UPM MAGAZINE PAPER ASSET REVIEW · during 2012 – Asset disposals(* are expected to total EUR 30 million, mainly during 2012 • Fixed asset write-off of approx. EUR 70 million in

UPM MAGAZINE PAPER ASSET REVIEW

UBS Global Paper and Forest Products Conference

Tapio Korpeinen

CFO

September, 2011

FINANCIALS Q2 2011

| © UPM

Solid result despite challenging cost

environment

Gearing

44% -11 pp

EBITDA

EUR 751 m +110 m

Operating cash flow

EUR 446 m +135 m

Net debt

EUR 3,162 m -675 m

2

Sales

EUR 2,423 m +9%

EBITDA

EUR 372 m +5%

Operating profit (*

EUR 201 m +1%

EPS (*

EUR 0.26 -10%

*) excluding special items

Q2/2011 vs. Q2/2010 H1/2011 vs. H1/ 2010

| © UPM 3

0

50

100

150

200

250

300

350

400

450

500

EBITDA

Q1/11

EBITDA

Q2/11

Q2 2011 EBITDA increased from last year

0

50

100

150

200

250

300

350

400

450

500

EBITDA

Q2/10

EBITDA

Q2/11

EUR million

Prices,

currency

Fibre

costs

Other

variable

costs

Fixed

costs

Deliveries

Energy

costs

EUR million

Prices,

currency Fibre

costs

Other

variable

costs

Fixed

costs

Deliveries Energy

costs

353 15.9%

372 15.4%

379 16.1%

372 15.4%

Price and cost development

stabilised in Q2 vs. Q1 2011

Higher prices offset the rise

in costs in Q2 vs. Q2 2010

| © UPM

Operating profit was steady

4

-100

-50

0

50

100

150

200

250

300

EUR million

201 8.3%

199 9.0%

31 1.7%

Operating profit excluding special items

155 6.5%

| © UPM

Earnings guidance for 2011 (*

(* See complete wording of the "Outlook"

in the Interim Report Q2 2011

• UPM guidance for operating profit excluding special items

• 2011 to improve from 2010

• H2/11 to be on about the same level as H1/11

• Guidance includes Myllykoski from 1 August onwards

• Broad-based solid demand growth has levelled off and the demand outlook for UPM’s products is largely stable in H2

• Only minor variable cost increases expected in H2 from H1/11

• Prices have increased in publication papers, label materials and plywood in Q3 from Q2/11, broadly offsetting cost increases

5

STRATEGIC FOCUS AREAS

| © UPM

8,3

3,5

5,4

8,3

7,2

6,0

8,2

0

2

4

6

8

10

12

2005 2006 2007 2008 2009 2010 H1 2011

Operating profit recovered to the pre-

recession level

% of sales Operating profit excluding special items

Target over 10%

7

| © UPM

8

Operating profit evenly distributed

– Paper is a major source of cash flow

Forest and Timber 3%

Pulp 23%

Energy 14%

Label 6%

Plywood 2%

Cumulative

EBITDA 2007 – H1 2011

Paper 53%

Forest and

Timber 13%

Pulp 35%

Energy 25%

Label 7%

Plywood 0%

Paper 19%

Cumulative

Operating profit 2007 – H1 2011

excluding special items

| © UPM

UPM's profitability challenge in Paper

9

0

20

40

60

80

100

120

140

160

180

200

220

Energy Pulp Label Paper Forest

and

timber

Plywood UPM

Total

0

5

10

15

20

25

30

35

40

Energy Pulp Label Paper Forest

and

timber

Plywood UPM

Total

Profitability

challenge

Average margins and returns over 2007 – H1 2011

Sales in H1 2011, as % of the economic peak year H1 2007

Operating margin % (** ROCE % (**

% %

**) excluding special items

WACC

100%

*) includes acquisition of the Uruguayan operations

(*

REVIEW OF MAGAZINE PAPER ASSETS’ LONG

TERM COMPETITIVENESS

| © UPM

Planned actions to improve profitability and cost efficiency in magazine paper production

