UPM FRONTRUNNER CFO SNAPSHOT. Jyrki Salo, CFO June 2, 2008 Nordland

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1 UPM FRONTRUNNER CFO SNAPSHOT Jyrki Salo, CFO June 2, 28 Nordland

2 CFO snapshot Proactive strategy Financial impacts Paper segments Label Materials and Wood Products Cash flow and investments Balance sheet UPM 2

3 PROACTIVE STRATEGY FINANCIAL IMPACTS Continuing operations sales CAGR 4% in 23-7 billion 11, 1,5 Sales and organic growth % 1 9 1, 9,5 9, 8,5 8, 7,5 7, 6,5 6, * Q EBIT margin (%) Divested businesses Continuing operations * Labour dispute in Finland UPM 3

4 PROACTIVE STRATEGY FINANCIAL IMPACTS EBIT excl. special items 23 7 million Paper segments and resources Q18 vs. Q17-33m Paper segments -14m EBIT 23 Paper prices, currency Paper deliveries Paper costs Paper depreciation Other operations Converting/Label Materials Wood Products Fair value gains EBIT 27 Q18 Vertical integration: energy and pulp self-sufficiency buffers input costs UPM 4

5 PROACTIVE STRATEGY FINANCIAL IMPACTS Cost development million Total costs excl. depreciation 27 partly from disposals +3.4% 8 23 Wood and fibers Chemicals Energy Other raw materials Delivery of own products Personnel and other NOTE: During the period, paper delivery tons have grown 11% (CAGR 2.7%) 27 UPM 5

6 Presentation outline Proactive strategy Financial impacts Paper segments Label Materials and Wood Products Cash flow and investments Balance sheet UPM 6

7 PROACTIVE STRATEGY FINANCIAL IMPACTS Raw material market prices have increased rapidly Index 24=1 25 Oil Electricity (EEX) Chemical pulp Electricity (Nordpool) Pulpwood birch (Fin) Coating materials Pulpwood spruce (Fin) Bleaching chemicals Q14 Q24 Q34 Q44 Q15 Q25 Q35 Q45 Q16 Q26 Q36 Q46 Q17 Q27 Q37 Q47 Q18 UPM 7

8 PROACTIVE STRATEGY FINANCIAL IMPACTS Paper segments fixed costs per tonne have declined 14% since Paper segments costs per delivered tonne (excluding depreciation) 23 = 1 +9% Variable costs 1 +2% Total costs % Fixed costs UPM 8

9 PROACTIVE STRATEGY FINANCIAL IMPACTS High self-sufficiency in electricity and pulp reduces earnings volatility EBIT excl. non-recurring items, trailing 12 months million Impact of the 25 labour dispute Paper segments Q14 Q24 Q34 Q44 Q15 Q25 Q35 Q45 Q16 Q26 Q36 Q46 Q17 Q27 Q37 Q47 Q18 Other operations, Associated companies (excluding fair value changes) Fair value changes of forests UPM 9

10 PROACTIVE STRATEGY FINANCIAL IMPACTS Electricity self-sufficiency will pay off 1(2) UPM's own power generation represents 79% of consumption 87% of power generation is nuclear, hydro power and CHP own power generation some 14 TWh, power plants outside mills represent some 1TWh TVO's new nuclear power plant starts in 211, adding 3.5TWh HYPOTHETICAL EXAMPLES FIGURES ARE NOT ACTUAL Case 1: own power generation Case 2: attractive power contract Volume 1 TWh - from TWh Production cost 25/MWh Market price 55/MWh Life span 5 years Volume Contract price Market price Maturity 1 TWh 3/MWh 55/MWh 1 years UPM 1

11 PROACTIVE STRATEGY FINANCIAL IMPACTS Electricity self-sufficiency will pay off 2(2) Pre-tax profit impact, million Little earnings difference until Significant difference eventually 25 Value difference: NPV Case 1: 4.bn Case 2: 1.4bn Benefit from owning power plants 2.6bn Case 1: Own power generation Case 2: Power contract Own generation benefit 223 Assumptions: Discount rate 7.5% Tax rate 26% NOTE: HYPOTHETICAL EXAMPLES FIGURES ARE NOT ACTUAL UPM 11

12 Presentation outline Proactive strategy Financial impacts Paper segments Label Materials and Wood Products Cash flow and investments Balance sheet UPM 12

13 PROACTIVE STRATEGY FINANCIAL IMPACTS Label Materials sales CAGR 8.5% since 23 billion 1 6 % EBIT margin (%) Sold units: Walki Wisa Loparex Walki Films UPM Raflatac Continuing operations sales CAGR 8.5% in 23-7 UPM 13

14 PROACTIVE STRATEGY FINANCIAL IMPACTS Label Materials - investments, raw materials and strong euro burden profits EBIT excl. non-recurring items, trailing 12 months million Converting Label Materials EBIT margin (%) Label Materials EBIT Converting EBIT Q44 Q15 Q25 Q35 Q45 Q16 Q26 Q36 Strong euro, higher raw material and fixed costs (partly due to investments) Price hikes have been announced Q46 Q17 Q27 Q37 Q47 Q18 UPM 14

