213800EC6PW5VU4J9U64-2022-12-31-en

Report of the Board of Directors

UPM introduction and business model

As a frontrunner in forest industry, UPM provides sustainable solutions to

the growing global consumer demand. UPM’s large product range

covers pulp, graphic papers and specialty papers, self-adhesive labels,

wood-based renewable diesel and naphtha, electricity as well as

plywood and timber products. Products are made from renewable

materials and are recyclable replacing fossil-based materials in various

end-uses.

UPM invests in sustainable growth and innovates for a future beyond

fossils across six business areas: UPM Fibres, UPM Energy, UPM

Raflatac, UPM Specialty Papers, UPM Communication Papers and UPM

Plywood. The business areas are competitive with strong market

positions.

UPM group creates value to its stakeholders by operating separate

businesses with a focus on:

•Competitive and sustainable wood sourcing, forestry and plantation

operations

•Value adding, efficient and responsible global functions

•Continuous improvement programmes in commercial strategies,

variable costs, working capital, site and maintenance costs, safety

and environmental performance

•Technology and intellectual property rights

•A global business platform

•Disciplined and effective capital allocation

•Compliance with applicable laws and regulations, UPM Code of

Conduct and corporate policies

Clear roles and responsibilities


Group	Businesses	Outcomes
Portfolio strategy Capital allocation Business targets Code of Conduct Responsibility targets	Business area strategies Commercial excellence Operational excellence Cost efficiency measures Focused growth project Innovation	Top performance Competitive advantage Value creation Stakeholder and societal value License to operate

Each business area is responsible for executing its own strategy and

achieving targets. Group direction and support from global functions

enable the businesses to capture benefits from UPM’s brand, scale and

integration, while navigating the complex operating environment.

Capital allocation decisions take place at the group level.

Corporate responsibility is an integral part of all of our operations

and a source of competitive advantage. UPM is committed to continuous

improvement in financial, social and environmental performance. UPM

promotes responsible practices throughout the value chain and is active

in finding sustainable solutions, in co-operation with its customers,

suppliers and partners.

Market environment in 2022

The global economy slowed down during 2022, while inflation rose to

approximately 9% — the highest level in decades. Global real GDP

growth is projected at 3.0% in 2022. Geopolitical tensions, tightening

financial conditions in most regions, Russia’s war in Ukraine, disrupted

global energy and food supplies, high energy prices, rising interest

rates and the lingering COVID-19 pandemic caused economic growth

to slow down. Still, global trade volumes continued to grow throughout

2022 and, together with the efforts to build a green world economy,

they showed resilient demand for environmentally sustainable products.

Russia’s war in Ukraine posed a geopolitical shock to Europe.

Western sanctions on Russia and Belarus, and Russia’s attempts to

weaponise energy supplies against Western countries led to increasing

geopolitical tensions, weaker macroeconomic conditions, and disrupted

supply chains for certain commodities and products. This forced

Western countries to intensify their focus on managing potential threats

to global security and deal with fiscal pressures due to additional

spending in energy and defence and simultaneous tightening of

monetary policy of the European Central Bank.

In Europe, economic growth is projected at 3.6% in 2022. The

economy continued to grow despite global uncertainty and the energy

crisis. Domestic demand was good and H1 was strong, as a result of

COVID-19-driven pent-up consumption which continued to drive

demand for consumer services. Successful energy savings and measures

to secure natural gas from alternative markets enabled countries to

avoid short-term gas shortages caused by declining Russian supply. The

economy was further stabilised by the labour market seeing record low

unemployment. Simultaneously, inflation saw record high rates, driven

by accelerating energy and food prices and continuing global supply

chain disruptions. As a result of high inflation followed by the interest

rate hikes and the tightening household real incomes, consumer

sentiment fell to its lowest level in H2 2022, and industry confidence

fell.

The US economy remained strong with a tight labour market, a

historically low unemployment rate and a growing economy driven by

good consumer spending. Economic growth in the US is projected at

2.0% in 2022. The US economy was resilient to the Federal Reserve’s

interest rate hikes to manage the rapid rise in inflation. The US dollar

strengthened to record highs against the euro and other major world

currencies. On a negative note, trade tensions between the US and

China intensified and raised increasing concerns regarding geopolitics

and impacts on global trade.

China’s economy faced the weakest growth on record, projected at

2.8% in 2022 as COVID-19 restrictions led to prolonged disruption in

China’s economic activity. Turmoil in international markets, lower net

exports and the crisis in the Chinese property sector continued to slow

down growth. China’s debt ratio reached an all-time high, growth in

retail sales continued to lag and household savings reached a new

record high. The year ended with COVID-19 restrictions being lifted

and a surge in COVID-19 cases, but with expectations of improving

consumer confidence and a sustainable recovery of the economy.

Calls for further action in the energy, industry, transport and

buildings sectors, as well as in the food and financial systems, to tackle

climate change continued. In line with the COP26 and COP27

meetings, additional net-zero commitments and capital towards a net-

zero world continued to be prioritised with a target to limit global

warming to 1.5°C. Furthermore, in line with climate change mitigation


UPM FINANCIAL REPORT 2022	2

objectives, governments focused on energy savings and investments in

low-emission energy supply to tackle the current energy crisis.

A new set of goals and a framework to guide global actions to halt

and reverse biodiversity loss by 2030 was agreed at the UN

Biodiversity Conference (COP15) in 2022. The participants of COP15

also agreed to increase financing for biodiversity, driving funds toward

sustainable investments and reducing harmful government subsidies.

Market demand for UPM’s sustainable and renewable products was

good, particularly in Europe and North America. Sales prices increased

in all businesses, offsetting the impact of increased variable costs.

UPM’s input costs were significantly higher compared to 2021, most

notably in energy.

The global demand for chemical pulp in 2022 was good. The

average market prices for both northern bleached softwood (NBSK) and

bleached hardwood kraft pulp (BHKP) increased in Europe and in

China.

Energy prices and volatility in Europe reached unprecedented levels

and the rise in energy futures increased the liquidity needs of energy

industry companies. Electricity sales prices in Finland were at a record

high, although prices on average stayed lower than in many other

European markets. Optimised hydropower generation helped to

stabilise the volatile markets. The first nuclear power test volumes

generated from the new OL3 unit improved Finland’s electricity self-

sufficiency.

In Q1-Q3 2022, the demand for self-adhesive label materials was

solid in Europe (excl. Russia) and North America while the markets were

somewhat impacted by supply constraints. However in Q4, the demand

declined in Europe and North America due to significant destocking in

the value chain. In Asia, demand was relatively soft. Market prices

increased in all main markets.

The global demand growth for label, release and packaging papers

was good though demand became softer towards the end of the year.

Market prices increased. Fine paper demand was impacted by the

COVID-19 lockdowns and containment measures in China. Market

prices for office papers in the Asia-Pacific region increased compared to

2021.

Demand for graphic papers in Europe decreased by 12% compared

to 2021. Market prices increased significantly for all paper grades.

In H1 2022, demand for spruce plywood in Europe was strong. In

H2, demand was softening due to reduced activity in the building and

construction industry. Demand for birch plywood was strong in panel

trading and industrial applications. Market prices increased in all end-

uses.

The timber business benefited from high levels of construction activity

in H1 2022, and market prices saw record highs. In H2, the demand-

supply balance weakened, and market prices fell under the peak level.

Strong demand for advanced renewable fuels continued to be driven

by climate targets. Market prices were at a high level.

Impact of the COVID-19 pandemic

The COVID-19 pandemic, the related containment measures around the

world and the rapid changes in the global economy impacted the

operating environment also in 2022 and continue to represent

uncertainty.

Global economy

The COVID-19 pandemic and the related containment measures resulted

in a sharp decline in the global economy in 2020. In 2021, the global

economy started to recover, but it is uncertain how long-lasting the

recovery will be. Despite progress with vaccinations, additional waves

of the pandemic in different parts of the world remain possible.

The recovery of the global economy from the deep downturn in

2020, combined with the ongoing pandemic created tightness and

disruptions globally in many supply chains, including logistics and

energy. This caused rising costs and uncertainty about the price and

availability of many raw materials and energy. China adopted a zero-

covid policy that held back its economic growth through 2022.

However, it opened up restrictions in December. This represents

uncertainties regarding surging infections in the country, but also

represents the potential to increase economic activity.

Safety and business continuity

UPM has implemented extensive precautions to protect the health and

safety of its employees and to ensure business continuity and the

progression of its strategic projects during the pandemic. Despite these

efforts, the operation of one or more units or the supply chain and

logistics could be temporarily disrupted during the pandemic, the

related lockdown measures, or the following economic recovery. In

these circumstances some units may need to limit operations or be

temporarily shut down. So far UPM has been able to protect its business

continuity well.

Demand for UPM products

Many of UPM's products serve essential everyday needs and have

therefore seen resilient demand during the crisis. These products include

pulp, specialty papers and self-adhesive label materials. However, even

in these businesses, demand is influenced by general economic activity,

and any re- or destocking cycles in product value chains.

Demand for graphic papers is more prone to be impacted by

lockdowns and economic cycles. Lockdowns limit a wide range of

consumer-driven services and retail, as well as work at the office. This

has had a negative impact on printed advertising and graphic paper

demand during the pandemic.

Lockdowns and the level of economic activity may also influence

demand for electricity, plywood and sawn timber.

Adjusting to different scenarios

The potential impacts on UPM are likely to differ by business and phase

and waves of the pandemic, lockdown measures, changes in consumer

behaviour, and the recession and recovery thereof. UPM has used shift

arrangements, temporary lay-offs, or reduced working hours as required

to adjust its operations in different scenarios.

Projects and maintenance shutdowns

The pandemic and the required health and safety measures add

challenges to large investment projects and maintenance shutdowns.

UPM's transformative pulp project in Uruguay and biochemicals project

in Germany are proceeding with strict health and safety controls.

Despite these efforts, some changes to the detailed timeline and costs of

such projects are possible during the pandemic, the related containment

measures, or due to tight global logistics and supply chains.

Financing

UPM’s financial position is strong. UPM's net debt was EUR 2,374

million at the end of 2022. Net debt has been impacted by energy

hedging derivative market value payments, which are driven by the

increase in energy futures prices and volatility in the energy markets.

Cash funds and unused committed credit facilities totalled EUR 6.4

billion at the end of 2022. The total amount of committed credit facilities

was EUR 5.7 billion of which EUR 4.5 billion maturing in 2024, EUR

300 million maturing in 2025 and EUR 950 million maturing in 2027.

The facilities and UPM's outstanding debt have no financial covenants.


UPM FINANCIAL REPORT 2022	3

Impact of Russia's war in Ukraine

In response to Russia´s attack on Ukraine, the European Union as well

as the United States, the United Kingdom, and other countries have

imposed extensive sanctions on Russia, the breakaway regions Donetsk

and Luhansk and more recently the oblasts of Zaporizhzhia and

Kherson, and Belarus. Since 21 February 2022, these measures include

for example asset freezes and travel restrictions on individuals and

entities, economic sanctions targeting sectors of the Russian and

Belarusian economies, and diplomatic restrictions. Russia has also

implemented several countermeasures affecting especially foreign

companies’ operations within Russia and with Russian counterparties.

Further escalation of the conflict has involved Russia’s attempted illegal

annexation of four partially occupied regions in Ukraine based on sham

referenda, mobilisation of military reservists in Russia, issuance of open

nuclear threats and explosions in Russia-to-Germany gas pipelines under

the Baltic Sea, which have all increased geopolitical tensions between

Russia and several other countries and triggered further sanctions

packages against Russia.

Global economy

While the sanctions primarily target Russia’s ability to finance its military

operations in Ukraine and cause economic and political costs on the

people responsible for them, economic and geopolitical uncertainty and

inflation may accelerate around the world. Import bans on various

goods categories will restrict the availability of raw materials and drive

cost and lead time increases in many supply chains that have been

under increasing pressure during the COVID-19 pandemic. Export bans

will impact industries dependent on Russian markets and shift delivery

volumes and services to other markets. Fuel prices are exposed to

geopolitical uncertainties. Because of Russia’s attack on Ukraine, the

sanctions imposed on the Russian energy sector and Russia’s

countermeasures on gas and electricity deliveries, energy price levels

and volatility may increase, especially in Europe if the scope of EU

sanctions expands to further fossil fuels such as natural gas.

Impact on UPM businesses

The EU has imposed export and import bans on several forest industry

product categories, prohibitions on Russian transportation operators

entering the EU and has sanctioned several Russian banks. Disruptions

in international sales, purchases and payment flows involving Russian

counterparties are inevitable. The EU has also imposed restrictions on

Russian seaborne crude oil, certain petroleum products and oil

transportation services and agreed in December 2022 to impose a cap

of USD 60 per barrel on the price of Russian oil. Russia has also

introduced legislation restricting non-Russian companies to repatriate

dividends and loan payments and has caused friction in collecting

customer payments from Russia. Russia has also restricted or suspended

the flow of natural gas or electricity from Russia. These restrictions have

impacted several European countries where UPM has production

locations and caused increases in the price of power and gas. The

unprecedented increase in energy futures prices has impacted cash

flows from energy hedges, temporarily tying liquidity. EU energy

ministers also adopted a new temporary regulation (applicable from 1

December 2022 to 30 June 2023) on the reduction of electricity use,

the capping of revenues of electricity producers, and mandatory

solidarity contributions from fossil fuel businesses. To implement the

revenue cap of electricity producers, on 29 December 2022 the Finnish

government has made a proposal for an additional profit tax on energy

companies, commonly referred to as the windfall tax. The additional

and temporary 30% tax would apply to Finnish electricity generating

companies’ profits exceeding a 10% return on adjusted shareholder’s

equity in the fiscal year 2023. According to the proposal, group

internal electricity profits would not be taken into account when

calculating the taxable net profit for the temporary profit tax. The

government proposal is still in the parliamentary decision-making

process and the final decision is expected by the end of February 2023

at the earliest. Major forest certification organisations (i.e. FSCTM and

PEFC) have also excluded Russian and Belarusian wood from their

certification systems. UPM businesses have suspended deliveries to

Russia as well as wood sourcing in and from Russia. UPM also decided

to suspend the UPM Chudovo plywood mill operations. UPM Raflatac’s

Kiev terminal has been closed down since March 2022 until further

notice. Due to the significant uncertainties related to operations in

Russia and Ukraine, UPM recognised a write off of all operating assets

and uninsured receivables locating or relating to operations in these

countries in Q1 2022. Impairment of fixed assets, inventories and other

receivables amounting to EUR 95 million was reported as items

affecting comparability. In addition, in Q1 the group increased the

general provision for expected credit losses on trade receivables by EUR

17 million, which is impacting comparable EBIT. At the end of 2022,

the impairment was EUR 80 million and the credit loss provision was

EUR 8 million. UPM’s sales to Russia and Ukraine combined was in

2022 less than 1% (2.3%) of UPM’s total sales. Assets in Russia were

less than 1% of the group total assets. In 2022, 3% (less than 10%) of

UPM’s wood sourcing to Finland originated from Russia.

Adjusting to different scenarios

The full impact of current and possible new sanctions, counter-sanctions

and market development will be known only as the situation evolves.

UPM has implemented mitigation plans to contain and reduce the

negative consequences for its employees, customers, vendors, and other

stakeholders as well as operations affected by sanctions and the war in

Ukraine in general. The potential further impacts for UPM are likely to

differ by business and by the pace, scope and duration of sanctions,

market price reactions, development of supply chains, and the length of

the war in Ukraine and whether any geographic escalation of the war

develops. UPM is monitoring the situation closely and preparing plans

to adjust its operations in different scenarios accordingly.


UPM FINANCIAL REPORT 2022	4

Key figures


	2022	2021	2020
Sales, EURm	11,720	9,814	8,580
Comparable EBITDA, EURm	2,536	1,821	1,442
% of sales	21.6	18.6	16.8
Operating profit, EURm	1,974	1,562	761
Comparable EBIT, EURm	2,096	1,471	948
% of sales	17.9	15.0	11.1
Profit before tax, EURm	1,944	1,548	737
Comparable profit before tax, EURm	2,066	1,457	924
Profit for the period, EURm	1,556	1,307	568
Comparable profit for the period, EURm	1,679	1,204	737
Earnings per share (EPS), EUR	2.86	2.41	1.05
Comparable EPS, EUR	3.09	2.22	1.37
Return on equity (ROE), %	13.0	12.7	5.8
Comparable ROE, %	14.0	11.7	7.5
Return on capital employed (ROE), %	12.8	12.4	6.7
Comparable ROCE, %	13.6	11.7	8.3
Operating cash flow, EURm	508	1,250	1,005
Operating cash flow per share, EUR	0.95	2.34	1.89
Equity per share at the end of period, EUR	23.44	20.34	17.53
Capital employed at the end of period, EURm	17,913	13,759	11,555
Net debt, EURm	2,374	647	56
Net debt to EBITDA	0.94	0.35	0.04
Personnel at the end of period	17,236	16,966	18,014

» Refer Other financial information Alternative performance measures for definitions of key figures.

Results

2022 compared with 2021

Sales in 2022 were EUR 11,720 million, 19% higher than the

EUR 9,814 million for 2021. Sales increased in UPM Communication

Papers, UPM Raflatac, UPM Energy, UPM Specialty Papers and UPM

Plywood business areas and decreased in UPM Fibres.

Comparable EBIT increased by 42% to EUR 2,096 million, 17.9% of

sales (1,471 million, 15.0%).

Sales prices increased significantly for all business areas, with the

largest impact in UPM Communication Papers.

Variable costs increased in all business areas, especially in UPM

Communication Papers, UPM Raflatac and UPM Fibres. At Group level,

the positive impact of higher sales prices was larger than the negative

impact of higher variable costs.

Delivery volumes were lower in all business areas. The strike in

Finland in January-April significantly affected delivery volumes

especially in UPM Fibres, UPM Communication Papers, UPM Specialty

Papers and UPM Biofuels.

The strike affected the January-June results through lost production

and sales, lower fixed costs and various dynamic impacts. The full-year

earnings impact was not material.

Fixed costs increased by EUR 100 million mainly due to scheduled

maintenance activity and costs related to the transformative projects.

Depreciation, excluding items affecting comparability, totalled

EUR 457 million (463 million) including depreciation of leased assets

totalling EUR 80 million (74 million). The change in the fair value of

forest assets net of wood harvested was EUR 12 million (111 million).

Operating profit totalled EUR 1,974 million (1,562 million). Items

affecting comparability in operating profit totalled EUR -122 million in

the period (91 million). In 2022, items affecting comparability include

EUR 80 million impairment charges of assets impacted by Russia´s war

in Ukraine, EUR 69 million settlement loss resulting from replacement of

a defined benefit pension plan in Finland with defined contribution

plan, EUR 8 million capital gain on the sale of Chapelle mill site in

France, EUR 11 million reversal of restructuring provisions related to the

Chapelle paper mill, EUR 26 million gain on the sale of other non-

current assets, EUR 18 million restructuring costs and EUR 8 million

addition to environmental provisions in Finland. In 2021, items affecting

comparability include the EUR 133 million gain on the sale of Shotton

Mill Ltd in the Communication Papers business area and EUR 50 million

impairment charges of newsprint related fixed assets.

Net interest and other finance income and costs were EUR -55

million (-12 million). The exchange rate and fair value gains and losses

were EUR 25 million (-3 million). Income taxes totalled EUR -388 million

(-240 million).

Profit for 2022 was EUR 1,556 million (1,307 million), and

comparable profit was EUR 1,679 million (1,204 million).


UPM FINANCIAL REPORT 2022	5

Financing and cash flow

In 2022 cash flow from operating activities before capital expenditure

and financing totalled EUR 508 million (1,250 million). Working capital

increased by EUR 687 million (115 million) mainly due to inflation and

energy-related items. In 2022, particularly in June - August, the energy

futures markets experienced an unprecedented rise in futures prices.

Due to this, the cash outflow of UPM's unrealised energy hedges totalled

EUR -0.9 billion in 2022. As UPM's energy hedges are only for hedging

the existing electricity generation and energy consumption, this cash

outflow will later be offset by a similar cash inflow from hedges or

production. Approximately 23% of the energy hedging cash outflow

during 2022 is included in the change in working capital above.

Net debt was EUR 2,374 million at the end of 2022 (647 million).

The gearing ratio as of 31 December 2022 was 18% (6%). The net

debt to EBITDA ratio, based on the last 12 month's EBITDA, was 0.94

at the end of the period (0.35).

On 31 December 2022 UPM's cash funds and unused committed

credit facilities totalled EUR 6.4 billion. The total amount of committed

credit facilities was EUR 5.7 billion of which EUR 4.5 billion maturing in

2024, EUR 300 million maturing in 2025 and EUR 950 million

maturing in 2027.

A dividend of EUR 1,30 per share (totalling EUR 693 million) was

paid on 7 April 2022 for the 2021 financial year.

Capital expenditure

In 2022, capital expenditure totalled EUR 1,555 million, which was

13.3% of sales (1,483 million, 15.1% of sales). Capital expenditure

does not include additions to leased assets.

In 2023, UPM's total capital expenditure, excluding investments in

shares, is expected to be about EUR 950 million, which includes

estimated capital expenditure of approximately EUR 750 million in

transformative projects. Transformative projects consist of the new pulp

mill in Uruguay and the biochemicals biorefinery in Germany.

In January 2019, UPM announced that it would invest in the

refurbishment of the Kuusankoski hydropower plant in Finland. The

average annual production of the Kuusankoski plant is expected to

increase from the current 180 GWh to 195 GWh. The investment will

be completed in Q1 2023.

In July 2019, UPM announced that it would invest in a 2.1 million

tonne greenfield eucalyptus pulp mill near Paso de los Toros, central

Uruguay. Additionally, UPM will invest in port operations in Montevideo

and in local investments outside the mill fence. The mill is scheduled to

start up by the end of Q1 2023, and the total investment estimate is

USD 3.47 billion.

In October 2019, UPM announced that it would invest EUR 95

million in a Combined Heat and Power (CHP) plant at the UPM

Nordland paper mill in Germany. The plant was connected to grid in

Q3 2022. The annual cost savings of more than EUR 10 million will

begin in 2023. The investment is estimated to decrease UPM's CO2

footprint by 300,000 tonnes.

In January 2020, UPM announced that it would invest in a 220,000

tonnes next-generation biochemicals biorefinery in Leuna, Germany. The

facility is scheduled to start up by the end of 2023, and the total

investment estimate is EUR 750 million.

In December 2021, UPM announced that it would invest EUR 10

million in the development of UPM Plywood's plywood mill in Joensuu,

Finland. The investment includes new production lines, new workspaces

and 720 square metres of completely new production space. The

investment will be completed by the end of 2023.

Personnel

In 2022, UPM had an average of 17,176 employees (17,512). At the

beginning of the year the number of employees was 16,966 and at the

end of 2022 it was 17,236.

Further information about personnel is available in » Our People section in

UPM Annual report 2022.

Uruguay pulp mill investment

On 23 July 2019, UPM announced that it would invest USD 2.72 billion

in a 2.1 million tonne greenfield eucalyptus pulp mill near Paso de los

Toros, central Uruguay. Additionally, UPM would invest approximately

USD 280 million in port operations in Montevideo and USD 70 million

in local investments outside the mill fence, including a new residential

area in Paso de los Toros. In May 2020, an electrical grid

reinforcement investment of USD 70 million was added to the scope of

the project to fully utilise and sell the surplus energy of the mill.

The investment will grow UPM's current pulp capacity by more than

50%, resulting in a step change in the scale of UPM's pulp business as

well as in UPM's future earnings.

With a combination of competitive wood supply, scale, best

available techniques and efficient logistics, the mill is expected to reach

a highly competitive cash cost level of approximately USD 280 per

delivered tonne of pulp. This figure includes the variable and fixed costs

of plantation operations, wood sourcing, mill operations and logistics

delivered to the main markets. Furthermore, the safety and sustainability

performance of the value chain from plantations to customer delivery is

expected to be on an industry-leading level.

Competitive wood supply

Eucalyptus availability for the mill is secured through UPM’s own and

leased plantations, as well as through wood sourcing agreements with

private partners. The plantations that UPM owns, leases or manages in

Uruguay cover 504,773 hectares. They will supply the current UPM

Fray Bentos mill and the new mill near Paso de los Toros.

State of the art mill design

The pulp mill has been designed as an efficient single-line operation.

The machines, materials, level of automation and standards enable a

high operating rate and maintainability, as well as a high energy

output. This ensures excellent safety, high environmental performance,

and low operating costs during the long lifecycle of the mill.

The mill is designed to fully meet strict Uruguayan environmental

regulations, as well as international standards and recommendations for

modern mills, including the use of the latest and best available

technology (BAT). The mill's environmental performance will be verified

through comprehensive and transparent monitoring.

The mill's initial annual production capacity is 2.1 million tonnes,

and the environmental permits enable further capacity potential. When

in operation, the mill generates more than 110 MW surplus of

renewable electricity.

Efficient logistics set-up

An efficient logistics chain will be secured by the agreed road

improvements, extensive railway modernisation and port terminal

construction.

The Public-Private-Partnership agreement between the government

and the construction company for the construction of the central railway

was signed in May 2019. Works on the central railway are


UPM FINANCIAL REPORT 2022	6

proceeding, but the overall rail project is delayed, and the railway is

scheduled to start operations in May 2023. UPM has a contingency

plan in place to ensure logistics with truck transportation before the rail

logistics are commissioned.

UPM has completed the construction of a deep-sea pulp terminal at

Montevideo port with an investment of approximately USD 240 million.

Direct rail access from the mill to a modern deep-sea port terminal will

create an efficient supply chain to world markets. The Montevideo deep-

sea port also enables synergies in ocean logistics with UPM’s existing

Uruguayan operations.

UPM entered into a port terminal concession agreement in 2019 and

signed an agreement on rail logistics services in October 2020. Both

agreements are considered in accordance with IFRS 16 Leases. The

total amount of such lease payments is expected to be USD 200 million.

Significant impact on the Uruguayan economy

Based on independent socio-economic impact studies, the mill is

estimated to increase Uruguay’s gross national product by about 2%

and the annual value of Uruguay’s exports by approximately 12% after

completion.

In the most intensive construction phase, more than 7,000 people

have been working on the site. In total, over 20,000 people have been

involved in the various construction sites related to the project.

When completed, approximately 10,000 permanent jobs are

estimated to be created in the Uruguayan economy of which

approximately 4,000 would involve direct employment by UPM and its

subcontractors. About 600 companies are estimated to be working in

the value chain.

The mill will be located in one of Uruguay's many free trade zones

and will pay a fixed annual tax of USD 7 million. The mill's value chain

is expected to contribute USD 170 million in annual taxes and social

security payments and to contribute USD 200 million annually in wages

and salaries.

Project schedule and capital outflow

The start-up will take place by the end of Q1 2023, and the total

investment estimate is USD 3.47 billion.

In December, UPM finalised construction works at the Paso de los

Toros mill site and is in its final phases of the project. The project now

proceeds with the finalization of the electrical, instrumental and

automation works and commissioning. The auxiliary boilers and power

boilers have been commissioned. The water intake and water treatment

process as well as the process air system are already in use. The

recovery boiler testing has started and is advancing well, and

commissioning is progressing in all process areas. As the project has

entered its final phases, the number of people working on the project

has significantly reduced and continues to rapidly decline.

Works at the pulp terminal in the port of Montevideo have been

completed. The railway connection from the port to the Central Railroad

is in progress.

The total capital expenditure of USD 3.47 billion will take place in

2019-2023, with 2021 and 2022 being the most intensive years. UPM

will hold 91% ownership of the project and a local long-term partner

which has also been involved in UPM Fray Bentos, owns 9%. UPM’s

investment will mainly be financed from operating cash flow

complemented by regular group financing activities.

Biochemicals refinery investment

On 30 January 2020 UPM announced that it would invest EUR 550

million in a 220,000 tonnes next-generation biochemicals refinery in

Leuna, Germany. Originally, the biorefinery was scheduled to start up

by the end of 2022. However, the pandemic has slowed down the

completion of the detailed engineering in Leuna. Disruptions to global

supply chains have affected both the availability and costs of critical

construction materials. Hence the start-up schedule has been updated to

take place by the end of 2023. The capital expenditure estimate has

been increased to EUR 750 million.

The biorefinery will produce a range of 100% wood-based

biochemicals, which will enable a switch from fossil raw materials to

sustainable alternatives in various consumer-driven end-uses. The

investment opens up totally new markets for UPM, with large growth

potential for the future.

The industrial scale biorefinery will convert solid wood into next

generation biochemicals: bio-monoethylene glycol (BioMEG) and

renewable functional fillers. In addition, the biorefinery will produce bio-

monopropylene glycol (BioMPG) and industrial sugars. Once the facility

is fully ramped up and optimised, it is expected to achieve the ROCE

target of 14%.

A combination of a sustainable wood supply, a unique technology

concept, integration into existing infrastructure at Leuna and the

proximity to customers will ensure the competitiveness of operations. The

safety and sustainability of the value chain will be based on UPM’s high

standards.

InfraLeuna GmbH, in the state of Saxony-Anhalt, offers very

competitive conditions for constructing a biorefinery with its logistics

arrangements and infrastructure for various services and utilities. In

October 2020, UPM entered into service agreements with InfraLeuna

GmbH related to wood handling, wastewater treatment and other

utilities, which will be recognised as lease assets and liabilities under

IFRS 16 Leases upon the commencement date. The total amount of such

lease assets and liabilities is estimated to be EUR 120 million.

Construction at the biorefinery-site in Leuna continues with visible

progress. Major overground structures have been emerging. The

erection of pipe racks, casings, tanks and the substation buildings is

progressing with good speed. Also, large parts of the reactors, furnaces

and columns have been delivered and are stored on site.

The business foundation has been strengthened further. Business

function teams are in place and hiring the operations staff has

progressed enabling entering to concrete start- and ramp-up

preparations from training through process development and concrete

operations planning. Also, the research and analytics laboratories are

now established in Leuna and the teams are staffed and working – an

important step towards quality assurance, process optimisation and to

define future development options.

Commercial activities have continued to proceed positively in

different product and application areas. After the launch of UPM

BioMotion™ Renewable Functional Fillers (RFF) in October 2021, joint

product development activities with potential customers in the rubber

value chain have progressed further as have discussions with OEMs,

especially in the automotive sector, with good results regarding both the

technical and commercial viability of the product. We made further

progress in taking renewable bio-monoethylene glycols (bMEG) to

market, advancing sales capabilities and extending pre-commercial

discussions with potential customers, as well as end-users in the

packaging, textile and automotive end-uses.

The environmental benefits of the biorefinery and the UPM

Biochemicals portfolio continue to be publicly acknowledged with

nominations as finalist in the Packaging Europe’s “Renewables, Pre

Commercialized” category and first position in the sustainability ranking

in the European Rubber Journal.


UPM FINANCIAL REPORT 2022	7

Biofuels business development

In January 2021, UPM announced that it moves forward with biofuels

growth plans and starts the basic engineering phase of a next

generation biorefinery. The potential biorefinery would have a

maximum annual capacity of 500,000 tonnes of high-quality renewable

fuels including sustainable jet fuel. The products would significantly

reduce the carbon footprint of road transport and aviation, as well as

replace fossil raw materials with renewable alternatives in chemicals

and bioplastics. Feedstock sourcing will focus on UPM integrated

feedstocks from the company’s own ecosystem and wood-based

residues play a substantial role. In addition, the biorefinery would use

sustainable liquid waste and residue raw materials.

UPM is proceeding with a detailed commercial and basic

engineering study to define the business case, select an innovative

technology option and sustainable feedstock mix and estimate the

investment need.

The site assessment of the potential biofuels refinery was completed

in January 2022 and Rotterdam in the Netherlands has been selected

as the optimal location.

If all preparations are concluded successfully, UPM would initiate the

company’s standard procedure of analysing and preparing an

investment decision.

OL3 power plant project

Teollisuuden Voima Oyj (TVO) is in the process of constructing a third

nuclear power plant unit, OL3 EPR, at the Olkiluoto site (OL3). UPM

participates in OL3 through its shareholding in Pohjolan Voima Oyj

(PVO), which is the majority shareholder in TVO. UPM’s indirect share

of OL3 is approximately 31%. The OL3 plant supplier, a consortium

consisting of AREVA GmbH, AREVA NP SAS and Siemens AG

(Supplier), is constructing OL3 as a turnkey project.

On 12 March 2022, TVO announced that the electricity production

at OL3 had started, when OL3 was connected to the national grid. In

June 2022 TVO announced that according to information received from

Supplier, OL3’s regular electricity production would start in December

2022. In August 2022, TVO announced that after completion of

maintenance and repair activities and automation updates the test

production continued with tests at a power level of 60 percent. Tests at

an 80 percent power level were started on 9 September 2022. On 30

September 2022, TVO announced that the commissioning of OL3

proceeded to the full electrical power level of approximately

1,600 MW.

On 18 October 2022, TVO announced that damage had been

detected in the internals of the feedwater pumps located in turbine

island. Cracks of a few centimeters were identified in all four of OL3’s

feedwater pumps. A schedule estimate on an effect on the continuation

of OL 3’s nuclear commissioning and the start of regular electricity

production is to be completed during the upcoming days.

On 7 November 2022, TVO announced that the investigations were

still ongoing and it was not possible to set a date for the continuation of

the test production programme. The feedwater pumps were delivered

for the turbine island by a proven pump supplier that supplies pumps to

several nuclear power plants.

On 21 November 2022, TVO announced that the investigation into

the damage at OL 3’s feedwater pumps would continue still for some

weeks, and its impact on the schedule cannot be estimated. According

to information TVO received from Supplier, electricity production will

continue on 11 December 2022 at the earliest, and as such regular

electricity production starts at the end of January 2023 at the earliest.

On 9 December 2022, TVO announced that the investigation into

the damage in OL3’s feedwater pumps proceeded into its final stages,

and that according to Supplier, electricity production would continue on

25 December 2022 at the earliest. Regular electricity production would

start in February 2023. According to TVO there were still uncertainties

related to the schedule.

On 21 December 2022, TVO announced that the electricity

production of OL3 will be continued on Tuesday, 27 December 2022.

During test production, approximately 1.3 terawatt hours of electricity

will be produced. Around ten significant tests still remain. Regular

electricity production is to start on 8 March 2023.

After the end of the reporting period, TVO announced on 4 January

2023 that after the production tests, production at the plant unit is

discontinued in January 2023 for planned inspections of the impellers of

the feedwater pumps.

On 20 January 2023, TVO announced that the impellers of OL3

feedwater pumps will be replaced with impellers with more robust

measurements during the ongoing production break. After this,

electricity production will continue mainly at full power. Regular

electricity production starts in March 2023. Supplier is obligated to

complete the plant unit in accordance with the Plant Contract and the

settlement agreements.

When completed, OL3 will supply electricity to its shareholders on a

cost-price principle (Mankala-principle), which is widely applied in the

Finnish energy industry. Under the Mankala-principle electricity and/or

heat is supplied to shareholders in proportion to ownership, and each

shareholder is, pursuant to the specific stipulations of the respective

articles of association, severally responsible for its respective share of

the production costs of the energy company concerned.

OL3 will increase UPM Energy’s electricity generation capacity

significantly. The new power plant unit is expected to be highly efficient

and meet the highest safety standards. Its power generation will be

CO2 -free and TVO will have a secure solution for the final disposal of

used fuel.

Events during the reporting period

On 1 January, UPM announced that members of the Paperworkers’

Union, the Finnish Electrical Workers´ Union and the Trade Union Pro

had started strikes at UPM mills in Jämsänkoski, Kouvola, Lappeenranta,

Pietarsaari, Rauma, Tampere and Valkeakoski. UPM businesses affected

by the strikes in Finland were UPM Pulp, UPM Biofuels, UPM

Communication Papers, UPM Specialty Papers and UPM Raflatac. The

duration of the strike was extended several times (5 January, 20

January, 4 February, 24 February, 16 March, 31 March and 14 April).

On 1 March, UPM launched a new forest responsibility programme.

On 3 March, UPM announced that it would cease deliveries to

Russia.

On 9 March, UPM announced that would suspend the purchasing of

wood in and from Russia as well as the UPM Chudovo plywood mill

operations for the time being.

On 12 March, electricity production began at the OL3 EPR unit.

On 22 March, UPM announced that a proposal for a settlement to

the collective labour agreement negotiations between UPM Pulp and the

Paperworkers’ Union had been submitted.

On 29 March, UPM held its Annual General Meeting.

On 9 April, UPM announced that the conciliator had interrupted the

conciliation between UPM Communication Papers and the

Paperworkers’ Union.

On 11 April, UPM announced that the conciliator had submitted

settlement proposals for UPM Specialty Papers and UPM Raflatac.


UPM FINANCIAL REPORT 2022	8

On 12 April, UPM announced that the conciliator had submitted

settlement proposal for UPM Biofuels.

On 14 April, UPM announced that UPM and the Paperworkers’

Union had not been able to come to a new collective labour

agreements. The union turned down four settlement proposals submitted

by the conciliator.

On 21 April, UPM announced that the conciliator had submitted

settlement proposals to five businesses in collective bargaining between

UPM's businesses and the Paperworkers’ Union.

On 22 April, UPM announced that UPM and Paperworkers’ Union

had agreed on the first-ever business-specific collective labour

agreements and the strike ended at UPM mills in Finland.

On 16 May, UPM announced that it had issued a new EUR 500

million Green Bond under its EMTN (Euro Medium Term Note)

programme and its Green Finance Framework. The bond matures in

May 2029 and pays a fixed coupon of 2.25%.

On 23 May, UPM announced that it had applied for listing of a EUR

500 million Green Bond under its Euro Medium Term Note (EMTN)

programme to Irish Stock Exchange plc, trading as Euronext Dublin.

On 27 May, UPM announced that UPM Raflatac had signed an

agreement to acquire AMC AG (Advanced Methods of Coating), a

Germany-based company. The transaction was expected to be closed in

Q3 2022 at the latest.

On 14 June, UPM announced that it had raised its earnings outlook

for H1 2022 and for the full year 2022.

On 21 June, UPM announced that it had signed an agreement to sell

100% of the shares of its Austrian subsidiary UPM-Kymmene Austria

GmbH to the HEINZEL GROUP. The transaction comprises the UPM

Steyrermühl site with approx. 400 employees, including the newsprint

paper machine with an annual capacity of 320,000 tonnes and the

Steyrermühl sawmill operations with an annual timber capacity of

370,000 cubic metres.

On 18 August, UPM announced that EcoVadis had recognised UPM

on a Platinum level based on the company’s sustainability performance.

Only one percent of the 90,000 global companies assessed received

the Platinum score.

On 15 September, UPM Raflatac announced that it had completed

the acquisition of AMC AG.

On 5 October, UPM announced that it had inaugurated its new pulp

terminal in the port of Montevideo, Uruguay.

On 13 October, UPM announced that it had substantiated its

positive outlook following the record strong Q3 2022 results.

On 18 October, UPM announced that UPM’s President and CEO

Jussi Pesonen would retire during 2024. Jussi Pesonen was appointed

as UPM’s President and CEO in 2004. Before that he served UPM in

several management positions since 1987.

On 12 December, UPM announced that it had been listed on the

Dow Jones European and World Sustainability Indices (DJSI) for

2022-2023 as the only company in its industry.

On 13 December UPM announced that it had been recognised with

a triple ‘A’ score for its performance and transparent reporting on

climate change, forests and water security by the global environmental

non-profit CDP.

On 23 December, UPM announced that it is finalizing the

construction works of the new pulp mill in Uruguay and enters the final

phases of the project.

Events after the balance sheet date

On 2 February 2023, UPM’s Board of Directors revised the company’s

dividend policy to be based on earnings instead of cash flow. This

aligns the dividend policy with the company’s transformative growth

strategy. According to the new policy, UPM aims to pay attractive

dividends, targeting at least half of the comparable earnings per share

over time.

Outlook for 2023

UPM reached record earnings in 2022, and 2023 is expected to be

another year of strong financial performance. UPM’s comparable EBIT

is expected to increase in H1 2023 from H1 2022.

In 2023, UPM’s delivery volumes are expected to benefit from the

ramp up of the UPM Paso de los Toros pulp mill and the OL3 nuclear

power plant unit and having no strike impact when compared to 2022.

In the early part of the year, however, demand for many UPM products

is expected to be held back by destocking in various product value

chains. The opening of the Chinese economy from the COVID

lockdowns and easing inflation in other key economies represent

potential for increasing demand as the year progresses.

Year 2023 is starting with high cost level for many inputs, while the

lower demand is exerting pressure on product prices. However, several

input costs have also progressed past their peak. UPM will continue to

manage margins with product pricing, by optimising its product and

market mix and by taking measures to improve variable and fixed cost

efficiency.

There are significant uncertainties, both positive and negative, in the

outlook for 2023, related to the European, Chinese and global

economy, Russia’s war in Ukraine, the remaining effects of the

pandemic, energy prices and related regulation in Europe, and the

ramp-up of the OL3 power plant unit.


UPM FINANCIAL REPORT 2022	9

UPM FibresUPM Energy

UPM Fibres consists of pulp and timber

businesses. UPM Pulp offers a versatile

range of responsibly-produced pulp

grades suitable for a wide range of

end-uses. UPM Timber offers certified

sawn timber. UPM has three pulp mills

in Finland, one mill and plantation

operations in Uruguay and operates

four sawmills in Finland.

UPM Energy generates cost-

competitive, zero-carbon electricity.

Operations also include physical

electricity and financial portfolio

management as well as services to

industrial electricity consumers and

producers.


	2022	2021
Sales, EURm	2,704	2,794
Comparable EBITDA, EURm	743	961
% of sales	27.5	34.4
Change in fair value of forest assets and wood harvested, EURm	11	-9
Share of results of associates and joint ventures, EURm	3	2
Depreciation, amortisation and impairment charges, EURm	-187	-173
Operating profit, EURm	517	781
% of sales	19.1	27.9
Items affecting comparability in operating profit, EURm 1)	-53	—
Comparable EBIT, EURm	570	781
% of sales	21.1	27.9
Capital employed (average), EURm	5,867	4,277
Comparable ROCE, %	9.7	18.3
Pulp deliveries, 1,000 t	2,761	3,724

2021 figures have been restated due to change in composition of reportable

segments. Refer Note 1.5 in UPM 2022 consolidated financial statements.

1) Include EUR 55 million settlement loss resulting from replacement of defined

benefit pension plan with defined contribution plan in Finland and EUR 2

million reversal of environmental provisions.

2022 compared with 2021

Comparable EBIT decreased. Pulp production and delivery volumes

were lower due to the strike in Finland in January-April. Sales prices

were higher offsetting the negative impact of higher variable costs.

Fixed costs increased partly due to scheduled maintenance activity and

partly in preparation for the start-up of the UPM Paso de los Toros mill.

The average price in euro for UPM’s pulp deliveries increased by 35%.

