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M-real Plans Closure of Unprofitable Mills

Metsa, Finland, 18 October 2011 -- M-real Corporation, part of Metsäliitto Group, announced on 04 May 2011 its plans to divest the Alizay mill in France and the entire Gohrsmühle mill in Germany or, alternatively parts of the Gohrsmühle mill separately, based on a Paper Park concept. It also was announced that if the divestments do not materialize, M-real plans to start consultation processes proposing to close the operations. M-real also announced plans to discontinue its remaining carbonless paper converting operations at the Reflex mill in Germany.

M-real received several offers for the Alizay mill, based on which the negotiations have been carried out to divest the mill. None of the buyer candidates however fulfilled M-real’s conditions for entering into the transaction. The main conditions for divestment set by M-real relate to the financial status of the buyer, credibility and capability to implement the presented business plan, and the ability to take responsibility for the employees, the business risks, and the financial consequences to M-real of the divestment.

M-real has decided to commence an information and consultation process to close the Alizay paper mill. Approximately 330 employees currently work at the Alizay mill. Despite extensive restructuring measures and investments at the Alizay mill, it currenlty is losing approximately EUR 3 million per month. In this very challenging operating environment that European paper industry faces, it is not possible to turn the heavy loss-making mill profitable, nor are there signs of such a turning point in the paper market that would change the situation.

In the past years, M-real has tried to divest the Alizay mill and discussed and negotiated with a number of companies, including key industry players with no success. M-real appointed leading industry experts who approached in excess of 80 companies in the most recent process to divest the mill, starting in May 2011. Out of these, 65 declined and 18 showed preliminary interest, received the information memorandum, and visited the site. In the last few weeks, there were serious negotiations with two remaining candidates.

The French State’s Invest in France Agency (AFII) also has supported M-real in the sales process. One key point in the negotiations has been the fact that M-real will not sell the Alizay mill to a buyer who would fail to turn the mill profitable. Consequently, if the mill would be shut down it could cause an unjustified position for the employees.

M-real also has not been able to find a buyer for its Gohrsmühle mill, whether in parts or as a whole. M-real is planning to discontinue the unprofitable speciality paper businesses and the production of uncoated fine paper in Gohrsmühle. M-real will continue the profitable Chromolux business and investigate possibilities to start up a new customer service and logistics center for folding boxboard in Gohrsmühle, including a sheeting facility.

M-real is currently negotiating to divest its Premium Papers business of the Reflex mill. The carbonless paper converting operations of the Reflex mill are under negotiations to be discontinued.

Approximately 940 employees work at the Gohrsmühle and Reflex mills in total. The Chromolux business and the planned cartonboard customer service center would employ approximately 400 persons. Approximately 100 employees are working for the Reflex Premium Papers business, which potentially is to be divested.

M-real has in recent years implemented numerous major profit improvement measures at the Gohrsmühle and Reflex mills including headcount reductions, closure of the loss-making coated fine paper production in Gohrsmühle, and transfer of the Simpele mill’s speciality paper volumes to Gohrsmühle. Despite such improvement measures, the Gohrsmühle and Reflex operations have, due to the challenging operating environment of the European paper industry, remained severely unprofitable. Currently, the monthly operating loss is approximately EUR 5 million. There are no signs that the profitability would materially improve in the future.

M-real has attempted to divest the Gohrsmühle and Reflex operations to many different buyer candidates during the last 5 years. In 2010, M-real successfully divested a part of the Reflex mill to Metsä Tissue. The other attempts to divest the operations have failed because of the major losses of the operations, the European overcapacity in fine and speciality papers, and severe cost inflation.

“We have done lot of work to find buyers for both Alizay and Gohrsmühle mills. We have been ready to accept a heavily negative sales price. Regardless, demands of buyer candidates have on the one hand been unacceptable from the company’s’ perspective, while on the other hand they have not been able to demonstrate capability to turn the unprofitable operations profitable, thereby guaranteeing the continuation of operations as a responsible owner and employer,” said Mikko Helander, M-real’s CEO.

If the production closure measures are implemented as planned, M-real’s annual sales will decline by approximately EUR 400 million, while the operating result is expected to increase by approximately EUR 70 million, based on 2011 first half’s actual performance. Most of the annual financial impact is expected to materialize in 2012, with full impact from 2013 onwards. None of the planned measures will be implemented without consulting the employee representatives, in line with applicable legal requirements.

If the measures materialize fully as planned, they are expected to result in approximately EUR 180 million negative nonrecurring items in total. In the third quarter of 2011, Office Papers operating results are expected to include approximately EUR 8 million nonrecurring asset impairment and Speciality Papers business area EUR 9 million cost provisions. The second quarter 2011 Speciality Papers operating results included nonrecurring impairment and cost provisions in total of EUR -22 million. The rest of the nonrecurring items will be booked in fourth quarter 2011 and first quarter 2012. The estimated net cash costs of all planned measures, taking into consideration change in net working capital from the beginning of May 2011, are approximately EUR 50 million.

“If implemented, the planned measures will lead to an even stronger transformation of M-real to become a cartonboard company, as stated in our strategy. At the same time the profitability of the company will raise to a new improved level,” Helander said.


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