Metsäliitto Group Interim Report 1-6/2011

Metsäliitto Group Interim Report 1–6/2011, Stock Exhange Release 4 August 2011 at noon


Metsäliitto Group’s operating result excluding non-recurring items was EUR 249 million


Result in the first half of 2011
– Sales amounted to EUR 2,806 million (1–6/2010: EUR 2,641 million).
– Operating result excluding non-recurring items was EUR 249 million (250). Operating result including non-recurring items was EUR 185 million (246).
– Result before taxes and excluding non-recurring items was EUR 181 million (185). Including non-recurring items, the result before taxes was EUR 113 million (165).


Result in the second quarter of 2011
– Sales amounted to EUR 1,403 million (4–6/2010: EUR 1,416 million).
– Operating result excluding non-recurring items was EUR 119 million (154). Operating result including non-recurring items was EUR 51 million (141).
– Result before taxes and excluding non-recurring items was EUR 95 million (130). Including non-recurring items, the result before taxes was EUR 24 million (102).


Events in the second quarter of 2011
– Metsä Tissue announced an extensive investment programme in Poland.
– Metsä-Botnia redeemed 6.7 per cent of its own shares from UPM-Kymmene Oyj.
– M-real's Simpele folding boxboard mill’s annual capacity was increased by 80,000 tonnes.
– M-real announced it will sell the Hallein pulp mill in Austria.
– M-real signed an agreement on the sale of its 35 per cent ownership share in Myllykoski Paper Oy.
– M-real announced plans to eliminate losses at the Gohrsmühle and Reflex mills in Germany and the Alizay paper mill in France.

 
“We continued to reinforce the business operations through planned investments and business arrangements. Successful price increases and internal measures to increase efficiency decreased the negative impacts of increasing costs on Group’s result. Worsening of paper and pulp markets and general uncertainty in the economy weaken the outlook for the third quarter.”

Kari Jordan, President & CEO, Metsäliitto Group



Metsäliitto Group
 

Metsäliitto Group
 

Business Areas

The interim report is unaudited

METSÄLIITTO GROUP

INTERIM REPORT 1 JANUARY–30 JUNE 2011                    


Sales and result
Metsäliitto Group’s sales for January–June were EUR 2,806 million (1–6/2010: EUR 2,641 million). Operating result excluding non-recurring items was EUR 249 million (250), or 8.9 per cent of the sales (9.5).

Net non-recurring items were EUR -64 million, of which income accounted for EUR 11 million and expenses accounted for EUR 75 million. The non-recurring income was primarily generated by the sale of land areas. EUR 49 million of the non-recurring expenses is associated with the sale of M-real's Hallein mill and EUR 22 million is associated with the write-downs and provisions of the Gohrsmühle and Reflex paper mills.

Sales in the second quarter of the year were EUR 1,403 million (4–6/2010: 1,416). Operating result excluding non-recurring items was EUR 119 million (154), or 8.5 per cent of the sales (10.9). Operating result including non-recurring items was EUR 51 million (141).

Operating result including non-recurring items in January–June was EUR 185 million (246). Financial income was EUR 5 million (3) and financial expenses were EUR 80 million (71). During the first quarter, dividends of approximately EUR 9 million paid on Metsä-Botnia's shares under the obligation to redeem were recognised in financial expenses.

The results from associates were EUR 3 million (-13). The figure includes a non-recurring impairment loss of approximately EUR 4 million (16) associated with the sale of M-real's 35 per cent ownership share and subordinated loan in Myllykoski Paper Oy.

The result for the period before taxes was EUR 113 million (165) and taxes, including changes in deferred tax liability, were EUR 60 million (63). The net result for the period was EUR 53 million (102).

Excluding non-recurring items, the Group's return on capital employed was 12.8 per cent (12.4) and return on equity was 14.4 per cent (16.4). Including non-recurring items, the return on capital employed was 9.4 per cent (11.4) and return on equity was 6.3 per cent (13.7).


Balance sheet and financing
Metsäliitto Group’s total liquidity was EUR 852 million at the end of June (31 December 2010: 1,054). This consisted of EUR 301 million (440) of liquid assets and investments and EUR 551 million (614) of binding credit facility agreements not included in the balance sheet. In addition, the Group can satisfy short-term financial needs with non-binding commercial paper schemes in Finland and abroad, as well as with credit limits amounting to approximately EUR 0.5 billion.

The Group’s equity ratio at the end of June was 30.9 per cent and net gearing was 121 per cent (31 December 2010: 29.7 per cent and 116 per cent, respectively). Interest-bearing net liabilities stood at EUR 2,051 million (31 December 2010: 1,939).

