Metsäliitto Group reported sales for January-September decreased to Euro 4,981 million

Oct 22, 2008. /Lesprom.com/. Metsäliitto Group reported sales for January-September were Euro 4,981 million (5,167). Comparable sales were down approximately three per cent. Sales have increased by the pulp mill in Uruguay, which has had an excellent start. However, sales have decreased by the closing down of the M-real's Sittingbourne and Wifsta paper mills, and the divestment of the folding carton business.

Due to the planned divestment of the Graphic Papers Business Area, the figures for the comparison years have also been adjusted in accordance with IFRS regulations. As a result of the divestment, Metsäliitto Group's sales in 2007 decreased by Euro 872 million, and in 2006 by Euro 858 million. 

The operating result, excluding non-recurring items, was Euro 120 million (259). The net amount of non-recurring items was Euro 88 million (-61).

The net amount of non-recurring items in the third quarter was Euro -8 million. The most significant item was the Euro 13 million cost provision relating to the guarantee to the mill's energy supplier on behalf of the Pont Sainte Maxence (PSM) mill, sold in June 2006, and the write-down of receivables from PSM. The net amount of other non-recurring items totalled Euro 5 million in July-September.

In the second quarter, M-real sold a total of 100,000 Pohjolan Voima Oy B2 shares to Kymppivoima Oy for Euro 80 million, for which a sales gain and fair value of Euro 74 million was realised. Another significant non-recurring income was booked during the first quarter. This, together with the sale of mill operations in the UK and pension liability arrangements, generated a profit of Euro 24 million in total. Furthermore, different cost provisions were booked in January-September, totalling approximately Euro 2 million.

The operating result including non-recurring items was Euro 208 million (198). The Group's net financial expenses were 3.5% of sales (3.0). Financial income was Euro 17 million (13), shares in associate companies were Euro 11 million (5) and financial expenses were Euro 193 million (169). Net exchange gains/losses recognised in financial items were Euro 1 million (-3). At the end of September, the exchange rate of the US dollar against the euro was 3% stronger and that of the British pound 8% weaker than at the beginning of the year. On average, the US dollar weakened by 13% in January-September, and the British pound by 16% compared to the same period last year.

The result before tax was Euro 44 million (44) and taxes, including changes in deferred tax liability, were Euro 5 million (59). The result for continuing operations was Euro 39 million (-15), the result for discontinued operations was Euro -276 million (-22) and the result for the financial period was Euro -237 million (-37).

The result for discontinued operations includes the result for mills classified as assets held for sale and the Euro 25 million sales gain reduction from the sale of the Map Merchant Group in 2007.

Euro 206 million as an impairment loss and other non-recurring items relating to the planned sale of the Graphic Papers Business Area was also recognised in the result for discontinued operations.

The result for January-September attributable to the owners of the parent company was Euro -73 million (50), and to the minority Euro -164 million (-87).

The Group's return on capital employed for continuing operations was 6.3%  (5.6), and the return on equity was 2.3%  (-0.8). Excluding non-recurring items, the return on capital employed was 4.0%  (7.2) and the return on equity was -3.0%  (2.4).

Restructuring process continues

On 29 September, M-real announced the sale of its Graphic Papers Business Area to the South African company Sappi Limited. The sale comprises the Kirkniemi and Kangas mills in Finland, the Stockstadt mill in Germany and the Biberist mill in Switzerland, whose total capacity is approximately 1.9 million tons.

Of the Graphic Papers Business Area's units, the paper mills in Hallein, Gohrsmühle, Reflex and Äänekoski, as well as Husum paper mill's paper machine 8, will remain in M-real's ownership. After the closing of the transaction, the Äänekoski paper mill and Husum mill's PM8 will continue production for Sappi under a long-term contract. As part of the transaction, M-real and Sappi have also entered into a long-term agreement on the supply of pulp and BCTMP and other smaller services and supplies. In addition, Metsäliitto and Sappi have also signed a long-term wood supply agreement.

