M-real's new programme targets EUR 100 million profit improvement

Both the extensive restructuring programme that Metsäliitto Group subsidiary M-real announced in October 2006 and the further extension that was announced in February this year are in their final stages, and their targets will be exceeded. M-real is now immediately launching, after the sale of Map Merchant, the fourth step of its strategic review process to improve profitability and reduce complexity. The new programme includes the planned closures of BCTMP mill at Lielahti and coated magazine paper machine No. 2 at Kangas, as well as the reorganisation of the company's business area structure, simplification of the coated magazine paper business, and streamlining the sales and marketing organisations. As part of the programme, M-real is prepared to carry out other measures, including, for example, further capacity reductions if so required by changes in the operational environment. M-real aims to achieve an improvement of EUR 100 million in total annual profits by the end of 2009.

- "We more than met the objectives for the previous steps that we took in M-real's strategic review, and the results from asset sales have also been better than targeted. The new programme combined with the earlier profit improvement steps constitute the next step in M-real's strategic review and will improve M-real's position for participating in various phases of consolidation in the European paper industry", says Kari Jordan, Chairman of M-real's Board of Directors and President and CEO of Metsäliitto Group.

- "Thanks to our success in restructuring we are now fully compensating for the effect of cost inflation 2007. With the measures announced today, we intend to deal with cost inflation in 2008-2009 as well, and to create a favourable basis for M-real to improve its profitability", adds Mikko Helander, CEO of M-real.

- "Kangas mill is unprofitable and losing money. The measures that have been taken up to now to improve the situation have proved out to be inadequate due to rising wood costs and the unsatisfactory trend in magazine paper prices. However, the efforts made by the mill's employees and management have been encouraging, so we are confident that by launching a new product and service concept on the remaining machine we can successfully turn the Kangas mill around", says Mikko Helander.

The annual capacity of paper machine No. 2 at Kangas is 100,000 tonnes of coated magazine paper.

- "With regard to the Lielahti mill, it is our oldest and smallest BCTMP mill, and the current and future requirement for BCTMP is significantly less than our total capacity. Rising wood costs and the situation regarding wood availability have made it impossible for us to sell the surplus fibre in a profitable manner from the company's point of view", Mikko Helander points out.

Lielahti mill's capacity is 105,000 tonnes of bleached chemithermomechanical pulp (BCTMP).

Improving the profitability of coated magazine paper grades by simplifying the business concept

M-real plans to change the business concept regarding the coated magazine paper grades. The key elements are targeted at improving customer service by increasing efficiency in manufacturing and supply chain operations.

The number of different product variants will be reduced and the coated magazine paper grades optimised. Production overlaps between the paper mills will be reduced; paper machines will be optimised to improve quality consistency and faster production cycles will enable us to improve the supply service to increase availability and reliability.

- "We are aiming at reducing complexity and simplifying the division of production between our coated magazine paper mills. We have created an operational concept, which on top of achieved savings will also improve customer satisfaction, which is one of the key aspects of all the changes," Mikko Helander notes.

Reducing business area complexity

Two of M-real's present business areas, 'Publishing', which focuses on magazine paper, and 'Commercial Printing', which specialises in coated fine paper, will be merged into a single new 'Graphic Papers' business area managed by Gregory Gettinger, the current head of Publishing business area. The current head of the Commercial Printing business area, Jarmo Salonen, is appointed Executive Vice President, Resources, and will be in charge of resources including wood, pulp and energy, purchasing, research and development, logistics and environmental affairs. Both will also continue as members of M-real Corporation Management Team. These changes become effective immediately.

- "The aim of integrating the two business areas is to reduce complexity. In practice we will be able to significantly rationalise management and production costs, and reduce working capital. The new programme's target for total profit improvement within the new business area, including closures and other measures to reduce complexity, is approximately EUR 60 million", says Mikko Helander.

In future, M-real will have three business areas: Graphic Papers, Consumer Packaging and Office Papers.

Profit improvement in Consumer Packaging and Office Papers

Consumer Packaging will be targeting cost savings, and the Lielahti mill closure will further enable this business area to optimise fibre sourcing. The business area will carry out other optimisation projects including for example optimisation of Joutseno BCTMP to board grades and sheeting concept development. The business area has a target of an estimated EUR 15 million annual profit improvement.

In the Office Papers business area, the new programme includes a profit improvement of approximately EUR 15 million through the planned streamlining of mill processes, and costs will also be reduced through the sales network streamlining.

An additional EUR 10 million in profit improvements are to be achieved from corporate function areas, such as purchasing, logistics and IT. M-real sales and marketing organisations will also contribute significantly to the new programme.

- "With our previous profit improvement steps we have shown that we can deliver what we promise or even more. We are going ahead with the new programme based on the same principle. And the continuation of our strategic review will certainly bring new elements and independently implemented measures for improving M-real's profitability and performance", promises CEO Mikko Helander

Possible reductions in personnel

Possible reductions in the numbers of employees as a result of the planned closures and cost-saving measures will depend on the outcome of statutory negotiations with the personnel which will be opened immediately. According to preliminary estimations, the total number of M-real's personnel could be reduced by 500, of whom 200 are employed in Finland and 300 outside Finland.

Financials of the new profit improvement programme

The total non-recurring costs from the new programme are estimated at EUR 73 million, of which approximately EUR 50 million are asset write-offs and approximately EUR 23 million costs with cash flow effect. The estimated amounts per business area are:

- Graphic Papers business area: EUR 40 million write-offs and EUR 11 million costs with cash flow effect
- Consumer Packaging business area: EUR 10 million write-offs and EUR 3 million costs with cash flow effect
- Office Papers business area: EUR 6 million costs with cash flow effect
- Other operations: EUR 3 million costs with cash flow effect.

The majority of the write-offs and cost provisions will be included in the results of 4Q/2007 and 1Q/2008. The cash flow will largely materialise by the end of 2009.

The planned capacity closures will have no material effect on M-real's annual sales.

Impairment testing according to IAS 36

Mainly due to wood price and interest rate development M-real estimates to include net impairment charges of EUR 181 million in its fourth quarter results, consisting of:

- An impairment charge of EUR 185 million from the goodwill of Office Papers business area
- A reversal of the EUR 4 million impairment charge made from the fixed assets of the Kyro Paper mill in Consumer Packaging business area in previous year's testing.

The impairment charges will have no material effect on M-real's depreciation or taxes.

Further information for media:

Lauri Peltola, Group Communications, tel. +358 50 570 5606
Anne-Mari Achren, Group Communications, tel. +358 50 598 8864

Further information for investors and analysts:

Seppo Parvi, CFO, tel. +358 10 469 4321
Juha Laine, Investor Relations, tel. +358 10 469 4335

 

Source: M-real