Market environment

•In 2022, global chemical pulp demand growth was good. In China,

COVID-19 restrictions held back market growth. In Europe, chemical

pulp demand was strong in H1. However, European demand growth

was slowing down towards the end of the year due to weakening

economic sentiment.

•In 2022, the average European market price in euro was 32% higher

for NBSK and 43% higher for BHKP, compared with 2021. In China,

the average market price in US dollars was 10% higher for NBSK

and 21% higher for BHKP, compared with 2021.

•In H1 2022, demand for sawn timber was strong and market prices

were at high level. In H2, market prices decreased from the peak

level. Sources: FOEX, UPM


	2022	2021
Sales, EURm	734	526
Comparable EBITDA, EURm	388	277
% of sales	52.9	52.7
Depreciation, amortisation and impairment charges, EURm	-7	-7
Operating profit, EURm	381	270
% of sales	52.0	51.3
Items affecting comparability in operating profit, EURm	0	0
Comparable EBIT, EURm	381	270
% of sales	52.0	51.3
Capital employed (average), EURm	3,286	2,375
Comparable ROCE, %	11.6	11.4
Electricity deliveries, GWh	9,442	9,300

2022 compared with 2021

Comparable EBIT increased due to significantly higher electricity sales

prices.

UPM’s average electricity sales price increased by 41% to

EUR 73.3/MWh (52.1/MWh).

Market environment

•The Nordic hydrological balance was below the long-term average at

the end of December. In Finland, the hydrological situation was

somewhat below the long-term average.

•The CO2 emission allowance price of EUR 82.3/tonne at the end of

2022 was higher than at the end of 2021 (EUR 80.1/tonne).

•The average Finnish area spot price on the Nordic electricity

exchange in 2022 was EUR 154.0/MWh, 113% higher than in

2021 (72.3/MWh).

Sources: The Norwegian Water Resources and Energy Directorate, Svensk

Energi, Finnish Environment Institute, Nord Pool, NASDAQ OMX, Bloomberg,

UPM


UPM FINANCIAL REPORT 2022	10

UPM RaflatacUPM Specialty Papers

UPM Raflatac offers high-quality self-

adhesive paper and film products

including label materials, graphics

solutions and removable self-

adhesive products.

UPM Specialty Papers offers

labelling and packaging materials

as well as office and graphic

papers for labelling, commercial

siliconising, packaging, office use

and printing.


	2022	2021
Sales, EURm	1,982	1,671
Comparable EBITDA, EURm	251	259
% of sales	12.7	15.5
Depreciation, amortisation and impairment charges, EURm	-41	-36
Operating profit, EURm	203	222
% of sales	10.3	13.3
Items affecting comparability in operating profit, EURm 1)	-11	-1
Comparable EBIT, EURm	214	223
% of sales	10.8	13.3
Capital employed (average), EURm	681	553
Comparable ROCE, %	31.5	40.2

1) In 2022, items affecting comparability include EUR 6 million impairment

charges of assets impacted by Russia´s war in Ukraine, EUR 2 million of

AMC acquisition-related costs and EUR 3 million restructuring charges. In

2021, items affecting comparability include restructuring charges.

2022 compared with 2021

Comparable EBIT decreased. Variable costs were higher, offsetting the

positive impact of higher sales prices. Q1 2022 was affected by a

provision for expected credit losses related to Russian trade receivables.

Market environment

•In Q1-Q3 2022, demand for self-adhesive label materials was solid

in Europe (excl. Russia) and North America while the markets were

somewhat impacted by supply constraints.

•In Q4 2022, demand for self-adhesive label materials declined in

Europe and North America due to significant destocking in the value

chain. Destocking was especially significant in Europe, resulting in

25% lower market deliveries during the quarter.

•Demand in Asia was relatively soft throughout the year 2022.

Sources: UPM, FINAT, TLMI


	2022	2021
Sales, EURm	1,677	1,482
Comparable EBITDA, EURm	230	209
% of sales	13.7	14.1
Depreciation, amortisation and impairment charges, EURm	-77	-75
Operating profit, EURm	153	135
% of sales	9.1	9.1
Items affecting comparability in operating profit, EURm	—	—
Comparable EBIT, EURm	153	135
% of sales	9.1	9.1
Capital employed (average), EURm	889	864
Comparable ROCE, %	17.2	15.6
Paper deliveries, 1000 t	1,431	1,658

2022 compared with 2021

Comparable EBIT increased. The positive impact of higher sales prices

more than offset the negative impact of higher input costs and lower

delivery volumes.

Market environment

•Global demand for label, release base and packaging papers was

good during 2022, though demand became softer towards the end

of the year and was impacted by destocking in the value chain.

Demand was driven by fast moving consumer goods and e-

commerce. Market prices increased.

•Fine paper demand was impacted by the COVID-19 lockdowns and

containment measures in China.

•In 2022, fine paper market prices in the Asia-Pacific region

increased compared to 2021.

Sources: UPM, RISI, AFRY, AWA


UPM FINANCIAL REPORT 2022	11

UPM Communication PapersUPM Plywood

UPM Communication Papers offers

an extensive product range of

sustainably produced graphic

papers for advertising and

publishing as well as home and

office uses.

UPM Plywood offers high quality

WISA® plywood and veneer

products for construction, vehicle

flooring, LNG shipbuilding, parquet

manufacturing and other industrial

applications.


	2022	2021
Sales, EURm	4,866	3,577
Comparable EBITDA, EURm	697	23
% of sales	14.3	0.6
Share of results of associates and joint ventures, EURm	3	0
Depreciation, amortisation and impairment charges, EURm	-80	-155
Operating profit, EURm	631	14
% of sales	13.0	0.4
Items affecting comparability in operating profit, EURm 1)	12	93
Comparable EBIT, EURm	619	-79
% of sales	12.7	-2.2
Capital employed (average), EURm	1,506	1,275
Comparable ROCE, %	41.1	-6.2
Paper deliveries, 1000 t	4,703	5,828

1) 2022 items affecting comparability include EUR 26 million capital gain on

sale of non-current assets, EUR 11 million settlement loss resulting from

replacement of a defined benefit pension plan in Finland with defined

contribution plan, EUR 9 million restructuring charges, EUR 11 million reversal

of restructuring provisions related to Chapelle paper mill and EUR 5 million

charges related to prior capacity closures. 2021 items affecting

comparability include gain on sale of Shotton Mill Ltd EUR 133 million,

impairment charges of newsprint fixed assets EUR 50 million, gain on sale of

non-current assets EUR 6 million and restructuring charges EUR 4 million.

2022 compared with 2021

Comparable EBIT increased. Significantly higher sales prices more than

offset the negative impact of higher variable costs. Production and

delivery volumes were lower, partly due to the strike in Finland in

January-April 2022.

The average price in euro for UPM’s paper deliveries increased by

71%.

Market environment

•In 2022, demand for graphic papers in Europe was 12% lower than

in 2021. Newsprint demand decreased by 8%, magazine papers by

18% and fine papers by 10% compared to 2021.

•In 2022, publication paper prices in Europe were 76% higher and

fine paper prices were 47% higher compared to 2021.

•In 2022, demand for magazine papers in North America increased

by 5%, compared to 2021. In 2022, the average price in US dollars

for magazine papers increased by 28% compared to 2021.

Sources: PPI/RISI, Euro-Graph, PPPC


	2022	2021
Sales, EURm	539	492
Comparable EBITDA, EURm	133	99
% of sales	24.6	20.0
Depreciation, amortisation and impairment charges, EURm	-67	-25
Operating profit, EURm	44	80
% of sales	8.2	16.2
Items affecting comparability in operating profit, EURm 1)	-65	8
Comparable EBIT, EURm	109	72
% of sales	20.3	14.6
Capital employed (average), EURm	247	286
Comparable ROCE, %	44.3	25.1
Plywood deliveries, 1,000 m3	616	738

1) In 2022, items affecting comparability include EUR 54 million impairment

charges of assets impacted by Russia's war in Ukraine, 8 million addition to

environmental provisions related to prior mill closures in Finland and EUR 3

million restructuring charges in Russia. In 2021, items affecting comparability

include EUR 6 million restructuring charges reversals and EUR 1 million

impairment reversals related to Jyväskylä plywood mill closure in 2020.

2022 compared with 2021

Comparable EBIT increased due to significantly higher sales prices.

Variable costs increased and delivery volumes were lower. Fixed costs

increased.

Market environment

•In H1 2022, demand for spruce plywood was strong. In H2, demand

became weaker due to lower activity in the building and construction

industry. Uncertainty around economic development increased

cautious purchasing behavior.

•In 2022, demand for birch plywood was strong in panel trading and

industrial applications.

Source: UPM


UPM FINANCIAL REPORT 2022	12

Other operations

Other Operations includes UPM Forest,

UPM Biofuels, UPM Biochemicals, UPM

Biomedicals and UPM Biocomposites

business units as well as biofuels

development and group services. UPM

Forest secures competitive wood and

biomass for UPM businesses and manages

UPM-owned and privately owned forests in

North Europe. In addition, UPM Forest

offers forestry services to forest owners and

forest investors. UPM Biofuels produces

wood-based renewable diesel for all diesel

engines and renewable naphtha that can

be used as a biocomponent for gasoline

or for replacing fossil raw materials in

petrochemical industry. UPM operates one

biorefinery in Finland.


	2022	2021
Sales, EURm	634	483
Comparable EBITDA, EURm	126	36
Change in fair value of forest assets and wood harvested, EURm	2	120
Share of results of associated companies and joint ventures, EURm	-2	0
Depreciation, amortisation and impairment charges, EURm	-64	-44
Operating profit, EURm	64	112
Items affecting comparability in operating profit, EURm 1)	-16	-1
Comparable EBIT, EURm	81	113
Capital employed (average), EURm	2,577	2,152
Comparable ROCE, %	3.1	5.2

2021 figures have been restated due to change in composition of reportable

segments. Refer to Note 1.5 in UPM 2022 consolidated financial statements.

1) In 2022, items affecting comparability include EUR 20 million impairment

charges of assets impacted by Russia´s war in Ukraine, EUR 8 million gain on

sale of other non-current assets, EUR 3 million settlement loss from

replacement of defined benefit pension plan in Finland with defined

contribution plan and EUR 2 million of AMC acquisition-related costs. In

2021, items affecting comparability relate to restructuring charges.

2022 compared with 2021

Comparable EBIT for other operations decreased. The change in the fair

value of forest assets net of wood harvested was EUR 2 million (120

million). The increase in the fair value of forest assets was EUR 85

million (171 million). The cost of wood harvested from UPM forests was

EUR 84 million (51 million). In 2021, the increase in fair value was

impacted by increased forest growth and higher stumpage price

estimates used in valuation.

Biofuels sales prices were significantly higher. In January-May 2022,

biofuels production and deliveries were impacted by the strike and the

long ramp-up of the process.

Market environment

•In 2022, market demand for advanced renewable fuels was strong

and prices were at a high level.

•In 2022, interest for bio-based MEG and renewable functional fillers

in Europe remained strong. Strong interest in more sustainable

solutions from consumers, brand-owners and automotive OEMs, is

driving demand for bio-based glycols and renewable functional

fillers.

•In 2022, market demand for biocomposites remained firm in Europe,

driven by the continued demand for sustainable products. However,

delivered volumes in construction related applications decreased in

H2 due to highly uncertain business environment. Market prices

increased in response to input cost inflation.

•In UPM Biomedicals, hydrogel demand for cell cultivation is driven by

material shortages in market. Hospitals continue to explore new

sustainable advanced wound care dressings.

Board of Directors and

the Group Executive Team

At the Annual General Meeting held on 29 March 2022, the number of

members of the Board of Directors was confirmed as nine, and Henrik

Ehrnrooth, Emma FitzGerald, Jari Gustafsson, Piia-Noora Kauppi,

Marjan Oudeman, Martin à Porta, Kim Wahl and Björn Wahlroos were

re-elected to the Board. Topi Manner was elected as a new director to

the Board. The directors’ term of office will end upon the closure of the

next AGM.

Björn Wahlroos was re-elected as Chairman, and Henrik Ehrnrooth

as Deputy Chairman of the Board of Directors of UPM-Kymmene

Corporation at the Board of Directors’ constitutive meeting that took

place following the Annual General Meeting. Mr Wahlroos has

announced that the commencing term will be his last as the Chairman.

In addition, the Board of Directors elected the chairs and other

members to the Board committees from among its members. Kim Wahl

was re-elected to chair the Audit Committee, and Jari Gustafsson and

Marjan Oudeman were elected as other committee members. Martin à

Porta was elected to chair the Remuneration Committee, and Emma

FitzGerald and Topi Manner were elected as other committee members.

Björn Wahlroos was re-elected to chair the Nomination and

Governance Committee, and Henrik Ehrnrooth and Piia-Noora Kauppi

were elected as other committee members.

Shares held by the Board of Directors and the Group Executive

Team

At the end of the year, the members of the Board of Directors owned a

total of 380,983 (685,197) UPM-Kymmene Corporation shares. These

represent 0.07% (0.13%) of the shares and 0.07% (0.13%) of the

voting rights. At the end of the year, President and CEO Jussi Pesonen

owned 567,390 shares. At the end of the year, the other members of

the Group Executive Team owned a total of 798,643 shares.

» Refer Note 3.2 Key management personnel, of the consolidated financial

statements 2022 for further information on remuneration and shares held by

the members of the Board and the President and CEO and remuneration of

the members of Group Executive Team.

Legal proceedings

The Group’s management is not aware of any significant litigation at

the end of 2022.

In October 2021, the European Commission conducted an

unannounced inspection at UPM’s premises. According to the


UPM FINANCIAL REPORT 2022	13

Commission’s press release on 12 October 2021, the Commission has

concerns that the inspected companies in the wood pulp sector may

have violated EU antitrust rules that prohibit cartels and restrictive

business practices. The Commission states that the unannounced

inspections are a preliminary step in an investigation into suspected

anticompetitive practices, and the fact that the Commission carries out

such inspections does not mean that the companies are guilty of anti-

competitive behaviour nor does it prejudge the outcome of the

investigation itself. UPM takes any suspected violation of antitrust rules

very seriously and has a compliance programme in place to mitigate the

risk of such violations. For example, all employees and executives are

required to take training on the UPM Code of Conduct, which includes

a section regarding antitrust compliance. In addition, UPM has also in

place a specific training programme regarding antitrust rules which

covers approximately 3,000 employees and executives.

» Refer Note 9.2 Litigation, of the consolidated financial statements

2022 for information on legal proceedings.

Risks

Risk management

UPM regards risk management as a systematic and proactive means to

analyse and manage opportunities and threats related to its business

operations. This also includes risks that can be avoided through careful

planning and evaluation of future projects and business environments.

Risk management is an integral part of UPM’s management system

as risk taking is a normal part of business operations. While executing

strategies, UPM and its business areas, functions and manufacturing

units are exposed to a number of risk and opportunities. Each business

area, function and unit is responsible for identifying, measuring and

managing of risks related to its own operations, and for reporting on

risk exposures, risk management activities and results to its

own management team and to the Risk Management function.

The Risk Management Committee, chaired by the CFO, is

responsible for recommending risk tolerances and profile to the

President and CEO and the Strategy Team. The Strategy Team is

responsible for aligning risk management priorities, business and risk

management strategies and policies.

The Board of Directors, assisted by the Audit Committee, monitors

and assesses the effectiveness of the company’s risk management

systems and oversees the assessment and management of risks related

to the company’s strategy and operations. The Audit Committee

oversees that risk management activities are aligned with the Risk

Management Policy, and that risk assessments are used to guide

internal audit activities.

UPM seeks to transfer insurable risks through insurance

arrangements for any risks that exceed the defined tolerance.

UPM strives to ensure compliance with the UPM Code of Conduct

and other corporate policies. To enhance compliance and mitigate

risks, UPM performs risk assessments, training and monitoring at regular

intervals.

UPM has developed and implemented a comprehensive internal

control system that covers business and financial reporting processes.

Internal control is aimed at ensuring that the company’s operations are

efficient and reliable, and in compliance with statutory requirements,

and that the company’s financial reporting is accurate and reliable, and

reflects operational results. Internal control pertaining to financial

reporting is described in the Corporate Governance Statement available

in the corporate website.

The main risk factors that can materially affect the company’s

business, financial results and non-financial performance are set out

below. They have been classified as strategic risks, operational risks,

and financial risks. Risks may also arise from legal proceedings

incidental to UPM’s operations.

Strategic risks

Uncertainties in the economic and political operating

environment

The main short-term uncertainties in UPM’s earnings relate to sales

prices and delivery volumes of its products, as well as to changes in the

main input cost items and currency exchange rates, most of which are

affected by uncertainty in the global, regional or local economic and

political conditions. Political developments are causing uncertainties to

the global economy. Such uncertainties also affect UPM’s customers

influencing the demand for UPM’s products.

Examples of such developments are the trade tensions between the

United States, the EU and China, the nature of the relationship between

the EU and the UK after its exit from the EU as well as increased

geopolitical tensions that may lead to military conflicts, such as Russia's

war in Ukraine, or economic sanctions, blockades, or export and/or

import restrictions that could limit or prevent UPM’s business in a country

or area. UPM is also exposed to the impacts of certain governmental

protection and trade protection measures such as foreign direct

investment restrictions that safeguard domestic industries and other

changes affecting international trade. Restrictions on import and export

and other measures protecting national interests may affect the

availability or cost of necessary raw materials, and changes in the

international trade agreements. Changes in fiscal, monetary and other

policies taken to respond to the economic impacts of Russia's war in

Ukraine and to reduce dependency on Russian resources may cause

unintended price volatility or other adverse effects on UPM. Economic

downturn, global pandemics, or global power struggles continue to

cause high uncertainty to global trade, geopolitics or trajectories of

economies.

UPM is especially exposed to the economic and political conditions

in countries in which UPM has significant production operations and

ongoing investment projects, such as Finland, Uruguay and Germany.

UPM also has significant production operations and sales in and to

China where the lack of transparency and predictability of the political,

economic and legal systems may lead to an increasing uncertainty and

risk level when investing in or operating in the country. UPM's

subsidiaries and employees in Russia and Ukraine, while currently not

operating, are exposed to challenging and unpredictable environment

stemming from Russia's war in Ukraine.

Cyclical and highly competitive markets

In all markets UPM operates in, the price level is determined by a

combination of demand and supply and an imbalance between them

could cause the prices of UPM’s products to fluctuate significantly.

Imbalances in demand and supply may be caused by factors such as

decreases or increases in the end-use demand, changes in customer

preferences, market adjustments to Russia's war in Ukraine, or a new

production capacity entering the market or an old production capacity

being closed, all of which may affect both the volume and price level of

UPM’s products.

Competitor behaviour may also influence the market price

development. UPM may, from time to time, experience price pressures

from competitors in its main business areas and geographic market

areas as well as particularly large fluctuations in operating margins due

to this competitive environment.

The majority of UPM’s revenue comes from sales of graphic and

specialty papers, pulp and label materials, and UPM principally


UPM FINANCIAL REPORT 2022	14

competes with several large multinational paper and forest product

companies as well as with numerous regional or more specialised

competitors.

Changes in consumer behaviour

Demand for UPM’s products may be affected by the introduction of

substitute or alternative products. The demand for graphic papers in the

mature markets is forecast to continue to decline. This will likely increase

the pressure on UPM’s graphic paper deliveries and sales prices as well

as the scarcity of recycled fibre. The COVID‑19 pandemic may further

amplify the speed of changes adopted by consumers in consuming and

communicating information. Changes in demand could also cause

overcapacity in some of UPM’s products, affecting the sales prices and

deliveries of such products.

Depending on the product area, the shifts in consumer demand may

either have a positive or an adverse effect on the consumption of UPM’s

products. For example, UPM expects that there will continue to be a

growing need for renewable and recyclable solutions, which creates

various opportunities for UPM and drive demand growth for most of

UPM’s products. At the same time digitalisation and e-commerce have

changed consumer behaviour and resulted in decline in demand for

graphic papers for various end uses.

Changes in legislation

UPM is exposed to a wide range of laws and regulations globally. The

performance of UPM’s businesses, for example the paper, energy, and

biofuels businesses, are to a high degree dependent on the regulatory

framework for these areas. Changes in regulation, direct and indirect

taxation or subsidies, aid, grants or allowances could have a direct

effect on UPM’s performance and its relative competitiveness, and

structurally restrict or exacerbate UPM’s ability to compete for raw

material. For example, the Finnish Government has published in

December 2022 a law proposal for a temporary profit tax on the

Finnish electricity sector. The proposed tax would be 30% of the

companies’ net profits generated from the electricity operations in

Finland in fiscal year 2023 exceeding 10% annual return on

shareholder’s equity of the electricity business. UPM Energy is the

second largest electricity producer in Finland and in the scope of the

proposed temporary profit tax.

UPM also operates in industries that are subject to extensive

environmental laws and regulations governing, among others,

emissions, water quality, energy efficiency, as well as waste handling,

recycling and disposal. Environmental laws and regulations have

become more stringent and may continue to develop to be even more

stringent due to various global, regional and national level regulatory

initiatives. As these environmental laws and regulations are amended or

as their application or enforcement is changed, additional costs in

complying with new and more stringent regulations may be imposed on

UPM.

UPM’s operations require UPM to obtain multiple environmental

permits and other licences from relevant authorities and comply with

their terms and conditions. These permits and licences may be subject to

modification, renewal or, subject to certain conditions, revocation by

the issuing authorities. UPM monitors regulatory changes in order to

better adapt to the effects of such changes.

Shareholdings in Pohjolan Voima Oyj

UPM is a shareholder of Pohjolan Voima Oyj (PVO), which is the

majority shareholder of Teollisuuden Voima Oyj (TVO). TVO is in the

process of constructing a third nuclear power plant unit, OL3 EPR, at the

Olkiluoto site (OL3). When completed, OL3 will supply electricity to its

shareholders on a cost-price principle (so called ‘Mankala-principle’)

that is widely applied in the Finnish energy industry. Under the Mankala

principle, electricity and/or heat is supplied to the shareholders in

proportion to their ownership and each shareholder is, pursuant to the

specific stipulations of the respective Articles of Association, severally

responsible for its respective share of the production costs of the energy

company concerned. OL3 is expected to increase UPM’s electricity

generation capacity significantly. UPM’s indirect share of OL3 is

approximately 31%.

According to TVO OL3 was procured as a fixed price turnkey

project from a consortium formed by Areva GmbH, Areva NP SAS and

Siemens AG (Supplier). Under the plant contract, the consortium

companies have joint and several liability for the contractual

obligations.

In March 2018 TVO announced that it had signed a Global

Settlement Agreement (the 2018 GSA) with Supplier and the Areva

Group parent company, Areva SA, a company wholly owned by the

French state. The Global Settlement Agreement, which concerns the

completion of the OL3 project and related disputes and entered into

force in late March 2018.According to TVO’s announcement, the GSA

was amended with agreements signed in June 2021.

In the GSA, the Supplier consortium companies committed to

ensuring that the funds dedicated to the completion of the OL3 project

are sufficient and cover all applicable guarantee periods. Consequently,

a trust mechanism was set up funded by the Areva companies to secure

the funds required to cover Areva’s costs for the completion of the OL3

project.

According to TVO the key matters of the amendment agreements to

the GSA are:

•The Areva companies’ trust mechanism, established in the GSA of

2018, was replenished in July 2021 with EUR 432.3 million.

•Both TVO and the Supplier are to cover their own costs as of July

2021 until end of February 2022.

•In the case that the Supplier consortium companies would not

complete the OL3 project by the end of February 2022, they

would pay additional compensation for delays, depending on the

date of completion.

•In connection with the amendment of GSA entering into force, the

Supplier paid EUR 206.9 million of the EUR 400.0 million delay

compensation as agreed in the GSA 2018.

Due to OL3 additional delay in 2022 in interim report Q3 2022

TVO announced that TVO had recorded receivables from the Supplier

for the additional delay compensation accumulated by the end of Q3

2022 in accordance with the amended GSA. The additional delay

compensation has been recorded as EUR 56.7 million at the end of Q3

2022. At the end of Q3 2022, TVO has recognised current receivables

of EUR 249.8 million from the Supplier.

According to TVO, all payments related to the settlement

compensations have been recorded in the consolidated balance sheet

as property, plant and equipment.

TVO announced in its interim report Q3 2022 that the trust, which

was replenished in July 2021, has been used to cover costs incurred to

Areva companies for the completion of the OL3 project in accordance

with the GSA. Also, TVO mentioned, that TVO’s right to terminate the

plant contract in accordance with the GSA was postponed until 31

March 2023. In addition, the payment of approximately EUR 193

million of the delay compensation agreed in the GSA of 2018 was

postponed until the completion of OL3, up to 31 March 2023 at the

latest.

On 12 March 2022, TVO announced that the electricity production

at OL3 had started, when OL3 was connected to the national grid. In

June 2022 TVO announced that according to information received from

Supplier, OL3’s regular electricity production would start in December

2022. In August 2022, TVO announced that after completion of


UPM FINANCIAL REPORT 2022	15

maintenance and repair activities and automation updates the test

production continued with tests at a power level of 60 percent. Tests at

an 80 percent power level were started on 9 September 2022. On 30

September 2022, TVO announced that the commissioning of OL3

proceeded to the full electrical power level of approximately 1,600

MW.

On 18 October 2022, TVO announced that damage had been

detected in the internals of the feedwater pumps located in turbine

island. Cracks of a few centimeters were identified in all four of OL3’s

feedwater pumps. A schedule estimate on an effect on the continuation

of OL 3’s nuclear commissioning and the start of regular electricity

production is to be completed during the upcoming days.

On 7 November 2022, TVO announced that the investigations were

still ongoing, and it was not possible to set a date for the continuation of

the test production programme. The feedwater pumps were delivered

for the turbine island by a proven pump supplier that supplies pumps to

several nuclear power plants.

On 21 November 2022, TVO announced that the investigation into

the damage at OL 3’s feedwater pumps would continue still for some

weeks, and its impact on the schedule cannot be estimated. According

to information TVO received from the Supplier, electricity production will

continue on 11 December 2022 at the earliest, and as such regular

electricity production starts at the end of January 2023 at the earliest.

On 9 December 2022, TVO announced that the investigation into

the damage in OL3’s feedwater pumps proceeded into its final stages,

and that according to the Supplier, electricity production would continue

on 25 December 2022 at the earliest. Regular electricity production

would start in February 2023. According to TVO there were still

uncertainties related to the schedule.

On 21 December 2022, TVO announced that the electricity

production of OL3 will be continued on Tuesday, 27 December 2022.

During test production, approximately 1.3 terawatt hours of electricity

will be produced. Around ten significant tests still remain. Regular

electricity production is to start on 8 March 2023.

After the end of the reporting period, TVO announced on 4 January

2023 that after the production tests, production at the plant unit is

discontinued in January 2023 for planned inspections of the impellers of

the feedwater pumps.

On 20 January 2023, TVO announced that the impellers of OL3

feedwater pumps will be replaced with impellers with more robust

measurements during the ongoing production break. After this,

electricity production will continue mainly at full power. Regular

electricity production starts in March 2023. The Supplier is obligated to

complete the OL3 plant unit in accordance with the Plant Contract and

the settlement agreements.

TVO announced in its Q3 2022 Interim Report that according to the

Supplier’s latest project schedule, TVO’s current cost estimate, and the

effects of the GSA, TVO estimates that its total investment in the OL3

project will be approximately EUR 5.8 (5.7) billion.

Also, in Q3 2022 Interim Report TVO presented that as the OL3

project is still ongoing, no assurance can be given that further delays

would not materialise prior completion of the project. According to TVO

a failure by one or more of the Supplier to meet their respective

obligations according to the Plant Contract or the Global Settlement

Agreement may subject to new legal proceedings or new negotiations

with the Supplier which have joint and several liability. In addition, TVO

said that restrictions caused by the main grid may have an impact on

OL3’s electricity production.

On 16 December 2020 TVO announced, that the shareholders of

TVO, including PVO, had signed an additional shareholder loan

commitment, comprising a total of EUR 400 million new subordinated

shareholder loan agreements. According to TVO with the new

shareholder loan commitment, TVO is preparing to maintain a sufficient

liquidity buffer and equity ratio to complete OL3. On 30 November

2022, TVO announced that the shareholder loan commitment of EUR

400 million, originally agreed in December 2020, has been extended

by one year until the end of 2023.

On 21 March 2022, TVO announced that S&P Global Ratings

upgraded its long-term credit rating from “BB” to “BB+” and affirmed its

positive outlook.

Further delays to the OL3 project could have an adverse impact on

PVO’s business and financial position, the fair value of UPM’s energy

shareholdings in PVO and/or the cost of energy sourced from OL3,

when completed. It is possible that the cost of energy sourced from OL3

at the time when it starts regular electricity production may be higher

than the market price of electricity at that time.

Climate change

UPM is exposed to a variety of risks related to climate change. Strategic

risks related to climate change include risks concerning competition,

markets, customers, products and regulation. For example,

unpredictable regulation, subsidies or EU policies and resulting national

legislation in EU countries may distort raw material, energy and final

product markets and changing costs of greenhouse gas emissions may

influence UPM’s financial performance. Policies and regulations

responding to Russia’s war in Ukraine and cutting Russian gas supply to

Europe may temporarily emphasize energy supply security over climate

targets and thus change the trajectory of climate change or slow down

the achievement of emission reductions. UPM believes that forest, wood-

based products and low-carbon energy hold significant value creation

potential with respect to renewable and recyclable products.

Other risks related to climate change particularly concern UPM’s

supply chain as well as the availability and price of major inputs, such

as wood and electricity. Climate change may cause exceptional

weather events, such as severe storms, floods and draughts, which

could, for example, result in unpredictable hydropower availability and

wood harvesting conditions. Exceptionally mild winter conditions with a

reduced period of frozen soil in the Nordics could affect the harvesting

and transport of wood, consequently undermining the stability of raw

material supply and potentially increasing the cost of wood. These could

also increase the risk of production limitations.

Loss of major customers and industry consolidation

UPM has several major customers, and the largest customer in terms of

sales represented approximately 3% of UPM’s sales in 2022, and the

ten largest customers represented approximately 15% of such sales.

Although UPM is not dependent on any specific customer or group of

customers, the loss of its major customers, if not replaced on similar

terms, could have a material effect on UPM’s business. Also, as the size

of UPM’s customers could increase in connection with industry

consolidation, such customers could exert increased bargaining power

on all of their suppliers, including UPM. UPM is also exposed to risks

related to any deterioration of a major customer group’s financial

condition.

Product development, innovation and intellectual property rights

Research and product development are an important part of UPM’s

strategy, particularly with regard to new businesses, such as wood-

based biofuels, biochemicals and biomedicals. The return on investment

of new or enhanced existing products and solutions may not meet

targets or improve UPM’s competitiveness.

UPM has a broad patent portfolio that provides value creation

potential in the future; however, it also exposes UPM to risks related to

the protection and management of intellectual property, including

patents and trademarks.


UPM FINANCIAL REPORT 2022	16

Corporate acquisitions and divestments

UPM’s strategy is to grow businesses with strong long-term fundamentals

and sustainable competitive advantage. This may result in acquisitions

of new businesses or divestments of existing businesses or parts thereof.

Carrying out corporate mergers, acquisitions and divestments involves

risks relating to the successful implementation of a divestment and the

ability to integrate and manage acquired businesses, systems, culture

and personnel successfully. In addition, the cost of an acquisition may

prove high and/or the anticipated economies of scale or synergies may

not materialise. Hidden liabilities of an acquired company (e.g.,

competition law liabilities) may also constitute a significant risk in

relation to potential acquisitions.

UPM may divest operations or assets to focus on strategic areas. Any

future divestments may be affected by many factors that are beyond

UPM’s control, such as the availability of financing to potential buyers,

interest rates, acquirers’ capacity, and regulatory approval processes,

and divestments may also expose UPM to indemnity claims.

Furthermore, divestments may involve additional costs due to historical

and unaccounted liabilities. The profitability of corporate acquisitions

and divestments may differ from UPM’s expectations.

Operational risks

Fluctuations in the prices of major inputs as well as changes in

their availability

The main inputs required in the manufacturing of UPM’s products are

wood, fibre, chemicals, energy and water. The prices for many of these

major production inputs have been volatile in the recent years and are

expected to remain volatile for the foreseeable future, which may have

an effect on the general profitability of the industries in which UPM

operates. Climate change may contribute to the increase of the price

volatility of UPM’s major production inputs. Also, any changes in the

current forestry practices and level of harvesting due to negative public

opinion towards harvesting could have an effect on the raw material

supply and may increase the cost of wood.

Governmental protection and trade protection measures, amplified

by Russia's war in Ukraine and the economic sanctions imposed as a

response, could also have an effect on the price and availability of raw

materials as countries may, for example, enact further export ban

policies to protect forests or to bolster their domestic industries, which

could have a material effect on the cost and availability of raw

materials for UPM. It is also uncertain how the EU energy policies may

affect the availability and costs of fibre and energy. Significant

increases in the prices of UPM’s major inputs could increase UPM’s

operating expenses.

Supplier and subcontractor network and raw materials

procurement

UPM’s business operations depend on a large number of suppliers and

contractors. The majority of UPM’s need of wood is covered by

suppliers, and other production inputs, such as chemicals, fillers and

recovered paper, are fully obtained from suppliers. Disruptions in the

supply of key inputs or transportation services could have a significant

effect on manufacturing operations. This could, for example, result in

interruption or downscaling of production, change in the product mix or

increased costs resulting from price increases for critical inputs or

transportation services as well as shifts in the availability and price of

wood. Due to Russia's war in Ukraine, the EU has imposed bans on

wood exports and imports and transportation operations directly

applying to sourcing of wood and other raw materials from Russia.

Supplier consolidation could also limit the number of suppliers from

which UPM would be able to source its production inputs and could

materially affect the prices paid by UPM for these inputs.

The UPM Supplier and Third Party Code defines the minimum level of

performance that UPM requires from its suppliers and third-party

intermediaries. UPM carries out supplier risk assessments on, for

example, operational, financial, quality and responsibility perspectives.

Based on the risk assessment, selected suppliers’ activities are evaluated

in more detail through annual surveys, supplier audits and joint

development plans. If any non-conformities are discovered, the supplier

is required to take corrective measures, which UPM follows up on. Some

contracts may also be discontinued due to the seriousness of the finding

or insufficient corrective measures.

Management and execution of large investment projects

Investment projects in UPM’s businesses are often large and take one or

more years to complete. Participation in large projects involves risks,

such as cost overruns or delays, shortage of labour, financial distress of

suppliers, or accidents as well as non-achievement of the economic

targets set for the investment. Currently, UPM’s largest ongoing

investment project is the construction of a new world-class pulp mill in

Uruguay, which includes other related investments as well (port, Free

Trade Zone infra and housing). Particular to this project is its size,

complexity with a number of interconnected sub-projects as well as the

level of cooperation with permit and other authorities. Additionally, the

second largest ongoing project is the construction of a biochemicals

refinery in Germany. This project involves the development of new

business concepts and technologies.

UPM is responsible for many projects in several of its countries of

operation at any given time. All projects involve technical and

operational risks, and projects require continuous operational planning,

steering and supervision, quality control, input procurement, scheduling

as well as resource and cost monitoring. Managing several projects

requires that UPM has sufficient resources and efficient processes. Port

congestion issues, transportation bottlenecks, accidents in transit, and

rising logistics costs, all of which could be resulting from external events

or market conditions beyond the control of UPM, may have an effect on

the execution or profitability of investment projects. The COVID‑19

pandemic and the required additional health and safety measures have

also added a new challenge to large investment projects. UPM’s

transformative pulp project in Uruguay and biochemicals project in

Germany are proceeding with strict health and safety controls, but

despite these efforts, some changes to the detailed timeline of the

projects may occur due to containment measures or infections affecting

project workers, suppliers or infrastructure.

Unavailability of information systems as well as cybersecurity

breaches

UPM’s production and business operations depend on the availability of

supporting information systems and network services. Unplanned

interruptions in UPM's or a supplier's critical information system

services, loss of critical, financial or personal data due to reasons

beyond UPM’s or its suppliers' control, such as power cuts, software or

telecommunication errors or other major disasters, such as fires or

natural disasters, as well as user errors by UPM’s own personnel or

suppliers, can potentially cause major damage to UPM’s businesses and

disruptions to the continuity of operations.

UPM’s or its suppliers' information systems may be exposed to

various cybersecurity risks. Malicious cyber intrusion could cause

leakage of sensitive information, violation of data privacy regulations,

theft of intellectual property, production outages and damage to UPM’s

reputation.


UPM FINANCIAL REPORT 2022	17

Litigation and compliance

UPM operates globally in a large number of jurisdictions and complex

regulatory frameworks. UPM may from time to time be involved in

litigation and other similar proceedings or it could become subject to

various claims and actions based on various grounds.

On a global scale, enforcement activities and jurisdictional reach

regarding competition issues and anti-corruption have increased. Also,

the recent development of Renewable Energy Sources Act (EEG) related

lawsuits in Germany for alleged non-payment of EEG based surcharges

may have an adverse impact on UPM, albeit UPM is not currently a

party to any such lawsuits. Russia's war in Ukraine triggered many

countries to impose several sanctions packages which may increase the

risk of investigations, litigations or claims associated with alleged

sanctions violations, or retaliatory litigation in Russia. The UPM Code of

Conduct sets the standards of responsible behaviour and it covers topics

relating to legal compliance and disclosure, anti-corruption, competition

law, HR practices, human rights, responsible sourcing and

environmental matters.

UPM’s environmental performance and social responsibility play a

significant role in UPM’s ability to operate and influence the long-term

success of its businesses. UPM also measures and publishes information

on its environmental, social and governance matters, for which there is

an increasing risk of investigation or litigation from activist or other

stakeholders on alleged misrepresentation. UPM has significant

manufacturing operations or sourcing in several developing countries,

some of which are perceived as highly corrupt or corrupt according to

Transparency International. In these countries, there is an increased risk

of corruption, for example in relation to interaction with government

officials and in the use of intermediaries when applying for permits and

licences requiring governmental approval. Breaches of applicable laws

and regulations or corporate policies by UPM employees may lead to

legal processes, sanctions and fines as well as reputational damages

effecting UPM’s operations. For example, In October 2021 the

European Commission conducted an unannounced inspection at UPM’s

premises. According to the Commission’s press release on 12th October

2021, the Commission has concerns that the inspected companies in

the wood pulp sector may have violated EU antitrust rules that prohibit

cartels and restrictive business practices. Commission states that the

unannounced inspections are a preliminary step in an investigation into

suspected anticompetitive practises, and the fact that the Commission

carries out such inspections does not mean that the companies are guilty

of anti-competitive behaviour nor does it prejudge the outcome of the

investigation itself. UPM continues to support the Commission with any

investigation activity that may follow.

Industrial actions

UPM is subject to risk of industrial actions, which could disrupt its

business operations or the business operations of its stakeholders.

Uncertainty may increase in the Finnish labour market amid the

announcement of the Finnish Forest Industries Federation in fall 2020 to

transfer collective bargaining to companies. For example, in the

beginning of 2022, members of the Paperworkers’ Union, the Finnish

Electrical Workers´ Union and the Trade Union Pro started strikes at

UPM mills in Jämsänkoski, Kouvola, Lappeenranta, Pietarsaari, Rauma,

Tampere and Valkeakoski, Finland. Any strike or other industrial action

in UPM’s business operations or related sectors could have an effect on

UPM’s business operations. For example, industrial actions in the

transport sector or among other stakeholders important to UPM, may

disrupt UPM’s operations. Additionally, public dissatisfaction with

UPM’s labour-related decisions may, in extreme cases, lead to

unanticipated boycotts or disruptions at its facilities or construction sites.

A natural disaster, fire, accident or other calamity at UPM’s

production facilities

UPM operates a significant number of production facilities globally that

are exposed to risks related to environment, fires, natural events,

machinery breakdowns, site security and occupational health and safety

risks. If UPM’s production facilities were to experience a major accident

or were forced to shut down or curtail production due to such

unforeseen events, such as a leak or spill due to malfunction or human

error, this could cause major interruptions in UPM’s operations and

result in significant costs in order to clean up and repair any potential

damages to the production plant and the surrounding areas. Any failure

to maintain high levels of safety management could also result in

physical injury, sickness (such as a COVID‑19 infection) or liability to

UPM’s employees, contractors or third parties. These risks are managed

through established management procedures, health and safety

precautions and loss prevention programmes. UPM’s insurance

programme provides coverage for insurable hazard risks, subject to

insurance terms and conditions.

Forests and plantations

UPM’s plantations and forests may be affected by the impacts of climate

change, which include more frequent and severe extreme weather

conditions such as heavy rainfall, storms, floods and drought. Climate

change is expected to have the biggest physical effect on UPM’s forest

lands in Finland, where temperatures are expected to rise more

significantly and rapidly compared with other countries where UPM

owns forest. Although forest growth will likely accelerate, particularly in

Finland, due to the longer growing season, extreme weather conditions

will intensify, presenting new risks. The increase of droughts and forest

fires are estimated to pose the most significant risks for UPM’s forests

and plantations. Also, damages caused by insects and tree diseases are

becoming increasingly common, which could have an effect on the

value of UPM’s forest assets. Should these risks materialise, they could

harm UPM’s forest and plantations resulting in production interruption

and additional costs.

Strategic partners

UPM collaborates with many partners. For example, product

development in the biofuels, bioenergy or biochemicals increases the

importance of partnerships in the search for new products and

businesses or higher efficiency. Partnerships may, however, create risks

to UPM's profitability, for example, through changes occurring within

the partner entity or changes in how the partnership operates. UPM is

also subject to the risk that its strategic partners do not comply with

UPM’s Code of Conduct with anti-corruption, competition law, HR

practices, human rights, responsible sourcing and environmental

matters.

Partnership arrangements may also be too rigid to enable timely

changes required, for example, in connection with changes in the

market conditions or the economy. UPM’s partners may have different

targets with respect to the business of the partnerships. As UPM may not

have sole control over strategic direction and operational output of

these entities, its partners may have the right to make certain decisions

on key business matters with which UPM does not agree. In some cases,

strategic partners may choose not to continue partnerships that they

have with UPM. Russia's war in Ukraine and the resulting adverse

economic conditions may cause financial stress to a strategic partner

and trigger unexpected negotiation or other processes causing delays

or cost increases for UPM.


UPM FINANCIAL REPORT 2022	18

Intellectual property rights of third parties

Molecular bioproducts form one of UPM’s three strategic focus areas for

growth. Initiatives within this strategic focus area are technology-

intensive and require increasing investments in such technologies either

through internal development or through third party licences or

technological partnerships. In addition to UPM’s own IPR portfolio, UPM

licences certain technologies developed by third parties. Evaluating the

rights related to the third party technologies UPM uses or intends to use

is increasingly challenging. Licensing third party technology exposes

UPM to such risks as the increase of overall licensing costs, loss of

negotiation power, the validity of such licensing arrangements and

potential infringement claims, which could restrict UPM’s ability to use

certain technologies, prevent the delivery of UPM’s products and/or

result in costly and time-consuming litigation. Risk related to IPR claims

and disputes relating to technological partnerships have been assessed

to increase.

