UPM-Kymmene Corporation Stock Exchange Release February 1, 2007 at 12:00 UPM Financial Review 2006 Earnings per share for 2006 were 0.65 ( 0.50 for 2005), excluding non-recurring items 0.80 ( 0.54). Operating profit for the year was 536 million ( 318 million), excluding non-recurring items 725 million ( 558 million). Operating profit for the fourth quarter was 247 million ( -58 million), excluding non-recurring items 252 million ( 202 million). The profitability programme improved prerequisites for sustainable profitability. Customer deliveries from closed production lines were successfully retained. Key figures Q4/ Q4/ Q1-Q4/ Q1-Q4/ Q1-Q4/ 2006 2005 2006 2005 2004 Sales, m 2,583 2,574 10,022 9,348 9,820 EBITDA, m 1) 467 423 1,678 1,428 1,435 % of sales 18.1 16.4 16.7 15.3 14.6 Operating profit, m 247 -58 536 318 685 excluding 252 202 725 558 470 non-recurring items, m Profit before tax, m 203 -91 367 257 556 excluding 202 160 550 399 341 non-recurring items, m Net profit for the 195 -77 338 261 920 period, m Earnings per share, 0.37 -0.15 0.65 0.50 1.76 excluding 0.30 0.22 0.80 0.54 0.49 non-recurring items, Diluted earnings 0.38 -0.15 0.65 0.50 1.75 per share, Return on equity, % 10.8 neg. 4.6 3.5 12.6 excluding 8.7 5.9 5.7 3.8 3.4 non-recurring items, % Return on capital 8.8 neg. 4.7 3.4 6.0 employed, % excluding 8.7 6.5 6.2 4.5 4.3 non-recurring items, % Equity to assets 50.4 47.3 50.4 47.3 48.2 ratio at end of period, % Gearing ratio at 56 66 56 66 61 end of period, % Shareholders' 13.90 14.01 13.90 14.01 14.46 equity per share at end of period, Net interest-bearing 4,048 4,836 4,048 4,836 4,617 liabilities at end of period, m Capital employed at 11,634 12,650 11,634 12,650 12,953 end of period, m Capital 197 220 699 749 686 expenditure, m Personnel at end of 28,704 31,522 28,704 31,522 33,433 period 1) EBITDA is operating profit before depreciation, amortization and impairment charges, and excluding the change in value of biological assets, the share of results of associated companies and joint ventures and non-recurring items. The market in 2006 Demand for printing and writing papers in Europe remained good, showing an increase of 2% from the previous year, while in North America, demand for printing and writing papers decreased by 1%. In other markets - most notably in Asia - demand for printing and writing papers continued to grow rapidly. Spending on advertising globally increased from the previous year. While spending on printed advertising increased, it decreased as a proportion of total advertising. Of the various types of printed advertising, direct-mail advertising showed the strongest growth. Average market prices for magazine papers in Europe and North America were about the same as last year. Standard newsprint market prices in Europe were on average 5% higher, but prices for coated and uncoated fine papers decreased by about 2%. In Asia, fine paper prices increased from last year. Demand for self-adhesive labelstock grew in the main markets: North America, Europe and Asia. Average prices for self-adhesive labelstock were slightly higher than in the previous year. Demand for industrial wrappings remained at the previous year's level. Prices were unchanged. In wood products, birch plywood demand continued to be strong in all markets. Spruce plywood markets maintained a good balance. Plywood prices increased slightly in comparison to last year. Also, the markets for veneer and further processed goods were solid. Redwood and whitewood sawn timber markets improved and prices increased. The supply of logs tightened, exerting upward pressure on costs. Changes in reporting classifications From the beginning of 2006, the share of results of associated companies and joint ventures related to business operations is reported in operating profit. In previous years, the results were reported after operating profit. Also from the beginning of 2006, part of the results of derivative instruments relating to cash flow hedges are allocated to the respective division. Comparative years have been revised accordingly. Earnings Q4 of 2006 compared with Q4 of 2005 Sales for the fourth quarter of 2006 were 2,583 million, slightly higher than the 2,574 million for the fourth quarter of 2005. Paper deliveries were 2,892,000 tonnes (2,907,000 tonnes). Operating profit was 247 million (loss of 58 million), 9.6% of sales (-2.3%). Operating profit excluding non-recurring items was 252 million, 9.8% of sales ( 202 million, 7.8% of sales). Operating profit for the fourth quarter includes non-recurring charges net of 5 million ( 260 million). The main non-recurring items were a provision of 13 million mainly for personnel expenses for the profitability programme and of a gain of 10 million from the sale of the Rauma power plant to Pohjola Voima Oy. Profitability of all divisions improved from last year. Transfer of production from the closed production lines to UPM's other paper machines improved capacity utilization. Profitability benefited from higher newsprint and fine paper prices and lower fixed costs. On the other hand, energy prices especially in Central Europe and the UK were higher than a year ago. The share of results of associated companies and joint ventures was 9 million ( 14 million). Profit before tax was 203 million (loss of 91 million) and excluding non-recurring items 202 million ( 160 million). A gain of 6 million from the sale of shares was reported after operating profit as a non-recurring gain. Interest and other finance costs net were 46 million ( 33 million). The average interest rate on borrowings increased; on the other hand, net interest-bearing liabilities decreased. Exchange rate and fair value gains and losses resulted in a gain of 4 million ( 0 million). Income taxes were 8 million ( 14 million positive). Fourth-quarter income taxes include income of 35 million primarily from a receivable arising from the change in German tax legislation. Profit for the fourth quarter was 195 million (loss of 77 million) and earnings per share were 0.37 ( -0.15). Earnings per share excluding non-recurring items were 0.30 ( 0.22). Return on equity was 10.8% (neg.) and return on capital employed 8.8% (neg.). Excluding non-recurring items, the respective figures were 8.7% (5.9%) and 8.7% (6.5%). 2006 compared with 2005 Deliveries and results in 2005 were affected by the labour dispute in Finland during the second quarter of 2005. Sales for 2006 were 10,022 million ( 9,348 million) showing an increase of 7% from the previous year's figure. Paper deliveries were 10,988,000 tonnes (10,172,000 tonnes). Operating profit was 536 million ( 318 million), 5.3% of sales (3.4%). Operating profit excluding non-recurring items was 725 million, 7.2% of sales ( 558 million, 6.0% of sales). Operating profit for 2006 includes non-recurring gains of 144 million and charges of 333 million, for a net figure of 189 million in charges (net figure of 240 million in charges). Due to the profitability programme announced in March 2006, an impairment of 135 million mostly attributable to the closure of Voikkaa paper mill, and a provision of 61 million from personnel expenses and other restructuring charges, in total to 196 million were reported as non-recurring charges. An impairment of 115 million was made from the production facilities at the Miramichi magazine paper mill in Canada, mainly due to the negative currency impact on the profitability. In addition, a loss of 10 million from the sale of the UPM-Kymmene Loulay S.A. plywood mill in France, a charge for a donation of 5 million to UPM-Kymmene Cultural Foundation and other charges of 7 million were reported as non-recurring charges. Reported as non-recurring gains were a capital gain of 41 million on the sale of Group Head Office real estate, a 93 million tax-exempt capital gain on the sale of the Finnish building materials merchant Puukeskus Oy and a gain of 10 million on the sale of the Rauma power plant to Pohjolan Voima Oy. The profitability of all divisions improved from last year. Transfer of production from the closed production lines to UPM's other paper machines improved capacity utilization. Energy prices, especially in Central Europe and the UK, were higher. Limited availability of wood raw material in Finland due to unusual weather conditions in the autumn put upward pressure on wood procurement costs. The increase in UPM's net costs was, however, moderate partly due to the high self sufficiency in chemical pulp and electricity. The fair value of biological