UPM-Kymmene Corporation Annual Financial Statement February 5, 2008 at 12:00 Earnings per share for 2007 were EUR 0.16 (0.65 for 2006), excluding special items EUR 1.00 (EUR 0.80). Operating profit for the year was EUR 483 (EUR 536) million, excluding special items EUR 835 (EUR 725) million. Operating profit for the fourth quarter was EUR 142 (EUR 247) million, excluding special items EUR 194 (EUR 252) million. Full year results were impacted by significantly higher than forecast cost of wood and fibrer. As a result of Profitability Programme 2006, UPM has reduced over 1.1 million tonnes of paper capacity and headcount by 3,200 persons. Key figures Q4/ Q4/ Q1-Q4/ Q1-Q4/ Q1-Q4/ 2007 2006 2007 2006 2005 Sales, EUR million 2,512 2,583 10,035 10,022 9,348 EBITDA, EUR million 1) 351 467 1,546 1,678 1,428 % of sales 14.0 18.1 15.4 16.7 15.3 Operating profit, 142 247 483 536 318 EUR million excluding special 194 252 835 725 558 items, EUR million Profit before tax, 92 203 292 367 257 EUR million excluding special 144 202 644 550 399 items, EUR million Net profit for the 29 195 81 338 261 period, EUR million Earnings per share, 0.06 0.37 0.16 0.65 0.50 EUR excluding special 0.24 0.30 1.00 0.80 0.54 items, EUR Diluted earnings 0.06 0.38 0.16 0.65 0.50 per share, EUR Return on equity, % 1.7 10.8 1.2 4.6 3.5 excluding special 7.1 8.7 7.4 5.7 3.8 items, % Return on capital 5.1 8.8 4.3 4.7 3.4 employed, % excluding special 6.9 8.7 7.4 6.2 4.5 items, % Gearing ratio at 59 56 59 56 66 end of period, % Equity to assets 48.8 50.4 48.8 50.4 47.3 ratio at end of period, % Shareholders' 13.21 13.90 13.21 13.90 14.01 equity per share at end of period, EUR Net 3,973 4,048 3,973 4,048 4,836 interest-bearing liabilities at end of period, EUR million Capital employed at 11,098 11,634 11,098 11,634 12,650 end of period, EUR million Capital 173 197 708 699 749 expenditure, EUR million Personnel at end of 26,352 28,704 26,352 28,704 31,522 period 1) EBITDA is operating profit before depreciation, amortisation and impairment charges, excluding the change in value of biological assets, excluding the share of results of associated companies and joint ventures, and special items. The market in 2007 Demand for printing and writing papers in Europe remained good, showing an increase of over 1% from the previous year. Demand for both coated and uncoated magazine papers increased by 4%. The demand for newsprint remained good and showed no change from the previous year. The demand for coated fine papers increased by 2% but for uncoated fine papers decreased by 1%. In North America, demand for printing and writing papers decreased by 5% from the previous year. However, demand for both coated and uncoated magazine papers increased by almost 5%. In other markets - most notably in Asia - demand for printing and writing papers continued to grow rapidly. Global advertising showed moderate growth in 2007. Print advertising in newspapers and magazines grew, albeit at a slower pace. Direct mail, on the other hand, continued its steady growth and was not threatened by the digitalisation of media. In North America and in Europe, which together account for about two thirds of the global advertising volume, growth was clearly slower. The fastest growth took place in Russia and Eastern European countries at around 15-20%. Average market prices for magazine papers in Europe were about 3% down from the previous year. Newsprint market prices were up 4% and uncoated fine paper reels up 7% from last year. Prices for coated fine papers remained about the same as last year. In North America, average US dollar prices for magazine papers were down about 6%. In Asia, fine paper prices increased from last year. Demand for self-adhesive labelstock diverged between the main markets: in Europe, good demand growth continued in the first half of the year but slowed towards the end of the year. In North America, demand growth stalled but showed signs of improvement towards the end of the year. In Asia, demand growth remained strong. RFID volumes continued to grow strongly. In Wood Products, birch plywood demand continued to be strong in all markets. Spruce plywood markets maintained a good balance. Plywood prices increased 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 during the first half of the year. After summer, the markets slowed down first for whitewood and then also for redwood. The supply of logs tightened and prices increased markedly. The euro continued to strengthen against other main trading currencies. This has lowered the profitability of exports and attracted new imports especially in printing papers. Changes in reporting classifications As of the beginning of 2007, the Converting Division consists only of UPM Raflatac and the division has been renamed as the Label Division. Walki Wisa, which was part of the Converting Division until the end of 2006, was sold in the second quarter of 2007. Until the disposal the unit was reported in Other Operations. Comparative periods have been regrouped accordingly. Earnings Q4 of 2007 compared with Q4 of 2006 Sales for the fourth quarter of 2007 were EUR 2,512 million, 3% less than EUR 2,583 million in the fourth quarter of 2006. Operating profit was EUR 142 million (EUR 247 million), 5.7% of sales (9.6%). Operating profit excluding special items was EUR 194 million, 7.7% of sales (EUR 252 million, 9.8% of sales). Operating profit for the fourth quarter includes charges net of EUR 52 million (EUR 5 million) as special items. The main special items were charges of EUR 100 million related to the closure of the Miramichi paper mill, including a EUR 19 million asset impairment and EUR 81 million other costs, and a non-taxable capital gain of EUR 58 million from the sale of the port operators Rauma Stevedoring Ltd and Botnia Shipping Ltd. Other special items, net of EUR 10 million, include charges of EUR 12 million from settlements of certain class-action lawsuits raised against magazine paper and labelstock manufacturers in the United States. Profitability declined clearly from last year. The strong increase in the cost of wood and recycled fibre and the adverse impact of the strengthened euro against other main trading currencies more than offset the achieved cost savings. Also, the average price for the Group's paper deliveries was lower than last year. In Label Materials, the cost of expansion together with the lower average price reduced profitability. In Wood Products, profitability improved slightly from last year. The change in the fair value of biological assets, net of wood harvested, was EUR 47 million (negative EUR 5 million). The share of results of associated companies and joint ventures was EUR 2 million (EUR 9 million). Profit before tax was EUR 92 million (EUR 203 million) and excluding special items EUR 144 million (EUR 202 million). In 2006, a gain of EUR 6 million from sale of shares was reported after operating profit as a special item. Interest and other finance costs net were EUR 46 million (EUR 46 million). Exchange rate and fair value gains and losses resulted in a loss of EUR 4 million (a gain of EUR 4 million). Income taxes were EUR 63 million (EUR 8 million). Fourth quarter income taxes include as special items charges of EUR 39 million from the decrease of deferred tax assets in Canada, primarily due to the decrease in the tax rate. Profit for the fourth quarter was EUR 29 million (EUR 195 million) and earnings per share were EUR 0.06 (EUR 0.37). Earnings per share excluding special items were EUR 0.24 (EUR 0.30). Return on equity was 1.7% (10.8%) and return on capital employed 5.1% (8.8%). Excluding special items, the respective figures were 7.1% (8.7%) and 6.9% (8.7%). 2007 compared with 2006 Sales for 2007 were EUR 10,035 million and about the same as last year (EUR 10,022 million). Operating profit was EUR 483 million (EUR 536 million), 4.8% of sales (5.3%). Operating profit excluding special items was EUR 835 million, 8.3% of sales (EUR 725 million, 7.2% of sales). Operating profit for 2007 includes as special items capital gains of EUR 133 million and charges net of EUR 485 million, totaling net charges of EUR 352 million (net charges of EUR 189 million). In June 2007 UPM decided to close the Miramichi magazine paper mill in Canada temporarily for nine to twelve months. However, due to poor financial prospects, UPM decided in December 2007 to close the mill permanently. These decisions resulted in impairment charges of EUR 41 million and other costs in total of EUR 91 million. In June 2007 the goodwill of Magazine Papers was tested, resulting in a charge of EUR 350 million. The primary drivers for the impairment relate to lower-than-forecast realised magazine paper price and the adverse development of exchange rates, especially that of the U.S. dollar. The main capital gains reported as special items were a capital gain of EUR 42 million on the sale of the real estate company UPM-Asunnot, a EUR 29 million non-taxable capital gain on the sale of Walki Wisa, a producer of wrappings and composite materials for industrial applications, and a non-taxable capital gain of EUR 58 million from the sale of the port operators Rauma Stevedoring Ltd and Botnia Shipping Ltd. The cost increase