ANNUAL REPORT 2010 M-Real Is Europe’S Leading Primary Fibre Paperboard Producer and a Major Paper Supplier

ANNUAL REPORT 2010 M-real is Europe’s leading primary fibre paperboard producer and a major paper supplier. M-real offers its customers innovative high-performance paperboards and papers for consumer packaging, communications and advertising end-uses.

M-REAL’S STRATEGY AND WAY OF WORKING ...... 2 CEO’S REVIEW ...... 4 OPERATING ENVIRONMENT ...... 6 CONSUMER PACKAGING ...... 10 OFFICE PAPERS ...... 12 SPECIALITY PAPERS ...... 14 MARKET PULP AND ENERGY ...... 16 SUSTAINABLE PREMIUM PRODUCTS ...... 20 MINIMISING THE ENVIRONMENTAL IMPACTS OF PRODUCTION ...... 22 ENERGY EFFICIENCY ...... 24 FROM RESTRUCTURING TO CONTINUOUS DEVELOPMENT OF THE PERSONNEL ...... 26 FINANCIAL STATEMENTS ...... 29 CORPORATE GOVERNANCE STATEMENT ...... 104 SALARY AND REMUNERATION REPORT ...... 110 BOARD OF DIRECTORS ...... 112 MANAGEMENT TEAM ...... 114 SHARES AND SHAREHOLDERS...... 116 FINANCIAL REPORTING ...... 126 CONTACT INFORMATION ...... 128 M-real 2010

KEY FIGURES YEAR 2010 IN BRIEF

2010 2009 Change % Sales, EUR million 2,605 2,432 7.1 EUR 26 million investment at the Simpele mill to increase the annual fold- Operating result excl. non-recurring items, EUR million 173 -150 ing boxboard capacity by about 80,000 - % of sales 6.6 -6.2 tonnes and expand the sheeting capacity. Operating result, EUR million 146 -267 - % of sales 5.6 -11.0 EUR 16 million investment at the Result from continuing operations - Kemiart Liners mill to modernize the before tax, EUR million 48 -358 coating section. - % of sales 1.8 -14.7 EUR 6 million investment in sheeting Result for the period, EUR million 27 -354 operations at the Äänekoski paper mill. Return on capital employed, % 5.7 -8.9 Return on equity, % 2.8 -28.9 The integration of production capacity Interest-bearing net liabilities, EUR million 827 777 6.4 in the Reflex mill in Germany and person- Net gearing ratio, % 83 84 nel reduction by 220. Equity ratio, % 32.1 29.6 The partial divestment of the Reflex Earnings per share, euros 0.09 -1.09 mill to Metsä Tissue Corporation for Earnings per share, from continuing operations, EUR 0.09 -1.02 approximately EUR 10 million. Equity per share, EUR 3.03 2.79 Dividend per share, EUR *) 0.00 0.00 The permanent closure of the Alizay Market capitalization 31 Dec, EUR million 845 517 63.4 pulp mill. Gross capital expenditure, EUR million 66 73 -9.6 Gross capital expenditure, from continuing operations The centralisation of speciality paper EUR million 66 73 -9.6 production to the Gohrsmühle mill in Germany and the closure of the Simpele Cash flow arising from operating activities, EUR million -69 81 paper machine. Personnel 31 Dec. 4,538 4,903 -7.4

Sales Operating result Return on capital employed EUR million EUR million %

4,000 200 6

100 3 3,000 0 0 2,000 -100 -3 1,000 -200 -6

0 -300 -9 06 07 08 09 10 06 07 08 09 10 06 07 08 09 10 DELIVERIES PER BUSINESS AREA DELIVERIES PERBUSINESSAREA (1,000 tonnes)

690 246 909 1,390 SHARE OFM-REAL’S DELIVERIES (%) 43% 28% 21% 8% Personnel, average Production, 1,000tonnes Deliveries, 1,000 tonnes Personnel, average Production, 1,000tonnes Deliveries, 1,000tonnes Personnel, average Production, 1,000tonnes Deliveries, 1,000tonnes Operating result, EURmillion Sales, EURmillion Operating result, EURmillion Sales, EURmillion Operating result, EURmillion Sales, EURmillion Operating result, EURmillion Sales, EURmillion Personnel, average Production, 1,000tonnes Deliveries, 1,000tonnes Operating result, % Operating result, % Operating result, % Operating result, % KEY FIGURES ,3 ,5 -26.6 1,550 1,138 -11.2 1,424 1,264 21.4 968 1,175 ,1 ,1 -0.3 15.3 14.7 1,517 1.232 1,212 1,512 1,420 1,390 2010 2010 2010 2010 1. -42.9 -17.8 155.3 11.5 0 7 11.1 -24.5 -40.3 271 863 1,155 301 652 690 -20.9 -28.1 297 342 235 246 14.5 15.1 795 790 910 909 164.7 51 135 3 0 -14.6 508 434 -13.9 352 303 21.2 543 658 5 -151 -54 . -17.9 8.3 -19.2 2.1 6-91 36 -104 14 09Change% 2009 Change% 2009 09Change% 2009 Change% 2009 M-real’s business areas

BUSINESS AREA

Consumer Packaging

Consumer Packaging is the Europe’s leading producer of innovative premium folding boxboard, coated white top liners and wallpaper base. The products are excellent for the packaging of cosmetics, food products and confectioneries, for example. The business area also offers versatile packaging services in Asia.

Office Papers

Office Papers produces, markets and sells premium uncoated fine papers to companies in the office supplies industry, office machine manufacturers and paper wholesalers. Office Papers’ products are excellent for printing, copying, forms and envelopes.

Speciality Papers

Speciality Papers is a leading producer of speciality papers in Europe. Its product range includes cast coated papers and boards, label and packaging papers, carbonless papers, graphic speciality papers, digital papers, bookbinding materials and uncoated fine papers.

Market Pulp and Energy

Market Pulp and Energy is responsible for selling M-real’s market pulp to external parties and coordinating measures that aim at improving the energy efficiency of all M-real production plants. The business area coordinates contract manufacturing issues between M-real and Sappi and is also responsible for the parties’ cooperation related to pulp and energy. 16

BUSINESS AREAS 1 M-real’s strategy and way of working

MISSION

M-real is Europe’s leading primary fibre paperboard producer and a major paper VISION supplier. M-real provides high- performance, premium quality paperboards and papers for its M-real will grow profitably, customers in consumer reaching an even stronger packaging, communications VALUES position as the world’s and advertising end-uses. leading supplier of high- quality consumer packaging boards.

Responsible profitability

Reliability

Cooperation

Renewal

STRATEGY

The cartonboard business will be emphasised even further in M-real’s business portfolio. In the first phase, M-real will further strenghten its market leadership in Europe and increase the capacity of the existing machines. During the second phase, the focus will be on expanding production activity more and more to developing markets, either alone or in cooperation with the strongest local players. With FINANCIAL TARGETS regard to the paper business, the aim is to improve operating conditions and profitability by taking Return on capital employed measures to enhance M-real’s efficiency and by (ROCE) target set at a mini- participating in the Europe-wide restructuring of the mum of 10% on average paper industry. High self-sufficiency in pulp and energy over the business cycle are significant competitive advantages for M-real.

Gearing ratio not to exceed 100%

2 STRATEGY AND WAY OF WORKING STAKEHOLDERS Committed and competent employees are at the core of M-real’s operations; HR development focuses on securing resources and ensuring competence and well-being at work. M-real provides its customers with added value through high-quality, ecological products tailored to each application. M-real’s aim is to continuously improve its performance and increase shareholder value. M-real’s business is based on responsible performance, which provides the prerequi- sites for continuous development of the operations in a way that benefits its customers, shareholders, employees and partners.

SALES AND SUPPLY CHAIN M-real has a global sales network and professional customer service. M-real aims for fast and efficient deliveries by utilising various transport methods and selecting the most appropriate means of transport. M-real’s lightweight products provide savings throughout the value chain by decreasing the volumes transported, emissions in the logistics chain and waste. PRODUCTS M-real’s lightweight products are produced using resource-saving methods where impact from the entire product life cycle is minimised. They are safe for people and the environment. In spite of being lightweight, the products have excellent performance and printing properties. M-real’s simplified product range makes it easier to choose the best possible product for each application. The carbon footprint of M-real’s products is smaller than heavier products throughout the value chain. PRODUCTION M-real uses the best available techniques at its production plants. Continuous improvement of operations, the minimisation of environmental impacts as well ass improving energy efficiency are key principles in production. Certified ISO 9001 Quality Systems and ISO 14001 Environmental Systems are in use at all production units. M-real is completely self-sufficient in pulp, and its energy self-sufficiency is approximately 62 per cent. The share of wood-based fuels was approximately 50 per cent in 2010.

RAW MATERIALS M-real is committed to using raw materials in its production in a sustainable and economical manner. M-real’s primary raw material is wood, which is sourced from sustainably managed forests in compliance with local legislation. The aim is to continuously increase the share of certified wood. In 2010, 55 per cent of the wood raw material was certified.

STRATEGY AND WAY OF WORKING 3 CEO’s review

SUSTAINABILITY is at the core of all our Our PROFITABILITY has clearly improved We have a firm COMMITMENT to create value operations. Our innovative, lightweight car- and reached the peer group level. Since sum- for our stakeholders. We are dedicated to tonboard and paper production uses less raw mer 2009, we have achieved one of the most excellent service by producing high-quality materials, energy and water, have lower impressive profitability turnarounds ever in products and services in a reliable and effi- transport weights and produce less waste our industry. An exciting fact is that there is cient way. Our employees have done great thereby decreasing environmental impacts still great profit improvement potential for work and showed a firm commitment in and costs at all stages of the product’s life the years to come, especially by eliminating 2010. We highly appreciate the well function- cycle. The lightweight concept has been a the losses generated by our paper busi- ing cooperation with our owners, customers great success and we will continue the work nesses and among others by reducing our and partners. Thank you all for 2010. to create new lightweight products. By using variable costs. A new EUR 70 million internal Together, we will continue to build on our virgin fibre raw material from sustainably profit improvement programme is currently strengths. managed forests we manage hygiene and being implemented. Through our own meas- product safety risks throughout the entire ures, we have a good possibility to mostly supply chain. Our pulp mills are also major offset the accelerating cost inflation in 2011. bioenergy producers. We have succeeded in In addition to internal efficiency actions, prof- reducing our emissions and we are commit- itability in 2011 will be supported by clearly ted to open and transparent reporting. higher cartonboard prices. Mikko Helander

SIMPLICITY enables us to focus on the We are seeking GROWTH in our cartonboard essentials. We offer a simpler choice of inno- business. We are strengthening our market vative products with optimised quality for leadership in Europe by expanding our fold- consistent performance in our customers’ ing boxboard capacity in Finland to satisfy processes. With streamlined production, we the growing demand for lightweight, eco- can guarantee faster availability and shorter logical boards. Fibre-based packaging solu- lead times. Our customers now have access tions are substituting plastic, metal and glass to greater reliability, flexibility and efficiency. packaging. Virgin fibre board is also gradually By simplifying our processes and ways of replacing recycled fibre-based board, espe- working, we have significantly improved our cially in food packaging thanks to superior own profitability safety features for excample. To accelerate profitable growth, further additions to our cartonboard capacity are needed. In the short Our RESTRUCTURING actions have been term, it means opening up the bottlenecks very successful. M-real is a totally different at the existing mills and, possibly in the company today than a couple of years ago. longer term, new capacity in emerging mar- We are further focusing our product portfo- kets. lio on packaging end uses. Thanks to our own actions we have, since 2006, improved our productivity significantly, reduced costs materially across the company and lowered the net debt to one third. We are continuing the strategic review of our paper business to take part in the Europe-wide consolidation.

4 CEO’S REVIEW Mikko Helander

CEO’s review 5

m_real_vsk.indd 5 3.3.2011 13.18 Operating Environment

PAPERBOARD Environmental concerns favour the use time generic drugs make pharmaceuticals of cartonboard over other packaging Demand for packaging materials is primarily more affordable to people living in developing materials, as it comes from sustainable driven by the state of the economy and, in the countries. Regulation on the detailed infor- resources and is fully recyclable. case of cartonboard, industrial production of mation to be given on the drug and efforts to packaged consumer goods in particular. In fight counterfeiting have an effect on the way addition, various global megatrends have an pharmaceuticals are packaged. effect on the way in which packaged con- The everyday usage of beauty care prod- sumer goods are regulated, and where, how ucts in developed economies, and the fast and how much they are purchased and con- growing demand for them in other world sumed. Such megatrends include globalisa- regions make this industry an attractive one. tion, urbanisation, smaller households, more Usage of luxury cosmetics decrease during women working out of home, a rise in aver- an economic downturn, good quality mass age available income, health awareness, the market products and professional line beauty ageing population in developed economies, care products marketed to consumers are a growth in the number of children and young doing very well. adults in developing countries as well as Tobacco consumption in Western econo- environmental and social concerns. mies is declining due to health awareness The main end-uses for M-real’s paper- and heavy regulation, but consumption in boards are high quality food, beauty care, developing economies is still growing. The healthcare, tobacco, consumer electronics trend away from soft packs to hard packs, and other retail packaging as well as graph- and increased regulation concerning health ical end-uses such as advertising, postcards warnings and advertising are driving demand and book covers. Each of these end-uses has for folding cartons. their own specific characteristics. There seems to be no end to the develop- The basic need for packaged foodstuffs ment of new consumer electronic gadgets makes this industry a relatively stable one. like mobile phones, palm computers, e-read- Although at an economic downturn consumers and the combination of these. Consumer ers tend to shift to cheaper products, they electronics, among other consumer goods, can still afford themselves small luxuries like are ever more frequently purchased through high quality confectionery instead of travel- the internet, which increased the need for ling abroad, for excample. The recent concern sturdy but representative packaging that pro- particularly in Germany, on detrimental min- tects the fragile product on its way to the eral oil migration from recycled fibre-based consumer. cartonboard into dried foodstuffs like break- Environmental concerns favour the use fast cereal, rice and biscuits has increased of cartonboard over other packaging materi- demand for virgin fibre-based cartonboard als, as it comes from sustainable resources in food packaging. and is fully recyclable. In particular, the light- The ageing population in Western econo- weight virgin fibre-based cartonboards pro- mies spends more medication; at the same duced by M-real promote sustainability by

Production capacities in Europe Million tonnes/year Europe M-real M-real’s share (%) Folding boxboard 2.4 0.8 33 Uncoated fine paper 11.2 0.9 8 Source: Pöyry Management Consulting, M-real

6 OPERATING ENVIRONMENT consuming fewer resources, reducing trans- Folding boxboard market price in Europe Uncoated fine paper market price in port volumes and producing less waste at EUR/tonne Europe the end of the packaging’s life. EUR/tonne

1,100 1,100 PAPER 1,000 1,000 Medium-term demand for cut-size paper is affected by computer and internet based 900 900 technologies, double side printing and waste 800 800 reduction programmes. Colour printing seems to be growing. 700 700 In Europe, the demand for paper 06 07 08 09 10 06 07 08 09 10 increased in 2010 on the previous year, but Source: Pöyry Management Consulting Source: FOEX nevertheless falls somewhat short of the level of 2008. Cuts in paper production capacity and production curtailments have contin- Largest folding boxboard producers in Largest uncoated fine paper producers in ued in Europe, which has improved utilisation Europe Europe rates, but there is still excess capacity in the Capacity, 1,000 tonnes Capacity, 1,000 tonnes paper market. The production capacity of uncoated fine paper has been declining for several years, M-real Portucel Soporcel but it is expected to stabilise in Europe. Due Stora Enso Stora Enso to the improved overall economic situation Mayr-Melnhof Mondi and higher fibre costs, prices increased in 2010, but the need for price increases to Careo UPM improve profitability still exists. The demand International Paper International Paper and prices of speciality prices also improved in 2010. Holmen/Iggesund M-real Paperboard Even though the European paper industry 0200 400 600 800 1,000 0400 800 1,200 1,600 2,000 has suffered due to overcapacity and Source: Pöyry Management Consulting Source: Pöyry Management Consulting decreased demend, its future is nevertheless solid. Electronic archiving and invoicing and e-books are among the challenges facing the paper industry. The increasing number of small and home offices, urbanisation and development of printing technology in East- ern Europe, on the other hand, are considered to be key drivers of the demand for office papers. The main raw material of paper is renewable and procured from sustainably managed forests. The products are manufactured using energy-efficient technology, and the final products can be recycled several times. At the end of their life cycle, they can also be utilised as a source of energy.