assets decreased by 126 million (increase of 34 million) mainly due to an increase of half a percentage point in the discount rate, 7.5% applied in forest valuation, and higher fellings from own forests. Deliveries of magazine papers were higher, and average prices increased slightly. Newsprint deliveries increased and average prices were higher than a year ago. Also fine paper deliveries increased. Average prices of fine papers were slightly down from last year. In the Converting division, profitability of UPM Raflatac's self-adhesive labelstock improved, and was good. Also Walki Wisa's profitability improved. The profitability of plywood was good. Sawmilling improved its profitability, and operating profit turned positive due to higher prices and increased deliveries. The operating profit of Other Operations was lower than a year ago the main reason being decrease in the fair value of biological assets and lower availability of hydropower. The share of the results of associated companies and joint ventures was 61 million ( 41 million). Profit before tax was 367 million ( 257 million) and excluding non-recurring items 550 million ( 399 million). A gain of 6 million on the sale of shares was reported after operating profit as a non-recurring gain. Interest and other finance costs were 185 million ( 147 million) net. The average interest rate on borrowings increased; on the other hand, net interest-bearing liabilities decreased. Exchange rate and fair value gains and losses resulted in a gain of 18 million (loss of 4 million). Income taxes were 29 million ( 4 million positive). Taxes include, as a negative item, a reduction of 22 million in the deferred tax assets of Miramichi due to a decrease in the income tax rate in Canada, and as positive items 20 million from the increase in deferred tax assets related to the change in the Group's structure in Canada, and 28 million from a receivable arising from the change in German tax legislation. The effective tax rate was 7.8% (positive 1.6%). Excluding the effect of non-recurring items, the effective tax rate was 24.4% (29.0%). Profit for the year was 338 million ( 261 million) and earnings per share were 0.65 ( 0.50). Earnings per share excluding non-recurring items were 0.80 ( 0.54). Operating cash flow per share was 2.32 ( 1.63). Return on equity was 4.6% (3.5%) and return on capital employed 4.7% (3.4%). Excluding non-recurring items, the respective figures were 5.7% (3.8%) and 6.2% (4.5%). Deliveries Paper deliveries for the year were 10,988,000 tonnes (10,172,000 tonnes). Magazine paper deliveries were 4,761,000 tonnes (4,486,000 tonnes), newsprint 2,677,000 tonnes (2,592,000 tonnes) and fine and speciality papers 3,550,000 tonnes (3,060,000 tonnes). Plywood production was 955,000 cubic metres (916,000 cubic metres) and sawn timber production 2,357,000 cubic metres (2,147,000 cubic metres). Financing Cash flow from operating activities, before capital expenditure and financing, was 1,215 million ( 853 million). The decrease in net working capital amounted to 21 million (increase of 234 million). The gearing ratio as of 31 December was 56% (66% on 31 December 2005). Net interest-bearing liabilities at the end of the year came to 4,048 million ( 4,836 million). In December 2006, UPM bought back three leased hydropower plants located on the Kymijoki river in Finland from the mutual pension insurance company Varma for a total of 126 million with no impact on UPM's balance sheet. The average maturity of borrowings at year end was 7.1 years (7.5 years). In 2006, UPM's credit ratings were unchanged. At the end of the year, the ratings for UPM's public bonds were BBB from S&P and Baa2 from Moody's. Personnel In 2006, UPM had an average of 31,039 employees (32,949 employees). At the beginning of the year the number of employees was 31,522 and at the end of the year 28,704, a decrease of 2,818 persons. Of this, a decrease of 2,371 was due to the closures of production lines and rationalisation of operations and 608 due to the sale of Puukeskus. In UPM Raflatac, the number of employees increased by 161. Capital expenditure In 2006, capital expenditure, excluding acquisitions and share purchases, was 631 million, 6.3% of sales ( 705 million, 7.5% of sales). Including acquisitions and share purchases, capital expenditure was 699 million, 7.0% of sales (749 million, 8.0%). In 2006, acquisitions and share purchases consisted mainly of an investment in shares of the Metsä-Botnia pulp mill in Uruguay for 56 million ( 21 million). In 2006, a decision was made to rebuild the recovery plant at the Kymi pulp mill. The total investment cost is 325 million and it is planned for completion in the summer of 2008. At the Jämsänkoski mill, 45 million will be invested to convert coated magazine paper machine 4 to produce label papers. The conversion is scheduled for completion in the second quarter of 2007. The investment plan announced in August 2005 to build an uncoated magazine paper machine in Continental Europe was postponed. At the plywood mills in Savonlinna and Jyväskylä, 8 million will be invested to improve production efficiency and product quality. The investments are scheduled for completion by the end of the first quarter of 2007. A 25 million investment will be made in bleached pulp production at the Tervasaari mill, where a new bleaching line is scheduled to start up in autumn 2007. An investment of 6 million will be made in plywood manufacturing at the Chudovo and Heinola mills. A new self-adhesive labelstock factory will be built in Dixon, Illinois, in the United States. The value of this investment is approximately USD 109 million, and the new factory is slated for completion in the first quarter of 2008. At the Jämsänkoski mill, 38 million will be invested in the quality of uncoated magazine paper. The investment will be completed in the second quarter of 2008. A new power plant using biofuels will be built at the Caledonian mill in Irvine, Scotland - the investment cost, net, is approximately 72 million and start-up is projected for the third quarter of 2009. The modernization of Tervasaari release paper machine 8 was completed at the end of February 2006. This investment increased annual production capacity by 45,000 tonnes to 175,000 tonnes and further improved the quality of the paper. Walki Wisa's converting factory in China started its operations in March 2006. In September, at the Nordland and Docelles paper mills, the rebuilds of two paper machines were completed. These investments substantially improved product quality and efficiency of the production lines. Completed in September, the modernisation investment for the film lamination line at the Tampere labelstock factory doubled the filmic self-adhesive labelstock capacity of the factory and further strengthened UPM Raflatac's position in the growing filmic labelstock market. At the Shotton paper mill in Wales, the new sludge boiler entered production use at the end of the year. The investment further improved the mills´ energy self-sufficiency and increased the use of biofuels. UPM Raflatac's new production plant in China started commercial production, ahead of the original schedule, in December. The biofuel-fired power plant investment for the Chapelle Darblay mill in France is proceeding according to plan, with completion scheduled for the first quarter of 2007. In Uruguay, UPM's associated company, Metsä-Botnia, is constructing a pulp mill with an annual capacity of 1 million tonnes. The construction project began in 2005 and is on schedule for a Q3/2007 start-up. The governments of Uruguay and Argentina are engaged in a dispute over the environmental impact of the mill. Changes in the Group's structure In March 2006, in connection with the Uruguayan pulp mill project, UPM sold its shares in the Uruguayan forestry company Compañia Forestal Oriental S.A. to Metsä-Botnia for 36 million. Control over Wisapower Oy was transferred from UPM to PVO in April. The transaction decreased the Group's assets net by 152 million from those held on 31 December, 2005. The Group Head Office real estate was sold for 77 million in June, which generated a 41 million capital gain. UPM will continue to occupy the premises under a lease contract. In August, UPM sold its Finnish building materials merchant Puukeskus Oy to the private equity investor Triton and Puukeskus's management. The sale resulted in a 93 million capital gain. Puukeskus had annual sales of approximately 400 million and employed 600 people. Also, UPM