was approximately 3% from last year. Cost increases were significant in wood and recovered paper and higher than was estimated in the beginning of the year. In Finland, wood price increases were triggered by poor forest harvesting conditions during the winter and the increase in export duties on Russian wood. In Central Europe, alternate uses of wood competed with fibre usage for paper making. Other variable and fixed costs remained almost unchanged, as actions like the Profitability Programme brought savings and increased efficiency of operations. The euro strengthened against other major trading currencies, considerably reducing the profitability of exports from Europe. The profitability of Magazine Papers declined. The average paper price was clearly lower than last year, the cost of wood fibre increased significantly and both the euro and the Canadian dollar strengthened, reducing the profitability of exports. Magazine paper deliveries increased slightly from last year. The profitability of Newsprint improved. The average paper price increased and lower cost of energy mainly compensated increases in other costs such as cost of wood and recycled fibre. Newsprint deliveries were about the same as last year. Fine and Speciality Papers' profitability declined due to higher cost of wood and chemical pulp. The average paper price was slightly higher and paper deliveries increased. The profitability of the Label business declined. The average price was slightly lower than last year partly due to a change in product and market mix and costs incurred from expansion of operations. Wood Products' profitability improved. The strong increase in log costs was managed to be offset by higher prices and improved production efficiency. Plywood production was limited by a shortage of birch logs. Operating profit of Other Operations was higher than a year ago. The good availability of hydropower improved the profitability of energy. The increase in the fair value of biological assets, net of wood harvested, was EUR 79 million (decrease EUR 126 million). The share of the results of associated companies and joint ventures was EUR 43 million (EUR 61 million). Profit before tax was EUR 292 million (EUR 367 million) and excluding special items EUR 644 million (EUR 550 million). In 2006, a gain of EUR 6 million from the sale of shares was reported after operating profit as a special item. Interest and other finance costs were EUR 191 million (EUR 185 million) net. The average interest rate on borrowings increased. Exchange rate and fair value gains and losses resulted in a loss of EUR 2 million (a gain of EUR 18 million). Income taxes were EUR 211 million (EUR 29 million). Taxes include as special items a charge of EUR 123 million from a reduction in the deferred tax assets of Miramichi due to write-down of tax assets and a decrease in the income tax rate in Canada, and as a positive item an income of EUR 25 million from the decrease of deferred tax liabilities relating to the impairment of goodwill of Magazine Papers. Additionally, special items in taxes include an income of EUR 27 million mainly relating to reversal of tax provisions. The effective tax rate was 72.3% (7.8%). Excluding the effect of special items and the decrease of tax rate in the U.K. and Germany, the effective tax rate was 22% (24.4%). Profit for the year was EUR 81 million (EUR 338 million) and earnings per share were EUR 0.16 (EUR 0.65). Earnings per share excluding special items were EUR 1.00 (EUR 0.80). Operating cash flow per share was EUR 1.66 (EUR 2.32). Return on equity was 1.2% (4.6%) and return on capital employed 4.3% (4.7%). Excluding special items, the respective figures were 7.4% (5.7%) and 7.4% (6.2%). Deliveries Paper deliveries for the year were 11,389,000 tonnes (10,988,000 tonnes). Magazine paper deliveries were 4,848,000 tonnes (4,761,000 tonnes), newsprint 2,682,000 tonnes (2,677,000 tonnes) and fine and speciality papers 3,859,000 tonnes (3,550,000 tonnes). Plywood deliveries were 945,000 cubic metres (931,000 cubic metres) and sawn timber deliveries 2,325,000 cubic metres (2,457,000 cubic metres). Financing Cash flow from operating activities, before capital expenditure and financing, was EUR 867 million (EUR 1,215 million). The increase in net working capital amounted to EUR 204 million (decrease EUR 21 million), partially due to increase of wood raw material inventories. The gearing ratio at 31 December was 59% (56% at 31 December 2006). Net interest-bearing liabilities at the end of the year came to EUR 3,973 million (EUR 4,048 million). The average maturity of borrowings at year end was 6.1 years (7.1 years). At the end of the year, the ratings for UPM's rated bonds were BBB of S&P and Baa2 of Moody's. During the year, UPM's credit ratings were unchanged but both rating agencies added “negative outlook” to their rating. Personnel In 2007, UPM had an average of 28,246 employees (31,039 employees). At the beginning of the year the number of employees was 28,704, and at the end of the year 26,352 resulting from a decrease of 2,352 persons. Of this, a decrease of 866 was due to the closures of production lines and rationalisations of operations, 975 due to the sale of Walki Wisa and 650 due to the sale of the Finnish port operators Rauma Stevedoring Ltd and Botnia Shipping Ltd. In Label division, the number of employees increased by 139. Capital expenditure In 2007, capital expenditure, excluding acquisitions and share purchases, was EUR 683 million, 6.8% of sales (EUR 631 million, 6.3% of sales). Including acquisitions and share purchases, capital expenditure was EUR 708 million, 7.1% of sales (EUR 699 million, 7.0%). In April 2007, UPM decided to build a self-adhesive label materials factory in Poland. The new production and logistics centre will serve the growing Eastern European markets and meet increasing Europe-wide demand for filmic label materials. The total investment cost is EUR 90 million and production is scheduled for start-up in the 4th quarter of 2008. In April, UPM decided to modernise and expand the birch plywood production at its Otepää plywood mill in Estonia. The investment is worth EUR 10 million and it will be completed in autumn 2008. In April, UPM announced a EUR 11 million investment in the Kajaani mill in Finland. The new application of ozone treatment will start in early 2008. The facility uses a new method that was developed in-house and uses pine for mechanical pulping. In December, UPM signed a letter of intent with the Russian Sveza Group for a 50/50 joint venture company. The purpose of the joint venture is to build a state-of-the-art forest industry facility in the Vologda region of Northwest Russia. The facility would include a pulp mill, a sawmill and an OSB (Oriented Strand Board) building panels mill. The total investment is estimated to be in excess of one billion euros. The final investment decision is subject to a satisfactory outcome of the final feasibility study and the necessary approvals from authorities. The biofuel-fired power plant investment for the Chapelle Darblay mill in France was completed in February 2007. The plant combusts energy wood and all the sludge produced in the mill's recovered paper recycling process, reducing the mill's CO2 emissions by 95%. The amount of the investment was EUR 85 million. At Jämsänkoski mill, a EUR 45 million investment to convert coated magazine paper machine 4 to produce label papers was completed in May. A new bleaching line at the Tervasaari mill started up in September. The investment amount was EUR 34 million. Investments in production efficiency and product quality of plywood mills in Savonlinna and Jyväskylä were completed during the year. The total investment amount was EUR 8 million. In Uruguay in November, UPM's associated company Metsä-Botnia started up a hardwood pulp mill with an annual capacity of 1 million tonnes. The total cost of the pulp mill investment was USD 1.2 billion. UPM's direct investment in the pulp mill has been EUR 93 million. The largest ongoing investment is the rebuild of the recovery plant at the Kymi pulp mill. The total investment cost is EUR 325 million, and it is planned for completion during the second quarter of 2008. A new renewable energy power plant is under construction at the Caledonian mill in Irvine, Scotland. The investment cost is EUR 84 million and start-up is projected for the third quarter of 2009. At the Jämsänkoski mill, a EUR 38 million investment in the quality of uncoated magazine paper will be completed early in 2008. A new self-adhesive label materials factory is under constructions in Dixon, Illinois in the United States. The value of this investment is approximately USD 100 million and the new factory is slated for completion in the first quarter of 2008. Changes in the Group's structure In June 2007, UPM sold Walki Wisa to funds managed by CapMan. The sale resulted in a capital gain of EUR 29 million. In 2006, Walki Wisa had sales of EUR 287 million and it employed 950 people. In April, UPM sold the real estate company UPM-Asunnot Oy to Waterhouse Real Estate Investment Oy. The sale resulted in a capital gain of EUR 42 million. UPM-Asunnot owned around 2,000 rental apartments in