In connection with the sale, M-real is planning to discontinue the production of standard coated fine paper in the Hallein and Gohrsmühle mills. The company's intention is to develop Gohrsmühle and Reflex mills together as the specialty paper unit and to extend uncoated fine paper production in Gohrsmühle. M-real is continuing to investigate various options for the development of the Hallein mill with selected partners.

The transaction consideration of Euro 750 million consists of Euro 500 million in cash and assumed debt, a Euro 200 million vendor loan note from Sappi to M-real and Euro 50 million of newly issued shares in Sappi. M-real expects the transaction to reduce its annual sales by approximately Euro 1 billion and its net liabilities by approximately Euro 630 million.

The sale is subject to the approvals of Sappi's extraordinary shareholders' meeting and the competition authorities, as well as the implementation of Sappi's planned rights offering. The sale is expected to be completed latest during the first quarter of 2009.

In this interim report, the units included in the sale have been classified as assets held for sale, and Euro 206 million has been booked as an impairment loss and other non-recurring items relating to the sale.

Business areas

Wood Supply

Wood Supply sales were Euro 1,372 million (1,243) in January-September, and the operating result came to Euro 26 million (28). The operating result includes approximately Euro 1 million (2) in non-recurring income. Wood Supply Finland accounted for Euro 936 million (864) of the sales and Euro 21 million (21) of the operating result.

Wood sale volumes in the entire industry are clearly below the level of recent years. The purchase volume of the forest industry from private forests was approximately 29 million cubic metres, which is about 14 million cubic metres less than in 2007.

The autumn season in domestic wood sales was boosted by the Finnish Government decision on tax exemption for wood from first thinning stands. Wood sales reached a weekly record in the last week of August with over 2.5 million cubic metres sold. While the government announced a fixed-term tax exemption for a share of the income from wood sales, the September wood sale volumes nevertheless dropped to a level some 25% below the volumes in the corresponding period of the previous years.

Metsäliitto is actively pursuing measures to find solutions for the challenging wood sale situation. The national Summer Logging Campaign started by Metsäliitto in the spring with the objective of increasing the amount of thinning has progressed well. The area marked for thinning was already increased by one-third in 2007 compared with previous years. Metsäliitto and its partners in the national Campaign for Exploiting Peatland Logging Reserves have identified technical solutions and operating models for increasing around-the-year logging in commercial peatland.

The wood supply organisation is undergoing a reform. The reform of the Finnish wood supply organisation, announced in August, enhances the services available to owner-members, simplifies operation control and improves reporting. Changes will also be made in the wood supply organisation in Russia due to Russian export taxes on wood, which will probably be implemented at the turn of the year. In January-September, Metsäliitto's imports from Russia to Finland amounted to 1.7 million cubic metres (1.4).

In the Baltic countries, wood supply from private forests remained low, and poor weather conditions impeded harvesting. In Sweden, the wood supply market has continued to be brisk. While log prices have shown a declining trend, pulpwood prices have remained stable. In Central Europe, supply has remained at a high level.

Sufficient quantities of wood as required by the curtailed production volumes were supplied to the mills throughout the wood supply operating area. Deliveries to the mills totalled Euro 26.5 million (27.5) cubic metres in January-September. 

Wood Products Industry

Metsäliitto Wood Products Industry's sales were Euro 923 million (1,078) in January-September, and the operating result came to Euro -19 million (88). The difficult situation in the Solid Wood business line, which is due to the disproportionate relationship between the low market price of sawn timber and high wood raw material prices, is the main reason for the negative result. While other business lines where the proportion of upgrading and services is larger achieved a profit, their profitability has also deteriorated due to the market situation. 

The market situation has led to the production of sawn timber being curtailed by 20% at all mills during the year. Statutory labour negotiations concerning the potential closure of the Teuva sawmill and improving the efficiency of upgrading operations at the Kaskinen mill will begin on 27 October. The number of personnel affected is 102. The statutory labour negotiations concerning plans to close the Soinlahti sawmill will be concluded today, 22 October. The number of personnel affected is 69. Plywood, Kerto and glulam production has also been curtailed since September.

The economic downturn has also affected the construction market. This is seen in the lower amount of new residential construction as well as in the renovation of buildings. The transportation industry's prospects have also weakened.

