Oct 18, 2006. /Lesprom Network/. M-real, one of Europe's leading producers of paper and paperboard and part of Metsäliitto Group, announces on October 18 an extensive restructuring programme as a first step in its strategic review. The planned programme includes possible capacity closures, a new cost savings programme, potential divestments and an impairment charge of approximately Euro 200 million. The programme will take effect immediately with a planned completion by the end of 2007. The restructuring programme is being undertaken to cut capacity and costs and in order to improve competitiveness. Strategic review Since autumn 2004, M-real has focused on improving its position through efficiency actions, affecting all M-real's operations and business areas. The implementation of these actions has progressed according to schedule. "M-real's board of directors initiated a strategic review of M-real's current business portfolio in March 2006, with a view to exploring potential benefits of participation in the consolidation and restructuring of the European paper industry. We firmly believe that further consolidation within the European paper industry is needed and that the structure of European paper merchanting is going to change. The planned restructuring programme announced today is the first step in the execution of the strategic review", says Kari Jordan, chairman of the board of directors, M-real. Possible closures of capacity "In order to reduce capacity, M-real has identified for possible closure mills and production lines which are uncompetitive. Following the possible closures mentioned, the competitiveness of the remaining business is expected to be substantially stronger. One purpose of the possible closures is to contribute to improving the supply-demand balance of the sector", says Kari Jordan. In total, M-real is planning to close two paper mills and an additional two paper machines resulting in total closures of 485 000 tonnes. The following mills or paper machines have been identified as potential closure candidates: - Sittingbourne, UK, 210 000 tonnes of coated woodfree paper - Paper machines 6 and 7 in Gohrsmühle, Germany, 100 000 tonnes of coated woodfree paper - Wifsta, Sweden, 175 000 tonnes of uncoated woodfree paper This would result in a reduction of M-real's fine paper capacity by 15%, both in commercial printing and office paper business areas. The annual revenue of the mills affected is estimated to be approximately Euro 200 million. The estimated cash cost of the planned closures will amount to approximately Euro 80 million, a one-time loss of approximately Euro 120 million while producing an ongoing positive annual EBIT impact of Euro 40 million. Profit and cash impacts of possible closures would be incurred during fourth quarter 2006 and first quarter 2007. The production lines, which are planned to be closed, employ approximately 500 people. New cost savings programme M-real is already in the process of undertaking a major cost saving programme initiated in 2004 in which a total of Euro 230 million of savings and efficiency improvements were identified. Measures related to the programme have been implemented by second quarter 2006. In an effort to increase the operating efficiency of M-real, a new savings programme for a further Euro 100 million of annual cost improvements is announced today. In addition to the previous restructuring actions, M-real will focus on further cost improvements of operational activities including a head office efficiency improvement project, which includes integrating business support functions with Metsäliitto Group support functions and possible headcount reductions, sourcing projects, logistics and supply chain rationalisation, administration and other fixed costs, IT costs and energy consumption. The ambition will be to realize further savings of Euro 100 million by the end of 2007 of which 30-40% P&L effect is to be achieved already during 2007. Additionally, M-real is launching a working capital improvement programme to further improve cash flows through more efficient working capital management. By improving supply chain efficiencies, payment terms and inventory management, M-real is targeting minimum of Euro 100 million of cash flow improvements in 2007. Strategic review of assets M-real has carefully reviewed the company's asset base and short listed potential divestitures which are expected to raise Euro 500 million in proceeds. The proceeds will be used to decrease indebtedness. The planned candidates for divestments include a possible sale of minimum of 8% stake of Metsä-Botnia to Metsäliitto and a potential sale of the folding cartonnes converting business, all units or each unit separately: - Meulemans cartonne plant in Belgium - Petöfi cartonne plant in Hungary - Tako cartonne plant in Finland Additional disposals are to be determined. Impairment and summary of financial impact of the restructuring programme M-real will book an impairment charge of approximately Euro 200 million during fourth quarter 2006. The overall impact of the planned restructuring programme is estimated to be the following: impairments of approximately Euro 200 million and a one-time loss of approximately Euro 120 million. The cash cost of the planned capacity closures is estimated to be approximately Euro 80 million. Profit and cash impacts of possible closures will be incurred during fourth quarter 2006 and Q1 2007. EBIT improvement is estimated to be Euro 40 million. Kari Jordan, chairman of M-real concludes: "The paper industry has been a difficult sector for a number of years and M-real like many of its competitors has had some tough decisions to make. This initial restructuring programme has been undertaken as part of a broader strategic review of M-real. M-real will emerge from the programme in a much stronger position and be better positioned to participate in the ongoing restructuring and consolidation of the industry."