Finland. In October, UPM sold its Finnish port operators Rauma Stevedoring Ltd and Botnia Shipping Ltd to Babcock & Brown Infrastructure. The sale resulted in a capital gain of EUR 58 million. The port operators' combined sales were EUR 62 million and they employed 660 employees. Profitability improvement In March 2006, UPM announced an extensive Profitability Programme for 2006-2008 to restore its profitability. The programme includes a reduction of approximately 3,600 employees over the three-year period and closures of uncompetitive paper production capacity. When finalised, the programme is estimated to result in annual cost savings of approximately EUR 200 million. In the first quarter of 2007, UPM stopped the production of coated magazine paper in Jämsänkoski paper machine 4, which had an annual capacity of 120,000 tonnes and converted it to produce label papers. Tervasaari paper machine 6, with an annual capacity of 115,000 tonnes of brown sack paper, and the semi-alkaline pulp (SAP) line, with an annual capacity of 60,000 tonnes, were closed in August. These closures completed the plan to close 520,000 tonnes of magazine paper capacity, 150,000 tonnes of fine paper capacity and 115,000 tonnes of packaging paper capacity. The annual cost savings from the programme in 2007 were approximately EUR 110 million, and the accumulated reduction in the number of employees by the end of 2007 was 3,200. On 17 December 2007, UPM decided on further actions to improve its profitability. The decision was made to permanently close the Miramichi 450,000 tonnes magazine paper mill in Canada, reduce 250,000 tonnes of newsprint capacity through temporary shutdowns during 2008, reduce label paper capacity through temporary shutdowns and rationalise self-adhesive label materials operations by closing four old coating lines. In Wood Products, UPM started negotiations with employees on the possible closure of the timber components and planing mill in Luumäki, Finland. The annualised cost saving of these actions is estimated to be in the range of EUR 50 to EUR 70 million. Shares In 2007, UPM shares worth, in total EUR 16,472 million were traded on the Helsinki stock exchange (EUR 12,812 million). The highest quotation was EUR 20.59 in February and the lowest EUR 13.01 in November. On 30 October 2007, UPM decided to terminate the listing of its American Depositary Shares (ADS) on the New York Stock Exchange (NYSE) and seek deregistration and termination of its reporting obligations under the Securities Exchange Act of 1934. The last day of listing on the NYSE was 5 December 2007, and starting from 6 December 2007 the Company's ADSs have been traded on the US over-the-counter (OTC) market under a Level 1 sponsored American Depositary Receipt program. The Annual General Meeting held on 27 March 2007 approved a proposal by the Board of Directors to buy back not more than 52,000,000 own shares. The authorisation is valid for 18 months. The meeting authorised the Board to decide on the disposal of shares so acquired as well as on a free issue of shares to the company itself so that the total number of shares to be issued to the company combined with the number of own shares bought back under the buy-back authorisation may not exceed 1/10 of the total number of shares of the company. On 20 August 2007, the UPM Board of Directors decided to buy back up to 16,400,000 own shares representing 3.1% of the total number of shares. The share buy-backs were initiated on 29 August and completed on 9 November. Shares worth EUR 266.2 million were bought at an average price of EUR 16.23. On 19 December, the Board of Directors decided to invalidate the acquired 16,400,000 shares. The invalidating of the shares was registered in the Trade Register on 21 December. Additionally, the Annual General Meeting authorised the Board of Directors to decide to issue shares and special rights entitling to shares of the company. The number of new shares to be issued, including shares to be obtained under special rights, shall be no more than 250,000,000. Of that amount, the maximum number that can be issued to the company's shareholders based on their pre-emptive rights is 250,000,000 shares, and the maximum amount that can be issued deviating from the shareholders' pre-emptive rights in a directed share issue is 100,000,000 shares. The maximum number of new shares to be issued as part of the company's incentive programmes is 5,000,000 shares. The authorisation is valid for no more than three years from the date of the decision. To date, this authorisation has not been used. The meeting also decided on granting share options in connection with the company's share-based incentive plans. In option programmes 2007A, 2007B and 2007C, the total number of share options is no more than 15,000,000, and they will entitle to subscribe for, in total, no more than 15,000,000 new shares of the company. To date, this authorisation has not been used. The meeting decided to decrease the share premium reserve as shown in the balance sheet of the parent company as per 31 December 2006 by the amount of EUR 776,122,940.18, and the legal reserve as shown in the balance sheet as per 31 December 2006 by the amount of EUR 187,227,209.68. The changes were executed on 1 August. The reserves were transferred to the invested non-restricted equity fund. Apart from the above, the Board of Directors has no current authorisation to issue shares, convertible bonds, or share options. In 2007, 5,709,890 shares were subscribed for through exercising of outstanding share options. The number of shares entered in the Trade Register on 31 December 2007 was 512,569,320. Through the issuance authorisation and share options, the number of shares may increase to a maximum of 794,158,420. The company has received the following notifications from shareholders: on 13 September 2007, the Capital Group Companies, Inc. informed that the Finnish Financial Supervision Authority has granted exemption to the Capital Group Companies, Inc. to report its holdings and those of Capital Group International, Inc. separately from those of Capital Research and Management Company. Pursuant to this exemption, the aggregate holdings of Capital Group Companies, Inc., Capital Group International, Inc. and its subsidiaries have fallen below 5% of the shares and voting rights of UPM-Kymmene Corporation. The aggregate holdings on 12 September 2007 were 11,388,908 shares, representing 2.15% of the shares and voting rights. On 12 September 2007, the Capital Research and Management Company held a total of 16,035,800 UPM-Kymmene Corporation shares, representing 3.03% of the shares and voting rights. On 7 March 2005, the Franklin Templeton Group and its affiliated investment advisors of Franklin Resources held 10.11% of the voting rights of UPM-Kymmene Corporation. The listing of UPM 2005G stock options on OMX Nordic Exchange Helsinki commenced on 1 October 2007. Company directors The Annual General Meeting of 27 March 2007 confirmed that the number of members on the Board of Directors is 11. Mr Veli-Matti Reinikkala, Head of Process Automation Division of ABB, and Mr. Jussi Pesonen, President and CEO of UPM, were elected to the Board of Directors as new members. In addition, Mr Michael C. Bottenheim, LL.M., MBA; Mr Berndt Brunow, member of the Board of Oy Karl Fazer Ab; Mr Karl Grotenfelt, LL.M., Chairman of the Board of Directors of Famigro Oy; Dr. Georg Holzhey, former Executive Vice President of UPM and Director of G. Haindl'sche Papierfabriken KGaA; Ms Wendy E. Lane, Chairman of American investment firm Lane Holdings, Inc; Mr Jorma Ollila, Chairman of Nokia Corporation and Royal Dutch Shell plc; Ms Ursula Ranin, LL.M., B.Sc. (Econ.); Ms Françoise Sampermans, B.A., Psych., Publishing Consultant and Mr Vesa Vainio, LL.M., were re-elected as members of the Board of Directors. The term of office of the members of the Board of Directors lasts until the end of the next Annual General Meeting. At the assembly meeting of the Board of Directors, Mr Vesa Vainio was re-elected as Chairman, and Mr Jorma Ollila and Mr Berndt Brunow were re-elected as Vice Chairmen. In addition, the Board of Directors elected from among its members an Audit Committee with Mr Michael C. Bottenheim as Chairman, and Ms Wendy E. Lane and Veli-Matti Reinikkala as members. A Human Resources Committee was elected with Mr Berndt Brunow as Chairman, and Mr Georg Holzhey, Ms Ursula Ranin and Ms Françoise Sampermans as members. Furthermore, a Nominating and Corporate Governance Committee was elected with Mr Jorma Ollila as Chairman, and Mr Karl Grotenfelt and Mr Georg Holzhey as members. Litigation Certain competition authorities are continuing investigations into alleged antitrust activities with respect to various products of the company. The US Department of Justice, the EU authorities and the authorities in several EU Member States, Canada and certain other countries have granted UPM conditional full immunity with respect to certain conduct disclosed to them. The US and Canadian investigations are now closed, and the European Commission has tentatively closed its investigation of the European fine paper, newsprint, magazine paper, label paper and self-adhesive