May 18, 2005. /Lesprom Network/. • First-quarter earnings per share were Euro 0.39 (0.09 for the first quarter of 2004), excluding non-recurring items Euro 0.20 (0.09). • First-quarter operating profit was Euro 173 million (99 million). • Profit before tax was Euro 249 million (61 million) and excluding non-recurring items Euro 148 million (61 million). • Paper deliveries were 6% down on the same quarter last year. CHANGES IN ACCOUNTING POLICIES UPM has been reporting under International Financial Reporting Standards (IFRS) since 2004. As of 1 January 2005, the company adopted the revised IAS 32, Financial Instruments: Disclosure and Presentation, revised IAS 39, Financial Instruments: Recognition and Measurement and IFRS 2 Share Based Payment. The standards will be applied retrospectively to the year 2004 and the financial statements for 2004 have been adjusted accordingly. From the beginning of 2005, the company also adopted IFRS 3,Business Combinations, and thus goodwill is no longer amortized.See New IFRS standards and revised IAS standards. EARNINGS FIRST QUARTER OF 2005 COMPARED WITH FIRST QUARTER OF 2004 Sales for the first quarter of 2005 were Euro 2,278 million, a decrease of 7% on the Euro 2,451 million for the first quarter of 2004. Paper deliveries were 6% lower, although paper demand in UPM’s main markets remained the same. The decrease in UPM’s paper deliveries was partly due to the strike at Miramichi mill in Canada. Operating profit was Euro 173 million, Euro 74 million higher than the previous year’s Euro 99 million. Taking into account the Euro 25 million goodwill amortization included in the first quarter of 2004, the increase in operating profit was Euro 49 million. Higher average paper prices, especially in North America, as well as the improved profitability of the Wood Products division had a positive impact on operating profit. The cost cuttings realized also improved profitability. Share-based option expenses were Euro 3 million (2 million). Raw material price increases exceeded the rate of inflation. The euro was on average 5% stronger vs. the US dollar. Operating profit was 7.6% of sales (4.0%). Profit before tax was Euro 249 million (61 million) and excluding non-recurring items Euro 148 million (61 million). Non-recurring items for the first quarter of 2005 consist of a Euro 89 million tax-free gain arising from the sale of shares in Metso Corporation. UPM’s share of the profits after tax from associated companies and joint ventures was Euro 31 million (12 million) including non-recurring income of Euro 12 million (–). Net finance costs were Euro 41 million (44 million). The decrease in net finance costs is mainly due to lower interest-bearing liabilities than a year ago. Exchange rate and fair value gains and losses resulted in a loss of Euro 3 million (loss of Euro 6 million). Income taxes were Euro 44 million (14 million) and the effective tax rate, excluding the impact of non-recurring items, was 30% (23%). Profit for the period was Euro 205 million (47 million) and earnings per share were Euro 0.39 (0.09). Excluding non-recurring items, earnings per share were Euro 0.20 (0.09). DELIVERIES Paper deliveries for the first three months were 2,478,000 tonnes, 6% lower than the previous year’s first-quarter deliveries of 2,634,000 tonnes. Magazine paper deliveries decreased by 4%, those for newsprint by 6% and for fine and speciality papers by 9%. FINANCING At the end of the review period the gearing ratio was 66% (75% at 31 March 2004). Net interest-bearing liabilities were Euro 4,812 million (5,033 million). The cash flow from operating activities, before capital expenditure and financing was Euro 98 million (–28 million). Change in working capital was Euro –246 million (–310 million, including the impact of Euro –179 million from termination of the asset securitization programme). PERSONNEL During the first three months of the year, UPM had an average of 32,972 employees (34,403 for this period last year). The number at the end of March was 32,924 (34,479). CAPITAL EXPENDITURE Gross capital expenditure for the first quarter of the year was Euro 160 million (136 million), 7.0% of sales (5.5%). UPM’s largest on-going investment, the 450,000 t/a paper machine project near Shanghai in China, has proceeded well and the machine is expected to start up in the latter part of May 2005. In January UPM decided to invest a total of Euro 14 million in modernizing Korkeakoski and Kaukas sawmills and Jyvaskyla plywood mill. The investments will be completed by autumn 2005. UPM will also invest approximately Euro 82 million in rebuilding paper machine 3 at Nordland paper mill in Germany. This will raise production capacity to 340,000 t/a. At Docelles paper mill in France, UPM will invest approximately Euro 26 million in rebuilding paper machine 1. Production capacity will increase to 155,000 t/a as a result. Both rebuilds will be completed in the third quarter of 2006. In February UPM decided to build a power plant at its Chapelle Darblay mill in France. The total investment cost is Euro 75 million. The power plant will start-up in the first quarter of 2007. In March UPM announced its decision to make a direct capital investment of USD 67 million (Euro 51 million) in the Uruguay pulp mill project being implemented by its associated company Metsa- Botnia. The total investment cost of the project is approximately USD 1.1 billion. The annual production capacity of the mill will be about one million tonnes of bleached eucalyptus pulp, of which UPM’s planned share will be about half. The mill is scheduled to start up in the third quarter of 2007. SHARES UPM shares worth Euro 3,182 million were traded on the Helsinki Stock Exchange during the period January–March (3,021 million). The highest quotation was Euro 18.15 in March and the lowest Euro 15.77 in January. On the New York Stock Exchange, the company’s shares were traded to a total value of USD 104 million (93 million). During the first quarter UPM bought back 8,000,000 of its own shares with a total value of Euro 136.6 million. The average cost per share was Euro 17.07. The Annual General Meeting held on 31 March 2005 decided