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UPM-Kymmene Corporation
Annual General Meeting 2013
Jussi Pesonen
President and CEO
4 April 2013
MORE WITH BIOFORE
Contents
• Year 2012
• Securing cash flow in mature markets
• Advancing in growth markets
• Growth in low-emission energy
• Recognised frontrunner in bioeconomy
• Summary
| © UPM
Global trends affecting our business
• Resource scarcity
• Climate change
• Digitalisation
• Shift of balance in global economy
• Increasing business clock speed
3
| © UPM
Operating profit excluding special items
Profitability over two economic slowdowns
Europe continues to underperform
the other major economic zones
Real GDP y-o-y growth %
Sources: Global Insight
5,1
8,3
5,4
3,5
8,2
6,8
0
2
4
6
8
10
12
2007 2008 2009 2010 2011 2012
% of sales
-7,5
-5,0
-2,5
0,0
2,5
5,0
7,5
10,0
12,5
2007 2008 2009 2010 2011 2012 2013
Euro zone
US
BRIC
4
Real GDP y-o-y growth %
| © UPM
Actions in 2012
• First biorefinery investment
• New nursery in Uruguay
• New paper machine in
Changshu, China
• New label terminals in
Argentina, Mexico, Ukraine
and Vietnam
• Acquisition of Gascogne’s
labelstock operations
• Realised Myllykoski cost
synergies
• Closed the Albbruck mill
• Timber restructuring
• Divestment of packaging
paper operations
• Divestment of Metsä Fibre
• Divestment of RFID
• Sale of 31,000 hectares
of forests
• Schongau CHP plant
5
| © UPM
Sales
EUR 10,438 m +4%
EBITDA
EUR 1,269 m -8%
Financials 2012:
strong cash flow, stable financial position
Operating cash flow (**
EUR 1,014 m -27 m
Net debt
EUR 3,010 m -582 m
*) excluding special items **) after restructuring payments of EUR 182 m in 2012
6
Operating profit (*
EUR 530 m -22%
EPS (*
EUR 0.70 -0.23
Market capitalisation
EUR 4,633 m +4%
Board’s dividend proposal per share
EUR 0.60 0%
| © UPM
0
200
400
600
800
1 000
1 200
1 400
2007 2008 2009 2010 2011 2012
Consistently strong cash flow
7
Operating cash flow
Cash flow
after investing
activities
Cash flow EUR million
| © UPM
Solid balance sheet
8
2 500
3 000
3 500
4 000
4 500
5 000
2008
2009
2010
2011
2012
1,5
2,0
2,5
3,0
3,5
4,0
Net debt, EUR million Net debt / EBITDA (trailing 12 months)
Net debt
Net debt / EBITDA
2.4
2 500
3 000
3 500
4 000
4 500
5 000
2008
2009
2010
2011
2012
30
40
50
60
70
80
Net debt, EUR million Gearing %
Net debt
Gearing
51
| © UPM
0,20
0,30
0,40
0,50
0,60
0,70
0,80
0,90
0
200
400
600
800
1 000
1 200
1 400
2008 2009 2010 2011 2012
Dividend proposal
Cash flow,
EUR million
EUR per
share
0.40
0.45
0.55
Actual / proposed dividend
Dividend policy
• at least 1/3 of net cash flow from
operating activities less
operational capital expenditure
• net cash flow calculated as an
average over three years
Board’s dividend proposal 2012
• EUR 0.60 (0.60) per share
Operational capex
Minimum dividend by the dividend policy
Cash flow after operational capex
0.60 0.60
9
| © UPM
EBITDA
Strong performance in growth businesses
Small improvement in mature businesses
0
4
8
12
16
20
0
200
400
600
800
1 000
0
10
20
30
40
50
0
50
100
150
200
250
-10
0
10
20
30
40
50
-150
0
150
300
450
600
750
0
3
6
9
12
15
0
30
60
90
120
150
-4
-2
0
2
4
6
8
-100
-50
0
50
100
150
200
-15
-10
-5
0
5
10
15
-40
-20
0
20
40
60
80
EURm % of sales Paper EURm % of sales Fortim EURm % of sales Plywood
EURm % of sales Label EURm % of sales Pulp EURm % of sales Energy
10
| © UPM
Outlook for 2013 (*
(* See complete wording of the "Outlook"
in the Financial statements release 2012
Business environment
• Economic growth in Europe in early 2013 is expected to remain very low, having a negative impact on the European graphic paper markets.