OPERATING ENVIRONMENT 7 8 innovations

m_real_vsk.indd 8 3.3.2011 13.18 INNOVATIONS M-real’s lightweight products are produced using resource-saving methods where impact from the entire product life cycle is minimised. They are safe for people and the environment. In spite of being lightweight, the products have excellent performance and printing properties.

INNOVATIONS 9 Consumer Packaging

Consumer Packaging is the Europe’s leading producer of innovative premium folding boxboard, coated white top liners and wallpaper base. The products are excellent for the packaging of cosmetics, food products and confectioneries, for example. The business area also offers versatile packaging services in Asia.

The demand for folding boxboard and liner- 50 million biopower plant at the Kyro’s board 2010 board reached a record level in 2010, and in mill in Hämeenkyrö. The aim is to start the order to answer the continuous strong construction of the power plant in spring Deliveries of folding boxboard and liner- demand, M-real decided on investments to 2011, and the new plant will enter production board reached a record level in 2010. expand and enhance its capacity during the use in autumn 2012. year under review. A decision to invest in increasing the MARKETS capacity of the Simpele folding boxboard mill 2011 and expand sheeting capacity was made in Consumer Packaging further reinforced its October. The value of the investments is EUR position as Europe’s leading producer of fold- Capacity will be expanded especially in 26 million, and they will be realised in sum- ing boxboard, coated white top liners and food packaging cartonboards. mer 2011. In addition, it was decided to invest wallpaper base. The business area’s main EUR 16 million in modernising the coating market area is Europe. section of the Kemiart Liners mill during The demand for folding boxboard and lin- 2011. erboard was at a record level throughout the The sheeting capacity of the Äänekoski year under review, but the demand for wallpaper mill was increased, which improved paper base remained favourable as well. the fluency of the sheeting, quality of packag- Price increases were made in all product ing and profitability of the mill. The value of categories. At the end of 2010, the prices of the investment was EUR 6 million, and it will folding boxboard and linerboard were over be finalised during 2011. 10 per cent higher compared to the previous The speciality paper machine at the Sim- year. pele mill was closed down in December 2010. Delivery volumes were at a record level M-real’s speciality paper production contin- in all main categories. ues in the Gohrsmühle mill in Germany. Consumer Packaging aims to reinforce M-real Corporation, Pohjolan Voima Oy its market leadership mainly by opening up and Leppäkosken Sähkö Oy decided in the bottlenecks of existing production; all November on the construction of a new EUR folding boxboard and linerboard mills have

10 INNOVATIONS CASE

Consumption of virgin fibre-based car- share has increased steadily, thanks to based cartonboard does not include any tonboard with a packaging material will the lightweight and sustainable products. contaminants, such as printing ink. increase gobally. The existing trend is to According to the latest market view, Demand of virgin fibre cartonboard is esti- replace non-renewable packaging mate- virgin fibre-based cartonboard will mated to increase approximately three rials as virgin fibre-based cartonboard. In increase its market share especially in per cent per annum in Europe. this competition, M-real has a good food packaging due to its product safety chance to succeed; the company’s market and lightweight properties. Virgin fibre-

Key figures DID YOU KNOW? 2010 2009 Change-% Sales, EUR million 1,175 968 21 EBITDA, EUR million 200 140 43 Lightweight EBITDA, excl. non-recurring items, EUR million 203 146 39 products need Operating result, EUR million 135 51 165 Operating result, % 11.5 5.3 less water, raw Operating result, excl. non-recurring items EUR million 149 69 116 materials and Operating result, exc. non-recurring items, % 12.7 7.1 energy, generate Return on capital employed, % 19.4 6.9 Return on capital employed, less waste and excl. non-recurring items, % 21.5 9.4 Deliveries, 1,000 tonnes 1,390 1,212 15 decrease logistics Production, 1,000 tonnes 1,420 1,232 15 costs. Personnel, average 1,512 1,517 0

potential for a moderate expansion of capacity. M-real is also investigating opportunities to expand to emerging markets in coopera- PRODUCTS AND SERVICES tion with the strongest local players.

Cartonboards PROFITABILITY TRENDS Carta Integra Carta Elega The most significant factors improving the Carta Solida result in 2010 were the implemented price Avanta Prima increases and the higher delivery volume Simcote resulting from the recovery in demand. Pro- Tako product group duction and delivery volume records were Graphic boards made in 2010 for folding boxboard as well as Carta Integra liners. Carta Elega Carta Solida

OUTLOOK Coated and uncoated white-top liners Kemiart product group Demand is expected to remain strong across all product categories. The demand for light- Flexible packaging and labeling weight primary fibre-based paperboard Simcastor product group packaging made of renewable fibre raw Wallpaper base material is expected to increase, especially Cresta product group in food packaging. Price increases will also continue in 2011, Integrated Brand Packaging services (IBP) provided that the demand and cost inflation remain high. Cost inflation is expected to continue with regard to raw material, energy and transportation costs in 2011.

INNOVATIONS 11 Office Papers

Office Papers produces, markets and sells premium uncoated fine papers to companies in the office supplies industry, office machine manufacturers and paper wholesalers. Office Papers’ products are excellent for printing, copying, forms and envelopes.

The Office Papers business area continued Husum’s turbine investment is expected 2010 measures to improve profitability in 2010, the to be complete during the second half of most important of which was closing down 2011. The investment will further increase Profitability was improved by several the Alizay pulp mill. The closure of the pulp electricity production, and the energy self- actions and the most significant of which mill also stabilised the operation of the Alizay sufficiency of the mill will increase from was closing down the Alizay pulp mill. paper mill. approximately 30 per cent to approximately First customer deliveries of the new SAVE! 50 per cent. paper produced at the Alizay paper mill took Thanks to the profit improvement actions, place in September. SAVE! is a new, lighter- the production efficiency of the Husum mill 2011 than-normal office paper, weighing only improved according to expectations. 65 g/m2. The production of lightweight office Profit improvement actions will be contin- paper consumes less fibre, water and energy, MARKETS ued; profit improvement potential is seen reduces the environmental load of the logis- especially in variable costs. tics chain and lowers printing costs. Cus- Office Papers is the sixth largest producer of tomer feedback has been extremely positive. uncoated fine paper in Europe – its main SAVE! is part of M-real’s concept of light- market area. weight products with a sustainable value The demand for uncoated fine paper chain that benefits customers, the environ- improved during the first two quarters as the ment as well as M-real. economic recession eased, driven by low pulp The renewal of the Husum mill recovery prices. Several price increases were carried boiler was completed during the second out during the year under review. All in all, quarter of the year under review. The renewal the prices of uncoated fine paper were of the recovery boiler increases the efficiency approximately 15 per cent higher at the end of production, lowers emissions and makes of 2010 compared to the previous year. Rap- it possible to increase electricity production. idly increased prices led to higher inventory The new recovery boiler has also had a sig- levels of the customers in the third quarter nificant impact on reducing oil consumption. that temporarily lowered order inflow in the fourth quarter.

12 INNOVATIONS CASE DID YOU KNOW?

The logistics arrangements of the Husum the railway will also facilitate new logistics mill have improved considerably with the solutions of end products in Europe. In Electronic Botnia Line stretching along the coast of addition, the railway both improves the communications northern Sweden. In particular, the mill’s reliability of logistics and provides flexibil- is not always railroad transportation of raw materials ity in the planning of transports through has increased significantly. In the future, alternative transport possibilities. environmental friendly. Paper is.

Key figures 2010 2009 Change-% Sales, EUR million 658 543 21 EBITDA, EUR million 43 1 EBITDA, excl. non-recurring items, EUR million 44 8 Operating result, EUR million 14 -104 Operating result, % 2.1 -19.2 Operating result, excl. non-recurring items EUR million 5 -48 Operating result, exc. non-recurring items, % 0.8 -8.8 Return on capital employed, % 2.8 -21.1 Return on capital employed, excl. non-recurring items, % 1.1 -9.8 Deliveries, 1,000 tonnes 909 790 15 Production, 1,000 tonnes 910 795 14 Personnel, average 1,264 1,424 -11

PROFITABILITY TRENDS PRODUCTS The 2010 result improved thanks to a higher average price as a result of implemented Data Copy Evolve price increases and higher delivery volumes Logic resulting from the recovery in demand. Modo Papers Increased fibre costs and the strengthening SAVE! of the SEK against the EUR, in turn, weakened the result. The profitability of the Husum mill was very good, but the Alizay mill’s profitability remained weak.

OUTLOOK The need for price increases will remain in 2011, as the margin between selling price and pulp price is historically small. Cost inflation is expected to continue. The European industry structure in uncoated fine paper is very fragmented. The industry is burdened with overcapacity, and the need for structural changes is apparent. New internal profit improvement measures have been started. The emphasis is on improving the profitability of the Alizay mill.

INNOVATIONS 13 Speciality Papers

Speciality Papers is a leading producer of speciality papers in Europe. Its product range includes cast coated papers and boards, label and packaging papers, carbonless papers, graphic speciality papers, digital papers, bookbinding materials and uncoated fine papers.

MARKETS The focus for the year under review was on 2010 implementing the significant profit improve- M-real Zanders, which comprises the Spe- ment programme announced at the end of ciality Papers business area, is one of The focus for the year under review was 2009, which included integration of produc- Europe’s leading producers of speciality on implementing the significant profit tion capacity at Reflex, cutting fixed costs and papers. improvement programme announced the reorganisation of the Reflex and Efforts were made to increase prices of at the end of 2009. Gohrsmühle organisations. Despite the products in several phases. On average, spe- changes, the product offering remains ciality paper prices were, in fact, approxi- unchanged. mately five percent higher at the end of 2010 The partial divestment of the Reflex mill compared to the end of 2009. 2011 to Metsä Tissue was realised in October. The The demand for cast-coated products was agreement covered paper machine 5 and strong throughout the year, and their prices Speciality Papers will continue to focus on related real estate, as well as certain infra- were also increased. the manufacture of packaging products, structure assets. M-real will continue to The market situation in label and flexible such as label and flexible packaging develop the Paper Park concept of the Reflex packaging papers remained stable during papers. mill; the purpose is to find more industrial the year under review, and demand improved partners for the mill site. on the previous year. The prices of label and The Gohrsmühle mill continued to invest flexible packaging papers were increased in one-side coated products by launching the during the year. Zanflex flexible packaging papers. The new The demand for graphical uncoated fine products support Speciality Papers’ strategy paper was good during the first two quarters, to focus further on packaging materials in but decreased slightly during the second half its portfolio. M-real’s label and packaging of the year. The prices of graphical uncoated paper operations have been centralised at fine paper increased by up to 30 per cent the Gohrsmühle mill. based on the implemented price increases and improved sales mix during the year under review.

14 INNOVATIONS CASE

During 2010, Speciality Papers continued at the Gohrsmühle mill, which has the portfolio was complemented with a new to focus further on the manufacture of widest cast coated, one-side coated and flexible packaging paper, Zanflex, used in packaging products, such as label and uncoated speciality paper product offering the packaging of dry soup, for example. flexible packaging papers. After the shut- in Europe. Zanflex is a state-of-the-art product; for down of the Simpele speciality paper M-real Zanders offers the most exten- example, its printing properties compete machine, M-real’s label and packaging sive portfolio of label and speciality pack- with fine art papers. paper operations have been centralised aging papers in the market. In 2010, the

Key figures DID YOU KNOW? 2010 2009 Change-% Sales, EUR million 303 352 -14 EBITDA, EUR million -17 -65 EBITDA, excl. non-recurring items, EUR million -16 -31 Paper operates Operating result, EUR million -54 -151 Operating result, % -17.8 -42.9 as carbon Operating result, excl. non-recurring items EUR million -26 -51 storage and Operating result, excl. non-recurring items, % -8.6 -14.5 Return on capital employed, % -49.1 -55.8 therefore it has Return on capital employed, excl. non-recurring items, % -23.6 -18.7 a positive Deliveries, 1,000 tonnes 246 342 -28 Production, 1,000 tonnes 235 297 -21 climate impact. Personnel, average 1,138 1,550 -27

PRODUCTS The demand for carbonless papers decreased further due to continuously decreasing consumption. In spite of the Packaging and labelling papers CHROMOLUX decreased demand, the prices of carbonless Zanflex papers could be increased by approximately Zanlabel 10 per cent during the year under review. Graphic papers and boards CHROMOLUX PROFITABILITY TRENDS ZANDERS Efalin ZANDERS Elephanthide The 2010 result was improved by the imple- ZANDERS Estralin mented price increases and cost savings. ZANDERS medley The result was weakened by considerably ZANDERS Spectral increased pulp prices. ZANDERS T2000 ZANDERS ZETA ZANTO OUTLOOK Office communications The need for price increases in all product ZANDERS autocopy types remains in 2011. ZANDERS Bankpost ZANDERS Classic The demand for speciality papers is ZANDERS Gohrsmühle expected to remain at the 2010 level. The ZANDERS medley need for structural change in the industry ZANDERS Reflex Special continues to exist. New profit improvement ZANDERS ZETA measures are underway to improve profit- Digital printing ability. Silver digital Silver image laser ZANDERS REFLEXION

INNOVATIONS 15 Market Pulp and Energy

Market Pulp and Energy is responsible for selling M-real’s market pulp to external parties and coordinating measures that aim at improving the energy efficiency of all M-real production plants. The business area coordinates contract manufacturing issues between M-real and Sappi and is also responsible for the parties’ cooperation related to pulp and energy.