The equity ratio of the parent company Metsäliitto Cooperative was 62.3 per cent at the end of June and net gearing was 37 per cent (31 December 2010: 58.6 per cent and 45 per cent, respectively).

During January–June, Metsäliitto’s members’ capitals increased by a total of EUR 43.0 million. The actual members’ capital grew by EUR 2.9 million, the additional members’ capital A by EUR 29.6 million and the additional members’ capital B by EUR 10.5 million. EUR 14.0 million of the additional members' capital fell due on

1 July 2011 (1 July 2010: EUR 35.6 million).

M-real’s 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 approximately EUR 664 million, 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, estimated to be completed in August 2011. With the reduction, the prerequisites for future distribution of profits will be improved.


Personnel
The Group employed an average of 13,229 people during the first half of the year (1–6/2010: 13,098). At the end of June, the number of personnel in the Group was 13,581 (31 December 2010: 12,820). The parent company Metsäliitto Cooperative employed 2,965 people at the end of June (31 December 2010: 2,495).


Members
At the end of the review period, the Metsäliitto Cooperative had 125,586 members (31 December 2010: 126,382). Since the beginning of the year, 947 new members have joined the Cooperative and 1,743 members have resigned.


Investments
Metsäliitto Group’s capital expenditure totalled EUR 102 million (42).

Metsä-Botnia's investments underway are progressing as scheduled. Kemi's new causticisation and water stations will be introduced in the last quarter of the year. The construction of a bark gasification plant that will improve the use of bioenergy has begun in Joutseno, and the new plant will be introduced by the end of 2012.

M-real's expansion investment at the Simpele folding boxboard mill was completed. The investment increased the mill's annual capacity by 80,000 tonnes. In addition, M-real announced its plans to invest approximately EUR 30 million in expanding the annual folding boxboard capacity at the Äänekoski and Kyröskoski mills by a total of approximately 70,000 tonnes. The Kyröskoski investment will be carried out at the end of 2011, and the Äänekoski investment in the spring of 2012.

Metsä Tissue launched an extensive investment programme in Poland. The three-year programme includes, among other things, the construction of two new tissue paper machines and an upgrading line at the Krapkowice mill, the rebuild of one paper machine, and infrastructure development. The total value of the investment programme is nearly EUR 60 million, and it will enable Metsä Tissue to increase its annual production capacity of tissue paper in Poland by 35,000 tonnes.


New ownership shares in Metsä-Botnia
Metsä-Botnia redeemed its own shares from UPM on the basis of a shareholder agreement signed by Metsä-Botnia's shareholders in 2009. The number of the shares to be redeemed equalled 6.7 per cent of the company's entire share capital, and the redemption price was approximately EUR 140 million. The arrangement became effective on 30 June 2011.

After the redemption, Metsäliitto Cooperative owns 56.8 per cent of Metsä-Botnia, M-real owns 32.2 per cent and UPM 11.0 per cent. The arrangement does not have a significant impact on Metsäliitto Group’s key figures.

In the same context, UPM also granted Metsäliitto Group an option to buy the remaining Metsä-Botnia shares it owns. The option will be valid for two years, and the agreed share price for executing the option is approximately EUR 150 million.


Structural changes
In June, M-real signed an agreement on the sale of the entire share capital of M-real Hallein GmbH to Scweighofer Group. The agreement covers the Hallein pulp mill, the biopower plant, the paper mill closed in 2009 and the surrounding estate. The completion of the arrangement is subject to the approval by Austria's competition authorities and estimated to be completed in the third quarter of 2011.

In May, M-real announced it will divest the entire Gohrsmühle mill in Germany or alternatively parts of the mill based on a Paper Park concept. Concurrently, M-real launched a process to discontinue the production of uncoated fine paper and unprofitable speciality papers at the Gohrsmühle mill in case the sales alternatives do not materialise. If the planned closings are implemented, M-real will focus on cast coated label and packaging products (Chromolux) at the Gohrsmühle mill. M-real is also planning to discontinue the remaining business operations, or refining carbonless paper converting operations, at the Reflex mill.

In May, M-real initiated a public process to find credible candidates to acquire the Alizay paper mill by the end of September 2011. Should M-real fail to divest the Alizay paper mill within the given timeframe, the plan is to close down the mill.

