Seppo Parvi CFO, Deputy to CEO and other...Seppo Parvi CFO, Deputy to CEO Handelsbanken Basic...

M-real Strengths and

ChallengesSeppo Parvi

CFO, Deputy to CEO

Handelsbanken Basic Industry Seminar 8.3.2007

Agenda

1. General 2. Changes in Operating Environment3. Restructuring Programmes and Re-Engineering4. Strengths and Challenges by Business Area5. Strengths and Challenges - Summary 6. Near-Term Outlook

M-real Strengths and ChallengesHandelsbanken Basic Industry Seminar 8.3.2007

General

M-real is one of the leading European paper and board companies.

M-real provides innovative products and services for consumer packaging, communications and advertising.



M-real in a Nutshell• Annual sales of EUR 5.6 billion (2006)• Employs about 14 000 people• Close to markets with a presence in over 70

countries• 23 production units in 9 European countries • ISO 14001 environmental certification for all

production units• Listed on Helsinki Stock Exchange

Annual sales breakdown(2006)

*About one third of Map’s sales volume is M-real’s products

Paper 56 %Paperboard 18 %Merchanting 26 %*


Paper Merchanting

European Enterprise

UK

Sweden

Others

Finland

Germany

Personnel At 31 December 2006:Total 14 125

5%

5%

PaperPulp

Turnover 2006, Total €5.6 billion by Country of Origin

France

Austria

Switzerland

5%

13%

40%

13%

5%

14%

17%

3%

4%

11%

30%

17%

6%

12% Folding CartonBoard

Business Portfolio• M-real’s core businesses are Consumer Packaging, Publishing,

Commercial Printing, Office Papers and Map Merchant Group

• Focus for strategic development on segments where M-real’s competitive advantage is strongest and financial returns are most attractive

Consumer Packaging

Map Merchant Group

Office Papers

Commercial Printing

Publishing

Sales 2006 971 m€

EBITDA 2006* 131 m€

Sales 2006 887 m€

EBITDA 2006* 114 m€

Sales 2006 1 438 m€

EBITDA 2006* 33 m€

Sales 2006 1 504 m€

EBITDA 2006* 74 m€

Sales 2006 727 m€

EBITDA 2006* 69 m€


* Excluding non-recurring items

Capacities in Europe

0 500 1000 1500 2000

UPM

Mondi

IP

M-real

Stora Enso

0 200 400 600 800 1000

Stora Enso

M-real

Holmen

Cascades

International Paper

0 1000 2000 3000

Myllykoski

Burgo

M-real

Stora Enso

UPM

Coated mechanical in Europe

Uncoated fine in Europe

0 500 1000 1500 2000 2500

UPM

Burgo

M-real

Lecta

Sappi

Folding Boxboard in Europe

Coated fine in Europe

0 5 10 15 20

Paperlinx

Papyrus (Stora Enso)

Antalis

Map (M-real)

Igepa

Paper Merchanting

%

Capacity: 1000 tons/year Capacity: 1000 tons/year Share of total sales


Source: Pöyry, company websites, M-real

Changes in Operating

Environment

Operating Environment• Our operational environment has changed

dramatically during recent years and the change is here to stay

• We are operating in exceptionally challenging times due to rises in energy and raw material prices, record-low prices of products and changes in exchange rates

• Consolidation process in the European paper industry and the paper merchant markets will continue

• We have to be responsible for our sector’s future


Change is a Must

• Future cannot be based on assumed better market conditions; rationalization and efficiency improvements must be made anyway

• Adaptation is not enough; we have to be ready for a drastic change to secure our future


M-real Strategic Review• In March 2006, M-real's Board of Directors initiated a strategic

review of current business portfolio to explore potential benefits of participation in the consolidation and restructuring of the European paper industry

• Further consolidation of the European paper industry is needed

• The structure of the European paper merchanting is expected to change

Strategy review is ongoing, extensive restructuring program was announced´18.10. 2006 as the first step


Restructuring Programmes

and Re-Engineering

Restructuring Programme


Closure of capacity– 2 entire paper mills and 2 additional paper

machines, representing 15% of M-real’s fine paper capacity

– Non-recurring costs 120 m€ of which 80 m€ cash

Follow up system createdFollow up system created

Announced 18.10.2006 Status

New €100m/a cost savings programme– P&L effect in 2007 40-50%– Estimated one off costs 10 m€, capex 10 m€

100 m€ reduction in ONWC by the end of 2007

– 9% of Metsä-Botnia sold to Metsäliitto for €240m. Folding carton plants disposals being negotiated. Further disposals to be determined