The Market Pulp and Energy business area add the consumption of roundwood, as the 2010 continued the cooperation associated with wood will be debarked and chipped at the the sales of market pulp initiated the previous mill. Energy efficiency projects continued year with Metsä-Botnia. The cooperation was The condensing steam turbine of the Hal- through the review year. For example increased further with regard to technical lein pulp mill uses steam to generate green energy efficiency of the Husum pulp mill sales support, for example. Through Metsä- electricity that is sold to the market. During improved significantly. Botnia, M-real has access to one of the most 2010, the energy produced by the condensing extensive market pulp sales networks in the steam turbine could be utilised in full. The world. Together with M-real, Metsä-Botnia sales of green electricity increased consider- can provide a wide product range to its cus- ably compared to 2009, amounting to 49 GWh 2011 tomers. during the year under review. During the year under review, the busi- Since Metsä-Botnia’s Kaskinen pulp mill The renewal of the recovery boiler in ness area initiated several technical coop- was closed down in early 2009, the infra- Husum will increase the efficiency of pro- eration projects with market pulp customers. structure of the Kaskinen BCTMP mill, such duction, lower emissions and make it pos- The projects allowed customers to obtain as the water treatment plant, debarking plant sible to increase electricity production. additional benefits through M-real’s expertise and concentrate recovery, were downsized for the suitability of pulp, in particular according to M-real’s needs. At Kaskinen, the BCTMP, in the final products and improving transition phase has been successful and their quality. Strengthening the technical managed with regard to infrastructure, cre- cooperation aims at long-term customer ating conditions in which M-real is able to relationships that benefit both parties. operate alone in the plant area. During the year, Market Pulp and Energy Energy efficiency projects in the business has invested in increasing to efficiency of the area continued during the year under review. units. At Husum, for example, energy efficiency was The debarking and chipping investment improved through boiler and turbine invest- at the Hallein pulp mill started in November ments. 2010. This will improve the availability of One of the business area’s focus areas in wood at the pulp mill. The investment will 2010 was improving the coordination of pulp

16 INNOVATIONS Pulp market price in Europe DID YOU KNOW? EUR/tonne 900 800 700 Pulp mills are 600 500 major 400 300 bioenergy 06 07 08 09 10 Short ﬁbre pulp producers. Long ﬁbre pulp Source: FOEX

Key figures 2010 2009 Change-% Sales, EUR million 434 508 -15 EBITDA, EUR million 75 -21 EBITDA, excl. non-recurring items, EUR million 79 -17 Operating result, EUR million 36 -91 Operating result, % 8.3 -17.9 Operating result, excl. non-recurring items, EUR million 53 -54 Operating result, excl. non-recurring items, % 12.2 -10.6 Return on capital employed, % 6.0 -12.2 Return on capital employed, excl. non-recurring items, % 8.9 -7.2 Deliveries, 1,000 tonnes 690 1,155 -40 Personnel, average 301 271 11

and wood raw material flows, which had a demand for both short-fibre and long-fibre favourable impact on the profitability of the pulp is expected to remain good. The market business area, as well as on M-real as a balance is also expected to remain stable in whole. 2011.

MARKETS PRODUCTS The price of market pulp increased strongly until August 2010. Prices decreased slightly from the record level towards the end of the Short fibre pulp Long fibre pulp year. BCTMP Pulp stocks were at a record low level early in the year, which was due, for example, to the good demand for paper and board ,and the availability of market pulp after an earth- quake in Chile closed down local pulp capacity.

PROFITABILITY TRENDS The 2010 result improved thanks to higher pulp prices. Moreover, the comparable delivery volume increased considerably.

OUTLOOK The pulp price outlook depends particularly on paper and board demand trends. The

INNOVATIONS 17 sustainability M-real is committed to using raw materials in its production in a sustainable and economical manner. M-real’s lightweight products are produced using resource-saving methods where impact from the entire product life cycle is minimised. Continuous improvement of operations, minimisation of environmental impacts and improving energy efficiency are key principles in production.

18 sustainability

m_real_vsk.indd 18 3.3.2011 13.18 sustainability 19

m_real_vsk.indd 19 3.3.2011 13.19 Sustainable premium products

The most important raw material for Thanks to special fibre properties, M-real’s In wood procurement, valuable plant and M-real’s high quality products is wood: lighter-than-normal boards and papers fea- animal habitats and other sites of importance a renewable, recyclable and energy- ture excellent performance. Lightweight in terms of the biodiversity of nature or land- efficient raw material that originates products consume fewer raw materials, have scape values are protected. Wood suppliers and is procured from sustainably fewer environmental effects in production and M-real’s logging sites as well as the log- managed forests. and transport and generate less waste than ging sites of subcontractors are inspected the average. more systematically and extensively in order M-real is committed to using sustainable to protect valuable habitats to ensure that raw materials in its production. The most harvesting is conducted in compliance with important raw material for its products is environmental permit conditions. At the wood: a renewable, recyclable and energy- same time, attention is paid to the quality of efficient raw material that originates and is the management of the forest environment procured from sustainably managed forests. and social dimensions such as the training M-real’s parent company Metsäliitto Coop- and occupational safety of employees. erative is responsible for M-real’s wood sup- Certified quality and environmental sys- ply. The bulk of the wood raw material used tems include a wood origin management by M-real in Finland comes from the forests system, ensuring that the origin of all proof the owner-members of Metsäliitto Coop- cured wood is known. In procuring wood raw erative. Other wood supply countries include material, M-real supports forest certification Austria, Latvia, Lithuania, France, Sweden, that is verified by a third party. Some 55 per Germany, Russia and Estonia. During the cent of the wood raw material used by M-real year under review, Metsäliitto supplied a total came from certified forests during the year of 5.7 million cubic metres of wood to M-real under review. Further, the PEFC forest cer- mills. tification criteria were revised in Finland, and M-real is committed to promoting respon- an agreement was made on the FSC forest sible forest management. All wood purchase certification criteria, which will set conditions agreements include precise environmental for FSC forest certification also in the future. criteria; also, forest regeneration measures All M-real mills employ a certified Chain are implemented in a habitat-sensitive man- of Custody system, which enables them to ner after timber harvesting is completed. verify the share of certified wood in their Wood procurement is governed by an products. M-real strives to launch more for- environmental policy regarding wood supply est certification labelled products on the and forestry, as well as the Group’s principles market. of corporate responsibility. These are imple- During the year under review, M-real used mented using certified quality and environ- approximately 1.8 million tonnes of various mental systems and an annually updated types of pulp, of which approximately 1.3 environmental programme. Wood procure- million tonnes were produced at M-real’s ment complies with local legislation and own mills. M-real had 0.7 million tonnes of regulations issued by the authorities. chemical pulp available through the share of Contractual partners are also required to ownership in Metsä-Botnia. Approximately operate in a responsible way, and they are 0.3 million tonnes was purchased from exter- trained on a regular basis. During the year nal suppliers and 0.5 million tonnes was sold under review, labour and nature manage- externally. M-real requires that its pulp sup- ment training were provided for harvesting pliers operate in strict compliance with the contractors and their machine operators. law, and report annually on the origin of Wood procurement operations are under wood, forest certification and environmental continuous development and best practices data. are always applied.

20 SUSTAINABILITY PRODUCT SAFETY trations of the substances in compliance with The Efficient Packaging research pro- Raw materials used in M-real products are the REACH chemical regulation. Registration gramme assesses the impact of lightweight selected on the basis of the end use of the of substances in accordance with the REACH yet high-performance boards on the effi- products. For example, in boards used for regulation (1907/2006/EC) was completed ciency of the entire packaging chain. The food packages, only raw materials approved during the year under review. The registered research programme yielded promising for this end use may be used. As a minimum substances were typically by-products of the results that can be used in the development requirement, all raw materials must be process, such as ash generated from the of the board business. approved by the German Federal Institute for incineration of bark. The REACH registration A project to improve the print surface of Risk Assessment (BfR) and the U.S. Food and obligation is not directly applicable to board cigarette packaging boards was imple- Drug Administration (FDA). and paper, as they are classified as ”prod- mented. The revised product was launched M-real products have been tested as ucts.” during the first quarter, and it has been required by the relevant laws and recom- received extremely positively in this demand- mendations; for example, the suitability of ing market. RESEARCH AND DEVELOPMENT boards as toy materials is tested in accord- During 2011, Consumer Packaging will ance with the European EN 71–3 and EN 71–9 M-real’s R&D activity during the year under implement investments at the Simpele, Kyro standards. review focused on the development of high- and Kemi board mills. Development activity A database is maintained on the key pro- quality lightweight packaging boards. With is an essential part of these investments. The duction chemicals. The database contains regard to the paper business operations, the Kemi mill has particularly focused on the environmental, health and safety information focus was on the development and launch of development of coating, while Simpele and and, for example, information on the regis- new products. Kyro has engaged in work to improve production techniques. The development of non-woven type products continued in wallpaper base papers. A new, lighter-than-normal SAVE! office paper was developed in the Office Papers Deliveries of certified wood to M-real’s mills in 2010 business area. The lightness is partly based on BCTMP pulp. The deliveries to the mar- PEFC (%) FSC (%) kets were started during autumn 2010. Spe- Finland 64 8 ciality Papers, on the other hand, has devel- Sweden 22 20 oped several new types of one-side coated Austria 62 2 flexible packaging and label papers. During the year under review, M-real was actively involved in the activity of Forest Clus- ter Ltd. Forest Cluster’s research pro- Wood supply to M-real’s mills by procurement area grammes provide resources for renewing business operations over the long term. 1,000 m3 2010 2009 *) M-real’s R&D expenditure for 2010 Sweden 2,210 2,272 amounted to approximately EUR 5 million, Finland 1,243 3,488 or some 0.2 per cent of sales. The decrease Austria 792 524 compared to the previous year is due to the Russia 573 563 end of the joint KCL research programme. Latvia 443 228 Estonia 236 204 Lithuania 109 47 South Africa 113 0 5,719 7,459

*) Including 30 per cent of wood delivered to Metsä-Botnia mills until 8 December 2009.

SUSTAINABILITY 21 Minimising the environmental impacts of production

M-real is committed to conducting its Minimising the environmental impacts of The management of environmental mat- business in a responsible manner and operations and maintaining open communi- ters at M-real and Metsä-Botnia was devel- promoting sustainable development cations are the key principles of M-real’s oped by appointing five joint regional envi- through its business activities as well as environmental policy. All of M-real’s mills ronmental managers to the production to continuously improving its operations. operate certified ISO 9001 and ISO 14001 plants. Work to combine the operational sys- quality and environmental management systems of five board mills under one certificate tems that support the systematic improve- was started in M-real’s Consumer Packaging ment and follow-up of operations. Several business area. mills also have a certified occupational and product safety system. EMISSIONS AND WASTE M-real’s mills also utilise a certified Energy Efficient System, which systematically Industrial air, water and noise emissions have manages the reduction of energy consump- decreased continuously due to the consistent tion and carbon dioxide emissions. M-real application of Best Available Techniques reports openly on its environmental impacts (BAT). through, for example, mill-specific EMAS M-real has systematically reduced the (Eco-Management and Audit Scheme) water consumption of its production. Water reports. The Äänekoski paper mill and the is recycled in the production processes, and Hallein mill published their EMAS reports it is thoroughly treated before being dis- during the year under review. charged into water systems. The climate impact of individual products The amounts of harmful substances in is reported on a customer-specific basis wastewater from board and paper production through carbon footprint calculations. Prod- have been reduced by more effective treat- uct-specific Paper Profile environmental ment processes, reduced water consumption product descriptions can be found for all and personnel training. Thanks to highly M-real products on the company’s website effective treatment processes, wastewater at www.m-real.com. The emissions and emissions cause eutrophication only within amounts of waste produced by M-real mills a limited area at the immediate point of dis- are reported on page 124–125 of this Annual charge. M-real’s production units are located Report. in areas of plentiful water supply and there- Several improvements that reduce envi- fore do not compete for water with house- ronmental loads and risks were implemented holds, agriculture or other water users. at M-real’s mills during the year under M-real has joined the UN’s Global Com- review. Improvements at the Husum mill cut pact CEO Water Mandate initiative to make particle emissions and aimed to reduce air water consumption and open reporting on it emissions of nitrogen oxides. The Alizay mill more efficient. M-real keeps a close eye on began to divert part of the bark boiler flue the development of international reporting gases to a pigment plant located at the mill policies on water consumption. site for utilising the carbon dioxide in the flue M-real has reduced its emissions into the gases. The use of thermal energy was made air by introducing low-sulphur fuels and by more efficient at the Joutseno chemi-ther- replacing fossil fuels with wood-based fuels. momechanical pulp mill. The Simpele mill The most significant atmospheric emissions began to expand its landfill. In Äänekoski, include: fuel-derived sulphur and nitrogen the noise generated by the vacuum blower oxides, which can cause water and soil acid- and waste water treatment plant was damp- ification; carbon dioxide, the main driver of ened at the board mill, and the mill’s noise climate change; and particle emissions, pollution report was updated. which have a negative impact on air quality.

22 SUSTAINABILITY Mill waste levels have also been reduced environmental certificates and policies play reported on a regular basis to the Group’s through the efficient re-use of by-products an essential role in their selection. Logistics- shareholders in, for instance, the Annual and co-products. In addition, on-site sorting related indicators and reporting, especially Report. of mill waste for use as raw material or for with regard to environmental performance, M-real has endorsed Metsäliitto Group’s energy production has reduced the need for are continuously improved. M-real reports Commitment to Corporate Responsibility, landfill disposal. For example, primary fibre, on the environmental impacts of the trans- which it implements through its principles high-quality recycled fibre or both are used port of its products in the Paper Profile envi- of corporate responsibility. The statement is as raw materials for office paper, depending ronmental declarations. based in part on the UN’s Global Compact. on its type. Packaging plastics, metals, paper The International Maritime Organisation Through Metsäliitto Group, M-real is also an and board are recycled. Process sludge and IMO adopted emission limits for sulphur and active member of the World Business Coun- wood-based waste are used as fuels if they nitrogen oxides gradually, which results in cil for Sustainable Development (WBCSD). cannot be otherwise utilised. The fibre sludge challenges, particularly for maritime trans- The themes of sustainable development generated during the recovered fibre deink- port in the Baltic region and fuels. The big- central to M-real’s customers and other ing process is used in the building products gest change concerning sulphur emission stakeholders include the legality of the wood industry and for energy production. Ash from standards is scheduled for 2015, when the raw material, wood origin management and the mill power plant is used in earthworks reduction from the current level of 1.0 per forest certification, climate-related matters, construction as an alternative to gravel and cent to 0.1 per cent comes into force. Esti- such as carbon footprints, questions related other soil resources. Wood ash can also be mates forecast the cost impact of the change to water consumption and matters of social used as a fertiliser. on the forest industry to be very considerable, responsibility and product safety. The man- and, in Finland, higher than in other compet- agement of environmental issues is based ing countries. on M-real’s environmental policy which, in DEVELOPING REPORTING ON THE turn, is based on the continuous development ENVIRONMENTAL PERFORMANCE OF of operations. The HR policy is managed LOGISTICS RESPONSIBLE BUSINESS PRACTICE systematically so that employees’ working Environmental impacts are mitigated by M-real is committed to conducting its busi- conditions and competence are improved and making logistics more efficient. The products ness in a responsible manner and promoting well-being at work and occupational safety are transported in the largest units possible, sustainable development through its busi- are developed in a proactive and target- with the transport vehicles loaded as full as ness activities as well as to continuously oriented way. possible. In selecting warehouses, those with improving its operations. The key values of M-real follows Metsäliitto Group’s Code a rail connection are preferred. However, the the company – responsible profitability, reli- of Conduct, which is designed to ensure March stevedore strike in Finland resulted ability, cooperation and renewal – lay the Group-wide adherence to approved practices in deviations from the established routes. foundation for all operations. M-real meas- and common ethical principles. The leading Transport and warehouse functions are ures the financial, social and environmental principles of the Code of Conduct include largely outsourced to partners, and valid impacts of its operations. The results are compliance with the principles of corporate responsibility, performing one’s duties in the best possible manner, anti-corruption, open communications, appropriate action in case Environmental indicators of conflicting interests, and fair competition.

