UPM-Kymmene Interim Review January-June 2000

UPM-Kymmene's profit before extraordinary items was EUR 995 million (465). Earnings per share were EUR 2.72 (1.19). Operating profit rose EUR 468 million to EUR 1,021 million (553). The figure includes EUR 336 million (138) in net capital gains from the sale of shares and business operations. The return on capital employed was 24.4% (12.3), and turnover was EUR 4,553 million (3,901 million).
Interim Review 1 January-30 June 2000

EARNINGS

Operating profit for January-June rose EUR 468 million to EUR 1,021 million (553 million for the first half of last year). The figure includes EUR 336 million (138 million) in net capital gains from the sale of shares and business operations. Excluding capital gains, operating profit for the second quarter improved 66% to EUR 328 million (197 million for the second quarter of 1999). It was, however, down on the first-quarter operating profit of EUR 357 million. The strike by Finnish paper workers in April, the mid-summer stoppages agreed upon in collective labour agreements, as well as related maintenance work weakened the second-quarter result.

A target of EUR 100 million has been set for this year as part of the cost-saving programme introduced in 1999. By the end of June, about a half of this target had been achieved.

The divisions that achieved the biggest increases in operating profit compared with last year were Chemical Pulp (EUR 203 million), Publication Papers (EUR 60 million) and Fine Papers (EUR 49 million). The improvement in operating profit in these divisions was mainly attributable to growth in delivery volumes and higher prices. The operating profit of Converting Materials and Wood Products remained roughly unchanged at last year's level.

Profit before extraordinary items was EUR 995 million (465 million). Financial expenses, net of income, were EUR 26 million (88 million) and include EUR 49 million (11 million) in dividend income.

Earnings per share were EUR 2.72 (1.19). The return on equity was 25.9% (12.4) and the return of capital employed was 24.4% (12.3). Calculated to exclude net capital gains, earnings per share were EUR 1.80 (0.81), return on equity was 17.1% (8.4) and return on capital employed 16.9% (9.4).

PRODUCTION AND TURNOVER

Paper production by the UPM-Kymmene Group for January-June was 3.900 million tonnes (3.505 million), a growth of 11%. The average capacity utilization rate was 94% (86).

The production of both sawn timber and plywood grew 12% in the review period. Sawn timber production was 1,053,000 cubic metres (943,000) and plywood production 410,000 cubic metres (367,000).

Turnover was EUR 4,553 million (3,901 million), 17% upon the first half of last year.

PERSONNEL

The average number of employees for the period was 32,076 (32,564). The number at the end of June was 34,298 (34,405).

CAPITAL EXPENDITURE AND RESTRUCTURING

Gross capital expenditure was EUR 303 million (279 million). Sales of shares and other fixed assets totalled EUR 373 million (165 million). The biggest investment project completed during the period was the change in the line of production of Stracel's paper machine.

The most significant on-going investment is the rebuild of Kymi papermill's PM8 and the construction of a coating line. The project will be completed in autumn 2001.

Capital expenditure for the year as a whole is expected to be about EUR 700 million.

In June, United Sawmills Ltd signed an agreement to purchase the share capital of the sawmilling company Aureskoski Oy. Aureskoski's sawmills have a combined annual capacity of around 300,000 cubic metres of sawn timber, of which 100,000 cubic metres are further processed goods. In 1999, the company had a turnover of EUR 72 million and employed 260 people. The acquisition was approved by the Finnish Competition Authority in July.

Also in June, UPM-Kymmene announced two deals concerning its Converting Materials division. Paper sack production (Walki Sack) is to be sold to Korsnäs AB, and Rosenlew will sell its plastic carrier bag and other retail product business to J D Stenqvist AB. Both of the acquiring companies are Swedish. Walki Sack's turnover in 1999 was EUR 50 million and it employs about 440 people. The business being sold by Rosenlew had a turnover of about FIM 250 million in 1999 and employs about 360 employees. The parties hope to complete the deals during the autumn.

At the end of the review period, UPM-Kymmene signed an agreement on the sale of its shares in Transfennica Ltd to Finnlines Plc. Transfennica, in which UPM-Kymmene has a 49.9% interest, is a company specializing in shipments of forest industry products. The deal will have to be approved bythe relevant competition authorities.

FINANCING

The Group's equity to assets ratio at the end of June was 49.1% (45.3). The gearing ratio was 49% (72).