Building capabilities to growth areas

The success of UPM’s business largely depends on the ability to build

and retain the necessary new capabilities required for future growth.

UPM is continuously developing its employee experience, leadership

culture, evaluating its recruitment, compensation policies and career

development opportunities and taking measures to attract and retain

diversely skilled personnel and individuals with rare and pivotal

specialist knowledge for current and future growth areas.

Financial risks

Financial risks are described in consolidated financial statements 2022.


TYPE OF RISK	CONSOLIDATED FINANCIAL STATEMENT NOTE
Credit risk	4.6 Working capital
Liquidity and refinancing risk	5.1 Capital management
Interest rate risk	6.1 Financial risk management
Foreign exchange risk	6.1 Financial risk management
Electricity price risk	6.1 Financial risk management
Counterparty risk	6.2 Derivatives and hedge accounting

Non-financial information

Global megatrends represent many long-term opportunities and

challenges for UPM towards 2030 and beyond. They are also driving

demand for sustainable solutions and responsible business practices.

To steer its responsibility activities, UPM has established a set of

responsibility focus areas with targets and key performance indicators.

They are reviewed every year based on a materiality analysis (page

62). The focus areas cover economic, social and environmental

responsibility. Mitigation of and adaptation to climate change is

becoming more important all the time, and it is relevant for UPM

throughout the whole value chain: land use, sourcing, production and

products. Thus, climate-related targets have been established for all of

these areas. In 2022, the importance of biodiversity was reflected in

UPM’s broader approach towards biodiversity and establishing it as an

own area of focus.

UPM’s Biofore strategy guides the company in achieving its

responsibility targets for 2030 and in contributing to the Sustainable

Development Goals (SDG) of the 2030 Agenda for Sustainable

Development published by the UN.

Connecting sustainability performance to financing demonstrates the

importance of responsible business practices to UPM’s long term value

creation. UPM’s revolving credit facility is linked to the long-term

biodiversity and climate targets, and three green bonds have been

issued since 2020. Since January 2022, responsibility-related measures

have been included in UPM’s management remuneration.

Based on international frameworks and commitments

UPM respects international human rights agreements and agreements

concerning labour rights, including the UN Declaration of Human

Rights, the ILO Declaration on Fundamental Principles and Rights at

Work, and the OECD Guidelines for Multinational Enterprises.

Since 2003, UPM is a signatory of the UN Global Compact

initiative, whose ten universal principles are derived from international

agreements in the areas of human rights, labour standards, the

environment and anti-corruption. In 2022, UPM joined the UN Global

Compact’s Living Wage Think Lab.

Regarding climate change UPM committed to the Science Based

Targets (SBT) initiative in 2017 and received validation of its tightened

CO2 targets in 2020. To further strengthen its climate approach, UPM

committed to the UN´s Business Ambition for the 1.5°C pledge and

joined The Climate Pledge to reach the targets set by the Paris

Agreement by 2040.

UPM follows the Finnish Corporate Governance Code issued by the

Securities Market Association and complies with all of its

recommendations.

UPM Code of Conduct and other corporate policies

UPM’s decision making, management and operations are guided by

UPM values and the UPM Code of Conduct. Legal compliance and

responsible practices are the foundation of all of UPM’s businesses and

create long-term value for both UPM and its stakeholders. The UPM

Code of Conduct emphasises UPM’s commitment to business integrity

and responsible business operations, manifesting the company’s

guiding principles.

The UPM Code of Conduct is approved by the Board of Directors as

UPM’s highest governance body. It is complemented by more detailed

policies approved by the Board of Directors and rules or statements

approved by the Group Executive Team, business areas or global

functions. These policies, rules and statements cover such topics as

treasury, taxes, disclosures, insider matters, anti-corruption, competition

law, confidentiality, human resources, responsibility, forestry,

information security and data protection, and safety.

UPM expects its suppliers, third party intermediaries and joint

venture partners to apply the same principles as in the UPM Code of

Conduct and to fulfil criteria concerning social and environmental

responsibility. These requirements are defined in the UPM Supplier and

Third Party Code, latest updates effective as of beginning of 2020.

The UPM Code of Conduct was last updated in 2022.

Roles of the group management and functions in leading non-

financial matters

The Board of Directors, with the assistance of the Audit Committee, is

responsible for monitoring compliance with applicable legal and

regulatory requirements and with the UPM Code of Conduct and other

corporate policies. The non-financial information in this Report of the

Board of Directors is reviewed by the Board as part of the approval

process. In addition, the Audit Committee oversees procedures for

treatment of complaints and concerns received by the company,

anonymous or otherwise. As part of the committee’s compliance review,

the committee is provided with a quarterly report by the company’s

Chief Compliance Officer, and a report of submissions under the

company’s Report Misconduct channel by the Head of Internal Audit.

In line with its main duties and responsibilities, the Board reviewed

and approved strategic plans during its strategy session in May 2022.

The main focus areas of the UPM Biofore strategy continue to be


UPM FINANCIAL REPORT 2022	19

performance, growth, innovation, responsibility and portfolio

development. This strategy is enhanced by the UPM purpose: We create

a future beyond fossils (read more on pages 20-21). An essential part

of the Board’s annual strategy work is to review and assess strategic

and operational risks and opportunities (see UPM Corporate

Governance Statement 2022). These risks and opportunities and their

impact on operations and strategy are described on pages 32-33.

In 2022, the Board decided to set measures related to

environmental, social and governance (ESG) themes in the Company’s

performance share plan (PSP), one of its long-term incentive plans. They

decided to set three distinct ESG performance measures and the total

weighting of these measures accounts for 20% of all measures.

The Group Executive Team, headed by the President and CEO, is

responsible for the management of corporate responsibility, including

possible impacts on economy, environment and people, determining

courses of action and guiding development work. In practice, corporate

responsibility work takes place in businesses and functions, and in the

group’s Responsibility team, which co-ordinates the projects carried out

by businesses and functions.

UPM Legal Function and its Compliance team manage legal

compliance programmes and arrange related training at regular

intervals for specific target groups, which have been defined based on

risk assessments. UPM Sourcing organisations follow clearly defined

selection and follow-up processes when evaluating suppliers. Reliable

long-term deliveries, product and service quality, financial sustainability

of suppliers, social and environmental responsibility and product safety

are the key factors when selecting and evaluating suppliers.

While executing strategies, UPM and its business areas, functions

and production units are exposed to a number of financial and non-

financial risks and opportunities. Each business area, function and unit

is responsible for identifying, measuring and managing risks related to

its own operations, and for reporting on risk exposures, risk

management activities and results to its own management team and to

the Risk Management Function.

Management of non-financial matters

UPM’s responsible thinking starts with anticipating, mitigating and

managing risks, and extends to creating a competitive advantage and

long-term value.

UPM continually strives to reduce its risk exposure and improve its

performance by using tools such as certified management systems.

Since 2018, all production sites have a certified ISO 14001

environmental management system. Nearly all production sites and

wood sourcing operations implemented integrated management systems

for environmental protection, quality management and occupational

health and safety in accordance with ISO 14001, ISO 9001 and ISO

45001 standards. All pulp and paper mills in the EU, as well as the

UPM Fray Bentos pulp mill in Uruguay and the UPM Changshu paper

mill in China, also adhere to the EU’s Eco-Management and Audit

Scheme (EMAS). Many of the sites also have energy management

systems certified under ISO 50001 or the Finnish ETJ+ system, and food

safety management systems certified under ISO 22000, if relevant.

Should stakeholders have any concerns or suspect misconduct, they

are encouraged to contact UPM or to use the UPM Report Misconduct

channel. The service is available on the corporate website for both the

company’s employees and external stakeholders. Operated by an

independent external service provider, the channel is accessible in over

40 languages, 24/7. In 2022, 54 (66) cases were reported either

through the UPM Report Misconduct channel or directly to Internal Audit

or the Compliance team. 9 (9) of these cases related to alleged

discrimination or harassment. 8 (18) cases led to disciplinary action

including warnings and terminations of employment.

Reporting framework used

For its Group-level sustainability reporting UPM follows the Global

Reporting Initiative’s (GRI) Sustainability Reporting Standards, the Task

Force on Climate-related Financial Disclosures (TCFD) as well as the AA

1000 AccountAbility Principles Standard. The respective information is

assured by an independent third-party, PricewaterhouseCoopers, Oy

(pages 116-117).

Committed to anti-corruption

The UPM Code of Conduct underlines the company’s zero tolerance

attitude towards corruption and bribery in any form. UPM Anti-

Corruption Rules explain prohibited conduct and expected ethical

behaviour in further detail.

UPM performs anti-corruption risk assessment on a regular basis. The

annual risk-assessment process includes a top-down risk discussion with

the management of each business area. All UPM group entities are also

assessed on the basis of country risk and complexity of operations. UPM

operates globally and has significant manufacturing operations in

several emerging market countries. Such operations require a number of

permits and other licenses from the relevant authorities. Some of the

countries where UPM operates are perceived as highly corrupt or

corrupt according to Transparency International. In these countries,

there is an increased risk of corruption, for example in relation to

interaction with government officials and in the use of intermediaries

when applying for permits and licences requiring governmental

approval.

Due diligence of suppliers and third parties with whom UPM does

business is an essential part of UPM’s anti-corruption compliance

programme. UPM requires that due diligence is performed before

entering into or renewing any contract with a third party that meets

specified criteria. UPM requires anti-bribery contract terms to be

included in agreements with such third parties outlining the third party’s

commitment to compliance with applicable anti-bribery laws and UPM’s

right to audit the third party to verify compliance with these terms. UPM

also has corresponding due diligence procedures for joint ventures,

including mergers and acquisitions.

UPM has a dedicated anti-corruption e-learning platform. The anti-

corruption training covers all white-collar employees. In 2022, the

company organised tailored anti-corruption training workshops for

selected target groups across the company and performed risk-based

compliance reviews in selected jurisdictions and operations.

Respect for human rights

UPM is committed to respecting and promoting human rights in line with

the United Nations Guiding Principles on Business and Human Rights.

UPM has assessed all its operations and activities and has identified the

potential human rights issues and impacts. When considering both the

severity and likelihood of these potential issues and impacts, UPM

considers the salient human rights issues in the company’s sphere of

influence to be environmental pollution, occupational health and safety

(OHS), working conditions, protection of children, and forced labour.

UPM reviews its human rights risks as part of the UPM compliance

process quarterly. The assessment of salient human rights issues on a

business area level as well as the integration of the process to unit

specific management systems continued. The focus was on catching up

with the developments in our business landscape and operational

environments and on identifying any gaps in our mitigation activities. As

a result of the 2022 assessments, contractor management was selected

as one of the focus areas going forward. UPM also continued to publish

a report of UPM’s Human Rights Responsibility.


UPM FINANCIAL REPORT 2022	20

Responsible sourcing

UPM requires its suppliers, third-party intermediaries and joint venture

partners to apply the same principles as in the UPM Code of Conduct

including commitment to anti-corruption, environmental and social

responsibility, safe products, human rights and occupational health and

safety practices.

Transparent supplier requirements are the basis for responsible

sourcing. These requirements for suppliers are defined in the UPM

Supplier and Third Party Code. A number of additional requirements

are in place for the sourcing of wood, chemicals, pulp and packaging

materials, as well as for safety and logistics. All contractors working on

site go through UPM’s safety requirements and a web-based safety

induction training.

UPM identifies its supply chains with a high risk of potential negative

environmental and social impacts. These responsibility-related high risk

suppliers are determined by the country of origin, sourced material or

service, and the UPM supply chain ESG risk register which holds UPM’s

view on company and business area relevant risks on people and the

environment. UPM also uses EcoVadis and other assessments, supplier

audits and joint development plans to carry out more detailed

evaluations of suppliers’ activities.

In 2022, UPM updated its supplier assessment criteria and supplier

audit questionnaire, and also started a renewal of its Responsible

Sourcing Framework with the aim of improving supply chain resilience

and risk management.

UPM continued its co-operation with Together for Sustainability (TfS),

a chemical industry initiative that promotes and improves sustainability

practices within the supply chains. In 2022, UPM conducted some 520

(340) EcoVadis environmental and social risk assessments and 121

(124) supplier audits. In addition, about 360 (300) contractor reviews

with a focus on working conditions were carried out.

Social and employee-related matters

UPM’s responsibility focus areas in social and employee-related matters

are: learning and development, responsible leadership, diversity and

inclusion, fair rewarding as well as safe and healthy working

environment.

UPM is committed to active employee participation and consultation,

organised in accordance with international and national rules and

regulations. After the Finnish Forest Industries Federation resigned from

collective bargaining, the terms of employment are agreed between

forest products companies and trade unions. UPM has agreed business-

specific collective labour agreements in Finland (page 67).

UPM aims to empower and engage employees at all levels through

responsible leadership. UPM encourages its employees to pursue

professional growth, expects development and supports them in

learning skills and developing them further.

UPM respects the privacy of employees and promotes equal

opportunities and objectivity in employment and career development.

All UPM employees are treated as individuals regardless of gender,

age, ethnic origin, nationality, etc. In 2022, UPM implemented gender

pay equity review process closing the unexplained gender pay gap and

carried out a living wage review process to make sure that salaries are

sufficient everywhere. Greater female representation in professional and

managerial roles has been in focus for different organisations.

In its People Strategy, UPM focused on leadership and creating a

safe, inclusive and diverse working environment, as well as aiming

higher in performance and ensuring the growth of our people. The aim

is to create a unique, positive UPM experience and to develop future

ways of working and collaborating, supported by attractive culture,

space and technology. In 2022, UPM continued with its programme to

develop the UPM experience and ways of working. The enabling

performance approach by strengthening feedback culture, agile goal

setting and frequent manager-employee discussions is being further

strengthened. Development programmes to support growth and

performance were continued and implemented virtually. To further

develop inclusive leadership and culture, UPM continued to train leaders

and launched a digital learning to all UPMers on LGBTIQ+ inclusion in

workplace.

UPM promotes employees´ health and wellbeing. Safety is an

essential part of UPM’s activities and business management system.

Equal safety requirements are applied to all employees, visitors and

contractors working at UPM’s premises. Proactively thinking about the

safety of employees and contractors remained an important focus area

in 2022. The safety and wellbeing of our employees during the global

pandemic has been the key priority. The requirements concerning

process safety have been clarified with a new safety standard and

process safety has been in focus especially in the new investment

projects of the biofuel and biochemicals businesses.

Product stewardship

The majority of UPM’s products are made from renewable raw materials

and are recyclable. UPM products help to mitigate climate change by

replacing fossil-based products with bio-based renewable alternatives.

Product stewardship covers the entire lifecycle of all UPM products from

the development phase to the end-use and beyond.

In 2022, the new Sustainable Product Design concept was further

tested on several product development cases with UPM businesses. The

approach applies lifecycle thinking and lifecycle assessment data, both

of which are integrated in sustainable product design practices. During

the process, the whole raw material chain, production and distribution

efficiency, sustainable use and circularity are considered.

UPM provides product declarations to provide customers with easy

access to information concerning the products´environmental and

product safety aspects or the wood origin. Together with a number of

paper and chemical companies the exchange of information in the

supply chain was improved. This facilitated a pre-assessment of

chemical use and to ensured compliance with legislations and

ecolabels.

Most UPM products are certified with widely recognised ecolabels,

such as the EU ecolabel and national ecolabels for graphic paper or

ISCC and RSB certification for biofuels, biocomposites and labels.

All UPM pulp mills, UPM Raflatac sites, UPM Specialty Papers´

production lines and UPM Kymi paper mill have implemented food

management systems in accordance with ISO 22000. The respective

products are designed and produced to meet food packaging

requirements.

In 2022, we modernised our chemical database to improve access

to advanced reporting and control features.


UPM FINANCIAL REPORT 2022	21

Environment

UPM’s responsibility focus areas in environmental matters are forests,

biodiversity, water, waste and climate. UPM uses raw materials, water,

energy and other resources in a responsible manner and continuously

improves its energy, resource and cost efficiency.

UPM is committed to sustainable forestry and third-party-verified

FSC™ and PEFC chain of custody certification covers all sites using

wood raw materials. This ensures that the wood is legally sourced from

sustainably managed forests. All UPM-owned forests are certified, or in

the process of certification if acquired recently.

UPM is continuously working to improve biodiversity in its forests.

Since 2022, biodiversity-related activities in Finland, Uruguay and the

U.S. have been incorporated in UPM’s new Forest Action programme.

The new programme covers not only biodiversity and climate but also

sustainability criteria related to water, soil and social aspects. In 2022,

the importance of biodiversity was also reflected in UPM’s broader

approach towards biodiversity to also cover other areas beside forests,

e. g. streams and mill sites, and in establishing it as an own focus area.

All of UPM’s production plants are located in areas with low and

medium basin risk where there is sufficient water available. A

comprehensive water risk analysis has provided 2030 and 2050

scenarios of water risks, based on climate and socio-economic changes

to enable us to understand and prepare for future water risks and

opportunities. The water used by UPM plants comes from rivers, lakes or

groundwater resources. UPM uses water responsibly in terms of the

company’s water usage and effluent quality. If the price of raw water

were to increase by EUR 0.01 per cubic metre, it would mean

additional water costs of approximately EUR 4 million annually. In

2022, wastewater volume increased by 3% per tonne of paper and by

15% per tonne of pulp. As Finnish pulp and paper mills went on strike

in early 2022, effluent treatment plants had to be kept in operation with

low capacity while production was ceased, leading to an increase of

wastewater volume per tonne of product.

Circular bioeconomy is at the core of our operations. We have

developed innovative ways to reduce and recover waste and to use side

streams, residues and recovered materials. For example, tall oil is used

for the production of UPM BioVerno renewable diesel and naphtha and

ash is utilised in soil stabilisation, cement industry or as raw material for

paper filler production. Regulatory changes may have an impact on the

options for waste or residue use, either by restricting the end uses and

thus causing higher costs for alternative solutions, or by creating new

opportunities. In 2022, 90 (89)% of UPM’s process waste was recycled

or recovered, of which 21 (21)% is energy recovery.

In 2022, UPM’s environmental investments totalled EUR 11 million

(5 million). The largest investment was for the improvement of one fibre

line’s brown stock washing at UPM Kaukas pulp mill to reduce the COD

load of wastewater. UPM’s environmental costs, which were mainly

attributable to effluent treatment and waste management, totalled EUR

123 million (111 million), including depreciation.

The company-wide Clean Run concept, launched in 2012, aims to

improve UPM’s environmental performance by bringing environmental

issues to the forefront of everyday work. All sites systematically follow

up any deviations, proactively report observations and near misses,

carry out walks and discussions, and compile detailed risk assessments.

Approximately 1,400 (1,400) environmental walks were organised and

2,100 (2,500) preventive environmental observations and near misses

were reported in 2022.

In 2022, the number of environmental non-conformances decreased

by 3 to a total of 22 (25) deviations from permit, contractual or other

obligations. 10 cases were related to air, 9 to water, 2 to soil and 1 to

noise. All deviations were reported to the authorities and, where

relevant, to local stakeholders. Appropriate measures were taken to

normalise the situation, and will be taken to prevent similar occurrences.

No major environmental incidents occurred at UPM production plants in

2022 and UPM was not required to pay any significant fines due to

environmental non-conformances.

Climate

The management of climate change related issues is integrated into the

management of other non-financial issues and is reported to the Board

depending on the context and matter. For example: 1) risks are

reported to the Board by CFO, 2) related compliance and regulatory

issues are briefed quarterly to the Audit Committee (Board) by the

Compliance Officer, 3) annual progress on 2030 responsibility targets

is reported by EVP Stakeholder Relations or 4) if there are specific

climate-related topics, then the responsible topic owner briefs the Board.

Additionally, major climate-related issues such as scenario analyses,

commitments and UPM’s overall approach of acting through forests,

emission reductions in production and supply chain and through climate-

positive products are reported directly to UPM management bodies led

by CEO.

UPM´s position and resilience in different climate scenarios (IPCC

RCP 2.6, RCP 4.5, RCP 8.5, IEA B2DS, IEA NPS and IEA CPS) have

been evaluated for the businesses and functions from both physical and

transitional angles, involving expertise from scientific community.

Generally, in low- and medium-emission scenarios the transition impacts

play a bigger role and UPM is well positioned as its business portfolio

allows for flexibility regarding recognised risks and opportunities. In the

high-emission scenario physical impacts dominate with severe

consequences not only for UPM but for the ecosystems and societies

across the globe.

UPM´s main target related to climate change is reducing fossil CO2

emissions (scope 1 and 2) by 65% from 2015 levels by 2030. This

target was validated by the Science-Based Targets initiative to be

aligned with the 1.5° C pathway according to the Paris agreement. In

2022, fossil CO2 emissions (scope 1 and 2) summed up to 4.5 (5.0)

million tonnes, which is a decrease of 11% compared to 2021.

Further targets related to climate change are reducing fossil CO2

emissions from supply chain (Scope 3) by 30% from 2018 levels by

2030, climate-positive land use and developing climate-positive product

portfolio. Concerning land use, forestry and product portfolio, UPM has

engaged with scientific partners in order to gain credible data and

approaches.

UPM favours the use of renewable and other carbon-neutral energy

sources. Biomass-based fuels make up 65% (70%) of fuels used by UPM

worldwide. If UPM needed to buy certificates to cover its whole direct

fossil CO2 emissions, and if the price of CO2 certificates were to rise by

EUR 10 per tonne, it would mean additional costs of approximately

EUR 23 million annually.

In 2022, UPM finalised a study on climate-related substitution and

carbon storage effects of our products with the Finnish SYKE and the

German IFEU institutes and we joined the pilot testing phase of the

GHG Protocol Land Sector and Removals Guidance. This development

work will help defining UPM’s approach for net-zero emissions


UPM FINANCIAL REPORT 2022	22

UPM climate related disclosures according to TCFD (Task Force on Climate-related Financial Disclosures)

are presented in the UPM annual report as follows:


REQUIREMENTS	PAGES
GOVERNANCE
a) The role of the Board in overseeing climate-related issues	Page 137-138, paragraph "Roles of the group management and functions in leading non-financial matters"
b) The role of management in assessing and managing climate-related issues	Page 137-138, paragraph "Roles of the group management and functions in leading non-financial matters"
STRATEGY
a) The climate related risks and opportunities over the short, medium and long term	Pages 132-136, chapter "Risks" Pages 32-33, chapter "Risks and opportunities" Pages 10-13, chapter "Beyond fossils"
b) The impact of climate-related risks and opportunities on business, strategy and financial planning	Pages 32-33, chapter "Risks and opportunities" Pages 10-13, chapter "Beyond fossils" Page 132 paragraph "Climate change", 136 paragraph "Forest and plantations"
c) The resilience of strategy, taking into consideration climate-related scenarios	Page 140, paragraph "Climate" Pages 10-13, chapter "Beyond fossils"
RISK MANAGEMENT
a) Processes for identifying climate-related risks	Page 132, paragraph "Risk management" Page 137-138, paragraph "Roles of the group management and functions in leading non-financial matters"
b) Processes for managing climate-related risks	Page 132, paragraph "Risk management" Page 137-138, paragraph "Roles of the group management and functions in leading non-financial matters"
c) How processes for identifying, assessing, and managing climate-related risks are integrated into overall risk management	Page 132, paragraph "Risk management" Pages 106-108, chapter "Governance"
METRICS AND TARGETS
a) Metrics used to assess climate-related risks and opportunities	Pages 14–15, "Key figures 2022"
b) Scope 1, Scope 2 and Scope 3 emissions, and related risks	Page 140, paragraph "Climate" Page 88, graph "Sources of UPM's greenhouse gas emissions"
c) Targets used to manage climate-related risks and opportunities and performance against targets	Page 149, table "Material non–financial topics and key performance indicators" Pages 30-31, table "UPM Responsibility targets"


UPM FINANCIAL REPORT 2022	23

EU Taxonomy

In 2020, the European Union’s Sustainable Finance Classification

System (EU Taxonomy Regulation, 2020/852) was published. In 2021,

the European Commission adopted the related EU Disclosures Delegated

Act, which requires large financial and non-financial companies to

provide information to investors about the environmental performance of

their assets and economic activities. In annual reports published in

2022, large companies were required to report the proportion of their

economic activities that are considered as Taxonomy-eligible. An

eligible economic activity is an activity that is described in the delegated

acts adopted pursuant to the Taxonomy Regulation. In 2023, large

companies are required to report also activities that are considered as

Taxonomy-aligned, i.e. activities that comply with the requirements for

environmentally sustainable economic activities. In the beginning the

focus is on activities contributing to climate objectives, climate change

mitigation and adaptation, according to the EU Climate Delegated Act.

In addition, in March 2022, the Commission adopted a

Complementary Climate Delegated Act including, under strict conditions,

specific nuclear and gas energy activities in the list of economic

activities covered by the EU taxonomy. It was published in July 2022

and applies as of January 2023.

In 2021, UPM carried out its first assessment to identify the economic

activities which would be eligible i. e. included in the scope of EU

Taxonomy.

In 2022, UPM conducted a thorough evaluation of the alignment of

activities with the sustainability requirements defined in the regulation.

After further investigation, UPM also re-evaluated some of the previous

identified eligible activities. The assessments were carried out with the

support of several UPM functions and businesses coordinated by UPM’s

finance and responsibility teams. EU NACE Classification (Statistical

Classification of Economic Activities in the European Community) was

used as a reference in activity identification. The identified eligible

activities focus on the climate change mitigation objective. The

assessment and its results are based on the current knowledge and

available interpretation of the regulation and cover the substantial

contribution criteria and the criteria for ‘do not significant harm’ for the

respective activities. In addition, the fulfillment of the minimum social

safeguard has been evaluated.

Regarding the nuclear and fossil gas related activities, UPM

identified the activities in nuclear power through its shareholdings in

Pohjolan Voima Oyj (PVO) which has direct shareholdings in

Teollisuuden Voima Oyj (TVO). TVO operates two nuclear power plants

(Olkiluoto 1 and Olkiluoto 2) and is constructing one new nuclear power

plant in Olkiluoto (Olkiluoto 3), Finland. Olkiluoto 3 has proceeded to its

test production phase. UPM did not recognise any fossil gas related

activities as defined in the Disclosures and Complementary Climate

Delegated Act.

UPM has re-evaluated Taxonomy-eligible activities and made

following changes to the eligible scope compared to 2021:

•UPM reports all sales of co-generated energy from bioenergy within

activity 4.20 as eligible, not separately within activities 4.15, 4.19

and 4.20.

•UPM reclassified activity for its investment in the biochemical refinery

from 3.14 to 3.6 that includes activities related to manufacture of

new developed carbon-low technology.

•The paper production from mostly recycled content and

biocomposites business was reclassified from eligible under 5.9 to

non-eligible, due to the EU Commission Notice on the interpretation

for the Delegated Act (2022/C 385/01) regarding the integrated

value chains.

Non-financial undertakings falling under the scope of the Non-

Financial Reporting Directive are required to disclose the KPIs, the

turnover, CapEx (capital expenditure) and OpEx (operating expenses) in

relation to economic activities which are Taxonomy-eligible and aligned

as defined in Disclosures Delegated Act. The eligibility and aligned-

related financial information to be disclosed pursuant to Article 8 of the

Taxonomy Regulation is presented in the following tables. The group has

ensured that activities are accounted only once when calculating KPIs.

In 2022, UPM's total Taxonomy-aligned turnover including the

nuclear activities was EUR 896 million, 8% of total sales, Taxonomy-

aligned CapEx was EUR 424 million, 26% of total CapEx and

Taxonomy-aligned OpEx EUR 109 million, 17% of total OpEx as

defined in Disclosures Delegated Act.


UPM FINANCIAL REPORT 2022	24

Turnover of taxonomy-eligible activities (excluding nuclear and fossil gas related activities)

Substantial contribution

criteria

DNSH criteria

(‘Does Not Significantly Harm’)

Economic activities

Code(s)

Absolute turnover

Proportion of turnover %

Climate change mitigation

Climate change adaptation

Water and marine resources

Circular economy

Pollution

Bioversity and ecosystems

Climate change mitigation

Climate change adaptation

Water and marine resources

Circular economy

Pollution

Bioversity and ecosystems

Minimum safeguards

Taxon

omy

aligne

propor

tion of

turnov

er,

year

2022

Taxono

aligne

proport

ion of

turnove

r, year

2021

Categ

ory

(enabli

activit

y = E)

Cate

gory

‘(tran

sition

activi

ty'=

A. TAXONOMY-ELIGIBLE

ACTIVITIES

EURm

Y/N

A.1. Environmentally sustainable

activities (Taxonomy-aligned)

1.3. Forest management

A2.1,

A2.2,

A2.3

100%

4.5. Electricity generation from hydropower

D35.1.

164

100%

4.13. Manufacture of biogas and biofuels for

use in transport

D35.2.

322

100%

4.20. Cogeneration of heat/cool and power

from bioenergy

D35.1.

D35.3

100%

Turnover of environmentally

sustainable activities (Taxonomy-

aligned) (A.1)

597

100%

A.2 Taxonomy-Eligible but not

environmentally sustainable activities

(not Taxonomy-aligned activities)

1.3. Forest management

A2.40

6.10 Sea and coastal freight water transport,

vessels for port operations and auxiliary

activities

H50.2

Turnover of Taxonomy-eligible but not

environmentally sustainable activities

(not Taxonomy-aligned activities) (A.2)

—%

Total (A.1 + A.2)

626

95%

B. TAXONOMY-NON-ELIGIBLE

ACTIVITIES

Turnover of Taxonomy-non-eligible

activities (B)

11,094

95%

Total (A + B)

11,720

100%

Turnover of Taxonomy-non-eligible activities (B) includes the eligible and aligned nuclear related activities


UPM FINANCIAL REPORT 2022	25

CapEx of taxonomy-eligible activities (excluding nuclear and fossil gas related activities)

Substantial

contribution criteria

DNSH criteria (‘Does Not

Significantly Harm’)

Economic activities

Code(s)

Absolute CapEx

Proportion of CapEx %

Climate change mitigation

Climate change adaptation

Water and marine resources

Circular economy

Pollution

Bioversity and ecosystems

Climate change mitigation

Climate change adaptation

Water and marine resources

Circular economy

Pollution

Bioversity and ecosystems

Minimum safeguards

Taxonomy

aligned

proportio

n of

CapEx,

year

2022

Taxonom

y aligned

proportio

n of

CapEx,

year

2021

Catego

(enabli

activity

= E)

Catego

‘(transiti

onal

activity'

= T)

A. TAXONOMY-ELIGIBLE ACTIVITIES

EURm

Y/N

A.1. Environmentally sustainable

activities (Taxonomy-aligned)

1.1. Afforestation

A2.1

100%

1.3. Forest management

A2.1,

A2.2,

A2.3

100%

3.6 Manufacture of other low carbon

technologies

C22

314

19%

100%

4.5. Electricity generation from hydropower

D35.1.1

100%

4.13. Manufacture of biogas and biofuels

for use in transport

D35.2.1

100%

4.20. Cogeneration of heat/cool and power

from bioenergy

D35.1.1,

D35.3

100%

9.1. Close to market research, development

and innovation

M72.1

100%

CapEx of environmentally

sustainable activities (Taxonomy-

aligned) (A.1)

424

26%

100%

A.2 Taxonomy-Eligible but not

environmentally sustainable

activities (not Taxonomy-aligned

activities)

6.10 Sea and coastal freight water

transport, vessels for port operations and

auxiliary activities

H50.2

CapEx of Taxonomy-eligible but not

environmentally sustainable

activities (not Taxonomy-aligned

activities) (A.2)

—%

Total (A.1 + A.2)

483

29%

88%

B. TAXONOMY-NON-ELIGIBLE

ACTIVITIES

CapEx of Taxonomy-non-eligible

activities (B)

1,173

71%

Total (A + B)

1,656

100%

CapEx of Taxonomy-non-eligible activities (B) includes the eligible and aligned nuclear related activities


UPM FINANCIAL REPORT 2022	26

OpEx of taxonomy-eligible activities (excluding nuclear and fossil gas related activities)

Substantial contribution

criteria

DNSH criteria (‘Does Not

Significantly Harm’)

Economic activities

Code(s)

Absolute OpEx

Proportion of OpEx %

Climate change mitigation

Climate change adaptation

Water and marine resources

Circular economy

Pollution

Bioversity and ecosystems

Climate change mitigation

Climate change adaptation

Water and marine resources

Circular economy

Pollution

Bioversity and ecosystems

Minimum safeguards

Taxono

aligned

proporti

on of

OpEx,

year

2022

Taxono

aligned

proporti

on of

OpEx,

year

2021

Catego

(enabli

activity

= E)

Categor

‘(transiti

onal

activity'

= T)

A. TAXONOMY-ELIGIBLE

ACTIVITIES

EURm

Y/N

A.1. Environmentally sustainable

activities (Taxonomy-aligned)

1.3. Forest management

A2.1,

A2.2,

A2.3

100%

4.5. Electricity generation from

hydropower

D35.1.1

100%

4.13. Manufacture of biogas and

biofuels for use in transport

D35.2.1

100%

4.20. Cogeneration of heat/cool and

power from bioenergy

D35.1.1,

D35.3

100%

9.1. Close to market research,

development and innovation

M72.1

100%

OpEx of environmentally

sustainable activities (Taxonomy-

aligned) (A.1)

11%

100%

A.2 Taxonomy-Eligible but not

environmentally sustainable

activities (not Taxonomy-aligned

activities)

6.10 Sea and coastal freight water

transport, vessels for port operations and

auxiliary activities

H50.2

OpEx of Taxonomy-eligible but

not environmentally sustainable

activities (not Taxonomy-aligned

activities) (A.2)

—%

Total (A.1 + A.2)

11%

100%

B. TAXONOMY-NON-ELIGIBLE

ACTIVITIES

OpEx of Taxonomy-non-eligible

activities (B)

582

89%

Total (A + B)

650

100%

OpEx of Taxonomy-non-eligible activities (B) includes the eligible and aligned nuclear related activities


UPM FINANCIAL REPORT 2022	27

Nuclear and fossil gas related templates

Template 1 Nuclear and fossil gas related activities


Row	Nuclear energy related activities
1.	The undertaking carries out, funds or has exposures to research, development, demonstration and deployment of innovative electricity generation facilities that produce energy from nuclear processes with minimal waste from the fuel cycle.	NO
2.	The undertaking carries out, funds or has exposures to construction and safe operation of new nuclear installations to produce electricity or process heat, including for the purposes of district heating or industrial processes such as hydrogen production, as well as their safety upgrades, using best available technologies.	YES
3.	The undertaking carries out, funds or has exposures to safe operation of existing nuclear installations that produce electricity or process heat, including for the purposes of district heating or industrial processes such as hydrogen production from nuclear energy, as well as their safety upgrades.	YES
	Fossil gas related activities
4.	The undertaking carries out, funds or has exposures to construction or operation of electricity generation facilities that produce electricity using fossil gaseous fuels.	NO
5.	The undertaking carries out, funds or has exposures to construction, refurbishment, and operation of combined heat/cool and power generation facilities using fossil gaseous fuels.	NO
6.	The undertaking carries out, funds or has exposures to construction, refurbishment and operation of heat generation facilities that produce heat/cool using fossil gaseous fuels.	NO

Template 2 Taxonomy-aligned economic activities (denominator)


Row	Economic activities	Amount and proportion
		CCM + CCA		Climate change mitigation (CCM)		Climate change adaptation (CCA)
		Amount	%	Amount	%	Amount	%
2.	4.27. Construction and safe operation of new nuclear power plants, for the generation of electricity or heat, including for hydrogen production, using best-available technologies	34	0%	34	0%	—	—%
3.	4.28. Electricity generation from nuclear energy in existing installations	266	2%	266	2%	—	—%
7.	Amount and proportion of other taxonomy- aligned economic activities not referred to in rows above in the denominator of Turnover	597	5%	597	5%	—	—%
8.	Total Turnover	11,720	100%	11,720	100%	—	—%


Row	Economic activities	Amount and proportion
		CCM + CCA		Climate change mitigation (CCM)		Climate change adaptation (CCA)
		Amount	%	Amount	%	Amount	%
3.	4.28. Electricity generation from nuclear energy in existing installations	41	6%	41	6%	—	—%
7.	Amount and proportion of other taxonomy- aligned economic activities not referred to in rows above in the denominator of OpEx	69	11%	69	11%	—	—%
8.	Total OpEx	650	100%	650	100%	—	—%


UPM FINANCIAL REPORT 2022	28

Template 3 Taxonomy-aligned economic activities (numerator)


Row	Economic activities	Amount and proportion
		CCM + CCA		Climate change mitigation (CCM)		Climate change adaptation (CCA)
		Amount	%	Amount	%	Amount	%
2.	4.27. Construction and safe operation of new nuclear power plants, for the generation of electricity or heat, including for hydrogen production, using best-available technologies	34	4%	34	4%	—	—%
3.	4.28. Electricity generation from nuclear energy in existing installations	266	30%	266	30%	—	—%
7.	Amount and proportion of other taxonomy- aligned economic activities not referred to above in the numerator of Turnover	597	67%	597	67%	—	—%
8.	Total amount and proportion of taxonomy- aligned economic activities in the numerator of the Turnover	896	100%	896	100%	—	—%


Row	Economic activities	Amount and proportion
		CCM + CCA		Climate change mitigation (CCM)		Climate change adaptation (CCA)
		Amount	%	Amount	%	Amount	%
3.	4.28. Electricity generation from nuclear energy in existing installations	41	37%	41	37%	—	—%
7.	Amount and proportion of other taxonomy- aligned economic activities not referred to in rows above in the numerator of OpEx	69	63%	69	63%	—	—%
8.	Total amount and proportion of taxonomy- aligned economic activities in the numerator of the OpEx	109	100%	109	100%	—	—%

Accounting Policy

UPM consolidated financial statements that are prepared in accordance

with International Financial Reporting Standards as adopted by the

European Union (IFRS as adopted by the EU) and IFRIC Interpretations.

UPM has calculated the KPIs using the financial information presented in

group consolidated financial statements 2022. The definitions of CapEx

and OpEx key performance indicators are based on group

interpretation of definitions set out in the Disclosures Delegated Act.

Turnover

UPM has calculated turnover, as defined in Disclosures Delegated Act,

based on the same accounting principles that apply for revenue in IFRS,

i.e., covering all amounts derived from the sale of products and services

in the course of ordinary activities. Total turnover corresponds to total

sales as reported in group consolidated financial statements. Refer to

Accounting policy in consolidated financial statements Note 2.2. Sales.

Taxonomy-eligible and -aligned turnover include only revenue from sales

of products and services generated from activities that are included in

the Taxonomy. The majority of UPM´s products and services contributing

to the turnover are not included in the EU Taxonomy. In determining the

eligible and aligned turnover any specific fragments of production

inputs, such as use of sustainable raw material or energy, have not

been included in the eligible turnover if the main activity is not included

in the Taxonomy.

UPM’s Taxonomy-eligible turnover includes sales of wood and wood-

based biomass such as logs, pulpwood and forest residues from UPM’s

own and leased forests to third party customers (other sources of wood

excluded from the eligible turnover), sales of forestry services to private

forestry owners, sales of energy generated from hydropower, sales of

wood-based renewable diesel and naphtha for transport and

petrochemicals, sales of heat and power generated from biomass in

combined heat and power plants and revenues from leased vessels.

Regarding the power plants, the portion of the fossil fuels has been

excluded from the turnover. Apart from the sales of forestry services to

private forest owners and revenues from leased vessels, all the UPM’s

eligible turnover is also Taxonomy-aligned.

CapEx

UPM has included in CapEx, as defined in Disclosures Delegated Act,

additions to tangible and intangible assets, before any depreciations,

impairments, amortisation charges and fair valuations during the

financial year, as accounted for in accordance with IAS 16 Property,

Plant and Equipment, IAS 38 Intangible assets, IAS 41 Agriculture and

IFRS 16 Leases. CapEx corresponds to cash payments to acquire fixed

assets in the Consolidated cash flow statement adjusted with amounts

accrued but not paid at the end of reporting period, and additions to

leased assets. Refer to line items Capital expenditure and Additions to

forest assets in Consolidated cash flow statement and Note 5.2. Leases

in UPM consolidated financial statements 2022.

Taxonomy-eligible CapEx includes purchased and leased land for

afforestation, purchased forest land, capitalised forest regeneration

costs during the growth cycle, capitalised investments in new


UPM FINANCIAL REPORT 2022	29

biochemicals refinery, capitalised investments in hydropower plants,

capitalised investments in biofuels biorefinery and other capitalised

development costs of Taxonomy-eligible activities towards a future

beyond fossils. Apart from the CapEx related to investments on leased

vessels, all the UPM’s eligible CapEx is also Taxonomy-aligned. Capital

expenditure presented in the UPM Annual report within Other financial

information differs from Taxonomy-CapEx as it does not include

additions to forest assets and leased assets.

OpEx

UPM has included in OpEx, as defined in Disclosures Delegated Act,

research and development costs as accounted for in accordance IAS 38

Intangible assets, short term lease expenses as accounted for in

accordance IFRS 16 Leases, and costs of day-to-day servicing (i.e.,

repairs and maintenance) of property, plant and equipment as

accounted for in accordance IAS 16. Costs of day-to-day servicing of

property, plant and equipment include direct salaries of maintenance

personnel, maintenance materials and maintenance services outsourced.

In addition, as UPM owns a significant amount of forest assets, it

considers forest management and support services as day-to-day

servicing of assets as defined in EU Disclosures Delegated Act. OpEx is

included in consolidated income statement line item Costs and

expenses, refer Note 2.3. Operating expenses and other operating

income.

Research and development costs included in Taxonomy-eligible

OpEx relate to technologies and products dedicated to the reduction of

GHG emissions. These costs relate to Taxonomy-eligible activities 1.3,

3.6 and 4.13 and include mainly new biochemicals biorefinery and

next generation biofuels refinery R&D costs. Day-to-day servicing of

property, plant and equipment included in Taxonomy-eligible OpEx

includes maintenance costs of hydropower and biofuels production

facilities and costs related to combined heat power plants and leased

vessels. Costs of day-to-day servicing of forest assets included in

Taxonomy-eligible OpEx relate to forestry infrastructure maintenance,

forest fire fighting, protection and environmental activities whereas

forest regeneration costs, e.g., planting, growing of seedlings and

operation of nurseries, are included in CapEx. All the above-mentioned

Taxonomy-eligible OpEx apart from the costs related to leased vessels

are also Taxonomy-aligned.

Nuclear and Gas related activities

UPM has reported separately its activities related to Nuclear and Gas

as defined in the Complementary Climate Delegated Act (2022/1214).