Tonnes 2010 2009 2008 Emissions to air

Greenhouse effect, CO2 -eqv 789,347 952,462 1,199,262

Acidification, SO2 -eqv 3,468 5,002 7,245 Discharges to water COD 18,414 26,095 35,004 Eutrophication, P-eqv 44 150 210 Waste Landfill waste 15,829 25,433 76,229

SUSTAINABILITY 23 tem, which is part of the Metsäliitto Group’s bon dioxide-neutral energy accounted for a Energy climate programme. For example, new total of 75 per cent of all energy consumption measurements and automation tools were in 2010. built and commissioned during the year At some M-real mills, the processes gen- efficiency under review. erate wood-based by-products for utilisation in energy consumption in excess of the mills’ own energy needs. The surplus is sold as USE OF BIOFUELS carbon dioxide-neutral wood fuel and/or heat Wood is M-real’s main source of energy (50 to partners in the region. per cent), of which by-products account for M-real aims to continuously improve the the majority. The aim is to increase the share ENERGY PRODUCTION ASSETS efficiency of energy consumption and produc- of wood-based fuels, thereby reducing car- DEVELOPED tion in its operations and increase the share bon dioxide emissions. of wood-based, carbon dioxide-neutral The fossil carbon dioxide emissions of During the year under review, the capacity energy, which is already high, in its energy M-real’s energy procurement decreased by of the recovery boiler at the Husum mill in procurement. some 17 percent during the year under Sweden was increased, and bio-based heat The energy efficiency of M-real’s opera- review compared to 2009. The emissions production increased with the need for oil tions improved significantly during the year decreased as a result of increased use of decreasing considerably as a result. Husum’s under review compared to the previous year. wood energy in Hallein, Husum and Kask- turbine investment is expected to be com- The improvement was particularly due to the inen. The emissions were reduced further by plete during the second half of 2011. The higher utilisation rates of the mills. In addi- the change in Metsä-Botnia’s consolidation investment will increase the mill’s electricity tion, several energy efficiency development method and changes in M-real’s production self-sufficiency from approximately 30 per projects were carried out during the year. structure carried out in 2009 and 2010, cent to 50 per cent. Additional electricity will The annual energy-saving impact of the mainly the shutdown of the Hallein paper be produced using wood-based fuels. projects is some 180,000 MWh of heat and mill and Alizay pulp mill and the production A decision was made towards the end of 50,000 MWh of electricity. The projects cut cuts of the Gohrsmühle mill. 2010 to build a new bio power plant at the carbon dioxide emissions by approximately The Olkiluoto nuclear power plant, which Kyröskoski mill, replacing the existing natu- 34,000 tonnes per year, or some four per cent is run by Teollisuuden Voima Oy, a subsidiary ral gas power plant. The bio power plant is of the total annual emissions. of Pohjolan Voima Oy, provides a significant planned to be complete toward the end of New minor projects that improve energy share of the electricity needed by M-real. In 2012. This will reduce the mill’s carbon diox- efficiency are continuously analysed and addition, the share of electricity produced ide emissions by approximately 100,000 evaluated. Energy efficiency is also improved with hydro power of electricity purchase is tonnes per year. The bio power plant invest- as part of the daily optimisation of production. carbon dioxide-neutral fuel, and combined ment is being implemented by a specific This development work was continued in with nuclear power they account for 25 per company, Hämeenkyrön Voima Oy, with Poh- 2010 by utilising the Energy Efficiency Sys- cent of energy purchase. Bio-based and car- jolan Voima as the majority shareholder and

Development of energy usage 2008–2010 Development of energy usage 2008–2010 GWh

16,000 GWh 2010 2009 2008 Use of wood-based fuels 6,924 11,216 14,096 12,000 Use of fossil fuels 3,153 3,702 4,701

8,000 Purchased energy 2,284 1,841 2,205 Purchased heat 412 54 228 4,000

0 Wood Fossil Purchaced Purchased based fuels energy heat Sources of total energy fuels

2008 2009 2010 GWh GWh 2010 (%) 2009 (%) 2008 (%) Wood-based 8,239 50 60 60 Nuclear power 3,453 21 14 14 Natural gas 2,284 14 11 13 Coal 1,150 7 6 6 Hydro power 730 4 3 3 Oil 271 2 4 4 Peal 212 1 1 1

24 SUSTAINABILITY EMISSIONS TRADING the local energy company Leppäkosken proposed that a monitoring system be estab- Sähkö Oy as a minority shareholder. lished for following up on the effect of input During the year under review, the Commis- tariff subsidies on the availability and price sion of the European Union specified its proof wood. State subsidies for the use of wood posal for the distribution of free emission FINLAND’S ENERGY POLICY for energy paid from overall taxation funds rights to the so-called carbon leakage indus- The Finnish State decided on considerable should be reduced if they cause problems to tries during 2013–2020. According to the increases in energy and waste taxes in 2010, the non-subsidised export industry. Commission’s proposal, free emission rights and, as a result, the taxes paid by M-real will The decision of the Finnish parliament on will be distributed in line with the energy increase in 2011. The Finnish burden of granting permits for two new nuclear power efficiency of the producers. Less efficient energy taxation is among the highest in plants made in 2010 in Finland was a positive producers will need to buy a larger share of Europe. In Sweden, the taxes, which have signal for the forest industry. One of the two their emissions rights. According to a pre- already been very low, are being decreased permits was granted to Teollisuuden Voima, liminary estimate, M-real will probably need further. which provides the majority of electricity pro- to purchase part of the emissions rights it During the year under review, Finland also cured by M-real from outside its mills. How- needs beginning in 2013. The differences increased so-called feed-in tariff subsidies ever, soon after this permit decision, the between the mills in need for purchases are for electricity produced using wood fuel. At government initiated surveys into the pos- high, depending particularly on the type of the same time, it was decided to start taxing sibility of a uranium tax on the producers of fuel they use. The EU will make final deci- peat burning. As a result of all this, it is more nuclear electricity. Carbon dioxide-neutral sions on the distribution rules in 2011. profitable than before for the energy industry energy production should not be burdened. to burn wood, which might reduce the avail- Investments in new nuclear power capacity ability of wood for the forest industry, thereby will become more uncertain than before if impairing the competitiveness and viability its profitability is weakened through political of the export industry. The forest industry has decisions.

Emissions to air (t) Particles 353

Carbon dioxide CO2 (fossil fuels) 789,347

Sulphur (as SO2) 1,271

Nitrogen oxides (as NO2) 6,276 Wood-based raw materials Wood (1,000 m3) 5,288 Pulp (1,000 t) 263 Recovered paper (1,000 t) 96

Other raw materials (1,000 t) M-real Production Pigments 568 Chemical (1,000t) Adhesives 110 Paper 1,459 Paperboard 1,105 Energy (GWh) Pulp and CTMP 1,295 Fuel purchased outside the Group 4,973 Electricity (purchased) 2,284 Heat (purchased) 412

Process water (1,000 m3) 101,900 Discharges to water systems (t)

Biological oxygen demand (BOD7) 1,889 Chemical oxygen demand (COD) 18,414 Phosphorus (P) 44 Nitrogen (N) 286 Total suspended solids 1,755

Waste (t) Landfill waste 15,829 Hazardous waste 355

SUSTAINABILITY 25 From restructuring to continuous development of the personnel

M-real considers well-being at work and M-real’s personnel-related development in connection with the changes implemented. occupational safety as important parts of measures were based on three focal areas, The changes in operating models result in profitable operations and the building of on the basis of which operations will also be extended and more diverse job descriptions, success. developed and continued in 2011: securing making work more varied and motivating. future resources, ensuring the competences Statutory labour negotiations were con- of existing personnel and developing well- ducted in Finland during the year under being at work. review at the Äänekoski mill in connection On 31 December 2010, the number of with the investment to improve production M-real personnel amounted to 4,538. This efficiency and at the Simpele mill in connec- was approximately 365 lower than the year tion with the investment in production to before, mainly due to the actions after social increase production capacity. Employees plan negotiations due to the closure of the made redundant or facing redundancy were Alizay pulp mill, and the operating model supported by training and seeking new changes and personnel reductions carried employment as well as re-employment at out at the Gohrsmühle, Reflex and Husum the company’s other sites. The support was mills. provided in accordance with the agreed social The ”Sharing Best Practices within plan in close cooperation with representa- M-real” programme shares best practices tives of the personnel and employment related to the working areas, content of work authorities. and operating models. During the year under The employer and personnel are holding review, the programme was continued at the continuous discussions in regular meetings Gohrsmühle and Husum mills by implement- arranged at the offices and mills. In addition, ing new operating and organisation models representatives of the management regularly

Occupational safety and well-being 2008–2010, M-real

2010 2009 2008 Sickness absenteeism (%) 4.7 4.8 4.7 Work injury absenteeism (%) 0.3 0.3 0.2 Lost time accident frequency rate (per million worked hours) 15.8 14.6 18.8 Reported near misses (per 100 employees) 38.0 16.9 15.8

Personnel by country Personnel Personnel at Net employment Average age 31.12.2010 31.12.2009 change 2010 of employees 2010 Finland 1,783 1,824 -41 44.3 Germany 1,073 1,228 -155 46.0 Sweden 891 980 -89 46.2 France 353 396 -43 41.2 Austria 197 203 -6 43.4 Other Countries 241 272 -31 38.9 Total 4,538 4,903 -365 44.5

26 SUSTAINABILITY take part in the personnel groups’ meetings. was also started during the year under mill. During 2011, the surveys will be During the year under review, the close coop- review. extended to other mills and offices. The com- eration between the previously merged M-real has implemented semi-annually petence surveys provide valuable information M-real and Metsä-Botnia HR organisations updated retirement forecasts where the for the development of the training system. and their integration with the business employees who are about to retire and the The training system was updated during organisations continued. competence leaving the company with them the year under review and launched on the An extensive personnel survey was initi- will be identified. The information obtained intranet, allowing employees to enrol in the ated at M-real which included all M-real units in this way will be combined with the results training. The implementation of supplemen- except for the Hallein, Gohrsmühle and Alizay of the personnel competence surveys, and tary training and degree-based training and mills. In 2011, the survey will cover all units. recruitment training will be developed production multi-skill training has been con- The need for improving internal communica- accordingly to correspond to future compe- tinued in joint groups with Metsä-Botnia in tions, utilising internal development ideas tence and personnel needs. M-real also order to ensure an extensive participant base. better and making the Performance and developed cooperation with schools and edu- Development Appraisal policy more efficient cational institutions in 2010. were identified on the basis of the results. The Simplifier development programme The information obtained from the personnel for middle-management was started during survey has been integrated into the annual the year under review and will be continued plans, and its results have been reviewed in 2011. In addition, M-real employees par- during the annual planning process in ticipated in Metsäliitto Group’s management autumn 2010. The implementation of the Challenger development programme. development measures agreed on the basis of the personnel survey is followed on a quar- ENSURING THE COMPETENCE OF terly basis. EXISTING PERSONNEL The reduction in personnel training resources DEVELOPMENT OF WELL-BEING AT during 2007–2009 due to the stringent finan- WORK cial position has been a special challenge in M-real considers well-being at work and the immediate past. During the year under occupational safety as important parts of review, M-real has invested strongly in iden- profitable operations and the building of suc- tifying the training needs of personnel, cess. The aim is to identify risks associated improving the quality of training and develop- with the personnel’s well-being in a system- ing the training system. atic and proactive way. Superiors are sup- Personnel training needs were identified ported by the local HR organisations, and with the help of an extensive analysis tool, M-real reduces the amount of sick leave and competence surveys, and Performance and occupational accidents through programmes Development Appraisals. During the year monitored on a monthly basis as part of the under review, M-real updated the Perform- reporting of the HR organisation. ance and Development Appraisal operating model, which includes support materials distributed to the employees and their supe- SECURING FUTURE RESOURCES riors. M-real participated considerably in Metsä- Extensive competence surveys identify liitto Group’s trainee programme, with 13 out the areas in which the personnel require of the selected 26 participants training to more efficient and higher-quality training. work for M-real. In addition, the planning of The Kyro mill was the pilot site during the the production personnel recruitment pro- year under review, and the implementation gramme that is due to commence in 2012 has been continued at the Äänekoski paper

SUSTAINABILITY 27 28 SUSTAINABILITY FINANCIAL STATEMENTS

REPORT OF THE BOARD OF DIRECTORS 2010 ...... 30 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ...... 38 CONSOLIDATED BALANCE SHEET ...... 39

STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY ...... 40 2010 CONSOLIDATED CASH FLOW STATEMENT ...... 41 NOTES TO THE FINANCIAL STATEMENT ...... 42 CALCULATION OF KEY RATIOS ...... 92

PARENT COMPANY ACCOUNTS – INCOME STATEMENT ...... 93 STATEMENTS PARENT COMPANY ACCOUNTS – BALANCE SHEET ...... 94 PARENT COMPANY ACCOUNTS – CASH FLOW STATEMENT ...... 95 PARENT COMPANY ACCOUNTING POLICIES ...... 96 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENT ...... 97 THE BOARD’S PROPOSAL FOR THE DISTRIBUTION OF PROFITS ...... 102

