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