M-real's operating result excluding non-recurring items for the first half of 2011 EUR 75 million

M-real Corporation Interim report January-June 2011 on 4.8.2011 at 12.00 EET
 

Result for the first half of 2011

• Sales EUR 1,345 million (Q1–Q2/2010: 1,278)
• Operating result excluding non-recurring items EUR 75 million (82) Operating result including non-recurring items EUR 14 million (84)
• Result before taxes excluding non-recurring items EUR 44 million (39) Result before taxes including non-recurring items EUR -22 million (25)
• Earnings per share from continuing operations excluding non-recurring items EUR 0.11 (0.08), and including non-recurring items EUR -0.09 (0.03)

Result for the second quarter of 2011

• Sales EUR 660 million (Q1/2011: 685)
• Operating result excluding non-recurring items EUR 32 million (43). Operating result including non-recurring items EUR -32 million (46)
• Result before taxes excluding non-recurring items EUR 16 million (28) Result before taxes including non-recurring items EUR -53 million (31)
• Earnings per share from continuing operations excluding non-recurring items EUR 0.04 (0.07), and including non-recurring items EUR -0.17 (0.08)

Events during the second quarter of 2011

• M-real announced plans to eliminate losses in the paper business, including divestments of or capacity closures at Alizay, Gohrsmühle and Reflex mills
• Increase of Simpele mill’s folding boxboard capacity by 80,000 tonnes
• Divestment of the Hallein sulphite pulp mill to Schweighofer Group

”The investment shutdown at Simpele, unfavorable exchange rate development and cost inflation weakened profitability as expected during the second quarter. Ongoing measures to reduce costs, increase prices and eliminate the losses of the paper businesses at Alizay and Speciality Papers business area will, when realised, improve M-real's profitability considerably in the future. Short-term profitability is negatively impacted by the softening of the demand, especially in paper products, caused by the uncertainty of the European general economy, and the planned measures at Alizay and Speciality Papers. Profitability of board production is expected to continue good."
CEO Mikko Helander

Result for April–June compared to the previous quarter

M-real’s sales totalled EUR 660 million (Q1/2011: 685). Comparable sales were down 3.6 per cent. The operating result was EUR -32 million (46), and operating result excluding non-recurring items was EUR 32 million (43).

A net total of EUR -64 million was recognised as non-recurring items in the operating result, the most significant of them being:

• Loss of EUR 49 million in Market Pulp and Energy related to the divestment of the Hallein pulp mill announced in June
• EUR 19 million impairment and cost provisions in Speciality Papers related to the reorganisation plans at Gohrsmühle announced in May
• EUR 7 million gain in other operations related to a property sale at Niemenranta, Tampere
• EUR 3 million personnel cost provision in Speciality Papers related to the personnel cuts at the Reflex mill

In the previous quarter, a non-recurring gain of EUR 3 million was recognised in Other operations from the property sale in Jyväskylä.

Operating result excluding non-recurring items was weaker compared to the previous quarter due to the investment shutdown at Simpele in May, cost inflation and lower average selling prices due to the weakening of the US dollar and British pound. The delivery volume of board decreased from the first quarter due to the investment shutdown at the Simpele mill. The delivery volume of paper fell short of the first quarter due to the weakened market situation.

The total paper business delivery volume was 277,000 tonnes for April–June (301,000). Deliveries by the Consumer Packaging business area totalled 315,000 tonnes (334,000).

Financial income and expenses totalled EUR -17 million (-15). Foreign exchange rate differences from trade receivables, trade payables, financial items and the valuation of currency hedging were EUR 0 million (2). Net interest and other financial income and expenses amounted to EUR -17 million (-17). Other financial expenses include EUR 1 million of valuation losses on interest rate hedges (valuation gain of 0).

The result from continuing operations before taxes in April–June was EUR -53 million (31). The result includes an impairment loss of EUR 4 million, related to the sale of M-real’s shares in Myllykoski Paper Oy to UPM-Kymmene, reported as a non-recurring item in “Share of results in associated companies” after the operating result. The result from continuing operations before taxes, excluding non-recurring items, was EUR 16 million (28). Income taxes, including the change in deferred tax liabilities, were EUR -6 million (-3).