sold the Rauma power plant to Pohjolan Voima Oy in December. The sale had no material impact on the Group's assets and liabilities. Profitability programme In March 2006, UPM announced an extensive programme for 2006-2008 to restore its profitability. The profitability programme includes a reduction of approximately 3,600 employees over the three year period and closures of uncompetitive paper production capacity. When finalized, the programme is estimated to result in annual cost savings of approximately 200 million. The annual cost savings in 2007 are estimated to amount to 110 million. As part of the programme, in June UPM closed the Voikkaa paper mill, which had an annual capacity of 410,000 tonnes of coated magazine paper, and Kymi paper machine 7, with an annual capacity of 150,000 tonnes of coated fine paper. In the first quarter of 2007, UPM will stop the production of coated magazine paper on Jämsänkoski paper machine 4, which has an annual capacity of 120,000 tonnes of coated magazine paper. The paper machine will be converted to produce label papers in the third quarter of 2007. UPM will close Tervasaari paper machine 6, with an annual capacity of 115,000 tonnes of brown sack paper and semi-alkaline pulp (SAP) line, with an annual capacity of 60,000 tonnes during the first half of 2007. Most employee negotiations relating to the profitability programme were completed in July 2006. Shares In 2006, UPM shares worth, in total, 16,021 million were traded on the Helsinki Stock Exchange ( 11,358 million). The highest per-share quotation was 20.91 in March and the lowest 15.36 in June. On the New York Stock Exchange, the company's shares were traded to a total value of USD 310 million (USD 338 million). The Annual General Meeting held on 22 March 2006 approved a proposal by the Board of Directors to buy back a minimum of 100 and a maximum of 49,825,000 own shares. The meeting authorised the Board to decide on the disposal of shares so purchased. No shares were purchased based on this authorisation in 2006. The meeting also authorised the Board of Directors to donate 162,000 own shares held by the company to a cultural foundation to be established. Subsequently, the company does not hold any own shares. Additionally the meeting authorised the Board of Directors to decide on an increase in the share capital, disapplying the pre-emptive rights of shareholders, by issuing new shares and/or convertible bond loans in one or more issues. On the basis of such issues of new shares or convertible bonds, the share capital can be increased by a maximum of 169,405,000, representing no more than 99,650,000 new shares having a book value of 1.70 per share. In 2006, 4,300 shares were subscribed for through exercising of outstanding share options. The number of shares entered in the Trade Register on December 31, 2006 was 523,259,430. Through the issuance authorisation and share options, the number of shares may increase to a maximum of 647,101,130. Apart from the above, the Board of Directors has no current authorization to issue shares, convertible bonds or share options. The company has received following notifications from shareholders: On December 15 2006, the Capital Group Companies Inc. held 51,660,753 shares representing 9.78 per cent of share capital, of which shares it held voting rights representing 7.86 per cent of the share capital of UPM-Kymmene Corporation. On March 7 2005, the Franklin Templeton Group and its affiliated investment advisers of Franklin Resources held 10.11% of the voting rights of UPM-Kymmene Corporation. The listing of UPM 2005F share options commenced on October 2 2006. Company directors The Annual General Meeting of 22 March 2006 elected Ms Ursula Ranin, LLM, B.Sc. (Econ.), a former General Counsel of Nokia Corporation as a new member to the Board of Directors. In addition, Mr Martti Ahtisaari, former President of the Republic of Finland; Mr Michael C. Bottenheim, LLM, MBA; Mr Berndt Brunow, President and CEO of Oy Karl Fazer Ab; Mr Karl Grotenfelt, LLM, Chairman of the Board of Directors of Famigro Oy; Dr. Georg Holzhey, former Executive Vice President of UPM and Director of Haindl'sche Papierfabriken KGaA; Ms Wendy E. Lane, Chairman of American Investment firm Lane Holdings, Inc; Mr Jorma Ollila, Chairman and CEO of Nokia Corporation; Ms Françoise Sampermans, BA Psych, Publishing Consultant and Mr Vesa Vainio, LLM were re-elected to the Board of Directors. At the Board of Directors' assembly meeting, Mr Vesa Vainio was re-elected as chairman. Mr Jorma Ollila and Mr Berndt Brunow were elected as vice chairmen. In addition, the Board of Directors elected from its independent members an Audit Committee, with Mr Michael C. Bottenheim as chairman and Ms Wendy E. Lane and Ms Ursula Ranin as members. A Human Resources Committee was elected with Mr Berndt Brunow as chairman, and Mr Georg Holzhey and Ms Françoise Sampermans as members. Furthermore, a Nomination and Corporate Governance Committee was elected with Mr Jorma Ollila as Chairman and Mr Karl Grotenfelt and Mr Georg Holzhey as members. Litigation The competition authorities are continuing investigations into alleged antitrust activities with respect to various products of the company. The US Department of Justice, the EU authorities and the authorities in several of its Member States, Canada and certain other countries have granted UPM conditional full immunities with respect to certain conducts disclosed to the authorities. During 2006, the investigations of the U.S. labelstock industry and European fine paper, newsprint, magazine paper, label paper and self-adhesive labelstock markets were closed by the U.S. Department of Justice and the European Commission competition authority. In December 2006, the Finnish Competition Authority decided not to propose a fine for UPM in its investigation of raw wood procurement in Finland. UPM has been named as a defendant in multiple class-action lawsuits against labelstock and magazine paper manufacturers in the United States. The remaining litigation matters may last several years. No provisions have been made in relation to these investigations. In March 2006, UPM paid a fine of 56.55 million imposed by the European Commission concerning antitrust activities in the market for plastic sacks but has appealed the decision. Events after the balance sheet date On 30 January 2007, M-real announced to sell 9% of Metsä-Botnia's shares to its parent company Metsäliitto for 240 million. Consequently, M-real rejected UPM's offer made in November 2006 to buy 15% of Metsä-Botnia's shares from M-real for 500 million. The Group's management is not aware of any other significant events occurring after 31 December 2006 which would have had an impact on the financial statements. Outlook for 2007 Demand for printing papers is forecast to grow somewhat from last year. In North America weak demand is expected to continue. The strongest growth in demand will be in emerging markets. UPM expects its paper deliveries to increase from last year. UPM's average paper price for the first quarter of 2007 is slightly higher than that of the fourth quarter of 2006. Demand for self-adhesive labelstock is forecast to grow in all markets. Labelstock prices are forecast to be stable. Demand for industrial wrappings is expected to grow somewhat. In wood products, demand for plywood and sawn timber will remain good. Wood, raw material and energy prices continue to rise. As a result of expected cost savings from the ongoing profitability programme, the increase in the company's overall costs is expected to remain at the level of 1-2%. Capital expenditure is forecast to be about the same as 2006. The Group expects its profits to increase from last year. Dividend for 2006 The Board of Directors will propose to the Annual General Meeting to be held on 27 March 2007 that dividend of 0.75 per share be paid in respect of the 2006 financial year ( 0.75 for 2005). It is proposed that the dividend be paid on 10 April 2007. Financial information in 2007 The Annual Report for 2006 will be published on the company's website, (main page address: www.upm-kymmene.com) on 12 March 2007. The printed Annual Report will be published in the week beginning 19 March 2007. Publication schedule of interim reports: Interim Report January-March 2007: 25 April 2007 Interim Report January-June 2007: 26 July 2007 Interim Report January-September 2007: 30 October 2007 Divisional reviews Magazine Papers Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 06 06 06 06 05 05 05 05 Sales, m 905 861 817 771 928 726 697 743 EBITDA, m 1) 157 155 145 113 163 155 59 130 % of sales 17.3 18.0 17.7 14.7 17.6 21.3 8.5 17.5 Depreciation, -88 -209 -210 -97 -262 -103 -102 -99 amortization and impairment charges,m Operating profit, m 75 -62 -85 16 -99 35 -43 31 % of sales 8.3 -7.2 -10.4 2.1 -10.7 4.8 -6.2 4.2 Non-recurring 6 -126 -133 - -156 -17 - - items, m 2) Operating profit excl. 69 64 48 16 57 52 -43 31 non-recurring items and amortization of goodwill, m % of sales 7.6 7.4 5.9 2.1 6.1 7.2 -6.2 4.2 Deliveries, 1,000 t 1,288 1,227 1,148 1,098 1,308 1,048 1,020 1,110 Q1-Q4/ Q1-Q4/ Q1-Q4/ 06 05 04 Sales, m 3,354 3,094 3,308 EBITDA, m 1) 570 507 497 % of sales 17.0 16.4 15.0 Depreciation, -604 -566 -535 amortization and impairment charges,m Operating profit, m -56 -76 -67 % of sales -1.7 -2.5 -2.0 Non-recurring -253 -173 -104 items, m 2) Operating profit excl. 197 97 95 non-recurring items and amortization of goodwill, m % of sales 5.9 3.1 2.9 Deliveries, 1,000 t 4,761 4,486 4,940 Capital employed 4,010 4,397 4,749 (average), m ROCE (excl. 4.9 2.2 2.0 non-recurring items and amortization of goodwill), % 1) EBITDA is operating profit before depreciation, amortization and impairment charges and excluding non-recurring items. 