On the whole, according to preliminary estimates made in May, the measures being planned for Alizay, Gohrsmühle and Reflex will have a non-recurring negative result impact of approximately EUR 170 million. The estimated net cash expenses are EUR 50 million. The estimates on financial impacts are preliminary and will be specified as the final decisions on the planned measures have been made. In the second quarter EUR 22 million was booked as non-recurring write-downs and provisions of the Gohrsmühle and Reflex paper mills.


Business areas

Wood Supply
Wood Supply sales for January–June were EUR 770 million (1–6/2010: 670) and operating result was EUR 15 million (15). The operating result does not include non-recurring items. Wood Supply Finland accounted for EUR 521 million (463) of the sales and EUR 9 million (8) of the operating result.

Sales in the second quarter were EUR 394 million (4–6/2010: 337) and operating result was EUR 7 million (8).

Wood sales, which were sluggish in the first months of the year, picked up in May. Metsäliitto's purchase volume from privately owned forests was near the target level in the second quarter. Harvesting conditions were good, and stands marked for felling were harvested as planned. Wood deliveries also worked as planned. Metsäliitto Wood Supply’s delivery volume to production units in the first half of the year was 15.5 million cubic metres (14.7).

Plenty of wood was available in Russia. In the Baltic countries, the wood volume from state-owned forests was steady in the first half of the year, and in addition, wood sales from private forests started up. Wood sales in Sweden also picked up in the second quarter.

The development of Metsäliitto's member services continued. June marked the release of a new service, an online store for members eligible for wood sales bonuses.

The result of the Cooperative’s Representative Council election was published in May, and the four-year term of the Representative Council and the district committees began on 1 July.


Wood Products Industry
Metsäliitto Wood Products Industry's sales in January–June were EUR 502 million (1–6/2010: 448) and operating result excluding non-recurring items was EUR 13 million (11). Operating result including non-recurring items was EUR 13 million (10).

Sales in the second quarter were EUR 264 million (4–6/2010: 256) and operating result excluding non-recurring items was EUR 8 million (11).

Compared to the same period last year, there was substantial business growth in all customer segments during the first six months of the year. Internal measures ensured that profitability remained at a reasonable level.

The market balance for sawn timber continued to be weak in the second quarter. In further processed products, the economic uncertainty and consumers cutting back on their spending also taxed the demand.

Investments in further processed products and the focus on different industrial segments improved the profitability of engineered wood products compared to the previous year. The profitability of construction products also improved, although sales in the second quarter were weaker than expected.


Pulp
During the first half of the year, Metsä-Botnia’s sales increased by 3 per cent compared with the corresponding period last year, amounting to EUR 678 million (1–6/2010: 656). Operating result excluding non-recurring items was EUR 185 million (167). Including non-recurring items, the operating result was EUR 181 million (169).

The price development of pulp, which had been positive for a long period, kept Metsä-Botnia's profitability at a good level. Foreign currency-denominated market prices of softwood pulp were, on average, 9 per cent higher in the first half of the year compared with the corresponding period last year. The average prices of hardwood pulp increased by 5 per cent.

Metsä-Botnia's sales in the second quarter were EUR 339 million (4–6/2010: 368). Operating result excluding non-recurring items totalled EUR 89 million (110).

Demand and supply of softwood pulp were for the most part in balance in the second quarter, but at the end of the review period, the suppliers' pulp inventories grew as supply exceeded demand. Customers' hardwood pulp inventory levels were high in the Asian markets in particular.

The utilisation rates of the Metsä-Botnia mills were for the most part good in the second quarter, which resulted in exceeded production targets at the beginning of the period. However, the utilisation rates declined due to process issues at the end of the period. The annual shutdowns planned for the spring were postponed to the autumn due to the labour market disturbance that lasted almost two months.


Board and Paper
Board and Paper's sales in January–June were EUR 1,345 million (1–6/2010: 1,278) and operating result excluding non-recurring items was EUR 75 million (82).

The operating result was weakened by the increase in the prices of wood, chemicals and energy. In addition, the strengthening of the Swedish krona and the weakening of the US dollar against the euro had a negative impact. The operating result was improved by the average sales prices which were significantly higher than last year.

Sales in the second quarter were EUR 660 million (4–6/2010: 676) and operating result excluding non-recurring items was EUR 32 million (43).

Net non-recurring items were EUR -61 million in January–June, of which income accounted for EUR 10 million and expenses accounted for EUR 71 million. The non-recurring gain was primarily generated by the sale of land areas. EUR 49 million of the non-recurring expenses is associated with the sale of M-real's Hallein mill and EUR 22 million is associated with the write-downs and provisions of the Gohrsmühle and Reflex paper mills.

