Business News

UPM Interim Report 1 January-30 September 2008

Tuesday 28. October 2008 - Operating profit excluding special items was EUR 216 million (195 million). Earnings per share for the third quarter were EUR -0.17 (0.23 for the third quarter of 2007), excluding special items EUR 0.25 (0.23). Higher paper prices together with stringent cost control led to better profitability. UPM continues actions to improve its profitability.

Key figures
Q3/ Q3/ Q1-Q3/ Q1-Q3/ Q1-Q4/
2008 2007 2008 2007 2007

Sales, EUR million 2,358 2,467 7,146 7,523 10,035
EBITDA, EUR million 1) 378 366 1,028 1,195 1,546
% of sales 16.0 14.8 14.4 15.9 15.4
Operating profit, -40 195 310 341 483
EUR million
excluding special 216 195 559 641 835
items, EUR million
Profit before tax, -90 144 159 200 292
EUR million
excluding special 160 144 402 500 644
items, EUR million
Net profit for the -87 119 106 52 81
period, EUR million
Earnings per share, -0.17 0.23 0.21 0.10 0.16
EUR
excluding special 0.25 0.23 0.61 0.76 1.00
items, EUR
Diluted earnings -0.17 0.23 0.21 0.10 0.16
per share, EUR
Return on equity,% neg. 6.9 2.1 1.0 1.2
excluding special 7.8 6.9 6.3 7.5 7.4
items, %
Return on capital neg. 6.8 3.7 4.1 4.3
employed, %
excluding special 7.7 6.8 6.6 7.6 7.4
items, %
Gearing ratio at 67 60 67 60 59
end of period, %
Shareholders’ 12.54 13.24 12.54 13.24 13.21
equity per share
at end of period,EUR
Net interest-bearing 4,409 4,120 4,409 4,120 3,973
liabilities at end
of period, EUR million
Capital employed at 11,310 11,173 11,310 11,173 11,098
end of period,
EUR million
Capital expenditure, 164 182 438 535 708
EUR million
Personnel at end of 25,616 27,550 25,616 27,550 26,352
period

1) EBITDA is operating profit before depreciation, amortisation and impairment
charges, excluding the change in value of biological assets, the share of
results of associated companies and joint ventures, and special items.


Results

Q3 of 2008 compared with Q3 of 2007

Sales for the third quarter of 2008 were EUR 2,358 million, 4% lower than last
year (2,467 million). Paper deliveries decreased by 9%.

Operating loss was EUR 40 million, -1.7% of sales (profit of EUR 195 million,
7.9% of sales). Excluding special items, operating profit improved to EUR 216
million, 9.2% of sales (195 million, 7.9% of sales). Special items in operating
profit totalled EUR -256 million net, including a EUR 230 million goodwill
impairment charge in the Newsprint Division and a EUR 30 million fixed asset
impairment charge in the Wood Products Division.

Operating profit excluding special items improved mainly due to higher average
paper prices and improved share of results from the associated companies.
Translated into euros, the average paper prices were approximately 5% higher
than last year. Fixed costs decreased. Paper divisions’ combined operating
profit improved. Profitability in Label Materials and Wood Products was weak.

The increase in the fair value of biological assets, net of wood harvested, was
EUR 4 million (21 million). The share of results of associated companies and
joint ventures improved to EUR 35 million (14 million).

Loss before tax was EUR 90 million (profit of EUR 144 million). Excluding
special items, profit before tax was EUR 160 million (144 million). Interest
and other finance costs, net, were EUR 50 million (42 million). Exchange rate
and fair value gains and losses were zero (loss of EUR 9 million).

Income taxes were EUR 3 million positive (charges of EUR 25 million). Taxes
include income of EUR 28 million arising from decreased deferred tax
liabilities, related to the goodwill impairment in the Newsprint Division.

Loss for the third quarter was EUR 87 million (profit of EUR 119 million).
Earnings per share were EUR -0.17 (0.23) and excluding special items EUR 0.25
(0.23).


January-September of 2008 compared with January-September of 2007

Sales for January-September were EUR 7,146 million, 5% lower than the EUR 7,523
million in the same period in 2007.

Operating profit was EUR 310 million, 4.3% of sales (341 million, 4.5% of
sales) and excluding special items EUR 559 million, 7.8% of sales (641 million,
8.5% of sales).

Sales decreased partly due to lower deliveries and partly due to the divestment
of the Walki Wisa industrial wrappings business in June 2007. Furthermore, both
GBP and USD depreciated against the euro, affecting sales.

The operating profit excluding special items declined mainly due to the
increase in wood costs, lower paper deliveries and the decline in sawn timber
prices. Recovered paper, purchased electricity and fuel prices were also higher
than last year. Fixed costs declined, and the net increase in cost level was
below 2%.

Paper divisions’ combined operating profit excluding special items declined to
EUR 296 million (334 million). Average paper prices increased approximately 2%
from last year. However, paper deliveries decreased by 5%. Production was
stopped in the Miramichi paper mill in Canada in August 2007, and the mill was
permanently closed at the end of the year.