2) Non-recurring items in the second quarter 2006 include personnel charges of 20 million related to the profitability programme, and impairment charges of 113 million related to the closure of the Voikkaa paper mill. In the third quarter 2006, non-recurring items include personnel charges of 8 million and impairment charges of 3 million at Voikkaa, and impairment charges of 115 million for Miramichi. In the fourth quarter, non-recurring items relate primarily to the capital gain on the sale of Rauma power plant. Non-recurring items in 2005: impairment charge of 151 million for Miramichi and 5 million in non-recurring depreciation at Augsburg (4th quarter), and 17 million provision for pension costs at Miramichi (3rd quarter). Q4 of 2006 compared with Q4 of 2005 Operating profit, excluding non-recurring items, for Magazine Papers increased by 12 million to 69 million. Sales for the fourth quarter decreased to 905 million from 928 million. Paper deliveries had a volume of 1,288,000 (1,308,000) tonnes. The fourth-quarter profitability of Magazine Papers improved on account of fixed costs being lower. Average prices for magazine papers when translated into euros were 2% lower than in the previous year. The decrease was mainly due to the weaker US dollar and decreased prices in North America. 2006 compared with 2005 Operating profit, excluding non-recurring items, for Magazine Papers increased from 97 million to 197 million. Sales increased from 3,094 million to 3,354 million. The paper delivery volume was 4,761,000 tonnes (4,486,000 tonnes). Profitability of magazine papers improved from the previous year. Higher deliveries and average prices improved profitability, while the lower US dollar exchange rate had a negative effect. The Voikkaa magazine paper mill was closed at the end of June, and its production was transferred to UPM's other mills, improving their utilisation of capacity. The Miramichi magazine paper mill experienced a three-month shutdown in the first half of the year. Translated into euros, average prices for magazine papers were slightly higher than those for 2005. Markets In Europe, coated magazine paper demand was flat. Uncoated magazine paper demand increased by 7% from the previous year. In North America, demand for coated magazine paper increased slightly while the uncoated magazine paper figure decreased by 3%. In other markets, especially in Asia, demand for magazine papers continued its rapid growth. Average market prices for magazine papers in Europe and North America were about the same as last year. Newsprint Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 06 06 06 06 05 05 05 05 Sales, m 380 360 351 345 379 296 320 313 EBITDA, m 1) 89 98 86 72 75 75 60 65 % of sales 23.4 27.2 24.5 20.9 19.8 25.3 18.8 20.8 Depreciation, -48 -48 -47 -47 -55 -48 -48 -47 amortization and impairment charges,m Operating profit, m 39 50 34 25 20 27 12 18 % of sales 10.3 13.9 9.7 7.2 5.3 9.1 3.8 5.8 Non-recurring -2 - -5 - -5 - - - items, m 2) Operating profit 41 50 39 25 25 27 12 18 excl. non-recurring items and amortization of goodwill, m % of sales 10.8 13.9 11.1 7.2 6.6 9.1 3.8 5.8 Deliveries, 1,000 t 697 666 660 654 736 593 631 632 Q1-Q4/ Q1-Q4/ Q1-Q4/ 06 05 04 Sales, m 1,436 1,308 1,304 EBITDA, m 1) 345 275 229 % of sales 24.0 21.0 17.6 Depreciation, -190 -198 -224 amortization and impairment charges,m Operating profit, m 148 77 7 % of sales 10.3 5.9 0.5 Non-recurring -7 -5 2 items, m 2) Operating profit excl. 155 82 33 non-recurring items and amortization of goodwill, m % of sales 10.8 6.3 2.5 Deliveries, 1,000 t 2,677 2,592 2,719 Capital employed 1,921 1,900 2,002 (average), m ROCE (excl. 8.1 4.3 1.6 non-recurring items and amortization of goodwill), % 1) EBITDA is operating profit before depreciation, amortization and impairment charges and excluding non-recurring items. 2) The non-recurring cost booked for 2006 relates mainly to the profitability programme, and for 2005 is due to one-time depreciation at Augsburg. Q4 of 2006 compared with Q4 of 2005 Operating profit, excluding non-recurring items, for Newsprint increased to 41 million from 25 million. Sales for the fourth quarter totalled 380 million ( 379 million). The total volume of paper deliveries was 697,000 tonnes (736,000 tonnes). The profitability of the Newsprint division benefited from higher paper prices. This period's average prices for both standard and improved newsprint when translated into euros were up about 6% on the figures for the equivalent period of 2005. Higher recycled paper and wood prices had a negative effect on profitability. 2006 compared with 2005 Operating profit, excluding non-recurring items, for Newsprint increased from 82 million in 2005 to 155 million. Sales amounted to 1,436 million, 10% higher than in 2005. Paper deliveries were 2,677,000 tonnes (2,592,000 tonnes). The main contributor to the improved profitability was the higher price of newsprint. Average prices for standard and improved newsprint were about 6% higher than in 2005, when translated into euros. Capacity was in good use. Higher energy prices in Central Europe and the UK negatively affected results. The average price of the most important raw material, recycled paper, was about the same as in 2005. Markets In Europe, demand for standard and improved newsprint showed a 2% increase compared with the year before. In Europe, standard newsprint market prices were, on average, 5% higher. Also in the other markets, with the exception of North America, growth in demand increased. Fine and Speciality Papers Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 06 06 06 06 05 05 05 05 Sales, m 667 626 627 640 626 574 495 539 EBITDA, m 1) 104 106 76 82 88 92 34 95 % of sales 15.6 16.9 12.1 12.8 14.1 16.0 6.9 17.6 Depreciation, -56 -55 -71 -55 -68 -56 -51 -49 amortization and impairment charges, m Operating profit, m 44 50 -13 27 20 36 -17 46 % of sales 6.6 8.0 -2.1 4.2 3.2 6.3 -3.4 8.5 Non-recurring -3 -2 -36 - -8 - - - items, m 2) Operating profit excl. 47 52 23 27 28 36 -17 46 non-recurring items and amortization of goodwill, m % of sales 7.0 8.3 3.7 4.2 4.5 6.3 -3.4 8.5 Deliveries, 1,000 t. 907 878 884 881 863 793 684 720 Q1-Q4/ Q1-Q4/ Q1-Q4/ 06 05 04 Sales, m 2,560 2,234 2,286 EBITDA, m 1) 368 309 367 % of sales 14.4 13.8 16.1 Depreciation, -237 -224 -199 amortization and impairment charges,m Operating profit, m 108 85 171 % of sales 4.2 3.8 7.5 Non-recurring -41 -8 3 items, m 2) Operating profit excl. 149 93 173 non-recurring items and amortization of goodwill, m % of sales 5.8 4.2 7.6 Deliveries, 1,000 t 3,550 3,060 3,074 Capital employed 2,760 2,843 2,640 (average), m ROCE (excl. 5.4 3.3 6.6 non-recurring items and amortization of goodwill), % 1) EBITDA is operating profit before depreciation, amortization and impairment charges and excluding non-recurring items. 2) In 2006, non-recurring items include personnel and impairment charges related to the profitability programme. In 2005, one-time depreciation was booked for the rebuild of Nordland's paper machine. Q4 of 2006 compared with Q4 of 2005 Operating profit, excluding non-recurring items, for Fine and Speciality Papers increased to 47 million ( 28 million). Sales were 667 million ( 626 million). Paper deliveries were 907,000 tonnes (863,000 tonnes). Operating efficiency improved in the fourth quarter and deliveries increased. Increasing raw material prices had a negative effect on profitability. Average prices for fine and speciality papers translated into euros were up 1%. 