The assessment is based on the comprehensive study made by

Teollisuuden Voima Oyj (TVO) which is in control of the nuclear

operations where UPM has shareholdings via Pohjolan Voima Oyj

(PVO), refer to Note 4.3 Energy shareholdings.

Taxonomy-eligible turnover from nuclear related activities includes

UPM's sales to external customers related to existing nuclear power

plants (Olkiluoto 1 & 2, activity 4.28) and the new constructed power

plant (Olkiluoto 3, activity 4.27) which is in the test production phase.

Taxonomy-eligible OpEx in activity 4.27 includes, as defined in

Disclosures Delegated Act, UPM's share of day-to-day servicing costs

related to property, plant and equipment in the existing nuclear power

plants Olkiluoto 1 & 2. UPM is not reporting any CapEx related to the

nuclear activities as due to the nature of its shareholding ownership in

PVO, investments related nuclear are not included in the total UPM's

Capital expenditure as presented in the UPM Annual report. UPM did

not recognise any gas related activities as defined in the Disclosures

and Complementary Climate Delegated Act. All the reported nuclear

activities and respective KPIs are both Taxonomy-eligible and

Taxonomy-aligned.


UPM FINANCIAL REPORT 2022	30

Material non-financial topics and key performance indicators


TOPIC	MANAGEMENT	KEY PERFORMANCE INDICATOR	2022 RESULTS
Governance/ Anti- corruption	Corruption related risks are identified and assessed in connection with the company’s risk management process. These risks are managed and mitigated by training, communication, due diligence procedures, audits and practical guidelines specifically targeted at anti-corruption and anti- bribery. UPM Code of Conduct training is mandatory for all employees and anti-bribery training to all salaried employees.	100% coverage of participation in UPM Code of Conduct training (continuous)	97% (98%) of active employees completed the new training for the UPM Code of Conduct since September 2022.
Human rights	UPM is committed to respecting human rights based on its Code of Conduct. UPM has a process for assessing human rights at UPM site level, including community relations and local sourcing, as well as for risk assessments and audits for suppliers.	Continuous supplier auditing based on systematic risk assessment practices	121 (124) supplier audits were conducted based on identified risks, including human rights, social and environmental topics. In addition, about 360 (300) contractor reviews with focus on working conditions were carried out.
Responsible sourcing	UPM requires its suppliers, third party intermediaries and joint venture partners to apply the same principles as in the UPM Code of Conduct. These supplier requirements are defined in the UPM Supplier and Third Party Code.	80% of total supplier spend covered by UPM Supplier and Third Party Code (continuous)	88% (86%) of supplier spend covered by UPM Supplier and Third-Party Code.
Responsible leadership	UPM continuously develops leadership capabilities, management teams and working environments. UPM measures work environments, team work and leadership with an annual engagement survey. UPM’s global leadership development portfolio develops capabilities to lead oneself, lead people and lead business. Programmes address, e.g., inspiring and purposeful leadership, coaching, conversation and feedback skills, resilience and leading in complexity.	Employee engagement clearly above benchmark by 2030	In the Employee Engagement Survey average score of 70 (68). This is 5 (9) points below the global external benchmark.
Learning and development	UPM has a systematic process for goal setting and development planning for all employees globally to ensure high performance and continuous professional development.	Goal setting discussions are held and development plans created for employees, completion rate 100% by 2030	83% (88%) of employees had completed individual goal settings or annual discussions. 58% (70%) had a development plan documented.
Safe and healthy working environment	UPM has a comprehensive safety management system which promotes a proactive and engaging safety culture. UPM uses means such as safety audits and reporting on safety-related near misses and safety observations.	No fatalities Total recordable injury frequency (TRIF) <2 by 2030, including contractors	3 (0) fatal accidents, 5 (3) serious accidents TRIF was 6.4 (6.3) for UPM workforce and 5.9 (7.2) including contractors.
Diversity and inclusion	UPM wants to develop organisational culture and local workplace to ensure an inclusive and diverse working environment. UPM has committed to, and promotes, diversity and inclusion in its policies. UPM reviews the diversity status of all its businesses and functions regularly. The composition of UPM key management teams and inclusiveness is discussed and development actions planned and implemented.	UPM is among top 10% companies by 2030 on employees’ sense of belonging at UPM	In the Employee Engagement Survey, question about belonging average score of 68 (67). This is 12 (13) points below the benchmark of top 10% companies.
Fair rewarding	UPM’s rewarding and recognition philosophy is to reward high performance. We aim to ensure fair, equitable and competitive rewarding for all employees. In addition to competitive, robust and performance based rewarding practices, we have yearly review processes ensuring the gender pay equity and employees’ pay meeting at least a living wage locally. UPM ensures that employees have sufficient information to understand what their rewarding comprises and how they can influence on its development.	Ensure gender pay equity for all employees by implementing yearly review process to identify and close unexplained pay gaps	Company-wide review done in 2022 and pay adjustments implemented to close identified statistically significant unexplained gaps related to gender.
Product stewardship	Ecolabels help customers make responsible choices and provide stakeholders with important information. Third-party verified environmental certificates and labels tell customers about the environmental performance of our products.	All applicable products eligible for ecolabelling by 2030	87% (84%) of UPM sales were eligible for ecolabelling.
Climate	UPM favours the use of renewable and other carbon-neutral energy sources and strives to continuously improve its energy efficiency across all its operations. Strengthened targets for scope 1 and 2 to be in line with the commitment to Science Based Targets and 1.5° pledge.	Fossil CO2 emissions from its own combustion and purchased electricity (Scope 1 and 2) reduced by 65% by 2030 (compared to 2015)	Fossil CO2 emissions reduced by 34% compared to 2015 and 11% compared to 2021.
Water	UPM's goal is to minimise the impact of its operations on water resources, safeguard the natural water cycle in forests, and maintain the functioning of aquatic ecosystems.	Wastewater volume reduced by 30% by 2030 (compared to 2008)	13% reduction in wastewater volume achieved since 2008 for the UPM average product.


UPM FINANCIAL REPORT 2022	31


TOPIC	MANAGEMENT	KEY PERFORMANCE INDICATOR	2022 RESULTS
Waste	Circular economy means both financial and environmental efficiency. UPM aims to reuse materials and products, reduce the amount of solid waste and increase recycling and recovery in its operations.	No process waste sent to landfills or to incineration without energy recovery by 2030	90% (89%) of all UPM’s process waste was recovered and recycled. The total amount of waste to landfills decreased by 40% compared to 2021.
Forest	UPM is committed to sustainable forestry and uses third-party verified chains-of-custody to ensure that wood is legally sourced from sustainably managed forests.	All fibre certified by 2030	86% (84%) of all wood used by UPM is sourced from certified forests.
Biodiversity	UPM aims to improve biodiversity with tangible actions for maximising positive impacts and mitigating possible negative impacts on land, in stream waters or in mill operations.	Positive impact on forest biodiversity in Finland (continuous)	Overall positive development measured, all subindicators positive

Material risks and their management is described on pages 132-137 of the Report of Board of Directors and in the Annual Report on pages 32–33. Information on

the company’s risk management system is available on the corporate website in the governance section and in the Corporate Governance Statement 2022, which is

also available as a separate report on the corporate website upm.com/governance. More information about performance related non-financial topics is available

in the general section of the Annual Report and on the UPM website upm.com.

Research and development

Innovating for the future

Innovation and R&D programmes are essential in the development of

new products and technologies. Research and development expenses

cover the development of new technologies, businesses and processes.

In 2022, UPM spent EUR 414 (266) million on research and

development, which accounted 81.5% (21.3%) of UPM’s operating

cash flow. In addition to direct R&D expenditure of EUR 55 (46) million,

the figure includes negative operating cash flow and capital

expenditure in developing businesses, transformative business prospects

and digitalisation projects.

The patents, trademarks and intellectual property rights protecting

our innovations supports the journey from innovation to business. We

have more than 3,000 patents and patent applications, and nearly

1,400 trademarks globally.

Licensing innovations and technologies provides an excellent basis

for value creation with customers and technology partners. As an

example, at the end of 2022, UPM Biochemicals owned 592 patents

and patent applications and another 433 patents and patent

applications were held by partners, covering technology and products

throughout the value chain.

Extensive partner network

Our close-knit global partner network is comprised of customers,

universities, research organisations, suppliers and start-up companies.

Collaboration speeds up the development and launch of new business

solutions.

Our network includes the Circular Bio-based Europe Joint

Undertaking (BBI) and the European Chemical Industry Council (CEFIC).

We are a part of the Renewable Carbon Initiative (RCI) and a member

of the 4evergreen alliance, an initiative created by CEPI to raise the

overall recycling rate of fibre-based packaging to 90% by 2030. We

also joined EUROPEN, the European association that strives towards

carbon neutrality of the packaging value chain.

We want to take part in the developments that reduce greenhouse

gas emissions. In 2022, we actively participated in Hydrogen Cluster

Finland, the EU’s Clean Hydrogen Alliance and participated in the

Roundtable on Clean Hydrogen in industrial applications.

Our focus in 2022

Implementing sustainable product design concept

Our 2030 responsibility targets and our contribution to the UN SDGs

are integrated into our R&D activities and product development. We

want our products to create value for our stakeholders during the whole

product lifecycle.

We started to implement the sustainable product design concept and

worked on cases for new product development to form solid

sustainability value propositions. At UPM Specialty Papers, the concept

was successfully used from development to the new packaging paper

launch. The new concept will be adopted gradually in all of our

businesses.

Our approach applies lifecycle thinking and lifecycle assessment

data, both of which are incorporated in sustainable product design

practices. We use different sustainability tools, such as Life Cycle

Assessments (LCAs), and biodegradability and recyclability testing in

product development. LCAs are a good tool to support businesses in

sustainability communication.

Innovating climate-positive products

Our biochemicals biorefinery under construction in Leuna, Germany,

will enable a switch from fossil raw materials to wood-based alternatives

in textiles, plastics, PET bottles, packaging as well as pharma and

cosmetics products. We introduced UPM BioPura™, renewable

monoethylene glycols (bMEG) produced from carbon-neutral feedstocks.

We are in the basic engineering phase of a next-generation biofuels

biorefinery. This biorefinery would produce high-quality renewable

fuels, including sustainable jet fuel. The products would significantly

reduce the carbon footprint of road transport and aviation, as well as

replace fossil raw materials with chemical and plastic alternatives.

We are also examining new ways to utilise renewable fibre-based

materials for textiles, nonwovens, hygiene products, labels and flexible

packaging for example. We also look into opportunities provided by

green hydrogen and biogenic CO2.

Expanding R&D infrastructure

UPM’s four Biofore Base research centres accelerate the development of

bio-based products. The new Leuna Biofore Base in Germany works in

connection with the upcoming biochemicals refinery and specialises in

developing new molecular bioproducts. The centres focus on research,

piloting and analytics enabling seamless collaboration with customers,

value chain partners and research organisations such as universities.


UPM FINANCIAL REPORT 2022	32

They work closely with UPM’s mills, businesses and business-specific

research centres in various countries.

UPM’s first forestry research centre specialising in eucalyptus

plantations began operations in Paysandú, Uruguay. The centre’s

research work is mainly focused on developing genetic materials with

high productivity, optimal wood quality and tolerance to the pests and

diseases that can affect plantations. The new centre contains state-of-the-

art laboratories and equipment, as well as specific greenhouses and

nurseries for various research and development purposes.

Developing R&D competences

R&D supports our growth and responsibility targets globally and

enhance technology-triggered business opportunities and protect

performance in existing businesses. The strong focus is on the growth

businesses and close collaboration with customers and production.

We continuously develop our competences for the future needs of

our businesses. Competence development is essential for the entire

organisation, including both technical capabilities and ways of working.

We focused especially on our digi and data and chemistry capabilities.

We also started an apprenticeship training to educate new laboratory

technicians and piloting plant operators for our growing needs in these

areas. In addition to internal competence development, we collaborate

with universities and vocational schools to enhance mutual learning, for

example through the Aalto International Talent mentoring programme.

UPM Biochemicals - ramping up new business

The world’s first industrial-scale biorefinery in Leuna is rapidly taking

shape, while a robust business platform is almost complete and new

customer partnerships confirm a promising commercial future.

Manufacturers in multiple sectors must reduce their carbon footprints

urgently. UPM’s new generation of biochemicals, sourced from

sustainably managed forests, will enable brands to redefine their net

zero targets, significantly reduce their scope 3 emissions and switch out

of fossil-based chemical feedstocks for good. Our biochemicals will

support the transition of the chemicals industry towards a renewable

circular bioeconomy.

The EUR 750 million-investment at Leuna is rapidly taking shape, in

anticipation for start-up by the end of 2023. The biorefinery will be the

first industrial-scale facility of its type ever built, requiring precision in

every detail of planning and construction.

The biorefinery will convert solid wood into next generation

biochemicals: bio-monoethylene glycol (BioMEG) and renewable

functional fillers. In addition, the biorefinery will produce bio-

monopropylene glycols (BioMPG) and industrial sugars.

After confirming in January 2022 that the completion of the

biorefinery would be delayed, we successfully navigated the challenges

stemming from the global supply chain disruptions.

Substantial progress has been made on-site: the concrete foundations

have been laid; the huge pipe rack that will bear the grid for utilities

has been built and the first structures are almost complete. [SPU1]

Along with developing the facility, we are preparing the business to

become fully operational. We have hired and started training the

operations personnel and established reliable supply chains.

We have also extended our feedstock sourcing network, resulting in

the first deliveries of wood on site in November. This has enabled us to

begin testing our wood handling and processing operations. The

networks we have built with partners in the forest value chain have

helped us to address the benefits of wood use in wider policy

discussions.

We took important steps to bring our products to global markets.

We presented our lignin-based Renewable Functional Filler (RFF)

solutions, UPM Biomotion™, at the world’s biggest rubber industry trade

fair (DKT IRC) in Nuremberg, further strengthened our distributor

network.

We were ranked by the European Rubber Journal as the most

important sustainability project in the elastomers and rubber industry.

Our renewable monoethylene glycols (bMEG), UPM BioPura™, were

shortlisted by Packaging Europe magazine as one of the standout

innovations for its 2022 Sustainability Awards.

We also announced commercial partnerships for UPM BioPura that

will transform the carbon footprint of value chains in different industries.

For manufacturers like Dongsung Chemical (a supplier to global

footwear brands) and Haertol (a leading engine and battery coolant

producer), this is an opportunity to both advance their net zero

commitments and achieve a competitive advantage in their global

markets, where demand for sustainable products is increasing.

In 2022 we also staffed our research and application development

laboratories, ensuring high quality, continuous process optimisation and

ongoing research and development activities around our portfolio of

biochemicals.

While fully focusing on completing the project and ramping up the

business, we have also built the fundamentals for further growth in

Biochemicals. We have brought together a team of experts to assess

and study future applications for biochemicals. We are exploring

opportunities to address needs in additional chemical value chains,

utilising side-stream products or based on the technological platform we

are now completing.

A heightened focus on reduced carbon emissions means the demand

for renewable materials will continue to increase. We are actively

working to optimise processes and material streams to further reduce

emissions, seeking carbon neutrality - or even carbon negativity - of the

products produced in our biorefinery.

The sustainable sourcing of biomass is a vital factor for our

commercial partners. The wood used to produce UPM’s renewable

biochemicals is 100% certified and sourced from regional beechwood

forests in and around Leuna, conserving biodiversity and natural

ecosystems. All the wood used is fully traceable and supported by a

verified third-party chain of custody.

UPM Biomedicals - advancing biomedical innovations

UPM Biomedicals is at the forefront of innovation and

commercialisation, with a particular focus on life science and clinical

applications.

UPM Biomedicals develops and supplies innovative and sustainable

wood-based biomedical products for medical and life science

applications. The main component in our products is high-quality

nanocellulose, refined from birch wood. All products are animal-free.

We actively collaborate with universities, research centres and key

industrial partners in the fields of high-throughput drug screening,

personalised medicine, cell therapies, 3D bioprinting, tissue engineering

and advanced wound care. More than 520 patents and patent

applications protect our existing and future products.

In life sciences, our main products are GrowDex®, a range of

hydrogels for 3D cell culturing, and GrowDase™, an enzyme to release

living cells from the gel. The nanocellulose ensures excellent

compatibility with even the most demanding cells, such as stem cells

and patient-derived cells.

In 2022, we completed a pilot study of GrowDex use in a cell-based

model of a liver. Liver models are used in testing the toxicity of almost

every new pharmaceutical candidate. The first mini-livers and other

mini-organs are currently growing in UPM’s own cell laboratory to better

support our customers and product development team.

GrowInk™ is a range of bioinks for 3D bioprinting, used in areas

like cancer research, where models of tumours can be printed to test


UPM FINANCIAL REPORT 2022	33

their response to different treatments. The ultimate goal is to print organs

or tissues that could, in the future, be transplanted into patients. In

2022, we continued to supply nanocellulose to Cellink.

In the clinical field, many Finnish healthcare professionals and

hospitals already use our CE-marked FibDex® wound dressings. The

products are also being piloted in selected university hospitals in the

Nordic countries and in Germany. In 2022, we launched a new clinical

investigation for superficial dermal burns led by experienced plastic

surgeons in the university hospitals of Uppsala and Linköping in

Sweden.

UPM Biocomposites - the best in class

UPM Biocomposites is creating circular economy solutions through the

manufacture of innovative composite materials and decking products.

The materials are based on our own research and development.

UPM ProFi utilises European post-consumer plastic waste and post-

industrial label waste to manufacture high quality composite decking.

The label production side streams come from UPM Raflatac and its

customers, with the waste collected and delivered to Germany where

the composite decking is manufactured. We also utilise recycled plastic

from European post-consumer waste in the manufacturing process.

The UPM ProFi Piazza product range is made with up to 75%

recycled materials and offers best-in-class performance. We are a

member of the EU Circular Plastics Alliance, which aims to increase the

EU market for recycled plastics to 10 million tonnes by 2025.

In 2022, the end of the COVID-19 pandemic lockdowns and the

uncertainty surrounding construction, as well as continued consumer

uncertainty, were reflected in UPM ProFi’s sales. However, we managed

to increase market shares in Central Europe, where we stand out thanks

to the responsibility and recyclability of our locally produced products.

The UPM ProFi Piazza product range was expanded.

UPM Formi creates and manufactures wood-based biocomposites,

enabling a reduction in the carbon footprint of the end product by up to

80% when compared to similar products made from fossil-based

materials. The composite materials are suitable for various end uses,

including kitchenware, personal care and acoustic devices. Products

comply with food safety standards and other similar quality

requirements.

Business growth continued in 2022 with our customers launching

new products on the market, from storage boxes to design objects.

Together with new and existing customers, we developed and piloted

new end-use areas for the material. Commercial interest was reflected in

the strong demand for almost 100% biobased UPM Formi EcoAce.


UPM FINANCIAL REPORT 2022	34

R&D’s role in different businesses


BUSINESS AREA	DESCRIPTION
UPM Fibres	In 2022, UPM saw a clear benefit of having research expertise in several continents. Our global R&D presence in Asia, Europe and the Americas, enabled us to work faster and better with our customers and partners to find and implement required solutions. By having a local presence at a global scale we were able to implement solutions even during the exceptional COVID-19 pandemic. Several developments were made to improve operational reliability, safety and environmental performance at our pulp mills. To further strengthen our strategy and commitment to developing sustainable and high-quality eucalyptus plantations for pulp production, we opened a new forestry research centre in Paysandú, Uruguay. The centre’s research work focuses mainly on developing genetic materials with high productivity, improved wood quality and good tolerance to the main pests and diseases that can affect plantation operations. After a period of solution development stage for our second state-of-the-art eucalyptus pulp mill scheduled to start operating in Uruguay by the end of the Q1 2023, more emphasis was placed on developing and piloting the first stages of our next fibre based and by-products growth concepts for our pulp mills. In doing so, we saw clear synergies and advantages in having in-house businesses that focus on replacing fossil materials with renewable solutions. It allows us to make our customers more successful faster by designing and implementing solutions based on our by-products in a range of industries and applications.
UPM Energy	The focus was on improving the cost-competitiveness and environmental performance of hydropower production assets and on developing competencies and business operations related to the optimisation of industrial energy consumption and demand-side flexibility. UPM Energy participated in several research programmes and undertook development work with the aim of improving UPM’s power generation and consumption operations in a changing electricity market, as well as developing means to mitigate the impact of hydro power operations on rivers and migratory fish.
UPM Raflatac	UPM Raflatac product development in Strategic Business Units and in Global R&D continues to support UPM’s sustainable development goals and commitments in self-adhesive label materials. Packaging recyclability, reduction of raw materials and new renewable raw materials are core elements in all UPM Raflatac’s R&D projects supporting UPM’s beyond fossils strategy. Limited availability of raw materials has been a challenge in recent years and this has been offset by approving alternative solutions. Continuous improvements in quality and cost efficiency remain essential to product and process development. The AMC acquisition brings new technologies and products which will further strengthen the technical competencies in self-adhesive materials. This will enable new opportunities for future product development.
UPM Specialty Papers	R&D and product development initiatives aim to enable high performance and efficiency in the value chain and to develop fibre-based alternatives for non-renewable materials. These initiatives also support growth targets by driving the innovation of products for new applications. We added a new heat-sealable barrier paper to our portfolio. Looking towards the future, we continue to focus on co-creating sustainable packaging papers for increasingly demanding end-uses, together with the packaging value network; we currently have several ongoing co- creation initiatives supported by our excellent R&D infrastructure including Northern European and Asian R&D centres. For example, together with machine manufacturer BOBST and specialty chemicals manufacturer Michelman, we launched a ground-breaking packaging solution for foods with long shelf life. UPM Specialty Papers continues to develop release liner base papers to further improve efficiency and minimise the environmental impact of the value chain. For example, our downgauging initiatives support our customers’ material efficiency targets. We are also driving an industry- wide design-for-recycling approach across the label and tape value chains by harmonising release liner shades.
UPM Communication Papers	The Research & Development Centre in Lappeenranta, Finland and the Central European Support Team in Augsburg, Germany continued to focus on investigating fibre concepts for various paper grades. The teams have been optimising recovered paper (RCP) supply by quality studies and development of a quality simulation model. UPM Communication Papers participated in projects and association activities to keep RCP recyclable, e. g. in the 4evergreen project and in the INGEDE. Furthermore, our R&D teams provided support to optimise the deinking process with the aim of minimising material losses, and reducing energy and the water consumption. Product portfolio development focused on the needs of key customer groups, as well as broadening the approach to address new and profitable end uses. In the area of energy, the focus was on technological innovations that help minimise energy needs at the production sites. Paper mills also developed further intelligent operations to enable increasing demand-side management towards the electricity markets and networks to support system stability and decrease emissions at peak times. In terms of operations efficiency, our R&D efforts concentrated on improving the efficiency of several mills for pinpointed efficiency supporting actions as well as safety-improving areas. Digital solutions were developed, built and tested to optimise RCF delivery flows and machine performance measurement, as well as improve order information machine reading. Contributions from the R&D teams contributed to meeting the 2030 targets in the areas of energy, water consumption, effluent treatment and resource efficiency.
UPM Plywood	UPM Plywood product management and development provides competitive products within selected end-use areas in collaboration with our customers, superior technical expertise and support for customers, and support for the commercialisation of newly developed products and applications. An example would be further expanding the use of lignin-based WISA BioBond gluing solution to new product lines.
Other operations UPM Biofuels	Collaboration for the development of new applications for renewable plastics based on UPM BioVerno naphtha continued. Piloting, research and process development continued to take place at the UPM Biorefinery Development Centre (BrDC) and with external partners. UPM also studied and tested the use of several new innovative feedstocks that meet sustainability criteria, such as wood residues and feedstocks from carbon farming for our possible growth plans.


UPM FINANCIAL REPORT 2022	35

Information on shares

UPM has one class of shares. Each share entitles the holder to one

vote at the General Meeting of UPM.

On 31 December 2022, the total number of UPM shares was

533,735,699. Through the issuance authorisation described below, the

number of shares may increase to a maximum of 558,735,699. On 31

December 2022, UPM held 411,653 treasury shares, representing

approximately 0.08% of the total number of UPM shares and voting

rights. There are no specific terms related to the shares.

In 2022, UPM shares worth a total of EUR 9,680 million (8,435

million) were traded on the Nasdaq Helsinki stock exchange. This is

estimated to represent more than 60% of the total trading volume in

UPM shares. The highest listing was EUR 37.14 in December and the

lowest was EUR 24.85 in March.

Authorisations held by the Board of Directors

The Annual General Meeting held on 29 March 2022 authorised the

Board of Directors to decide on the repurchase of a maximum of

50,000,000 of the Company’s own shares. The authorisation will be

valid for 18 months from the date of the AGM resolution.

The Annual General Meeting held on 29 March 2022 authorised

the Board of Directors to decide on the issuance of new shares, the

transfer of treasury shares and the issuance of special rights entitling to

shares in proportion to the shareholders’ existing holdings in the

Company, or in a directed share issue, deviating from the shareholder’s

pre-emptive subscription right. The Board of Directors may also decide

on a share issue without payment to the Company itself. The aggregate

maximum number of new shares that may be issued and treasury shares

that may be transferred is 25,000,000, including the number of shares

that can be received on the basis of special rights. The authorisation will

be valid for 18 months from the date of the AGM resolution.

Aside from the above, the Board of Directors has no current

authorisation to issue shares, convertible bonds or share options.

Changes in number of shares


	2022	2021	2020	2019	2018
Number of shares 1 January	533,735,699	533,735,699	533,735,699	533,735,699	533,735,699
Number of shares at 31 December	533,735,699	533,735,699	533,735,699	533,735,699	533,735,699

Major shareholders at 31 December 2022


	NUMBER OF SHARES	HOLDING %
Varma Mutual Pension Insurance Company	10,065,404	1.89
Ilmarinen Mutual Pension Insurance Company	8,331,000	1.56
ELO Mutual Pension Insurance Company	4,148,000	0.78
The Society of Swedish Literature in Finland	2,617,070	0.49
The State Pension Fund	2,600,000	0.49
Holding Manutas Oy	2,500,000	0.47
OP-Suomi Investment fund	2,060,190	0.39
Mandatum Life Insurance Company	1,801,493	0.34
SECURITY TRADING OY	1,750,000	0.33
Kymin Osakeyhtiön 100-vuotissäätiö	1,696,360	0.32
Nominees & Registered foreign owners	363,421,356	68.09
Others	132,744,826	24.87
Total	533,735,699	100.00


UPM FINANCIAL REPORT 2022	36

Shareholders by category at 31 December, %


	2022	2021	2020	2019	2018
Companies	2.6	2.9	2.7	2.3	2.1
Financial institutions and insurance companies	3.6	3.7	3.8	3.0	2.9
Public bodies	5.3	5.8	6.0	5.7	6.8
Non-profit organisations	4.5	4.6	4.7	4.6	4.4
Households	16.0	15.8	15.6	15.2	15.0
Non-Finnish nationals	68.1	67.2	67.1	69.1	68.7
Total	100.0	100.0	100.0	100.0	100.0

Share distribution at 31 December 2022


SIZE OF SHAREHOLDINGS	NUMBER OF SHARE- HOLDERS	% OF SHARE- HOLDERS	NUMBER OF SHARES, MILLION	% OF SHARES
1 – 100	56,083	42.47	2.4	0.5
101 – 1,000	58,198	44.07	22.2	4.2
1,001 – 10,000	16,430	12.44	43.7	8.2
10,001 – 100,000	1,233	0.93	29.7	5.6
100,001 –	123	0.09	74.4	13.9
Total	132,067	100.00	172.5	32.3
Nominee-registered			361.2	67.7
Not registered as book entry units			—	0.0
Total			533.7	100.0

Under the provisions of the Securities Markets Act, changes in holdings must be disclosed when the holding reaches, exceeds or falls below 5, 10, 15, 20, 25, 30,

50 or 66.7 (2/3) per cent of the voting rights or the number of shares of the company. The stock exchange releases on notifications of changes in holdings pursuant

to Chapter 9, Section 5 of the Securities Market Act are available in UPM website upm.com/investors.


UPM FINANCIAL REPORT 2022	37

Adjusted share related indicators


	2022	2021	2020	2019	2018	2017	2016	2015	2014	2013
Earnings per share (EPS), EUR	2.86	2.41	1.05	1.99	2.80	1.82	1.65	1.72	0.96	0.63
Comparable EPS, EUR	3.09	2.22	1.37	2.07	2.24	1.88	1.65	1.38	1.20	0.91
Equity per share, EUR	23.44	20.34	17.53	18.87	18.36	16.24	15.43	14.89	14.02	14.08
Dividend per share, EUR 1)	1.50	1.30	1.30	1.30	1.30	1.15	0.95	0.75	0.70	0.60
Dividend to earnings ratio, %	52.4	53.9	123.7	65.4	46.4	63.0	57.6	43.6	72.9	95.2
Dividend to operating cash flow, %	158	55	69	38	52	42	30	34	30	43
Dividend to comparable EPS, %	49	59	95	63	58	61	58	54	58	66
Effective dividend yield, %	4.3	3.9	4.3	4.2	5.9	4.4	4.1	4.4	5.1	4.9
P/E ratio	12.2	13.9	29.0	15.5	7.9	14.2	14.1	10.0	14.2	19.5
Operating cash flow per share, EUR	0.95	2.34	1.89	3.46	2.49	2.74	3.16	2.22	2.33	1.39
Dividend distribution, EURm 1)	800	693	693	693	693	613	507	400	373	317
Share price at 31 Dec., EUR	34.93	33.46	30.47	30.91	22.15	25.91	23.34	17.23	13.62	12.28
Lowest quotation, EUR	24.85	29.11	20.31	21.10	21.69	20.82	13.71	13.19	10.07	7.30
Highest quotation, EUR	37.14	35.37	31.50	31.49	34.70	26.69	23.41	19.26	13.99	13.02
Average quotation for the period, EUR	32.50	32.15	26.09	25.73	28.86	23.89	17.51	16.37	12.26	9.42
Market capitalisation, EURm	18,629	17,845	16,250	16,485	11,813	13,818	12,452	9,192	7,266	6,497
Shares traded, EURm 2)	9,680	8,435	9,921	9,695	9,980	8,460	6,749	7,469	6,233	5,308
Shares traded (1,000)	297,879	262,377	380,237	376,801	345,822	354,053	385,355	456,168	508,318	563,382
Shares traded, % of all shares	55.9	49.2	71.3	70.7	64.8	66.4	72.2	85.5	95.6	106.7
Number of shares, average (1,000)	533,324	533,324	533,324	533,324	533,324	533,415	533,505	533,505	531,574	527,818
Number of shares at the end of period (1,000)	533,736	533,736	533,736	533,736	533,736	533,736	533,736	533,736	533,736	529,302
of which treasury shares (1,000)	412	412	412	412	412	412	231	231	231	231

1) 2022 proposal

2) Trading on the Nasdaq Helsinki Main Market. Treasury shares bought by the company are included in shares traded.

The definitions of adjusted share related indicators are described below


SHARE RELATED INDICATORS	DEFINITION
Earnings per share (EPS), EUR	Profit for the period attributable to owners of the parent company divided by adjusted average number of shares during the period excluding treasury shares.
Comparable EPS, EUR	Earnings per share calculated in accordance with IFRS excluding items affecting comparability and their tax impact.
Equity per share, EUR	Equity attributable to the owners of the parent company in relation to the adjusted number of shares at the end of period.
Dividend per share, EUR	Dividend distribution divided by adjusted number of shares at the end of period.
Dividend to earnings ratio, %	Dividend per share as a percentage of earnings per share.
Dividend to operating cash flow, %	Dividend per share as a percentage of operating cash flow per share.
Dividend to comparable EPS, %	Dividend per share as a percentage of comparable earnings per share
Effective dividend yield, %	Adjusted dividend per share as a percentage of adjusted share price at 31.12.
P/E ratio	Adjusted share price in relation to the earnings per share.
Operating cash flow per share, EUR	Operating cash flow divided by adjusted average number of shares during the period excluding treasury shares.
Market capitalisation, EURm	Total number of shares (excluding those held as treasury shares) multiplied by the share price at the end of period.
Adjusted share price at the end of period	Share price at the end of period in relation to share issue coefficient.
Adjusted average share price	Total value of shares traded in relation to adjusted number of shares traded during the period.


UPM FINANCIAL REPORT 2022	38

Board of Directors´ proposal for the distribution of profit

The Board of Directors proposes to the Annual General Meeting

of UPM-Kymmene Corporation to be held on 12 April 2023 that an

aggregate dividend of EUR 1.50 per share be paid based on the

balance sheet to be adopted for the financial year ending 31 December

2022, and that the remaining portion of the distributable funds be

retained in the Company’s unrestricted shareholders’ equity. The Board

proposes that the dividend be paid in two instalments.

The first dividend instalment, EUR 0.75 per share, is proposed to be

paid to shareholders registered in the Company’s register of

shareholders maintained by Euroclear Finland Oy on the record date for

the first dividend instalment 14 April 2023. The Board proposes that the

payment date for the first dividend instalment would be on 21April

2023.

The second dividend instalment, EUR 0.75 per share, is proposed to

be paid to shareholders registered in the Company's register of

shareholders maintained by Euroclear Finland Oy on the record date for

the second dividend instalment 26 October 2023. The Board proposes

that the payment date for the second dividend instalment would be on 2

November 2023.

If the payment of the dividend is prevented due to applicable law,

regulation or unexpected circumstances, the Board will resolve, as soon

as practically possible, on a new record date and payment date.

On the date of the dividend proposal, 2 February 2023, the

registered number of the Company’s shares is 533,735,699.

The aforementioned number of shares includes 411,653 treasury shares

which are not entitled to dividend. As a result, the proposed dividend

would total EUR 800.0 million.

On 31 December 2022, the distributable funds of the

parent company were EUR 2,415,624,457.82. The loss of the parent

company for the period was EUR 189,734,449.30. No material

changes have taken place in respect of the Company's financial

position after the balance sheet date. In the opinion of the Board Of

Directors, the proposed distribution of profits does not risk the solvency

of the Company.

Signatures of the annual accounts and the report of the Board of Directors for the year 2022

Helsinki, 2 February 2023


Björn Wahlroos Chair	Henrik Ehrnrooth	Topi Manner


Emma FitzGerald	Jari Gustafsson	Piia-Noora Kauppi


Marjan Oudeman	Martin à Porta	Kim Wahl


Jussi Pesonen President and CEO


UPM FINANCIAL REPORT 2022	39

Financial Statements 2022


Consolidated income statement and statement of comprehensive income	41
Consolidated balance sheet	42
Consolidated statement of changes in equity	43
Consolidated cash flow statement	44
Notes to the consolidated financial statements	46


1. Basis for reporting	46	5. Capital structure	74
1.1 Corporate information	46	5.1 Capital management	74
1.2 Basis of preparation	46	5.2 Net debt	77
1.3 Consolidation principles	47	5.3 Financial assets and liabilities by category	82
1.4 Foreign currency translation	48	5.4 Financial income and expenses	85
1.5 Changes in accounting policies	48	5.5 Share capital and reserves	85

2. Business performance	49	6. Risk management	87
2.1 Business areas	49	6.1 Financial risk management	87
2.2 Sales	54	6.2 Derivatives and hedge accounting	89
2.3 Operating expenses and other operating income	55
2.4 Earnings per share and dividend	57	7. Income tax	93
		7.1 Tax on profit for the year	93
3. Employee rewards	58	7.2 Deferred tax	93
3.1 Employee costs	58
3.2 Key management personnel	58	8. Group structure	95
3.3 Share-based payments	59	8.1 Business acquisitions and disposals	95
3.4 Retirement benefit obligations	61	8.2 Principal subsidiaries and joint operations	96
		8.3 Related party transactions	98
4. Capital employed	64	8.4 Assets held for sale	98
4.1 Property, plant and equipment	65
4.2 Forest assets	67	9. Unrecognised items	98
4.3 Energy shareholdings	67	9.1 Commitments and contingencies	98
4.4 Goodwill and other intangible assets	69	9.2 Litigation	98
4.5 Provisions	71	9.3 Events after balance sheet date	99
4.6 Working capital	72
		10. Other notes	99
		10.1 Forthcoming new standards, amendments and accounting policy changes	99


Parent company accounts	100


UPM FINANCIAL REPORT 2022	40

Consolidated financial statements, IFRS

Consolidated income statement


EURm	NOTE	2022	2021
Sales	2.1, 2.2	11,720	9,814
Other operating income	2.3	231	254
Costs and expenses	2.3	-9,470	-8,104
Change in fair value of forest assets and wood harvested	4.2	12	111
Share of results of associated companies and joint ventures		4	2
Depreciation, amortisation and impairment charges	2.3, 4.1, 4.4	-522	-515
Operating profit		1,974	1,562

Exchange rate and fair value gains and losses	5.4	25	-3
Interest and other finance costs, net	5.4	-55	-12
Profit before tax		1,944	1,548

Income taxes	7.1	-388	-240
Profit for the period		1,556	1,307

Attributable to:
Owners of the parent company		1,526	1,286
Non-controlling interests	8.1	31	22
		1,556	1,307

Earnings per share for profit attributable to owners of the parent company
Basic earnings per share, EUR	2.4	2.86	2.41
Diluted earnings per share, EUR	2.4	2.86	2.41

Consolidated statement of comprehensive income


EURm	NOTE	2022	2021
Profit for the period		1,556	1,307
Other comprehensive income for the period, net of tax
Items that will not be reclassified to income statement:
Actuarial gains and losses on defined benefit plans		192	96
Changes in fair value of energy shareholdings		1,051	632
Items that may be reclassified subsequently to income statement:
Translation differences		150	337
Net investment hedge		-15	-21
Cash flow hedges		-531	-127
Other comprehensive income for the period, net of tax	7.2	847	918
Total comprehensive income for the period		2,403	2,225

Attributable to:
Owners of the parent company		2,358	2,194
Non-controlling interests		45	31
		2,403	2,225

The notes are integral part of these consolidated financial statements.


UPM FINANCIAL REPORT 2022	41

Consolidated balance sheet


EURm	NOTE	2022	2021
ASSETS
Goodwill	4.4	282	237
Other intangible assets	4.4	553	366
Property, plant and equipment	4.1	6,733	5,569
Leased assets	5.2	713	608
Forest assets	4.2	2,442	2,328
Energy shareholdings	4.3	3,652	2,579
Other non-current financial assets	5.3	70	133
Deferred tax assets	7.2	485	466
Net retirement benefit assets	3.4	1	79
Investments in associates and joint ventures		27	33
Other non-current assets		20	20
Non-current assets		14,977	12,420

Inventories	4.6	2,289	1,594
Trade and other receivables	4.6, 5.3	2,696	2,024
Other current financial assets	5.3	118	139
Income tax receivables		61	40
Cash and cash equivalents	5.1, 5.3	2,067	1,460
Current assets		7,230	5,257
Assets		22,207	17,676

EURm	NOTE	2022	2021
EQUITY AND LIABILITIES
Share capital	5.5	890	890
Treasury shares		-2	-2
Translation reserve		449	329
Other reserves	5.5	2,460	1,938
Reserve for invested non-restricted equity	5.5	1,273	1,273
Retained earnings		7,433	6,419
Equity attributable to owners of the parent company		12,502	10,846
Non-controlling interests	8.1	376	261
Equity		12,879	11,106

Deferred tax liabilities	7.2	636	596
Net retirement benefit liabilities	3.4	527	676
Provisions	4.5	134	155
Non-current debt	5.2, 5.3	4,476	2,566
Other non-current financial liabilities	5.3	103	109
Non-current liabilities		5,876	4,102

Current debt	5.2, 5.3	558	86
Trade and other payables	4.6, 5.3	2,720	2,254
Other current financial liabilities	5.3	102	95
Income tax payables		73	32
Current liabilities		3,452	2,468
Liabilities		9,329	6,570
Equity and liabilities		22,207	17,676

The notes are integral part of these consolidated financial statements.


UPM FINANCIAL REPORT 2022	42

Consolidated statement of changes in equity


EURm	SHARE CAPITAL	TREASURY SHARES	TRANS- LATION RESERVE	OTHER RESERVES	RESERVE FOR INVESTED NON- RESTRICTED EQUITY	RETAINED EARNINGS	EQUITY ATTRIBU- TABLE TO OWNERS OF THE PARENT COMPANY	NON- CONTROLLING INTERESTS	TOTAL EQUITY
Value at 1 January 2022	890	-2	329	1,938	1,273	6,419	10,846	261	11,106
Profit for the period	—	—	—	—	—	1,526	1,526	31	1,556
Translation differences	—	—	136	—	—	—	136	14	150
Cash flow hedges - reclassified to income statement, net of tax	—	—	—	376	—	—	376	—	376
Cash flow hedges - reclassified to PPE	—	—	—	25	—	—	25	2	27
Cash flow hedges - change in fair value, net of tax	—	—	—	-932	—	—	-932	-2	-934
Net investment hedge, net of tax	—	—	-15	—	—	—	-15	—	-15
Energy shareholdings - changes in fair value, net of tax	—	—	—	1,050	—	1	1,051	—	1,051
Actuarial gains and losses on defined benefit plans, net of tax	—	—	—	—	—	192	192	—	192
Total comprehensive income for the period	—	—	121	519	—	1,718	2,358	45	2,403
Share-based payments, net of tax	—	—	—	3	—	-10	-7	—	-7
Dividend distribution	—	—	—	—	—	-693	-693	-27	-721
Other items	—	—	—	—	—	-1	-1	—	-1
Contributions by non-controlling interests	—	—	—	—	—		—	98	98
Total transactions with owners for the period	—	—	—	3	—	-704	-701	70	-631
Total equity at 31 December 2022	890	-2	449	2,460	1,273	7,433	12,502	376	12,879

Value at 1 January 2021	890	-2	25	1,430	1,273	5,735	9,351	162	9,513
Profit for the period	—	—	—	—	—	1,286	1,286	22	1,307
Translation differences	—	—	325	—	—	—	325	13	337
Cash flow hedges - reclassified to income statement, net of tax	—	—	—	63	—	—	63	—	63
Cash flow hedges - reclassified to PPE	—	—	—	-14	—	—	-14	-1	-16
Cash flow hedges - change in fair value, net of tax	—	—	—	-172	—	—	-172	-2	-174
Net investment hedge, net of tax	—	—	-21	—	—	—	-21	—	-21
Energy shareholdings - changes in fair value, net of tax	—	—	—	632	—	1	632	—	632
Actuarial gains and losses on defined benefit plans, net of tax	—	—	—	—	—	96	96	—	96
Total comprehensive income for the period	—	—	304	508	—	1,382	2,194	31	2,225
Share-based payments, net of tax	—	—	—	-1	—	-6	-6	—	-6
Dividend distribution	—	—	—	—	—	-693	-693	-13	-706
Other items	—	—	—	—	—	—	—	-1	—
Contributions by non-controlling interests	—	—	—	—	—	—	—	82	82
Total transactions with owners for the period	—	—	—	-1	—	-698	-699	68	-632
Total equity at 31 December 2021	890	-2	329	1,938	1,273	6,419	10,846	261	11,106

» Refer Note 5.5 Share capital and reserves, for further information.