15 PROACTIVE STRATEGY FINANCIAL IMPACTS Label Materials investing on growth million Dixon, Wroclaw 14 Strategic growth investments : Fletcher, US 21 Fletcher, US 25 Tampere, Finland 26 Changshu, China 27 Dixon, US Q18 Wroclaw, Poland Q E Growth investments exceed 2m Depreciation Capex No material investment decisions for 29 UPM 15

16 PROACTIVE STRATEGY FINANCIAL IMPACTS Wood Products continuing operations sales CAGR 3% in 23-7 million % EBIT margin (%) Sold units: Puukeskus Brooks Anco Trae Sawmilling Plywood UPM 16

17 PROACTIVE STRATEGY FINANCIAL IMPACTS Wood Products - sawmilling boom is over EBIT excl. non-recurring items, trailing 12 months million ,5 6 EBIT margin (%) 6 4 4,5 3 Wood Products 2 1,5 Q14 Q24 Q34 Q44 Q15 Q25 Q35 Q45 Q16 Q26 Q36 Q46 Q17 Q27 Q37 Q47 Q18 Sawmilling: higher wood costs, weakened timber market Plywood: good profitability continues UPM 17

18 PROACTIVE STRATEGY FINANCIAL IMPACTS Summary Several divestments, no acquisitions since 23 Organic growth 4% pa Investments focused on energy, efficiency and quality not visible in top-line will lead to long-term advantage Input costs (wood, RCP, energy, chemicals) have increased Proactive measures have been taken to mitigate this Capacity closures More efficient use of capacity Personnel reductions Development for lower consumption of inputs (energy, pulp, etc.) per tonne Global sourcing and efficient logistics Paper production variable costs per delivered tonne +9%, total cost per delivered tonne +2% since 23 UPM 18

19 Presentation outline Proactive strategy Financial impacts Paper segments Label Materials and Wood Products Cash flow and investments Balance sheet UPM 19

20 CASH FLOW AND INVESTMENTS Operating cash flow Net operating cash flow, trailing 12 months million Capex and acquisitions Dividend Net operating cash flow Cash flow after investing activities Q43 Q14 Q24 Q34 Q44 Q15 Q25 Q35 Q45 Q16 Q26 Q36 Q46 Q17 Q27 Q37 Q47 Q18 Q27-Q18: working capital increased 165m mainly due to wood inventory volume and price Capex expected to be approx. 5m in 28, 15-2m lower than previously UPM 2

21 CASH FLOW AND INVESTMENTS Cumulative cash flow Cash from operations 5,19-3,368 Capital expenditure -194 Sale of fixed assets -2,179 Other -1,312 Shares and company acquisitions 1,832 Share repurchases and dividends paid 31 Debt , million Cash flow priorities: 1. Maintenance investments 2. Dividend 3. Strategic investments 4. Share buy-backs 5. Reduction of debt UPM 21

22 CASH FLOW AND INVESTMENTS Strategic investments since 23 approx. 2 billion million 12 Strategic investments since Q18 Strategic investments Maintenance investments Depreciation Energy RCP China, Labels Energy/Pulp Paper rebuilds Maintenance investments approx pa Committed strategic investments (as of 6/8) approx. 1m for 29-1 UPM 22

23 CASH FLOW AND INVESTMENTS Summary Working capital increased 165m in the past 12 months mainly due to wood inventory volume, price Capex guidance for 28 is 5m 15-2m lower than the level seen over the past years Depreciation approx. 8m pa Energy, fiber and efficiency dominate UPM's latest investments Strategic investments 2bn since 23 Low investment needs Modern and well invested paper and pulp mills means lower reinvestment needs Committed strategic investments beyond 28 approx. 1m Maintenance capex approx. 25-3m pa UPM 23

24 Presentation outline Proactive strategy Financial impacts Paper segments Label Materials and Wood Products Cash flow and investments Balance sheet UPM 24

25 BALANCE SHEET Healthy balance sheet Gearing ratio Net interest-bearing liabilities % million Target: maximum 1% March Ratings: Moody s Baa3 (stable), latest change February 11, 28 S&P BBB- (negative), latest change April 21, March UPM 25

26 BALANCE SHEET Structure of interest bearing debt 1 % 9 % 8 % Bond loans 7 % 6 % 5 % 4 % 3 % 2 % Loans from financial institutions and pension loans Short term loans 1 % % UPM 26

27 BALANCE SHEET Extended and even maturity profile of long term debt million Maturity profile average life of 6.1 years Other Loans EUR Bonds USD Bonds GBP Bonds JPY Bonds Committed facilities UPM 27

28 CFO snapshot Summary Efficiency gains achieved Self sufficiency in low cost energy and pulp provides long-term advantage Low investment needs going forward Extended maturity of debt Healthy balance sheet UPM 28

29 UPM 29