labelstock markets. UPM has been named as a defendant in multiple class-action lawsuits against labelstock and magazine paper manufacturers in the United States. During 2007, UPM agreed to settle the class-action lawsuits raised by direct purchasers of labelstock and magazine paper for a total amount of approximately EUR 12 million. Certain class action lawsuits filed by indirect purchasers of labelstock and magazine paper continue to be pending. The remaining litigation matters may last several years. No material provisions have been made in relation to these investigations. Events after the balance sheet date The Group's management is not aware of any significant events occurring after 31 December 2007 that would have an impact on the financial statements. Risk factors The announced increases in the export duty on Russian wood will gradually make wood imports uneconomical and there is a risk that these imports cannot be replaced in a financially sound manner. This could result in reduction of production at the Finnish mills already during 2008. Until the final decisions on the proposed EU Energy Package have been made there will be uncertainties on how the proposed policies and measures will impact the availability and cost of wood fibre for wood processing industries. Outlook for 2008 Global demand for printing papers is forecast to grow somewhat from the last year. In Europe, good demand is expected to continue especially in Eastern Europe. In North America, weakening demand trend is expected to continue. The highest growth in demand will be in China. UPM's deliveries are expected to be about the same as 2007 despite the significant capacity closures. Group's average paper price in local currency is expected to be higher for the first quarter 2008 than it was at the end of last year. UPM's current order books in printing papers are good. In magazine papers the company has agreed price increases in all markets and shortened contract validities in Europe. In newsprint contract price negotiations for 2008 in Europe are not yet finalized. Demand for self-adhesive labelstock is forecast to grow in Europe and Asia. Self-adhesive labelstock prices are expected to increase first in North America and in some Asian markets. Demand for RFID products is expected to grow at a healthy rate. In wood products, strong demand for birch plywood and stable demand for spruce plywood is expected to continue. In sawn timber outlook is cautious due to existing high inventories and slowing of the building activity in some of the main markets. Wood and recycled fibre costs for 2008 are forecast to be higher than full year 2007. An increase in the company's overall costs is expected to be about 2 %. This includes cost savings from the ongoing profitability programme. Capital expenditure is forecast to be about EUR 500 million, clearly below the depreciation. For the full year 2008, the Group expects its operative profitability to be about the same as in 2007. However, the first quarter is expected to be below the same period last year. The Group continues to seek new ways to improve its profitability. Dividend for 2007 The distributable funds of the company are EUR 3.2 billion. The Board of Directors will propose to the Annual General Meeting to be held on 26 March 2008 that a dividend of EUR 0.75 per share be paid in respect of the 2007 financial year (EUR 0.75 for 2006). It is proposed that the dividend be paid on 10 April 2008. Financial information in 2008 The Annual Report for 2007 will be published on the company's website, (main page address: www.upm-kymmene.com) on 29 February 2008. The printed Annual Report will be available in the week beginning 17 March 2008. Publication schedule of interim reports: Interim Report January-March 2008: 24 April 2008 Interim Report January-June 2008: 24 July 2008 Interim Report January-September 2008: 28 October 2008 Divisional reviews Magazine Papers Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2007 2007 2007 2007 2006 2006 2006 2006 Sales, EUR million 811 847 798 793 905 861 817 771 EBITDA, EUR million 1) 98 116 114 113 157 155 145 113 % of sales 12.1 13.7 14.3 14.2 17.3 18.0 17.7 14.7 Depreciation, -83 -82 -443 -86 -88 -209 -210 -97 amortisation and impairment charges, EUR million Operating profit, -62 34 -339 27 75 -62 -85 16 EUR million % of sales -7.6 4.0 -42.5 3.4 8.3 -7.2 -10.4 2.1 Special items, EUR -77 - -371 - 6 -126 -133 - million 2) Operating profit 15 34 32 27 69 64 48 16 excl. special items, EUR million % of sales 1.8 4.0 4.0 3.4 7.6 7.4 5.9 2.1 Deliveries, 1,000t 1,238 1,266 1,189 1,155 1,288 1,227 1,148 1,098 Q1-Q4 Q1-Q4/ Q1-Q4/ 2007 2006 2005 Sales, EUR million 3,249 3,354 3,094 EBITDA, EUR million 1) 441 570 507 % of sales 13.6 17.0 16.4 Depreciation, -694 -604 -566 amortisation and impairment charges, EUR million Operating profit, -340 -56 -76 EUR million % of sales -10.5 -1.7 -2.5 Special items, EUR -448 -253 -173 million 2) Operating profit 108 197 97 excl. special items, EUR million % of sales 3.3 5.9 3.1 Deliveries, 1,000t 4,848 4,761 4,486 Capital employed 3,403 4,010 4,397 (average), EUR million ROCE (excl. special 3.2 4.9 2.2 items), % 1) EBITDA is operating profit before depreciation, amortisation and impairment charges and excluding special items. 2) Special items in the second quarter of 2007 include a goodwill impairment charge of EUR 350 million, an impairment charge of EUR 22 million and personnel costs of EUR 10 million related to the Miramichi paper mill, and an income of EUR 11 million related to impairment reversals. In the fourth quarter, special items include personnel charges of EUR 44 million and other costs of EUR 36 million related to the Miramichi paper mill, and an income of EUR 3 million related to other restructuring measures. Special items in the second quarter of 2006 include personnel charges of EUR 20 million related to the profitability programme, and impairment charges of EUR 113 million related to the closure of the Voikkaa paper mill. In the third quarter, special items include personnel charges of EUR 8 million and impairment charges of EUR 3 million of Voikkaa, and impairment charges of EUR 115 million of Miramichi. In the fourth quarter, special items relate primarily to the capital gain on the sale of the Rauma power plant. Q4 of 2007 compared with Q4 of 2006 The operating profit, excluding special items, for Magazine Papers was EUR 15 million, EUR 54 million lower than a year ago (EUR 69 million). Sales were EUR 811 million (EUR 905 million). Paper deliveries decreased by 4% to 1,238,000 (1,288,000) tonnes. Profitability weakened compared with the same period last year. The main reasons for the decline were lower paper prices and markedly increased fibre costs. The euro strengthened against USD and GBP, further reducing profitability of exports. The average price for all magazine paper deliveries when translated into euros was over 6% lower than a year ago. 2007 compared with 2006 The operating profit, excluding special items, for Magazine Papers was EUR 108 million, EUR 89 million lower than in the previous year (EUR 197 million). Sales decreased slightly to EUR 3,249 million (EUR 3,354 million). Paper deliveries increased by 2% to 4,848,000 (4,761,000) tonnes. Profitability decreased from the year 2006, due to lower paper prices, a stronger euro and Canadian dollar against USD and higher raw material costs. When translated into euros, the average price for all magazine paper deliveries was approximately 5% lower than a year ago. The cost of fibre, i.e. wood, chemical pulp and recycled paper, increased clearly from last year. On the other hand, the efficiency of operations improved as the division maintained delivery volumes despite significant capacity closures. The Miramichi coated magazine paper mill in Canada, with a capacity of 450,000 t/a, was shut down permanently in December. The mill was idled in August on a temporary basis. Closure costs reported as special items were EUR 91 million. In June, the value of the asset of the mill, EUR 22 million, was written off as a special item. Additionally, the division recorded a EUR 350 million impairment charge of the division's goodwill as a special item. Market review During 2007, good growth in magazine paper demand in Europe continued, partly driven by a strong increase in demand in Eastern Europe. Demand for coated and uncoated magazine paper increased by about 4% from that of 2006. Export of magazine paper from Europe declined from the previous year by about 11%. The average market price for magazine papers in Europe decreased and was 3% down from last year's figure. In North America, demand for magazine paper increased by approximately 5%. In North America, average USD prices for magazine papers were about 6% lower, although they started to recover after the summer. Newsprint Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2007 2007 2007 2007 2006 2006 2006 2006 Sales, EUR million 378 365 379 348 380 360 351 345 EBITDA, EUR million 1) 79 91 100 92 89 98 86 72 % of sales 20.9 24.9 26.4 26.4 23.4 27.2 24.5 20.9 Depreciation, -48 -47 -47 -48 -48 -48 -47 -47 amortisation and impairment charges, EUR million Operating profit, 36 44 53 44 39 50 34 25 EUR million % of sales 9.5 12.1 14.0 12.6 10.3 13.9 9.7 7.2 Special items, EUR 5 - - - -2 - -5 - million 2) Operating profit 31 44 53 44 41 50 39 25 excl. special items, EUR million % of sales 8.2 12.1 14.0 12.6 10.8 13.9 11.1 7.2 Deliveries, 1,000t 702 667 683 630 697 666 660 654 Q1-Q4/ Q1-Q4/ Q1-Q4/ 2007 2006 2005 Sales, EUR million 1,470 1,436 1,308 EBITDA, EUR million 1) 362 345 275 % of sales 24.6 24.0 21.0 Depreciation, -190 -190 -198 amortisation and impairment charges, EUR million Operating profit, 177 148 77 EUR million % of sales 12.0 10.3 5.9 Special items, EUR 5 -7 -5 million 2) Operating profit 172 155 82 excl. special items, EUR million % of sales 11.7 10.8 6.3 Deliveries, 1,000t 2,682 2,677 2,592 Capital employed 1,872 1,921 1,900 (average), EUR million ROCE (excl. special 9.2 8.1 4.3 items), % 1) EBITDA is operating profit before depreciation, amortisation and impairment charges and excluding special items. 