Earnings per share were EUR -0.17 (0.08). Earnings per share from continuing operations excluding non-recurring items were EUR 0.04 (0.07). Return on equity was -23.5 per cent (10.8), and 4.2 per cent (9.5) excluding non-recurring items. The return on capital employed was -6.1 per cent (8.4); 6.4 per cent (7.8) excluding non-recurring items.


Result for January–June compared with the corresponding period last year

M-real’s sales totalled EUR 1,345 million (1,278). Comparable sales were up 5.2 per cent. Operating result was EUR 14 million (84), and operating result excluding non-recurring items was EUR 75 million (82).

A net total of EUR -61 million was recognised as non-recurring items in the operating result for January–June, the most significant items being:

• Loss of EUR 49 million in Market Pulp and Energy related to the divestment of the Hallein pulp mill announced in June
• EUR 19 million impairment and cost provisions in Speciality Papers related to the reorganisation plans at Gohrsmühle announced in May
• EUR 10 million income item in other operations related to sales of properties in Finland
• EUR 3 million personnel cost provision in Speciality Papers related to the personnel cuts at the Reflex mill

The non-recurring items of the corresponding period in the previous year were EUR +2 million net.

Operating profit excluding non-recurring items compared with the corresponding period last year was weakened by cost inflation; in particular, costs regarding wood, chemicals and energy were higher than a year before. In addition, the strengthening of the Swedish krona and weakening of the US dollar against the euro had a negative impact. The operating result was improved, the average selling prices being clearly higher than the previous year.

The total paper business delivery volume in January–June was 578,000 tonnes (589,000). Board and paper deliveries by Consumer Packaging totalled 649,000 tonnes (693,000). Excluding the negative impact of Simpeleinvestment shutdown board deliveries increased.The figure for the comparison period includes 23,000 tonnes of deliveries from the Simpele paper mill closed down at the end of 2010.

Financial income and expenses in the period totalled EUR -32 million (-39). Foreign exchange rate differences from trade receivables, trade payables, financial items and the valuation of currency hedging were EUR 2 million (-6). Net interest and other financial income and expenses amounted to EUR -34 million (-33). Other financial expenses include EUR 1 million of valuation losses on interest rate hedges (valuation gain of 0).

In the review period, the result from continuing operations before taxes was EUR -22 million (25). The result includes an impairment loss of EUR 4 million, related to the sale of M-real’s shares in Myllykoski Paper Oy to UPM-Kymmene, reported as a non-recurring item in “Share of results in associated companies” after the operating result. "Share of results in associated companies" included an impairment loss of EUR 16 million from Myllykoski Paper Oy the previous year. The result from continuing operations before taxes and excluding non-recurring items was EUR 44 million (39). Income taxes, including the change in deferred tax liabilities, were EUR -9 million (-14).

Earnings per share were EUR -0.09 (0.03). Earnings per share from continuing operations excluding non-recurring items were EUR 0.11 (0.08). Return on equity was -6.3 per cent (2.4), and 7.0 per cent (5.3) excluding non-recurring items. Return on capital employed was 1.4 per cent (6.1); 7.2 per cent (7.3) excluding non-recurring items.


Personnel

The number of personnel was 4,699 at the end of June (30 June 2010: 4 946, 31.12.2010: 4,538), of whom 1,959 (2,019, 1,783) people worked in Finland. During the period, M-real employed an average of 4,653 people (2010: 4,772).


Investments

Gross investments in January–June totalled EUR 43 million (January-June 2010: 17).


Structural change

M-real's structural change from a paper company to a clearer packaging producer has progressed according to the strategy. The focus of the operations has increasingly shifted from restructuring to development, as demonstrated by the investments in Simpele, Äänekoski, Kyro and Kemiart Liners mills scheduled for 2011–2012.

M-real divested the entire share capital in M-real Hallein GmbH to the Schweighofer Group. M-real Hallein GmbH assets consist of the Hallein pulp mill, bioenergy plant, paper mill closed in 2009 and the surrounding estate. The pulp mill's annual capacity is 160,000 tonnes of sulphite pulp and the amount of personnel is approximately 200. The debt-free value of the transaction is approximately EUR 34 million and the positive cash impact for M-real approximately EUR 24 million. The divestment is expected to reduce M-real’s annual sales by approximately EUR 75 million and improve the operating result by approximately EUR 5 million based on Hallein mill’s actual performance in 2010. The transaction is subject to the approval of Austrian competition authorities and it is expected to be closed during 3Q 2011.