The objective of Metsäliitto Wood Products Industry's business strategy is to increase added value and to decrease the proportion of standard products. During the first three quarters of the year, Wood Products Industry acquired iLevel's European engineering wood operations, constructed a new birch plywood upgrading mill in Suolahti and started the modernisation of the Boston unit's upgrading line in the UK.

Pulp

During January-September, Metsä-Botnia's sales increased by approximately 20% compared with the corresponding period last year, amounting to Euro 1,232 million (1,028). The operating result was Euro 221 million (160).

The sales and operating result improved particularly due to the excellent performance of the Uruguay mill, which started up in November 2007. The impact of the IFRS valuation of Uruguayan forests was approximately Euro 17 million. The profitability of the Finnish mills was only satisfactory due to higher wood raw material costs and the unsteady availability of raw material.

Frequent paper mill shutdowns during the summer in North America and Europe reduced the demand for pulp. In the third quarter, Chinese paper manufacturers also began to consume their existing pulp stocks and decreased their purchase volumes. As pulp mill utilisation rates were high during the third quarter, compared to the previous quarter, although demand was poor, the producers` pulp stocks increased markedly and pulp prices took a downward turn. In June, softwood pulp was selling at USD 900/tonne and hardwood pulp at USD 840/tonne. The comparable prices at the end of September were USD 850 and USD 800.

Foreign-currency-denominated market prices for softwood pulp were, on average, 13% higher in January-September compared with the corresponding period last year. The average prices of hardwood pulp increased by 19%. Conversely, the US dollar dropped approximately 13%, so euro-denominated prices increased only slightly.

The Fray Bentos mill in Uruguay is performing steadily to the standards required as concerns production, product quality and the environment. The International Finance Corporation (IFC), a member of the World Bank Group, released the first environmental monitoring report for the mill since it began operating in November 2007. The report finds that the mill is performing to the air and water quality standards projected in the Cumulative Impact Study (CIS) and Environmental Impact Assessment (EIA) published by IFC before mill start-up. Emissions and effluents also remain clearly below the permit limits defined by the Uruguayan environmental authorities.

The external operating system of the Fray Bentos mill was audited in September by Inspecta. The audit results confirmed that the mill complies with international quality, environmental, occupational health and safety and product safety standards. The mill will be brought under Metsä-Botnia's joint ISO certificate at a later date.

M-real's result includes 30% of pulp production's operating profit. In total, 53% of the figures for the Pulp Industry are consolidated into Metsäliitto Group's financial statements.

Board and Paper

Board and Paper Industry's sales totalled Euro 2,514 million (2,671), and the operating result excluding non-recurring items was Euro 16 million (66).

Increased wood raw material and energy costs, the stronger euro against the US dollar and British pound, and the production curtailments at Metsä-Botnia's mills in Finland depressed the operating result excluding non-recurring items compared with last year. The result was improved by the cost savings measures and price increases that were implemented, and the launch of the pulp mill in Uruguay in November 2007.

Non-recurring items totalled Euro 84 million net (73) in January-September.

The non-recurring items recognised in the operating result in July-September totalled Euro -11 million. They consisted of a Euro 13 million cost provision concerning the guarantee to the mill's energy supplier on behalf of the Pont Sainte Maxence (PSM) mill, sold in June 2006, the write-down of corresponding receivables from PSM and a Euro 2 million gain on the sale of land of mills sold at an earlier date.

During the second quarter, the Euro 74 million gain on the sale of Pohjolan Voima shares was booked as income, and a Euro 2 million cost provision dealing with the sales network efficiency enhancement programme was booked as an expense. During the first quarter, Euro 24 million was booked as income connected to the release of pension liabilities in the UK as a result of the divestment of the New Thames mill, and from certain other liabilities related to the shut-down of the Sittingbourne mill. Different cost provisions totalling Euro 1 million were booked as expenses.

The operating result including non-recurring items was Euro 100 million (139). Net interest and other financial expenses totalled Euro 108 million (100), income from associates was Euro -1 million (0) and net exchange gains/losses recognised as financial items were Euro 2 million (-3).

