UPM-KYMMENE CORPORATION ANNUAL GENERAL MEETING 2008 CEO REVIEW. Jussi Pesonen March 26, 2008

Transcription

1 UPM-KYMMENE CORPORATION ANNUAL GENERAL MEETING 2008 CEO REVIEW Jussi Pesonen March 26, 2008

2 Year 2007 operational efficiency and profitability improved fibre costs and strong euro slowed down the good profitability development the company has foreseen changes in the business environment by starting its restructuring on time strong balance sheet gives a good foundation for developing the company

3 Content Business environment Financials 2007 Strategic focus areas Summary

4 BUSINESS ENVIRONMENT

5 BUSINESS ENVIRONMENT Demand, capacity and prices in North America Paper capacity and demand Paper prices '000 tonnes % -4% USD NA demand Capacity 400 News 48,8 g/m² LWC 59,2 g/m² WFUr offset 74 g/m² SC 51,8 g/m² WFCr 88,8 g/m² Source: Cepiprint, Cepifine, PPPC, RISI

6 BUSINESS ENVIRONMENT Demand, capacity and prices in Asia Paper capacity and demand Paper prices in China '000 tonnes % +4% USD Imported Domestic Asia demand Capacity WFU s g WFC s g Source: PPI

7 BUSINESS ENVIRONMENT Demand, capacity and prices in Europe '000 tonnes Paper capacity and demand -2% Paper prices % Demand Capacity News 45 g/m² LWC off 60 g/m² SC rg 56 g/m² WFCr 100 g/m² Source: Cepiprint, Cepifine, PPI WFUr 80 g/m²

8 BUSINESS ENVIRONMENT Demand for self-adhesive label materials bn m² Demand in Europe and in North America +5% 0% Change in demand from 2006: In Europe approx. + 5% In North America +/- 0% 2 1 Prices Europe North America Prices declined slightly in North America and in Europe Sources: Finat, TLMI, Estimates of UPM Raflatac

9 BUSINESS ENVIRONMENT Demand for Wood Products Demand for sawn timber was strong during the first half of the year After summer the markets slowed down first for whitewood and then in the fourth quarter also for redwood Plywood demand continued to be strong in 2007

10 BUSINESS ENVIRONMENT Stumpage prices were record high in 2007 / m³ 80 Log prices / m³ 28 Fibre wood prices Jan 06 Feb Mar Apr May JunJul Aug Sep Oct Nov Dec Jan 07 Feb Mar Apr May JunJul Aug Sep Oct Nov Dec Jan 08 Feb Jan 06 FebMar Apr May JunJul Aug SepOct Nov Dec Jan 07 FebMar Apr May JunJul Aug SepOct Nov Dec Jan 08 Feb Spruce Pine Birch Spruce Pine Birch Source: Metla

11 BUSINESS ENVIRONMENT Wood procurement in imports from Russia UPM uses annually over 22 million cubic metres of wood in Finland Imports from Russia are approx. 4 million cubic metres Russian export duties impacted UPM in 2007 by approx. EUR 13 million Other Finland Consumption 22.3 mill. m 3 Russia Procurement approx. 5 mill. m³ Imports approx. 4 mill. m³ Baltic countries

12 BUSINESS ENVIRONMENT Strong euro affecting exports Euro has strengthened in % compared to USD 23% compared to yen 11% compared to remimb (China) 1,5 1,4 1,3 1,2 Annual average EUR/USD exchange rate 1,24 1,26 1,37 1,47 Strong euro has increased paper imports to Europe UPM has raised export prices has ceased unprofitable exports Source: Bank of Finland 1,1 1,0 1, Tammi-helmi UPM mitigates the currency fluctuations by selling about half of 12 months estimated currency income (net) in advance.