UPM FINANCIAL REPORT 2022	43

Consolidated cash flow statement


EURm	2022	2021
Cash flows from operating activities
Profit for the period	1,556	1,307
Adjustments 1)	35	356
Interest received	8	1
Interest paid	-43	-26
Dividends received	3	2
Other financial items, net	-52	-2
Income taxes paid 4)	-313	-275
Change in working capital 3)	-687	-115
Operating cash flow	508	1,250

Cash flows from investing activities
Capital expenditure	-1,398	-1,432
Additions to forest assets	-79	-89
Acquisition of businesses and subsidiaries, net of cash acquired	-138	0
Proceeds from sale of property, plant and equipment and intangible assets, net of tax 4)	41	17
Proceeds from sale of forest assets, net of tax 4)	7	6
Proceeds from disposal of businesses and subsidiaries and advances received	15	157
Proceeds from disposal of shares in associates and joint ventures	11	0
Proceeds from disposal of energy shareholdings	2	1
Net cash flows from net investment hedges	-47	9
Change in other non-current assets	3	6
Investing cash flow	-1,585	-1,323

Cash flows from financing activities
Proceeds from non-current debt	4,402	600
Payments of non-current debt	-2,550	-16
Lease repayments	-91	-84
Change in current liabilities	439	0
Net cash flows from derivatives	20	34
Dividends paid to owners of the parent company	-693	-693
Dividends paid to non-controlling interests	-27	-12
Contributions paid by non-controlling interests	97	82
Change in investment funds	99	-100
Other financing cash flow	-9	-5
Financing cash flow	1,687	-194

Change in cash and cash equivalents	610	-268

Cash and cash equivalents at the beginning of the period	1,460	1,720
Exchange rate effect on cash and cash equivalents	-3	8
Change in cash and cash equivalents	610	-268
Cash and cash equivalents at the end of the period	2,067	1,460


UPM FINANCIAL REPORT 2022	44

1) Adjustments


EURm	2022	2021
Change in fair value of forest assets and wood harvested	-12	-111
Share of results of associated companies and joint ventures	-4	-2
Depreciation, amortisation and impairment charges	522	515
Capital gains and losses on sale of non-current assets	-35	-146
Financial income and expenses	30	15
Income taxes	388	240
Utilised provisions	-52	-85
Non-cash changes in provisions	7	1
Other adjustments 2)	-808	-70
Total	35	356

2) 2022 other adjustments include energy hedging derivative market value payments.

3) Change in working capital


EURm	2022	2021
Inventories	-665	-271
Receivables included in working capital	-400	-445
Liabilities included in working capital	378	601
Total	-687	-115

4) Total income taxes paid in 2022 amounted to EUR 315 million (276 million). Income taxes paid related to investing activities are presented in investing cash flow.


UPM FINANCIAL REPORT 2022	45

Notes to the consolidated financial statements

The notes to the consolidated financial statements are grouped into sections based on their nature. The notes contain the relevant financial

information as well as a description of accounting policy and key estimates and judgements applied for the topics of the individual notes. All amounts

are shown in millions of euros unless otherwise stated.

1.Basis for reporting

1.1Corporate information

UPM-Kymmene Corporation (“the parent company” or “the company”)

together with its consolidated subsidiaries (“UPM” or “the group”) is a

global forest-based bioindustry group. UPM´s large product range

covers pulp, graphic and specialty papers, selfadhesive labels, wood-

based renewable diesel, electricity as well as plywood and timber

products.

UPM-Kymmene Corporation is a Finnish limited liability company,

domiciled in Helsinki in the Republic of Finland. The address of the

company’s registered office is Alvar Aallon katu 1, 00100 Helsinki,

where a copy of the consolidated financial statements can be obtained.

The parent company’s shares are publicly traded on the Nasdaq

Helsinki Main Market.

These group consolidated financial statements were authorised

for issue by the Board of Directors on 2 February 2023. According

to the Finnish Companies Act, the General Meeting of Shareholders

is entitled to decide on the adoption of the company’s financial

statements.

1.2Basis of preparation

UPM’s consolidated financial statements are prepared in accordance

with International Financial Reporting Standards as adopted by the

European Union (IFRS as adopted by the EU) and IFRIC Interpretations.

The consolidated financial statements have been prepared under

the historical cost convention, except for forest assets, energy

shareholdings and certain other financial assets and financial liabilities,

defined benefit plan assets and obligations and share-based payment

arrangements which are measured at fair value.

The consolidated financial statements are presented in millions of

euros, which is the functional and presentation currency of the parent

company. Items included in the financial statements of each group

subsidiary are measured using the currency of the primary economic

environment in which the subsidiary operates (“the functional currency”).

The amounts within parentheses refer to the preceding year, 2021.

Figures presented in these financial statements are rounded and

therefore the sum of individual figures might deviate from the presented

total figure.

In accordance with the European Single Electronic Format (ESEF)

reporting requirements, UPM has published the Board of Directors'

report and the financial statements as an XHTML file as its official

financial statements. In line with the ESEF requirements, the primary

statements of the consolidated financial statements and notes have been

labelled with XBRL tags. XBRL tags within the ESEF financial statements

are not audited. The group has also voluntarily published its financial

statements in a PDF format. The consolidated financial statements have

been prepared in two languages, of which the Finnish version is official

and the English translation is non-official.


	Accounting policies

The accounting policies applied to the consolidated financial statements

as a whole are described in this section, while the remaining accounting

policies are described in the notes to which they relate as UPM aims to

provide enhanced understanding of each financial statement area.

Further, to provide a better understanding, the accounting choices made

within the framework of the prevailing IFRS are described together with

the policy.


	Key estimates and judgements

In the process of applying the group’s accounting policies, management

has made a number of judgements and applied estimates of future

events that affect the reported amounts of assets and liabilities, the

disclosure of contingent assets and liabilities at the date of the financial

statements, and the reported amounts of revenues and expenses during

the reporting periods. Although these estimates are based on

management’s best knowledge, actual results and timing may ultimately

differ from previously made estimates.

Key estimates and judgement which are material to the reported

results and financial position are presented in the following notes.


KEY ESTIMATES AND JUDGEMENTS	NOTE
Valuation of forest assets	4.2 Forest assets
Fair value determination of energy shareholdings	4.3 Energy shareholdings
Impairment of property, plant and equipment	4.1 Property, plant and equipment
Impairment of goodwill and other intangible assets	4.4 Goodwill and other intangible assets
Pension and other post-employment benefits	3.4 Retirement benefit obligations
Income taxes	7. Income tax
Environmental provisions	4.5 Provisions
Legal contingencies	9.2 Litigation


UPM FINANCIAL REPORT 2022	46


	Financial risks

UPM is exposed to a variety of financial risks as a result of its business

activities including currency risk, interest rate risk, commodity price risk,

credit risk, capital risk and liquidity risk. Risk management related to

financial activities is carried out by UPM’s central treasury department,

Treasury and Risk Management, under policies approved by the Board

of Directors. Financial risks are described in the relevant notes as

described below.


FINANCIAL RISK	NOTE
Credit risk	4.6 Working capital
Liquidity and refinancing risk	5.1 Capital management
Interest rate risk	6.1 Financial risk management
Foreign exchange risk	6.1 Financial risk management
Electricity price risk	6.1 Financial risk management
Financial counterparty risk	6.2 Derivatives and hedge accounting

Impact of COVID-19 on the financial statements

The impact of COVID-19 on UPM financial statements has been

relatively limited. The group uses estimates and makes significant

judgements when valuating certain assets and liabilities, including

energy shareholdings, forest assets, retirement benefit obligations and

provisions. The group has assessed the impact of COVID-19 to balance

sheet items by considering indicators of impairment of goodwill and

other intangible assets, recoverable amount of property, plant and

equipment, recoverability of deferred tax assets, valuation of inventories,

and collectability of trade receivables. The expectations of future cash

flows, discount rates and other significant valuation inputs were revised

to reflect changed economic environment. Based on these assessments,

no significant adjustments to the carrying amounts of said assets were

made due to COVID-19. However, the increased uncertainty in the

economic environment can lead to significant adjustments to the carrying

amount of assets.

The group expects that it will continue to operate and meet its

liabilities as they fall due. UPM has a strong financial position. Net debt

in the balance sheet amounted to EUR 2,374 million on 31 December

2022. Cash, investment funds, and unused committed credit facilities

amounted to EUR 6.4 billion. The facilities and UPM's outstanding debt

have no financial covenants.

Accounting implications of the effects of the Russia's war in

Ukraine

The group has assessed the balance sheet impact of Russia´s war in

Ukraine and the related sanctions imposed on Russia, by considering

indicators of impairment of goodwill and other intangible assets,

recoverable amount of property, plant and equipment, recoverability of

deferred tax assets, valuation of inventories, and collectability of trade

receivables. The expectations of future cash flows have been revised to

reflect changed economic environment.

Due to the significant uncertainties related to operations in Russia

and Ukraine, UPM recognised a write off of all operating assets and

uninsured receivables locating or relating to operations in these

countries in Q1 2022. Impairment of fixed assets, inventories and other

receivables amounting to EUR 95 million was reported as items affecting

comparability. In addition, in Q1 the group increased the general

provision for expected credit losses on trade receivables by EUR 17

million, which is impacting comparable EBIT. At the end of 2022, the

impairment was EUR 80 million and the credit loss provision was EUR 8

million.

For the time being, UPM businesses have suspended deliveries to

Russia as well as wood sourcing in and from Russia. UPM has also

suspended the UPM Chudovo plywood mill operations following

carefully the legislation in Russia and with due consideration of local

employees, customers, and stakeholders.

The group expects that it will continue to operate and meet its

liabilities as they fall due. » Refer Note 2.1 Business Areas and Note 4.6

Working capital for financial information on implications of Russia's

war in Ukraine.

1.3Consolidation principles

Subsidiaries

UPM’s consolidated financial statements include the financial statements

of the parent company, UPM-Kymmene Corporation, and subsidiaries

controlled by UPM. All group entities apply consistently UPM’s

accounting policies. All intercompany transactions, receivables,

liabilities and unrealised profits, as well as intragroup profit

distributions, are eliminated. Unrealised losses are also eliminated unless

the transaction provides evidence of an impairment of the transferred

asset.

Joint operations

A joint operation is a joint arrangement whereby the parties that have

joint control of the arrangement have rights to the assets, and

obligations for the liabilities, relating to the arrangement. Joint control is

a contractually agreed sharing of control of an arrangement, which

exists only when decisions about the relevant activities require the

unanimous consent of the parties sharing control.

UPM’s share in joint operations is recognised in the consolidated

balance sheet through recognition of the group’s own assets and

liabilities and revenues and expenses in the arrangement together

with UPM’s proportionate share in the joint assets, liabilities and joint

income and expenses. The proportionate share of realised and

unrealised gains and losses arising from intragroup transactions

between UPM and its joint operations is eliminated.

Associates and joint ventures

Associates are entities over which the group has significant influence but

no control. Significant influence is the power to participate in the

financial and operating policy decisions without the power to control or

jointly control those policies. Joint ventures are joint arrangements where

the group has joint control with other parties and the parties have rights

to the arrangement’s net assets.

Interests in associates and joint ventures are accounted for using

the equity method of accounting and are initially recognised at cost.

Associates and joint ventures follow the group accounting policies for

consolidation purpose.

Non-controlling interests

The profit or loss attributable to owners of the parent company and non-

controlling interests is presented on the face of the income statement.

Non-controlling interests are presented in the consolidated balance sheet

within equity, separately from equity attributable to owners of the parent

company.

Transactions with non-controlling interests are treated as transactions

with equity owners of the group. For purchases from non-controlling

interests, the difference between consideration paid and the acquired

share of the carrying value of the subsidiary’s net assets is recorded in


UPM FINANCIAL REPORT 2022	47

equity. Gains or losses of disposals to non-controlling interests are also

recorded in equity, net of transaction costs.

1.4Foreign currency translation

Foreign currency transactions are translated into the functional currency

using the exchange rate prevailing at the date of transaction.

Receivables and liabilities denominated in foreign currencies

outstanding on the balance sheet date are translated into the functional

currency using the balance sheet date exchange rate. Foreign exchange

gains and losses resulting from the settlement of such transactions and

from the translation at year-end exchange rates of monetary assets and

liabilities denominated in foreign currencies are recognised in the

income statement, except when recognised in other comprehensive

income as qualifying cash flow hedges and qualifying net investment

hedges.

UPM records foreign exchange differences relating to ordinary

business operations within the appropriate line items above operating

profit and those relating to financial items are presented separately as a

net amount in finance costs.

Income and expenses of subsidiaries that have a functional currency

different from euro are translated into euros at quarterly average

exchange rates. Assets and liabilities of subsidiaries are translated at the

closing rate at the balance sheet date. All resulting translation

differences are recognised as a separate component in other

comprehensive income. On consolidation, exchange differences arising

from the translation of net investment in foreign operations and other

currency instruments designated as hedges of such investments, are

recognised in other comprehensive income. When a foreign entity is

partially disposed of, sold or liquidated, translation differences accrued

in equity are recognised in the income statement as part of the gain or

loss on sale/liquidation.

1.5Changes in accounting policies

The group has reviewed IFRS standard amendments effective on periods

starting 1 January 2022. The amendments effective as of 1 January

2022 did not have any impact on the group's financial statements.

Change in the composition of reportable segments

The group has changed its reportable segments composition by moving

the UPM Biofuels business into Other Operations on 1 January 2022.

UPM has formed a new business unit by combining UPM Biofuels,

UPM Biochemicals, UPM Biomedicals and UPM Biocomposites

businesses. The aim is to speed up business growth and to leverage the

capabilities and competences across projects efficiently. This unit has

inherited the name UPM Biorefining and is reported as part of Other

operations. UPM Pulp and UPM Timber priorly reported under UPM

Biorefining are reported as UPM Fibres business area from 1 January

2022.

Following the change, Other Operations include UPM Forest, UPM

Biofuels, UPM Biochemicals, UPM Biomedicals and UPM Biocomposites

businesses as well as group services. The change has impacted KPIs of

UPM Biorefining (1.1.2022 UPM Fibres) reportable segment and Other

Operations. The comparative periods have been restated according to

the new reporting principles. The reporting change has no impact on

group financial result or balance sheet.

UPM Biorefining (1.1.2022 UPM Fibres)


2021	UPM Biorefining as published	UPM Fibres restated
Sales EURm	2,945	2,794
Comparable EBITDA, EURm	1,016	961
% of sales	34.5	34.4
Change in fair value of forest assets and wood harvested, EURm	-9	-9
Share of results of associated companies and joint ventures, EURm	2	2
Depreciation, amortisation and impairment charges, EURm	-191	-173
Operating profit, EURm	817	781
% of sales	27.8	27.9
Comparable EBIT, EURm	817	781
% of sales	27.8	27.9
Capital employed (average), EURm	4,437	4,277
Comparable ROCE, %	18.4	18.3

Other operations


2021	As published	Restated
Sales EURm	280	483
Comparable EBITDA, EURm	-19	36
Change in fair value of forest assets and wood harvested, EURm	120	120
Depreciation, amortisation and impairment charges, EURm	-25	-44
Operating profit, EURm	75	112
Items affecting comparability in operating profit, EURm	-1	-1
Comparable EBIT, EURm	76	113
Capital employed (average), EURm	1,992	2,152
Comparable ROCE, %	3.8	5.2


UPM FINANCIAL REPORT 2022	48

2.Business performance


Sales			Comparable EBIT			Comparable ROE
EUR	11,720	m	EUR	2,096	m	14.0	%
(EUR 9,814m)			(EUR 1,471m)			(11.7%)

2.1Business areas

UPM business portfolio consist of six competitive businesses with strong

market positions. UPM reports financial information for the following

business areas (segments): UPM Fibres, UPM Energy, UPM Raflatac,

UPM Specialty Papers, UPM Communication Papers, UPM Plywood and

Other operations. UPM has production plants in 12 countries. The

group’s most important markets are Europe, North America and Asia.


	Accounting policies

UPM business areas are reported consistently with the internal reporting

provided to UPM’s President and CEO who is responsible for allocating

resources and assessing performance of the business areas. Internal

reporting is prepared under the same basis as the consolidated

accounts. Costs, revenues, assets and liabilities are allocated to

business areas on a consistent basis. The sales transactions between

business areas are based on market prices, and they are eliminated on

consolidation.


UPM FINANCIAL REPORT 2022	49

The goods and services included in sales revenue of each business area are presented in below table:


BUSINESS AREA	DESCRIPTION AND PRODUCTS
UPM Fibres	UPM Fibres consists of UPM Pulp and UPM Timber business units. UPM Pulp offers a versatile range of responsibly-produced pulp grades suitable for a wide range of end uses such as tissue, specialty and packaging papers, graphic papers and board. UPM Timber offers certified sawn timber for joinery, packaging, furniture, planing and construction end-use segments.
UPM Energy	UPM Energy generates cost-competitive, zero-carbon electricity. Operations also include physical electricity and financial portfolio management as well as services to industrial electricity consumers and producers.
UPM Raflatac	UPM Raflatac offers innovative and sustainable self-adhesive label materials for branding and promotion, information and functional labelling in the food, beverage, personal care, pharmaceutical and logistics segments, for example.
UPM Specialty Papers	UPM Specialty Papers offers labelling and packaging materials as well as office and graphic papers for labelling, commercial siliconising, packaging, office use and printing.
UPM Communication Papers	UPM Communication Papers offers an extensive product range of sustainably produced graphic papers for advertising and publishing as well as home and office uses.
UPM Plywood	UPM Plywood offers high quality WISA® plywood and veneer products for construction, vehicle flooring, LNG shipbuilding, parquet manufacturing and other industrial applications.
Other operations	Other operations include UPM Forest, UPM Biofuels, UPM Biochemicals-, UPM Biomedicals-, UPM Biocomposites- business units and group services. UPM Forest secures competitive wood and biomass for UPM businesses and manages UPM-owned and privately-owned forests in North Europe. In addition, UPM offers forestry services to forest owners and forest investors. UPM Biofuels produces wood-based renewable diesel for all diesel engines and renewable naphtha that can be used as a biocomponent for gasoline or for replacing fossil raw materials in the petrochemical industry. UPM Biochemicals offers innovative wood-based biochemicals for replacing fossil-based raw materials in various applications such as textiles, PET bottles, packaging, cosmetics, pharmaceuticals, detergents, rubbers and resins. UPM Biomedicals is the forerunner in producing nanofibrillar cellulose for clinical and life science applications in the field of drug screening, personalised medicine, advanced cell therapies, 3D bioprinting, tissue engineering and wound care. UPM Biocomposites is a pioneer in circular economy offering composite decking materials based on both recycled consumer and industrial waste. The product range also includes composite materials made from renewable fibres and polymers to replace fossil-based plastics.

Key performance indicators and financial targets

UPM aims to grow its comparable EBIT over the long term. The group

has a portfolio of five businesses that operate on growing markets and

one business that faces declining demand. All of UPM businesses are

competitive and have strong market positions. Financial target setting,

follow up and allocation of resources in the group’s performance

management process is mainly based on the business area comparable

EBIT and comparable ROCE.

UPM presents comparable performance measures to reflect the

underlying business performance and to enhance comparability

from period to period. However, the comparable performance measures

used by management should not be considered in isolation as a

substitute for measures of performance in accordance with IFRS.

Business area information including description of items affecting

comparability is presented below.


UPM FINANCIAL REPORT 2022	50

Business area information for the year ended 31 December 2022


EURm, OR AS INDICATED	UPM FIBRES	UPM ENERGY	UPM RAFLATAC	UPM SPECIALTY PAPERS	UPM COM PAPERS	UPM PLYWOOD	OTHER OPE- RATIONS	ELIMINATI- ONS AND RECONCILI -ATIONS 2)	GROUP
External sales	2,052	343	1,981	1,423	4,792	518	608	2	11,720
Internal sales	652	390	0	254	73	21	26	-1,416	—
Total sales	2,704	734	1,982	1,677	4,866	539	634	-1,415	11,720
Comparable EBIT	570	381	214	153	619	109	81	-31	2,096
Items affecting comparability in operating profit	-53	—	-11	—	12	-65	-16	13	-122
Operating profit	517	381	203	153	631	44	64	-18	1,974
Finance costs, net									-30
Income taxes									-388
Profit for the period									1,556
Operating assets 1)	6,888	4,068	995	1,316	2,245	297	3,153	-657	18,304
Deferred tax assets									485
Other non-operating assets									82
Other financial assets									3,336
Total assets									22,207
Operating liabilities 1)	510	240	201	379	649	47	448	-596	1,878
Deferred tax liabilities									636
Other liabilities									733
Other financial liabilities									6,081
Total liabilities									9,329
Other items
Change in fair value of forest assets and wood harvested	11	—	—	—	—	—	2	—	12
Share of results of associates and joint ventures	3	—	—	—	3	—	-2	—	4
Depreciation and amortisation	-187	-7	-37	-77	-81	-23	-45	—	-457
Impairment charges	—	—	-4	—	1	-43	-19	—	-65
Capital employed, 31 December	6,378	3,827	793	937	1,596	250	2,705	1,426	17,913
Average capital employed	5,867	3,286	681	889	1,506	247	2,577	784	15,836
Capital expenditure	1,005	8	175	18	57	9	283	1	1,555
Capital expenditure, excluding acquisitions and shares	1,005	8	18	18	57	9	283	1	1,399
Comparable ROCE, %	9.7	11.6	31.5	17.2	41.1	44.3	3.1	—	13.6
Personnel, 31 December	2,688	79	3,319	1,959	6,289	1,982	921	—	17,236

1) Business area’s operating assets include goodwill, other intangible assets, property, plant and equipment, forest assets, energy shareholdings, investments in

associates and joint ventures, inventories and trade receivables. Operating liabilities include trade payables and advances received.

2) Eliminations and reconciliations include the elimination of internal sales and internal inventory margin and the changes in fair value of unrealised cash flow and

commodity hedges that are not allocated to segments.

» Refer Other financial information on Alternative performance measures, for definitions of key figures and reconciliation to measures presented in the

consolidated income statement and balance sheet prepared in accordance with IFRS.


UPM FINANCIAL REPORT 2022	51

Business area information for the year ended 31 December 2021


EURm, OR AS INDICATED	UPM FIBRES 3)	UPM ENERGY	UPM RAFLATAC	UPM SPECIALTY PAPERS	UPM COM PAPERS	UPM PLYWOOD	OTHER OPE- RATIONS 3)	ELIMINATI- ONS AND RECONCILI -ATIONS 2)	GROUP
External sales	2,092	290	1,671	1,275	3,536	471	474	5	9,814
Internal sales	702	236	—	207	41	21	9	-1,215	—
Total sales	2,794	526	1,671	1,482	3,577	492	483	-1,210	9,814
Comparable EBIT	781	270	223	135	-79	72	113	-42	1,471
Items affecting comparability in operating profit	—	—	-1	—	93	8	-1	-9	91
Operating profit	781	270	222	135	14	80	112	-50	1,562
Finance costs, net									-15
Income taxes									-240
Profit for the period									1,307
Operating assets 1)	5,393	2,932	768	1,169	1,903	333	2,666	-528	14,635
Deferred tax assets									466
Other non-operating assets									139
Other financial assets									2,436
Total assets									17,676
Operating liabilities 1)	402	140	193	265	737	43	409	-479	1,710
Deferred tax liabilities									596
Other liabilities									863
Other financial liabilities									3,400
Total liabilities									6,570
Other items
Change in fair value of forest assets and wood harvested	-9	—	—	—	—	—	120	—	111
Share of results of associates and joint ventures	2	—	—	—	—	—	—	—	2
Depreciation and amortisation	-172	-7	-36	-75	-103	-27	-43	—	-463
Impairment charges	—	—	—	—	-52	1	-1	—	-52
Capital employed, 31 December	4,991	2,792	575	903	1,165	290	2,257	785	13,759
Average capital employed	4,277	2,375	553	864	1,275	286	2,152	874	12,657
Capital expenditure	1,180	12	25	12	56	14	184	-1	1,483
Capital expenditure, excluding acquisitions and shares	1,180	7	25	12	56	14	183	-1	1,477
Comparable ROCE, %	18.3	11.4	40.2	15.6	-6.2	25.1	5.2	—	11.7
Personnel, 31 December	2,558	72	3,016	1,918	6,422	2,196	784	—	16,966

1) Business area’s operating assets include goodwill, other intangible assets, property, plant and equipment, forest assets, energy shareholdings, investments in

associates and joint ventures, inventories and trade receivables. Operating liabilities include trade payables and advances received.

2) Eliminations and reconciliations include the elimination of internal sales and the changes in fair value of unrealised cash flow and commodity hedges that are not

allocated to segments.

3) On 1 January 2022, UPM has changed its reportable segments composition by moving the UPM Biofuels business into Other Operations. The comparative periods

have been restated according to the new reporting principles. » Refer Note 1.5 Changes in accounting policies for more information.

» Refer Other financial information on Alternative performance measures, for definitions of key figures and reconciliation to measures presented in the

consolidated income statement and balance sheet prepared in accordance with IFRS.


UPM FINANCIAL REPORT 2022	52

Items affecting comparability


EURm	2022	2021
In operating profit
Impairment charges	-80	-52
Restructuring charges	-15	11
Change in fair value of unrealised cash flow and commodity hedges	13	-8
Capital gains and losses on sale of non-current assets	34	140
Other items	-74	—
Total	-122	91
Total in profit before tax	-122	91
In income taxes
Taxes related to items affecting comparability	9	12
Tax provisions	-10	—
Total	-1	12
Total in profit for the period	-122	103

In 2022, items affecting comparability include EUR 80 million

impairment charges of assets impacted by Russia´s war in Ukraine.

Other items include EUR 69 million settlement loss resulting from

replacement of a defined benefit pension plan in Finland with defined

contribution plan. Tax provisions relate to tax dispute.

In 2021, items affecting comparability relate mainly to UPM

Communication Papers and include a capital gain on sale of shares of

Shotton Mill Ltd amounting to EUR 133 million and impairment charges

of newsprint related fixed assets amounting to EUR 50 million.


	Accounting policies

Certain non-operational or non-cash valuation transactions with

significant income statement impact are considered as items affecting

comparability and reported separately to reflect the underlying business

performance and to enhance comparability from period to period. The

group applies relevant IFRS standards to such transactions.

Total assets and capital expenditure by country


	Assets		Capital expenditure
EURm	2022	2021	2022	2021
Finland	12,478	9,889	82	83
Germany	1,946	1,521	468	204
Uruguay	5,364	4,046	980	1,159
China	680	711	4	7
United States	660	412	9	5
United Kingdom	108	148	1	1
Austria	96	101	1	2
Russia	31	137	—	2
Poland	179	155	6	16
Estonia	55	51	2	1
France	37	33	1	1
Other EU countries	65	53	—	—
Other European countries	40	27	—	1
Rest of world	467	392	2	1
Total	22,207	17,676	1,555	1,483

Sales by destination country


EURm	2022	2021
Finland	973	1,046
Germany	2,032	1,395
United States	1,623	1,089
United Kingdom	676	617
China	1,165	1,058
France	501	378
Uruguay	56	63
Poland	402	336
Austria	194	151
Russia	37	194
Other EU countries	2,033	1,651
Other European countries	388	352
Rest of world	1,639	1,482
Total	11,720	9,814


UPM FINANCIAL REPORT 2022	53

2.2Sales

UPM generates revenue mainly from the sale of goods, i.e. several types

of products.

The majority of UPM’s revenue comes from sales of graphic and

specialty papers to publishers, retailers, printing houses, merchants and

distributors, converters and label stock manufacturers; sales of self-

adhesive label materials to label printers and brand owners and sales

of pulp products to tissue, board, specialty and graphic paper

producers. The revenue comprises also sales of energy, biofuels, sawn

timber and plywood products and a very limited amount of services not

related to sale of goods.

UPM sells a proportion of its products to several major customers.

The largest customer in terms of sales represented approximately 3%

(2%) of UPM’s sales and the ten largest customers represented

approximately 15% (15%) of such sales.

The group disaggregates its external sales by business area,

because this depicts how the nature, amount, timing and uncertainty of

revenue and cash flows are affected by economic factors. Sales by

UPM business areas are reported consistently with the internal reporting

provided to UPM’s President and CEO who is responsible for allocating

resources and assessing performance of the business areas. The goods

and services included in sales revenue of each business area are

presented in below tables.

» Refer Note 2.1 Business areas for information on UPM products.

Sales by business area


EURm	2022	2021	CHANGE
UPM Fibres	2,704	2,794	-3 %
UPM Energy	734	526	40 %
UPM Raflatac	1,982	1,671	19 %
UPM Specialty Papers	1,677	1,482	13 %
UPM Communication Papers	4,866	3,577	36 %
UPM Plywood	539	492	9 %
Other operations	634	483	31 %
Eliminations	-1,415	-1,210	—
Total	11,720	9,814	19 %

External sales by major products


BUSINESS AREA	BUSINESS	2022	2021
EUR million
UPM Fibres	UPM Pulp, UPM Timber	2,052	2,092
UPM Energy	UPM Energy	343	290
UPM Raflatac	UPM Raflatac	1,981	1,671
UPM Specialty Papers	UPM Specialty Papers	1,423	1,275
UPM Communication Papers	UPM Communication Papers	4,792	3,536
UPM Plywood	UPM Plywood	518	471
Other operations	UPM Forest, UPM Biofuels, UPM Biochemicals, UPM Biomedicals, UPM Biocomposites	608	474
Eliminations and reconciliations		2	5
Total		11,720	9,814


BUSINESS	PRODUCT RANGE
UPM Pulp	Softwood, birch and eucalyptus pulp
UPM Timber	Standard and special sawn timber
UPM Energy	Electricity and related services
UPM Raflatac	Self-adhesive paper and film label stock
UPM Specialty Papers	Labelling materials, release base papers, flexible packaging materials, office papers, graphic papers
UPM Communication Papers	Graphic papers for various end uses
UPM Plywood	Plywood and veneer products
UPM Forest	Wood and wood-based biomass (logs, pulpwood, chips, forest residues etc.), full forestry service offering
UPM Biofuels	Wood-based renewable diesel for transport and renewable naphtha for transport and petrochemicals
UPM Biochemicals	Lignin products for industrial use
UPM Biomedicals	Wood-based products for biomedical applications
UPM Biocomposites	UPM ProFi decking products and UPM Formi granules


UPM FINANCIAL REPORT 2022	54

Effect of a 10% change in prices on operating profit for the year


EURm	2022	2021
Papers in UPM Communication Papers	464	336
Fine and specialty papers in UPM Specialty Papers	139	126
Label materials in UPM Raflatac	198	167
Plywood	51	46
Sawn timber	48	49
Chemical pulp (net effect)	46	65

The figures above illustrate the effects on the operating profit of years

2022 and 2021 only. The biggest factor affecting UPM’s financial

results is the sales price of paper. A change in the volume delivered has

less than half of the effect of the same percentage change in sales

prices.


	Accounting policies

Sales of goods

UPM’s performance obligation in the contracts with customers consists of

providing the goods specified in the contracts. Revenue from UPM’s

product sales is recognised when performance obligation is satisfied,

which takes place at point in time when control of the good has been

transferred to the customer. In UPM’s customer contracts the transfer of

control and thus timing of revenue recognition is largely dependent on

delivery terms. Group terms of delivery are based on Incoterms 2020,

the official rules for interpretation of trade terms issued by the

International Chamber of Commerce. Major part of the sales contracts is

on delivery terms basis, whereby delivery is not a promised service to

the customer, as the control of a good does not transfer to the customer

before shipment. Revenue and the corresponding receivable are

recorded at the point in time when the product is delivered to the

destination point for terms designated Delivered Duty Paid (“DDP”) or

Delivered at Place (“DAP”). For sales transactions designated free of

carriage (FCA), revenue is recorded at the time of shipment. For sales

transactions designated as Carriage paid to (CPT) or Carriage and

Insurance Paid to (CIP), the portion of revenue relating to goods is

recorded at the time of loading and the portion of revenue relating to

delivery services over time when the service has been performed.

UPM sells energy to NordPool electricity market. Revenue is

recognised when electricity is transmissed over time.

Sales of services

UPM provides forest expertise and contracting services to woodland and

forestry owners and freight services (free space on group’s vessels sold

as freight services). Revenues from services are recorded over time when

the service has been performed. Sales of services is very limited and thus

the group does not report it separately.

Revenue recognition

The group recognises revenue as an amount equal to the price specified

in the customer contract net of any sales taxes, cash flow hedging results

of sales in foreign currency, hedges of energy sales and variable

consideration, when applicable. Variable consideration is defined as

any variability that may occur between the sales price and the amount

UPM expects to receive. The variable consideration includes mainly cash

discounts and volume rebates that encourage the customer to take

specific volumes in a given timescale. In addition, the group gives the

customers the right for purchase price refund in case the products do not

meet the quality as specified in the agreement. The amount of variable

consideration is recognised as a refund liability when some of the

amount received is expected to be refunded to the customer. Customer

rebates payable to customers in relation to sales made until the end of

the reporting period and expected quality claims are estimated using the

expected value method, and revenue is only recognised to the extent

that it is highly probable that a significant reversal will not occur. A

refund liability is included in trade and other payables.

Receivables are recognised when the goods are delivered, and the

consideration is unconditional except for the passage of time. For most

of UPM’s customer contracts the period between the transfer of goods or

services to customers and the receipt of payment is less than 12 months.

For these contracts the group has elected to use the practical expedient

not to adjust revenue for the effect of financing components.

Advance payments received from customers are recognised as

contract liability. UPM does not have any contract assets arising from

contracts with customers.

» Refer Note 4.6 Working capital for information on contract liabilities and

refund liabilities.

2.3Operating expenses and

other operating income

Operating expenses

Operating expenses excluding forest assets fair value change, wood

harvested and share of results of associates and joint ventures are

presented below.


EURm	2022	2021
Costs and expenses
Raw materials, consumables and goods	6,260	5,446
Employee costs 1)	1,181	1,094
Other operating costs and expenses 2)	1,028	670
Delivery costs and other external charges	1,001	894
Total	9,470	8,104

1) » Refer Note 3 Employee rewards, for further information.

2) Distribution of other operating costs and expense


EURm	2022	2021
Rents and lease expenses	29	25
Emission expenses 1)	70	-106
Losses on sale of non-current assets	1	0
Credit losses	9	-5
Maintenance and other operating expenses 2)	919	756
Total	1,028	670

1)Emission expenses include losses on sales of emission rights EUR 2 (gains

144) million.

2)Other operating expenses include, among others, energy as well as

expenses related to services and group’s administration.


UPM FINANCIAL REPORT 2022	55

Auditor’s fees


EURm	2022	2021
Audit fee	4.0	3.4
Audit related services	0.2	0.2
Tax services	0.3	0.4
Other services	0.1	0.2
Total	4.6	4.2

In 2022, auditor's fees include EUR 0.2 (0.2) million related to audit services,

EUR 0.0 (0.0) million related tax services and EUR 0.1 (0.2) million related to

other services paid to PwC Oy.

Research and development costs

The research and development costs included in operating expenses

were EUR 55 million (46 million) in 2022. The focus was on new

technologies and developing businesses.

Government grants

In 2022, government grants recognised as deduction of operating

expenses totalled to EUR 10 million (9 million) of which EUR 8 million

(3 million) relates to Finland. EUR 1 million (4 million) is related to

COVID relief in Austria. In addition, the group received emission rights

from governments amounting to EUR 208 million (75 million) of which

EUR 122 million (22 million) relates to Finland, EUR 74 million

(46 million) to Germany, EUR 8 million (1 million) to Austria and

EUR 4 million (5 million) to UK.

Other operating income


EURm	2022	2021
Gains on sale of non-current assets	37	147
Rental income	12	13
Emission rights received	208	75
Derivatives, non-qualifying hedges	3	-22
Exchange rate gains and losses	-47	-5
Other	17	47
Total	231	254

In 2021, gains on sale of non-current assets include an EUR 133 million gain

from the disposal of Shotton Mill LTd.

Emission rights

The group has recognised EUR 208 million (75 million) of income in

Other operating income and EUR 70 million of expense (106 million of

income) under Other operating costs and expenses relating to CO2

emissions. The liability to cover the obligation to return emission rights

amounted to EUR 53 million (39 million) and is recognised in provisions.

The emission rights recognised in intangible assets are specified below:


EURm	2022	2021
Carrying value, at 1 January	104	95
Emission rights received and purchased	231	86
Deliveries and disposals	-100	-78
Carrying value, at 31 December	235	104
Accumulated costs	236	105
Accumulated impairments	-1	-1
Carrying value, at 31 December	235	104


	Accounting policies

Research and development costs

Research and development costs are expensed as incurred, except for

certain development costs, which are capitalised as they generate future

economic benefits, and UPM can the measure the cost reliably.

Capitalised development costs are amortised on a systematic basis over

their expected useful lives, usually not exceeding five years.

Government grants

Government grants are recognised at fair value where there is a

reasonable assurance that the grant will be received and the group will

comply with the attached conditions. Government grants relating to the

purchase of property, plant and equipment are deducted from the

acquisition cost of the asset and accordingly directly reduce the annual

depreciation of the underlying asset. Other government grants are

recognised in the income statement in the period necessary to match

them with the costs they are intended to compensate. A government

grant can also become receivable by the group as compensation for

expenses incurred in a previous period. Such a grant is recognised in

profit or loss of the period in which it becomes receivable.


UPM FINANCIAL REPORT 2022	56

Other operating income

Other operating income mainly includes gains on the disposal of non-

current assets and rental income. Further, other operating income

includes foreign exchange gains and losses in respect of UPM’s normal

business activities. Gains and losses on derivatives not qualifying hedge

accounting are also recognised in other operating income.

Emission rights

The group participates in the European Emissions Trading Scheme

aimed at reducing greenhouse gas emissions. Emission rights received

from governments free of charge to emit a fixed tonnage of carbon

dioxide in a fixed period of time give rise to an intangible asset for the

emission rights, a government grant and a liability for the obligation to

deliver emission rights equal to the emissions that have been made

during the compliance period.

Emission rights are initially recognised as intangible assets based on

market value at the date of initial recognition. Emission rights are not

amortised. If the market price of emissions rights at the balance sheet

date is less than the recognised costs, any surplus emission rights that

are not required to cover actual and estimated emissions during the

financial year, are impaired to the market price.

Government grants are recognised as deferred income in the

balance sheet at the same time as emission rights and are recognised in

other operating income in the income statement, systematically, over the

compliance period to which the corresponding emission rights relate.

The liability to deliver emission rights is recognised based on actual

emissions. The emissions realised are expensed under other operating

costs and expenses in the income statement and presented as a

provision in the balance sheet. The liability is settled using emission

rights on hand, measured at the carrying amount of those emission

rights. Emission rights and associated provisions are derecognised when

disposed. Any profit or loss represents the costs of purchasing additional

rights to cover excess emissions, the sale of unused rights in the case

realised emission are under emission rights received free of charge or

the impairment of unused emission rights.

2.4Earnings per share and dividend

On 2 February 2023, UPM’s Board of Directors revised the company’s

dividend policy to be based on earnings instead of cash flow.

According to new dividend policy, the company aims to pay attractive

dividends, targeting at least half of the comparable earnings per share

over time.» Refer Note 9.3 Events after the balance sheet date.

The dividend paid in 2022 were EUR 693 million (EUR 1.30 per

share) which is 55% of the operating cash flow per share and in 2021

EUR 693 million (EUR 1.30 per share). The Board of Directors proposes

to the Annual General Meeting that a dividend of EUR 800 million,

EUR 1.50 per share, will be paid in respect of 2022. The proposed

dividend represents 49% of UPM's comparable earnings per share for

the year 2022.

Earnings per share


EURm	2022	2021
Profit attributable to owners of the parent company, EURm	1,526	1,286
Weighted average no. of shares (1,000)	533,324	533,324
Basic earnings per share, EUR	2.86	2.41
Diluted earnings per share, EUR	2.86	2.41


	Accounting policies

Earnings per share

Earnings per share (EPS) is the amount of profit for the period

attributable to each share. The basic earnings per share are computed

using the weighted average number of shares outstanding during the

period. Diluted earnings per share are computed using the weighted

average number of shares outstanding during the period plus the dilutive

effect of share options. The group did not have share-option schemes at

the end of 2022 and 2021.

Dividend

Dividend distribution to the owners of the parent company is recognised

as a liability in the group’s consolidated financial statements in the

period in which the dividends are approved by the parent company’s

shareholders.


UPM FINANCIAL REPORT 2022	57

3.Employee rewards

3.1Employee costs


EURm	2022	2021
Salaries and fees	901	877
Share-based payments	16	13
Pension and other post-employment benefits, defined benefit plans 1)	77	16
Pension costs, defined contribution plans	93	95
Other indirect employee costs 2)	94	93
Total	1,181	1,094

1) 2022 includes EUR 69 million settlement loss related to replacement of a

defined benefit pension plan in Finland with defined contribution plan.

2) Other indirect employee expenses primarily include other statutory social

expenses, excluding pension expenses.

3.2Key management personnel

The remuneration of the Chair of the Board of Directors was resolved to

be raised so that the Chair of the Board was paid an annual base fee of

EUR 200,000. The remuneration of the Deputy Chair of the Board and

the other members of the Board remained unchanged, and the Deputy

Chair of the Board was paid an annual base fee of EUR 140,000 and

other members of the Board EUR 115,000.

The annual base fee was paid in company shares and cash so that

approximately 40% of the fee was paid in the company shares

purchased on the Board members’ behalf, and the rest in cash. The

company paid any costs and transfer tax related to the purchase of the

company shares.

The Chair of Audit Committee received annual committee fee of

EUR 35,000 and Chair of Nomination and Governance Committee EUR

20,000. The remuneration of the Chair of Remuneration Committee was

resolved to be raised to EUR 27,500. The members of Audit Committee

received annual committee fee of EUR 15,000 and members of other

committees EUR 10,000. The annual committee fees were paid in cash.

In 2022, 2,489 (2,383) company shares were purchased to the

Chair, 1,742 (1,710) to the Deputy Chair and 1,431 (1,405) to other

members of the Board.