• Growth market economies are expected to fare better, which is supportive for the global pulp and label materials markets, paper markets in Asia and wood products markets outside Europe.
UPM performance in H1 2013 compared with H2 2012
• UPM’s performance will be underpinned by continued stable overall outlook for growth businesses such as Energy, Pulp and Label.
• Slightly lower publication paper prices, adverse currency development and lower delivery volumes are expected to have a clear negative impact on the European paper business profitability.
| © UPM 11
| © UPM
Asset values changed to reflect fair values
0
1 000
2 000
3 000
4 000
5 000
6 000
Energy Pulp Fortim Paper Label Plywood Other
Energy assets
booked at fair
value in Q1/2013
Paper assets
impaired to reflect the
current profitability
EUR million Capital employed
12
| © UPM
New asset values represent UPM’s EBITDA
generation during recent years
Capital employed
31 Dec 2012, incl. changes in Q1 2013
Forest and
timber 15%
Pulp 22%
Energy
25%
Label 5%
Plywood 2%
Paper
30%
Other 1%
Cumulative
EBITDA 2010 – 2012
Forest and Timber 2%
Pulp 41%
Energy 16%
Label 8%
Plywood 1%
Paper 32%
13
SECURING CASH FLOW IN
MATURE MARKETS
| © UPM
20 000
25 000
30 000
35 000
40 000
45 000
50 000
55 000
60 000
65 000
70 000
2006 2007 2008 2009 2010 2011p 2012e
Asia demand Capacity
20 000
25 000
30 000
35 000
40 000
45 000
50 000
55 000
60 000
65 000
70 000
2006 2007 2008 2009 2010 2011 2012p
NA demand Capacity
20 000
25 000
30 000
35 000
40 000
45 000
50 000
55 000
60 000
65 000
70 000
2006 2007 2008 2009 2010 2011 2012p
Eur demand Capacity
Asia is as big graphic paper market as
declining Europe and North America combined
Europe Asia North America
Source: Euro-Graph, PPPC, PPI
'000 tonnes '000 tonnes '000 tonnes
10 mt
10 mt
P = preliminary
15
| © UPM
Significant regional differences in paper use
Source: UPM, RISI
0
5
10
15
20
25
30
35
40
45
50
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Consum
ption [
Kg /
Capita]
0
5
10
15
20
25
30
35
40
45
50
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Consum
ption [
Kg /
Capita]
0
10
20
30
40
50
60
70
80
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Consum
ption [
Kg /
Capita]
Newsprint Magazine Fine
North America North America North America
Europe Europe Europe
China China China
16
| © UPM
Biofore in action
Myllykoski cost synergies achieved as planned
• Paper EBITDA increased by
EUR 25m in 2012 from 2011
• UPM’s paper deliveries in
2012 decreased by 10%,
prices by 1%
• In 2012, synergy benefits
reduced Paper business’
costs by about EUR 170m
• Full cost synergies of
EUR 200m are expected to
be achieved in 2013
UPM Paper EBITDA
0
2
4
6
8
10
12
14
16
18
20
0
100
200
300
400
500
600
700
800
900
1 000
2007 2008 2009 2010 2011 2012
EURm % of sales
17
| © UPM
Adjusting operations to the profitable demand Planned actions subject to employee negotiations
Planned capacity closures
and other actions
Capacity t/a and
paper grade
Reduction in
personnel
Timeline