In June, M-real announced that it will divest its 35% holding in Myllykoski Paper and the capital loan that it has granted to Myllykoski Paper to UPM-Kymmene Corporation. The transaction has a EUR 10.5 million positive cash impact. The transaction is subject to the closing of UPM’s acquisition of Myllykoski Group and Rhein Papier and the approval of competition authorities. The transaction is expected to be completed during 3Q 2011.

M-real announced its new plans to eliminate financial losses of its paper business in May. M-real has had several unsuccessful attempts to divest the Alizay paper mill during recent years. Possibilities to divest the mill are still being pursued. In May, M-real initiated a public process to find credible candidates to acquire the Alizay paper mill by the end of September 2011 at the latest. Should M-real fail to find a credible buyer for the mill within the given time frame, M-real plans to close the mill down.

M-real also plans to divest the entire Gohrsmühle mill in Germany or alternatively parts of the mill based on a Paper Park concept. In case the divestment would turn out to be unsuccessful, M-real has commenced a process to discontinue the uncoated fine and the unprofitable parts of the speciality paper operations at Gohrsmühle mill. Should the closures materialise, Gohrsmühle mill would only produce cast coated label and packaging products (Chromolux). M-real is also planning to discontinue its remaining carbonless paper converting operations at the Reflex mill in Germany.

With the implementation of the planned measures in Alizay, Gohrsmühle and Reflex, M-real’s annual sales are estimated to decrease by approximately EUR 390 million and its operating result to improve by about EUR 60 million, based on the 2010 actual figures. Most of the possible impact on sales and profit is expected to be seen in 2012 and full impact from 2013 onwards. As a result of the planned measures, M-real’s annual paper production capacity would reduce by about 500,000 tonnes, of which about 430,000 tonnes would be uncoated fine paper and 70,000 tonnes coated specialty papers. Implementations of any measures are subject to the completion of statutory consultation processes with employees based on applicable local legislation. M-real will be proactive in the mitigation of the planned measures’ negative impacts for the employees.

In total the planned measures in Alizay, Gohrsmühle and Reflex are preliminarily expected to result in approximately EUR 170 million negative non-recurring result impacts out of which EUR 22 million was booked in the Q2 2011. The estimated net cash costs are EUR 50 million. The estimates of the non-recurring financial impacts are preliminary and they will be further determined when the final decisions for the planned measures are taken.

In January, M-real launched a EUR 70 million profit improvement programme for 2011. The programme focuses on improving the profitability of the paper business operations as well as on decreasing the variable costs of all businesses. The earlier-announced profit improvement impact of the cartonboard investments in Simpele and Kemi and the closure of speciality paper production at Simpele are included in the new profit improvement programme. The full effect of the programme on operating profit, EUR 70 million, is expected to be reached from 2012 onwards. The result improvement in 2011 is expected to be approximately EUR 30 million. Cost inflation is estimated to accelerate in 2011. M-real's new profit improvement programme and the earlier programmes are estimated to have a total positive impact of approximately EUR 90 million on the 2011 result, which is believed to mainly offset the increased cost inflation.


Financing

At the end of June, M-real's equity ratio was 33.9 per cent (31 December 2010: 32.1) and gearing ratio was 120 per cent (135). The net gearing ratio was 84 per cent (83). Some of M-real’s loan agreements set a 120 per cent limit on the company’s net gearing ratio and a 30 per cent limit on the equity ratio. Calculated as defined in the loan agreements, the gearing ratio at the end of June was approximately 64 per cent (64) and equity ratio approximately 40 per cent (38).

The change in the fair value of investments available for sale was approximately EUR +7 million, mainly due to the increase in the value of the Pohjolan Voima shares, during the period under review.