Shareholdings (no. of shares) and fees of the Board of Directors


	Shareholdings 31 December		Annual base fee (EUR 1,000)		Annual committee fee (EUR 1,000)
	2022	2021	2022	2021	2022	2021
Board members
Björn Wahlroos, Chair	273,189	270,700	200	195	20	20
Berndt Brunow, Deputy Chair 1)	—	316,462	—	140	—	10
Henrik Ehrnrooth, Deputy Chair	14,461	12,719	140	115	10	20
Emma FitzGerald	4,644	8,213	115	115	10	25
Jari Gustafsson	2,836	1,405	115	115	15	15
Piia-Noora Kauppi	24,035	22,604	115	115	10	10
Topi Manner 2)	1,431	—	115	—	10	—
Marjan Oudeman	9,594	8,163	115	115	15	15
Martin à Porta	24,844	20,413	115	115	28	10
Kim Wahl	25,949	24,518	115	115	35	35
Total	380,983	685,197	1,145	1,140	153	160

1) Berndt Brunow stepped down from the Board in 2022

2) Topi Manner was elected as a new director to the Board in 2022


UPM FINANCIAL REPORT 2022	58

Salaries and benefits paid to the President and CEO and the Group Executive Team


	President and CEO Jussi Pesonen		Other members of Group Executive Team1)
EUR 1,000	2022	2021	2022	2021
Salaries	1,153	1,093	4,140	3,958
Short-term incentives	1,309	708	2,739	2,054
Share rewards	2,997	1,902	9,347	5,979
Benefits	28	31	135	142
Total	5,486	3,734	16,361	12,132

1) 11 members in 2022 and 2021.

In 2022, costs under the Finnish statutory pension scheme for the

President and CEO amounted to EUR 458,000 (329,000) and

payments under the voluntary pension plan amounted to

EUR 1,000,000 (1,200,000).

In 2022, costs under the Finnish and German statutory pension

schemes for Group Executive Team (GET) members (excluding the

President and CEO) amounted to EUR 941,000 (860,000) and

payments under the voluntary pension plan amounted to EUR 987,000

(1,035,000).

The remuneration of the President and CEO and other members of

the Group Executive Team consists of the base salary and benefits,

short-term incentives and long-term share-based incentives.

In 2022 and 2021, the short-term incentives are based on the

company's Short-Term Incentive Plan and they are paid annually in

cash. The amount of the incentive is linked to the executive's position

and achievement of annually set targets. The maximum incentives

amount to a total of 110% of the annual base salary to the Business

Area Executives and to a total of 90% of annual base salary to the other

members of the Group Executive Team. For the President and CEO, the

maximum annual incentive amounts to 150% of the annual base salary.

The expenses recognised in income statement in respect of share-

based payments for the Group Executive Team were EUR 3.6 million

(3.8 million).

According to the service agreement, the President and CEO would

have been entitled to retire in November 2020 at the age of 60 but at

the request of the company's Board of Directors, the President and CEO

has decided to continue in his position. However, UPM’s President and

CEO Jussi Pesonen has announced that he will exercise his right to retire

from UPM during 2024.

The President and CEO has a voluntary pension benefit in addition

to the Finnish statutory pension scheme. The President and CEO's

voluntary pension benefit was arranged through a defined benefit plan

until the end of November 2020. The last contribution to the defined

benefit plan was made in 2020. Under the defined benefit plan, the

target pension was 60% of the average indexed earnings from the last

ten full calendar years of employment calculated according to the

Finnish statutory pension scheme. The income of the President and

CEO’s defined benefit pension plan in 2022 was EUR 0.5 million (1.3

million in 2021). The plan assets amounted to EUR 10.8 million (15.0

million) and the obligation amounted to EUR 9.6 million (12.8 million).

As of December 2020, the voluntary pension benefit is arranged

through a defined contribution plan. First contribution to the defined

contribution plan took place in 2021.

The retirement age of other members of the Group Executive Team is

63. Other Group Executive Team members are under defined

contribution plans.

Should the company or the President and CEO give notice of

termination of the service agreement, no severance pay will be paid in

addition to the salary for the 12-month notice period. For GET members,

the period for severance pay is 12 months, in addition to the six

months’ salary for the notice period, unless notice is given for reasons

that are solely attributable to the executive. Should a GET member give

notice of termination to the company, no severance pay will be paid in

addition to the salary for the notice period.

If there is a change of control in the company, the President and

CEO may terminate his service agreement within three months and each

GET member within one month from closing the takeover and shall

receive compensation equivalent to 24 months' base salary.

3.3Share-based payments

UPM offers rewards and recognition with an emphasis on high

performance. All UPM’s employees belong to a unified annual Short

Term Incentive (STI) scheme. In addition, UPM has two long-term

incentive schemes: the Performance Share Plan (PSP) for senior

executives and the Deferred Bonus Plan (DBP) for other key employees.

Performance Share Plan

The Performance Share Plan (PSP) is targeted at the President and CEO

and other Group Executive Team (GET) members as well as other

selected members of the management. Under the PSP 2020–2022 and

2021–2023 UPM shares are awarded based on total

shareholder return during a three-year earning period. Total shareholder

return takes into account share price appreciation and paid dividends.

The performance measures for the PSP 2022–2024 comprise the total

shareholder return (80% weighting) and selected environmental, social

and governance related (ESG) measures, which are reduction of fossil

CO2 emissions from UPM’s own combustion and purchased electricity

by 65% by 2030 from 2015 level (10% weighting), achievement of a

net positive impact on biodiversity in the Company’s own forests in

Finland (5% weighting) and achievement of gender pay equity (5%

weighting). In all plans, the earned shares are delivered after the

earning period has ended.


UPM FINANCIAL REPORT 2022	59


PERFORMANCE SHARE PLANS	PSP 2019-2021	PSP 2020-2022	PSP 2021-2023	PSP 2022-2024
No. of participants at 31 December 2022	26	25	26	28
Actual achievement	97.31%	100%	—	—
Max no. of shares to be delivered 1)
to the President and CEO	91,541	85,589	83,272	80,870
to other members of GET	285,463	272,500	275,700	295,000
to other selected members of management	180,901	160,200	176,100	189,500
Total max no. of shares to be delivered	557,905	518,289	535,072	565,370
Share delivery (year)	2022	2023	2024	2025
Earning criteria (weighting)	Total shareholder return (100%)	Total shareholder return (100%)	Total shareholder return (100%)	Total shareholder return (80%) ESG (20%)

1) For PSP 2019–2021 and PSP 2020–2022, the gross number of shares actually earned.

Deferred Bonus Plan

The Deferred Bonus Plan (DBP) is targeted at other selected key

employees and it consists of annually commencing plans. Each plan

consists of a one-year earning period and a two-year restriction period.

UPM shares are awarded based on achievement of group or group and

business area EBITDA targets. Prior to share delivery, the share rewards

earned are adjusted with dividends and other capital distributions, if

any, paid to all shareholders during the restriction period.


DEFERRED BONUS PLANS	DBP 2019	DBP 2020	DBP 2021	DBP 2022
No. of participants (at grant)	390	393	428	451
No. of participants (at 31 December 2022)	334	330	378	423
Max no. of shares to be delivered (at grant)	460,000	429,558	459,912	487,130
Estimated no. of shares to be delivered at 31 December 2022 1)	180,334	141,642	362,295	395,908
Share delivery (year)	2022	2023	2024	2025
Earning criteria	Group/Business Area EBITDA	Group/Business Area EBITDA	Group/Business Area EBITDA	Group/Business Area EBITDA

1) For DBP 2019 and DBP 2020, the gross number of shares actually earned

The indicated actuals and estimates of the share rewards under the

Performance Share Plan and the Deferred Bonus Plan represent the

gross amount of the rewards of which the applicable taxes will be

deducted before the shares are delivered to the participants.


	Accounting policies

The group’s long-term share incentive plans are recognised as equity-

settled or cash-settled share-based payment transactions depending on

the settlement. The group classifies the transactions with net settlement

features for tax obligations as equity-settled in its entirety. Shares are

valued using the market rate on the grant date. The settlement is a

combination of shares and cash. The group may obtain the necessary

shares by using its treasury shares or may purchase shares from the

market. PSP and DBP share deliveries are executed by using already

existing shares and the plans, therefore, have no dilutive effect.


UPM FINANCIAL REPORT 2022	60

3.4Retirement benefit obligations

The group operates various pension schemes in accordance with local

conditions and practices in the countries of operations. Retirement

benefits are employee benefits that are payable usually after the

termination of employment, such as pensions and post-employment

medical care.

The pension plans are generally funded through payments to

insurance companies or to trustee-administered funds or foundations and

classified as defined contribution plans or defined benefit plans.

Defined benefit assets and liabilities recognised in the balance sheet

are presented below:


	2022					2021
EURm	FINLAND	UK	GERMANY	OTHER COUN- TRIES	TOTAL	FINLAND	UK	GERMANY	OTHER COUN- TRIES	TOTAL
Present value of funded obligations	27	316	30	11	384	577	542	39	15	1,174
Fair value of plan assets	-26	-300	-2	-11	-340	-632	-565	-2	-15	-1,214
Deficit (+)/surplus (–)	0	16	27	0	44	-55	-23	36	—	-40
Present value of unfunded obligations	—	—	414	52	466	—	—	548	68	616
Net defined benefit liability (+)/ asset (–)	0	16	442	52	510	-55	-23	585	68	576
Net retirement benefit asset in the balance sheet	-1	—	—	—	-1	-56	-23	—	—	-79
Net retirement benefit liability in the balance sheet 1)	1	16	442	52	511	2	—	585	68	655

1) Net retirement benefit liability in the balance sheet includes other long-term employee benefits of EUR 16 million (21 million) in 2022.

Approximately 15% (24%) of UPM’s employees are active members

of defined benefit arrangement plans. In 2022, the most significant

defined benefit plan in Finland (UPM Sellutehtaiden eläkesäätiö) was

replaced with defined contribution arrangement. Following the

replacement, UPM's most significant defined benefit arrangements are in

the UK and in Germany. The group has defined benefit obligations also

in Austria, Holland, France, Canada and in the US.

Finland

In Finland employers are obliged to insure their employees for statutory

benefits, as determined in Employee’s Pension Act (TyEL). TyEL provides

the employee with insurance protection for old age, disability and

death.

Group's Finnish employees are mainly insured with an insurance

company and these arrangements qualify as defined contributions plans.

At the end of 2021, approximately 21% of group´s Finnish employees

were insured with TyEL foundation (UPM Sellutehtaiden eläkesäätiö), that

is classified as a defined benefit plan. In 2022, the TyEL foundation was

replaced with defined contribution arrangement. The assets and

liabilities of the plan were transferred to the insurance company and the

group recognised EUR 69 million settlement loss in the income statement.

The cash received on the settlement amounted to EUR 128 million.

In the UK, the group operates a legacy defined benefit scheme

providing benefits that are linked to the salary level near retirement age

or an earlier date of leaving service. The scheme is closed both for new

members and future accrual for old members. Part of the scheme is a

defined contribution plan and is open to all current employees. The UK

pension scheme operates under a single trust which is independent from

the group.

Germany

In Germany employees within defined benefit arrangements are entitled

to annual pensions on retirement based on their service and final salary.

All significant defined benefit plans are closed for new employees.


UPM FINANCIAL REPORT 2022	61

Present value of obligation and fair value of plan assets


	Pension and other post-employment benefits 2022			Pension and other post-employment benefits 2021
EURm	PRESENT VALUE OF OBLIGATION	FAIR VALUE OF PLAN ASSETS	NET DEFINED BENEFIT LIABILITY/ (ASSET)	PRESENT VALUE OF OBLIGATION	FAIR VALUE OF PLAN ASSETS	NET DEFINED BENEFIT LIABILITY/ (ASSET)
Carrying value, at 1 January	1,790	-1,214	576	1,859	-1,140	719
Current service cost	11	—	11	15	—	15
Past service cost	-1	—	-1	-2	—	-2
Gains and losses arising from settlements 1)	62	—	62	—	—	—
Interest expense (+) income (–)	18	-13	5	12	-9	3
Total included in employee costs (Note 3.1)	90	-13	77	25	-9	16
Actuarial gains and losses arising from changes in demographic assumptions	—	—	—	-12	—	-12
Actuarial gains and losses arising from changes in financial assumptions	-562	—	-562	-58	—	-58
Actuarial gains and losses arising from experience adjustments	50	—	50	4	—	4
Return on plan assets, excluding amounts included in interest expense (+) income (–)	—	263	263	—	-62	-62
Total remeasurement gains (–) and losses (+) included in other comprehensive income	-512	263	-249	-66	-62	-128
Benefits paid	-59	59	—	-64	64	—
Settlements paid	-431	431	—	-4	3	-1
Contributions by the employer	—	104	104	—	-33	-33
Translation differences	-29	30	1	39	-36	3
Carrying value, at 31 December	850	-340	511	1,790	-1,214	576

1) In 2022, gains and losses on settlement relate to replacement of a defined benefit pension plan in Finland with defined contribution plan.


	Actuarial risks

Defined benefit plans typically expose the group to the following

actuarial risks:

Investment risk (asset volatility)

The group is exposed to changes of assets’ values especially in the UK.

The asset values of UK arrangements constitute 88% of total asset values

in defined benefit plans within group.

Interest risk

Discount rates used in calculations are based on high-quality corporate

bond yield curves in currency in which the benefits are paid. A decrease

in the discount rate would increase the plan liabilities. The maturities of

yields are reflecting the durations of the underlying obligations. The

weighted average duration of group’s defined benefit obligation is 14

years (18 years) at the end of 2022.

Inflation risk

In the UK, the pensions in payment are tied to Retail Price Index whilst

being tied to Consumer Price Index during deferment. An increase of

0.5% in indexes will increase the liabilities by some EUR 15 million.

In Germany the pensions have to be adjusted in accordance with the

Consumer Price Index.

Salary risk

The present value of the net retirement benefit assets and liabilities is

calculated by reference to the expected future salaries of plan

participants. An increase in the salary of the plan participants would

increase the plan liabilities. In the UK, the changes in salary levels have

no impact on the funding position as all defined benefit arrangements in

the UK are closed to future accrual. In Germany, an increase of 0.5% in

expected future salaries would increase the obligation by EUR 7 million.

Life expectancy

Adjustments in mortality assumption have an impact on group’s defined

benefit obligation. An increase in life expectancy by one year will

increase the obligation in the UK by EUR 11 million and in Germany by

EUR 16 million.


UPM FINANCIAL REPORT 2022	62


	Key estimates and judgements

Several actuarial assumptions are used in calculating the expense

and liability related to the defined benefit plans. Statistical information

used may differ materially from actual results due to, among others,

changing market and economic conditions, or changes in service period

of plan participants. Significant differences in actual experience or

significant changes in assumptions may affect the future amounts of the

defined benefit obligation and future expense.

Actuarial assumptions

The weighted average principal assumptions used in the valuations of the defined benefit obligations are detailed below:


	FINLAND		UK		GERMANY		OTHER COUNTRIES
	2022	2021	2022	2021	2022	2021	2022	2021
Discount rate %	3.25	0.80	4.80	1.90	3.32	0.82	3.67	1.11
Inflation rate %	2.53	2.03	3.25	3.40	2.00	1.70	2.51	2.00
Rate of salary increase %	2.23	2.01	—	—	2.50	2.50	2.87	2.58
Rate of pension increase %	1.77	1.02	3.15	3.25	2.00	1.70	1.13	1.13
Expected average remaining working years of participants	1.9	15.3	9.5	10.1	8.0	8.2	9.0	8.9


EURm	0.5% INCREASE		0.5% DECREASE
	2022	2021	2022	2021
Discount rate %	-52	-145	57	162
Rate of salary increase %	7	13	-7	-12
Rate of pension increase %	39	81	-38	-80
Life expectancy +1 year	29	78	—	—

A negative change indicates a decrease in the defined benefit obligation.

A positive change indicates an increase in the defined benefit obligation.

Plan assets by categories at 31 December


EURm	2022		2021
	Quoted	Unquoted	Quoted	Unquoted
Money market	97	36	478	138
Debt instruments	—	77	—	253
Equity instruments	—	15	92	56
Property	—	59	—	123
Assets held by insurance companies	—	39	—	52
Other assets	—	16	—	23
Total	97	243	570	644

In 2022 plan assets include the company's ordinary shares with a fair value of

EUR 0 million (0 million).

In 2023 contributions of EUR 27 million are expected to be paid to

group’s defined benefit plans. In 2022 contributions of EUR 24 million

were paid to group’s defined benefit plans and cash received from

settlements amounted to EUR 128 million.

Sensitivity analysis of defined benefit obligations

The sensitivity analysis shows the effect of the change in assumption.

The analysis assume that all other assumptions remain unchanged.

The projected unit credit method has been applied when calculating

the obligation as well as these sensitivities.


UPM FINANCIAL REPORT 2022	63


	Accounting policies

Defined benefit pension plans

Plan benefits depend on salary and length of service. The defined

benefit obligations are calculated annually by independent actuaries

using the projected unit credit method. The present value of the defined

benefit obligation is determined by discounting the estimated future cash

outflows using interest rates of high-quality corporate bonds that are

denominated in the currency in which the benefits will be paid and that

have terms to maturity approximating the term of the related pension

liability. The liability recognised in the balance sheet in respect of

defined benefit pension plans is the present value of the defined benefit

obligation at the balance sheet date less the fair value of plan assets.

The cost of providing pensions is charged to the income statement as

employee costs so as to spread the cost over the service lives of

employees. Changes in actuarial assumptions and actuarial gains and

losses arising from experience adjustments are charged or credited in

other comprehensive income in the period in which they arise. Past

service costs and gains or losses on settlement are recognised

immediately in income when they occur.

Defined contribution plans

For defined contribution plans, contributions are paid to pension

insurance companies. Once the contributions have been paid, there are

no further payment obligations. Contributions to defined contribution

plans are charged to the income statement in the period to which the

contributions relate.

Other post-employment obligations

Some group companies provide post-employment medical and other

benefits to their retirees. The entitlement to healthcare benefits is usually

conditional on the employee remaining in service up to retirement age

and the completion of a minimum service period. The expected costs of

these benefits are accrued over the period of employment, using an

accounting methodology similar to that for defined benefit pension

plans. Valuations of these obligations are carried out by independent

qualified actuaries.

4.Capital employed

UPM’s capital employed primarily relates to its production facilities and

both forest and energy assets. UPM aims to capture growth opportunities

in its existing business portfolio and invest in projects with attractive and

sustainable returns.

Capital employed


EURm	2022	2021
Property, plant and equipment	6,733	5,569
Leased assets	713	608
Forest assets	2,442	2,328
Energy shareholdings	3,652	2,579
Goodwill and other intangible assets	834	603
Operating working capital	2,026	1,204
Provisions	-134	-155
Net retirement benefit assets and liabilities	-526	-597
Cash and cash equivalents	2,067	1,460
Other assets and liabilities	257	290
Net deferred tax assets and liabilities	-151	-130
Total	17,913	13,759


UPM FINANCIAL REPORT 2022	64

4.1Property, plant and equipment


EURm	LAND AND WATER AREAS	BUILDINGS	MACHINERY AND EQUIPMENT	OTHER TANGIBLE ASSETS	CONSTRUC- TION IN PROGRESS	TOTAL
2022
Accumulated costs	902	3,707	13,163	866	2,993	21,628
Accumulated depreciation and impairments	-2	-2,653	-11,526	-718	—	-14,895
Carrying value, at 31 December	900	1,054	1,638	148	2,993	6,733
Carrying value, at 1 January	857	848	1,674	122	2,069	5,569
Additions	5	1	7	1	1,353	1,366
Companies acquired	3	26	20	—	6	56
Disposals	-3	-4	-1	-1	—	-9
Depreciation	—	-75	-266	-17	—	-357
Impairment	—	-10	-37	-5	—	-52
Reclassifications	—	260	235	45	-540	1
Reclassifications to assets held for sale	—	—	—	—	—	—
Translation differences	39	8	4	2	106	159
Carrying value, at 31 December	900	1,054	1,638	148	2,993	6,733
2021
Accumulated costs	859	3,452	13,136	834	2,069	20,349
Accumulated depreciation and impairments	-2	-2,604	-11,462	-712	—	-14,780
Carrying value, at 31 December	857	848	1,674	122	2,069	5,569
Carrying value, at 1 January	757	846	1,864	125	724	4,316
Additions	58	2	5	2	1,448	1,515
Disposals	-3	-3	-4	-1	—	-12
Depreciation	—	-71	-280	-17	—	-368
Impairment	—	-12	-38	-1	—	-52
Reclassifications	—	60	80	9	-150	-2
Reclassifications to assets held for sale	—	-3	-11	—	—	-13
Translation differences	44	29	58	6	47	185
Carrying value, at 31 December	857	848	1,674	122	2,069	5,569

Capital expenditure

Capital expenditure, excluding acquisitions and shares, amounted to

EUR 1,399 million (1,477 million) in 2022.

In December 2021, UPM announced that it would invest EUR 10

million in the development of UPM Plywood's plywood mill in Joensuu,

Finland. The investment includes new production lines, new workspaces

and 720 square metres of completely new production space. The

investment will be completed by the end of 2023.

In January 2020, UPM announced that it would invest in a 220,000

tonnes next-generation biochemicals biorefinery in Leuna, Germany. The

facility is scheduled to start up by the end of 2023, and the total

investment estimate is EUR 750 million.

In January 2019 UPM announced that it would invest in the

refurbishment of the Kuusankoski hydropower plant in Finland. The

average annual production of the Kuusankoski plant is expected to

increase from the current 180 GWh to 195 GWh. The investment will

be completed in Q1 2023.

In July 2019, UPM announced that it would invest in a 2.1 million

tonne greenfield eucalyptus pulp mill near Paso de los Toros, central

Uruguay. Additionally, UPM will invest in port operations in Montevideo

and in local investments outside the mill fence. The mill is scheduled to

start up by the end of Q1 2023, and the total investment estimate is

USD 3.47 billion.

In October 2019 UPM announced that it would invest EUR 95 million

in a Combined-Heat-Power (CHP) plant at the UPM Nordland paper mill

in Germany. The plant was connected to the grid in Q3 2022.

Capitalised borrowing costs

In 2022, the borrowing costs capitalised as part of non-current assets

amounted to EUR 20 million (9 million). Amortisation of capitalised

borrowing costs was EUR 1 million (2 million) and the average interest

rate used 0.79% (0.73%), which represents the average costs to finance

the projects. In 2022, capitalised borrowing costs were mainly related

to the construction of the new pulp mill in Uruguay.

Government grants

In 2022, government grants recognised as deduction of non-current

assets totalled to EUR 15 million (0 million). Grants relate mainly to the

biochemicals biorefinery investment in Leuna.


UPM FINANCIAL REPORT 2022	65

Major capital commitments at 31 December


EURm	2022	2021
New biorefinery / Germany	257	315
New pulp mill / Uruguay	493	1,406
Renovation and modernisation / Kuusankoski hydro power plant	6	10
Mill development / Plywood Joensuu	4	8

Impairment losses

In 2022, impairment charges relate to property, plant and equipment

impacted by Russia´s war in Ukraine. Due to the significant uncertainties

related to operations in Russia and Ukraine, UPM recognised a write off

of all property, plant and equipment as well as operating assets and

uninsured receivables locating or relating to operations in these

countries.

In December 2021, UPM conducted an impairment test of UPM

Communication Papers fixed assets. The costs of pulp, recycled fibre,

logistics and energy increased significantly in 2021 and high

production costs continue to challenge the operations in the foreseeable

future. Fair value less cost to sell method was used in the calculation with

an inflation rate of 2.0%, negative sales growth rate of 5.4% in real

terms, and a post-tax discount rate of 6.7%. As a result of the test

calculation, UPM recognised impairment charges of EUR 50 million

related to newsprint property, plant and equipment.


	Accounting policies

Property, plant and equipment

Property, plant and equipment is stated at historical cost. Costs of assets

of acquired in business combinations are determined at fair value at the

acquisition date. Depreciation is calculated on a straightline basis and

the carrying value is adjusted for impairment charges, if any. The

carrying value of property, plant and equipment on the balance sheet

represents the cost less accumulated depreciation and any impairment

charges.

Borrowing costs incurred for the construction of any qualifying assets

are capitalised during the period of time required to complete and

prepare the asset for its intended use. Other borrowing costs are

expensed.

Major renovations are capitalised and depreciated over the useful

lives of the related asset. Ordinary expenses for repairs and

maintenance are expensed as incurred.

Gains and losses on disposals are determined by comparing the

disposal proceeds with the carrying amount and are included in other

operating income and other operating expenses, respectively.


ASSESSED USEFUL LIVES	NUMBER OF YEARS
Land, not subject to depreciation	-
Buildings	20-50
Power plants	20-30
Heavy machinery	15-20
Light machinery	10-15
Equipment	5

Impairment testing

Carrying values of individual items included in property, plant and

equipment are reviewed at each closing date to determine whether there

is any indication of impairment. The carrying value is written down

immediately to the asset’s recoverable amount if the carrying value

exceeds the estimated recoverable amount. Assets that have an

indefinite useful life are not subject to amortisation and are tested

annually for impairment. The recoverable amount is determined as

the higher of an asset’s fair value less costs to sell and its value in use.

Value in use is determined by discounting future cash flows expected to

be generated by the asset. For the purposes of assessing impairment,

assets are grouped at the lowest levels for which there are separately

identifiable cash flows (cash-generating units).

Non-financial assets, other than goodwill, that have suffered

impairment are reviewed for possible reversal of the impairment at each

reporting date. Where an impairment loss is subsequently reversed, the

carrying amount of the asset is increased to the revised estimate of its

recoverable amount, but the increased carrying amount will not exceed

the carrying amount that would have been determined had no

impairment loss been recognised for the asset in prior years.


	Key estimates and judgements

The estimations of useful lives, residual value as well as depreciation

and amortisation methods require significant management judgement

and are reviewed annually. Management makes estimates on the future

cash flows expected to result from the use of the asset and its eventual

disposal. While management believes that estimates of future cash flows

are reasonable, different assumptions regarding such cash flows could

materially affect valuations.

The long useful lives of assets, changes in estimated future sales

prices of products, changes in product costs and changes in the discount

rates used could lead to significant impairment charges.

Estimates are also made in an acquisition when determining the fair

values and remaining useful lives of acquired intangible and tangible

assets.


UPM FINANCIAL REPORT 2022	66

4.2Forest assets

UPM is both a major forest owner and a purchaser of wood. The value

of forest assets, i.e. standing trees, amounted to EUR 2,442 million

(2,328 million) at the end of 2022.


EURm	2022	2021
Carrying value, at 1 January	2,328	2,077
Additions	79	104
Disposals	-16	-6
Wood harvested	-143	-98
Net change in fair value	153	206
Translation differences	40	44
Carrying value, at 31 December	2,442	2,328

Change in fair value, change due to harvesting and gains or losses on

sale of forest assets are recognised in the income statement as a net

amount amounting to EUR 12 million (111 million) in 2022. In 2021,

the increase in fair value was impacted by increased forest growth and

higher stumpage price estimates used in valuation.

Forest assets


EURm	2022	2021
Forest assets in Finland	1,702	1,678
Forest assets in Uruguay	724	633
Forest assets in United States	15	17
Carrying value, at 31 December	2,442	2,328

Forest land

Forest land is included in land and water areas within property, plant

and equipment. » Refer Note 4.1 Property, Plant and equipment. At the

end of 2022, carrying value of own forest land amounted to EUR 736

million (EUR 694 million) and leased forest land EUR 243 million (EUR

219 million).

UPM's own and leased forest land areas are summarised in below

table.


1,000 ha	FOREST LAND	PRO- DUCTIVE FOREST LAND	FORESTED LAND
Finland	522	430	422
Uruguay	305	182	176
Uruguay, leased land	167	136	130
United States	76	55	55
Total	1,070	802	783


	Accounting policies

The group divides all its forest assets for accounting purposes into

growing forests, which are recognised as forest assets at fair value less

costs to sell, and land. Own land is stated at cost whereas leased land is

valued at cost less accumulated depreciation.

Any changes in the fair value of the growing forests are recognised

in the operating profit in the income statement. The fair value is

calculated on the basis of discounted future expected cash flows

considering existing, sustainable harvesting plans and assessments

regarding growth, timber prices, harvesting and silviculture costs and

selling expenses. The fair value of forest assets is a level 3 measure in

terms of the fair value measurement hierarchy.


	Key estimates and judgements

Fair valuation

The valuation process of forest assets is complex and requires

management estimates and judgement on assumptions that have a

significant impact on the valuation of the group’s forest assets.

Main factors used in the fair valuation of forest assets are estimates

for growth and wood harvested, stumpage prices and discount rates.

Stumpage price forecasts are based on the current prices adjusted by

the management’s estimates for the full remaining productive lives of the

trees, up to 100 years for forests in Finland and in the US and up to 10

years for plantations in Uruguay. The cash flows are adjusted by selling

costs and costs related to future risks. Felling revenues and maintenance

costs are estimated on the basis of actual costs and prices, taking into

account the group’s projection of future price and costs development. In

addition, calculations take into account future forest growth and

environmental restrictions.

The pre-tax discount rate used to determine the fair value of the

Finnish forests in 2022 was 8.0% (7.0%) and for Uruguayan plantations

11.0% (9.9%). A decrease (increase) of one percentage point in

discount rate would increase (decrease) the fair value of forest assets by

approximately EUR 257 million (270 million).

4.3Energy shareholdings

UPM is both a significant purchaser and producer of energy. The

majority of electrical and thermal energy is consumed at the group’s

pulp and paper production. The production is mainly carried out by

energy companies in which UPM has energy shareholdings. Energy

shareholdings are unlisted equity investments. UPM does not have

control or joint control of or significant influence in the said energy

companies.

The value of energy shareholdings amounted to EUR 3,652 million

(2,579 million) at the end of 2022. These energy companies supply

energy or both energy and heat to their shareholders on a cost-price

principle (Mankala-principle) which is widely applied in the Finnish

energy industry. Under the Mankala-principle energy and/or heat is

supplied to the shareholders in proportion to their ownership and each

shareholder is, pursuant to the specific stipulations of the respective

articles of association, severally responsible for its respective share of

the production costs of the energy company concerned.

In 2020, UPM issued a shareholder loan of EUR 47 million without a

maturity date to PVO. Embedded into the loan terms is a right to issue

new shares in the PVO B2 series against the remaining, unpaid nominal

of the loan starting from 2021. The loan is valued at fair value and is

taken into account as a part of the total fair valuation of the PVO B2

series valuation. In addition, in 2020 UPM issued a similar loan

commitment of EUR 123 million to PVO, where also a right to issue new

PVO B2 shares is embedded starting from 2023. The commitment

matures at the end of 2023.


UPM FINANCIAL REPORT 2022	67

Energy shareholdings


	Number of shares	Group holding %	Carrying value, EURm
			2022	2021
Pohjolan Voima Oyj, A series	8,176,191	61.24	584	473
Pohjolan Voima Oyj, B series	4,140,132	58.11	2,016	1,219
Pohjolan Voima Oyj, B2 series	2,869,819	51.22	454	424
Kemijoki Oy	179,189	7.33	442	327
Länsi-Suomen Voima Oy	10,220	51.10	150	131
Other	—	—	5	6
Carrying value, at 31 December			3,652	2,579

PVO’s share capital is divided into different series of shares. The B

and B2 series relate to PVO’s shareholdings in Teollisuuden Voima Oyj

(TVO). UPM has no direct shareholdings in TVO. TVO operates two

nuclear power plants (Olkiluoto 1 and Olkiluoto 2) and is constructing

one new nuclear power plant in Olkiluoto (Olkiluoto 3), Finland.

Olkiluoto 3 has proceeded to its test production phase. The operation of

a nuclear power plant is governed by international, European Union

and local nuclear regulatory regimes. Pursuant to the Finnish Nuclear

Liability Act, the operator of a nuclear facility has a strict third-party

liability in relation to nuclear accidents. Shareholders of power

companies that own and operate nuclear power plants are not subject to

the liability under the Nuclear Liability Act. In Finland, the future costs of

conditioning, storage and final disposal of spent fuel, management of

low and intermediate level radioactive waste as well as nuclear power

plant decommissioning are provided for by a state established fund (the

Finnish State Nuclear Waste Management Fund). The contributions to

the Fund are intended to be sufficient to cover estimated future costs.

These contributions have been taken into consideration in the fair value

of the related energy shareholdings.

Changes in energy shareholdings


EURm	2022	2021
Carrying value, at 1 January	2,579	1,936
Disposals	-2	-1
Changes in fair value recognised in other comprehensive income	1,074	643
Carrying value, at 31 December	3,652	2,579


	Accounting policies

The group has made an irrevocable election to designate its energy

shareholdings as equity instruments where changes in fair value are

recognised through OCI. The shareholdings are not held for trading as

the group has an intention to hold the investments for the long term.

Purchases of energy shareholdings are initially and subsequently

measured at fair value through other comprehensive income, net of tax if

applicable, with only dividend income recognised through profit and

loss. Initial fair value is acquisition cost including transaction costs. Upon

disposal of the investment, the accumulated fair value changes in equity

are not recycled to the income statement but instead, are reclassified

from the fair value reserve to retained earnings.

The fair value of energy shareholdings is a level 3 measure in the fair

value measurement hierarchy.


	Key estimates and judgements

Fair valuation and sensitivity

Valuation of energy shareholdings requires management’s assumptions

and estimates of a number of factors that may differ from the actual

outcome which could lead to significant adjustment to the carrying

amount of the asset. Fair value is determined on a discounted cash flow

basis and the main factors impacting the future cash flows include future

electricity prices, price trends and discount rates.

The electricity price estimate is based on future electricity forward

prices and a simulation of the Finnish area electricity price. A change of

5% in the electricity price used in the model would change the total

value of the assets by EUR 390 (370) million. The discount rate of

7.13% (5.08%) used in the valuation model is determined using the

weighted average cost of capital method. A change of 0.5% percentage

points in the discount rate would change the estimated fair value of the

assets by approximately EUR 230 (330) million.

Other uncertainties and risk factors in the value of the assets relate to

start-up schedule of the fixed price turn-key Olkiluoto 3 EPR nuclear

power plant project. UPM’s indirect share of the capacity of Olkiluoto 3

EPR is approximately 31%, through its PVO B2 shares. Changes in

regulatory environment or taxation also have an impact on the value of

the energy generating assets. For example, temporary profit tax on the

electricity sector applicable in 2023 according to Finnish Government’s

law proposal.


UPM FINANCIAL REPORT 2022	68

4.4Goodwill and other intangible assets

The group’s goodwill mainly relates to pulp operations in Finland and

Uruguay belonging to UPM Fibres business area. In 2022, the group's

goodwill and other intangible assets increased mainly as a result of the

company acquisition of AMC AG in UPM Raflatac business area. Refer

Note 8.1 Business acquisitions and disposals for further information.

Goodwill by business area


EURm	2022	2021
Pulp operations Uruguay	109	102
Pulp operations Finland	113	113
UPM Raflatac	46	7
UPM Plywood	13	13
Other operations	1	1
Total	282	237

Goodwill


EURm	2022	2021
Carrying value, at 1 January	237	229
Companies acquired	38	—
Translation differences	6	8
Carrying value, at 31 December	282	237

Other intangible assets


EURm	INTANGIBLE RIGHTS	SOFTWARE AND OTHER INTANGIBLE ASSETS	TOTAL
2022
Accumulated costs	482	614	1,096
Accumulated amortisation and impairments	-285	-494	-779
Carrying value, at 31 December	198	120	317
Carrying value, at 1 January	198	64	262
Additions	3	11	14
Companies acquired	—	62	62
Amortisation	-3	-17	-21
Reclassifications	—	—	1
Carrying value, at 31 December	198	120	317
Emission rights, carrying value 1)			235
Carrying value including emission rights, at 31 December			553
2021
Accumulated costs	477	541	1,018
Accumulated amortisation and impairments	-279	-477	-756
Carrying value, at 31 December	198	64	262
Carrying value, at 1 January	199	69	267
Additions	3	13	15
Amortisation	-3	-18	-21
Reclassifications	—	1	1
Carrying value, at 31 December	198	64	262
Emission rights, carrying value 1)			104
Carrying value including emission rights, at 31 December			366

1) » Refer Note 2.3 Operating expenses and other operating income, for further information on emission rights.


UPM FINANCIAL REPORT 2022	69

Impairment testing

Impairment tests for goodwill and water rights with indefinite life were

carried out in the fourth quarter 2022.

Water rights of hydropower plants belonging to UPM Energy and

reported in intangible rights amounted EUR 189 million at the end of

2022 and 2021. The values of water rights were tested based on

expected future cash flows of each separate hydro power plant.

Goodwill impairment tests were carried out for pulp operations in

Finland and Uruguay, belonging to UPM Fibres business area, UPM

Raflatac business area and UPM Plywood business area.

The 2022 impairment tests did not result in a recognition of any

impairment.

The basis for valuation and key assumptions used in goodwill impairment testing are summarised in below table:


CASH GENERATING UNIT	BASIS OF VALUATION	PERIOD OF FORECAST	PRE-TAX DISCOUNT RATE	KEY ASSUMPTIONS
Pulp operations Finland	Value in use	10 years + terminal value	10.84 % (2021: 9.41 %)	Pulp price, wood costs
Pulp operations Uruguay	Value in use	10 years + terminal value	9.30 % (2021: 7.50 %)	Pulp price, wood costs
UPM Raflatac	Value in use	10 years + terminal value	9.48 % (2021: 8.22 %)	Product prices, cost development
UPM Plywood	Value in use	10 years + terminal value	15.77 % (2021: 13.01 %)	Product prices, cost development

Sensitivity analyses

The sensitivity analyses of goodwill impairment tests indicate that no

reasonable change in key assumptions would result in recognition of

impairment loss against goodwill. In pulp operations the recoverable

amount is most sensitive to pulp sales prices and the cost of wood raw

material.


	Key estimates and judgements

The group’s assessment of the carrying value of goodwill and indefinite

life assets requires significant judgement.

While management believes that estimates of future cash flows are

reasonable, different assumptions are subject to change as a result of

changing economic and operational conditions. Actual cash flows could

therefore vary from estimated discounted future cash flows and could

result in changes in the recognition of impairment charges in future

periods.

Future cash flows

The review of recoverable amount for goodwill and indefinite life assets

is based on a calculation of value in use, using management projections

of future cash flows. The most important assessments and assumptions

needed in calculations are forecasts for future growth rates for the

business in question, product prices, cost development and the discount

rates applied. The group is using ten-year forecasts in calculations as

the nature of the group’s business is long-term, due to its capital

intensity, and is exposed to cyclical changes. In estimates of product

prices and cost development, forecasts prepared by management for

the next three years and estimates made for the following seven years

are taken into consideration. In addition, consideration is given to the

investment decisions made by the group as well as the profitability

programmes that the group has implemented and the views of

knowledgeable industry experts on the long-term development of

demand and prices. In the projection of cash flows UPM uses EBITDA

adjusted with cash flows not captured within EBITDA, including working

capital movements and capital expenditures.

Discount rate

The discount rate is estimated using the weighted average cost of

capital (WACC) on the calculation date adjusted for risks specific to the

business in question. The adjusted after-tax discount rate is translated to

a pre-tax rate for each cash generating unit (CGU) based on the

specific tax rate applicable to where the CGU operates.


	Accounting policies

Goodwill

Goodwill arises in connection with business combinations where the

consideration transferred exceeds the fair value of the acquired net

assets. Goodwill is recognised at cost less accumulated impairment and

is an intangible asset with an indefinite useful life. Goodwill is allocated

to the cash generating units that are expected to benefit from the

synergies from the business combination.

Intangible rights

Intangible rights include water rights of hydropower plants, patents,

licences, intellectual property and similar rights. Water rights are

deemed to have an indefinite useful life as the company has a

contractual right to exploit water resources in the energy production

of power plants.

The values of water rights are tested annually for impairment based

on expected future cash flows of each separate hydropower plant.

Other intangible rights are recognised at cost less accumulated

amortisation and impairment. Amortisation is calculated using the

straight-line method over their estimated useful lives ranging from 5 to

10 years.

Software and other intangible assets

Research expenditure is recognised as an expense as incurred.

Costs incurred in acquiring software that will contribute to future

period financial benefit are capitalised to software and systems. Other

intangible assets are recognised at cost less accumulated amortisation

and impairment. Amortisation is calculated using the straight-line

method over their estimated useful lives ranging from 3 to 5 years.


UPM FINANCIAL REPORT 2022	70

Impairment testing

Goodwill and other intangible assets that are deemed to have an

indefinite life are tested at least annually for impairment. For goodwill

impairment testing purposes the group identifies its cash-generating units

(CGUs), which is the smallest identifiable group of assets that generate

cash inflows largely independent of the cash inflows of other assets or

other groups of assets. Each CGU is no larger than a business area. The

carrying amount for the CGU includes goodwill, non-current assets and

working capital. If the balance sheet carrying amount of the CGU unit

exceeds its recoverable amount, an impairment loss is recognised.

Impairment loss is allocated first to reduce the carrying amount of any

goodwill allocated to the unit and then to other assets of the unit. An

impairment loss recognised for goodwill is not reversed in a subsequent

period.

Other intangible assets with indefinite useful lives are impaired if the

recoverable amount of the asset is less than the carrying amount. The

carrying amount of the asset is then reduced to the recoverable amount

which is the higher of the asset’s net selling price and its value in use.

4.5Provisions


EURm	RESTRUCTURING	TERMINATION	ENVIRON- MENTAL	EMISSIONS	OTHER	TOTAL
2022
Provisions at 1 January	24	36	30	39	26	155
Provisions made during the year	5	11	11	69	21	117
Provisions utilised during the year	-12	-23	-1	-54	-30	-121
Unused provisions reversed	-3	-2	-11	—	-2	-18
Reclassifications	—	—	—	—	—	—
Translation differences	—	—	—	—	—	—
Provisions at 31 December	14	22	29	53	15	134
Non-current						64
Current						70
Total						134
2021
Provisions at 1 January	52	91	29	21	28	222
Provisions made during the year	5	6	2	41	11	64
Provisions utilised during the year	-22	-53	-1	-21	-10	-107
Unused provisions reversed	-11	-8	-1	-2	-2	-25
Reclassifications	—	—	—	—	—	—
Translation differences	—	—	—	—	—	1
Provisions at 31 December	24	36	30	39	26	155
Non-current						68
Current						88
Total						155

UPM has undergone several restructuring in recent years including mill

closures and profit improvement programs. Restructuring provisions

recognised include various restructuring activities including dismantling

costs. Termination provisions include severance payments,

unemployment compensations or other arrangements for employees

leaving the company. In Finland termination provisions include also

unemployment arrangements and disability pensions. Unemployment

provisions in Finland are recognised 2–3 years before the granting and

settlement of the compensation.

At 31 December 2022 and 2021, restructuring and termination

provisions relate mainly to capacity closures and optimisation of

operations in UPM Communication Papers business area. In 2022 and

2021, there were no significant additions to restructuring and

termination provisions.

The group recognises provisions for normal environmental

remediation costs expected to be incurred in a future period upon a

removal of non-current assets and restoring industrial landfills where a

legal or constructive obligation exists. In 2022, the group recognised

EUR 8 million additional environmental provision related to prior

capacity closures in Finland.