Strategic review of assets– Target of 500m€ in proceeds during 2007

– €176m booked in 4Q 06Impairment charge of approx. 200 m€

– Sittingbourne closed 31.1.2007, PM 6 & 7 in Gohrsmühle by 28.2.2007Wifsta by 30.6.2007

– Costs slightly higher than originally estimated. 75 m€ was booked in 4Q 06, remaining 50-60 m€ to be booked in 1Q. Cash costs estimate of 80 m€ still valid

– Savings actions identified, implementation started

– Implementation started

Savings TargetsCost Savings 2007

EUR, millionSavings

target 2007

Consumer Packaging 10

Publishing 10

Commercial Printing 40

Office Papers 10

Map Merchant Group 10

Corporate functions 20

Total 100

• Focus on cost improvements of operations• Head-office efficiency improvement project

• Headcount reductions

• Sourcing projects

• Logistics and supply chain rationalisation

• Administration and other fixed costs

• IT costs

• Energy consumption

• Target to realize €100 million by the end of 2007• 40-50% P&L effect to be achieved already during 2007

• Related one off costs ~10 m€, capex requirement ~10 m€30 %

22 %

48 %

Otherfixedcosts

Variablecosts

Personnelcosts


ONWC Reduction Targets

ONWC Reduction 2007EUR, million

ONWC Reduction target 2007

Consumer Packaging 30

Publishing 10

Commercial Printing 20

Office Papers 10

Map Merchant Group 10

Corporate functions 20

Total 100

• Targeting €100 million reduction through:

• Supply chain efficiency

• Receivables and payables management

• Collection activities

• Warehouse management

31 %

17 %

52 %

AccountsPayable

AccountsReceivable

Inventories


Finnish Restructuring 2007-2008The 18.10.2006 announced restructuring programmeconcentrates more on operations outside FinlandOn 6.2. 2007 the program was extended to Finnish operations where a clear profit improvement is also neededTargeted profit impact is EUR 40 million a year, major effect from 2008, full effect from 2009 onwardsEstimated headcount reduction is 600 peopleCurrently there are no plans to close entire mills


Cost Savings Cover Only Cost Inflation – For Profit Improvement We Need Price Increases

CumulativeProfit impact vs. 2006, m€ target 2007 2008 2009

1 Cost savings program 2007 100 40 100 100

2 Old cost savings program 60 60 60 60

3 Capacity closures 40 30 40 40

4 Restructuring of Finnish operations 40 5 30 40

Total 240 135 230 240

Estimated cost inflation 2007 120

Profit impact after cost inflation vs. 2006 15 230 240

CumulativeProfit impact vs. 2006, m€ target 2007 2008 2009

1 Cost savings program 2007 100 40 100 100

2 Old cost savings program 60 60 60 60

3 Capacity closures 40 30 40 40

4 Restructuring of Finnish operations 40 5 30 40

Total 240 135 230 240

Estimated cost inflation 2007 120

Profit impact after cost inflation vs. 2006 15 230 240


Reorganized Management & Decision Making

• Faster decision making needed• No more committees – power and responsibility of the BA

management enhanced• More frequent M-real Management Team meetings instead• Aim is to continue downsizing the head office top management

positions• Management practices and overlapping functions will be

streamlined, and costs cut


Re-Engineering of Business Practices

• Great opportunity in paper industry• Paper industry companies are generally speaking conservative

and old-fashioned • We need a new, open-minded attitude and new ways to secure

our future in this permanently changed business environment• We have to be able to critically analyse our old strategies and

procedures and to find new and more efficient ways of working• We must focus on customer orientation, internal efficiency and

improving M-real’s overall profit in all sectors


M-real’sStrengths and Challenges byBusiness Area

Consumer PackagingMain grades: Folding Boxboard (capacity 0,8 million tons) and

White Top Linerboard (0,35 million tons)

Good and specialized assets Premium products and good imageFocused product range for growing end use areasCooperation with and thorough knowledge of end user areas BCTMP, R & D and innovation overall

All production in FinlandCreate larger market for quality cartonboardsCustomers‘ increased service needs

Strengths Challenges

EBIT % ~ industry averageSource: company reports



PublishingMain grade: Coated Magazine Paper (capacity 1,3 million tons)


Integrated productionRaw material availability, top class coating know howCustomer relationship approachStrong Galerie-brandGood foothold on emerging European markets

All production in Nordic countriesProduct offering vs. publication paper demand structureCustomer consolidation




Commercial Printing Main grade: Coated Fine Paper (capacity 1,4 million tons)


Mill locations on main marketsLarge enough in key segmentsProduct innovationsTop class coating know howStrong European customer baseAccess to own competitive fibre sources (BCTMP, euca)

Improve cost competitiveness and productivityBalanced cooperation with merchants over the value chainManage overcapacity vs. price in fine papersCompetitive fibres