13 BUSINESS ENVIRONMENT Increased price of electricity weakens the competitiveness of European industry Price of electricity has risen by approx. 35% since ,0 50,0 Annual average EUR/MWh Market price for emission allowances in 2008 is approx. 21 / t CO 2 UPM benefits from the consistent development of its energy resources 40,0 30,0 20,0 10,0 0, Nord Pool EEX UPM's self-sufficiency in the Nord Pool region is 100%. Source: Reuters

14 BUSINESS ENVIRONMENT EU Energy Package uncertainty before final decisions Emission targets set for Finland are challenging Estimated annual cost impact for the Finnish forest industry is EUR million Considering the future of the forest industry it is important: to use wood and fibre primarily to other purposes than energy production to avoid subsidies which hinder competition Uncertainty on final decisions impacts business planning and postpones investment decisions

15 BUSINESS ENVIRONMENT Business environment 2007 Summary Demand for UPM's main products was good Price development was unsatisfactory due to tough competition Particularly wood and fibre costs increased Continued strengthening of euro increased imports to Europe

16 FINANCIALS 2007

17 FINANCIALS 2007 Key figures 2007 Sales, M EBITDA, M % of sales Operating profit, M Non-recurring items, net Operating profit excl. non-recurring items, M EPS excl. non-recurring items, Net cash generated from operating activities, M Paper deliveries, 1,000 tonnes Personnel at end of period ,035 1, ,389 26, ,022 1, ,215 10,988 28,704

18 FINANCIALS 2007 Special items related to restructuring in 2007 GAINS ON SALES - Walki Wisa - UPM-Asunnot - Rauma Stevedoring and Botnia Shipping WRITE DOWNS IN MAGAZINE PAPERS DIVISION - Fixed asset write downs - Closure costs - Goodwill impairments OTHER SPECIAL ITEMS, NET SPECIAL ITEMS, NET IN OPERATING PROFIT Operating profit, M

19 FINANCIALS 2007 Sales development billion Divested businesses Paper prices, USD/EUR exchange rate approx. -12% approx. +7% Paper deliveries Other divisions 2007 (UPM Raflatac, Wood Products)

20 FINANCIALS 2007 Development of capacity and deliveries in Paper Divisions '000 tonnes Capacity (at year end) Deliveries

21 FINANCIALS 2007 UPM has improved its operational efficiency Productivity has increased Production per person has increased significantly approx. 30% improvement in Deliveries / Personnel

22 FINANCIALS 2007 UPM's cost development 2006 vs Wood and RCP Chemicals, pigments and distribution Costs: Increased Unchanged Decreased Others Personnel Energy

23 FINANCIALS 2007 Magazine papers Factors improving the result improved production efficiency higher deliveries Operating profit Factors weakening the result increase in wood costs strengthened euro lower average prices ( / ton) UPM closed the unprofitable Miramichi mill in Canada. Operating profit* Operating profit % * Excluding special items

24 FINANCIALS 2007 Newsprint Factors improving the result higher prices improved production efficiency Operating profit Factors weakening the result rise in fibre costs weakening market balance Deliveries were about the same as previous year Operating profit* Operating profit % * Excluding special items 0

25 FINANCIALS 2007 Fine and speciality papers Factors improving the result higher average prices improved production efficiency Operating profit Factors weakening the result rise in wood costs rise in pulp costs Deliveries increased by 9% (+ 309,000 tons) Operating profit* Operating profit % * Excluding special items 0

26 FINANCIALS 2007 Self-adhesive label materials Sales exceeded one billion euros Operating profit decreased partly due to growth investments New factory investments in the USA and in Poland proceeded as planned million % million Operating profit Sales 1, , Operating profit* Operating profit % * Excl. special items Label materials sales

27 FINANCIALS 2007 Wood Products Strong improvement in operating profit Profitability of sawn timber improved, outlook weakened Good profitability and demand in plywood and veneer products million % Operating profit 86 7, million Sales Operating profit* Operating profit % Current businesses * Excl. special items

28 FINANCIALS 2007 EBITDA * margin development % EBITDA* % * EBITDA is operating profit before depreciation, amortization and impairment charges, excluding the change in value of biological assets, the share of results of associated companies and joint ventures and special items.

29 FINANCIALS 2007 Financial objectives Return on capital employed (ROCE) % % 7.4% 4.3% WACC pre tax ROCE excl. special items ROCE as reported

30 FINANCIALS 2007 Gearing ratio and net interest-bearing liabilities Gearing ratio Net interest-bearing liabilities % million Target: maximum 100% Ratings: Moody s Baa3 (stable), latest change February 11, 2008 S&P BBB (negative), latest change October 22, 2007

31 FINANCIALS 2007 Capital expenditure million Depreciation excl. amortization of goodwill Strategic investments Operational investments