Operating result including non-recurring items was EUR 14 million (84). Net interest and other financial expenses were EUR 34 million (33) and the exchange gains and losses recognised in financial items were EUR 2 million (-6).

The results from associates were EUR -4 million (-20). The figure includes a non-recurring impairment loss of approximately
EUR 4 million (16) associated with the sale of M-real's 35 per cent ownership share and capital loan in Myllykoski Paper Oy.

Excluding non-recurring items, the result before taxes for the period was EUR 44 million (39), earnings per share were EUR 0.11 (0.08) and the return on capital employed was 7.2 per cent (7.3). Including non-recurring items, the result before taxes was EUR -22 million (25), earnings per share were EUR -0.09 (0.03) and the return on capital employed 1.4 per cent (6.1).

At the end of June, M-real’s equity ratio was 33.9 per cent and net gearing was 84 per cent (31 December 2010: 32.1 per cent and 83 per cent, respectively). Some of M-real’s loan agreements set a 120 per cent limit on the company’s net gearing and a 30 per cent limit on the equity ratio. At the end of June, net gearing calculated in the manner defined in the borrowing agreements was approximately 64 per cent and the equity ratio about 40 per cent.

M-real Corporation's own interim report is published on 4 August 2011 at 12:00.


Tissue and Cooking Papers
The January–June sales of Metsä Tissue, producer of tissue and cooking papers, totalled EUR 478 million (456). The increase in sales was primarily due to the structure of sales as well as exchange rate fluctuations. The sales of own brands increased by 10 per cent compared to the corresponding period in the previous year.

Operating result excluding non-recurring items was EUR 10 million (31). Including non-recurring items, the operating result was EUR 10 million (24). The prices of pulp, recycled fibre and other raw materials and energy continued to increase, and therefore the operating result was weaker than that in the corresponding period last year. The additional expenses related to the launch of production at the Düren mill in Germany also burdened the operating result.

Sales in the second quarter were EUR 237 million (4–6/2010: 231) and operating result excluding non-recurring items was EUR 3 million (12).

Metsä Tissue's investment programme at the Düren mill is progressing on schedule. The rebuild of paper machine 5 and the production facilities were completed and the upgrading lines were started. The mill focuses solely on the production of baking and cooking papers marketed under the SAGA brand.

Metsä Tissue's three-year investment programme at the Krapkowice mill in Poland has progressed to the construction stage. The programme published in April includes the construction of two new paper machines and an upgrading line, a rebuild of one paper machine and infrastructure development.

In June, Metsä Tissue signed an exclusive licence agreement with Georgia-Pacific. The licence agreement authorises Metsä Tissue to manufacture, sell and market Lotus soft tissue products aimed at consumers in Russia. The transaction is planned for completion at the end of the third quarter. The sales of Lotus consumer products in Russia were approximately EUR 20 million last year.

In Finland, Lambi launched a toilet paper grade with a new embossing and a thicker and softer paper quality. Katrin introduced a new plastic-free Green Spa sauna seat cover which is the world's first completely biodegradable sauna seat. It was also awarded the Nordic Swan label endorsement. Furthermore, Mola’s and Tento‘s product grades were renewed.


Events after the period
M-real's negotiations to divest its Premium Papers business to a sister company of German Papierwerke Lenk AG were suspended until further notice at the beginning of July. The parties are evaluating possibilities to continue the negotiations at a later date, and M-real is also considering other options to divest its Premium Papers business.

The feasibility study of a biodiesel plant planned by Metsäliitto and Vapo is proceeding. Four alternative locations for the plant were reviewed initially, and an environmental impact assessment was carried out on two of the locations. As the study has progressed further, Ajos in Kemi, Finland, has been specified as a potential location. The area was not included in the already assessed alternatives, which is why an environmental impact assessment will now commence separately for it.

The advantages of the plant concept under review are that it can be duplicated and that it is independent of the regional industrial production. The review found Ajos in Kemi to be a suitable location based on its logistical advantages and from the perspective of the raw material and end products.

The biodiesel project of Metsäliitto and Vapo laid out in the feasibility study is one of three projects submitted by the Finnish Ministry of Employment and the Economy to the European Commission to apply for NER300 funding from the EU. The Forest BtL project, owned by Vapo and Metsäliitto, is responsible for the project preparations.


Risks and uncertainties
The estimates and statements in this Interim Report are based on current plans and estimates. They involve risks and uncertainties that may cause the results to differ from those expressed in such statements. In the short term, the price of and demand for end products, raw material costs, energy prices and the exchange rate development of the euro have an effect on the results of Metsäliitto Group.