EBIT % below industry average Source: company reports

EBIT % below industry average Source: company reports

Office Papers Main grade: Uncoated Fine Paper (capacity 1,4 million tons*)


Leading office papers brandsProduct offering includes also recycled fibre based productsBroad product portfolioLocation of mills combined with efficient logisticsCustomer service performanceFocused multi-channel strategy

Competitive fibresCommoditization of business –how to differentiateThreat of increasing imports New capacity entering into the market


EBIT % slightly below industry average Source: company reports

EBIT % slightly below industry average Source: company reports

* Includes Wifsta that will be closed by 30.6.2007

Map Merchant Group


Critical mass combined with local way of operatingStrong market positions where presentGood foothold and development on emerging European marketsBalanced sourcing structure

Pressure on marginsIncomplete coverage in Europe




Strategic Strengths and Challenges-

Summary

M-real’s Strategic Strengths-Summary• Leading market positions and well balanced industrial geography

in main product categories• Good knowledge on different fibres and pulps with direct access

to various pulp qualities • High pulp and energy integration levels• Potential for further cost savings and improved operational

efficiency• Main part of asset base is well invested with no urgent major

investments needs


M-real’s Strategic Challenges-Summary• M-real’s current financial performance – result and cash flow – not

satisfactory regardless of market situation• Balance sheet burdened due to major acquisitions with high

valuation• Main demand growth outside of current main markets• Depressed prices of paper due to overcapacity• Fast increased prices of raw materials and transportation


Financial Targets• ROCE target set at a minimum of 10% on average over the business cycle• Gearing ratio not to exceed 100%

Minimum ROCE 10%* Maximum Gearing 100%


184%

119%137%

82%95%

126%

83%

145%

99 00 01 02 03 04 05 06

Maximum level of 100%

13,5%

6,2%

2,1% 1,6%0,5%

1,4%

10,2%

7,6%

99 00 01 02 03 04 05 06

Minimum target of 10%

* Excluding non-recurring items

Near-TermOutlook

Near-Term Market OutlookDemand for paper and paperboard expected to improve due to seasonal factorsExpected price development in Europe

Both uncoated and coated fine paper market price increasesNo major changes in coated magazine paper and folding boxboard market prices

Fight to increase sales prices continues Market balance improves gradually due to capacity closuresDue to weak USD European producers are moving some export volume to Europe


Near-Term Operations and Profitability OutlookStrategic review’s next steps under evaluationRestructuring program continues as planned

Capacity closures ahead of scheduleAsset disposals proceed as planned

Fine paper operating rates very high in 1QNo major maintenance or investment shutdowns in 1QWood costs higher than in the previous yearBotnia’s Uruguay pulp mill’s construction on schedule, start up at the end on 3Q 2007


Thank you!Q&A


Appendix

Key Events 2006• Strategy Review initiated in March• Extensive restructuring program launched in October as the first step of strategy review

• New senior management• Uncoated fine paper price on growth track • General paper market balance in Europe improving


Key Profitability Figures- Annual

Annual 2006 2005 Diff.Sales, M€ 5 624 5 241 383Growth, % 7 %

EBIT, M€ -271 36 -307EBIT, excl. non-recurrings, M€ 45 4 41

Financial items, M€ -137 -146 9

Result before taxes, M€ -408 -114 -294Result before taxes, excl. non- recurrings, M€ -92 -142 50

Net result, M€ -399 -80 -319

EPS, € -1,21 -0,25 -0,96

Board's dividend proposal to the AGM, € 0,06 0,12 -0,06

Annual 2006 2005 Diff.Sales, M€ 5 624 5 241 383Growth, % 7 %

EBIT, M€ -271 36 -307EBIT, excl. non-recurrings, M€ 45 4 41

Financial items, M€ -137 -146 9

Result before taxes, M€ -408 -114 -294Result before taxes, excl. non- recurrings, M€ -92 -142 50

Net result, M€ -399 -80 -319

EPS, € -1,21 -0,25 -0,96

Board's dividend proposal to the AGM, € 0,06 0,12 -0,06


Key Profitability Figures- Quarterly

Quarterly 4Q06 3Q06 Diff. 4Q 05 Diff.Sales, M€ 1 438 1 367 71 1 369 69Growth, % 5 % 5 %

EBIT, M€ -246 15 -261 -27 -219EBIT, excl. non-recurrings, M€ 14 17 -3 11 3

Financial items, M€ -45 -37 -8 -22 -23

Result before taxes, M€ -291 -22 -269 -49 -242Result before taxes, excl. non- recurrings, M€ -31 -20 -11 -11 -20