AUDITOR’S REPORT ...... 103 M-REAL FINANCIAL

29 Report of the Board of Directors 2010

Market situation in 2010 amounted to EUR -27 million net (2009: -117 and 2008: -26), the Demand for all main products increased clearly in 2010. Demand most significant being: for board products was very strong throughout the year, especially ǩ EUR 28 million impairment of fixed assets in the Speciality Papers with regard to food packaging. Backed up by the solid demand out- business area look, M-real announced that it will increase its folding boxboard ǩ EUR 15 million impairment of fixed assets in the Market Pulp and production capacity. Demand for office paper deteriorated slightly Energy business area towards the end of the year after a very solid first half of the year. ǩ EUR 15 million impairment of fixed assets and cost provisions in Total deliveries of European folding boxboard producers increased the Consumer Packaging business area related to the closure of by 9 percent and total deliveries of uncoated fine paper producers the Simpele paper machine by 7 percent in 2010 compared with 2009. ǩ EUR 9 million reversal of impairment of fixed assets in the Office The price of folding boxboard was increased, and the prices of Papers business area annual agreements for 2011 made at the end of the year were more ǩ EUR 10 million gain and reversal of impairment loss in the Spe- than 10 percent better than the annual agreements for 2010. Office ciality Papers business area connected with the partial divestment paper prices were increased by approximately 15 percent and spe- of the Reflex mill to Metsä Tissue ciality papers by approximately 5 percent on average. The pulp ǩ EUR 8 million net cost provision in the Speciality Papers business market price increased considerably during the year, reaching its area connected with the restructuring of M-real Zanders and peak during the second quarter. However, the average pulp price partial divestment of the Reflex mill to Metsä Tissue was the highest during the third quarter. ǩ EUR 10 million income was recognised in the operating profit There were no significant changes in production costs as a whole under Other Operations in connection with IT arrangements. In in 2010. addition, EUR 2 million was allocated to the result for discontinued The average exchange rate of the euro against the US dollar, the operations due to the arrangement. British pound and, in particular, the Swedish krona weakened in ǩ EUR 8 million reversal of impairment loss under Other Operations 2010. associated with the sale of paper machine 2 in Kangas ǩ EUR 6 million gain from patents sold to Sappi under Other Oper- Result for the review period ations M-real’s sales totalled EUR 2,605 million (2009: 2,432 and 2008: ǩ EUR 4 million additional cost provision in the Market Pulp and 3,236). Comparable sales were up 19.2 per cent. The operating result Energy business area relating to the closure of the Alizay pulp mill was EUR 146 million (2009: -267 and 2008: -61), and the operating result excluding non-recurring items was EUR 173 million (2009: The non-recurring items recognised in the operating result for 2009 -150 and 2008: -35). The result from continuing operations before amounted to EUR -117 million net, the most significant being: taxes excluding non-recurring items was EUR 92 million (2009: -230 ǩ EUR 134 million profit related to the Metsä-Botnia arrangement, and 2008:-178), and including non-recurring items EUR 48 million of which EUR 18 million is allocated to Market Pulp and Energy (2009: -358 and 2008: -204). and EUR 116 million to Other Operations. The operating results was EUR 146 million (2009:-267 and 2008: ǩ An impairment loss of EUR 113 million according to IAS 36, of -61). The non-recurring items recognised in the operating result which EUR 66 million is allocated to Speciality Papers and EUR

Sales Operating result Operating result, excluding EUR million EUR million non-recurring items EUR million 4,000 200 200

100 3,000 100 0 2,000 0 -100 1,000 -100 -200

0 -300 -200 06 07 08 09 10 06 07 08 09 10 06 07 08 09 10

30 REPORT OF THE BOARD OF DIRECTORS 2010 47 million to Office Papers. Of these, EUR 33 million was recog- by Consumer Packaging totalled 1,390,000 tonnes (2009: 1,212,000 nised in goodwill. and 2008: 1,345,000). ǩ EUR 48 million in write-downs and cost provisions in the Market Financial income and expenses totalled EUR -74 million (-75). Pulp and Energy business area connected to the plan to perma- Foreign exchange gains and losses from accounts receivable, nently close down the Alizay pulp mill. accounts payable, financial income and expenses and the valuation ǩ EUR 28 million in cost provisions and write-downs in the Special- of currency hedging were EUR -9 million (5). Net interest and other ity Papers business area connected to the closure of the Hallein financial income and expenses amounted to EUR -65 million (-80). paper mill. Other financial income and expenses included EUR 2 million of ǩ EUR 22 million cost provisions and write-downs associated with valuation loss on interest rate derivatives (valuation gain of 10). The the closure of the Metsä-Botnia Kaskinen mill. This total consists financial income of 2009 also included a gain of approximately EUR of EUR 16 million related to the Consumer Packaging business 31 million related to repurchases of M-real’s own bonds and finan- area and EUR 6 million to the Market Pulp and Energy business cial expenses included a loss of EUR 30 million related to early area. repayment of the vendor note by Sappi. ǩ EUR 12 million cost provision in Other Operations associated with In the year under review, the result from continuing operations the terminated IT contract. before taxes was EUR 48 million (2009: -358 and 2008: -204). In addi- ǩ EUR 11 million cost provision related to profit improvement meas- tion to the non-recurring items booked in the operating result, the ures at the Husum mill, of which EUR 9 million in the Office Papers result includes an impairment loss of EUR -16 million, related to business area and EUR 2 million in the Market Pulp and Energy M-real’s holding in Myllykoski Paper Oy, reported as a non-recurring business area. item in Share of results in associated companies after the operating ǩ EUR 5 million cost provision associated with the profit improve- result. The result for year 2009 included a non-recurring item of ment programme of the Speciality Papers business area. EUR -11 million in the line Share of results in associated companies ǩ EUR 12 million net in other non-recurring items, of which EUR 2 from the Sunila pulp mill divested by Myllykoski Paper during the million was in Consumer Packaging, EUR 1 million in Speciality second quarter. The result from continuing operations before taxes, Papers and EUR 9 million in Other Operations. excluding non-recurring items, was EUR 92 million (2009: -230 and 2008: -178). Income taxes, including the change in deferred tax The operating result excluding non-recurring items compared with liabilities, were EUR -21 million (2009: positive 27 and 2008: positive the previous year was improved by the implemented price increases 34). in board and paper, increased delivery volumes, cost savings and Earnings per share were EUR 0.09 (2009:-1.09 and 2008: -1.58). higher pulp price. The result was weakened by the strengthening of Earnings per share from continuing operations excluding non- the Swedish crown against the euro, the investment shutdown at recurring items were EUR 0.23 (2009:-0.66 and 2008: -0.48). The the Husum mill and the Finnish stevedore strike. The operating result return on equity was 2.8 per cent (2009: -28.6 and 2008: -10.4), and of the review period includes a capital gain of EUR 8 million from 7.6 per cent (2009: -18.3 and 2008: -9.0) excluding non-recurring sold Sappi shares booked in other operating income. items. The return on capital employed was 5.7 per cent (2009: -8.9 The total delivery volume of paper businesses in 2010 was and 2008: -1.3); 7.6 per cent (2009: -4.5 and 2008: -0.5) excluding 1,155,000 tonnes (2009: 1,132,000 and 2008: 1,761,000). Deliveries non-recurring items.

Return on capital employed Earnings per share Result from continuing % EUR operations before tax EUR million 6 0.5 100

3 0 0

0 -0.5 -100

-3 -1.0 -200

-6 -1.5 -300

-9 -2.0 -400 06 07 08 09 10 06 07 08 09 10 06 07 08 09 10

REPORT OF THE BOARD OF DIRECTORS 2010 31 Personnel would further clearly improve M-real’s profitability. The strategic The number of personnel was 4,538 on 31 December (31 December review of the paper business continues. 2009: 4,903 and 31 December 2008: 6,546), of which 1,783 (2009: M-real’s EUR 80 million profit improvement programme for 2010 1,824 and 2008: 2,258) worked in Finland. In 2010, M-real employed announced in December 2010 was realised according to plans. The an average of 4,772 people (2009: 5,913 and 2008: 9,087). The figures most significant measures were: for the end of 2009 no longer includes the share of Metsä-Botnia ǩ Permanent closure of the Alizay pulp mill in France personnel due to change in the consolidation method. The figures ǩ Closure of the speciality paper capacity of the Reflex mill in for 2008 included 30 per cent of Metsä-Botnia personnel (2008: 553). Germany In 2010 salaries and wages totalled EUR 209 million (2009: 254 and ǩ Streamlining of the organisation and management model in 2008: 293). Metsä-Botnia’s wages are included until 8.12.2009. Zanders ǩ A new EUR 20 million internal profit improvement programme Investments covering all business areas Gross investments in January-December totalled EUR 66 million (2009: 73 and 2008: 128). The investments in 2009 included a EUR In addition, the profit improvement programme includes a EUR 22 16 million share of Metsä-Botnia’s investments based on M-real’s million investment at the Husum mill to improve its energy efficiency. 30 per cent share of ownership and the consolidation method of The investment is proceeding according to plan. Metsä-Botnia until 8 December 2009. The combined profit impact of these measures and the previous M-real has announced that it will invest EUR 26 million in the years’ profit improvement programmes is expected to have been an Simpele mill to increase its folding boxboard capacity by approxi- improvement of approximately EUR 100 million in 2010, divided as mately 80,000 tonnes. The sheeting capacity will also be expanded follows: at the same time. The investments will be carried out in summer ǩ The profit improvement programme of 2010: EUR 40 million 2011. ǩ Earlier implemented profit improvement programmes: EUR 60 M-real has also announced that it will invest in the modernisation million of the coating section at the Kemiart Liners mill. The total value of the investment is approximately EUR 16 million. This investment will The Reflex mill in Germany is developed according to the Paper Park also be carried out in 2011. concept, the target being to find industrial partners for the mill site. In October 2010, M-real announced the first phase of the develop- Structural change ment: partial divestment of the Reflex mill to Metsä Tissue for M-real’s structural change from a paper company to become more approximately EUR 10 million. The agreement with Metsä Tissue clearly a packaging material producer has proceeded according to covered paper machine 5 and related real estate, as well as certain the strategy. The focus has increasingly shifted from restructuring infrastructure assets. The negotiations to reduce the headcount at to development, as is demonstrated by the Simpele and Kemiart the M-real Zanders mills concluded in June. Liners investments scheduled for 2011. Efforts to solve the problems In July, M-real exercised its option to purchase former Kangas of loss-making paper units will continue, and success in this area paper mill real estate and land area from Sappi for a price of EUR 13 million. The deal was part of an agreement in which M-real and

Assets and capital employed EUR million

8,000 Non-current assets Inventories 6,000 Other current assets Average 4,000

2,000

0 06 07 08 09 10

32 REPORT OF THE BOARD OF DIRECTORS 2010 Sappi settled the issues still open related to the divestment of M-real’s several new types of double-coated flexible packaging and label Graphic Papers business area in 2008. In September, the city of papers. Jyväskylä decided to use its right of pre-emption based on law to During the year under review, M-real was actively involved in the purchase the Kangas mill real estate from M-real for an equivalent activity of Forest Cluster Ltd. Forest Cluster’s research programmes price of EUR 13 million. provide resources for renewing business operations over the long M-real discontinued Simpele’s speciality paper production at the term. end of the year. The production of corresponding products will con- M-real’s R&D expenditure for 2010 amounted to approximately tinue at the Gohrsmühle mill in Germany. The transfer of production EUR 5 million, or some 0.2 percent of sales (2009: 7 and 0.3 per cent, is expected to improve M-real’s annual operating result by approxi- 2008: 10 and 0.3 per cent). The decrease compared to the previous mately EUR 4 million. year is due to the end of the joint KCL research programme.

Research and development Environmental factors M-real’s R&D activity during the year under review focused on the Minimising the environmental impacts of operations and maintain- development of high-quality lightweight packaging boards. With ing open communications are the key principles of M-real’s environ- regard to the paper business operations, the focus was on the devel- mental policy. All of M-real’s mills operate certified ISO 9001 and opment and launch of new products. ISO 14001 quality and environmental management systems that The Efficient Packaging research programme assesses the impact support the systematic improvement and follow-up of operations. of lightweight yet high-performance boards on the efficiency of the Several mills also have a certified occupational and product safety entire packaging chain. The research programme yielded promising system. results that can be used in the development of the board business. M-real’s mills also utilise a certified Energy Efficient System, A project to improve the print surface of cigarette packaging which systematically manages the reduction of energy consumption boards was implemented. The revised product was launched during and carbon dioxide emissions. M-real reports openly on its environ- the first quarter, and it has been received extremely positively in this mental impacts through, for example, mill-specific EMAS (Eco- demanding market. Management and Audit Scheme) reports. The Äänekoski paper mill During 2011, Consumer Packaging will implement investments and the Hallein mill published their EMAS reports during the year at the Simpele and Kemi board mills and is planning to invest in under review. Äänekoski and Kyröskoski board mills. Development activity is an The climate impact of individual products is reported on a cus- essential part of these investments. The Kemi mill has particularly tomer-specific basis through carbon footprint calculations. Product- focused on the development of coating, while Simpele has engaged specific Paper Profile environmental product descriptions can be in work to improve production techniques. The development of non- found for all M-real products on the company’s website at woven type papers continued in wallpaper base papers. www.m-real.com. The emissions and amounts of waste produced A new, lighter-than-normal SAVE! office paper was developed in by M-real mills are reported on page 124–125 of this Annual Report. the Office Papers business area. The lightness is partly based on Several improvements that reduce environmental load and risks BCTMP pulp. The deliveries to the markets were started during were implemented at M-real’s mills during the year under review. autumn 2010. Speciality Papers, on the other hand, has developed Improvements at the Husum mill cut particle emissions and aimed

Equity ratio Gearing ratio Net gearing ratio % % %

40 160 120 100 30 120 80 20 80 60 40 10 40 20 0 0 0 06 07 08 09 10 06 07 08 09 10 06 07 08 09 10

REPORT OF THE BOARD OF DIRECTORS 2010 33 to reduce air emissions of nitrogen oxides. The Alizay mill began to board are recycled. Process sludge and wood-based waste are used divert part of the bark boiler flue gases to a pigment plant located as fuels if they cannot be otherwise utilised. The fibre sludge gener- at the mill site for utilising the carbon dioxide in the flue gases. The ated during the recovered fibre deinking process is used in the build- use of thermal energy was made more efficient at the Joutseno ing products industry and for energy production. Ash from the mill chemi-thermomechanical pulp mill. The Simpele mill began to power plant is used in earthworks construction as an alternative to expand its landfill. In Äänekoski the noise generated by the vacuum gravel and other soil resources. Wood ash can also be used as a blower and waste water treatment plant was dampened at the car- fertiliser. ton mill, and the mill’s noise pollution report was updated. Environmental liabilities relating to past activities have decreased Industrial air, water and noise emissions have decreased con- in recent years following the rehabilitation measures of contaminated tinuously due to the consistent application of Best Available Tech- land areas and landfill sites. During the year under review, the reha- niques (BAT). M-real has systematically reduced the water consump- bilitation of the old landfill sites of the Niemi sawmill and Lielahti tion of its production. Water is recycled in the production processes, chemi-thermomechanical pulp mill was completed in Tampere. and it is thoroughly treated before it is discharged into water systems. Currently, the only significant environmental liabilities relating to The amounts of harmful substances in wastewater from board and past activities that M-real is aware of relate to the area of the closed paper production have been reduced by more effective treatment Wifsta mill in Sweden. Provisions for environmental management processes, reduced water consumption and personnel training. were approximately EUR 2 million at the end of the year. M-real’s Thanks to highly effective treatment processes, wastewater emis- environmental costs totalled EUR 25 million (38) in 2010. The envi- sions cause eutrophication only within a limited area at the immedi- ronmental costs are mainly comprised of operating and maintenance ate point of discharge. M-real’s production units are located in areas expenses from environmental protection equipment, expenses relat- of plentiful water supply and therefore do not compete for water with ing to waste management and environmental insurance policies and households, agriculture or other water users. M-real has joined the depreciation of capitalised environmental costs. UN’s Global Compact CEO Water Mandate initiative to make water consumption and open reporting on it more efficient. M-real keeps Wood Supply a close eye on the development of international reporting policies M-real is committed to using sustainable raw materials in its pro- on water consumption. duction. The most important raw material for its products is wood: M-real has reduced its emissions into the air by introducing low- a renewable, recyclable and energy-efficient raw material that sulphur fuels and by replacing fossil fuels with wood-based fuels. originates from sustainably managed forests and is procured sus- The most significant atmospheric emissions include: fuel-derived tainably. M-real’s parent company Metsäliitto Cooperative is respon- sulphur and nitrogen oxides which can cause water and soil acidi- sible for M-real’s wood supply. The bulk of the wood raw material fication; carbon dioxide, the main driver of climate change; and used by M-real in Finland comes from the forests of the owner- particle emissions, which have a negative impact on air quality. members of Metsäliitto Cooperative. Other wood supply countries Mill waste levels have also been reduced through efficient re-use include Austria, Latvia, Lithuania, France, Sweden, Germany, Russia of by-products and co-products. In addition, on-site sorting of mill and Estonia. During the year under review, Metsäliitto supplied a waste for use as raw material or for energy production has reduced total of 5.7 million cubic metres of wood to M-real mills. the need for landfill disposal. For example, primary fibre, high- Wood procurement is governed by an environmental policy regard- quality recycled fibre or both are used as raw materials for office ing wood supply and forestry, as well as the Group’s principles of paper, depending on its type. Packaging plastics, metals, paper and corporate responsibility. These are implemented using certified