2006 compared with 2005 Operating profit, excluding non-recurring items, for Fine and Speciality Papers was 149 million ( 93 million). Sales were 2,560 million (2,234 million). Paper deliveries increased from 3,060,000 tonnes to 3,550,000 tonnes. Energy and raw material costs increased from the last year but the negative impact of these was partially offset by improved operating efficiency. Kymi paper machine 7 was closed at the end of June. Its production was transferred to other machines at the Kymi and Nordland Papier mills due to which their capacity utilisation improved. Speciality paper capacity was in good use. The new paper machine, started up in May 2005 in China, contributed to the volume increase. Average prices for fine and speciality papers translated into euros were slightly down from last year. Markets In Europe, demand for coated fine papers increased by 2% and for uncoated fine papers by 1% compared with the previous year. For label and packaging papers, the good demand continued. In Asia, demand for coated and uncoated fine papers increased. Market prices for coated and uncoated fine papers in Europe decreased by about 2%. In Asia, fine paper prices were higher than a year ago. Converting Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 06 06 06 06 05 05 05 05 Sales, m 323 312 316 323 297 343 346 361 EBITDA, m 1) 25 23 26 28 18 22 17 32 % of sales 7.7 7.4 8.2 8.7 6.1 6.4 4.9 8.9 Depreciation, -9 -11 -9 -9 -11 -11 -11 -12 amortization and impairment charges,m Operating profit, m 16 12 17 19 8 36 6 20 % of sales 5.0 3.8 5.4 5.9 2.7 10.5 1.7 5.5 Non-recurring - - - - 1 25 - - items, m 2) Operating profit excl. 16 12 17 19 7 11 6 20 non-recurring items and amortization of goodwill, m % of sales 5.0 3.8 5.4 5.9 2.4 3.2 1.7 5.5 Q1-Q4/ Q1-Q4/ Q1-Q4/ 06 05 04 Sales, m 1,274 1,347 1,414 EBITDA, m 1) 102 89 122 % of sales 8.0 6.6 8.6 Depreciation, -38 -45 -53 amortization and impairment charges,m Operating profit, m 64 70 71 % of sales 5.0 5.2 5.0 Non-recurring - 26 2 items, m 2) Operating profit excl. 64 44 74 non-recurring items and amortization of goodwill, m % of sales 5.0 3.3 5.2 Capital employed 489 603 654 (average), m ROCE (excl. 13.1 7.3 11.3 non-recurring items and amortization of goodwill), % 1) EBITDA is operating profit before depreciation, amortization and impairment charges and excluding non-recurring items. 2) Non-recurring items in 2005 include a gain of 26 million from the sale of Loparex. Q4 of 2006 compared with Q4 of 2005 Operating profit, excluding non-recurring items, for Converting was 16 million ( 7 million). Fourth-quarter sales for the division came to 323 million ( 297 million). UPM Raflatac's self-adhesive labelstock profitability was good. Prices were slightly higher than a year earlier. UPM Raflatac's sales increased in all markets. The internal efficiency of Walki Wisa improved, but price increases for oil-based raw materials had a negative effect on the result. Sales of Walki Wisa increased. 2006 compared with 2005 For 2006, Converting's operating profit, excluding non-recurring items, increased to 64 million from 44 million. The division's sales came to 1,274 million ( 1,347 million). The Loparex Group, with approximately 340 million in annual sales, was sold in August 2005. The profitability of UPM Raflatac's self-adhesive labelstock improved and was good. Volumes were higher, and sales increased by 15% to 987 million. Notable growth took place in North America and Europe but also in Asia. Sales growth in Asia Pacific accelerated towards the end of the year, led by good development in China. The new factory in Changshu made its first commercial deliveries at the end of December. Prices of raw materials remained largely unchanged. The growth in sales volume for RFID tags accelerated towards the end of the year. The profitability of Walki Wisa's industrial wrappings improved, mainly as a result of internal measures. Sales amounted to 287 million, 7% higher than for 2005. Markets Demand for self-adhesive labelstock grew in North America, Europe, and Asia. Average prices for self-adhesive labelstock were slightly higher. The demand for industrial wrappings continued to be strong, at the previous year's level; however, competition remained fiery as well. Prices were unchanged. Wood Products Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 06 06 06 06 05 05 05 05 Sales, m 287 310 378 346 331 302 343 314 EBITDA, m 1) 24 22 33 25 22 9 26 29 % of sales 8.4 7.1 8.7 7.2 6.6 3.0 7.6 9.2 Depreciation, -10 -11 -11 -11 -40 -11 -12 -12 amortization and impairment charges,m Operating profit, m 14 104 22 4 -23 -2 14 17 % of sales 4.9 33.5 5.8 1.2 -6.9 -0.7 4.1 5.4 Non-recurring - 93 - -10 -32 - - - items, m 2) Operating profit 14 11 22 14 9 -2 14 17 excl. non-recurring items, m % of sales 4.9 3.5 5.8 4.0 2.7 -0.7 4.1 5.4 Production, plywood 259 209 239 248 245 189 245 237 1,000 m3 Production, sawn 591 486 581 556 592 475 455 495 timber 1,000 m3 Q1-Q4/ Q1-Q4/ Q1-Q4/ 06 05 04 Sales, m 1,321 1,290 1,492 EBITDA, m 1) 104 86 80 % of sales 7.9 6.7 5.4 Depreciation, -43 -75 -73 amortization and impairment charges,m Operating profit, m 144 6 111 % of sales 10.9 0.5 7.4 Non-recurring 83 -32 83 items, m 2) Operating profit excl. 61 38 28 non-recurring items and amortization of goodwill, m % of sales 4.6 2.9 1.9 Production, plywood 955 916 969 1,000 m3 Production, sawn 2,214 2,017 2,276 timber 1,000 m3 Capital employed 616 660 748 (average), m ROCE (excl. 9.9 5.8 3.7 non-recurring items), % 1) EBITDA is operating profit before depreciation, amortization and impairment charges and excluding non-recurring items. 2) Non-recurring items in the first quarter 2006 include a loss of 10 million from the sale of the Loulay plywood mill, and in the third quarter, a capital gain of 93 million on the sale of Puukeskus. Non-recurring items in 2005 include impairment charges of 25 million relating to the Group's Finnish sawmills and a provision of 7 million relating mainly to restructuring of the sales network. Q4 of 2006 compared with Q4 of 2005 Operating profit, excluding non-recurring items, for Wood Products increased to 14 million ( 9 million). Sales for the division came to 287 million ( 331 million). The plywood production was 259,000 (245,000) cubic metres and sawn timber production 591,000 (592,000) cubic metres. The profitability of plywood was good. The profitability of sawmilling improved, and its operating profit was positive. Due to the exceptionally warm autumn, availability of wood weakened and capacity could not be utilized in an optimal manner. 2006 compared with 2005 The division's operating profit, excluding non-recurring items, increased to 61 million ( 38 million). Sales came to 1,321 million ( 1,290 million). Plywood production was 955,000 cubic metres (916,000 cubic metres) and sawn timber production 2,214,000 cubic metres (2,017,000 cubic metres). Plywood enjoyed good profitability. Sawmilling improved its profitability, and operating profit turned positive due to higher prices and increased deliveries. Sawn timber production was higher than in 2005, mainly as a result of the increased volumes from the Pestovo sawmill in Russia. Sale of the building materials merchant Puukeskus Oy took place at the end of August. The annual sales of Puukeskus were approximately 400 million. Markets Birch and spruce plywood demand continued to be strong in all markets. Plywood prices increased slightly from their 2005 levels. Markets for veneers and further processed goods were solid. Redwood and whitewood sawn timber markets improved, and prices increased. The supply of logs tightened, causing upward pressure on prices. Other Operations m Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 06 06 06 06 05 05 05 05 Sales 1) 162 143 126 140 133 111 136 137 EBITDA 2) 69 23 32 66 55 32 37 36 Depreciation, -8 -6 -8 -4 -5 -4 -7 -6 amortization and impairment charges Operating profit Forestry 3) 23 20 -82 20 20 17 5 22 Energy Department, 36 - 18 40 42 23 41 29 Finland Other and -9 -19 27 -7 -60 -7 -6 -11 eliminations Operating profit, total 50 1 -37 53 2 33 40 40 Non-recurring items 4) -6 -1 41 -5 -57 - - - Operating profit, 56 2 -78 58 59 33 40 40 excluding non-recurring items m Q1-Q4/ Q1-Q4/ Q1-Q4/ 06 05 04 Sales 1) 571 517 538 EBITDA 2) 190 160 138 Depreciation, -26 -22 -38 amortization and impairment charges Operating profit Forestry 3) -19 64 66 Energy Department, 94 135 118 Finland Other and -8 -84 150 eliminations Operating profit, total 67 115 334 Non-recurring items 4) 29 -57 219 Operating profit, 38 172 115 excluding non-recurring items Capital employed 3,343 3,501 3,355 at the end of period (including associated companies) 1) Includes sales outside the Group. 