M-real starts measures to eliminate losses of its paper business

M-real Corporation Stock Exchange Release on 18 October 2011 at 14:00 EET

M-real Corporation, part of Metsäliitto Group, announced on 4 May 2011 in a stock exchange release its plans to divest the Alizay mill in France and the entire Gohrsmühle mill in Germany or, alternatively parts of the Gohrsmühle separately based on a Paper Park concept. It was then announced also that if the divestments do not materialize, M-real plans to start consultation processes proposing to close the operations. M-real also announced plans to discontinue its remaining carbonless paper converting operations at the Reflex mill in Germany.

Consultation process to close the Alizay mill will be commenced

M-real received several offers for the Alizay mill, based on which the negotiations have been carried out to divest the mill. None of the buyer candidates however fulfilled M-real’s conditions for entering into transaction. The main conditions for divestment set by M-real relate to the financial status of the buyer, credibility and capability to implement the presented business plan, ability to take responsibility for the employees and the business risks as well as the financial consequences to M-real of the divestment.

M-real has decided to commence an information and consultation process to close the Alizay paper mill. There are currently approximately 330 employees at Alizay mill.
Despite extensive restructuring measures and also investments implemented at Alizay mill, it loses currently approximately EUR 3 million per month. In this very challenging operating environment that European paper industry faces, it is not possible to turn the heavily loss-making mill profitable. Nor are there any signs of such a turning point in the paper market that would change the situation.
 
In the past years, M-real has tried to divest the Alizay mill and discussed and negotiated with a number of companies, including key industry players with no success. M-real appointed leading industry experts who approached in excess of 80 companies in the most recent process to divest the mill started in May 2011. Out of these 65 declined and 18 showed preliminary interest, received the information memorandum and visited the site. In the last few weeks, there were serious negotiations with two remaining candidates. Also the French State’s Invest in France Agency (AFII) has supported M-real in the sales process. One key point in the negotiations has been the fact that M-real will not sell Alizay mill to a buyer who would fail to turn the mill profitable. Consequently, if the mill would be shut down it could cause an unjustified position for the employees.

Statutory negotiations will be commenced in Speciality Papers to discontinue unprofitable businesses, Chromolux business will be continued

M-real has not been able to find a buyer for its Gohrsmühle mill, whether in parts or as a whole. M-real is planning to discontinue the unprofitable speciality paper businesses as well as the production of uncoated fine paper in Gohrsmühle. M-real will continue the profitable Chromolux business and investigate possibilities to start up a new customer service and logistics center for folding boxboard in Gohrsmühle, including a sheeting facility.

M-real is currently negotiating to divest its Premium Papers business of the Reflex mill.  The carbonless paper converting operations of the Reflex are under negotiations to be discontinued.

There are currently approximately 940 employees at Gohrsmühle and Reflex mills in total. The Chromolux business and the planned cartonboard customer service center would employ approximately 400 persons.  There are approximately 100 employees working for the Reflex Premium Papers business, to be potentially divested.

M-real has in recent years implemented plenty of major profit improvement measures at Gohrsmühle and Reflex mills including headcount reductions, closure of the loss-making coated fine paper production in Gohrsmühle and transfer of the Simpele mill’s speciality paper volumes to Gohrsmühle. Despite heavy improvement measures the Gohrsmühle and Reflex operations have, due to the challenging operating environment of the European paper industry, remained severely unprofitable. Currently the monthly operating loss is approximately EUR 5 million per month. There are no signs that the profitability would materially improve in the future.

M-real has attempted to divest the Gohrsmühle and Reflex operations to many different buyer candidates during the last 5 years. In 2010 M-real successfully divested a part of the Reflex mill to Metsä Tissue. The other attempts to divest the operations have failed due to the major losses of the operations, the European overcapacity in fine and speciality papers and the severe cost inflation.

“We have done lot of work to find buyers for both Alizay and Gohrsmühle mills. We have been ready to accept a heavily negative sales price. Regardless, demands of buyer candidates have on the one hand been unacceptable from the company’s’ perspective, while on the other hand they have not been able to demonstrate capability to turn the unprofitable operations  profitable, thereby guaranteeing the continuation of operations as a responsible owner and employer”, says M-real’s CEO Mikko Helander.

Financial impacts of the planned measures

If the production closure measures are implemented as planned M-real’s annual sales is expected to reduce by approximately EUR 400 million, while the operating result is expected to increase by approximately EUR 70 million based on 2011 first half’s actual performance. Most of the annual financial impact is expected to materialize in 2012 with full impact from 2013 onwards. None of the planned measures will be implemented without consulting the employee representatives in line with applicable legal requirements.

If the measures materialize fully as planned, they are preliminarily expected to result in approximately EUR 180 million negative non-recurring items in total.  In 3Q 2011 Office Papers operating result is expected to include approximately EUR 8 million non-recurring asset impairment and Speciality Papers business area EUR 9 million cost provisions. The  2Q 2011 Speciality Papers operating result included non-recurring impairment and cost provisions in total of EUR -22 million. . Rest of the non-recurring items will be booked in 4Q 2011 and in 1Q 2012. The estimated net cash costs of all planned  measures, taking into consideration change in net working capital from the beginning of May 2011, are approximately EUR 50 million in total.

“If implemented, the planned measures will lead to an even stronger transformation of M-real to become a cartonboard company as stated in our strategy. At the same time the profitability of the company will raise to a new improved level,” says Helander.

M-REAL CORPORATION

For further information, please contact:
 
Matti Mörsky, CFO, tel. +358 10 465 4913
Juha Laine, Vice President, Investor Relations and Communications, tel. +358 10 465 4335