Repayment of non-current loans Investments, continuing operations (2011–2016) % sales EUR million 700 10 600 8 500 400 6 300 4 200 2 100 0 0 11 12 13 14 15 16 06 07 08 09 10

34 REPORT OF THE BOARD OF DIRECTORS 2010 quality and environmental systems and an annually updated envi- ing needs, the Group also had at its disposal uncommitted domestic ronmental programme. Wood procurement complies with local and foreign commercial paper programmes and credit facilities legislation and regulations issued by the authorities. amounting to EUR 519 million. Certified quality and environmental systems include a wood ori- In January, M-real redeemed early a EUR 250 million item of its gin management system, ensuring that the origin of all procured own bond at a 100 per cent redemption price, according to the terms wood is known. In procuring wood raw material, M-real supports of the bond, and the remaining EUR 90.05 million of the same bond forest certification that is verified by a third party. Some 55 percent in July. In June 2010, M-real raised pension loans worth a total of of the wood raw material used by M-real came from certified forests EUR 135 million with a maturity of ten years. In December, the com- during the year under review. During the year under review, the PEFC pany raised pension loans worth a total of EUR 31 million. With these forest certification criteria were revised in Finland, and an agreement measures, M-real has extended the maturity profile of its loans and was made on the FSC forest certification criteria, which will set strengthened its liquidity. conditions for FSC forest certification as well in the future. In August, Standard & Poor’s upgraded M-real’s CCC+ credit rat- All M-real mills employ a certified Chain of Custody system, which ing to B-. The rating outlook remains stable. The upgrade has a enables them to verify the share of certified wood in their products. positive impact of approximately EUR 1 million on M-real’s annual M-real strives to launch more forest certification labelled products financing costs. on the market. In September, Moody’s Investors Service upgraded M-real’s Caa1 rating to B3. The rating outlook was changed to positive. The upgrade Financing has a positive impact of approximately EUR 1 million on M-real’s At the end of 2010, M-real’s equity ratio was 32.1 per cent (31 Decem- annual financing costs. ber 2009: 29.6 and 31 December 2008: 30,8) and the gearing ratio was 135 per cent (2009: 153 and 2008 152). The net gearing ratio was Significant risks and uncertainty factors 83 per cent (2009: 84 and 2008: 90). Some of M-real’s loan agree- M-real estimates its strategic, operative, financial and insurable ments set a 120 per cent limit on the company’s net gearing ratio risks twice a year. The risk assessments carried out during 2010 and a 30 per cent limit on the equity ratio. Calculated as defined in identified the following risks and uncertainties with a possible impact the loan agreements, the gearing ratio at the end of the year was on M-real’s financial performance and ability to operate. approximately 64 per cent (63) and the equity ratio some 38 per cent (35). Uncertainty of the general economy development The change in the fair value of investments available for sale was In the main markets, paper and board demand mainly follows the approximately EUR +28 million, based mainly on the increase in the general economic development. Demand improved clearly in 2010 value of the Pohjolan Voima shares. as the result of the recovery of the world economy. There are still At the end of the year, net interest-bearing liabilities totalled EUR significant uncertainties connected with the development of the 827 million (31 December 2009: 777 and 31 December 2008: 1,254). general economy. In particular, the development of the euro area Foreign-currency-denominated loans accounted for 9 per cent; 83 influences the demand for and profitability of M-real’s main products. per cent were floating-rate and the rest were fixed-rate. At the end of 2009, the average interest rate on loans was 5.1 per cent and the Competitive environment average maturity of long-term loans 2.7 years. The interest rate The balance between demand and supply has a significant impact maturity of loans was 9.4 months at the end of the year. During the on the prices of paper and paperboard products. In 2010, the market period, the interest rate maturity has varied between six and ten balance was mainly normal for M-real’s main products. The demand months. for folding boxboard exceeded the supply in Europe in 2010. Any Cash flow from operations amounted to EUR 49 million (Q1- decrease in demand or increase in supply in the future may have Q4/2009: 110). Working capital was up by EUR 86 million (down 140), unfavourable effects on the market balance. Business cycles unfa- mainly as a result of the increase in delivery volumes and prices. vourable to M-real or capacity increases by competitors may decrease Turnover of operating net working capital remained on 2009 level. the prices of M-real’s products. On the other hand, potential capac- At the end of December, an average of 4.8 months of the net ity closures in the industry or consolidation of the industry structure foreign currency exposure was hedged. The degree of hedging var- may lead to an increase in prices. The strengthening of the euro ied between four and six months during the period. Approximately versus the US dollar in particular may result in increased imports 70 per cent of the non-euro-denominated equity was hedged at the to Europe, which would further weaken the market balance in Europe. end of December. Liquidity continues at a good level. At the end of December, liquid- Credit and other counterparty risks ity was EUR 415 million, of which EUR 7 million consisted of undrawn The management of the credit risks involved in commercial activities pension premium (TyEL) loans and EUR 408 million of liquid assets is the responsibility of M-real’s centralised credit control and busi- and investments. EUR 218 million of the liquid assets and invest- ness areas. The credit control function together with the business ments are assets deposited by other Metsäliitto Group companies areas defines the internal credit limits and terms of payment for in M-real’s subsidiary Metsä Finance. To meet its short-term financ- different customers. A significant part of the credit risks are trans-

REPORT OF THE BOARD OF DIRECTORS 2010 35 ferred further to credit insurance companies by means of credit Financial risks insurance contracts. M-real’s customer credit risk was at a normal M-real’s profitability improved considerably during 2010. M-real level in 2010. Measures are taken to reduce the risk further by inten- launched new profit improvement measures in January 2011, the sifying internal credit control and its processes. positive effect of which on the result for 2011 with the programmes The main principles for the company’s credit control are defined implemented during the preceding years will total approximately in the credit policy approved by the company’s Board of Directors. EUR 90 million compared to 2010. M-real has good opportunities for Counterparty-specific, approved maximum amounts are also applied covering the accelerating cost inflation by means of its own measures to money market investments, derivatives and borrowings in order in 2011. There are uncertainties and the risk of not achieving the to ensure creditworthiness and to reduce risk concentrations. desired profit improvement in full associated with the implementation of the internal profit improvement measures. Changes in consumer habits The main financial risks involved in business operations relate In the future, changes in new electronic communications technology, mainly to currencies, interest rates, liquidity and counterparty risks marketing channels and other consumer habits may change the and the use of derivative instruments. The financial risks are man- demand for M-real’s paper and paperboard products. aged in accordance with the treasury policy approved by M-real’s Board of Directors. The aim is to hedge against significant financial Price risks of production input costs risks, balance the cash flow and give the business units time to adjust A radical and unforeseen rise in the price and transport costs of their operations to changing conditions. M-real’s financial risks and production inputs important for M-real’s operations, such as wood, their management are described in more detail on pages 53–57 of energy and chemicals, or problems with their availability may reduce this annual report. profitability and threaten the continuity of operations. M-real endeavours to hedge against this risk by entering into long-term delivery Preparing for and transferring risks agreements and related derivative contracts. Depending on the EU’s Identified risks are prepared for to the best of the company’s knowl- decisions and emission right prices, significant additional costs may edge and as most appropriate for the company. M-real cooperates be entailed for M-real as from 2013 due to the need to purchase actively with insurance companies related to risk management; for emission rights for its operations. Cost inflation will accelerate clearly example, by regularly executing risk evaluations in different business in 2011 compared to 2010, mainly due to increased prices of wood, areas. The production plants have prepared for potential disturbances energy and chemicals. of operation by drawing up crisis management, continuity and recovery plans, for example. Some of the risks are borne by the company Liability risks itself and some are selectively transferred by means of, for example, M-real’s business operations involve various types of liability risks, insurance contracts, derivative contracts and terms and conditions the most central of which are general operational liability risks, otherwise included in contracts, to be borne by insurance companies, environmental risks and product liability risks. Measures are taken banks and other counterparties. to manage these risks by improving business processes, practices, The most common loss risks are mainly covered by comprehen- quality requirements and the transparency of operations. Some of sive global insurance contracts, such as: the above-mentioned risks have been transferred to insurance com- – property and business interruption insurance panies by means of insurance contracts. – general third-party and product liability insurance – liability insurance for Directors and Officers Business interruption risks – credit insurance Different kinds of large losses, major accidents, natural disasters, – cargo insurance. serious malfunctions in the key information systems, labour disputes and delivery problems of the most important raw materials may, in Shares extreme cases, interrupt M-real’s business operations and even In 2010, the highest price for M-real’s A shares on the NASDAQ OMX cause loss of customers. Continuity and recovery plans have been Helsinki was EUR 3.64, the lowest EUR 1.93, and the average price drawn up in the business areas and plants to mitigate these risks. EUR 2.85. At the end of the year, the price of the A shares was EUR In addition, some of the mill operation interruption risks have been 2.85. At the end of 2009, the price of the A shares was EUR 1.94, selectively transferred to insurance companies by way of insurance while the average price in 2009 was EUR 1.52. contracts. The highest price for M-real’s B shares in 2010 was EUR 3.26, the lowest EUR 1.46, and the average price EUR 2.44. At the end of the Personnel year, the price of the B shares was EUR 2.54. At the end of 2009, the M-real has paid special attention to ensuring the availability and price of the B shares was EUR 1.53, while the average price in 2009 retention of personnel by means of various development programmes was EUR 0.66. and special measures. M-real endeavours to prepare for a genera- The trading volume of A shares was EUR 6 million, 5 per cent of tional shift and other risks related to personnel by means of career the share capital. The trading volume of B shares was EUR 894 mil- planning and job rotation.

36 REPORT OF THE BOARD OF DIRECTORS 2010 lion, 125 per cent of the share capital. The market value of A and B positive result impact in 2011 is expected to be approximately EUR shares totalled EUR 845 million at the end of the year. 30 million. Cost inflation is expected to accelerate in 2011. The com- At the end of the year, Metsäliitto Cooperative owned 38.8 per bined result impact of M-real’s new profit improvement programme cent of the shares, and the voting rights conferred by these shares and the previous years’ programmes is in 2011 estimated to be EUR amounted to 60.5 per cent. International investors held 14 per cent 90 million positive, which is expected to mostly offset the cost infla- of the shares. tion. On 8 April 2010, the holdings of Norway’s Central Bank (Norges The annual folding boxboard capacity of the Äänekoski and Bank) in M-real dropped to 4.4 per cent of the share capital and 1.4 Kyröskoski mills is planned to be increased by a total of approximately per cent of the voting rights. 70,000 tonnes. The total value of the planned investments is some The company does not hold any of its own shares. EUR 30 million. The Kyroskoski investment is planned to be completed in late 2011 and the Äänekoski investment in spring 2012. Distributable funds and dividend Related to the planned investment M-real will start statutory nego- The distributable funds of the parent company as of 31 December tiations at the Äänekoski board mill on 18 February 2011 covering 2010 were EUR -382,932,705.40 of which the result for the financial the mill workers in total of about 130 people. The maximum person- year is EUR -40,145,050.84. The company therefore has no distribut- nel reduction need is estimated to be 10 people. Kyröskoski invest- able funds. In its meeting on 10 February 2011, the Board of Directors ment is expected to have no personnel impact. Following the planned decided to propose to the Annual General Meeting in the spring 2011, investments, the annual production capacity is to increase to 190,000 to be held on 23 March 2011, that no dividend is paid for the financial tonnes at Kyröskoski and to 240,000 tonnes at Äänekoski. Production year 2010. No dividend was paid for 2009. is planned to be directed to food packaging. Even after these planned investments, M-real has good potential to further increase the pro- Board of Directors and Auditors duction capacity of the Kyröskoski and Äänekoski mills should the The Annual General Meeting of March confirmed the number of market situation so require. members of the M-real Board of Directors as nine (9). The Annual Sari Pajari was appointed as SVP, Business Development and a General Meeting elected the following as members of the Board of member of the Corporate Management Team. Her education is Directors: Mikael Aminoff, M.Sc. (Forestry); Martti Asunta, M. Sc. Master of Science, Engineering. Her main responsibilities are busi- (Forestry); Kari Jordan, Honorary Counsellor; Kirsi Komi, LL.M.; Kai ness development and Total Quality Management. Pajari starts in Korhonen, M.Sc. (Eng); Liisa Leino, MA (Education); Juha Niemelä, the new position on 1 April 2011 and reports to CEO Mikko Helander. Honorary Counsellor; Antti Tanskanen, Minister; and Erkki Varis, Pajari is moving to M-real from the position of SVP, CIO of Metsäliitto M.Sc. (Eng). The term of office of the Board members expires at the Group which she held since 2009. Prior to joining Metsäliitto Group end of the next Annual General Meeting. At its organising meeting, in 2007 Pajari has worked as a managing strategy consultant in Pöyry, the Board of Directors elected Kari Jordan as its Chairman and Martti PwC Consulting and IBM. Asunta as its Vice Chairman. The Board further resolved to organise the Board committees. The members of the Audit Committee are Near-term outlook Kirsi Komi, Kai Korhonen, Antti Tanskanen and Erkki Varis. The The demand for board is expected to remain good during the next members of the Nomination and Compensation Committee are few months. M-real’s folding boxboard and liner prices are in excess Mikael Aminoff, Martti Asunta, Kari Jordan, Liisa Leino and Juha of 10 per cent higher than at the beginning of the previous year as a Niemelä. result of increases implemented in Europe. The Annual General Meeting elected Authorised Public Account- The demand for uncoated fine paper seems to continue stable. ants PricewaterhouseCoopers Oy as M-real’s auditor. The term of M-real has announced a price increase of 6–8 per cent, effective in office of the auditor expires at the end of the next Annual General March. The demand for speciality papers is also expected to remain Meeting. stable and the price level unchanged. A Corporate Governance Statement has been published as a The average price of pulp is expected to be slightly lower in the separate report at the same time with the financial statements and first quarter compared with the fourth quarter of the previous year. this report. A significant decrease in the price of pulp is not foreseen, however. Cost inflation is expected to accelerate in 2011. M-real started a Events after the period new EUR 70 million profit improvement programme in January 2011. M-real started a new EUR 70 million profit improvement programme. The combined result impact of the new programme and the previous The programme focuses on improving profitability of the paper busi- years’ profit improvement programmes is in 2011 estimated to be ness, as well as decreasing the variable costs of all businesses. The EUR 90 million positive, which is expected to mostly offset the accel- earlier-announced profit improvement impact of the Simpele and erated cost inflation. Kemi board investments and the closure of speciality paper produc- In the first quarter of 2011 M-real’s operating result, excluding tion at Simpele are included in the new profit improvement pro- non-recurring items, is expected to improve from the fourth quarter gramme. The full effect of the programme on operating profit, EUR of 2010. 70 million, is estimated to be reached from 2012 onwards. The