2) Special items in the fourth quarter of 2007 include an income of EUR 5 million related mainly to other restructuring measures. Special items booked for 2006 relate mainly to the profitability programme. Q4 of 2007 compared with Q4 of 2006 For Newsprint, operating profit, excluding special items, decreased to EUR 31 million (EUR 41 million). Sales were EUR 378 million (EUR 380 million). Paper deliveries amounted to 702,000 tonnes (697,000 tonnes). Profitability decreased from the previous year. This was due to higher deliveries to overseas markets and a stronger euro against USD and GBP. The average price for all newsprint deliveries, when translated into euros, was slightly down on the corresponding quarter in 2006. Costs remained about the same as the cost increase of wood and recycled paper was offset mainly by lower energy costs. 2007 compared with 2006 Operating profit, excluding special items, for Newsprint was EUR 172 million, EUR 17 million higher than a year ago (EUR 155 million). Sales were EUR 1,470 million (EUR 1,436 million). Paper deliveries were about the same as last year at 2,682,000 tonnes (2,677,000 tonnes). The main contributor to the improved profitability was the higher price of newsprint. The average price for all newsprint deliveries when translated into euros was over 2% higher than a year ago. The contract prices in Europe increased by 4-5%, but overseas prices declined. Recycled paper and wood costs increased clearly but were mainly offset by cost savings from energy investments. In December, UPM announced a plan for production curtailments of 250,000 tonnes by closing temporarily PM4 in Kajaani, Finland and PM4 in Steyrermühl, Austria during 2008. Market review The demand for standard and improved newsprint was flat in Europe when compared with last year. Partly due to the strong euro, the prices in Europe compared to overseas deliveries were higher. Consequently imports to Europe increased and exports from Europe decreased. The average market price for standard newsprint was about 5% higher in Europe than a year ago. As a response to weaker market balance, capacity closures and production curtailments were announced. Fine and Speciality Papers Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2007 2007 2007 2007 2006 2006 2006 2006 Sales, EUR million 718 694 686 699 667 626 627 640 EBITDA, EUR million 1) 66 82 92 85 104 106 76 82 % of sales 9.2 11.8 13.4 12.2 15.6 16.9 12.1 12.8 Depreciation, -54 -53 -53 -53 -56 -55 -71 -55 amortisation and impairment charges, EUR million Operating profit, 12 29 39 32 44 50 -13 27 EUR million % of sales 1.7 4.2 5.7 4.6 6.6 8.0 -2.1 4.2 Special items, EUR - - - - -3 -2 -36 - million 2) Operating profit 12 29 39 32 47 52 23 27 excl. special items, EUR million % of sales 1.7 4.2 5.7 4.6 7.0 8.3 3.7 4.2 Deliveries, 1,000t 977 954 960 968 907 878 884 881 Q1-Q4/ Q1-Q4/ Q1-Q4/ 2007 2006 2005 Sales, EUR million 2,797 2,560 2,234 EBITDA, EUR million 1) 325 368 309 % of sales 11.6 14.4 13.8 Depreciation, -213 -237 -224 amortisation and impairment charges, EUR million Operating profit, 112 108 85 EUR million % of sales 4.0 4.2 3.8 Special items, EUR - -41 -8 million 2) Operating profit 112 149 93 excl. special items, EUR million % of sales 4.0 5.8 4.2 Deliveries, 1,000t 3,859 3,550 3,060 Capital employed 2,821 2,760 2,843 (average), EUR million ROCE (excl. special 4.0 5.4 3.3 items), % 1) EBITDA is operating profit before depreciation, amortisation and impairment charges and excluding special items. 2) In 2006, special items include personnel and impairment charges related to the profitability programme. Q4 of 2007 compared with Q4 of 2006 The operating profit, excluding special items, for Fine and Speciality Papers came to EUR 12 million, which is EUR 35 million less than last year (EUR 47 million). Sales increased from EUR 667 million to EUR 718 million. Paper deliveries increased by 8% to 977,000 (907,000) tonnes. The profitability of the division weakened mainly as a result of higher wood and pulp costs. The average price for all fine and speciality paper deliveries when translated into euros was about 1% higher than a year ago. The increase in deliveries resulted from the improved operational efficiency. 2007 compared with 2006 The operating profit, excluding special items, for Fine and Speciality Papers was EUR 112 million, EUR 37 million lower than last year (EUR 149 million). Sales increased from EUR 2,560 million to EUR 2,797 million. Paper deliveries increased to 3,859,000 tonnes, 9% higher than a year ago (3,550,000 tonnes). Profitability decreased mainly as a result of higher fibre costs. The average price increase for all deliveries when translated into euros was about 1% up. A stronger euro compared to USD affected mainly label papers, where the prices in USD were unchanged. Deliveries increased as a result of efficiency improvements, even though substantial closures of capacity took place during 2006 and 2007. To curtail production, UPM decided in December 2007 to close temporarily two label paper machines for 3 months in Finland, one in Tervasaari (PM5) and the other in Jämsänkoski (PM4). Market review When compared to the corresponding period last year, the demand in Europe for coated fine paper increased by about 2% while that for uncoated fine paper remained the same. Imports of fine papers to Europe increased markedly. The average market price for coated fine paper in Europe was flat and started to decrease towards the end of the year. The average price for uncoated fine paper reels was about 7% higher than last year after the steady increase during 2007. In Asia, demand and prices for fine paper increased from last year. The good demand for packaging papers continued. Growth in demand for label papers slowed down from the previous year. Label Materials Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2007 2007 2007 2007 2006 2006 2006 2006 Sales, EUR million 249 252 260 261 251 240 245 251 EBITDA, EUR million 1) 15 18 21 26 25 20 24 24 % of sales 6.0 7.1 8.1 10.0 10.0 8.3 9.8 9.6 Depreciation, -9 -8 -8 -8 -8 -9 -8 -7 amortisation and impairment charges, EUR million Operating profit, 10 10 13 18 17 11 16 17 EUR million % of sales 4.0 4.0 5.0 6.9 6.8 4.6 6.5 6.8 Special items, EUR 4 - - - - - - - million Operating profit 6 10 13 18 17 11 16 17 excl. special items, EUR million % of sales 2.4 4.0 5.0 6.9 6.8 4.6 6.5 6.8 Q1-Q4/ Q1-Q4/ Q1-Q4/ 2007 2006 2005 Sales, EUR million 1,022 987 859 EBITDA, EUR million 1) 80 93 71 % of sales 7.8 9.4 8.3 Depreciation, -33 -32 -30 amortisation and impairment charges, EUR million Operating profit, 51 61 41 EUR million % of sales 5.0 6.2 4.8 Special items, EUR 4 - - million Operating profit 47 61 41 excl. special items, EUR million % of sales 4.6 6.2 4.8 Capital employed 439 388 368 (average), EUR million ROCE (excl. special 10.8 15.7 11.1 items), % 1) EBITDA is operating profit before depreciation, amortisation and impairment charges and excluding special items. 2) Special items in the fourth quarter of 2007 include an income of EUR 4 million related to other restructuring measures. Q4 of 2007 compared with Q4 of 2006 The operating profit, excluding special items, for Label Materials was EUR 6 million (EUR 17 million). Sales were EUR 249 million (EUR 251 million). The division's profitability was clearly lower than last year due to slightly lower average prices, the stronger euro against USD and expansion costs. Delivery volumes of self-adhesive label materials grew in the European and North American markets. In Asia, volumes increased due to the start-up of the new factory in China at the end of 2006 and the opening of new distribution terminals in the region. For RFID, the sales growth continued to be strong. 