Permanent closure of the UPM Ettringen PM4
in Germany
175,000
SC
155 By the end of
H1/13
Permanent closure of the UPM Rauma PM3
in Finland
245,000
SC
90 By the end of
H1/13
Sale of the UPM Docelles mill in France
or other exit from UPM Paper business
160,000
Fine
165 Sales process
6 months
Streamlining of Paper BG and global functions 450 End 2013
Total planned actions 580,000 860
UPM Stracel production ceased 270,000
Coated magazine
250 January 2013
Total 850,000 1,110
Estimated annual fixed cost savings of EUR 90m
18
| © UPM
Securing cash flow in mature paper markets
Low cost, low investment position
• Improved mill portfolio through restructuring
• Lower fixed costs per tonne
• Strict investment policy, focus on cost efficiency improvements
Cash flow
• Annual cash flow after capex has averaged over EUR 400 million since the financial crisis
Consolidation in Europe
• Myllykoski acquisition completed and synergies achieved
• Packaging papers divestment completed
Adjusting operations to the profitable demand
• Improve efficiency in supply chain and reduce variable costs
19
ADVANCING IN
GROWTH MARKETS
| © UPM
Over 80% of pulp demand is in growing
end-use segments
Bleached market pulp demand by end-use and region
*Source: Hawkins Wright. End use markets
for bleached kraft pulp, September 2011
WE NA China ROW Total
P&W 14% 5% 10% 9% 39%
Tissue 9% 6% 4% 8% 28%
Packaging 2% 1% 3% 2% 8%
Speciality 7% 2% 3% 4% 16%
Fluff 2% 3% 1% 4% 10%
35% 16% 21% 27% 100%
= declining market segment (19%)
= growing market segment (81%)
21
| © UPM
Biofore in action
UPM’s pulp platform for growth
22
Kymi
• major investment in 2008
Pietarsaari
• major investment in 2004
Kaukas
• modernisation in 1996
Fray Bentos
• started 2007
BHKP tonnes
BSKP tonnes
Total capacity
Fray Bentos
1,100,000 1,100,000
Kaukas 310,000 430,000 740,000
Kymi 370,000 190,000 560,000
Pietarsaari 320,000 480,000 800,000
Total 2,100,000 1,100,000 3,200,000
Fray Bentos
Pietarsaari
Kymi Kaukas
| © UPM
Biofore in action
Consistent growth in label materials
0
250
500
750
1 000
1 250
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
UPM Raflatac sales EURm
23
| © UPM
0
50
100
150
200
250
300
350
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Emerging markets, all products
Biofore in action
Growth in higher value added labelstock
products and growth markets
UPM Raflatac sales (indexed)
2003 = 100
Mature markets,
high added value
products
Mature markets, all products
24
| © UPMU
Biofore in action UPM Paper in APAC and China 1998-2012
25
PM2
Start-up
UPM 100%
ownership
Decision on
PM1 PM1
start-up
R&D Center
established
Decision on
PM3
UPM and APRIL
1998 2000 2002 2004 2006 2008 2009 2010 2012 2014 2016
APAC sales
volume,
tonnes
| © UPM
Biofore in action
UPM grows in China and in the fast
developing label materials segment
• Increase presence in the fast growing Asian
paper segments and strengthen position in the
label materials value chain
• UPM will build a new paper machine at the
Changshu mill in China
• Total investment CNY 3,000m (approx.