Net interest-bearing liabilities fell EUR 914 million to EUR 2,762 million (3,676 million). The average rate of interest on the Group's loans was 5.3% (4.9).

The net cash flow from operations before capital expenditure and financing was EUR 728 million (677 million).

SHARES

UPM-Kymmene Corporation shares worth EUR 3,825 million (1,737 million) were traded on the Helsinki Stock Exchange up to the end of June. The corresponding figure for the New York Stock Exchange was EUR 94 million. The highest quotation was EUR 44.90 in January and the lowest EUR 24.91 in March.
During the review period a total of 491,244 shares was subscribed under the FIM 960 million convertible bond issue of 1994. The total number of shares in issue at the end of June was 259,522,201. Share subscriptions under convertible bonds and options issued to key personnel could raise the number of shares to a maximum of 269,733,109.

At the Extraordinary General Meeting held on 13 June 2000, it was decided that the share capital would be reduced by EUR 12.7 million to EUR 436.5 million by invalidating 7,538,000 own shares held by the company. The meeting also decided to authorize the company to buy a maximum of 12.9 million of its own shares.

During the review period the company purchased own shares worth EUR 24.5 million at an average price of EUR 26.98 per share. At the end of June the company held 909,000 own shares, representing 0.35 of the share capital. On 8 August, the company held 2,628,083 own shares, acquired at a total cost of EUR 73.8 million and an average price of EUR 28.10 per share.

The Board of Directors has no current authorization to raise the company's share capital or to issue convertible bonds or bonds with equity warrants.

DISTRIBUTION OF EXTRA DIVIDEND FOR 1999

At the Extraordinary General Meeting held on 13 June 2000, it was decided to pay an extra dividend of EUR 0.90 per share according to the proposal of the Board of Directors. The dividend, totalling EUR 234 million, was paid on 22 June 2000. Including the dividend of EUR 1.25 per share decided by the Annual General Meeting, the total amount distributed as dividend for 1999 was EUR 557 million.

PLANNED MERGER WITH CHAMPION INTERNATIONAL

On 17 February, UPM-Kymmene announced that its Board ofDirectors and the Board of Directors of the American company Champion International Corporation had agreed on a merger of the two companies. On 12 May 2000, however, the merger plan foundered when UPM-Kymmene declined to exceed a competing bid from International Paper. According to the company's management and its Board of Directors completion of the merger at the raised price would not have been in the interests of UPM-Kymmene's shareholders. In May, the company received EUR 230 million in compensation for the termination of the agreement. After deduction of expenses and taxes, this amount has been included in extraordinary items.

LITIGATION

In March last year, the European Commission presented UPM-Kymmene with a Statement of Objection alleging participation by the company's predecessors in a price cartel concerning newsprint during the period 1989-1995. The company's response to the allegation is being considered by the Commission. No provision has been made in this respect.

The company has no other significant matters of litigation.

MARKET OUTLOOK
Strong economic growth is expected to continue in Europe and Asia. In the United States, economic growth was very robust in the first half of the year, but some cooling off is anticipated. The overall demand situation for forest products is forecast to continue buoyant in the coming months.

The price of long-fibre chemical pulp continued to rise and reached USD 710 per tonne in July. Pulp stocks are currently at extremely low levels and demand remains brisk. Only limited new paper production capacity will come onto the market in the near future. Minimal additional capacity coupled with strong demand is likely to sustain the favourable trend in paper prices. Delivery volumes are expected to be at a high level in the coming months.

DIVISIONAL REVIEWS

PUBLICATION PAPERS
Operating profit of the Publication Papers division improved 31% compared with the first half of last year. Operating profit for the second quarter was the same as in the first, despite the higher prices of pulp and recycled paper and the loss of production caused by the strike in April. A high utilization rate and cost savings achieved through improved production efficiency sustained the level of operating profit. Demand has remained brisk and the mills' order books at the end of the review period were stronger than normal.

In the first half of the year, the demand for newsprint rose 5% in Europe and about 1% in the United States. The growth in demand for SC paper was 9% in Europe and roughly 17% in the United States. Demand for LWC paper rose 12% in Europe and around 7% in the United States.

Compared with the first half of last year, sales prices for the division's products remained unchanged in Europe and the United States.