Label Materials’ operating profit excluding special items declined to EUR 5
million from last year’s EUR 41 million, mainly due to higher raw material and
fixed costs.

Further weakening of sawn timber markets led to lower prices which combined
with the high wood costs caused the Wood Products Division to report an
operating loss excluding special items of EUR 18 million (profit of EUR 71
million).

In Other Operations, the Energy Department in Finland improved its operating
profit to EUR 127 million (70 million), benefiting from good availability of
hydropower and increased electricity price. The increase in the fair value of
biological assets net of wood harvested was EUR 52 million (32 million). The
share of results of associated companies and joint ventures was EUR 78 million
(41 million). The improvement came from Metsä-Botnia’s new pulp mill in
Uruguay, started up in October 2007, which more than compensated for the
weakened profitability in Metsä-Botnia’s Finnish operations.

Profit before tax was EUR 159 million (200 million) and excluding special items
EUR 402 million (500 million). Interest and other finance costs, net, were EUR
142 million (145 million). Exchange rate and fair value gains and losses
resulted in a loss of EUR 11 million (gain of EUR 2 million).

Income taxes were EUR 53 million (148 million), and the effective tax rate
excluding the impact of special items was 22% (24%).

Profit for the period was EUR 106 million (52 million). Earnings per share were
EUR 0.21 (0.10) and excluding special items EUR 0.61 (0.76). Operating cash
flow per share was EUR 0.52 (1.09).


Paper deliveries

Paper deliveries for the first nine months amounted to 8,048,000 tonnes
(8,472,000). Magazine paper deliveries totalled 3,383,000 tonnes (3,610,000),
newsprint 1,898,000 tonnes (1,980,000), and fine and speciality papers
2,767,000 tonnes (2,882,000).


Financing

In January-September, cash flow from operating activities, before capital
expenditure and financing, was EUR 271 million (573 million). The increase in
working capital amounted to EUR 329 million (271 million), of which about one
third is attributable to wood procurement operations. Wood inventories at the
end of September 2008 were significantly higher than they were a year ago as
UPM pursues to secure the availability of wood raw material in Finland. The
cash flow from operations was also negatively affected by a one-time cash
contribution for changing the UK pension plans from defined benefit to defined
contribution, and settlement of the restructuring provisions related to the
closure of the Miramichi paper mill in 2007.

As of 30 September, the gearing ratio was 67% (60% as of 30 September 2007).
Equity to assets ratio on 30 September was 46.7% (49.1%). Net interest-bearing
liabilities at the end of the period were EUR 4,409 million (4,120 million).


Personnel

In January-September, UPM had an average of 26,283 employees (28,830 employees
for the same period last year). The number of employees at the end of September
was 25,616 (27,550).


Capital expenditure

For the first nine months of the year, gross capital expenditure was EUR 438
million, 6.1% of sales (535 million, 7.1% of sales).

The largest ongoing investment, worth approximately EUR 90 million, is the
building of a new self-adhesive label materials factory in Poland. The project
is scheduled for start-up in the fourth quarter of 2008.

UPM is building a new power plant at its Caledonian mill in Irvine, Scotland.
The total investment cost is EUR 75 million. The new bioboiler is scheduled to
start in the third quarter of 2009.


Restructuring

In September UPM announced plans to close its least competitive paper and pulp
capacity in Finland. The company is planning possible closures of the Kajaani
paper mill (annual capacity 640,000 tons of newsprint, special newsprint and
uncoated SC magazine papers) and the Tervasaari pulp mill (annual capacity
210,000 tons of pulp) by the end of 2008. UPM has started cooperation
negotiations with the employee representatives in the Kajaani and Tervasaari
mills affecting 535 and 150 employees, respectively.

The planned actions to close capacity are estimated to provide a positive
EBITDA impact.

In case the closures are implemented as planned, UPM will book in the fourth
quarter of 2008 approximately EUR 170 million write-off in fixed assets and
make a provision of about EUR 30 million for the reduction in the number of
employees, and for other closure costs.

UPM is also planning measures to improve efficiency in all of the company’s
business groups and functions. A preliminary estimate on the number of
employees affected by these measures is around 950. The streamlining of
operations is expected to result in annual savings of about EUR 70 million in
fixed costs.

If all above mentioned measures are completed as planned, the Group’s total
number of employees will decline by around 1,600 in 2009-2010.

In August, UPM decided to close the Leivonmäki sawmill (annual capacity of
80,000 cubic meters of spruce sawn timber). The operations will cease during
2008.

UPM’s Label Division plans to undertake restructuring of its European
operations in 2009-2010. A detailed plan will be announced later this year.


New business structure

In September UPM announced that it will adopt a completely new business
structure. The company will consist of three Business Groups: Energy and Pulp,
Paper, and Engineered Materials. The change will take effect on 1 December,
2008.

