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  • M-real Strengths and

    Challenges Seppo Parvi

    CFO, Deputy to CEO

    Handelsbanken Basic Industry Seminar 8.3.2007

  • Agenda

    1. General 2. Changes in Operating Environment 3. Restructuring Programmes and Re-Engineering 4. Strengths and Challenges by Business Area 5. Strengths and Challenges - Summary 6. Near-Term Outlook

    Page 2 M-real Strengths and Challenges Handelsbanken 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.

    Page 4 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

  • Page 5 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

    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 %*

  • Page 6 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

    Paper Merchanting

    European Enterprise

    UK

    Sweden

    Others

    Finland

    Germany

    Personnel At 31 December 2006: Total 14 125

    5%

    5%

    Paper Pulp

    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 Carton Board

  • 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€

    Page 7 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

    * 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

    Page 8 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

    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

    Page 10 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

  • 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

    Page 11 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

  • 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

    Page 12 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

  • Restructuring Programmes

    and Re-Engineering

  • Restructuring Programme

    Page 14 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

    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 28.2.2007 Wifsta 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 Targets Cost Savings 2007

    EUR, million Savings

    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 %

    Other fixed costs

    Variable costs

    Personnel costs

    Page 15 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

  • ONWC Reduction Targets

    ONWC Reduction 2007 EUR, 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 %

    Accounts Payable

    Accounts Receivable

    Inventories

    Page 16 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

  • Finnish Restructuring 2007-2008 The 18.10.2006 announced restructuring programme concentrates more on operations outside Finland On 6.2. 2007 the program was extended to Finnish operations where a clear profit improvement is also needed Targeted profit impact is EUR 40 million a year, major effect from 2008, full effect from 2009 onwards Estimated headcount reduction is 600 people Currently there are no plans to close entire mills

    Page 17 M-real Strengths and Challenges Handelsbanken Basic Industry Seminar 8.3.2007

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

    Cumulative Profit 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

    Cumulative Profit impact vs. 2006, m€ target 2007