Other provisions are mainly attributable to onerous contracts and

will be incurred over a period longer than one year. In 2022, additions

to other provisions include EUR 10 relating to tax dispute.

Provisions for emissions include liability to cover the obligation to

return emission rights. The group possesses emission rights amounting to

EUR 235 million (104 million) as intangible assets.

» Refer Note 2.3 Operating expenses and other operating income, for

further information on emission rights.


UPM FINANCIAL REPORT 2022	71


	Accounting policies

A provision is recognised when a present legal or constructive

obligation exists as a result of a past event and it is probable that an

outflow of resources will be required to settle the obligation and the

amount can be reliably estimated. Provisions are split between amounts

expected to be settled within 12 months of the balance sheet date

(current) and amounts expected to be settled later (non-current).

Restructuring and termination provisions

A restructuring provisions is recognised when a detailed plan for the

implementation of the measures is complete and when the plan has

been communicated to those who are affected. Employee termination

provisions are recognised when the group has communicated the plan

to the employees.

Environmental provisions

Environmental expenditures that relate to an existing condition

caused by past operations that do not contribute to future earnings are

expensed. The recognition of environmental provisions is based on

current interpretations of environmental laws and regulations. Such

provisions are recognised when the group has an obligation to

dismantle and remove a facility or an item of plant and to restore the

site on which it is located. The amount recognised is the present value of

the estimated future expenditure determined in accordance with

local conditions and requirements. A corresponding item of property,

plant and equipment of an amount equivalent to the provision is also

recognised and subsequently depreciated as part of the asset.

Provisions do not include any third-party recoveries.

Emission provisions

Emission obligations are recognised in provisions based on realised

emissions. The provision is measured at the carrying amounts of the

corresponding emission rights held, which are recognised as intangible

assets. In case of deficit in emission rights, the shortage is valued at

the market value at the balance sheet date.


	Key estimates and judgements

Environmental provisions

The estimates used in determining the provisions are based on the

expenses incurred for similar activities in the current reporting period

taking into account the effect of inflation, cost-base development and

discounting. Because actual outflows can differ from estimates due to

changes in laws, regulations, public expectations, technology, prices

and conditions, and can take place many years in the future, the

carrying amounts of provisions are regularly reviewed and adjusted

to take into account of any such changes. The discount rate applied

is reviewed annually.

The group aims to operate in compliance with regulations related to

the treatment of waste water, air emissions and landfill sites. However,

expected events during production processes and waste treatment could

cause material losses and additional costs in the group’s operations.

Legal contingencies

Management judgement is required in measurement and recognition of

provisions related to pending litigation. Provisions are recorded when

the group has a present legal or constructive obligation as a result of

past event, an unfavourable outcome is probable and the amount of loss

can be reasonably estimated. Due to inherent uncertain nature of

litigation, the actual losses may differ significantly from the originally

estimated provision.

» Refer Note 9.2 Litigation for details of legal contingencies.

4.6Working capital

The group defines operating working capital as inventories, trade

receivables, trade payables and advances received which are

presented separately below. The performance obligations related to

advances received are typically fulfilled within 12 months of receipt

of the advance. UPM is focusing on working capital efficiency and

targeting a sustainable and permanent reduction in operating working

capital.

Operating working capital


EURm	2022	2021
Inventories	2,289	1,594
Trade receivables	1,614	1,320
Trade payables	-1,855	-1,697
Advances received	-23	-14
Total	2,026	1,204

Inventories


EURm	2022	2021
Raw materials and consumables	1,128	794
Work in progress	11	6
Finished products and goods	1,116	769
Advance payments	34	25
Total	2,289	1,594

Trade and other receivables


EURm	2022	2021
Trade receivables
Trade receivables	1,647	1,345
Loss allowance provision	-32	-25
Total trade receivables	1,614	1,320
Prepayments and accrued income
Personnel expenses	2	5
Interest income	1	0
Energy and other excise taxes	15	20
Other items	158	175
Total prepayments and accrued income	176	200
Other receivables
VAT and other indirect taxes receivable	326	166
Cash collaterals	500	292
Other receivables	80	47
Total other receivables	906	504
Total	2,696	2,024


UPM FINANCIAL REPORT 2022	72

Trade receivables ageing


	2022			2021
EURm	TRADE RECEIVABLES	LOSS ALLOWANCE PROVISION	TRADE RECEIVABLES, NET OF PROVISION	TRADE RECEIVABLES	LOSS ALLOWANCE PROVISION	TRADE RECEIVABLES, NET OF PROVISION
Undue	1,471	-1	1,470	1,005	-5	1,000
Past due up to 30 days	114	-1	114	314	-1	313
Past due 31-90 days	19	-3	16	6	-1	5
Past due over 90 days	42	-28	14	20	-19	2
Total	1,647	-32	1,614	1,345	-25	1,320

Trade and other payables


EURm	2022	2021
Accrued expenses and deferred income
Personnel expenses	184	191
Interest expenses	21	9
Indirect taxes	17	13
Customer rebates	130	119
Customer claims	7	6
Other items	169	111
Total accrued expenses and deferred income	528	449
Advances received	23	14
Trade payables	1,855	1,697
Other current liabilities	314	94
Total	2,720	2,254


	Operational credit risk

Operational credit risk is defined as the risk where UPM is not able to

collect the payments for its receivables. The group has a credit policy in

place and the exposure to credit risk is monitored on an ongoing basis.

Outstanding trade receivables, days of sales outstanding (DSO) and

overdue trade receivables are followed on monthly basis. Potential

concentrations of credit risk with respect to trade and other receivables

are limited due to the large number and the geographic dispersion of

customers. Customer credit limits are established and monitored, and

ongoing evaluations of their financial condition is performed. The group

has trade credit insurances to protect accounts receivables from

significant credit losses. In certain market areas, including Asia and

Northern Africa, measures to reduce credit risks include letters of credit,

prepayments and bank guarantees. Maximum exposure to credit risk,

without taking into account any credit enhancements, is the carrying

amount of trade and other receivables.

UPM does not have significant concentration of customer credit risk.

The ten largest customers accounted for approximately 17% (15%) of

the trade receivables as at 31 December 2022 – i.e., approximately

EUR 269 million (200 million).

In 2022, trade receivables amounting to EUR 2 million (5 million)

were subject to permanent write-off and the loss was recognised under

other costs and expenses. In accordance with the group’s accounting

policy, trade receivables are permanently written off when there is no

reasonable expectation of recovery. In addition, due to the significant

uncertainties related to operations in Russia and Ukraine, the group

increased the general provision for expected credit losses on trade

receivables, and impaired inventories and other receivables. As at

31 December 2022, the credit loss provision related to operations in

Russia was EUR 8 million, impairment related to inventories EUR 10

million and impairment related to other receivables EUR 5 million.


	Accounting policies

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost

is determined by the method most appropriate to the particular nature of

inventory, the first-in, first-out (FIFO) or weighted average cost. The cost

of finished goods and work in progress comprises raw materials, direct

labour, other direct costs and related production overheads (based on

normal operating capacity) but excludes borrowing costs. Net realisable

value is the estimated selling price in the ordinary course of business,

less the costs of completion and selling expenses. If the net realisable

value is lower than cost, a valuation allowance is established for

inventory obsolescence.

Trade and other receivables

Trade receivables arising from selling goods and services in the normal

course of business are recognised initially at transaction price and

subsequently at amortised cost less loss allowance provision. No

element of financing is deemed present as the sales are made with a

credit term of 14–60 days, which is consistent with market practice.

The group applies the IFRS 9 simplified approach to measuring

expected credit losses which uses a lifetime expected loss allowance for

all trade receivables. The group has recognised two types of provisions

for trade receivables – a general provision for lifetime expected credit

losses and a provision for specified individual trade receivables, both of

which are charged to the income statement. The group uses a provision

matrix for estimating lifetime expected credit losses where trade

receivables are segregated by businesses. The provision matrix is based

on historical observed default rates, adjusted by forward looking

information. It takes into account trade credit insurances, payment

profile of customers and the factor that as debts get older they are more

likely not to be paid. Additionally, the group recognises a provision

individually for outstanding trade receivables where specific debtor

information is available. In these cases there must be objective evidence

that the group will not be able to collect all amounts due according to

the original terms of the receivables.

Trade receivables are permanently written off when there is no

reasonable expectation of recovery. The customer entering into

bankruptcy or liquidation proceedings or finalising such proceedings, or

entering into debt-restructuring are considered indicators that the trade

receivables are no longer expected to be recovered. Subsequent


UPM FINANCIAL REPORT 2022	73

recoveries of amounts previously written off are credited to the income

statement. The carrying amount of trade receivables approximates to

their fair value due to the short-term nature of the receivables.

Other receivables consist mainly of cash collaterals pledged for

commodity contracts and interest rate futures. The fair value equals to

the amount of cash pledged as collateral. The cash collaterals cover the

counterparties' losses in case UPM is unable to meet its obligations.

Trade and other payables

Trade payables arise from purchase of inventories, fixed assets and

goods and services in the ordinary course of business from UPM’s

suppliers. Trade and other payables are classified as current liabilities if

they are due to be settled within the normal operating cycle of the

business or within 12 months from the balance sheet date. Trade

payables are recognised initially at fair value and subsequently at

amortised cost using the effective interest method. The carrying amount

of trade payables approximates to their fair value due to the short-term

nature of the payables.

The group is recognising refund liability for expected volume and

other discounts arising from contracts with customers. Customer rebates

include mainly volume discounts and are recognised as equal to an

amount which is most likely to be paid to the customer. The carrying

amount of expected customer rebates is updated at each reporting date,

using the latest forecast data available.

Customer claims relating to quality complaints are accounted for as

revenue related refund liability. Expected customer claims are estimated

based on historical data and the amount of refund liability is updated at

each reporting date. Customer claims and customer rebates are

typically expected to realise within the next 12 months.

Advances received are recognised as contract liability until the

performance obligation is fulfilled.

5.Capital structure

UPM has a strong cash flow and industry-leading balance sheet that

mitigates risks and enables value-enhancing strategic actions.


Net debt			Free cash flow
EUR	2,374	m	EUR	-1,077	m
(EUR 647m)			(EUR -74m)

5.1Capital management

UPM’s objective for managing capital comprising of net debt and total

equity is to ensure maintenance of flexible capital structure to enable the

ability to operate in capital markets and maintain optimal returns to

shareholders. The group manages its financing activities, debt portfolio

and financial resources via various policies that are designed to ensure

optimum financing arrangements minimising simultaneously financial

expenses and refinancing risk and optimising liquidity. Borrowing

activities are centralised to the parent to the extent possible and cash

resources are distributed within the group by the central treasury

department.

UPM targets a net debt to EBITDA ratio of approximately 2 times or

less.

UPM’s capital


EURm	2022	2021
Equity attributable to owners of the parent company	12,502	10,846
Non-controlling interest	376	261
Total equity	12,879	11,106
Non-current debt	4,476	2,566
Current debt	558	86
Total debt	5,034	2,652
Total capitalisation	17,913	13,759
Total debt	5,034	2,652
Less: Interest-bearing financial assets and investment funds	2,660	2,006
Net debt	2,374	647
Gearing ratio, % 1)	18	6
Net debt to EBITDA 1)	0.94	0.35

1) Refer » Other financial information on Alternative performance measures.


	Liquidity and refinancing risk

Under all circumstances, UPM seeks to maintain adequate liquidity,

which depends on a number of factors, such as the availability of cash

flows from operations and access to additional debt and equity

financing. UPM aims to ensure sufficient liquidity by means of efficient

cash management and restricting financial investments to investment

types that can readily be converted into cash and by keeping a

sufficient amount of unused committed credit lines or cash as a reserve.

UPM aims to minimise refinancing risks by ensuring a balanced loan

portfolio maturing schedule and sufficiently long maturities. The average

loan maturity at 31 December 2022 was 4.6 years (7.3 years).

Liquidity and refinancing


EURm	2022	2021
Cash at bank	1,632	1,313
Cash equivalents	434	146
Investment funds	1	100
Committed credit lines	5,709	909
of which used	-1,378	—
Loan commitments	-123	-123
Used uncommitted credit lines	-444	-2
Long-term loan repayment cash flow	-94	-77
Liquidity	5,738	2,267

Cash and cash equivalents comprise cash in hand, deposits held at

banks and with original maturities of three months or less. Investment

funds comprise fund investments with a redemption period of less than

12 months. Commercial papers and utilized bank overdrafts are

included in used uncommitted credit lines and presented within current

debt in the balance sheet. In 2022 or 2021, no impairment and no

expected credit losses were recognised in profit or loss for loan

receivables or cash and cash equivalents.


UPM FINANCIAL REPORT 2022	74

Maturity table of debt at the end of 2022


EURm	2023	2024	2025	2026	2027	2028+	TOTAL
Bonds	—	—	—	—	352	1,750	2,102
Loans from financial institutions	9	1,001	337	34	134	99	1,613
Lease liabilities	84	75	80	49	36	343	668
Other loans	1	—	—	—	—	151	152
Current loans	444	—	—	—	—	—	444
Principal payments	538	1,076	417	83	521	2,343	4,978
Interest payments	70	69	66	63	61	128	458

The difference between the above nominal values and carrying value of total debt arise from fair value adjustments and discounting decreasing

carrying value by EUR 80 million and other non-cash adjustments decreasing carrying value by EUR 24 million.

Maturity table of debt at the end of 2021


EURm	2022	2023	2024	2025	2026	2027+	TOTAL
Bonds	—	—	—	—	—	1,581	1,581
Loans from financial institutions	6	8	19	34	31	122	219
Lease liabilities	70	69	62	67	31	275	574
Other loans	1	—	—	—	—	163	164
Current loans	2	—	—	—	—	—	2
Principal payments	79	76	81	101	62	2,141	2,540
Interest payments	45	45	44	44	43	107	328

The difference between the above nominal values and carrying value of total debt arise from fair value adjustments increasing carrying value

by EUR 104 million and other non-cash adjustments decreasing carrying value by EUR 22 million.


UPM FINANCIAL REPORT 2022	75

Maturity table of derivatives included in net debt and guarantees at the end of 2022


EURm	2023	2024	2025	2026	2027	2028+	TOTAL
Net settled interest rate swaps
Net inflow	3	6	8	9	9	—	35
Net outflow	-24	-28	-26	-25	-25	-25	-153
Gross settled derivatives
Gross currency swaps
Total inflow	7	7	7	7	7	160	197
Total outflow	-7	-7	-6	-6	-6	-175	-208
Forward foreign exchange contracts
Total inflow	625	—	—	—	—	—	625
Total outflow	-623	—	—	—	—	—	-623
Guarantees	2	—	—	—	—	—	2

Maturity table of derivatives included in net debt and guarantees at the end of 2021


EURm	2022	2023	2024	2025	2026	2027+	TOTAL
Net settled interest rate swaps
Net inflow	20	16	14	14	14	14	92
Net outflow	—	-1	-3	-4	-5	-11	-25
Gross settled derivatives
Gross currency swaps
Total inflow	7	7	7	7	7	178	213
Total outflow	-1	-1	-2	-2	-2	-171	-178
Forward foreign exchange contracts
Total inflow	574	—	—	—	—	—	574
Total outflow	-574	—	—	—	—	—	-574
Guarantees	2	—	—	—	—	—	2


UPM FINANCIAL REPORT 2022	76

5.2Net debt

Net debt is defined as the total of current and non-current debt less cash

and cash equivalents and interest-bearing current and non-current

financial assets. In 2022, net debt increased by EUR 1,728 million. Net

debt totalled EUR 2,374 million (647 million) at the end of 2022. Net

debt has been impacted by energy hedging derivative market value

payments, which are driven by the increase in energy futures prices and

volatility in the energy markets

In October 2020 UPM established a EUR 3 billion Euro Medium

Term Note (EMTN) programme and launched a Green Finance

Framework. The independent second opinion concerning the framework

was provided by CICERO Shades of Green. UPM’s framework was

rated with the highest-grade, CICERO Dark Green.

In May 2022, UPM successfully issued its third Green Bond

under its EMTN (Euro Medium Term Note) programme and

Green Finance Framework. The EUR 500 million bond matures

in May 2029 and pays a fixed coupon of 2.25%. There are no

financial covenants connected to this or the previously issued

bonds. The net proceeds from the bonds are used for financing

and/or refinancing Eligible Projects and Assets under UPM’s

Green Finance Framework. All issued euro bonds are listed on

the Irish Stock Exchange plc, trading as Euronext Dublin.

Net debt


EURm	2022	2021
Bonds	1,974	1,624
Loans from financial institutions	1,604	213
Lease liabilities	583	504
Derivatives	137	23
Other loans	179	201
Non-current debt	4,476	2,566
Repayments of non-current debt	9	7
Repayments of lease liabilities	84	70
Derivatives	24	8
Other liabilities	441	2
Current debt	558	86
Total debt	5,034	2,652
Loan receivables	4	4
Derivatives	61	126
Other receivables	19	19
Non-current interest-bearing assets	84	148
Loan receivables	0	3
Derivatives	9	4
Other receivables	500	292
Investment funds	1	100
Cash and cash equivalents	2,067	1,460
Current interest-bearing assets	2,576	1,858
Total interest-bearing assets	2,660	2,006
Net debt	2,374	647


	Accounting policies

Debt

Debt comprising of bonds, bank and pension loans, lease liabilities and

other loans is recognised initially at fair value, net of transaction costs

and subsequently measured at amortised cost using the effective interest

method. Any difference between proceeds (net of transaction costs) and

the redemption value is recognised in the income statement over the

estimated life of the borrowing. UPM classifies debt as non-current

unless due for settlement within a year. Most of the debt is hedged in a

fair value hedge relationship as described in » Note 6.1 Financial risk

management.


UPM FINANCIAL REPORT 2022	77

Change in net debt 2022


	Reported in financing activities in cash flow statement
EURm	NON- CURRENT LOANS INCL. REPAYMENTS	LEASE LIABILITIES	CURRENT LOANS	NET DERIVA- TIVES	INVEST- MENT FUNDS	OTHER FINANCIAL ASSETS	CASH AND CASH EQUIVALENTS	NET DEBT
Carrying value, at 1 January	2,046	574	2	-99	-100	-317	-1,460	647
Change in net debt, cash
Proceeds from non-current debt	4,402	—	—	—	—	—	—	4,402
Payments of non-current debt	-2,550	—	—	—	—	—	—	-2,550
Lease repayments	—	-91	—	—	—	—	—	-91
Change in current liabilities	—	—	439	—	—	—	—	439
Net cash flows from derivatives	—	—	—	20	—	—	—	20
Transaction costs and discounts in operating cash flow	-5	—	—	—	—	—	—	-5
Change in other financial assets in operating cash flow	—	—	—	—	—	-208	—	-208
Change in other financial assets in investing cash flow	—	—	—	—	—	2	—	2
Change in investment funds	—	—	—	—	99	—	—	99
Change in cash and cash equivalents	—	—	—	—	—	—	-610	-610
	1,847	-91	439	20	99	-206	-610	1,499
Change in net debt, non-cash
Companies acquired	22	—	—	—	—	—	—	22
New contracts and subsequent additions	—	171	—	—	—	—	—	171
Lease liability reassessments	—	-5	—	—	—	—	—	-5
Fair value gains and losses	-180	—	—	169	—	—	—	-11
Exchange gains and losses	28	18	—	—	—	—	3	49
Effective interest rate adjustment	3	—	—	—	—	—	—	3
	-127	184	—	169	—	—	3	229
Carrying value, at 31 December	3,766	668	441	90	-1	-523	-2,067	2,374


UPM FINANCIAL REPORT 2022	78

Change in net debt 2021


	Reported in financing activities in cash flow statement
EURm	NON- CURRENT LOANS INCL. REPAYMENT S	LEASE LIABILITIES	CURRENT LOANS	NET DERIVA- TIVES	INVEST- MENT FUNDS	OTHER FINANCIAL ASSETS	CASH AND CASH EQUIVALENTS	NET DEBT
Carrying value, at 1 January	1,489	544	2	-161	—	-97	-1,720	56
Change in net debt, cash
Proceeds from non-current debt	600	—	—	—	—	—	—	600
Payments of non-current debt	-16	—	—	—	—	—	—	-16
Lease repayments	—	-84	—	—	—	—	—	-84
Change in current liabilities	—	—	—	—	—	—	—	—
Net cash flows from derivatives	—	—	—	34	—	—	—	34
Transaction costs and discounts in operating cash flow	-7	—	—	—	—	—	—	-7
Change in other financial assets in operating cash flow	—	—	—	—	—	-224	—	-224
Change in other financial assets in investing cash flow	—	—	—	—	—	5	—	5
Change in investment funds	—	—	—	—	-100	—	—	-100
Change in cash and cash equivalents	—	—	—	—	—	—	268	268
	577	-84	—	34	-100	-219	268	476
Change in net debt, non-cash
New contracts and subsequent additions	10	93	—	—	—	—	—	103
Lease liability reassessments	—	1	—	—	—	—	—	1
Fair value gains and losses	-53	—	—	28	—	—	—	-25
Exchange gains and losses	21	21	—	—	—	—	-8	33
Effective interest rate adjustment	3	—	—	—	—	—	—	3
	-20	115	—	28	—	—	-8	114
Carrying value, at 31 December	2,046	574	2	-99	-100	-317	-1,460	647


UPM FINANCIAL REPORT 2022	79

Free cash flow

Free cash flow is primarily a liquidity measure. It is an important

indicator of UPM’s overall operational performance as it reflects the

cash generated from operations after investing activities.


EURm	2022	2021
Operating cash flow	508	1,250
Investing cash flow	-1,585	-1,323
Free cash flow	-1,077	-74
Dividends paid to owners of the parent company	-693	-693
Dividends paid to non-controlling interests	-27	-12
Contributions paid by non-controlling interests	97	82
Other financing cash flow	-9	-5
Transaction costs and discounts in operating cash flow	5	7
Change in other financial assets in operating cash flow	208	224
Change in other financial assets in investing cash flow	-2	-5
Change in net debt, cash	1,499	476
Change in net debt, non-cash	229	114
Change in net debt	1,728	590
Opening net debt	647	56
Closing net debt	2,374	647

Bonds


FIXED RATE PERIOD	INTEREST RATE, %	CURRENCY	NOMINAL VALUE ISSUED, MILLION	CARRYING VALUE 2022 EURm	CARRYING VALUE 2021 EURm
1997-2027	7.450	USD	375	378	413
2020-2028	0.125	EUR	750	605	718
2021-2031	0.500	EUR	500	494	494
2022-2029	2.250	EUR	500	496	—
Value, at 31 December				1,974	1,624
Current portion				—	—
Non-current portion				1,974	1,624

Leases

Leases of property, plant and equipment where UPM, as a lessee,

obtains substantially all of the economic benefits from the use of the

identified asset and where UPM has the right to direct the use of the

identified asset, are classified as leases. Approximately 34% (36%) of

leased assets recognised on the balance sheet consists of land areas in

Uruguay, which the group uses for eucalyptus plantations.

Approximately 24% (30%) of the leased assets on the balance sheet

consist of five power plants. UPM uses the energy generated by these

plants for its own production. In addition, the group has leased one

waste water treatment plant as well as several warehouses, terminals,

offices, railcars and vessels. UPM also leases some production

machinery and equipment like forklifts and vehicles that are insignificant

to the total leased assets portfolio.

In 2022, additions to lease assets relate mainly to biochemicals

refinery utilities in Leuna and new vessels for sea transportation in

Europe. Impairment charges in 2022 relate to assets impacted by the

Russia´s war in Ukraine. Due to the significant uncertainties related to

operations in Russia and Ukraine, UPM recognised a write off of all

leased assets locating or relating to operations in these countries.

In 2022, the total cash outflow for leased assets was EUR 91 (84)

million. The expenses related to short-term leases recognised in the

income statement in 2022 amounted to EUR 3 (3) million. The group

had no significant variable lease payments in 2022.

The lease commitments for leases not commenced at year-end

31 December 2022 totalled approximately EUR 245 (409) million,

which are mostly related to long-term charter agreements, railway

service agreement in Uruguay and service agreements related waste

water treatment and other utilities in Leuna, Germany.


UPM FINANCIAL REPORT 2022	80

Changes in leased assets


	LAND AREAS	BUILDINGS	MACHINERY AND EQUIPMENT	OTHER LEASED ASSETS	ADVANCE PAYMENTS 1)	TOTAL
2022
Carrying value, at 1 January	252	264	80	8	4	608
New contracts and subsequent additions	24	18	127	—	8	178
Business acquisitions	—	—	—	—	—	—
Reassessments and disposals	8	—	-8	—	—	—
Depreciations	-16	-34	-29	—	—	-80
Impairments	—	-3	-7	-2	—	-12
Reclassifications	—	—	5	-5	—	-1
Translation differences	15	2	1	—	—	18
Carrying value, at 31 December	283	247	169	1	13	713

2021
Carrying value, at 1 January	214	245	86	12	4	561
New contracts and subsequent additions	30	47	13	5	4	98
Reassessments and disposals	4	-1	—	—	—	3
Depreciations	-13	-31	-21	-8	—	-74
Impairments	—	—	—	—	—	—
Reclassifications	—	2	—	—	-2	—
Translation differences	18	2	2	—	—	21
Carrying value, at 31 December	252	264	80	8	4	608

1) Advance payments for leases not commenced at the year end reporting date 31 December.


	Accounting policies

Leases

The group as a lessee

UPM assesses whether a contract is or contains a lease at inception of

the contract. This assessment involves the exercise of judgment about

whether it depends on a specified asset, whether UPM obtains

substantially all the economic benefits from the use of that asset, and

whether UPM has the right to direct the use of the asset.

The group recognises a leased asset and a lease liability at the lease

commencement date, except for short-term leases. UPM applies this to

all asset classes. Short-term leases are leases that, at the commencement

date, have a lease term of 12 months or less. A lease that contains a

purchase option is not a short-term lease. UPM recognises lease

payments of short-term leases as an expense on a straight-line basis

over the lease term.

The lease term is determined as the non- cancellable period of the

lease taking into consideration the options to extend and terminate if it

is reasonably certain that the group will exercise the extension option or

will not exercise the termination option. If the contract is for an indefinite

period of time and the group and the lessor both have a right to

terminate the contract within a short notice period (12 months or less)

without a significant economic penalties and termination cash

payments, the contract is considered to be a short-term.

The lease liability is recognised at the commencement date and

measured at the present value of the lease payments to be paid during

the lease term. The group uses, as a basis, discount rate implicit in the

lease and if that rate cannot be readily determined, UPM uses

incremental borrowing rate which comprises of currency and lease term-

based reference rate and specific credit spread as well as other specific

terms and conditions of a lease. Lease payments can include fixed

payments, variable payments that depend on an index or rate and

extension option payments or purchase options if it is reasonably certain

that the group will exercise them. The lease liability is subsequently

measured at amortised cost using the effective interest rate method and

remeasured (with corresponding adjustment to the related leased asset)

when there is a change in future lease payments due to renegotiation,

changes of an index or rate or reassessment of options.

Leased asset comprises the initial lease liability, initial direct costs

and the obligations to refurbish the asset, less any incentives granted by

the lessors. The leased asset is subsequently valued at cost less

accumulated depreciation and impairment losses. Remeasurement takes

place in case lease liability is remeasured and change in cash flows is

based on contract terms that have been included in the original

contract. The leased asset is depreciated over the shorter of the asset’s

useful life and the lease term. The leased asset is subject to testing for

impairment if there is an indicator for impairment, as for own assets.

The group has elected to separate non-lease components such as

service components and other variable components and account them

for as expenses, if they can be separated from the leased asset.

However, the group does not separate non-lease components from the

lease contracts of company cars.

The group does not apply portfolio approach of leases with similar

characteristics.

Leased assets are presented in the balance sheet as a separate

financial statement line item. Lease liabilities are presented as part of

non-current debt and current debt line items in the balance sheet. Lease

liabilities are part of net debt calculation of the group. Short-term lease

payments are reported as rents and lease expenses. Variable lease


UPM FINANCIAL REPORT 2022	81

payments are recognised within the operating costs and expenses

based on the nature of the payment. The interest expense on the lease

liability is recognised as a component of finance costs in income

statement. In cash flow statement, payments for the principal portion of

the lease liability are recognised as financing cash flow while payments

for interest portion of lease liability, short-term leases, and variable

amounts not included in the measurement of the lease liability, are

classified within operating cash flow.

The group as a lessor

At inception of a lease contract, the group makes an assessment

whether the lease is a finance lease or an operating lease. If the lease

transfers substantially all of the risks and rewards incidental to

ownership of the asset, it is considered to be a finance lease; if not, the

lease is considered to be an operating lease. The group has only a

minor amount of operating lease contracts, whereby the lease payments

are recognised on a straight-line basis over the term of the lease.

5.3Financial assets and liabilities by category

Financial assets and liabilities recognised in the balance sheet include

cash and cash equivalents, loans and other financial receivables,

investments in securities, trade receivables, trade payables, loans, bank

overdrafts and derivatives.

Classification of financial assets into different measurement

categories depends on the contractual cash flow characteristics and the

business model for managing the financial asset. The measurement

category of each financial asset is determined at inception. Financial

assets and liabilities are offset and the net amount reported in the

balance sheet when there is a legally enforceable right in all

circumstances to offset the recognised amounts and there is an intention

to settle on a net basis or realise the asset and settle the liability

simultaneously. Financial assets are derecognised when the rights to

receive cash flows from the financial assets have expired or have been

transferred, and the group has transferred substantially all the risks and

rewards of ownership.

Financial assets and liabilities by category at the end of 2022


EURm	FAIR VALUE THROUGH PROFIT AND LOSS	EQUITY INSTRUMENTS AT FAIR VALUE THROUGH OCI	DERIVATIVES UNDER HEDGE ACCOUNTING	FINANCIAL ASSETS AND LIABILITIES AT AMORTISED COST	TOTAL
Energy shareholdings	—	3,652	—	—	3,652
Other non-current financial assets
Loans and receivables	—	—	—	8	8
Derivatives	—	—	62	—	63
	—	—	62	8	70
Trade and other receivables	—	—	—	2,696	2,696
Other current financial assets
Derivatives	17	—	100	—	117
Investment funds	1	—	—	—	1
	18	—	100	—	118
Cash and cash equivalents	—	—	—	2,067	2,067
Total financial assets	18	3,652	162	4,771	8,602
Non-current debt
Interest-bearing liabilities	—	—	—	4,340	4,340
Derivatives	—	—	137	—	137
	—	—	137	4,340	4,476
Other non-current financial liabilities
Other liabilities 1)	—	—	—	90	90
Derivatives	—	—	13	—	13
	—	—	13	90	103
Current debt
Interest-bearing liabilities	—	—	—	534	534
Derivatives	24	—	—	—	24
	24	—	—	534	558
Trade and other payables	—	—	—	2,720	2,720
Other current financial liabilities
Derivatives	14	—	88	—	102
	14	—	88	—	102
Total financial liabilities	37	—	238	7,683	7,959

1) Consists mainly of non-current advances received and a put liability that is not estimated to mature within 12 months.


UPM FINANCIAL REPORT 2022	82

Financial assets and liabilities by category at the end of 2021


EURm	FAIR VALUE THROUGH PROFIT AND LOSS	EQUITY INSTRUMENTS AT FAIR VALUE THROUGH OCI	DERIVATIVES UNDER HEDGE ACCOUNTING	FINANCIAL ASSETS AND LIABILITIES AT AMORTISED COST	TOTAL
Energy shareholdings	—	2,579	—	—	2,579
Other non-current financial assets
Loans and receivables	—	—	—	8	8
Derivatives	—	—	126	—	126
	—	—	126	8	133
Trade and other receivables	—	—	—	2,024	2,024
Other current financial assets
Loans and receivables	—	—	—	3	3
Derivatives	13	—	23	—	36
Investment funds	100	—	—	—	100
	113	—	23	3	139
Cash and cash equivalents	—	—	—	1,460	1,460
Total financial assets	113	2,579	149	3,494	6,335
Non-current debt
Interest-bearing liabilities	—	—	—	2,543	2,543
Derivatives	—	—	23	—	23
	—	—	23	2,543	2,566
Other non-current financial liabilities
Other liabilities 1)	—	—	—	107	107
Derivatives	—	—	2	—	2
	—	—	2	107	109
Current debt
Loans	—	—	—	79	79
Derivatives	8	—	—	—	8
	8	—	—	79	86
Trade and other payables	—	—	—	2,254	2,254
Other current financial liabilities
Derivatives	12	—	83	—	95
	12	—	83	—	95
Total financial liabilities	20	—	108	4,982	5,111

1) Consists mainly of non-current advances received and a put liability that is not estimated to mature within 12 months.

The carrying amounts of financial assets and financial liabilities except for non-current loans approximate their fair value. The fair value of non-current

loans amounted to EUR 3,607 million (2,573 million) at the end of 2022. For quoted bonds, the fair values are based on the quoted market value as

of 31 December. At the end of 2022, all bonds were quoted.

For other non-current borrowings fair values are estimated using the expected contractual future payments discounted at market interest rates and

are categorised within level 2 of the fair value hierarchy.

» Refer Note 5.2 Net debt, for further information on net debt and bonds.


UPM FINANCIAL REPORT 2022	83

Fair value measurement hierarchy for financial assets and liabilities


EURm	2022				2021
	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Financial assets
Investment funds	—	1	—	1	—	100	—	100
Derivatives, non-qualifying hedges	—	17	—	17	—	13	—	13
Derivatives under hedge accounting	12	150	—	162	1	148	—	149
Energy shareholdings	—	—	3,652	3,652	—	—	2,579	2,579
Total	12	168	3,652	3,832	1	261	2,579	2,841

Financial liabilities
Derivatives, non-qualifying hedges	—	37	—	37	—	20	—	20
Derivatives under hedge accounting	46	192	—	238	6	102	—	108
Total	46	229	—	275	6	122	—	128

There have been no transfers between levels in 2022 and 2021.


	Accounting policies

Fair value through profit or loss

This category includes derivatives that do not qualify for hedge

accounting and investments funds. They are measured at fair value and

any gains or losses from subsequent measurement are recognised in the

income statement.

Equity instruments at fair value through OCI

This category includes mainly UPM’s energy shareholdings. These assets

are measured at fair value through other comprehensive income.

Financial assets at amortised cost

This category comprises loan receivables with fixed or determinable

payments that are not quoted in an active market, as well as trade and

other receivables, and cash and cash equivalents. They are included in

non-current assets unless they mature within 12 months of the balance

sheet date. Cash and cash equivalents are always classified as current

assets. Loan receivables that have a fixed maturity are measured at

amortised cost using the effective interest method. Loan receivables

without fixed maturity date are measured at amortised cost. As soon as

a loan receivables or cash and cash equivalents are originated or

purchased, a loss allowance for 12-month expected credit losses are

recognised in profit or loss. If credit risk increases significantly, full

lifetime expected credit losses are recognised in profit or loss. In the

comparison period, loan receivables were impaired if the carrying

amount exceeded the estimated recoverable amount. The credit loss

model applied to trade receivables is described in » Note 4.6 Working

capital.

Derivatives under hedge accounting

All derivatives are initially and continuously recognised at fair value in

the balance sheet. Gains and losses on remeasurement of derivatives

used for hedging purposes are recognised in accordance with the

accounting principles described in » Note 6.2 Derivatives and hedge

accounting.

Financial liabilities measured at amortised cost

This category includes debt, trade payables and other financial

liabilities. » Refer Note 5.2 Net debt, for further information.

The different levels of fair value hierarchy used in fair value estimation

are defined as follows:

Fair values under level 1

Quoted prices (unadjusted) traded in active markets for identical assets

or liabilities. Derivatives include futures and commodity forwards traded

in exchange.

Fair values under level 2

Observable inputs are used as basis for fair value calculations either

directly (prices) or indirectly (derived from prices). If all significant inputs

required to fair value an instrument are observable, the instrument is

included in level 2. For investment funds, the valuation is based on

quoted prices (unadjusted) for identical assets in markets that are not

active. For derivatives, level 2 include OTC derivatives like forward

foreign exchange contracts, foreign currency options, interest and

currency swaps and commodity swaps. Specific valuation techniques

used to value financial instruments at level 2 include the following

methods:

Interest forward rate agreements (FRA) are fair valued based

on quoted market rates on the balance sheet date. Forward foreign

exchange contracts are fair valued based on the contract forward rates

at the balance sheet date. Foreign currency options are fair valued

based on quoted market rates and market volatility rates on the balance

sheet date by using the Black&Scholes option valuation model. Interest

and currency swap instruments are fair valued as present value of the

estimated future cash flows based on observable yield curves.

Commodity swaps are fair valued based on quoted forward prices on

the balance sheet date.

An embedded derivative that is by nature a foreign currency forward

contract is valuated at market forward exchange rates and is included

in level 2. Embedded derivatives are monitored by the group and the

fair value changes are reported in other operating income in the income

statement.

Fair values under level 3

Financial assets or liabilities of which fair values are not based on

observable market data (that is, unobservable inputs) are classified

under level 3. This category include UPM’s energy shareholdings and

forest assets. Fair valuations are performed at least quarterly by

respective business areas or functions. Fair valuations are reviewed by

the group finance management and overseen by the Audit Committee.

» Refer Note 4.3 Energy shareholdings and » Note 4.2 Forest assets.


UPM FINANCIAL REPORT 2022	84

5.4Financial income and expenses


EURm	2022	2021
Exchange rate gains and losses
Derivatives	8	26
Exchange gains and losses on financial liabilities measured at amortised costs	-37	-21
Exchange gains and losses on financial assets measured at amortised costs	22	-7
Other exchange rate gains and losses	29	0
	22	-1
Fair value changes
Fair value gains and losses on derivatives designated as fair value hedges	-177	-55
Fair value adjustment of debt attributable to interest rate risk	180	53
	3	-1
Total	25	-3
Interest and other finance income and costs, net
Interest expense on lease liabilities	-14	-12
Interest expense on other financial liabilities measured at amortised cost	-49	-35
Interest income on derivatives	26	31
Interest income on loans, receivables and cash	9	1
Other financial income and expenses, net	-27	2
	-55	-12
Total	-30	-15

Net gains and losses on derivatives included in the operating profit


EURm	2022	2021
Cash flow hedges reclassified from hedging reserve	-475	-79
Non-qualifying hedges	3	-22
Total	-472	-102

Foreign exchange gains and losses in the operating profit excluding non-qualifying hedges


EURm	2022	2021
Sales	-59	6
Other operating income	-47	-5
Total	-106	1

5.5Share capital and reserves

The company has one series of shares and each share carries one vote.

There are no specific terms related to the shares. At 31 December

2022, the number of the company’s shares was 533,735,699. The

shares do not have any nominal counter value. The shares are included

within the book entry system for securities.

Share capital


	2022	2021
Number of shares (1,000)	533,736	533,736
Share capital, EURm	890	890


UPM FINANCIAL REPORT 2022	85

Treasury shares

At 31 December 2022, the company held 411,653 (411,653) of its

own shares, 0.08% (0.08%) of the total number of shares.

Reserves


EURm	2022	2021
Fair value reserve	3,062	2,012
Hedging reserve	-627	-96
Share-based payments reserve	25	21
Total other reserves	2,460	1,938
Reserve for invested non-restricted equity	1,273	1,273
Translation reserve	449	329
Total reserves	4,182	3,539

Fair value reserve

This reserve represents the cumulative net change in the fair value of

investments in equity securities comprising mainly of the fair value

change of the energy shareholdings. Amounts are recycled only within

equity upon the disposal of the asset.

Hedging reserve

This reserve comprises the cumulative net change in the fair value of the

effective portion of cash flow hedging instruments related to hedged

transactions that have not yet occurred and the cost of hedging when

recognised in OCI. Amounts are recognised in profit or loss when the

associated hedged transactions affect profit or loss or as part of the

acquisition cost of property, plant and equipment. In 2022, a gain of

EUR 5 million (9) was reclassified from the hedging reserve to other

financial income and expenses as a result of inefficiency.

Share-based payments reserve

The share-based payments reserve is used to recognise the fair value at

the grant date of the share incentive plans, Performance Share Plan and

Deferred Bonus Plan, over their vesting period.

Reserve for invested non-restricted equity

Reserve for invested non-restricted equity includes, under the

Companies’ Act, the exercise value of shareholders’ investments

in the company unless otherwise decided by the company.

Translation reserve

This reserve includes the foreign currency differences arising from the

translation of foreign operations, and the effective result of transactions

that hedge the group’s net investments in foreign operations. There were

no reclassifications from the translation reserve to profit or loss during

the period resulting from inefficiency of net investment hedges.


	Accounting policies

Transaction costs directly relating to the issue of new shares or share

options are recognised, net of tax, in equity as a reduction in the

proceeds. Where any group company purchases the parent company’s

shares (treasury shares), the consideration paid, including any directly

attributable incremental costs (net of tax), is deducted from equity

attributable to the owners of the parent company until the shares are

cancelled or reissued. Where such shares are subsequently reissued,

any consideration received, net of any directly attributable incremental

transaction costs and the related income tax effects, is included in equity

attributable to the owners of the parent company.

Hedging reserve


EURm	CURRENCY CASH FLOW HEDGES	ELECTRICITY PURCHASE AND SALES HEDGES	COST OF HEDGING	TAX	TOTAL
2022
Hedging reserve, at 1 January	-32	-84	-1	22	-96
Amounts reclassified to profit and loss	65	401	4	-94	376
Amounts reclassified to acquisition cost of a fixed assets	24	—	1	—	25
Change in fair value of hedging instruments recognised in OCI	-15	-1,131	-15	228	-932
Hedging reserve, at 31 December	42	-814	-11	155	-627


EURm	CURRENCY CASH FLOW HEDGES	ELECTRICITY PURCHASE AND SALES HEDGES	COST OF HEDGING	TAX	TOTAL
2021
Hedging reserve, at 1 January	57	-26	-2	-1	28
Amounts reclassified to profit and loss	-5	85	-1	-16	63
Amounts reclassified to acquisition cost of a fixed assets	-14	—	—	—	-14
Change in fair value of hedging instruments recognised in OCI	-70	-143	2	38	-172
Hedging reserve, at 31 December	-32	-84	-1	22	-96


UPM FINANCIAL REPORT 2022	86

6.Risk management

6.1Financial risk management

The objective of financial risk management is to protect the group

from unfavourable changes in financial markets and thus help to

secure profitability. The objectives and limits for financing activities

are defined in the Group Treasury Policy approved by the Board of

Directors. In financial risk management various financial instruments are

used within the limits specified in the Group Treasury Policy. Only such

instruments which market value and risk profile can be continuously and

reliably monitored are used for this purpose.

Financing services are provided to the group entities and financial

risk management carried out by the central treasury department,

Treasury and Risk Management.