When the new business structure is in effect, the company will report financial
information for the following six segments: Energy, Pulp, Forest and Timber,
Paper, Label Materials, and Plywood. The Energy and Pulp segments will include
shares of corresponding associated companies. Historical financial figures for
the period from the first quarter of 2007 to the third quarter of 2008
according to the new structure will be published in December 2008.


Shares

UPM shares worth EUR 7,963 million in total were traded on the NASDAQ OMX
Helsinki Ltd (12,812 million) during January-September. The highest quotation
was EUR 13.87, in January, and the lowest EUR 9.67, in July.

The Annual General Meeting held on 26 March 2008 approved a proposal to
authorise the Board of Directors to decide to buy back not more than 51,000,000
own shares. The authorisation is valid for 18 months from the date of the
decision. As of the end of September, this authorisation had not been
exercised.

On the basis of the decisions of the Annual General Meeting of 27 March 2007,
the Board has the authority to decide on a free issue of shares to the company
itself so that the total number of shares to be issued to the company combined
with the number of own shares bought back under the buyback authorisation may
not exceed 1/10 of the total number of shares of the company. In addition, the
Board has the authority to decide to issue shares and special rights entitling
the holder to shares of the company. The number of new shares to be issued,
including shares to be obtained under special rights, shall be no more than
250,000,000. Of that, the maximum number that may be issued to the company’s
shareholders based on their pre-emptive rights is 250,000,000 shares and the
maximum amount that can be issued deviating from the shareholders’ pre-emptive
rights in a directed share issue is 100,000,000 shares. The maximum number of
new shares to be issued as part of the company’s incentive programmes is
5,000,000 shares. Furthermore, the Board is authorised to decide on the
disposal of own shares. These authorisations of the 2007 Annual General Meeting
will remain valid for no more than three years from the date of the decision.
To date this authorisation has not been exercised.

In January-September 7,393,296 shares were subscribed for through exercising of
outstanding share options. The number of shares entered in the Trade Register
as of 30 September 2008 was 519,968,088. Through the issuance authorisation and
share options, the number of shares may increase to a maximum of 793,966,088.
Apart from the above, the Board of Directors has no current authorisation to
issue shares, convertible bonds or share options.

On 26 September 2008 UPM applied for listing of 2005H stock options on the
NASDAQ OMX Helsinki Ltd to start 1 October. The total number of stock options
is 3,000,000, each entitling to subscription of one share.


Litigation

Certain competition authorities are continuing investigations into alleged
antitrust activities with respect to various products of the company. The US
Department of Justice, the EU authorities and the authorities in several EU
Member States, Canada, and certain other countries have granted UPM conditional
full immunity with respect to certain conduct disclosed to them. The US and
Canadian investigations are closed, and the European Commission has tentatively
closed its investigation of the European fine paper, newsprint, magazine paper,
label paper, and self-adhesive labelstock markets.

UPM has been named as a defendant in multiple class-action lawsuits against
labelstock and magazine paper manufacturers in the United States. UPM has
agreed to settle the class-action lawsuits raised by direct purchasers of
labelstock and magazine paper. Certain class-action lawsuits filed by indirect
purchasers of labelstock and magazine paper continue to be pending. The
remaining litigation matters may last several years. No material provisions
have been made in relation to these investigations.


Events after the balance sheet date

The Group’s management is not aware of any significant events occurring after
30 September 2008.


Risk factors

Rapid downgrades in European and global economic growth forecasts have
considerably increased uncertainties about 2009 business environment including
cost development and demand of UPM’s products.

If implemented, the third increase in the export duty on Russian wood from the
beginning of 2009 will make imports of round wood uneconomical. Finnish
industry, including UPM, has announced plans to close wood consuming capacity
in Finland. Despite these efforts, there is a high risk that the imports cannot
be fully replaced in a financially sound manner in 2009.


Outlook

Paper demand in Europe is expected to be lower than last year. In North
America, continued decline in demand persists. Demand growth in China is
slowing down.

For the fourth quarter of the year UPM’s paper deliveries are expected to be
over 200,000 tons less than last year. Group’s average paper price in euro is
expected to be unchanged from the third quarter of 2008.

Market demand for self-adhesive labelstock is forecast to be lower than last
year both in Europe and North America. In Asia, growth in demand continues
although at a clearly slower pace. Self-adhesive labelstock prices in local
currencies are expected to increase in key markets.

In Wood Products, market balance is expected to further soften both in birch
and spruce plywood. In sawn timber, weak market continues. Combined with high
cost of wood raw material, the result is not expected to improve from the loss
made in the third quarter.

Wood fibre costs are expected to stay at the current high level. However, due
to cost savings from the ongoing profitability actions, an increase in the
company’s overall costs for the full year is still expected to be about 2%.

Demand outlook of UPM’s businesses for the fourth quarter has weakened from the
outlook presented at the end of the second quarter. UPM’s operating profit for
the fourth quarter of 2008, excluding special items and changes in the fair
value of biological assets, is estimated to be about the same as last year.