REPORT OF THE BOARD OF DIRECTORS 2010 37 Consolidated statement of comprehensive income

EUR million Note 1.1. – 31.12.2010 1.1. – 31.12.2009 Continuing operations Sales 4 2,605 2,432 Change in stocks of finished goods and work in progress 7 34 -71 Other operating income 6 108 252 Materials and services 7 -2,022 -1,801 Employee costs 7 -312 -406 Share of profit from associated companies 15 78 2 Depreciation, amortization and impairment charges 4, 8 -166 -356 Other operating expenses 7 -179 -319 Operating result 146 -267

Share of profit from associated companies 15 -24 -16

Net exchange gains/losses 9 -9 5 Other financial income 91225 Interest and other financial expenses 9 -77 -105 Result from continuing operations before tax 48 -358 Income taxes 10 -21 27 Result for the period from continuing operations 27 -331 Discontinued operations Result for the period from discontinued operations 5 0 -23 Result for the period 27 -354

Other comprehensive income Cash flow hedges 11 10 26 Available for sale investments 11 28 -115 Translation differences 11 12 5 Share of profit from associated companies 11 2 Income tax relating to components of other comprehensive income 11 -2 27 Other comprehensive income, net of tax 50 -57

Total comprehensive income for the period 77 -411

Attributable to: Shareholders of parent company 28 -358 Non-controlling interest -1 4 27 -354 Total comprehensive income for the period attributable to: Shareholders of parent company 78 -412 Non-controlling interest -1 1 77 -411 Basic and diluted earnings per share for result attributable to the shareholders of parent company, EUR 12

From continuing operations 0.09 -1.02 From discontinued operations 0.00 -0.07 Total 0.09 -1.09

The notes are an integral part of these financial statements.

38 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Consolidated balance sheet

EUR million Note 31.12.2010 31.12.2009 ASSETS

Non-current assets Goodwill 13 13 13 Other intangible assets 13 26 32 Tangible assets 13, 37 1,063 1,130 Investments in associated companies 15 265 210 Available for sale investments 16, 28 314 317 Other non-current financial assets 17, 25, 28 59 58 Deferred tax receivables 18 3 3 Derivative financial instruments 28, 29 8 5 1,751 1,768 Current assets Inventories 19 391 313 Accounts receivables and other receivables 20, 25, 28 516 497 Current income tax receivables 38 38 Derivative financial instruments 28, 29 13 19 Cash and cash equivalent 21, 25, 28 408 497 1,366 1,364

Total assets 3,117 3,132

SHAREHOLDERS´ EQUITY AND LIABILITIES

Equity attributable to shareholders of parent company 22 Share capital 558 558 Share premium account 667 667 Translation differences 23 2 Fair value and other reserves 223 194 Retained earnings -477 -505 994 916 Non-controlling interest 58 Total shareholders´ equity 999 924

Non-current liabilities Deferred tax liabilities 18 179 162 Post employment benefit obligations 23 85 89 Provisions 24, 37 35 60 Borrowings 25, 28 1,016 943 Other liabilities 26, 28 8 12 Derivative financial instruments 28, 29 18 18 1,341 1,284 Current liabilities Provisions 24, 37 7 44 Current borrowings 25, 28 334 467 Accounts payable and other liabilities 27, 28 415 381 Current income tax liabilities 36 Derivative financial instruments 28, 29 18 26 777 924

Total liabilities 2,118 2,208 Total shareholders' equity and liabilities 3,117 3,132

The notes are an integral part of these financial statements.

CONSOLIDATED BALANCE SHEET 39 Statement of changes in shareholders’ equity

Equity attributable to shareholders of parent company Fair value Share and Share premium Translation other Retained Non-control- EUR million Note capital account differences reserves earnings Total ling interest Total Shareholders’ equity, 1 January 2009 558 667 -9 259 -146 1,329 57 1,386

Result for the period -358 -358 4 -354 Other comprehensive income 11 Cash flow hedges 26 26 26 Available for sale investments -115 -115 -115 Translation differences 8 8 -3 5 Share of other comprehensive income of associated companies Income tax relating to components of other comprehensive income 3 24 27 0 27 Other comprehensive income total 11 -65 -54 -3 -57

Comprehensive income total 11 -65 -358 -412 1 -411 Related party transaction Metsä Botnia restructuring in Uruguay -50 -50 Shareholders’ equity, 31 December 2009 558 667 2 194 -504 916 8 924

Shareholders’ equity, 1 January 2010 558 667 2 194 -504 916 8 924

Result for the period 28 28 -1 27 Other comprehensive income 11 Cash flow hedges 10 10 10 Available for sale investments 28 28 28 Translation differences 12 12 12 Share of other comprehensive income of associated companies 1 1 2 2 Income tax relating to components of other comprehensive income 8 -10 -2 -2 Other comprehensive income total 21 29 50 50

Comprehensive income total 21 29 28 78 -1 77 Related party transaction Dividends relating to 2009 -2 -2 Shareholders' equity, 31 December 2010 558 667 23 223 -476 994 5 999

The notes are an integral part of these financial statements.

40 STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Consolidated cash ﬂow statement

EUR million Note 2010 2009 Cash flow from operating activities Result for the period 27 -354 Adjustments to the result, total 31 108 324 Interest received 12 20 Interest paid -76 -114 Dividends received 11 Other financial items, net -39 55 Income taxes paid -16 9 Change in working capital 31 -86 140 Net cash flow from operating activities -69 81

Cash flow arising from investing activities

Acquisition of other shares -2 -3 Capital expenditure -64 -70 Proceeds from disposal of joint venture, net of cash 5 0 274 Proceeds from disposal of shares in associated companies 33 0 46 Proceeds from disposal of other shares 41 3 Proceeds from sale of fixed assets 45 9 Proceeds from long-term receivables 01 Increase in long-term receivables 0 -49 Net cash flow arising from investing activities 20 211

Cash flow arising from financing activities

Proceeds from non-current liabilities 167 71 Payment of non-current liabilities -389 -483 Proceeds from current liabilities, net 162 -134 Change in current interest-bearing receivables, net 21 202 Dividends paid -2 0 Net cash flow arising from financing activities -41 -344

Change in cash and cash equivalents -90 -52

Cash and cash equivalents at beginning of period 497 550 Translation adjustments 1-1 Changes in cash and cash equivalents -90 -52 Cash and cash equivalents at end of period 21 408 497

The notes are an integral part of these financial statements.

CONSOLIDATED CASH FLOW STATEMENT 41 Notes to the ﬁnancial statement

1 Accounting policies In preparing these interim financial statements, the group has followed the same accounting policies as in the annual financial statements for 2009 except for the effect of changes required by the The principal accounting policies to be adopted in the preparation adoption of the following new standards, interpretations and amend- of the consolidated financial statements are as follows. ments to existing standards and interpretations on 1 January 2010:

Main operations IFRS 3 (Revised) Business Combinations. The revised standard con- M-real Corporation and its subsidiaries comprise a forest industry tinues to apply the acquisition method to business combinations, group, which operations are organized into four business segments: with some significant changes. For example, all payments to pur- Consumer Packaging, Office Papers, Speciality Papers and Market chase a business are to be recorded at fair value at the acquisition Pulp and Energy. The Group has manufacturing operations in five date, with contingent payments classified as debt subsequently re- countries in Europe. Europe is also the company’s main market area, measured through the income statement. There is a choice on an but its products are sold worldwide. The Group’s other operations acquisition-by-acquisition basis to measure the non-controlling are the head office along with ancillary functions that support busi- interest in the acquiree at fair value or at the non-controlling inter- ness operations. Group’s main product areas are folding boxboard, est’s proportionate share of the acquiree’s net assets. All acquisition- office papers and special papers. related costs should be expensed. The revised standard will affect M-real Corporation is Group’s parent company that is domiciled the accounting of all business combinations from 1 January 2010. in Helsinki. The registered address of the company is Revontulentie 6, 02100 Espoo Finland, IAS 27 (Revised) Consolidated and Separate Financial Statements. The copy of the annual report can be obtained in M-real’s website The revised standard requires the effects of all transactions with www.m-real.com or parent company’s head office Revontulentie 6, non-controlling interests to be recorded in equity if there is no change 02100 Espoo Finland. in control and these transactions will no longer result in goodwill or The Group consolidated financial statements were authorized for gains and losses. The standard also specifies the accounting when issue by the Board of Directors on 10 February 2011. control is lost. Any remaining interest in the entity is remeasured to According to Finnish Companies Act shareholders have possibil- fair value, and a gain or loss is recognised in profit or loss. The group ity to accept or reject the financial statements in General Meeting will apply IAS 27 (revised) prospectively to transactions with non- of shareholders after date of publication. General Meeting of share- controlling interests from 1 January 2010. holders also have possibility to decide to change financial statements. IFRIC 16 Net Investment in a Foreign Operation. IFRIC 16 clarifies Accounting policies and measurement bases the accounting for the hedge of a net investment in a foreign opera- M-real Corporation’s consolidated financial statements have been tion in an entity’s consolidated financial statements. It eliminates prepared in accordance with the International Financial Reporting the possibility of an entity applying hedge accounting for a hedge of Standards (IFRS), applying the IAS and IFRS standards and SIC and the foreign exchange differences between the functional currency IFRIC interpretations that were effective and approved by the EU at of a foreign operation and the presentation currency of the parent’s the date of the financial statements 31 December 2009. International consolidated financial statements. The requirements of IAS 21, ‘The Financial Reporting Standards refer to the standards and their inter- effects of changes in foreign exchange rates’, do apply to the hedged pretations approved for use in the EU by the Finnish Accounting Act item. The interpretation does not have an impact on the consolidated and the regulations set out pursuant to it in accordance with the financial statements. procedure defined in the EU decree (EC) no. 1606/2002. The notes to the consolidated financial statements also comply with the require- IFRIC 17 Distribution of non-cash assets to owners. The interpreta- ments of Finnish accounting and Community legislation supplement- tion is part of the IASB’s annual improvements project published in ing the IFRS regulations. April 2009. This interpretation provides guidance on accounting for The consolidated financial statements are presented in millions arrangements, whereby an entity distributes non-cash assets to of euros. shareholders either as a distribution of reserves or as dividends. The financial statements have been prepared based on historical IFRS 5 has also been amended to require that assets are classified costs, except for biological assets, derivative contracts and certain as held for distribution only when they are available for distribution other financial assets and liabilities that have been measured at fair in their present condition and the distribution is highly probable. The value. interpretation does not have an impact on the consolidated financial statements. Management assesses that in foreseeable future group has enough resources to continue as a going concern. The group has prepared IFRS 2 (Amendment) Share-based Payment – Group Cash-settled the financial statements on a going concern basis. Share-based Payment Transactions. The amendment to IFRS 2 clarifies that an entity that receives goods or services from its suppliers must apply IFRS 2 even though the entity has no obligation to

42 NOTES TO THE FINANCIAL STATEMENT make the required share-based cash payments. The interpretation IAS 36 (Amendment) Impairment of Assets. The amendment clari- does not have an impact on the consolidated financial statements. fies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing IAS 39 (Amendment) Financial instruments: Recognition and meas- is an operating segment as defined in IFRS 8, ‘Operating segments’ urement – Eligible Hedged Items’. The amendment prohibits desig- (that is, before the aggregation of segments with similar economic nating inflation as a hedgeable component of a fixed rate debt. It characteristics permitted by IFRS 8). The amendments do not have also prohibits including time value in the one-sided hedged risk a material impact on the consolidated financial statements. when designating options as hedges. The amendment does not have a material impact on the consolidated financial statements. IFRIC 16 (Amendment) Hedges of a net investment in a foreign operation. The amendment states that, in a hedge of a net invest- IFRIC 9 and IAS 39 (Amendment) Reassessment of embedded deriv- ment in a foreign operation, qualifying hedging instruments may be atives on reclassification. The amendments to IFRIC 9 and IAS 39 held by any entity or entities within the group, including the foreign clarify that on reclassification of a financial asset out of the ‘at fair operation itself, as long as the designation, documentation and value through profit or loss’ category all embedded derivatives have effectiveness requirements of IAS 39 that relate to a net investment to be assessed and, if necessary, separately accounted for in finan- hedge are satisfied. Management is assessing the impact of these cial statements. The amendments do not have an impact on the changes on the financial statements of the group. consolidated financial statements. New standards, interpretations and IASB published changes to 12 standards or interpretations in April amendments to existing standards 2009 as part of the annual Improvements to IFRSs project, which The following new standards, interpretations and amendments to were adopted by the group in 2010. The following presentation existing standards and interpretations issued during the year 2010 includes the most relevant changes to the group. will be adopted by the group in 2011:

IFRS 5 (Amendment) Non-current Assets Held for Sale and Discon- IAS 24 (Revised) Related Party Disclosures. The revised standard tinued Operations. The amendment clarifies that IFRS 5, ‘Non- simplifies the disclosure requirements for government-related enti- current assets held for sale and discontinued operations’, specifies ties and clarifies the definition of a related party. The revised stand- the disclosures required in respect of non-current assets (or disposal ard still requires disclosures that are important to users of financial groups) classified as held for sale or discontinued operations. It also statements but eliminates requirements to disclose information that clarifies that the general requirements of IAS 1 still apply, particularly is costly to gather and of less value to users. It achieves this balance paragraph 15 (to achieve a fair presentation) and paragraph 125 by requiring disclosure about these transactions only if they are (sources of estimation uncertainty) of IAS 1. The amendments do individually or collectively significant. The interpretation does not not have a material impact on the consolidated financial statements. have an impact on the consolidated financial statements.

