MARKET DRIVEN BUSINESS MODEL – What does it mean to Energy and Pulp?

Heikki Vappula

President

Energy and Pulp Business Group

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Contents

• Growth through market based approach

• Energy

• Pulp

• Biofuels

• Summary

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ENERGY AND PULP Growth through market based approach in Energy and Pulp Business Group

EnergyCompetitive climate friendly energy portfolio with market presence in Nordic and Central European markets

PulpPulp production and plantation operations. Pulp market operations.

Increase the cost-competitive pulp capacity and market operations

Grow in low-emission generation and leverage market operations

BiofuelsResearch and development of advanced biofuels

Leverage the business opportunities in biofuels and biochemicals

MARKET BASED BUSINESS MODEL IN ENERGY

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MARKET BASED BUSINESS MODEL – ENERGYUPM targets profitable growth in CO 2neutral power generation

12,5 TWh

2010

2012

2014

2016

2018

9 TWh

+ OL 3

2020

+ OL 4

Strengths• Versatile production portfolio

• Long and vast experience in electricity generation

• Competence in market operations• 80% of fuels used for electricity generation

in Finland are renewable

Challenges• Energy biomass sourcing

• Renewable energy support schemes

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MARKET BASED BUSINESS MODEL – ENERGYMarket integration from regional markets to European markets is taking place

• Market models and dynamics unified • Markets merging • Price regions disappearing • Cross border trading increasing• New transmission investments

needed

Nordic region as a frontrunner Expected developments

BNL

LF

IAL

BHYUMZ

CH

PL

CZSKH

SLHR

D

European electricity, gas, emission and environment al certificate market

Key success factors:•Good quality production portfolio•European wide market operations•In-depth market intelligence

Broadly homogeneous price regions 2008

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MARKET BASED BUSINESS MODEL – ENERGYElectricity price is influenced by number of varying factors and drivers

Fundaments

WeatherRegulation

Economicgrowth

Co2price

Demand

Productioncapacity

Equity

Gasprice

Oil price

Coal price

Interestrates

Operating in marketsrequires variouscompetences:

•Long term planning for short term actions

•Optimal production and consumption balancing

•Hedging strategies

•Follow-up of technical and market indicators

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MARKET BASED BUSINESS MODEL – ENERGYIntegrated utilisation of UPM's expertise to create value for power assets and to secure competitive price for mills

External salesInternal demand

Cost based pricing

Resource based approach

• Energy as resource

• Balanced demand/supply in Nordic• Only small net external sales

Market based approach

• Energy as business

• Net open position grows (incl. OL3)

• Ability to optimize gross position

• Risk policy and active hedging strategy • Integration benefits through strong

position in the value chain

Generation Consumption

External sales / purchaseInternal generation (mill site CHP)

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MARKET BASED BUSINESS MODEL IN PULP

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MARKET BASED BUSINESS MODEL – PULP World chemical market pulp demand growing

• Growth takes place in non-integrated pulp

million tonnes

Source Pöyry 2009

Total

Chemical pulp

BleachedMarket

0

50

100

150

200

250

300

350

400

Sulphite

Recycled paper

Mechanical pulp

Un-bleachedNon-wood

Integrated

Market BHKPMarket BSKP

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

2003

2004

2005

2006

2007

2008

2009

2010

2011

e

2012

e

2013

e

2014

e

Sulphite

UKP

BSKP

BHKP

World fibre consumption

Source PPPC 2010

Market pulp demand development 2003-2014

million tonnes

Forecast

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MARKET BASED BUSINESS MODEL – PULPGrowth focus on regions with increasing wood availability and cost efficient plantation operation s

Wood availability

Increasing

Stable / decreasing

Source: Pöyry

0

2000

4000

6000

8000

Total LatinAmerica

Asia NorthAmerica

EasternEurope

WesternEurope

'000

tonn

es

2.4%

4.7%

4.3%

1.2%1.8% 0.2%

Chemical market pulp capacity growth by region

2009 - 2014

Source: PPPC

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150

250

350

450

550

650

750

0 10 000 20 000 30 000 40 000 50 000 60 000

Cumulative capacity, 1000 t/a

MARKET BASED BUSINESS MODEL – PULP UPM's current pulp production portfolio provides excellent operational performance

€/t Market pulp producers' delivered cash costs to Frankfurt, EUR/t

UPM FinlandUPM UruguayMetsä-Botnia Finland

Source: Pöyry estimate Q4/2010

World softwoodmarket pulp

World hardwoodmarket pulp

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MARKET BASED BUSINESS MODEL – PULPDriven by market based approach, UPM strengthens its position in the value chain

Resource based approach

• Pulp as resource

• Integrated pulp producer • Production in the northern hemisphere

• Pulp supplier mainly for printing and writing papers

• Cost based pricing

Market based approach

• Pulp as business• Active operator in the pulp market

• Production in the cost efficient regions

• Pulp supplier for wide range of growing end-uses

• Market based pricing

-1000

0

1000

2000

3000

4000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

External sales

3rd party deliveries to UPM

Botnia deliveries to UPM

UPM pulp production

UPM pulp usage

1,000 t/a

BIOFUELS

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BIOFUELSUPM's biofuel strategy

High green house gas reductions

Away from the

food chain

High quality fuels

BTLBiodiesel

Bio-oil Bioethanol

Hydrotreatedbiofuels

SUMMARY

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Summary

• Combination of market based business model and strong integration benefits improves UPM's competitive advantage

• Driven by market based approach Energy and Pulp has good growth opportunities

• Market based integration means

- Improved ability to respond to changes

- Increased market insight leading to new opportunities

- Improved business minded capabilities and competences

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0

20

40

60

80

100

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

€, million Operating profit excluding special items

ENERGYSteady profit generator

41.8%34.3%36.6%25.1%EBIT %

18.6%

40.3%

26.9%18.4%9.6%ROCE %

41.6%43.3%31.1%EBITDA %

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-100

-50

0

50

100

150

200

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

€, million Operating profit excluding special items

PULPStrong year for pulp producers

34.0%-19.4%15.7%23.3%EBIT %

-7.6%

-2.8%

23.3%8.8%13.2%ROCE %

42.6%14.7%23.3%EBITDA %

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-80

-60

-40

-20

0

20

40

60

80

100

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

€, million Operating profit excluding special items

FOREST AND TIMBERIncrease in the fair value of forest and higher deliveries of sawn timber

11.9%1.6%-1.2%10.5%EBIT %

1.3%

1.8%

10.6%-1.2%12.7%ROCE %

3.4%-2.5%7.8%EBITDA %

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