2007 compared with 2006 Label Materials' operating profit, excluding special items, was EUR 47 million (EUR 61 million). Sales increased to EUR 1,022 million (EUR 987 million). The profitability of the division decreased from the previous year. Sales growth was impacted by the strengthening of the euro, slightly lower prices and a change in the product and market mix. The cost of raw materials was stable but operating costs increased as a result of rapid expansion. In the RFID business, strong growth in volumes continued. In April, UPM announced that a new self-adhesive label materials factory will be built in Wroclaw-Kobierzyce, Poland. In December, an announcement was made on the closure of three label lines in Tampere, Finland, and of one in Melbourne, Australia. Market review In Europe, the good demand continued in the first half of the year, but the first signs of a slowdown were visible during the second half. In North America, demand for self-adhesive label materials was unchanged in the first half of the year but improved slightly during the second half. In the Asia-Pacific region, demand continued to grow at a healthy rate. For RFID, the retail, logistics and mass transit markets were the strongest in Europe, while the media management, especially the library sector, showed the strongest growth in the USA. Wood Products Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2007 2007 2007 2007 2006 2006 2006 2006 Sales, EUR million 297 262 326 314 287 310 378 346 EBITDA, EUR million 1) 26 8 51 42 24 22 33 25 % of sales 8.8 3.1 15.6 13.4 8.4 7.1 8.7 7.2 Depreciation, -11 -10 -11 -10 -10 -11 -11 -11 amortisation and impairment charges, EUR million Operating profit, 21 -2 41 32 14 104 22 4 EUR million % of sales 7.1 -0.8 12.6 10.2 4.9 33.5 5.8 1.2 Special items, EUR 6 - - - - 93 - -10 million 2) Operating profit 15 -2 41 32 14 11 22 14 excl. special items, EUR million % of sales 5.1 -0.8 12.6 10.2 4.9 3.5 5.8 4.0 Deliveries, plywood 239 204 247 255 243 205 232 251 1,000 m3 Deliveries, sawn 520 480 637 587 598 517 622 580 timber 1,000 m3 Q1-Q4/ Q1-Q4/ Q1-Q4/ 2007 2006 2005 Sales, EUR million 1,199 1,321 1,290 EBITDA, EUR million 1) 127 104 86 % of sales 10.6 7.9 6.7 Depreciation, -42 -43 -75 amortisation and impairment charges, EUR million Operating profit, 92 144 6 EUR million % of sales 7.7 10.9 0.5 Special items, EUR 6 83 -32 million 2) Operating profit 86 61 38 excl. special items, EUR million % of sales 7.2 4.6 2.9 Deliveries, plywood 945 931 827 1,000 m3 Deliveries, sawn 2,224 2,317 1,883 timber 1,000 m3 Capital employed 577 616 660 (average), EUR million ROCE (excl. special 15.0 9.9 5.8 items), % 1) EBITDA is operating profit before depreciation, amortisation and impairment charges and excluding special items. 2) Special items in the fourth quarter of 2007 include a gain of EUR 6 million on sale of estate assets. Special items in the first quarter of 2006 include a loss of EUR 10 million from the sale of the Loulay plywood mill, and in the third quarter, a capital gain of EUR 93 million on the sale of Puukeskus. Q4 of 2007 compared with Q4 of 2006 The operating profit, excluding special items, for Wood Products was EUR 15 million (EUR 14 million). Sales increased to EUR 297 million (EUR 287 million). Plywood deliveries were 239,000 (243,000) cubic metres in volume and sawn timber deliveries 520,000 (598,000) cubic metres. The profitability of Wood Products improved. Higher prices more than offset the strong increase in the cost of wood. The profitability of plywood was better than the previous year. Availability of birch logs was tight, causing less optimal use of production capacity. Sawmilling profitability weakened clearly from last year. The market balance for sawn timber weakened, causing a decline in timber prices. 2007 compared with 2006 The operating profit, excluding special items, for Wood Products was EUR 86 million, EUR 25 million higher than last year (EUR 61 million). Sales were EUR 1,199 million (EUR 1,321 million). Excluding Puukeskus Oy, which was sold in August 2006, sales increased from last year. Plywood deliveries were 945,000 (931,000) cubic metres and sawn timber deliveries 2,224,000 (2,317,000) cubic metres. The profitability of both plywood and sawn timber improved as the prices were higher and efficiency improved. Wood costs started to increase rapidly in the spring, which together with the deteriorating market balance weakened the profitability of sawmilling in the second half of the year. As a result of the weakening raw material supply situation, UPM decided on 17 October to close down the Keuruu Veneer mill in Finland. The operations will cease in spring 2008. On 17 December, UPM announced that it will start negotiations with employees on the possible closure of the timber components and planing mill in Luumäki, Finland. Market review During 2007, birch plywood demand continued to be strong and prices increased. Demand for spruce plywood and veneers remained solid and prices increased slightly. In the first half of the year, redwood and whitewood sawn timber demand was strong and prices increased. After summer, the markets slowed down first for whitewood - partly due to the new capacity - and then during the last quarter also for redwood. Sawn timber inventories increased in the main markets. In the beginning of the year, the supply of logs was tight but the situation normalised for all wood species except birch. The prices of logs were considerably higher than a year ago. Other Operations EUR million Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2007 2007 2007 2007 2006 2006 2006 2006 Sales 1) 188 173 214 234 224 206 189 204 EBITDA 2) 67 51 32 60 69 27 33 70 Depreciation, -31 -6 -5 -10 -8 -9 -9 -6 amortisation and impairment charges Operating profit Forestry 3) 61 43 34 28 23 20 -82 20 Energy Department, 42 23 19 28 36 - 18 40 Finland Other and 20 - 59 -9 -10 -18 28 -5 eliminations Operating profit, 123 66 112 47 49 2 -36 55 total Special items 4) 10 - 71 - -6 -1 41 -5 Operating profit, 113 66 41 47 55 3 -77 60 excluding special items EUR million Q1-Q4/ Q1-Q4/ Q1-Q4/ 2007 2006 2005 Sales 1) 809 823 970 EBITDA 2) 210 199 178 Depreciation, -52 -32 -37 amortisation and impairment charges Operating profit Forestry 3) 166 -19 64 Energy Department, 112 94 135 Finland Other and 70 -5 -55 eliminations Operating profit, 348 70 144 total Special items 4) 81 29 -31 Operating profit, 267 41 175 excluding special items Capital employed 3,220 3,395 3,484 at the end of period (including associated companies) 1) Includes sales outside the Group. 2) EBITDA is operating profit before depreciation, amortisation and impairment charges, excluding the change in value of biological assets and special items. 3) The fourth quarter of 2007 includes an increase of EUR 47 million in the fair value of biological assets and wood harvested. The second quarter of 2006 includes a change of EUR 102 million of the decrease in the fair value of biological assets and wood harvested. 4) Special items in the second quarter of 2007 include capital gains of EUR 42 million related to the sale of UPM-Asunnot and EUR 29 million related to the sale of Walki Wisa. In the fourth quarter, special items include a capital gain of EUR 58 million on the sale of port operators Rauma Stevedoring and Botnia Shipping, compensation charge of EUR 12 million related to class-action lawsuits in US, impairment charges of EUR 31 million related mainly to Miramichi's forestry and sawmilling operations, and other restructuring costs of EUR 5 million. Special items in 2006 include in the first quarter the donation of EUR 5 million to UPM-Kymmene Cultural Foundation, and in the second quarter the capital gain of EUR 41 million for the sale of the Group head office real estate. Q4 of 2007 compared with Q4 of 2006 Excluding special items, the operating profit for Other Operations was EUR 113 million (EUR 55 million). Sales amounted to EUR 188 million (EUR 224 million). The operating profit of forestry was EUR 61 million (EUR 23 million). The price of wood increased significantly. The cost of wood raw material harvested from the Group's forests was EUR 27 million (EUR 27 million) and the increase in the fair value of biological assets (growing trees) was EUR 74 million (EUR 22 million). The operating profit of the Energy Department in Finland was EUR 42 million (EUR 36 million). Availability of hydropower was very good and on a higher level than the previous year. The price of electricity in Nord Pool was lower than last year. 2007 compared with 2006 Excluding special items, the operating profit of Other Operations was EUR 267 million (EUR 41 million). Sales were EUR 809 million (EUR 823 million). The operating profit of forestry was EUR 166 million (EUR -19 million). The cost of wood raw material harvested from the Group's forests was EUR 116 million (EUR 107 million). The increase in the fair value of biological assets (growing trees) was EUR 195 million (decrease of EUR 19 million). The price of wood increased markedly. The availability of wood was weak at the beginning of the year due to unusually warm and rainy weather in Finland and Russia, which made it more difficult to reach the felling sites. The authorities in Russia increased the export duties for round wood in July to EUR 10 per m3 from EUR 4. Fellings from own forests remained on a high level. The operating profit of the Energy Department in Finland was EUR 112 million (EUR 94 million). The good availability of hydropower and the decrease in emission right prices reduced the costs of electricity generation. On the other hand, electricity prices in Nord Pool were significantly lower than in the previous year. The sale of the real estate company UPM-Asunnot was concluded in April. The sale of WalkiWisa was concluded in June. In