Net result, M€ -266 -33 -233 -38 -228

EPS, € -0,81 -0,10 -0,71 -0,12 -0,69

Quarterly 4Q06 3Q06 Diff. 4Q 05 Diff.Sales, M€ 1 438 1 367 71 1 369 69Growth, % 5 % 5 %

EBIT, M€ -246 15 -261 -27 -219EBIT, excl. non-recurrings, M€ 14 17 -3 11 3

Financial items, M€ -45 -37 -8 -22 -23

Result before taxes, M€ -291 -22 -269 -49 -242Result before taxes, excl. non- recurrings, M€ -31 -20 -11 -11 -20

Net result, M€ -266 -33 -233 -38 -228

EPS, € -0,81 -0,10 -0,71 -0,12 -0,69


Key Cash Flow and Balance Sheet Figures

4Q06 3Q06 4Q05 2006 2005Net Cash flow arising from operations, M€ 115 67 -26 222 136(including change in ONWC)

Investments -123 -101 -144 -428 -452Disposals and other investing activity 14 2 -8 28 312Net investments, M€ -109 -99 -152 -400 -140

Net cash flow after investments, M€ 6 -32 -178 -178 -4

Gearing at the end of period, % 126 111 95 126 95

Equity ratio at the end of period, % 30,9 34,3 36,6 30,9 36,6

4Q06 3Q06 4Q05 2006 2005Net Cash flow arising from operations, M€ 115 67 -26 222 136(including change in ONWC)

Investments -123 -101 -144 -428 -452Disposals and other investing activity 14 2 -8 28 312Net investments, M€ -109 -99 -152 -400 -140

Net cash flow after investments, M€ 6 -32 -178 -178 -4

Gearing at the end of period, % 126 111 95 126 95

Equity ratio at the end of period, % 30,9 34,3 36,6 30,9 36,6


EBITDA 299 439Costs related to capacity closures (excl. write downs) -47Loss related to the sale of PSM* mill -37Stockstadt, Hallein, Alizay restructuring costs -24Map Merchant Group restructuring costs -6Other non-recurring items 2Total non-recurring items in EBITDA -112 55

EBITDA, excl. non-recurring items 411 384

Operating result -271 36Non-recurring items in EBITDA -112Impairment -176Fixed asset write downs related to capacity closures -28Total non-recurring items in operating result -316 32

Operating result , excl. non-recurring items 45 4

Non-recurring Items, EUR million 2006 2005


*Pont Sainte Maxence

EBITDA 48 106Costs related to capacity closures (excl. write downs) -47Hallein restructuring costs -5Map Merchant Group restructuring costs -6Other non-recurring items 2Total non-recurring items in EBITDA -56 -2

EBITDA, excl. non-recurring items 104 108

Operating result -246 15Non-recurring items in EBITDA -56Impairment -176Fixed asset write downs related to capacity closures -28Total non-recurring items in operating result -260 -2

Operating result , excl. non-recurring items 14 17

Non-recurring Items, EUR million 4Q 2006 3Q 2006


*Pont Sainte Maxence

Sales by Business Area EUR, million

1390

704

1488

796864

1438

727

1504

887

971

0

400

800

1200

1600

Consumer Packaging Publishing Commercial Printing Office Papers Map Merchants

20062005


Operating Result by Business Area*EUR, million

-33

1422

4

41

27

7

-26

30

47

-40

-30

-20

-10

0

10

20

30

40

50

60

Consumer Packaging Publishing Commercial Printing Office Papers Map Merchants

2005 2006 * excl. non-recurring items


Main Profitability Drivers, 2006 vs. 2005Profitability excl. non-recurrings improved

Higher deliveriesSlightly higher uncoated fine and coated magazine paper sales pricesDecreased personnel costs

Profitability of all business areas improvedReduction in ONWCFine paper and paperboard demand on a relatively good level, coated magazine paper demand weaker than expectedPaper and board prices remained depressed in general, achieved increases moderateRaw material, energy and transportation costs increased clearly


Folding Boxboard Market Price in Europe2000 – 2006EUR / tn Three month moving average

Source: M-real

400

600

800

1000

1200

2000 2001 2002 2003 2004 2005 2006


PaperEUR / tn,

Pulp USD/ tn

Paper and Pulp Market Price in Europe1998 – 2006

Coated fine paper

Uncoated fine paper

NBSK

LWCSource: M-real, Foex, ReutersEUR/USD

EUR/USD

400

500

600

700

800

900

1000

1998 1999 2000 2001 2002 2003 2004 2005 20060,8

0,9

1

1,1

1,2

1,3

1,4


Seppo Parvi CFO, Deputy to CEO and other...Seppo Parvi CFO, Deputy to CEO Handelsbanken Basic...

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