• UPM plans to adjust its paper capacity to match the demand of its

global customer base, confirming its position as a truly cost competitive

paper supplier committed to print media

• UPM plans to reduce 1.3 million tons of paper capacity and to

restructure overlapping organisation and functions

• Total reduction in personnel from these actions would be 1,110

employees

• The annual synergy benefits of Myllykoski acquisition after planned

actions would be approximately EUR 200 million

• Planned measures would clearly lower unit costs in UPM magazine

and newsprint production compared to UPM before the combination

11

| © UPM

12

Planned capacity closures and other actions

Capacity kt/a

and

paper grade

Reduction in

personnel

Timeline

Permanent closure of the UPM Myllykoski paper

mill in Finland

600,000

SC, LWC

375 By the end of 2011

Permanent closure of the UPM Albbruck paper

mill Germany

320,000

LWC

557 By the end of 2011

Permanent closure of the UPM Ettringen PM3 in

Germany

110,000

Newsprint

66 By the end of 2011

Transfer of sheeting lines from UPM Albbruck

mill to UPM Plattling mill in Germany

During H1 2012

Sale or other exit of the UPM Stracel paper mill

in France from UPM Paper business

280,000

LWC

Within 12 months

Restructuring of overlapping paper sales and

supply chain networks and global functions

210

(of which 98

included in

above figures)

Based on the

transition plan

TOTAL IMPACT 1,310,000 1,110

Planned actions – subject to employee negotiations and final decisions

| © UPM

• Annual cost synergies from the plan

would total approx. EUR 200 million

• Net cash restructuring costs would

total approx. EUR 170 million

– Provision for personnel reduction,

dismantling and other closure costs

in Q3 2011 is estimated to be

approx. EUR 200 million. Cash

impact would take place mainly

during 2012

– Asset disposals(* are expected to

total EUR 30 million, mainly during

2012

• Fixed asset write-off of approx.

EUR 70 million in Q3 2011

Financial impacts – annual cost synergies

estimated to total EUR 200 million

13

Estimated timing and sources of

planned EUR 200m cost synergies

H2

2011

H1

2012

H2

2012

H1

2013

Fixed

costs

Variable

costs

*) excluding the potential sale of UPM Stracel mill

| © UPM

5 000

5 500

6 000

6 500

7 000

7 500

8 000

8 500

9 000

9 500

10 000

2003 2004 2005 2006 2007 2008 2009 2010 2011

Capacity (at year end) Deliveries

14

Planned actions would enable more efficient

use of UPM’s capacity

'000 tonnes

H1/2011

proforma

annualised

UPM Publication paper deliveries and capacity

Planned

capacity

reductions

| © UPM

0

5

10

15

20

25

30

35

40

4550

55

60

65

70

75

80

85

90

95

100

0 10 20 30 40 50 60 70 80 90 100

Asset Index, %

Planned actions would strengthen UPM’s

competitiveness in European magazine paper

UPM PMs affected by planned

actions

Remaining magazine PMs

(UPM and others)

UPM average before and

after planned actions

Sources: Pöyry, UPM

Lower maintenance

costs and investments

Lower

delivered

cash costs

STRONG

WEAK

Position in European cost curve, %

15

UPM before Myllykoski

acquisition

Myllykoski before acquisition

| © UPM

Industry

average

Ex-UPM Post deal Planned actions UPM after

planned actions

After planned actions UPM’s unit costs would

be lower than both UPM’s and Myllykoski’s

before the combination

16

Unit delivered cost in magazine papers €/t

Sources: Pöyry, UPM

| © UPM

Myllykoski acquisition merits revisited based on plans

• Larger synergies – improved cost position confirmed

• Cash flow enhancing immediately excluding restructuring costs, EPS enhancing in 2012

• Improved geographic positioning and optimal product portfolio

17

Myllykoski 2009

Myllykoski LTM Sept/2010

After planned actions, incl.

cost synergies (*

Paper EV / capacity

EUR 293 / t EUR 293 / t EUR 556 / t

EV / Sales 0.6x 0.6x 0.7x

EV / EBITDA 4.8x 11.7x 4.0x

*) EV includes net cash restructuring costs of EUR 170 million

Sales: 2x H1/11 Myllykoski sales

EBITDA: 2x H1/11 Myllykoski EBITDA + cost synergies of EUR 200m

Valuation multiples

| © UPM

Other UPM plans

Paper and Pulp

• UPM plans to temporarily close PM 2 at UPM Nordland Papier in Germany (annual production capacity 200,000 tonnes of uncoated fine paper)

• UPM plans to streamline operations in Pietarsaari pulp and paper mills in Finland by the end of 2011. The planned reduction in personnel is approximately 60.

