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Focus on European profitability

Jyrki OvaskaPresident

Paper Business Group

2 | © UPM

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Contents

• Paper in 2010

• Paper market

• Actions so far

• Myllykoski acquisition

• Growth option in China

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-100

-50

0

50

100

150

200

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

-4.1%6.0%3.6%3.6%EBIT %

6.1%

16.1%

-4.6%3.8%3.6%ROCE %

4.4%12.6%12.8%EBITDA %

PAPERLoss-making year due to high fibre costs and low paper prices

€, million Operating profit excluding special items

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Demand pick-up after 2009 slumpPrice recovery started in 2H 2010 and continues in 2011Stock turnover improved by 7 % and year-end inventory levels lowCustomer satisfaction continued improving Paper consolidation finally taking place

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Paper in 2010 – positives and negatives

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Paper in 2010 – positives and negatives

Deep losses due to huge fibre cost increases (pulp and RCP)Collapse of the publication paper prices to all-time low levelsCost savings could not offset the cost inflation Strikes in Finland, supply disruptions in logistics

Paper market

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450

550

650

750

850

950

2006 2007 2008 2009 2010 2011

300

400

500

600

700

800

WFU LWC PIX BHKP

WFU / LWC €/ton

Source: FOEX Indexes Ltd., PPI, RISI

400

450

500

550

600

2006 2007 2008 2009 2010 2011

0

50

100

150

200

News 45 g/m² RCP

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Fibre prices squeezing paper makers' margins

LWC

RCP

NewsprintBHKP

Hardwood pulp (BHKP) €/ton Newsprint €/ton RCP (ONP) €/ton

WFU

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UPM's paper prices in 2011

• UPM has increased paper prices in the beginning of 2011. Examples in Europe:

- Magazine papers about + 5-8%

- Newsprint about + 20%

- Fine and speciality papers no material changes

• The average price for UPM's paper deliveries is expected to increase by about 6% in the beginning of the year from Q4 2010

• Publication paper prices return broadly to 2009 level

• Raw material costs have increased substantially from 2009

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Graphic papers demand is shifting to growth markets

0

50

100

150

'90 '95 '00 '05 '10e '15e '20e

0

50

100

150

Source: JP, PPPC, RISI, BCG, UPM

Others

China

Japan

Europe

North America

5%

9%

0%

-1%

2%

1990-2010 CAGR 2.0% p.a. 2011-2020 CAGR 0.6% p.a.million tons

9

3%

4%

-2%

-3%

-1%

Actions so far

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Net capacity reduction by company6.6 million tonnes (12%) in Europe in 2005–2011e

-2000 -1500 -1000 -500 0 500 1000

OthersPortucel

Palm GroupPerlen Papier

MyllykoskiP. de Voiron/Vertaris

HolmenPaperalia S.A.

PSMArctic Paper

BurgoAbitibiBowater

Int. PaperMat. & Forest

SappiNorske Skog

UPMM-Real

Stora Enso

Source: Pöyry, UPM, public sources decided changes includednet changes '000 tons

– +

UPM has closed 1.8m tonnes in total, including North America

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0

100

200

300

400

500

600

700

800

2003 2004 2005 2006 2007 2008 2009 20100

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

9 000

10 000

2003 2004 2005 2006 2007 2008 2009 2010

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UPM assets are well maintained in spite of lower capital expenditure

Capital expenditure and depreciationCapital employed in Paper business area

Depreciation

Capital employed

Energy investments ~ EUR 900mPM in China ~ EUR 400m

Capex

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Winning formula in the future paper business

• Excellence at the customer interface

• Large, cost competitive mill sites with maximum on-site synergies

• Economies-of-scale in sales, operations and sourcing

• Low overhead costs and lean mentality

• Renewed working capital practices

Strong position in Energy, Pulp and Paper is key for future cost efficiency

Myllykoski acquisition

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Energy and pulp Paper Engineered materials

• Expand in cost competitive low-emission energy

• Develop second generation biofuels

• Grow in cost competitive pulp

• Focus on European profitability

• Consolidation in Europe

• Growth in China and other growth markets

• Profitable growth in self-adhesive label materials

• Plywood renewal

• Drive product renewal and develop new businesses

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Myllykoski acquisition – strategy in the making

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Paper operations to be acquired

Source: Myllykoski

114380SCPlattling Papier (RP)

Mills Grade Cap.1,000 t

Personnel Q3/2010

Myllykoski Paper LWC, SC 600 469

MD Albbruck MWC/LWC 320 544

Lang Paper News, SC 600 413

MD Plattling LWC 400 387

Madison Paper SC 220 229

Hûrth (RP) News 310 102

TOTAL 2,830 2,600 *)

North America

Madison

Myllykoski Paper

UPM mills

Myllykoski mills

Rhein Papier

Albbruck Lang

Plattling

*) incl. non-mill personnel

Invested recently over EUR 700m on new capacity

• Plattling PM 1 (2007); 380,000 t/a of SC paper

• Hürth (2002); 310,000 t/a of newsprint

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In Europe, capacity share increases by 7 percentage points to 29% (*

Stora Enso

Norske SkogBurgo

Holmen

SCA

Lecta

Palm

OthersMyllykoski

Sappi

UPM

PUBLICATION PAPERS INCLUDING WFC CAPACITY

17*) subject to closing of the transaction

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Achieve sustainable cost structure through consolidation

Price

Costs

Transaction

Marginsqueeze

Sustainableprofitability

Declining real price trend –needed for print media

competitiveness

Continuous potential for cost savings in

a large production portfolio

Restructuring costs and investments to gain synergies

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Benefits of the Myllykoski acquisition

1919

• Forming a cost efficient European paper supplier committed to print media

• Contributing to the cost competitiveness of the print media

• Strengthening customer service and supply security closer to our customers

• Enabling efficiency improvement necessary for the future development of the European industry

• Ensuring sourcing of key inputs like fiber and energy cost efficiently in the future

Growth option in China

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Organic growth opportunity in China

• Demand in China and other Asia is estimated to grow 6-8 %/a

• Permits have been granted to build a new paper machine in the Changshumill

• Decision subject to project feasibility, market opportunity and UPM strategic priorities in growth

• Timing is open – no investment decision has been made yet

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Summary

• 2010 was a challenging year for Paper, but not without successes

• Stable demand, increasing paper prices and moderating cost inflation provide a base for profitability improvement in 2011

• Myllykoski acquisition is a key step to improve profitability in UPM'sEuropean paper business

• With the acquisition, UPM is strengthening its position as a cost efficient reliable partner for paper customers

• China represents a growth option

23 | © UPM