2) EBITDA is operating profit before depreciation, amortization and impairment charges and excluding the change in value of biological assets and non-recurring items. 3) The second quarter of 2006 includes a decrease of 102 million in the fair value of biological assets and wood harvested. 4) Non-recurring items in 2006 include in the second quarter the capital gain of 41 million of the Group head office real estate, and in the first quarter, the donation of 5 million to a UPM-Kymmene Cultural Foundation, and in 2005 they include a fine of 57 million imposed by the European Commission. Q4 of 2006 compared with Q4 of 2005 Excluding non-recurring items, operating profit for Other Operations was 56 million ( 59 million). Sales were 162 million ( 133 million). The cost of wood raw material harvested from the Group's forests was 27 million ( 12 million). The increase in the fair value of biological assets (growing trees) was 22 million ( 21 million). Operating profit of the Energy Department in Finland was 36 million ( 42 million). Hydropower availability was significantly lower than the previous year even if the water reservoirs in the Nordic countries returned to their normal levels for the season, or even higher, by the end of the year. 2006 compared with 2005 Excluding non-recurring items, the operating profit for Other Operations in 2006 was 38 million ( 172 million). Sales totalled 571 million ( 517 million). The cost of wood raw material harvested from the Group's own forests was 107 million ( 34 million). The decrease in the fair value of biological assets (growing trees) was 19 million (increase of 68 million). Fellings from the Group's own forests increased as planned to compensate transient shortage in wood supply stemming from the change in Finnish forest taxation. Additionally, during the fourth quarter there were difficulties in reaching the felling sites in Finland and Russia, due to unusually warm and rainy weather. The decrease in the fair value of biological assets was mainly due to an increase of half a percentage point, to 7.5%, in the discount rate applied in forest valuation. The operating profit of the Energy Department in Finland was 94 million ( 135 million). Availability of hydropower was significantly lower than in the comparison period and costs of energy increased. Average energy prices in Nord Pool were substantially higher. Associated companies and joint ventures m Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 06 06 06 06 05 05 05 05 Share of result after tax Oy Metsä-Botnia Ab 18 24 13 14 19 13 -10 14 Pohjolan Voima Oy -9 -7 -5 7 - -1 -11 12 Other - 1 - 5 -5 3 2 5 Total 9 18 8 26 14 15 -19 31 m Q1-Q4/ Q1-Q4/ Q1-Q4/ 06 05 04 Share of result after tax Oy Metsä-Botnia Ab 69 36 56 Pohjolan Voima Oy -14 - -5 Other 6 5 7 Total 61 41 58 The first quarter of 2005 includes non-recurring income of 12 million, and the fourth quarter charges of 3 million, both relating to valuation of the assets of Pohjolan Voima Oy. The average price of long-fibre (NBSK) pulp was USD 675/tonne, up by 10% on last year. The price for short-fibre (BHKP) pulp was USD 638/tonne, up 10%. The corresponding prices in euros were 535/tonne for NBSK (up 10%) and 508/tonne for BHKP (up 11%). Deliveries and production Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 06 06 06 06 05 05 05 05 Deliveries Magazine papers, 1,288 1,227 1,148 1,098 1,308 1,048 1,020 1,110 1,000 t Newsprint, 1,000 t 697 666 660 654 736 593 631 632 Fine and speciality 907 878 884 881 863 793 684 720 papers, 1,000 t Converting papers, - - - - - 10 8 16 1,000 t Deliveries total 2,892 2,771 2,692 2,633 2,907 2,444 2,343 2,478 Production Paper, 1,000 t 2,858 2,858 2,744 2,691 2,801 2,840 1,929 2,653 Plywood, 1,000 m3 259 209 239 248 245 189 245 237 Sawn timber, 1,000 m3 614 526 623 594 618 508 493 528 Chemical pulp, 1,000 t 547 506 498 544 539 516 237 548 Q1-Q4/ Q1-Q4/ Q1-Q4/ 06 05 04 Deliveries Magazine papers, 4,761 4,486 4,940 1,000 t Newsprint, 1,000 t 2,677 2,592 2,719 Fine and speciality 3,550 3,060 3,074 papers, 1,000 t Converting papers, - 34 59 1,000 t Deliveries total 10,988 10,172 10,792 Production Paper, 1,000 t 11,151 10,223 10,886 Plywood, 1,000 m3 955 916 969 Sawn timber, 1,000 m3 2,357 2,147 2,409 Chemical pulp, 1,000t 2,095 1,840 2,243 Helsinki, 1 February 2007 UPM-Kymmene Corporation Board of Directors Financial information This financial review is unaudited Consolidated income statement m Q4/ Q4/ Q1-Q4/ Q1-Q4/ Q1-Q4/ 2006 2005 2006 2005 2004 (As (As (As revised) revised)revised) Sales 2,583 2,574 10,022 9,348 9,820 Other operating 20 27 231 117 168 income Costs and expenses -2,141 -2,241 -8,514 -8,092 -8,254 Change in fair value -5 9 -126 34 15 of biological assets and wood harvested Share of results of 9 14 61 41 58 associated companies and joint ventures Depreciation, -219 -441 -1,138 -1,130 -1,122 amortization and impairment charges Operating profit 247 -58 536 318 685 Gains on -2 - -2 90 1 available-for-sale investments, net Exchange rate and 4 - 18 -4 48 fair value gains and losses Interest and other -46 -33 -185 -147 -178 finance costs, net Profit before tax 203 -91 367 257 556 Income taxes -8 14 -29 4 364 Profit for the period 195 -77 338 261 920 Attributable to: Equity holders of 196 -76 340 263 919 the parent company Minority interest -1 -1 -2 -2 1 195 -77 338 261 920 Earnings per share for profit attributable to the equity holders of the parent company Basic earnings per 0.37 -0.15 0.65 0.50 1.76 share, Diluted earnings 0.38 -0.15 0.65 0.50 1.75 per share, Consolidated balance sheet m 31.12. 31.12. 2006 2005 ASSETS Non-current assets Goodwill 1,514 1,514 Other intangible assets 461 535 Property, plant and equipment 6,500 7,316 Investment property 30 35 Biological assets 1,037 1,174 Investments in associated 1,177 1,034 companies and joint ventures Available-for-sale investments 127 153 Non-current financial assets 74 170 Deferred tax assets 362 352 Other non-current assets 73 38 11,355 12,321 Current assets Inventories 1,255 1,256 Trade and other receivables 1,657 1,653 Income tax receivables 3 28 Cash and cash equivalents 199 251 3,114 3,188 Assets held for sale - 32 Total assets 14,469 15,541 EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital 890 890 Share premium reserve 826 826 Treasury shares - -3 Translation differences -89 -34 Fair value and other reserves 278 233 Retained earnings 5,366 5,415 7,271 7,327 Minority interest 18 21 Total equity 7,289 7,348 Non-current liabilities Deferred tax liabilities 790 887 Retirement benefit obligations 427 429 Provisions 187 190 Interest-bearing liabilities 3,353 4,326 Other liabilities 13 13 4,770 5,845 Current liabilities Current interest-bearing 992 976 liabilities Trade and other payables 1,399 1,364 Income tax payables 19 8 2,410 2,348 Total liabilities 7,180 8,193 Total equity and liabilities 14,469 15,541 Consolidated statement of changes in equity Attributable to equity holders of the parent m Share Share Share Trea- Trans- Fair Re- capital issue premium sury lation value tained reserve shares diffe- and ear- rences other nings reser- 1) ves 1) Balance at 1 January 890 - 737 - -42 263 5,149 2004 (as revised) Transactions with equity holders Share options exercised 1 1 8 - - - - Share-based compensation - - - - - 12 - Dividend paid - - - - - - -393 Business combinations - - - - - - - Income and expenses recognised directly in equity Translation differences - - - - -13 - - Other items - - - - - 1 1 Cash flow hedges recorded in equity, - - - - - 31 - net of tax transferred to income - - - - - -19 - statement, net of tax Available-for-sale investments gains/losses arising - - - - - 13 - from fair valuation, net of tax transferred to income - - - - - - - statement, net of tax Revision of profit - 27 on valuation of available-for-sale investments Profit for the period - - - - - - 919 (as revised) Balance at 31 891 1 745 - -55 328 5,676 December 2004 (as revised) Transactions with equity holders Share options exercised 12 -1 68 - - - - Acquisition of - - - -151 - - - treasury shares Reissuance of - - - 11 - - - treasury