EUR 390m), start-up by the end of 2014
• Investment supports the good profitability
of UPM’s growth businesses
26
| © UPM
Biofore in action
Planned new investments
at UPM Changshu mill site
Regional
Supply Chain Center
Global
IT Center
New
Cutsize
Line
PM3
Boiler
Effluent Treatment
Extension
27
GROWTH IN
LOW-EMISSION ENERGY
| © UPM
0
500
1 000
1 500
2 000
2 500
3 000
02 03 04 05 06 07 08 09 10 11 12 16e
Nuclear
Hydro
Biomass
+OL3
Biofore in action
Consistent growth in low-emission
electricity generation
• During the past decade:
– 83% growth in biomass-based
electricity generation
– 16% growth in hydropower
• 81% of UPM’s power generation
is CO2 neutral
• Biggest on-going projects are
the Schongau CHP plant in
Germany and the OL3 nuclear
power plant in Finland
MW CO2 emission neutral electricity capacity
29
| © UPM
Biofore in action
UPM creates new business in
wood-based renewable diesel
• UPM invests in the world’s first wood-based renewable diesel
production in Lappeenranta, Finland
− Total investment of approximately EUR 150m
− Production capacity 100,000 tonnes/a
− Production starts in 2014
• Raw material is sustainably produced crude tall oil,
a residue from pulp production
• Technology is based on UPM’s innovation and
long-term development work
• Potential to grow into a significant new business
with good profitability
30
| © UPM
Growing UPM Kaukas mill site in
Lappeenranta, Finland
February 2012
1
2
3
4
5
6
RESEARCH CENTRE
BIOREFINERY
SAW MILL
PAPER MILL
BIOMASS POWER PLANT
PULP MILL
1
2
3
4
5
6
| © UPM
Growing UPM Kaukas mill site in
Lappeenranta – Biorefinery
| © UPM 32
| © UPM
| © UPM
Biofore in action
New opportunities for the future
34
BIOFIBRILS
BIOCHEMICALS
NEW AREAS
NEW BUSINESSES
BIOFUELS
First large-scale
investment ongoing
Pilot plant start-up
in Q1 2012
Pilot plant start-up
in Q3 2011
Mill scale concepts
under development
BIOCOMPOSITES
| © UPM
Biofore in action
UPM’s development expenditure
35
0
20
40
60
80
100
2008 2009 2010 2011 2012
*) Includes R&D, capital expenditure and net operating expenses for new businesses
EURm
Mature businesses
Growth businesses (*
RECOGNISED
FRONTRUNNER IN
BIOECONOMY
| © UPM
• Supersector leader in basic materials
sector, the only forestry and paper
company worldwide listed on Dow
Jones Sustainability Indexes (DJSI)
• ‘Most Innovative Company’ award from
Ethical Corporation Awards thanks to
UPM’s ecodesign concept and overall
sustainability thinking
• Highest score for climate change
disclosure in the Nordic Carbon
Disclosure Leadership Index
• Winner of the ‘Breakthrough Innovation
in Technology’ for improving efficiency
and sustainability of biofuels production
UPM has been recognized
| © UPM 37
| © UPM
Visibility and recognition
Reporting and follow-up
World class safety results in three years!
Target: lost time accident frequency < 5
Step Change in Safety 2012-2014
Resources
.
Major change effort
Measurable sub-targets
Incentives to all UPMers
38 | © UPM
| © UPM
0
5
10
15
20
2010 2011 2012 2013 YTD 2/2013
In 2012, lost time accident frequency fell by 40%
39
Lost time accident frequency =
Number of LTA / 1 million hours
of work
Step Change in Safety
target by end 2014 < 5
World class
safety results
in three years!
Lost time accident frequency
SUMMARY
| © UPM
Expanding well performing growth businesses
maintaining cash flow from mature businesses
0
2 000
4 000
6 000
8 000
2007 2012 "5+ years"
41
3.1bn
4.4bn
Energy Biofuels Pulp Paper China,
label papers Label
+43%
0
2 000
4 000
6 000
8 000
2007 2012 "5+ years"
7.6bn 6.8bn -11%
Paper other Timber Plywood
Steps in well performing
growth businesses
• Labelstock expansion
• Paper machine in China
• Biofuel refinery
• Fair valuation of Energy
assets
Challenge in European
graphic papers
• Exit Stracel, 270kt of
magazine paper capacity
• Plan to reduce 580kt of
graphic paper capacity
• Planned annual fixed cost
savings EUR 90m
• Plywood and Timber
restructuring
Sales, EURm
(*
*) This is not a forecast, but one
scenario from some of UPM’s
existing growth opportunities
Average
EBITDA margin 21%
ROCE 13%
Average
EBITDA margin 5%,
generating free cash flow
Gro
wth
busin
esses
Matu
re b
usin
esses
Sales, EURm
| © UPM
What are we targeting?
• More than 50% of sales from well performing
growth businesses in 5+ years
• Drive strong cash flow through improved margin,
release capital from mature businesses
• Maintain solid balance sheet and strong cash flow
• Increase UPM’s earnings and valuation
42