Plywood

• UPM plans to streamline of sales, functions and maintenance by the end of 2011 to improve efficiency and competitiveness

• The planned reduction in personnel is a maximum of 125 divided in several locations

Timber

• UPM prepares for production curtailments and temporary layoffs in its sawmills in Finland as a response to weak market demand

18

POTENTIAL FOR INCREASING

SHAREHOLDER VALUE

| © UPM

Strong free cash flow

– supporting room for strategic actions

20

0

200

400

600

800

1 000

1 200

1 400

Q10

7

Q20

7

Q30

7

Q40

7

Q10

8

Q20

8

Q30

8

Q40

8

Q10

9

Q20

9

Q30

9

Q40

9

Q11

0

Q21

0

Q31

0

Q41

0

Q11

1

Q21

1

Operating

cash flow

Cash flow

after investing

activities

EUR million Cash flow, trailing 12 months

• Q2 2011 operating cash

flow was EUR 280m (102m)

• Cash flow after investing

activities was EUR 1,030m

in the past 12 months

• Fast digestion of the

additional debt from the

Myllykoski transaction

• Room for strategic actions

• Cash flow-based dividend

| © UPM

Low operational investments – strategic capex

focused on value enhancing M&A

21

0

200

400

600

800

1 000

05 06 07 08 09 10 11e

€ million

Operational investments

350

Capital expenditure

Strategic investments

Depreciation

Uruguay

acquisition

21

Estimate

Myllykoski

acquisition

| © UPM

UPM has potential for increasing

shareholder value

22

Solid free cash flow

Competitive, valuable, cash-generative assets

Cash flow-based dividend

Improve profitability through

consolidation, cost synergies, restructuring

Case Myllykoski

Growth

Biofuels

Label, Paper in growth markets

Low emission Energy, competitive Pulp

New Biofore products

Strategic enabler

floor for share price

Short- to mid-term:

improvement

in profitability

and cash flow

Mid- to long-term:

increase valuation

multiples by growth

and reshaping

portfolio

| © UPM

24

Managing change

– UPM has a consistent track record

Restructuring and

efficiency

improvement

Cost competitiveness

and cash flow

Improved

financial flexibility

500

600

700

800

900

1000

2003 2004 2005 2006 2007 2008 2009 2010

tons/person

+28% in 5 years

Paper business group capacity per employee

closed

1.8mt (14%)

of capacity

new plan

to reduce

1.3mt (9%)

of capacity

| © UPM

25

Managing change

– UPM has a consistent track record

0 %

5 %

10 %

15 %

20 %

25 %

Q10

6

Q20

6

Q30

6

Q40

6

Q10

7

Q20

7

Q30

7

Q40

7

Q10

8

Q20

8

Q30

8

Q40

8

Q10

9

Q20

9

Q30

9

Q40

9

Q11

0

Q21

0

Q31

0

Q41

0

Q11

1

Q21

1

Norske Skog Stora Enso M-realHolmen Sappi SCAIP Lecta UPM

EBITDA margin compared with peers

Restructuring and

efficiency

improvement

Cost competitiveness

and cash flow

Improved

financial flexibility

| © UPM

26

Managing change

– UPM has a consistent track record

2 500

3 000

3 500

4 000

4 500

5 000

5 500

Q10

6

Q20

6

Q30

6

Q40

6

Q10

7

Q20

7

Q30

7

Q40

7

Q10

8

Q20

8

Q30

8

Q40

8

Q10

9

Q20

9

Q30

9

Q40

9

Q11

0

Q21

0

Q31

0

Q41

0

Q11

1

Q21

1

1,5

2,0

2,5

3,0

3,5

4,0

4,5

Net debt, € million Net debt / EBITDA (trailing 12 months)

Net debt

Net debt / EBITDA

Restructuring and

efficiency

improvement

Cost competitiveness

and cash flow

Improved

financial flexibility