shares Cancellation of -13 - 13 137 - - -137 treasury shares Share-based - - - - - 8 - compensation Dividend paid - - - - - - -387 Business combinations - - - - - - - Income and expenses recognised directly in equity Translation differences - - - - 25 - - Net investment hedge, - - - - -4 - - net of tax Cash flow hedges recorded in equity, - - - - - -63 - net of tax transferred to - - - - - -2 - income statement, net of tax Available-for-sale investments gains/losses arising - - - - - 51 - from fair valuation, net of tax transferred to - - - - - -89 - income statement, net of tax Profit for the period - - - - - - 263 Balance at 31 890 - 826 -3 -34 233 5,415 December 2005 Transactions with equity holders Reissuance of - - - 3 - - 1 treasury shares Share-based compensation - - - - - 7 - Dividend paid - - - - - - -392 Business combinations - - - - - - - Income and expenses recognised directly in equity Translation differences - - - - -63 - - Other items - - - - - -2 2 Net investment hedge, - - - - 8 - - net of tax Cash flow hedges recorded in equity, - - - - - 45 - net of tax transferred to - - - - - -5 - income statement, net of tax Available-for-sale investments gains/losses arising - - - - - - - from fair valuation, net of tax transferred to - - - - - - - income statement, net of tax Profit for the period - - - - - - 340 Balance at 31 890 - 826 - -89 278 5,366 December 2006 m Total Mino- Total rity equity interest Balance at 1 6,997 32 7,029 January 2004 (as revised) Transactions with equity holders Share options exercised 10 - 10 Share-based compensation 12 - 12 Dividend paid -393 - -393 Business combinations - -7 -7 Income and expenses recognised directly in equity Translation differences -13 - -13 Other items 2 - 2 Cash flow hedges recorded in equity, 31 - 31 net of tax transferred to -19 - -19 income statement, net of tax Available-for-sale investments gains/losses 13 - 13 arising from fair valuation, net of tax transferred to - - - income statement, net of tax Revision of profit 27 - 27 on valuation of available-for-sale investments Profit for the period 919 1 920 (as revised) Balance at 31 7,586 26 7,612 December 2004 (as revised) Transactions with equity holders Share options exercised 79 - 79 Acquisition of -151 - -151 treasury shares Reissuance of 11 - 11 treasury shares Cancellation of - - - treasury shares Share-based compensation 8 - 8 Dividend paid -387 - -387 Business combinations - -3 -3 Income and expenses recognised directly in equity Translation differences 25 - 25 Net investment -4 - -4 hedge, net of tax Cash flow hedges recorded in equity, -63 - -63 net of tax transferred to -2 - -2 income statement, net of tax Available-for-sale investments gains/losses 51 - 51 arising from fair valuation, net of tax transferred to -89 - -89 income statement, net of tax Profit for the period 263 -2 261 Balance at 31 7,327 21 7,348 December 2005 Transactions with equity holders Reissuance of 4 - 4 treasury shares Share-based compensation 7 - 7 Dividend paid -392 - -392 Business combinations - -1 -1 Income and expenses recognised directly in equity Translation differences -63 - -63 Other items - - - Net investment 8 - 8 hedge, net of tax Cash flow hedges recorded in equity, 45 - 45 net of tax transferred to -5 - -5 income statement, net of tax Available-for-sale investments gains/losses - - - arising from fair valuation, net of tax transferred to - - - income statement, net of tax Profit for the period 340 -2 338 Balance at 31 7,271 18 7,289 December 2006 1) Reflects the retrospective application of new and revised International Financial Reporting Standards. Cash flow statement 1.1.- 31.12. m 2006 2005 2004 (As revi- sed*) Cash flow from operating activities Profit for the period 338 261 920 Adjustments to 1,195 1,125 419 profit for the period 1) Interest received 9 15 39 Interest paid -187 -156 -189 Dividends received 16 21 39 Other financial -18 -86 -45 items, net Income taxes paid -159 -93 -72 Change in working 21 -234 -114 capital 2) Net cash provided 1,215 853 997 by operating activities Cash flow from investing activities Acquisition of - -6 -1 subsidiary shares, net of cash Acquisition of -68 -5 -40 shares in associated companies Acquisition of - -22 -1 available-for-sale investments Capital expenditure -635 -690 -630 Proceeds from 203 200 185 disposal of subsidiary shares,net of cash Proceeds from 52 16 25 disposal of shares in associated companies Proceeds from 3 284 -41 disposal of available-for-sale investments Proceeds from sale 108 47 29 of fixed assets Proceeds from 23 25 20 long-term receivables Increase in long-term - -7 -12 receivables Other investing - - - cash flow Net cash used in -314 -158 -466 investing activities Cash flow from financing activities Proceeds from 415 178 - long-term liabilities Payments of -574 -641 -224 long-term liabilities Proceeds from -398 262 -102 (payment of) short-term borrowings, net Share options - 78 10 exercised Dividends paid -392 -388 -393 Purchase of own shares - -151 - Other financing cash flow -2 74 -1 Net cash used in -951 -588 -710 financing activities Change in cash and -50 107 -179 cash equivalents Cash and cash 251 142 338 equivalents at the beginning of year Foreign exchange -2 2 -17 effect on cash Change in cash and -50 107 -179 cash equivalents Cash and cash 199 251 142 equivalents at year-end Notes to the consolidated cash flow statement 1) Adjustments to net profit Taxes 29 -4 -364 Depreciation, 1,138 1,130 1,122 amortization and impairment charges Share of results in -61 -41 -58 associated companies and joint ventures Profits and losses -157 -48 -138 on sale of fixed assets and investments Gains on 2 -90 -1 available-for-sale investments, net Finance costs, net 167 151 130 Rosenlew cartel fine -57 - - Change in the - - -269 Finnish pension system Other adjustments 134 27 -3 1,195 1,125 419 2) Change in working capital Inventories -60 -124 -26 Current receivables -69 -130 -203 Current non-interest 150 20 115 bearing liabilities 21 -234 -114 *) Reflects the retrospective application of new and revised International Financial Reporting Standards. Quarterly information m Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ 06 06 06 06 05 05 05 Sales by segment Magazine Papers 905 861 817 771 928 726 697 Newsprint 380 360 351 345 379 296 320 Fine and Speciality 667 626 627 640 626 574 495 Papers Converting 323 312 316 323 297 343 346 Wood Products 287 310 378 346 331 302 343 Other Operations 162 143 126 140 133 111 136 Internal sales -141 -117 -131 -105 -120 -109 -84 Sales, total 2,583 2,495 2,484 2,460 2,574 2,243 2,253 Operating profit by segment Magazine Papers 75 -62 -85 16 -99 35 -43 Newsprint 39 50 34 25 20 27 12 Fine and Speciality 44 50 -13 27 20 36 -17 Papers Converting 16 12 17 19 8 36 6 Wood Products 14 104 22 4 -23 -2 14 Other Operations 50 1 -37 53 2 33 40 Share of results of 9 18 8 26 14 15 -19 associated companies and joint ventures Operating profit 247 173 -54 170 -58 180 -7 (loss), total % of sales 9.6 6.9 -2.2 6.9 -2.3 8.0 -0.3 Gains on -2 - - - - - 1 available-for-sale investments, net Exchange rate and 4 -3 5 12 - 14 -15 fair value gains and losses Interest and other -46 -41 -52 -46 -33 -45 -29 finance costs, net Profit (loss) 203 129 -101 136 -91 149 -50 before tax Income taxes -8 18 -2 -37 14 -38 72 Profit (loss) for 195 147 -103 99 -77 111 22 the period Basic earnings per 0.37 0.29 -0.20 0.19 -0.15 0.21 0.05 share, Diluted earnings 0.38 0.28 -0.20 0.19 -0.15 0.21 0.05 per share, Average number of 523,258 523,256 523,256 523,108 523,105 523,115 521,617 shares basic (1,000) Average number of 526,416 525,938 525,874 525,936 524,703 524,710 522,131 shares diluted (1,000) Non-recurring items in operating profit. Non-recurring items in operating profit are specified in the divisional reviews on pages 6-9. Magazine Papers 6 -126 -133 - -156 -17 - Newsprint -2 - -5 - -5 - - Fine and Speciality -3 -2 -36 - -8 - - papers Converting - - - - 1 25 - Wood Products - 93 - -10 -32 - - Other Operations -6 -1 41 -5 -57 - - Share of results of - - - - -3 - - associated companies and joint ventures Non-recurring items -5 -36 -133 -15 -260 8 - in operating profit, total Non-recurring items 6 - - - 9 - - reported after operating profit 1) Non-recurring items 35 20 -29 - -16 - 58 reported in taxes 2) Non-recurring 36 -16 -162 -15 -267 8 58 items, total Operating profit, 252 209 79 185 202 172 -7 excl. non-recurring items % of sales 9.8 8.4 3.2 7.5 7.8 7.7 -0.3 Profit before tax, 202 165 32 151 160 141 -50 excl. non-recurring items % of sales 7.8 6.6 1.3 6.1 6.2 6.3 -2.2 Earnings per share, 0.30 0.25 0.04 0.21 0.22 0.19 -0.07 excl. non-recurring items, Return on equity, 8.7 7.2 1.1 6.1 5.9 5.3 neg. excl. non-recurring items, % Return on capital 8.7 7.1 2.7 6.4 6.5 6.0 neg. employed, excl. non-recurring items, % m Q1/ Q1-Q4/ Q1-Q4/ Q1-Q4/ 05 06 05 04 Sales by segment Magazine Papers 743 3,354 3,094 3,308 Newsprint 313 1,436 1,308 1,304 Fine and Speciality 539 2,560 2,234 2,286 Papers Converting 361 1,274 1,347 1,414 Wood Products 314 1,321 1,290 1,492 Other Operations 137 571 517 538 Internal sales -129 -494 -442 -522 Sales, total 2,278 10,022 9,348 9,820 Operating profit by segment Magazine Papers 31 -56 -76 -67 Newsprint 18 148 77 7 Fine and Speciality 46 108 85 171 Papers Converting 20 64 70 71 Wood Products 17 144 6 111 Other Operations 40 67 115 334 Share of results of 31 61 41 58 associated companies and joint ventures Operating profit 203 536 318 685 (loss), total % of sales 8.9 5.3 3.4 7.0 Gains on 89 -2 90 1 available-for-sale investments, net Exchange rate and -3 18 -4 48 fair value gains and losses Interest and other -40 -185 -147 -178 finance costs, net Profit (loss) 249 367 257 556 before tax Income taxes -44 -29 4 364 Profit (loss) for 205 338 261 920 the period Basic earnings per 0.39 0.65 0.50 1.76 share, Diluted earnings 0.39 0.65 0.50 1.75 per share, Average number of 520,281 523,220 522,029 523,641 shares basic (1,000) Average number of 523,065 526,041 523,652 526,247 shares diluted (1,000) Non-recurring items in operating profit. Non-recurring items in operating profit are specified in the divisional reviews on pages 6-9. Magazine Papers - -253 -173 -104 Newsprint - -7 -5 2 Fine and Speciality - -41 -8 3 papers Converting - - 26 2 Wood Products - 83 -32 83 Other Operations - 29 -57 219 Share of results of 12 - 9 10 associated companies and joint ventures Non-recurring items 12 -189 -240 215 in operating profit, total Non-recurring items 89 6 98 - reported after operating profit 1) Non-recurring items - 26 42 519 reported in taxes 2) Non-recurring 101 -157 -100 734 items, total Operating profit, 191 725 558 470 excl. non-recurring items % of sales 8.4 7.2 6.0 4.8 Profit before tax, 148 550 399 341 excl. non-recurring items % of sales 6.5 5.5 4.3 3.5 Earnings per share, 0.20 0.80 0.54 0.49 excl. non-recurring items, Return on equity, 5.6 5.7 3.8 3.4 excl. non-recurring items, % Return on capital 6.1 6.2 4.5 4.3 employed, excl. non-recurring items, % 1) Non-recurring items in the first quarter of 2005 include net gains of 89 million on sales of listed shares, and in the fourth quarter gains of 9 million from the sale of associated companies. 2) Non-recurring items in the second quarter 2006 comprise 29 million relating to the decrease of deferred tax assets due to the reduction of income tax rate in Canada, in the third quarter 20 million income due to an increase in deferred tax assets, and in the fourth quarter 35 million income primarily due to the change in German tax legislation. Non-recurring items in the first quarter of 2005 comprise 58 million in deferred tax assets booked on the losses made by UPM's Canadian operations and for the fourth quarter 16 million relating to the tax status of an associated company. Changes in property, plant and equipment m Q1-Q4/ Q1-Q4/ 2006 2005 Book value at 7,316 7,621 beginning of period Acquired companies - 6 Capital 604 671 expenditure Decreases -325 -118 Depreciation and -1,039 -1,049 impairment charges Translation -56 185 difference and other changes Book value at end 6,500 7,316 of period Commitments and contingencies m 31.12. 31.12. 2006 2005 Own commitments Mortgages 92 94 On behalf of associated companies and joint ventures Guarantees for loans 12 18 On behalf of others Guarantees for loans 1 2 Other guarantees 5 6 Other own commitments Leasing commitments 23 25 for the next 12 months Leasing commitments 94 70 for subsequent periods Other commitments 69 61 Capital commitments m Comple- Total By 31.12. Q1-Q4/ After tion cost 2005 2006 31.12. 2006 Pulp mill rebuild, June 2008 325 - 25 300 Kymi New mill, UPM March 2008 88 - 8 80 Raflatac, Dixon New bioboiler, September 2009 72 - - 72 Caledonia PM5 quality June 2008 38 - - 38 upgrade, Jämsänkoski PM4 rebuild, May 2007 45 - 11 34 Jämsänkoski Notional amounts of derivative financial instruments m 31.12. 31.12. 2006 2005 Currency derivatives Forward contracts 4,293 4,552 Options, bought 20 - Options, written 10 - Swaps 570 588 Interest rate derivatives Forward contracts 2,500 2,609 Swaps 2,566 2,856 Other derivatives Forward contracts 13 16 Swaps 16 38 Related party (associated companies and joint ventures) transactions and balances m Q1-Q4/Q1-Q4/ 2006 2005 Sales to associated 61 43 companies Purchases from 448 438 associated companies Non-current - 4 receivables at end of period Trade and other 20 21 receivables at end of period Trade and other 23 19 payables at end of period Key exchange rates for the euro at end of period 31.12. 30.9. 30.6. 31.3. 31.12. 30.9. 30.6. 2006 2006 2006 2006 2005 2005 2005 USD 1.3170 1.2660 1.2713 1.2104 1.1797 1.2042 1.2092 CAD 1.5281 1.4136 1.4132 1.4084 1.3725 1.4063 1.4900 JPY 156.93 149.34 145.75 142.42 138.90 136.25 133.95 GBP 0.6715 0.6777 0.6921 0.6964 0.6853 0.6820 0.6742 SEK 9.0404 9.2797 9.2385 9.4315 9.3885 9.3267 9.4259 31.3. 2005 USD 1.2964 CAD 1.5737 JPY 138.44 GBP 0.6885 SEK 9.1430 Basis of preparation The Group has adopted the following interpretation to existing standards to its financial statements from 1 January 2006 that have affected the amounts reported for the current period: IFRS 2 applies to share-based payment transactions in which the entity receives or acquires goods or services. IFRIC 8 includes into the scope of IFRS 2 the transactions where the entity, when granting its own shares, cannot identify the goods or services received. The interpretation is effective for annual periods beginning on or after 1 May 2006. The Group early adopted IFRIC 8 as of the beginning of 2006 resulting in a charge of 3 million in the first quarter. Revised 2005 and 2004 Operating profits for 2005 and 2004 have been revised to correspond with the current reporting format. The share of results of associated companies and joint ventures, related to business operations, previously reported after operating profit, is now reported in operating profit, with an effect of income of 41 million and 58 million in Q1-Q4/2005 and Q1-Q4/2004, respectively. Also from the beginning of 2006, part of the results of derivative instruments relating to cash flow hedges are allocated to the respective division. Comparative years have been revised accordingly. It should be noted that certain statements herein which are not historical facts, including, without limitation, those regarding expectations for market growth and developments; expectations for growth and profitability; and statements preceded by "believes", "expects", "anticipates", "foresees", or similar expressions, are forward-looking statements. Since these statements are based on current plans, estimates and projections, they involve risks and uncertainties which may cause actual results to materially differ from those expressed in such forward-looking statements. Such factors include, but are not limited to: (1) operating factors such as continued success of manufacturing activities and the achievement of efficiencies therein, continued success of product development, acceptance of new products or services by the Group's targeted customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by the Group's patents and other intellectual property rights, the availability of capital on acceptable terms; (2) industry conditions, such as strength of product demand, intensity of competition, prevailing and future global market prices for the Group's products and the pricing pressures thereto, financial condition of the customers and the competitors of the Group, the potential introduction of competing products and technologies by competitors; and (3) general economic conditions, such as rates of economic growth in the Group's principal geographic markets or fluctuations in exchange and interest rates. For more detailed information about risk factors, see pages 4-8 of the company's annual report on form 20-F for the year-ended 31 December, 2005 under "Item 3. Risk Factors". UPM-Kymmene Corporation Pirkko Harrela Executive Vice President, Corporate Communications DISTRIBUTION Helsinki Exchanges New York Stock Exchange Main media www.upm-kymmene.com