In March, the state enterprise Metsähallitus filed a claim for damages at the District Court of Helsinki, demanding that Metsäliitto, UPM and Stora Enso jointly pay a maximum of approximately EUR 340 million in compensation due to prohibited cooperation with regard to prices in the raw wood market. The claim is related to the 3 December 2009 decision by the Market Court which states that the aforementioned companies have violated the act on competition restrictions. Metsäliitto considers the claim for damages unfounded, and the company has not recognised any provisions regarding it.

The risks related to the Group’s business have been explained more extensively in Metsäliitto Group’s Annual report for 2010.


Near-term outlook
The wood consumption at the Group's production units is estimated to remain at the normal level in the third quarter. Metsäliitto actively buys all timber grades. In Finland, the focus in July and August is on stands marked for summer felling.

In Wood Products Industry increasing raw material prices and the challenge of implementing corresponding price increases to end products will weaken the result outlook for the third quarter. Cost control remains a key theme, and sawmill operations may have to be adjusted to the situation.

In the pulp market, seasonal weakening is to be expected and the prices are expected to decline slightly. Furthermore, carrying out maintenance shutdowns in the autumn will decrease the utilisation rates of the mills in the second half of the year.

Demand for folding boxboard and liner seems to continue to be good. M-real's order books for folding boxboard have normalised from the exceptionally high level of the end of last year and the beginning of this year. In April, M-real successfully increased the prices of liner, and in May it announced a 7–9 per cent increase in the price of folding boxboard in new agreements. In the short term, profitability of M-real’s paper business is burdened by the plans, published in May, to eliminate losses of Alizay mill and Speciality Papers business area. In addition, the weakened market situation of all paper grades burdens the result.

Demand for uncoated fine paper and speciality paper is believed to continue at the current, rather modest level. In June, M-real announced a 5–8 per cent price increase for office paper, effective in September. The price level of speciality paper is likely to remain the same.

Demand for tissue and cooking papers is estimated to continue to be steady, and the sales of own brands are expected to increase further. Measures to improve the result will continue, and the production costs and other additional expenses arising will be compensated for by increasing sales prices.

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

Metsäliitto Group's operating result excluding non-recurring items in the third quarter in 2011 is estimated to be clearly weaker than in the second quarter. This is due to the weakening market situation of paper and pulp, Metsä-Botnia's investment and maintenance shutdowns as well as the planned measures at M-real's Alizay mill and Speciality Papers business area.


Espoo, 4 August 2011


Metsäliitto Group

Board of Directors


Further information:
Vesa-Pekka Takala, Group CFO, Metsäliitto Group, tel. +358 10 465 4260
Anne-Mari Achrén, Group CCO, Metsäliitto Group, tel. +358 10 465 4541



Unaudited

METSÄLIITO GROUP
 

Unaudited
 

Unaudited

                                                                Equity attributable to members of parent company
 

Unaudited                                             
 

BUSINESS AREAS
 

Other operations include among others Metsäliitto’s service and holding functions.

 EBITDA = Operating result before depreciation and impairment losses


 

Business acquisitions
In June, Oy Metsä-Botnia Ab redeemed its own shares by EUR 143 million from UPM-Kymmene so that the ownership structure between the Groups, defined in the shareholder agreement, was achieved after the arrangement. The redemption price was accounted for as debt in the original acquisition in December 2009. When the redemption price deviated from the estimate, the Group recognised EUR 31 million as increased goodwill. As a result of the arrangement the share of indirect non-controlling interests in the Metsäliitto Group increased by 1.3 percentage points.
 

Assets held for sale included the tangible assets of M-real's Hallein GmbH in June 2011. In June 2010, assets held for sale included part of the old equipment of Metsä-Botnia’s Kaskinen pulp mill, shut down in 2009 (EUR 11 million), and the tangible assets of paper machine 2 at M-real's Kangas mill (EUR 8 million). In December 2010, assets held for sale included part of the old equipment of Metsä-Botnia's Kaskinen pulp mill, shut down in 2009.
 

The market value of open derivative contracts at the end of the review period was EUR -5 million (12/10: EUR -20 million). Open derivative contracts also include closed contracts to a total amount of EUR 324 million (12V/10: EUR 522 million).



Accounting policies
This Interim Report was prepared in accordance with the IAS 34 standard Interim Financial Reporting and the accounting policies presented in Metsäliitto Group’s Annual Report 2010.