October, UPM sold port operators Rauma Stevedoring Ltd and Botnia Shipping Ltd to Babcock & Brown Infrastructure (BBI) for approximately EUR 90 million. Associated companies and joint ventures EUR million Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2007 2007 2007 2007 2006 2006 2006 2006 Share of result after tax Oy Metsä-Botnia Ab 6 19 12 21 18 24 13 14 Pohjolan Voima Oy -4 -5 -5 - -9 -7 -5 7 Other - - -1 - - 1 - 5 Total 2 14 6 21 9 18 8 26 EUR million Q1-Q4/ Q1-Q4/ Q1-Q4/ 2007 2006 2005 Share of result after tax Oy Metsä-Botnia Ab 58 69 36 Pohjolan Voima Oy -14 -14 - Other -1 6 5 Total 43 61 41 Deliveries Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2007 2007 2007 2007 2006 2006 2006 2006 Deliveries Magazine papers, 1,238 1,266 1,189 1,155 1,288 1,227 1,148 1,098 1,000 t Newsprint, 1,000 t 702 667 683 630 697 666 660 654 Fine and speciality 977 954 960 968 907 878 884 881 papers, 1,000 t Converting papers, 1,000 t Paper deliveries 2,917 2,887 2,832 2,753 2,892 2,771 2,692 2,633 total Wood products deliveries Plywood, 1,000 m3 239 204 247 255 243 205 232 251 Sawn timber, 1,000 m3 537 505 666 617 621 557 663 616 Q1-Q4/ Q1-Q4/ Q1-Q4/ 2007 2006 2005 Deliveries Magazine papers, 4,848 4,761 4,486 1,000 t Newsprint, 1,000 t 2,682 2,677 2,592 Fine and speciality 3,859 3,550 3,060 papers, 1,000 t Converting papers, 34 1,000 t Paper deliveries 11,389 10,988 10,172 total Wood products deliveries Plywood, 1,000 m3 945 931 827 Sawn timber, 1,000 m3 2,325 2,457 2,016 Helsinki, 5 February 2008 UPM-Kymmene Corporation Board of Directors Financial information This financial review is unaudited Consolidated income statement EUR million Q4/ Q4/ Q1-Q4/ Q1-Q4/ Q1-Q4/ 2007 2006 2007 2006 2005 Sales 2,512 2,583 10,035 10,022 9,348 Other operating 87 20 200 231 117 income Costs and expenses -2,270 -2,141 -8,650 -8,514 -8,092 Change in fair 47 -5 79 -126 34 value of biological assets and wood harvested Share of results of 2 9 43 61 41 associated companies and joint ventures Depreciation, -236 -219 -1,224 -1,138 -1,130 amortisation and impairment charges Operating profit 142 247 483 536 318 Gains on - -2 2 -2 90 available-for-sale investments, net Exchange rate and -4 4 -2 18 -4 fair value gains and losses Interest and other -46 -46 -191 -185 -147 finance costs, net Profit before tax 92 203 292 367 257 Income taxes -63 -8 -211 -29 4 Profit for the period 29 195 81 338 261 Attributable to: Equity holders of 32 196 85 340 263 the parent company Minority interest -3 -1 -4 -2 -2 29 195 81 338 261 Earnings per share for profit attributable to the equity holders of the parent company Basic earnings per 0.06 0.37 0.16 0.65 0.50 share, EUR Diluted earnings 0.06 0.38 0.16 0.65 0.50 per share, EUR Consolidated balance sheet EUR million 31.12.2007 31.12.2006 ASSETS Non-current assets Goodwill 1,163 1,514 Other intangible assets 392 461 Property, plant and equipment 6,179 6,500 Investment property 14 30 Biological assets 1,095 1,037 Investments in associated 1,193 1,177 companies and joint ventures Available-for-sale investments 116 127 Non-current financial assets 82 74 Deferred tax assets 284 362 Other non-current assets 121 73 10,639 11,355 Current assets Inventories 1,342 1,255 Trade and other receivables 1,717 1,657 Income tax receivables 18 3 Cash and cash equivalents 237 199 3,314 3,114 Total assets 13,953 14,469 EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital 890 890 Share premium reserve - 826 Translation differences -158 -89 Fair value and other reserves 193 278 Reserve for invested 1,067 - non-restricted equity Retained earnings 4,778 5,366 6,770 7,271 Minority interest 13 18 Total equity 6,783 7,289 Non-current liabilities Deferred tax liabilities 745 790 Retirement benefit obligations 441 427 Provisions 171 187 Interest-bearing liabilities 3,384 3,353 Other liabilities 12 13 4,753 4,770 Current liabilities Current interest-bearing 931 992 liabilities Trade and other payables 1,443 1,399 Income tax payables 43 19 2,417 2,410 Total liabilities 7,170 7,180 Total equity and liabilities 13,953 14,469 Consolidated statement of changes in equity EUR million Attributable to equity holders of the parent Share Share Treasury Transl- Fair capital premium shares ation value and reserve differences other reserves Balance at 1 890 826 -3 -34 233 January 2006 Translation differences - - - -63 - Other items - - - - -2 Net investment hedge, - - - 8 - net of tax Cash flow hedges fair value gains/losses, - - - - 45 net of tax transfers from equity, - - - - -5 net of tax Available-for-sale investments fair value gains/losses, - - - - - net of tax transfers to income - - - - - statement, net of tax Profit of the period - - - - - Total recognised income - - - -55 38 and expence for the period Reissuance of treasury - - 3 - - shares Share-based compensation - - - - 7 Dividend paid - - - - - Business combinations - - - - - Total of other changes - - 3 - 7 in equity Balance at 31 890 826 - -89 278 December 2006 Translation differences - - - -69 - Net investment hedge, - - - - - net of tax Cash flow hedges fair value gains/losses, - - - - 68 net of tax transfers from equity, - - - - -41 net of tax Available-for-sale investments fair value gains/losses, - - - - - net of tax transfers to income - - - - -1 statement, net of tax Profit of the period - - - - - Total recognised income - - - -69 26 and expence for the period Share options exercised - - - - - Acquisition of - - -266 - - treasury shares Cancellation of - - 266 - - treasury shares Share-based compensation, - - - - 13 net of tax Dividend paid - - - - - Business combinations - - - - - Transfers and others - -826 - - -124 Total of other - -826 - - -111 changes in equity Balance at 31 890 - - -158 193 December 2007 EUR million Attributable to equity holders of the parent Reserve Retained Total Minority Total for invested earnings interest equity non-restricted 1) equity Balance at 1 5,415 7,327 21 7,348 January 2006 Translation differences - - -63 - -63 Other items - 2 - - - Net investment hedge, - - 8 - 8 net of tax Cash flow hedges fair value gains/losses, - - 45 - 45 net of tax transfers from equity, - - -5 - -5 net of tax Available-for-sale investments fair value gains/losses, - - - - - net of tax transfers to income - - - - - statement, net of tax Profit of the period - 340 340 -2 338 Total recognised income - 342 325 -2 323 and expence for the period Reissuance of treasury - 1 4 - 4 shares Share-based compensation - - 7 - 7 Dividend paid - -392 -392 - -392 Business compensations - - - -1 -1 Total of other changes - -391 -381 -1 -382 in equity Balance at 31 - 5,366 7,271 18 7,289 December 2006 Translation differences - - -69 - -69 Net investment hedge, - - - - - net of tax Cash flow hedges fair value gains/losses, - - 68 - 68 net of tax transfers from equity, - - -41 - -41 net of tax Available-for-sale investments fair value gains/losses, - - - - - net of tax transfers to income - - -1 - -1 statement, net of tax Profit of the period - 85 85 -4 81 Total recognised income - 85 42 -4 38 and expence for the period Share options exercised 104 - 104 - 104 Acquisition of - - -266 - -266 treasury shares Cancellation of - -266 - - - treasury shares Share-based compensation, - - 13 - 13 net of tax Dividend paid - -392 -392 - -392 Business compensations - - - -1 -1 Transfers and others 963 -15 -2 - -2 Total of other 1,067 -673 -543 -1 -544 changes in equity Balance at 31 1,067 4,778 6,770 13 6,783 December 2007 Cash flow statement 1.1. - 31.12. EUR million 2007 2006 2005 Cash flow from operating activities Profit for the period 81 338 261 Adjustments to profit for the 1,390 1,195 1,125 period 1) Interest received 4 9 15 Interest paid -191 -187 -156 Dividends received 23 16 21 Other financial items, net -72 -18 -86 Income taxes paid -164 -159 -93 Change in working capital 2) -204 21 -234 Net cash provided 867 1,215 853 by operating activities Cash flow from investing activities Acquisition of subsidiary shares, - - -6 net of cash Acquisition of shares in -25 -68 -5 associated companies Acquisition of available-for-sale - - -22 investments Capital expenditure -673 -635 -690 Proceeds from disposal of 205 203 200 subsidiary shares,net of cash Proceeds from disposal of shares 2 52 16 in associated companies Proceeds from disposal of 3 3 284 available-for-sale investments Proceeds from sale of fixed assets 71 108 47 Proceeds from long-term receivables 1 23 25 Increase in long-term receivables -9 - -7 Net cash used in investing activities -425 -314 -158 Cash flow from financing activities Proceeds from long-term liabilities 965 415 178 Payments of long-term liabilities -879 -574 -641 Proceeds from (payment of) 66 -398 262 short-term borrowings, net Share options exercised 104 - 78 Dividends paid -392 -392 -388 Purchase of own shares -266 - -151 Other financing cash flow - -2 74 Net cash used in -402 -951 -588 financing activities Change in cash and cash 40 -50 107 equivalents Cash and cash equivalents at the 199 251 142 beginning of year Foreign exchange effect on cash -2 -2 2 Change in cash and cash equivalents 40 -50 107 Cash and cash equivalents 237 199 251 at year-end Notes to the consolidated cash flow statement 1) Adjustments to net profit Taxes 211 29 -4 Depreciation, amortisation