Net interest-bearing liabilities amounted to EUR 809 million at the end of June (827). Foreign-currency-denominated loans accounted for 6 per cent; 77 per cent were floating-rate, and the rest were fixed-rate. At the end of June, the average interest rate on loans was 5.9 per cent and the average maturity of long-term loans 2.2 years. The average interest rate was increased by a decrease in the portion of Metsäliitto Group's internal short-term financing. The interest rate maturity of loans was 11.9 months at the end of June. During the period, the interest rate maturity varied between seven and twelve months.

Cash flow from operations amounted to EUR 56 million (Q1–Q2/2010: 0). Working capital increased by EUR 5 million (71). In the cash flow statement, the net financial expenses for the period include a dividend of EUR 45 million paid by Metsä-Botnia.

At the end of the period under review, an average of 4.5 months of the net foreign currency exposure was hedged. The degree of hedging varied between four and five months during the period. Approximately 26 per cent of the non-euro-denominated equity was hedged at the end of the period under review.

Liquidity continues at a good level. At the end of the period under review, liquidity was EUR 270 million, of which EUR 7 million consisted of undrawn pension premium (TyEL) loans and EUR 263 million of liquid assets and investments. In March, Metsäliitto Cooperative made an early repayment of the EUR 49 million vendor note received in connection to the restructuring of Metsä-Botnia ownership in 2009. In June, M-real's liquidity decreased when Botnia redeemed its own shares from UPM Kymmene Corporation in accordance with the partnership, decreasing Botnia's deposits in M-real's subsidiary Metsä Finance. At the end of June, EUR 45 million of the liquid assets and investments are assets deposited by other Metsäliitto Group businesses in M-real’s subsidiary Metsä Finance. To meet its short-term financing needs, the Group also had at its disposal uncommitted domestic and foreign commercial paper programmes and credit facilities amounting to EUR 517 million.

Standard & Poors raised the outlook of M-real's credit rating B- from stable to positive.


Shares

In January–June, the highest price for M-real’s A share on NASDAQ OMX Helsinki Ltd. was EUR 3.34, the lowest EUR 2.60, and the average price EUR 3.09. At the end of June, the price of the A share was EUR 3.10. At the end of 2010, the price of the A share was EUR 2.85, while the average price in 2010 was EUR 2.85.

In January–June, the highest price of M-real’s B share was EUR 3.33, the lowest EUR 2.50, and the average price EUR 2.99. At the end of June, the price of the B share was EUR 2.94. At the end of 2010, the price of the B share was EUR 2.54, while the average price in 2010 was EUR 2.44.

The trading volume of the A shares was EUR 4 million, or 3 per cent of the share capital. The trading volume of the B shares was EUR 367 million, or 42 per cent of the share capital. The market value of the A and B shares totalled EUR 971 million at the end of June.

At the end of June, Metsäliitto Cooperative owned 39 per cent of the shares, and the voting rights conferred by these shares amounted to 61 per cent. International investors held 11 per cent of the shares.

The company does not hold any treasury shares.


Reduction of the share premium account

The Annual General Meeting decided to reduce the share premium account in operating capital, as stated on the parent company’s balance sheet on 31 December 2010, by transferring all funds in the account, or EUR 663,812,052.56, to the company’s non-restricted equity reserve. The reduction of the share premium account will take place without consideration and it does not impact the company’s number of shares, the rights conferred by the shares, or the proportionate ownership of the shareholders. The reduction will become effective after the completion of the creditor protection procedure referred to in the Limited Liability Companies Act. The creditor protection procedure is expected to be completed in August 2011. The reduction improves the company’s capability to pay dividends in the future.

Events after the period

M-real Corporation’s negotiations to divest its Premium Papers business to a sister company of German Papierwerke Lenk AG were suspended in July. M-real announced in April 2011 the Memorandum of Understanding (MoU) regarding the divestment of the Germany based Reflex mill’s Premium Papers business to a sister company of Papierwerke Lenk AG. The transaction was expected to be closed by the end of Q2 2011. The parties will evaluate possibilities to continue negotiations later and M-real will also consider other options to divest its Premium Papers business.

Near-term outlook

Indications of economic slowdown in the United States and Europe have weakened the outlook in paper and pulp market.