to reduce the share capital by invalidating, without payment, 8,000,000 own shares acquired by the company. The meeting also decided to buy back a minimum of 100 and a maximum of 25,000,000 own shares and authorized the Board of Directors to decide on the disposal of own shares. In addition, the meeting authorized the Board of Directors to decide on an increase in the share capital, disapplying the pre-emptive rights of shareholders, through one or several issuances of new shares and/or one or several convertible bond issues. The increase in the number of shares may amount to an aggregate maximum of 104,715,000. The meeting also authorized the Board of Directors to issue share options to the key personnel of the UPM-Kymmene Group as well as to a wholly owned subsidiary of UPM-Kymmene Corporation. In total, the share options will entitle the subscription of a maximum of 9,000,000 shares. Of the share options, 3,000,000 will be marked with the symbol 2005F, 3,000,000 with the symbol 2005G and 3,000,000 with the symbol 2005H. The subscription price for the 2005F share options is the average trade-weighted share price between 1 January and 28 February 2005 plus 10%, i.e. Euro 18.23 per share, for the 2005G options the price between 1 January and 28 February 2006 plus 10%, and for the 2005H options the price between 1 January and 28 February 2007 plus 10%. The subscription period for 2005F options will be 1 October 2006 – 31 October 2008, for 2005G options 1 October 2007 – 31 October 2009 and for 2005H options 1 October 2008 – 31 October 2010. During the first quarter of 2005 no options were exercised to subscribe shares. Through the issue authorization and share options, the number of shares may increase to a maximum of 652,493,930. The number of shares entered in the Trade Register at 31 March 2005 was 524,450,272. After the registration on 12 April of the invalidation of the 8,000,000 shares repurchased, the number of shares is 516,450,272. Apart from the above, the Board of Directors has no current authorization to issue shares, convertible bonds or share options. UPM’s listing of 2002E share options commenced on 1 April 2005. Capital Group International, Inc. announced on 15 February 2005 that it managed 6.30% of UPM shares and 4.65% of the voting rights based on these shares at 31 December 2004. Franklin Resources Inc. Group announced on 7 March 2005 that it held 7.58% of UPM shares together with the voting rights for 2.53% of UPM shares based on managed accounts, making a total of 10.11% of the voting rights. DIVIDEND The Annual General Meeting held on 31 March 2005 approved the Board’s proposal that a dividend of Euro 0.75 per share be paid for the 2004 fi nancial year. The total dividend of Euro 387 million was debited from shareholders equity and credited to short-term non-interestbearing liabilities at the end of March. The dividend was paid on 12 April. BOARD OF DIRECTORS The Annual General Meeting elected one new member to the Board of Directors: Ms. Wendy E. Lane, Chairman of the investment fi rm Lane Holdings, Inc. The following members of the Board of Directors were re-elected: Martti Ahtisaari, former President of the Republic of Finland; Michael C. Bottenheim, former Managing Director of Lazard Brothers; Berndt Brunow, President and CEO of Oy Karl Fazer Ab; Karl Grotenfelt, Chairman of the Board of Directors of Famigro Oy; Georg Holzhey, former Executive Vice President of UPM-Kymmene and Director of Haindl Papier GmbH & Co KG; Jorma Ollila, Chairman of the Board and CEO of Nokia Corporation; Francoise Sampermans, Publishing Consultant, former Director of the French media distribution chain NMPP; Gustaf Serlachius and Vesa Vainio. At its fi rst meeting the Board of Directors re-elected Vesa Vainio to serve as its chairman. Jorma Ollila and Berndt Brunow were elected as vice chairmen. The Board of Directors elected from its independent members an Audit Committee with Michael C. Bottenheim as chairman and Martti Ahtisaari and Wendy E. Lane as members. A Human Resources Committee was elected with Berndt Brunow as chairman and Georg Holzhey and Francoise Sampermans as members. A Nomination Committee was elected with Karl Grotenfelt as chairman and Jorma Ollila and Berndt Brunow as members. LITIGATION In August 2003, UPM received a grand jury subpoena in connection with the US Department of Justice Antitrust Division’s investigation into the US labelstock industry. The company has responded, and is continuing to respond, to the subpoena as required. Following internal investigations into competitive practices, UPM decided on 15 January 2004 to approach the competition authorities in the European Union, the United States and Canada. The competition authorities have started investigations into alleged antitrust activities and consequently the EU, several of its member states, and the Canadian authorities have informed UPM that it has received conditional full immunity with respect to certain conduct disclosed to the authorities. The US Department of Justice has not decided on immunity, which is pending and available. UPM has also been named as a defendant in several class-action lawsuits against labelstock and magazine paper manufacturers in the United States. In May 2004, UPM received a European Commission Statement of Objection concerning alleged antitrust activities in the market for plastic industrial sacks. UPM manufactured plastic industrial sacks until December 2000. The annual sales of the operations under investigation amounted to Euro 11 million. UPM has responded to the Statement of Objection. All of the above litigation matters may last several years. No provisions have been made in relation to these investigations. MARKET OUTLOOK Second-quarter paper deliveries are forecast to increase from last year. The average price for papers is estimated to be up on the first quarter partly due to already agreed higher prices. Demand for converted products is expected to remain good. Plywood is also in good demand, while the markets for sawn timber will continue to be oversupplied. Possible strikes at the Finnish mills may affect both deliveries and profit for the second quarter.