32 FINANCIALS 2007 Major capital expenditure ONGOING ENERGY: Caledonian bio power plant PULP: Kymi recovery plant PAPERS: Jämsänkoski LABEL MATERIALS: Dixon, USA Wroclaw, Puola WOOD PRODUCTS: Otepää COMPLETED 2007 Value Value 84 M 325 M 38 M 100 M$ 90 M 10 M Estimated completion Completion PULP: UPM's associated company Botnia's pulp mill in Uruguay, total value of the investment USD 1.2 billion UPM's direct investment: 93 M Q4 New bleaching line at Tervasaari mill PAPERS: Jämsänkoski PM 4 34 M 45 M Q3 Q2 ENERGY: Chapelle Darblay bio power plant 85 M Q2

33 FINANCIALS 2007 Operating cash flow and dividend per share Operating cash flow per share Dividend 3,50 1,2 3,00 1,0 2,50 2,32 0,8 0,75 2,00 1,50 1,67 0,6 1,00 0,4 0,50 0,2 0, , Operating cash flow per share Dividend per share Dividend proposed

34 STRATEGIC FOCUS AREAS

35 UPM's strategy UPM aims to be one of the leading companies in printing and speciality papers self-adhesive label materials wood products High self-sufficiency in pulp and energy High integration of forest resources and recycled fibre

36 Actions to execute the strategy Improving profitability in Europe Advancing in new growth markets Developing new business opportunities 1 2 3

37 1 Improving European profitability Implementation of UPM's profitability programme Company's own restructuring Strengthening of self-sufficiency in fibre and in energy Readiness for industry restructuring

38 PROFITABILITY Profitability programme is proceeding as planned milion Efficiency improvement + Target million Estimate 2008 Savings in variable costs Savings in fixed costs 135 Asset impairment Target: Profitable growth 61 Provision for personnel costs

39 PROFITABILITY Coated magazine and fine paper Structural overcapacity in Europe 0,9 3,0 1,6 0,7 0,6 Overcapacity significantly reduced 18,5 19,0 19,3 Increase in European demand but decrease in net exports End 2005 Closures 2006 End 2006 Closures 2007 End 2007 Sources: Cepi, PPPC, EMGE, RISI, Jaakko Pöyry * 2007 estima

40 PROFITABILITY Asset review 1. Closure of Miramichi mill in Canada - 450,000 t/a magazine paper (temporarily closed in August) 2. Reduction of 250,000 tons of newsprint capacity during Temporary shutdowns at Kajaani and Steyrermühl mills 3. Reduction of label paper capacity with temporary shutdowns 4. Rationalisation of self-adhesive label materials operations closing four old coating lines Improved market balance and annual cost savings of M

41 PROFITABILITY High self-sufficiency secures competitive energy supply Self-sufficiency in electricity: 100% in Finland Approx. 70% within the Group Biomass accounts for nearly 60% of UPM's total fuel procurement 70 % 60 % 50 % 40 % Share of biomass-based fuels in energy generation UPM, UPM Finland Total EU Target: 20% by % 20 % In UPM, the share of renewable energy will grow further 10 % 0 % OECD total EU-15 USA Japan UPM total UPM, Finland Source: IEA

42 PROFITABILITY UPM's fossil carbon dioxide emissions in Finland have decreased by 36% since UPM's investments in energy account for approx. 900 million CO Paper production at mills Kyoto target Consistent investments in biomass-based power plants and energy efficiency

43 PROFITABILITY Electricity consumption per tonne of paper has decreased significantly MWh/t 2,2 2 1,8 approx. 23% 1,6 1,4 1,

44 PROFITABILITY Versatile fibre base improves competitiveness Self-sufficiency in pulp over 100% Annual own capacity 2.3 million tonnes Share of Botnia's annual capacity 1.75 million tonnes Pulps used in UPM's paper manufacturing (%) UPM uses annually 3 million tonnes of recovered paper in printing paper manufacturing Significant user of mechanical pulp High quality fibre base Recycled fibre Mechanical pulp Chemical pulp

45 PROFITABILITY Industry restructuring UPM will participate in industry restructuring provided it will bring added value to the company - capacity adjustments Traditional /tonne value creation - costs related to restructuring - Necessary additional investments Real value

46 Actions to execute the strategy Improving profitability in Europe Advancing in new growth markets Developing new business opportunities 1 2 3