Due to the uncertainty of the European general economy, cartonboard order inflows have weakened from the record level of late 2010 and early 2011 but are still strong. The capacity utilisation rates of M-real's board mills are still high, and the demand for board and profitability of board production continues to be good. In order to compensate for cost inflation, M-real successfully increased the prices of liner in April and announced a price increase of 7-9 per cent in folding boxboard regarding new contracts. The realisation of the price increases in folding boxboard will be resolved in the late summer and early autumn. The production shutdown related to the investment in the modernisation of the coating section at the Kemi mill in September–October will have a negative impact on the result of Consumer Packaging. Worsened paper market situation weakens Äänekoski Paper’s and Kyro Paper’s profitability that has a negative result impact in Consumer Packaging business area.

In the short term, the profitability of M-real's paper businesses is negatively impacted by the plans to eliminate the financial losses of the Alizay mill and Speciality Paper business area. In addition, the weakened market situation for all paper grades will negatively impact the result. In order to compensate for cost inflation, M-real announced a price increase of 5–8 per cent for office paper in June, aiming to implement it by the end of the year.

The weakening of the demand for paper also causes uncertainty in the pulp market. Pulp deliveries are estimated to decrease slightly in the next few months and the euro-denominated average price to be slightly lower in 3Q compared to the level of 2Q. In addition, the extensive maintenance shutdowns at Botnia's pulp mills will have a negative impact on M-real's 3Q profitability.

Cost inflation has clearly accelerated in 2011. M-real's launched a EUR 70 million profit improvement programme for 2011 in January. The new profit improvement programme and the earlier programmes are estimated to have a total positive impact of approximately EUR 90 million on the 2011 result, which is believed to mainly offset the increased cost inflation.

M-real’s 3Q 2011 operating result, excluding non-recurring items, is expected to weaken clearly from 2Q 2011 due to the worsened paper and pulp market situation, planned measures at Alizay and Speciality Papers as well as investment and maintenance shutdowns at Botnia’s pulp mills. Profitability of board production is expected to be good also in 3Q 2011.


Near-term business risks

Risks of the economic growth of the euro zone slowing down or coming to a standstill and of the demand for board and paper products experiencing another downturn have increased. Should the demand for M-real's main products considerably decrease, there would be a risk of prices declining.

M-real has a good opportunity to cover the increased cost inflation mainly with its own profit improvement measures. However, there is a risk that the cost levels of production factors will increase more than the current estimates, which would have a negative impact on profitability.

M-real has announced significant new plans to eliminate the losses of its paper business. Implementing the reorganisation of operations carries a risk of not being able to carry out the plans as pursued. There is still a risk of the profit-making ability of the units concerned weakening significantly further as the implementation of the plans proceeds.

The company's short-term and medium-term financial position is secure. As a result of increasing uncertainty and regulation in the financial market, the operation of the credit and bond markets may become more difficult, which may hamper the company’s ability to acquire long-term debt financing at a competitive price.

Because the forward-looking estimates and statements of these financial statements are based on current plans and estimates, they contain risks and other uncertain factors that may cause the results to differ from the statements concerning them. In the short term, M-real’s result will be particularly affected by the price of and demand for finished products, raw material costs, the price of energy, and the exchange rate development of the euro. More information about longer-term risk factors can be found on pages 35–36 of M-real’s 2010 annual report.


M-REAL CORPORATION


Further information:

Matti Mörsky, CFO, tel. 010 465 4913
Juha Laine, Vice President, Investor Relations and Communications, tel. 010 465 4335

More information is available starting from 1 pm on 4 August 2011. A conference call held in English for investors and analysts starts at 3 p.m. (EET). Conference call participants are requested to dial in and register a few minutes prior to the start of the conference call on the following numbers:

Europe: +44 (0)20 7162 0025
US: +1 334 323 6201

The conference ID is 891243.



 

BUSINESS AREAS AND MARKET DEVELOPMENT

Consumer Packaging business area

Result for April–June compared to the previous quarter
The operating result excluding non-recurring items for the Consumer Packaging business area decreased from the previous quarter and was EUR 39 million (Q1/2011: 50). The result was weakened by the investment shutdown at Simpele, the weakening of the coated fine paper market and lower average selling prices due to the weakening of the US dollar and pound sterling.

