demand.