The result before tax from continuing operations was Euro -7 million (36), earnings per share were Euro -0.05 (0.06) and return on capital employed was 4.9% (6.1). Excluding non-recurring items, the result before taxes was Euro -91 million      (-37), earnings per share were Euro -0.31 (-0.19) and the return on capital employed was 1.3% (3.2).

At the end of September, M-real's equity ratio was 32.5% and net gearing was 114% (31 December 2007: 34.4% and 99%). In some of M-real's borrowing arrangements, a limit of 120% has been set for net gearing and a limit of 30% for the equity ratio. At the end of September, net gearing calculated in the manner defined in the borrowing agreements was approximately 96%, and the equity ratio approximately 38%.

Tissue and Cooking Papers

In January-September, sales of Metsä Tissue, which produces tissue and cooking papers, stood at Euro 696 million (632), and its operating result was Euro 33 million (22). The steady development in Metsä-Tissue's own brands and private label products contributed to the improvement in the result.

The operating result includes approximately Euro 5 million in non-recurring expenses and approximately Euro 4 million in non-recurring income.

Sales were up approximately 10% from last year. Growth was promoted by an increase in production volumes (4%), the increase in selling prices and the changes in sales structure (6%).

Clean and Shine cleaning paper was launched under the Serla brand. In the large-scale consumer business, the Saga brand was integrated into the Katrin brand. The products were also grouped into three different quality grades at the same time. The Mola brand design was also modernised.

A second upgrading line was installed at the Naro Fominski distribution and upgrading unit in Russia. The line manufactures products under the Lambi, Mola and Katrin brands. Roller towel production for large-scale customers began in Krapkowice, Poland.

The construction of new warehouse space in Zilina, Slovakia, and Düren, Germany, is progressing according to schedule. The Bork warehouse in Germany has been sold.

In Sweden, the company launched a 12-month maintenance project in September with the purpose of documenting the best maintenance practices and sharing them throughout all Metsä Tissue units.

Outlook

Demand for all timber types continues to be good in Finland, and Metsäliitto is in an good position to respond to the desired and permanent upturn in the wood trade. Stands marked for felling before the winter, roundwood and forest energy are in particular demand. Although weather conditions in Finland will have an impact on the supply of wood to the Group's mills, it is probable that sufficient quantities can be supplied by means of special arrangements.

In order to improve the weakened profitability of the Solid Wood business line, Metsäliitto Wood Products Industry will have to initiate further production adjustment measures. The remaining business lines continue to be profitable despite the difficult market situation. Solid Wood will achieve a negative result for the full year, and the profitable operations of other business lines will not be enough to make the overall result profitable.

As pulp prices are expected to show a slightly declining trend, achieving profitable performance will be a challenge for Metsä-Botnia. The fourth-quarter result is nevertheless expected to be at a good level. The sharp growth in production costs will erode the profitability of the Finnish mills, and there will be further production curtailments in Finland.

The demand for M-real's principal products in Europe seems to be continuing at a relatively stable level in the fourth quarter, and measures aimed at increasing product prices will be continued in all business areas. Production costs will remain high, and M-real will not be able to fully offset cost inflation through its own cost-efficiency measures this year.

M-real's fourth-quarter operating result excluding non-recurring items is expected to show a seasonal weakening on the third quarter. The overall operating result for 2008 excluding non-recurring items will remain weaker than the year before. This is attributable to higher production expenses, restrictions in pulp production due to the wood raw material situation and the fact that price increases for coated fine paper have been delayed.

The weakening growth prospects in Europe are not expected to have any significant influence on the sales volumes of tissue and cooking paper. There is continuing pressure to transfer the higher expenses, regarding energy and transportation in particular, to sales prices.

Metsäliitto Group's third-quarter result excluding non-recurring items was in line with expectations. Due to seasonal factors and the difficult market situation of the Wood Products Industry in particular, the fourth-quarter operating profit before non-recurring items is likely to remain below the previous quarter's level. Metsäliitto Group's operating result for 2008, excluding non-recurring items will remain clearly below last year's level.