The result included EUR 1 million of non-recurring expenses. The result for the previous quarter did not include non-recurring items.

The deliveries of European folding boxboard producers were 1 per cent lower compared with the previous quarter. Consumer Packaging’s deliveries of folding boxboard were down by 3 per cent due to the Simpele investment shutdown.

Result for January–June compared with the corresponding period last year
The operating result excluding non-recurring items for the Consumer Packaging business area improved from the corresponding period last year and totalled EUR 89 million (77). The most significant factor improving the result was the average sales price of board which had increased due to the price increases achieved. The result was weakened by increasing prices of raw materials and energy and the weakening of the US dollar against the euro.

The result included EUR 1 million of non-recurring expenses. The result for the corresponding period last year did not include non-recurring items.

The deliveries of European folding boxboard producers increased by 1 per cent compared to the corresponding period last year. Consumer Packaging’s deliveries of folding boxboard were up 3 per cent.
 

Office Papers business area

Result for April–June compared to the previous quarter
The operating result excluding non-recurring items for Office Papers improved compared to the previous quarter and was EUR -3 million (Q1/2011: -6). The result was improved by lower pulp and energy costs.

The result does not include non-recurring items. The result for the previous quarter did not include non-recurring items.

Total deliveries by European uncoated fine paper producers were down 5 per cent compared to the previous quarter. The delivery volume of Office Papers decreased by 8 per cent.

Result for January–June compared with the corresponding period last year
The operating result for Office Papers, excluding non-recurring items, weakened compared to the corresponding period last year and totalled EUR -9 million (-4). The result was weakened by the higher prices of pulp, other raw materials and energy as well as the strengthening of the Swedish krona against the euro. The most significant factor improving the result was the average sales price which had increased due to the price increases.

The result does not include non-recurring items. The result for the corresponding period last year did not include non-recurring items.

Total deliveries by European uncoated fine paper producers decreased by 3 per cent year-over-year. The delivery volume of Office Papers increased by 3 per cent.

 

Speciality Papers business area

Result for April–June compared to the previous quarter
The operating result excluding non-recurring items for Speciality Papers improved slightly compared to the previous quarter and was EUR -7 million (Q1/2011: -9). The result was boosted by a higher average selling price. The result was weakened by the lower delivery volume and higher raw material costs.

The result included non-recurring items of a total of EUR -22 millionin impairment losses and cost provisions related to the restructuring plans at Gohrsmühle and personnel cuts at Reflex announced on 4 May. The result for the previous quarter did not include non-recurring items.

The delivery volume of Speciality Papers fell by 8 per cent.

Result for January–June compared with the corresponding period last year
The operating result for Speciality Papers, excluding non-recurring items, weakened compared to the corresponding period last year and totalled EUR -16 million (-11). The result was weakened by the higher prices of pulp and other raw materials and the lower delivery volume of paper. The result was improved by the implemented price increases and cost saving measures.

The result includes non-recurring items of a total of EUR -22 million. The result for the corresponding period the previous year included a non-recurring item of EUR -16 million related to the planned shutdown of the two paper machines at the Reflex mill and the reorganisation of the Reflex and Gohrsmühle organisations.

The delivery volume of Speciality Papers fell by 18 per cent.
 

Market Pulp and Energy business area

Result for April–June compared to the previous quarter
The operating result excluding non-recurring items for the Market Pulp and Energy business area weakened compared with the previous quarter and was EUR 5 million (Q1/2011: 7). The result was weakened by the slightly lower selling price of pulp. The result was improved by the higher delivery volume.

The result includes non-recurring items of a total of EUR -49 million related to the divestment of the Hallein pulp mill. The result for the previous quarter did not include non-recurring items.

Result for January–June compared with the corresponding period last year
The operating result of the Market Pulp and Energy business area, excluding non-recurring items, weakened compared to the corresponding period last year and totalled EUR 13 million (25). The result was weakened by the higher cost of wood, chemicals, other raw materials and energy. The result was improved by the higher delivery volume. The average selling price of pulp was on a par with the previous year.

The result includes non-recurring items of a total of EUR -49 million related to the divestment of the Hallein pulp mill. The result for the corresponding period last year did not include non-recurring items.