47 2 GROWTH MARKETS Advancing in new growth markets SIGNIFICANT INVESTMENTS: Expansion of self-adhesive label materials business Investments in China will strengthen UPM's position in Asian markets Investments in short fibre pulp production in Uruguay Investments in Russia letter of intent for a forest industry project

48 GROWTH MARKETS UPM Label Division's growth into a global player Milj Creating global presence RFID Jyväskylä Polinya China UPM-Kymmene Corporation Raflatac Fletcher South Africa Strong organic development RFID Fletcher Fletcher CM2 RFID China Dixon, USA Changshu Poland 200 Australia UPM-Kymmene Corporation Label Materials Division Malaysia UPM Raflatac UPM-Kymmene Corporatio UPM Raflatac

49 GROWTH MARKETS Investments of self-adhesive label materials business New label materials factories 1. Changshu in China (2007) 2. Dixon in the USA (Q1 / 2008) 3. Wroclaw in Poland (Q4 / 2008) The investments account for a total of nearly 200 million

50 GROWTH MARKETS Changshu mill site in China base for growth in Asia Modern paper mill capacity of 850,000 t/a Label materials factory (2007) Excellent location and expansion possibilities A total investment of over USD 1 billion

51 GROWTH MARKETS Associated company Botnia's pulp mill in Uruguay Investment secures access to low cost fibre Pulp mill: Annual capacity 1,000,000 t/a Total investment cost: USD 1,200 million UPM UPM's share about half of the production UPM uses the pulp mainly in its mills in China and Central Europe

52 GROWTH MARKETS Letter of intent: 50/50 joint venture between UPM and Russian Sveza MODERN FOREST INDUSTRY FACILITY PLANNED: Pulp mill: capacity of approx. 800,000 t/a Sawmill approx. 300,000 m 3 OSB-building panels factory approx. 450,000 m3 Total investment would exceed EUR 1.0 billion Investment decisions expected latest early 2009 Final investment decision is subject to a satisfactory outcome of the feasibility study and necessary approvals from authorities

53 Actions to execute the strategy Improving profitability in Europe Advancing in new growth markets Developing new business opportunities 1 2 3

54 3 Developing new business opportunities Wood plastic composite UPM ProFi - made of fibre and plastics surplus originating from UPM's labelstock production - Production in Finland, demand is growing RFID tags and inlays - production in Finland and in the USA; new factory will be opened in China in 2008 Biofuels - Business concepts and technical solutions under development Agro residues - e.g. straw and reed

55 Summary Actions to execute the strategy Consolidate in mature markets Develop the portfolio Profitable growth Strengthened competitive position Grow in new markets Use assets efficiently Close uncompetitive capacity Improved cost base Improve operating efficiency

56 Beginning of the year 2008 UPM's year has started as forecast. Paper demand continues to be good. Already announced and completed capacity reductions further improve market balance in Europe. Demand for self-adhesive labelstock in Europe and in Asia has continued to grow. However, demand in North America has decreased slightly. In wood products, demand for plywood has continued as forecast. In sawn timber outlook is weak. The question of export duties on Russian wood still unsolved. EU Energy Package 2020 uncertainty on the final decisions impacts business planning and postpones investment decisions

57 Forward-looking statement It should be noted that certain statements herein which are not historical facts, including, without limitation, those regarding expectations for market growth and developments; expectations for growth and profitability; and statements preceded by "believes", "expects", "anticipates", "foresees", or similar expressions, are forward-looking statements. Since these statements are based on current plans, estimates and projections, they involve risks and uncertainties which may cause actual results to materially differ from those expressed in such forward-looking statements. Such factors include, but are not limited to: (1) operating factors such as continued success of manufacturing activities and the achievement of efficiencies therein including the availability and cost of production inputs, continued success of product development, acceptance of new products or services by the Group's targeted customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by the Group's patents and other intellectual property rights, the availability of capital on acceptable terms; (2) industry conditions, such as strength of product demand, intensity of competition, prevailing and future global market prices for the Group's products and the pricing pressures thereto, financial condition of the customers and the competitors of the Group, the potential introduction of competing products and technologies by competitors; and (3) general economic conditions, such as rates of economic growth in the Group's principal geographic markets or fluctuations in exchange and interest rates. For more detailed information about risk factors, see pages of the company's Annual Report 2006.

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