	Foreign exchange risk

As a consequence of the global nature of its business, UPM is exposed

to risks associated with changes in exchange rates, primarily with

respect to USD, GBP and UYU. Foreign exchange risk arises from

contracted and expected commercial future payment flows (transaction

exposure), changes in value of recognised assets and liabilities

denominated in foreign currency and changes in the value of assets and

liabilities in foreign subsidiaries (translation exposure). The objective of

foreign exchange risk management is to limit the uncertainty created by

changes in foreign exchange rates on the future value of cash flows

earnings and in the group’s balance sheet. Changing exchange rates

can also have indirect effects, such as change in relative

competitiveness between currency regions.

Transaction exposure

The group hedges transaction exposure related to highly probable future

commercial foreign currency cash flows on a rolling basis over the next

12-month period based on forecasts by the respective business areas.

Transaction risk arises from the changes in currency rates of highly

probable transactions, which are expected to take place in currencies

other than the functional currency of the entity. The group’s policy is to

hedge an average of 50% of its estimated net risk currency cash flow.

Some highly probable cash flows have been hedged for longer than 12

months ahead while deviating from the risk neutral hedging level at the

same time. At 31 December 2022, 51% (49%) of the forecast 12-month

currency flow was hedged.

The group enters into external forward contracts, which are

designated at group level as hedges of foreign exchange risk of specific

future foreign currency flows. Cash flow hedge accounting is applied

when possible. If hedge accounting is not possible, fair value changes

of the hedging instrument are recognised through profit and loss

immediately.

At the end of 2022, UPM’s estimated net risk currency flow for the

next 12 months was EUR 2,291 million (1,886 million).

The weighted hedging rate by currency against EUR were

USD 1.05, UYU 46.18 and GBP 0.87.

In addition to commercial foreign currency flow, the group has

hedged risk currency flow related to investments. Cash flow or fair value

hedge accounting is applied. At the end of 2022 the hedged net risk

currency flow was EUR 141 million (EUR 360 million).

Translation exposure

The group has several currency denominated assets and liabilities on its

balance sheet such as foreign currency bonds, loans and deposits,

group internal loans and cash in other currencies than functional

currencies. UPM aims to fully hedge this balance sheet translation

exposure, however, UPM might have unhedged balance sheet

exposures within the limits set in group Treasury Policy.

At 31 December 2022 the unhedged balance sheet exposures in net

of interest-bearing assets and liabilities amounted to EUR 8 million (9

million). Hedge accounting is not applied and all fair value changes of

hedging instruments are recognised through profit and loss immediately.

The group has also accounts receivable and payable balances

denominated in foreign currencies and UPM aims to fully hedge the net

exposure in main currencies. The nominal values of the hedging

instruments in net of accounts payable and receivable hedging were

EUR 410 million (352 million). Hedge accounting is not applied and all

fair value changes of hedging instruments are recognised through profit

and loss immediately.

UPM's net investments in foreign subsidiaries are also subject to

foreign currency translation differences. The exchange rate differences

arising from translation of foreign subsidiaries are accumulated as a

separate component of equity in the translation reserve relate mainly to

USD, CNY and GBP. Currency exposure arising from the net investment

in foreign subsidiaries is generally not hedged. However, at

31 December 2022, part of the foreign exchange risk associated with

the net investments was hedged, major ones in China and Uruguay,

and net investment hedge accounting has been applied. The average


UPM FINANCIAL REPORT 2022	87

weighted hedging rate of these hedges against EUR were China CNY

7.29 and Uruguay USD 1.08.

Derivatives used for hedging translation risks are external forward

contracts, cross currency swaps and currency options.

Foreign exchange risk sensitivity

The following table illustrates the effect to profit before tax due to

recognised balance sheet items in foreign currency and the effect to

equity arising mainly from foreign currency forwards used to hedge

foreign currency flows.


	Profit before tax		Equity
EURm	2022	2021	2022	2021
EUR strengthens by 10%
USD	1	2	97	97
GBP	—	—	17	19
UYU	—	—	-15	-12
JPY	-1	—	8	9
EUR weakens by 10%
USD	-1	-2	-97	-97
GBP	—	—	-17	-19
UYU	—	—	15	12
JPY	1	—	-8	-9

The following assumptions were made when calculating the sensitivity to

changes in the foreign exchange risk:

•Major part of non-derivative financial instruments (such as cash and

cash equivalents, trade receivables, debt and trade payables) are

either directly denominated in the functional currency or are

transferred to the functional currency through the use of derivatives

i.e. the balance sheet position is close to zero. Exchange rate

fluctuations have therefore minor or no effects on profit or loss.

•The position includes foreign currency forward contracts that hedge

commercial flows or investments and are part of the effective cash

flow hedge having an effect on equity.

•The position includes also foreign currency forward contracts that are

not part of the effective cash flow hedge having an effect on profit.

•The position excludes foreign currency denominated future cash flows

and effects of translation exposure and related hedges


	Interest rate risk

The interest-bearing liabilities and assets expose the group to interest

rate risk, namely repricing and fair value interest rate risk caused by

interest rate movements. According to the Group Treasury Policy the

interest rate exposure is defined as the difference in interest rate

sensitivity between assets and liabilities compared to a benchmark

portfolio with a 6-month duration. The total interest rate exposure is a

net debt portfolio which includes all interest bearing assets and

liabilities and derivatives that are used to hedge the aforementioned

balance sheet items. The policy sets risk limits and allowed deviation

from target net debt duration level. UPM has decided to deviate from its

policy target and extend the duration of net debt. At 31 December

2022 the duration of net debt was 45 months. The group uses interest

rate derivatives, such as interest rate swaps, interest rate futures and

cross currency swaps, to change net debt duration.

The table below shows the nominal value of interest rate position

exposed to interest rate risk in each significant currency. The position

includes all cash balances, investment funds, interest bearing assets and

liabilities and derivatives used to hedge these items. The positive/

negative position indicates a net liability/asset position by currency and

that the group is exposed to repricing and/or fair value interest risk by

interest rate movements in that currency. Table excludes leasing

transactions.

Nominal values of the group’s net debt by currency including

derivatives


EURbn	2022	2021
USD	0.5	0.4
EUR	1.8	0.2
GBP	-0.2	-0.2
Others	-0.3	-0.3
Total	1.8	0.1

Most of the interest rate derivatives hedging interest on long-term debt

meet the requirement of fair value hedge accounting.

Interest rate risk sensitivity

The following table illustrates the effect to profit before tax mainly as

a result of changes in interest expense on floating rate debt.


	Profit before tax
EURm	2022	2021
Interest rate of net debt 100 basis points higher	-24	-11
Interest rate of net debt 100 basis points lower	24	11

The following assumptions were made when calculating the sensitivity to

changes in interest rates:

•The variation of interest rate is assumed to be 100 basis points

parallel shift in applicable interest rate curves.

•In the case of fair value hedges designated for hedging interest rate

risk, the changes in the fair values of the hedged items and the

hedging instruments attributable to the interest rate movements

balance out almost completely in the income statement in the same

period. However, the possible ineffectiveness has an effect on the

profit of the year.

•Cash balances are excluded.

•Investment funds are excluded.

•Leasing transactions are excluded.

•Fixed rate debt that is measured at amortised cost and is not

designated to fair value hedge relationship is not subject to interest

rate risk sensitivity.

•Floating rate debt that are measured at amortised cost and not

designated as hedged items are included in interest rate sensitivity

analysis.

•Changes in the market interest rate of interest rate derivatives (interest

rate futures, swaps and cross currency swaps) that are not designated

as hedging instruments in hedge accounting affect the financial

income or expenses (net gains or losses from remeasurement of the

financial assets and liabilities to fair value) and are therefore

included in the income-related sensitivity analysis.


UPM FINANCIAL REPORT 2022	88


	Electricity price risk

UPM is hedging the price of electricity consumption and production.

Electricity prices rely on weather, fossil fuel and emissions allowance

prices as well as the balance of supply and demand. The group’s

sensitivity to electricity market price is dependent on the electricity

production and consumption levels and the hedging levels. The inherent

price risks arise from the daily sales and purchases of electricity from

the power market with spot prices, and the hedging objective is to

reduce the earnings volatility that arises from electricity prices.

UPM considers Nordic system and electricity price area differential

(EPAD) for Finland products perfect hedges for corresponding electricity

price risk components in Finland. The components of electricity price risk

in the Nordic power market are hedged by entering into System and

EPAD electricity derivative contracts, mostly Nasdaq Commodities

futures and bilateral forwards. System and EPAD prices are considered

as separately identifiable and reliably measurable risk components in

electricity sales and purchase contracts as well as in the hedging

instruments, as a quoted price is available. Fair value changes of

designated system and EPAD derivatives are offsetting electricity sales

and purchase price changes. The share of system component covers

approximately 80-90% and the share of EPAD component covers

10-20% of the changes in electricity sales and purchase prices.

The electricity price risk in the Central European power market is

hedged by entering into European Electricity Exchange futures. Products

used for hedging hedge the entire price risk for the underlying price

area.

The time frame hedged has historically been approximately rolling 5

years. Hedging level has been typically higher for the nearest years and

lower for the latter years. Hedging level for a certain year has

historically varied between 0-80%. UPM constantly updates its electricity

production and consumption forecasts. Hedging level is calculated

based on the most recent available information about the electricity

production and consumption forecast.

The group applies cash flow hedge accounting for the hedging

relationships when it hedges its electricity price risk. In small amounts,

the group is also trading electricity forwards and futures. As well as

hedging, proprietary trading risks are monitored on a daily basis.

Value-At-Risk levels are set to limit the maximum risk at any given time.

Cumulative maximum loss is limited by stop-loss limits.

Electricity derivatives price sensitivity

Sensitivity analysis for financial electricity derivatives is based on

position at the end of financial year. Sensitivities change over time

as the overall hedging and trading positions change. Underlying

physical positions are not included in the sensitivity analysis. Sensitivity

analysis is calculated separately for the hedge accounted and non-

hedge accounted volumes. In the analysis it is assumed that forward

quotation in Nasdaq Commodities and EEX would change EUR 5/

MWh throughout the period UPM has derivatives.


EURm	EFFECT	2022	2021
+/– EUR 5/MWh in electricity forward quotations
Effect on profit before tax	+/-	0.1	0.1
Effect on equity	+/-	93.0	115.9

6.2Derivatives and hedge accounting

The group uses financial derivatives to manage currency, interest rate

and commodity price risks.

» Refer Note 6.1 Financial risk management.


	Accounting policies

All derivatives are initially and continuously recognised at fair value in

the balance sheet. The fair value gain or loss is recognised through the

income statement or other comprehensive income depending on

whether the derivative is designated as a hedging instrument, and on

the nature of the item being hedged. Certain derivatives are designated

at inception either hedges of the fair value of recognised assets or

liabilities or a firm commitment (fair value hedge), hedges of highly

probable forecasted transactions (cash flow hedge), or hedges of net

investments in foreign subsidiaries with other than the EUR as their

functional currency (net investment hedge). Derivative fair values on the

balance sheet are classified as non-current when the remaining maturity

is more than 12 months and as current when the remaining maturity is

less than 12 months.

For hedge accounting purposes, UPM documents the relationship

between the hedging instruments and hedged items, as well as the risk

management objective and strategy for undertaking various hedge

transactions at the inception date. This process includes linking all

derivatives designated as hedges to specific assets and liabilities or to

specific firm commitments or forecast transactions. The group also

documents its assessment, both at the hedge inception and on an on-

going basis, as to whether the hedge is highly effective in offsetting

changes in fair values or cash flows of the hedged items.

Certain derivatives, while considered to be economical hedges for

UPM’s financial risk management purposes, do not qualify for hedge

accounting. Such derivatives are recognised at fair value through the

income statement in other operating income or under financial items.

Cash flow hedges

The effective portion of changes in the fair value of derivatives that are

designated and qualify as cash flow hedges is recognised in other

comprehensive income. Cost of hedging, meaning forward points of

derivative forward contracts accounted as cash flow hedges, is

recognised as a part of the hedging reserve. Amounts deferred in equity

are transferred to the income statement and classified as income or

expense in the same period as that in which the hedged item affects the

income statement (for example, when the forecast external sale to the

group that is hedged takes place).

When the forecasted transaction that is hedged results in the

recognition of a fixed asset, gains and losses previously deferred in

equity are transferred from equity and included in the initial

measurement of the acquisition cost and depreciated over the useful

lives of the assets.

When a hedging instrument expires or is sold, or when a hedge no

longer meets hedge accounting criteria, any cumulative gain or loss

existing in equity at that time remains in equity and is recognised when

the committed or forecasted transaction is ultimately recognised in the

income statement. However, if a forecasted transaction is no longer

expected to occur, the cumulative gain or loss that was reported in

equity is immediately recognised to the income statement.

In currency cash flow hedging, the hedging instrument is made in the

same currency as the hedged item and hence the fair value change of

the hedging instrument are expected to effectively offset the fair value


UPM FINANCIAL REPORT 2022	89

changes generated by the hedged items. Thereby the hedge ratio

between the instrument and the cash flow is 1:1. Ineffectiveness may

arise in the highly unlikely case that the forecasted cash flows are no

longer expected to occur. Ineffectiveness can also occur in a situation

where the hedging instrument with an appropriate maturity is not

available in the market for the whole duration of the hedged item. Then

the terms of the hedging instrument and the hedged item don't fully

match, which causes minor ineffectiveness. There are no other

significant sources of ineffectiveness that can reasonably be expected to

take place.

Ineffectiveness in electricity price hedges may arise in the highly

unlikely case that the forecasted cash flows are no longer expected to

occur. Ineffectiveness may also arise in case EPAD prices remained

negative for a longer period of time, but considering historical price

development UPM considers this scenario to be highly unlikely.

Hedges of net investments in foreign subsidiaries

The fair value changes of forward exchange contracts used in hedging

net investments that reflect the change in spot exchange rates are

recognised in other comprehensive income within translation reserve.

Any gain or loss relating to the interest portion of forward exchange

contracts is recognised immediately in the income statement under

financial items. Gains and losses accumulated in equity are included in

the income statement when the foreign operation is partially disposed of

or sold.

The hedging instrument is always made in the same currency as the

hedged investment, hence the hedge ratio in net investment hedging is

1:1. For hedging of net investments, ineffectiveness may only arise in

the highly unlikely situation where the hedged item is disposed or sold

during the duration of the hedging instrument.

Fair value hedges

The group applies fair value hedge accounting for hedging fixed

interest risk on debt. Changes in the fair value of derivatives that are

designated and qualify as fair value hedges and that are prospectively

highly effective are recorded in the income statement under financial

items, along with any changes in the fair value of the hedged asset or

liabilities that are attributable to the hedged risk. The carrying amounts

of hedged items and the fair values of hedging instruments are included

in interest-bearing assets or liabilities.

Derivatives that are designated and qualify as fair value hedges

mature at the same time as hedged items. If the hedge no longer meets

the criteria for hedge accounting, the adjustment to the carrying amount

of a hedged item for which the effective interest method is used is

amortised to profit or loss over the expected period to maturity.

Ineffectiveness in fair value hedge of fixed interest risk may arise in

case of early redemption of such debt, which is hedged under fair value

hedge accounting. The group has not recognised other significant

sources of ineffectiveness that can reasonably be expected to take

place.

The group applies fair value hedge accounting also for hedging firm

commitment of a purchase in foreign currency. The currency changes of

the hedging instrument are recorded through profit and loss in financial

items, until they are recognised as a part of the acquisition cost of a

fixed asset.


	Financial counterparty risk

The financial instruments the group has agreed with banks and financial

institutions contain an element of risk of the counterparties being unable

to meet their obligations. According to the Group Treasury Policy

derivative instruments and investments of cash funds may be made only

with counterparties meeting certain creditworthiness criteria. The group

minimises counterparty risk also by using a number of major banks and

financial institutions. Creditworthiness of counterparties is constantly

monitored by Treasury and Risk Management.

Effect of IBOR reform and significant assumptions

Group’s risk exposure that is directly affected by the IBOR reform is fair

value hedge accounting of long-term fixed-rate debt for changes in fair

value attributable to USD LIBOR which is the current benchmark interest

rate. USD LIBOR is currently expected to be published until June 2023.

Group currently has only few contracts which reference USD LIBOR and

extend beyond June 2023. Group oversees the IBOR transition and

follows ISDA and other market guidelines on effects of these changes to

UPM’s contracts. In fair value hedging relationships, fair value for both

the hedged item and hedging instrument is calculated with identical

rate. Therefore no ineffectiveness is expected.


UPM FINANCIAL REPORT 2022	90

Net fair values of derivatives


	Positive fair values	Negative fair values	Net fair values	Positive fair values	Negative fair values	Net fair values
EURm	2022			2021
Foreign exchange risk
Forward foreign exchange contracts
Cash flow hedges	67	-34	33	21	-53	-31
Net investment hedge	2	-2	—	2	-27	-25
Non-qualifying hedges	16	-15	—	11	-13	-2
Cross currency swaps
Non-qualifying hedges	—	-16	-16	—	-4	-4
Derivatives hedging foreign exchange risk	85	-68	18	33	-97	-63
Interest rate risk
Interest rate swaps
Fair value hedges	30	-137	-107	86	-23	63
Non-qualifying hedges	—	-2	-2	2	—	2
Cross currency swaps
Fair value hedges	31	—	31	40	—	40
Non-qualifying hedges	—	—	—	—	—	—
Derivatives hedging interest risk	62	-139	-77	128	-23	105
Commodity risk
Electricity sales
Cash flow hedges	19	-54	-35	—	-6	-6
Non-qualifying hedges	—	-2	-2	—	—	—
Electricity purchase
Cash flow hedges	12	-11	1	1	—	—
Other commodities
Non-qualifying hedges	1	-1	—	—	-3	-2
Derivatives hedging commodity risk	32	-69	-36	1	-9	-8
Total	179	-275	-96	162	-128	34

No derivatives are subject to offsetting in the group’s financial statements. All derivatives are under ISDA or similar master netting agreement.

Nominal amounts of derivatives


EURm	2022	2021
Interest rate futures	1,969	2,280
Interest rate swaps	1,102	1,081
Forward foreign exchange contracts	3,913	3,550
Currency options	—	—
Cross currency swaps	149	161
Commodity contracts	1,744	1,508

Cash collaterals pledged for commodity contracts and interest rate

futures totalled EUR 500 (292) million of which EUR 498 (291) million

relate to commodity contracts and EUR 2 (1) million to interest rate

futures. Cash collaterals are included in Other receivables. » Refer Note

4.6 Working capital.

Net fair values of derivatives calculated by counterparty


EURm	POSITIVE FAIR VALUES	NEGATIVE FAIR VALUES	NET FAIR VALUES
2022	88	-185	-96
2021	124	-90	34


UPM FINANCIAL REPORT 2022	91


Timing of nominal amounts of derivatives 2022	Within 1 year	Between 1–5 years	Later than 5 years	Total
EURm	2022
Foreign exchange risk
Forward foreign exchange contracts
Cash flow hedges	2,597	18	—	2,615
Net investment hedge	365	—	—	365
Non-qualifying hedges	928	5	—	934
Cross currency swaps
Non-qualifying hedges	—	—	149	149
Interest rate risk
Interest rate swaps
Fair value hedges	—	352	750	1,102
Cross currency swaps
Fair value hedges	—	—	149	149
Interest rate futures
Non-qualifying hedges	1,969	—	—	1,969
Commodity risk
Electricity sales
Cash flow hedges	968	393	—	1,361
Non-qualifying hedges	5	1	—	6
Electricity purchase
Cash flow hedges	244	40	—	283
Other commodities
Non-qualifying hedges	93	—	—	93


Timing of nominal amounts of derivatives 2021	Within 1 year	Between 1–5 years	Later than 5 years	Total
EURm	2021
Foreign exchange risk
Forward foreign exchange contracts
Cash flow hedges	2,196	90	—	2,286
Net investment hedge	392	—	—	392
Non-qualifying hedges	864	8	—	872
Cross currency swaps
Non-qualifying hedges	—	—	161	161
Interest rate risk
Interest rate swaps
Fair value hedges	—	—	1,081	1,081
Non-qualifying hedges	—	—	—	—
Cross currency swaps
Fair value hedges	—	—	161	161
Interest rate futures
Non-qualifying hedges	2,190	89	—	2,280
Commodity risk
Electricity sales
Cash flow hedges	612	335	—	947
Non-qualifying hedges	—	2	—	2
Electricity purchase
Cash flow hedges	397	108	—	505
Other commodities
Non-qualifying hedges	54	—	—	54

The nominals of cross currency swaps are included in both foreign exchange risk and interest rate risk.


UPM FINANCIAL REPORT 2022	92

7.Income tax

7.1Tax on profit for the year

Income tax

In 2022, tax on profit for the year amounted to EUR 388 million (240

million). The effective tax rate was 19.9% (15.5%). In 2022 and 2021,

the effective tax rate was affected by the income not subject to tax from

subsidiaries operating in tax free zone and German tax rate that is

higher than in Finland. In 2021, effective tax rate was also impacted by

tax exempt capital gain on the sale of shares of Shotton Mill Ltd.

Income tax


EURm	2022	2021
Current tax expense	344	273
Change in deferred taxes	44	-32
Total	388	240

Tax rate reconciliation


EURm	2022	2021
Profit before tax	1,944	1,548
Computed tax at Finnish statutory rate of 20%	389	310
Difference between Finnish and foreign rates	62	-16
Tax-exempt income	-99	-90
Non-deductible expenses	11	6
Withholding taxes	0	4
Tax loss with no tax benefit	19	18
Results of associates	-1	0
Change in tax legislation	1	2
Change in recoverability of deferred tax assets	9	13
Utilisation of previously unrecognised tax losses	-9	-3
Other items	7	-3
Total income taxes	388	240
Effective tax rate, %	19.9%	15.5%


	Accounting policies

The group’s income tax expense comprises current tax and deferred tax.

Current tax is calculated on the taxable result for the period based on

the tax rules prevailing in the countries where the group operates and

includes tax adjustments for previous periods and withholding taxes

deducted at source on intra-group transactions. Tax expense is

recognised in the income statement, unless it relates to items that have

been recognised in equity or as part of other comprehensive income. In

these instances, the related tax expense is also recognised in equity or

other comprehensive income, respectively.


	Key estimates and judgements

The group is subject to income taxes in numerous jurisdictions and

the calculation of the group’s tax expense and income tax liabilities

involves a degree of estimation and judgement. Tax balances reflect

a current understanding and interpretation of existing tax laws.

Management periodically evaluates positions taken in tax returns with

respect of situations in which applicable tax regulation is subject to

interpretation and adjusts income tax liabilities where appropriate.

The Finnish Government has published in December 2022 the law

proposal for a temporary profit tax on the electricity sector. The

proposed tax would be 30% of the companies’ net profits generated

from the electricity business in Finland in fiscal year 2023 exceeding

10% annual return on shareholder’s equity of the electricity business (in

addition to standard 20 % corporate income tax rate on profits

generated from electricity operations). According to the proposal,

internal electricity business profits would not be taken into account when

calculating the taxable net profit for the temporary profit tax. UPM

Energy is the second largest electricity producer in Finland and in the

scope of the proposed temporary profit tax. The tax would become

payable in early 2024. However, the financial impact would depend

on the results of the electricity business and energy market development.

In December 2022, EU member states reached agreement to

implement at EU level the minimum taxation component, known as Pillar

2, of the OECD’s reform of international taxation. The entities in scope

will be liable to pay a top-up tax for the difference between their GloBE

effective tax rate per jurisdiction and the 15% minimum rate. The EU

currently has plans to implement the rules in member states in 2023 with

an effective date for accounting periods starting on or after 31

December 2023. The rules have no impact on current or deferred taxes

for financial reporting period ending on 31 December 2022 as Pillar 2

requirements have not been substantively enacted in any of the

territories in which it operates. UPM is currently evaluating Pillar 2

requirements and legislation in the jurisdictions that are likely to be

impacted.

7.2Deferred tax


EURm	2022	2021	2020
Deferred tax assets
Intangible assets and property, plant and equipment	86	83	77
Inventories	86	53	38
Retirement benefit liabilities and provisions	88	127	156
Other temporary differences	475	269	163
Tax losses and tax credits carried forward	167	230	157
Offset against liabilities	-417	-297	-170
Total	485	466	421
Deferred tax liabilities
Intangible assets and property, plant and equipment	-335	-261	-245
Forest assets	-423	-398	-352
Retirement benefit assets	-2	-17	-5
Other temporary differences	-294	-217	-132
Offset against assets	417	297	170
Total	-636	-596	-564
Net deferred tax assets (liabilities)	-151	-130	-143


UPM FINANCIAL REPORT 2022	93

Deferred income tax assets and liabilities are offset when there is a

legally enforceable right to offset current tax assets against current tax

liabilities and when the deferred income taxes relate to the same fiscal

authority.

Movements in deferred tax assets and liabilities


EURm	2022	2021
Carrying value, at 1 January	-130	-143
Charged to income statement	-44	32
Charged to other comprehensive income	58	-15
Companies acquired	-26	—
Exchange rate adjustments	-9	-4
Net deferred tax assets (liabilities)	-151	-130

Tax charge to other comprehensive income


	Before tax	Tax	After tax	Before tax	Tax	After tax
EURm	2022			2021
Actuarial gains and losses on defined benefit plans	249	-57	192	128	-32	96
Energy shareholdings	1,074	-23	1,051	643	-11	632
Translation differences	150	—	150	337	—	337
Cash flow hedges	-665	134	-531	-149	22	-127
Net investment hedges	-19	4	-15	-27	5	-21
Total	789	58	847	933	-15	918


	Key estimates and judgements

Recognised deferred tax assets

The recognition of deferred tax assets requires management judgement

as to whether it is probable that such balances will be utilised and/or

reversed in the foreseeable future. At 31 December 2022, net operating

loss carry-forwards for which the group has recognised a deferred tax

asset amounted to EUR 584 million (802 million), of which EUR 514

million (717 million) was attributable to German subsidiaries. In

Germany net operating loss carry-forwards do not expire. In other

countries net operating loss carry-forwards expire at various dates and

in varying amounts. Based on profit forecasts, it is probable that there

will be sufficient future taxable profits available against which the tax

losses can be utilised.

The assumptions regarding future realisation of tax benefits, and

therefore the recognition of deferred tax assets, may change due to

future operating performance of the group, as well as other factors,

some of which are outside of the control of the group.

Unrecognised deferred tax assets and liabilities

The net operating loss carry-forwards for which no deferred tax is

recognised due to uncertainty of their utilisation amounted to EUR 890

million (843 million) in 2022. These net operating loss carry-forwards

are mainly attributable to certain German and French subsidiaries and

do not expire. In addition, the group has not recognised deferred tax

assets on loss carry-forwards relating to closed Miramichi paper mill

due to only minor operations in Canada. These loss carry-forwards

expire at different times by the end of 2029.

The group has not recognised deferred tax liability in respect of

undistributed earnings of non-Finnish subsidiaries to the extent that it is

probable that the temporary differences will not reverse in the

foreseeable future. In addition, the group has not recognised deferred

tax liability for the undistributed earnings of Finnish subsidiaries and

associates as such earnings can be distributed without any tax

consequences.


	Accounting policies

Deferred tax is calculated based on temporary differences between the

carrying amounts and the taxable values of assets and liabilities and for

tax loss carry-forwards to the extent that it is probable that these can be

utilised against future taxable profits.

Deferred income tax is determined using tax rates (and laws) that

have been enacted or substantially enacted by the balance sheet date

and are expected to apply when the related deferred income tax asset

is realised or the deferred income tax liability is settled.

Deferred income tax is provided on temporary differences arising on

investments in subsidiaries, associates and joint ventures, except where

the timing of the reversal of the temporary difference is controlled by the

group and it is probable that the temporary difference will not reverse in

the foreseeable future. Deferred tax assets and liabilities are recognised

net where there is a legal right to set-off and an intention to settle on a

net basis.


UPM FINANCIAL REPORT 2022	94

8.Group structure

8.1Business acquisitions and disposals

In 2022, UPM sold its 33,09 % holding in the associated company

Encore Ympäristöpalvelut Oy, and made several minor sales of equity

investments accounted at fair value through OCI. In 2021, UPM

permanently closed paper production at its Shotton newsprint mill site in

North Wales, United Kingdom. The site and all related assets were sold

to Eren Paper Ltd, a subsidiary of Modern Karton Sanayi Ve Ticaret

A.Ş., the containerboard and corrugated packaging business of the

Turkish industrial conglomerate Eren Holding (“Eren”), thereby closing

the transaction announced in May 2021. Net cash arising from

disposal was EUR 157 million and gain on disposal was EUR 133

million. UPM also made several minor sales of equity investments

accounted at fair value through OCI.

In 2022, UPM made a minor investment in ASK Altpapier

Sortierung Kinsau GmbH by acquiring the full share capital of of the

company, and made several minor investments in equity investments

accounted at fair value through OCI. In 2021, UPM purchased an

additional 20.23% share in the joint operation Alholmens Kraft,

increasing UPM's ownership from 29.77% to 50.00 %. UPM also made

a minor investment in InfraLeuna GmbH which is an equity investment

accounted at fair value through OCI.

Business combinations

On 15 September 2022, UPM Raflatac completed the acquisition of

AMC AG (Advanced Methods of Coating). The acquisition announced

in May 2022 was closed after regulatory clearances. AMC AG

employs more than 300 people and has two production sites in

Northern Germany, in Kaltenkirchen and in Hagenow. UPM Raflatac

expects to realize significant synergies through the acquisition.

If the transaction had occurred on 1 January 2022, UPM’s sales for

January–December 2022 would have been EUR 11,794 million and

profit for the period EUR 1,558 million. These amounts have been

calculated using the Group’s accounting policies and by adjusting the

results of the subsidiaries to reflect the depreciation, amortisation and

expenses that would have been charged assuming application of fair

value adjustments to other intangible assets, property, plant and

equipment and inventories from 1 January 2022, together with the

consequential tax effects.

Goodwill arising from the acquisition is mainly attributable to the

expected synergies and skilful assembled workforce. Details of the

purchase consideration, the net assets acquired and goodwill are as

follows:


EURm
Cash paid	150
Total purchase consideration	150


EURm	15 SEP 2022
Customer relationships	42
Trademarks	9
Technology	11
Other intangible assets	0
Property, plant and equipment	56
Leased assets	0
Inventories	20
Trade and other receivables	22
Income tax receivables	0
Cash and cash equivalents	12
Total assets	172

Deferred tax liabilities	26
Non-current debt	20
Current debt	2
Trade and other payables	10
Income tax payables	2
Total liabilities	60

Net identifiable assets acquired	112
Net assets belonging to non-controlling interest	0
Goodwill arising from acquisition	38

The fair value of trade and other receivables included trade receivables

with a fair value of EUR 21 million. At the date of acquisition, the gross

contractual amount for trade receivables was EUR 21 million, of which

EUR 0 million was expected to be uncollectible.

Acquisition-related costs of EUR 5 million are included in other

operating expenses and are reported as items affecting comparability in

UPM Raflatac business area and Other operations.

Information on the amounts of revenue and profit or loss of the

acquiree since the acquisition date included in the consolidated income

statement for the reporting period is not disclosed because it would be

impracticable. The acquired business has been included in the group

since 15 September 2022, and the effects of the revenues and profit or

loss thereof are not considered material for disclosure purposes.

The fair values of net identifiable assets acquired are provisional and

dependent on final fair valuations.


UPM FINANCIAL REPORT 2022	95

Transactions with non-controlling interests

In 2022, UPM acquired a holding with a minor non-controlling interest

as a part of the acquisition of AMC AG. » Refer Note 8.1 Business

acquisitions and disposals. In 2021, UPM made a minor acquisition of

an additional 24% holding of its subsidiary Jyväs-Helmi Oy from a non-

controlling shareholder.


	Accounting policies

UPM consolidates acquired entities at the acquisition date which is

when it gains control using the acquisition method. Consideration

transferred is determined as the fair value of the assets transferred,

the liabilities incurred and equity instruments issued including the fair

value of a contingent consideration. Acquisition related transaction costs

are expensed as incurred. Identifiable assets acquired and liabilities

and contingent liabilities assumed are measured initially at their fair

values at the acquisition date. The group measures any non-controlling

interest in the acquiree either at fair value or at the non-controlling

interest’s proportionate share of the acquiree’s net assets.

The excess of the consideration transferred, the amount of any non-

controlling interest in the acquiree and the acquisition-date fair value of

any previous equity interest in the acquiree over the fair value of the

identifiable net assets of the subsidiary acquired is recorded as

goodwill.

The assets, liabilities, income and expenses of subsidiaries with non-

controlling interests are consolidated line by line into the UPM

consolidated financial statements. The proportion of the profit for the

period, as well as the accumulated share of total equity belonging to

non-controlling interests are presented separately in the consolidated

income statement and consolidated balance sheet.

8.2Principal subsidiaries and joint operations


SUBSIDIARIES	COUNTRY OF INCORPORATION	HOLDING % 2022	HOLDING % 2021
Blandin Paper Company	US	100.00	100.00
Blanvira S.A.	UY	91.00	91.00
Cuecar S.A.	UY	91.00	91.00
Forestal Oriental S.A.	UY	100.00	100.00
Gebrüder Lang GmbH Papierfabrik	DE	100.00	100.00
LLC UPM Ukraine	UA	100.00	100.00
Nordland Papier GmbH	DE	100.00	100.00
NorService GmbH	DE	100.00	100.00
nortrans Speditionsgesellschaft mbH	DE	100.00	100.00
OOO UPM-Kymmene	RU	100.00	100.00
OOO UPM-Kymmene Chudovo	RU	100.00	100.00
Print Inform Japan K.K. 1)	JP	80.00	—
PT UPM Raflatac Indonesia	ID	100.00	100.00
Rhein Papier GmbH	DE	100.00	100.00
SERPRI S.A. Unipersonal 1)	DE	100.00	—
Steyrermühl Sägewerksgesellschaft m.b.H. Nfg KG	AT	100.00	100.00
Tebetur S.A.	UY	91.00	91.00
Tile Forestal S.A.	UY	91.00	91.00
UPM (China) Co., Ltd	CN	100.00	100.00
UPM (Vietnam) Ltd	VN	100.00	100.00
UPM AG	CH	100.00	100.00
UPM Asia Pacific Pte. Ltd	SG	100.00	100.00
UPM Biochemicals GmbH	DE	100.00	100.00
UPM Biochemicals Sales GmbH	DE	100.00	100.00
UPM Biofuels S.A.	UY	100.00	100.00
UPM Communication Papers Oy	FI	100.00	100.00
UPM Energy Oy	FI	100.00	100.00
UPM France S.A.S.	FR	100.00	100.00
UPM Fray Bentos S.A.	UY	100.00	100.00
UPM GmbH	DE	100.00	100.00
UPM OÜ	EE	100.00	100.00
UPM Plywood Oy	FI	100.00	100.00
UPM Pulp Sales Oy	FI	100.00	100.00
UPM Raflatac (China) Co., Ltd.	CN	100.00	100.00


UPM FINANCIAL REPORT 2022	96


SUBSIDIARIES	COUNTRY OF INCORPORATION	HOLDING % 2022	HOLDING % 2021
UPM Raflatac (S) Pte Ltd	SG	100.00	100.00
UPM Raflatac (UK) Limited	GB	100.00	100.00
UPM Raflatac Chile SpA	CL	100.00	100.00
UPM Raflatac Co., Ltd	TH	100.00	100.00
UPM Raflatac GmbH 1)	DE	100.00	—
UPM Raflatac Iberica S.A.	ES	100.00	100.00
UPM Raflatac Inc.	US	100.00	100.00
UPM Raflatac Mexico S.A. de C.V.	MX	100.00	100.00
UPM Raflatac NZ Limited	NZ	100.00	100.00
UPM Raflatac Oy	FI	100.00	100.00
UPM Raflatac Pty Ltd	AU	100.00	100.00
UPM Raflatac s.r.l.	AR	100.00	100.00
UPM Raflatac SAS	FR	100.00	100.00
UPM Raflatac Sdn. Bhd.	MY	100.00	100.00
UPM Raflatac South Africa (Pty) Ltd	ZA	100.00	100.00
UPM Raflatac Sp. z o.o.	PL	100.00	100.00
UPM S.A.	UY	91.00	91.00
UPM Sales GmbH	DE	100.00	100.00
UPM Sales Oy	FI	100.00	100.00
UPM Specialty Papers Oy	FI	100.00	100.00
UPM Sähkönsiirto Oy	FI	100.00	100.00
UPM Trading (Shanghai) Co	CN	100.00	100.00
UPM-Kymmene (Korea) Ltd	KO	100.00	100.00
UPM-Kymmene (UK) Ltd	GB	100.00	100.00
UPM-Kymmene Austria GmbH	AT	100.00	100.00
UPM-Kymmene Inc.	US	100.00	100.00
UPM-Kymmene India Private Limited	IN	100.00	100.00
UPM-Kymmene Japan K.K.	JP	100.00	100.00
UPM-Kymmene Kagit Urunleri Sanayi ve Ticaret Ltd. Sti.	TR	100.00	100.00
UPM-Kymmene Otepää OÜ	EE	100.00	100.00
UPM-Kymmene S.A.	ES	100.00	100.00
UPM-Kymmene Seven Seas Oy	FI	100.00	100.00
UPM-Kymmene Sp. z o.o.	PL	100.00	100.00
UPM-Kymmene S.r.l.	IT	100.00	100.00
Uruwood S.A.	UY	93.25	93.09
Werla Insurance Company Ltd	MT	100.00	100.00

1) In 2022, UPM completed the acquisition of AMC AG. After the acquisition, AMC AG's corporate form and legal company name have been changed to UPM

Raflatac GmbH. Print Inform Japan K.K. and SERPRI S.A. Unipersonal have also been acquired as a part of the AMC AG acquisition.» Refer Note 8.1 Business

acquisitions and disposals.


JOINT OPERATIONS	COUNTRY OF INCORPORATION	HOLDING % 2022	HOLDING % 2021
Oy Alholmens Kraft Ab (Pohjolan Voima Oyj, G series and direct ownership)	FI	50.00	50.00
EEVG Entsorgungs- und Energieverwertungsgesellschaft m.b.H.	AT	50.00	50.00
Järvi-Suomen Voima Oy	FI	50.00	50.00
Kaukaan Voima Oy (Pohjolan Voima Oyj, G9 series)	FI	54.00	54.00
Kymin Voima Oy (Pohjolan Voima Oyj, G2 series)	FI	76.00	76.00
Madison Paper Industries	US	50.00	50.00
Rauman Biovoima Oy (Pohjolan Voima Oyj, G4 series)	FI	71.95	71.95


UPM FINANCIAL REPORT 2022	97

8.3Related party transactions

The Board of Directors and the Group Executive Team

There have not been any material transactions between UPM and its

members of the Board of Directors or the Group Executive Team (key

management personnel) or persons closely associated with these

members or organisations in which these individuals have control or

significant influence. There are no loans granted to any members of the

Board of Directors or the Group Executive Team at 31 December 2022

or 2021.

For information concerning shares held by members of the Board of

Directors as well as remuneration to members of the Board of Directors and

the Group Executive Team are disclosed in » Note 3.2. Key management

personnel.

Associates and joint ventures

Austria Papier Recycling GmbH purchases recovered paper in Austria

and L.C.I s.r.l. in Italy. ASD Altpapier Sortierung Dachau GmbH is a

German recovered paper sorting company. In Finland, the group has

organised its producer’s responsibility of recovered paper collection

through Encore Ympäristöpalvelut Oy. In October 2022, UPM has sold

its ownership in Encore Ympäristöpalvelut Oy.

Transactions with associates and joint ventures are presented in the

table below. The group has no individually material associates or joint

ventures.


EURm	2022	2021
Dividends received	3	2
Purchases of raw materials and services	57	69
Loan receivables	5	5
Trade and other receivables	1	2
Trade and other payables	7	9

Subsidiaries and joint operations

» Refer Note 8.2 Principal subsidiaries and joint operations.

Pension Funds

In the UK, the single UPM Pension Scheme operates under a Trust which

is independent from the group. The Trust consists of various defined

benefit sections, all of which are closed to future accrual and one

common defined contribution section which is open to all UPM

employees in the UK. The group made contributions of EUR 6 million (6

million) to the defined benefit sections of the Scheme in 2022. The fair

value of the UK defined benefit fund assets at 31 December 2022 was

EUR 300 million (565 million), of which 5% was invested in equity

instruments, 26% in debt instruments, 20% in property, 44% money

market and 5% in other investments.

At the end of 2021, pensions for about 21% of the group's Finnish

employees were arranged through the TyEL foundation, UPM

Sellutehtaiden eläkesäätiö, which is a separate legal entity. In 2022,

the foundation was replaced with defined contribution arrangement and

the assets and liabilities of the plan were transferred to the insurance

company. In 2022, the contributions paid by UPM to the TyEL

foundation amounted to EUR 0 (18) million. Cash received from

settlements amounted to EUR 128 million. The fair value of foundation

assets at 31 December 2022 was EUR 0 (597) million.

8.4Assets held for sale

No assets were classified as held for sale at the end of 2022 or 2021.


	Accounting policies

Non-current assets (or disposal groups) are classified as assets held for

sale and stated at the lower of carrying amount and fair value less costs

to sell, if UPM will recover their carrying amount through a sale

transaction which is considered highly probable. Non-current assets

classified as held for sale, or included within a disposal group that is

classified as held for sale, are not depreciated after the classification.

9.Unrecognised items

9.1Commitments and contingencies

In the normal course of business, UPM enters into various agreements

providing financial or performance assurance to third parties. The

maximum amounts of future payments for which UPM is liable is

disclosed in the table below under “Other commitments”. Property under

mortgages given as collateral for own commitments include property,

plant and equipment, industrial estates and forest land.


EURm	2022	2021
On behalf of others
Guarantees	2	2
Other own commitments
Leasing commitments for the next 12 months in accordance with IFRS 16	2	4
Other commitments	219	213
Total	223	220

The lease commitments for leases not commenced at the end of 2022

totals approximately EUR 245 million, which are mostly related to long-

term charter agreements, railway service agreement in Uruguay and

service agreements related to waste water treatment and other utilities in

Leuna, Germany. Such lease commitments at the end of 2021

amounted to EUR 409 million.

9.2Litigation

Contingent liabilities

The group is defendant or plaintiff in a number of legal proceedings

incidental to its operations. These lawsuits primarily involve claims

arising from commercial law issues.

Group companies

The Group’s management is not aware of any significant litigation at

the end of 2022.

In October 2021, the European Commission conducted an

unannounced inspection at UPM’s premises. According to the

Commission’s press release on 12 October, the Commission has

concerns that the inspected companies in the wood pulp sector may

have violated EU antitrust rules that prohibit cartels and restrictive

business practices. The Commission states that the unannounced

inspections are a preliminary step in an investigation into suspected


UPM FINANCIAL REPORT 2022	98