and 1,224 1,138 1,130 impairment charges Share of results in associated -43 -61 -41 companies and joint ventures Profits and losses on sale of -157 -157 -48 fixed assets and investments Gains on available-for-sale -2 2 -90 investments, net Finance costs, net 193 167 151 Rosenlew cartel fine - -57 - Other adjustments -36 134 27 1,390 1,195 1,125 2) Change in working capital Inventories -152 -60 -124 Current receivables -129 -69 -130 Current non-interest bearing 77 150 20 liabilities -204 21 -234 Quarterly information EUR million Q4/07 Q3/07 Q2/07 Q1/07 Q4/06 Sales by segment 1) Magazine Papers 811 847 798 793 905 Newsprint 378 365 379 348 380 Fine and Speciality Papers 718 694 686 699 667 Label Materials 249 252 260 261 251 Wood Products 297 262 326 314 287 Other Operations 188 173 214 234 224 Internal sales -129 -126 -126 -130 -131 Sales, total 2,512 2,467 2,537 2,519 2,583 Operating profit by segment 1) Magazine Papers -62 34 -339 27 75 Newsprint 36 44 53 44 39 Fine and Speciality Papers 12 29 39 32 44 Label Materials 10 10 13 18 17 Wood Products 21 -2 41 32 14 Other Operations 123 66 112 47 49 Share of results of 2 14 6 21 9 associated companies and joint ventures Operating profit 142 195 -75 221 247 (loss), total % of sales 5.7 7.9 -3.0 8.8 9.6 Gains on available-for-sale - - - 2 -2 investments, net Exchange rate and -4 -9 8 3 4 fair value gains and losses Interest and other -46 -42 -54 -49 -46 finance costs, net Profit (loss) before tax 92 144 -121 177 203 Income taxes -63 -25 -77 -46 -8 Profit (loss) for the period 29 119 -198 131 195 Basic earnings per 0.06 0.23 -0.38 0.25 0.37 share, EUR Diluted earnings 0.06 0.23 -0.38 0.25 0.38 per share, EUR Average number of 514,085 527,012 527,111 523,261 523,258 shares basic (1,000) Average number of 515,322 529,530 530,980 527,086 526,416 shares diluted (1,000) Special items in operating profit Special items in operating profit are specified in the divisionalreviews on pages 7-12. Magazine Papers -77 - -371 - 6 Newsprint 5 - - - -2 Fine and Speciality Papers - - - - -3 Label Materials 4 - - - - Wood Products 6 - - - - Other Operations 10 - 71 - -6 Share of results of - - - - - associated companies and joint ventures Special items in -52 - -300 - -5 operating profit, total Special items reported - - - - 6 after operating profit Special items -39 - -32 - 35 reported in taxes Special items, total -91 - -332 - 36 Operating profit, 194 195 225 221 252 excl. special items % of sales 7.7 7.9 8.9 8.8 9.8 Profit before tax, 144 144 179 177 202 excl. special items % of sales 5.7 5.8 7.1 7.0 7.8 Earnings per share, 0.24 0.23 0.28 0.25 0.30 excl. special items, EUR Return on equity, 7.1 6.9 8.5 7.3 8.7 excl. special items, % Return on capital 6.9 6.8 8.3 7.9 8.7 employed, excl. special items, % 1) Segment classification has been changed, see page 2. EUR million Q3/06 Q2/06 Q1/06 Q1-Q4/ Q1-Q4/ Q1-Q4/ 07 06 05 Sales by segment 1) Magazine Papers 861 817 771 3,249 3,354 3,094 Newsprint 360 351 345 1,470 1,436 1,308 Fine and Speciality 626 627 640 2,797 2,560 2,234 Papers Label Materials 240 245 251 1,022 987 859 Wood Products 310 378 346 1,199 1,321 1,290 Other Operations 206 189 204 809 823 970 Internal sales -108 -123 -97 -511 -459 -407 Sales, total 2,495 2,484 2,460 10,035 10,022 9,348 Operating profit by segment 1) Magazine Papers -62 -85 16 -340 -56 -76 Newsprint 50 34 25 177 148 77 Fine and Speciality 50 -13 27 112 108 85 Papers Label Materials 11 16 17 51 61 41 Wood Products 104 22 4 92 144 6 Other Operations 2 -36 55 348 70 144 Share of results of 18 8 26 43 61 41 associated companies and joint ventures Operating profit 173 -54 170 483 536 318 (loss), total % of sales 6.9 -2.2 6.9 4.8 5.3 3.4 Gains on available-for- - - - 2 -2 90 sale investments, net Exchange rate and -3 5 12 -2 18 -4 fair value gains and losses Interest and other -41 -52 -46 -191 -185 -147 finance costs, net Profit (loss) 129 -101 136 292 367 257 before tax Income taxes 18 -2 -37 -211 -29 4 Profit (loss) for 147 -103 99 81 338 261 the period Basic earnings per 0.29 -0.20 0.19 0.16 0.65 0.50 share, EUR Diluted earnings 0.28 -0.20 0.19 0.16 0.65 0.50 per share, EUR Average number of 523,256 523,256 523,108 522,867 523,220 522,029 shares basic (1,000) Average number of 525,938 525,874 525,936 525,729 526,041 523,652 shares diluted (1,000) Special items in operating profit Special items in operating profit are specified in the divisional reviews on pages 7-12. Magazine Papers -126 -133 - -448 -253 -173 Newsprint - -5 - 5 -7 -5 Fine and Speciality -2 -36 - - -41 -8 papers Label Materials - - - 4 - - Wood Products 93 - -10 6 83 -32 Other Operations -1 41 -5 81 29 -31 Share of results of - - - - - 9 associated companies and joint ventures Special items in -36 -133 -15 -352 -189 -240 operating profit, total Special items reported - - - - 6 98 after operating profit Special items 20 -29 - -71 26 42 reported in taxes Special items, total -16 -162 -15 -423 -157 -100 Operating profit, 209 79 185 835 725 558 excl. special items % of sales 8.4 3.2 7.5 8.3 7.2 6.0 Profit before tax, 165 32 151 644 550 399 excl. special items % of sales 6.6 1.3 6.1 6.4 5.5 4.3 Earnings per share, 0.25 0.04 0.21 1.00 0.80 0.54 excl. special items, EUR Return on equity, 7.2 1.1 6.1 7.4 5.7 3.8 excl. special items, % Return on capital 7.1 2.7 6.4 7.4 6.2 4.5 employed, excl. special items, % 1) Segment classification has been changed, see page 2. Changes in property, plant and equipment EUR million Q1-Q4/ Q1-Q4/ 2007 2006 Book value at 6,500 7,316 beginning of period Capital expenditure 644 604 Decreases -96 -325 Depreciation -752 -804 Impairment charges -42 -243 Impairment reversal 12 - Translation -87 -48 difference and other changes Book value at end 6,179 6,500 of period Commitments and contingencies EUR million 31.12.07 31.12.06 Own commitments Mortgages 90 92 On behalf of associated companies and joint ventures Guarantees for loans 10 12 On behalf of others Guarantees for loans - 1 Other guarantees 3 5 Other own commitments Leasing commitments 21 23 for the next 12 months Leasing commitments 99 94 for subsequent periods Other commitments 70 69 Capital commitments EUR million Completion Total cost By 31.12. Q1-Q4/ After31.12. 2006 2007 2007 Pulp mill rebuild, June 2008 325 25 201 99 Kymi New Bioboiler, Sep 2009 84 - 11 73 Caledonian New Poland mill, Nov 2008 90 - 23 67 UPM Raflatac PM5 quality May 2008 38 - 14 24 upgrade, Jämsänkoski New USA mill, UPM March 2008 75 8 51 16 Raflatac, Dixon Notional amounts of derivative financial instruments EUR million 31.12.2007 31.12.2006 Currency derivatives Forward contracts 4,369 4,293 Options, bought 50 20 Options, written 60 10 Swaps 529 570 Interest rate derivatives Forward contracts 3,642 2,500 Swaps 2,383 2,566 Other derivatives Forward contracts 12 13 Swaps 3 16 Related party (associated companies and joint ventures) transactions and balances EUR million Q1-Q4/ Q1-Q4/ 2007 2006 Sales to associated 130 136 companies Purchases from 500 448 associated companies Non-current - - receivables at end of period Trade and other 29 20 receivables at end of period Trade and other 42 23 payables at end of period Key exchange rates for the euro at end of period 31.12.2007 30.9.2007 30.6.2007 31.3.2007 31.12.2006 USD 1.4721 1.4179 1.3505 1.3318 1.3170 CAD 1.4449 1.4122 1.4245 1.5366 1.5281 JPY 164.93 163.55 166.63 157.32 156.93 GBP 0.7334 0.6968 0.6740 0.6798 0.6715 SEK 9.4415 9.2147 9.2525 9.3462 9.0404 30.9.2006 30.6.2006 31.3.2006 USD 1.2660 1.2713 1.2104 CAD 1.4136 1.4132 1.4084 JPY 149.34 145.75 142.42 GBP 0.6777 0.6921 0.6964 SEK 9.2797 9.2385 9.4315 Basis of preparation This unaudited financial report has been prepared in accordance with the accounting policies set out in International Accounting Standard 34 on Interim Financial Reporting and in the Group's Consolidated Financial Statements for 2006. The Group has adopted the following standard: IFRS 7 Financial Instruments: Disclosures, and a complementary amendment to IAS 1 Presentation of Financial Statements - Capital Disclosures, effective for annual periods beginning on or after 1 January 2007. IFRS 7 introduces new disclosures to improve the information about financial instruments. The amendment to IAS 1 introduces disclosures about how an entity manages its capital. Adoption of IFRS 7 and the amendment to IAS 1 will expand disclosures presented in the annual financial statements. Calculation of key indicators Return on equity, %: Profit before tax - income taxes divided by Shareholders' equity (average) x 100 Return on capital employed, %: Profit before tax + interest expenses and other financial expenses divided by Balance sheet total - non-interest-bearing liabilities (average) x 100 Earnings per share: Profit for the period attributable to equity holders of parent company divided by Adjusted average number of shares during the period excluding own shares 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 including the availability and cost of production inputs, 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 15-17 of the company's Annual Report 2006. UPM-Kymmene Corporation Pirkko Harrela Executive Vice President, Corporate Communications DISTRIBUTION OMX Nordic Exchange Helsinki Main media www.upm-kymmene.com