In Europe, newsprint and SC prices will generally be tied to the present level until the end of the year. The sales prices of LWC paper did rise in Europe in July. In the United States there was an upward trend in the prices of magazine papers in the second quarter.

Production by the division rose 9%. The capacity utilization rate was 93% (85).

FINE PAPERS
The division's operating profit improved 91% compared with the first half of last year. However, the second-quarter result was weaker than the first owing to the strike in April, the high prices of pulp and the mid-summer maintenance stoppages. The extremely robust demand for both coated and uncoated fine papers in the early part of the year had returned to the normal level by the end of June. The mills' order books at the end of the review period were healthy and fine paper stocks at mills and wholesalers were at normal levels.

In Europe, demand for coated and uncoated fine paper rose 3% and 11%, respectively.

The upward trend in fine paper prices levelled off in Europe during the review period. In the United States and Asia, uncoated fine paper prices came under some pressure, but the market for coated grades continued to be stable. In Europe, uncoated fine paper prices were on average 15% higher than last year. The corresponding rise in coated fine paper prices was 14%. A rise in the price of pulp in July has exerted pressure for new increases in fine paper prices during the third quarter.

UPM-Kymmene's fine paper production was up 17% on the first half of last year. The capacity utilization rate was 96% (87).

CONVERTING MATERIALS
The division's turnover rose 14% but profitability was weaker than in the first half of last year. The operating profit for the second quarter was also down on the first. The growth in delivery volumes and the higher prices of some products, were not enough to cover the marked rise in the price of pulp. From 1January 2000, the chemical pulp used locally in Pietarsaari has been included in the Converting Materials division.

Demand for self-adhesive labelstock (Raflatac) continued to grow in the review period, and delivery volumes were more than a fifth up on the same period last year. Stocks of label papers and siliconized papers held by both customers and producers are at very low levels and demand is brisk. The order books for packaging materials and envelope papers at the end of June were stronger than normal, and delivery volumes are expected to be at a high level for the near future. The price trend for converting materials as a whole is expected to be moderately positive in the second half of the year.

Production of the division's special papers rose 11% in the review period to 399,000 tonnes.

WOOD PRODUCTS
The division's turnover rose 17% and its operating profit 13%. Building activity in Europe has continued to be brisk, and delivery volumes of both sawn timber and plywood rose considerably. The supply of sawn goods increased during thereview period. Demand for spruce plywood has been particularly strong and prices have risen. Birch plywood prices, on the other hand, have remained stable. The plywood order book at the end of the review period was good.

UPM-Kymmene's production of both sawn timber and plywood rose 12%. The wood-based building supplies business grew strongly. In Finland the turnover of Puukeskus, a wood-based building supplies business, was up by about a fifth and its result developed favourably. Brooks Group's turnover was over 50% up on last year, mainly due to the acquisition of the business operations of Charles Manson Group, which operates a chain of timber products outlets in Britain.

RESOURCES
The average price for long-fibre market pulp rose by one third to USD 650 per tonne during the review period, compared with USD 490 per tonne at this time last year. At the end of June, pulp stocks of producers (NORSCAN) were only 1.071 million tonnes and the stocks of European paper producers (UTIPULP) were more than 10% lower than at the same time last year. The price of long-fibre market pulp rose to USD 710 per tonne at the beginning of July.

UPM-Kymmene's own pulp production was 914,000 tonnes (927,000) at an average capacity utilization rate of 91% (97). The fall in production was partly due to the closure of Stracel pulpmill last year and to the strikes during the spring. Of theGroup's total pulp production, 226,000 tonnes (224,000) belonged to the Fine Papers division and 172,000 tonnes (84,000) to Converting Materials.

Purchases of raw wood from private forests were in line with the target in Finland and 42% up on the first half of last year. Wood deliveries to mills during the January-June period rose to 10.9 million cubic metres, 7% higher than in the first six months of last year. Pulpwood prices were the same as a year ago, but the price of spruce sawlogs was markedly higher.

The Group's electricity consumption in Finland rose by 5%. However, sales to outside parties declined due to arrangements made at the end of last year.

Helsinki, 9 August 2000
Board of Directors

Forecasts and assessments presented in this Interim Review are based on the management's current views of the future trends in the Group's business environment. Such forecasts and assessments may be affected by changes in the forest industry and in the general economic situation.

This Interim Review is unaudited