IAS 1 (Amendment) Presentation of Financial Statements. The IAS 32 (Amendment) Financial Instruments: Presentation – Clas- amendment clarifies that the potential settlement of a liability by sification of Rights Issues. The amendment addresses the account- the issue of equity is not relevant to its classification as current or ing for rights issues (rights, options or warrants) that are denomi- non-current. By amending the definition of current liability, the nated in a currency other than the functional currency of the issuer. amendment permits a liability to be classified as non-current (pro- Previously such rights issues were accounted for as derivative lia- vided that the entity has an unconditional right to defer settlement bilities. However, the amendment requires that, provided certain by transfer of cash or other assets for at least 12 months after the conditions are met, such rights issues are classified as equity regard- accounting period) notwithstanding the fact that the entity could be less of the currency in which the exercise price is denominated. The required by the counterparty to settle in shares at any time. The amendment does not have an impact on the consolidated financial amendments do not have a material impact on the consolidated statements. financial statements. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. IAS 17 (Amendment) Leases. The amendment deletes specific guid- The interpretation clarifies the accounting when an entity renegoti- ance regarding classification of leases of land, so as to eliminate ates the terms of its debt with the result that the liability is extin- inconsistency with the general guidance on lease classification. As guished by the debtor issuing its own equity instruments to the a result, leases of land should be classified as either finance or creditor. IFRIC 19 requires a gain or loss to be recognised in profit operating using the general principles of IAS 17. The amendments or loss when a liability is settled through the issuance of the entity’s do not have a material impact on the consolidated financial state- own equity instruments. The amount of the gain or loss recognised ments. in profit or loss will be the difference between the carrying value of the financial liability and the fair value of the equity instruments

NOTES TO THE FINANCIAL STATEMENT 43 issued. The interpretation does not have an impact on the consoli- IAS 34 (amendment) Interim financial reporting. The change provides dated financial statements. guidance to illustrate how to apply disclosure principles in IAS 34 and add disclosure requirements around: IFRIC 14 (Amendment) Prepayments of a Minimum Funding Require- ment. The amendment is aimed at correcting an unintended conse- The circumstances likely to affect fair values of financial instruments quence of IFRIC 14. As a result of the interpretation, entities are in and their classification; Transfers of financial instruments between some circumstances not permitted to recognise some prepayments different levels of the fair value hierarchy; Changes in classification for minimum funding contributions as an asset. The amendment of financial assets; and Changes in contingent liabilities and assets. remedies this unintended consequence by requiring prepayments Management is assessing the impact of these changes on the finan- in appropriate circumstances to be recognised as assets. The inter- cial statements of the Group. pretation does not have an impact on the consolidated financial statements. The following standards, interpretations and amendments will be adopted in 2012 or later: IASB published changes to 7 standards or interpretations in July 2010 as part of the annual Improvements to IFRSs project, which IFRS 9 Financial Assets – Classification and Measurement. The will be adopted by the group in 2011. The following presentation standard represents the first milestone in the IASB’s planned replace- includes the most relevant changes to the group. The changes are ment of IAS 39. It addresses classification and measurement of still subject to endorsement by the European Union. financial assets. The next steps involve reconsideration and re- exposure of the classification and measurement requirements for IFRS 3 (amendments) financial liabilities, impairment testing methods for financial assets, a) Transition requirements for contingent consideration from a busi- and development of enhanced guidance on hedge accounting. Man- ness combination that occurred before the effective date of the agement is currently assessing the impact of the standard on the revised IFRS financial statements of the Group. b) Measurement of non-controlling interests c) Un-replaced and voluntarily replaced share-based payment awards IFRS 9 Financial Liabilities – Classification and Measurement. The second part of IFRS 9 was published in October 2010. It complements a) Clarifies that the amendments to IFRS 7, ‘Financial instruments: previously issued IFRS 9, ‘Financial instruments’ to include guidance Disclosures’, IAS 32, ‘Financial instruments: Presentation’, and on financial liabilities. The accounting and presentation for financial IAS 39, ‘Financial instruments: Recognition and measurement’, liabilities shall remain the same except for those financial liabilities that eliminate the exemption for contingent consideration, do not for which fair value option is applied. Management is currently apply to contingent consideration that arose from business com- assessing the impact of the standard on the financial statements of binations whose acquisition dates precede the application of IFRS 3. the Group. b) The choice of measuring non-controlling interests at fair value or at the proportionate share of the acquiree’s net assets applies only IFRS 7 (amendment) Disclosures – Transfers of financial assets. The to instruments that represent present ownership interests and amendment adds disclosure requirements related to risk exposures entitle their holders to a proportionate share of the net assets in derived from transferred assets. Additional disclosures, where the event of liquidation. All other components of non-controlling financial assets have been derecognised but the entity is still exposed interest are measured at fair value unless another measurement to certain risks and rewards associated with the transferred asset, basis is required by IFRS. are required. The amendment can increase the disclosures in the c) The application guidance in IFRS 3 applies to all share-based pay- notes to financial statements in the future. Management is currently ment transactions that are part of a business combination, includ- assessing the impact of the standard on the financial statements of ing unreplaced and voluntarily replaced share-based payment the Group. awards.The amendment does not have an impact on the consolidated financial statements. Principles of consolidation

IFRS 7 (amendment) Financial instruments: Financial statement Subsidiaries disclosures. The amendment emphasizes the interaction between Subsidiaries include all companies (including units established for quantitative and qualitative disclosures about the nature and extent a specific purpose) in which the Group has the right to control the of risks associated with financial instruments. Management is principles of finances and operations. This is usually based on hold- assessing the impact of these changes on the financial statements ing shares conferring more than one half of the votes. When evalu- of the Group. ating whether the Group has control over another company, the existence and impact of potential voting power that can be realised at the time of the review by exercising the right or performing an exchange. Subsidiaries are consolidated in the consolidated financial

44 NOTES TO THE FINANCIAL STATEMENT statements in their entirety starting on the day on which the Group accumulated after the acquisition. If the Group’s share of associated obtains control in them. The consolidation stops when the control companies’ losses is as large or larger than its share of the associ- ceases. ated company including any other unsecured receivables, the Group Mergers of business operations are processed using the acquisi- will not recognise additional losses unless it has commitments con- tion method. Consideration paid for the purchase of a subsidiary is cerning the associated companies and it has not made payments on determined as the fair value of paid assets, assumed liabilities and behalf of it. equity shares issued by the Group. The assigned consideration A proportion corresponding to the Group’s shareholding is elim- includes the fair value of an asset or liability arising as the result of inated from unrealised profits between the Group and its associated a conditional consideration arrangement. Acquisition-related costs companies. Unrealised losses are also eliminated unless the trans- are recognised as expenses as they materialise. Identifiable assets action indicates an impairment of the value of the asset. The account- obtained in a business merger and assumed liabilities and conditional ing principles followed by associated companies have been amended liabilities are valued at fair value at the date of acquisition. The hold- to correspond to the principles followed by the Group as necessary. ing of non-controlling shareholders in the target of the acquisition Profits or losses from investments in associated companies due to is recognised on an acquisition-specific basis either at fair value or the dilution effect are recognised in the income statement. an amount corresponding to the proportion of the net assets of the target of the acquisition held by non-controlling shareholders. Joint ventures The amount by which the sum of paid consideration, proportion The Group’s holdings in jointly controlled units are processed in the of non-controlling shareholders in the target and previously owned consolidated financial statements using proportional consolidation. proportion exceed the Group’s proportion of the fair value of the The Group’s proportion of the joint venture’s individual income items, acquired net assets is reported on the balance sheet as goodwill. If expenses, assets and liabilities and cash flows are consolidated in the total amount of consideration, proportion of non-controlling the corresponding items of the consolidated financial statements. shareholders and previously owned portion is lower than the fair For assets sold to a joint venture, the proportion of profits of losses value of the net assets and the transaction is a beneficial one, the belonging to third parties is recognised. The Group does not recog- difference is recognised in the income statement. nise its share of a joint venture’s profits or losses arising from assets Business transactions, receivables and liabilities between the purchased from it by the Group before the assets have been sold Group companies and unrealised profits are eliminated. Unrealised further to an independent party. However, a loss incurred by business losses are also eliminated. The accounting principles followed by transactions will be recognised immediately if it indicates a decrease subsidiaries have been amended to correspond to the principles in the net realisation value or impairment of current assets. followed by the Group as necessary. Oy Metsä-Botnia Ab, Äänevoima Oy and Ääneverkko Oy have been consolidated on a proportionate basis line by line. After Metsä Botnia Transactions with non-controlling shareholders transaction in December 2009 Metsä-Botnia is handled as an asso- Business transactions with non-controlling shareholders are proc- ciated company from 8 December 2009 on. essed in the same way as those with Group shareholders. When shares are purchased from non-controlling shareholders, the dif- Transactions in foreign currency ference between the consideration paid and the proportion of the The figures concerning the profit and financial position of the Group net assets in the subsidiary purchased is recognised in equity. Also, units are presented in the currency that is used in the primary oper- profit or loss from sale of shares to non-controlling shareholders is ating environment of the unit in question. The consolidated financial recognised in equity. statements are presented in euros, which is the parent company’s The non-controlling interest in the accumulated losses is recog- operating and reporting currency. Business transactions denomi- nised in the consolidated financial statements up to the amount of nated in foreign currencies are recognised in the operating currency the investment. using the rate of the transaction date. Monetary items denominated in foreign currencies are translated into the operating currency using Associated companies the rate of the closing date. Non-monetary items in foreign curren- Associated companies include all companies in which the Group has cies recognised at fair value have been translated into the operating considerable influence but no control. Usually, significant influence currency using the rate of the date on which the value was deter- is based on a shareholding conferring 20–50 per cent of the votes. mined. Otherwise, non-monetary items have been recognised using Investments in associated companies are processed using the equity the rate of the transaction date. method, and they are initially entered at cost. The Group’s shares in Any gains or losses resulting from transactions in foreign cur- associated companies also include the goodwill measured at the rencies, and from the translation of monetary items, are recognised time of acquisition less any impairment. under financial income and expenses with the exception of liabilities The Group’s share of profits or losses of associated companies classified as hedges for net investment in a foreign entity, for which following the acquisition is recognised in the income statement, and the currency gains and losses are entered for the part of hedge its proportion of changes in equity after the acquisition is recognised proven effective in the translation differences in other comprehensive in equity. The book value of the investment is adjusted for changes income.

NOTES TO THE FINANCIAL STATEMENT 45 The income statements of Group companies whose reporting cash flow. In this valuation, information received from the market is currencies are other than euro are translated into euros using aver- usually used, and factors specified by the Group itself are used as age exchange rates for the reporting period, and their balance sheets little as possible. Changes in fair value are recognised under other at the exchange rates prevailing at the balance sheet date. Transla- comprehensive income and presented in the fair value reserve, tak- tion differences arising on translation and on applying the purchase ing the tax effect into account. Accumulated changes in fair value method of consolidation are entered in other comprehensive income. are transferred from equity to profit and loss as a correction of clas- In conjunction with divestments of subsidiaries, either by selling or sification when the investment is divested or its value has impaired by dissolving, translation differences accumulated by the time of so that an impairment loss is to be recognised for the investment. divestment are entered in the income statement as part of the gain An impairment of financial assets must be charged, if the book or loss from the divestment. value of the financial asset exceeds the amount of money obtainable for it, the assessment of which is based on, for example, the debtor’s Financial assets financial difficulties, neglect of payment or disappearance of an Financial assets have been classified according to the IAS standards active market for the item in question. as follows: 1) Financial assets at fair value through profit or loss, 2) Cash and cash equivalents comprise cash in hand, deposits held Held-to-maturity investments, 3) Loans and other receivables and at call with banks and other short-term highly liquid investments. 4) Available-for-sale financial assets. Categorisation depends on the Cash and cash equivalents include items with original maturities of purpose for which the assets were acquired and is made at the time three months or less from the date of acquisition. they were originally recorded. Financial assets are initially recognised The Group assesses at each balance sheet date whether there is at fair value. Transaction costs are included in the fair value unless objective evidence of impairment of a financial asset or group of the item is measured at fair value through profit and loss. Financial financial assets. Objective evidence of impairment of available-for- assets are derecognised when the Group has lost the contractual sale financial assets includes a significant or long-term decrease of right to receive cash flows or it has transferred substantially risks the value of the investment under the acquisition cost. If the fair and rewards of ownership to outside the Group. Financial asset value of investments has substantially gone under acquisition cost purchases and sales are recorded at the settlement date. and exceeded the period of time defined by the Group, it shall indicate Investments acquired for trading have been classified as financial that the value of the investment may be impaired. If there is evidence assets at fair value through profit or loss. These may include, for of impairment, the accumulated losses recognised in fair value example, short-term and long-term money market deposits, com- reserve shall be transferred to profit and loss. Impairment losses of mercial papers and bonds. Financial assets held for trading have equity instruments classified as available for sale financial assets been recognized at fair value based on price quotations in the mar- shall not be reversed through profit and loss. ket. Unrealised and realised gains and losses due to changes in fair The criteria for determining whether there is objective evidence value are recognized immediately in the income statement during of impairment of loans and other receivables include: the financial period in which they are incurred. - significant financial problems of the issuer or debtor; Derivatives not included in hedge accounting are also classified - breach of contractual terms and conditions, such as defaults on as financial assets held for trading. Their accounting principles and interest or capital payments; principles of determining their fair value are described below. - concessions given by the Group to the debtor due to its financial Held-to-maturity investments include those investments with a or legal reasons related to its financial problems that it would not specific date of maturity which the Group has full intention and abil- otherwise contemplate giving ity to retain until the date of their maturity. The Group has no held- - probability of the debtor’s bankruptcy to-maturity investments. Loans and other receivables are non- - the financial asset in question no longer having an active market derivative financial assets with fixed or determinable payments that due to financial problems. are not quoted in an active market. Held-to-maturity investments include those investments which Impairment testing of trade receivables is described below in more the Group has full intention and ability to retain until the date of their detail with regard to the relevant accounting principles. maturity. Loans and other receivables comprise external and The amount of the impairment loss is determined as the differ- Metsäliitto Group’s internal accounts, loan and other receivables. ence between the carrying amount of the financial asset and the Financial assets designated in these categories are carried at amor- current value of the estimated cash flows of the financial asset dis- tised cost using the effective interest method. counted using the original effective interest rate (excluding any non- Available-for-sale financial assets are publicly quoted and realised future credit losses). Impairment of financial assets has to unquoted shares. They are valued at fair value, or if fair value cannot be recorded if the carrying amount of the financial asset exceeds its be reliably determined, at cost less impairment. The fair values of recoverable amount. The carrying amount of the asset is decreased publicly quoted shares are based on the share price at the date of and the loss is entered in the consolidated income statement. If the the financial statements. If there are no quoted prices for available- amount of the impairment loss decreases during a subsequent period for-sale financial assets, the Group applies different types of valu- and the decrease can be objectively linked to an event realised after ation in their valuation, such as recent transactions and discounted

46 NOTES TO THE FINANCIAL STATEMENT the recording of the impairment (such as the debtor’s credit rating are presented in Notes to the accounts no. 29. The maturity analysis improving), the impairment loss is reversed in the income statement. of cash flow hedge accounting is presented in Notes to the accounts no. 30. Financial liabilities The Group has classified all financial liabilities under “Other liabil- Currency hedging ities”. When a financial liability is entered in the accounts, it is meas- To hedge its foreign currency exposure, the Group has partly applied ured at cost, which is equal to the fair value of the consideration hedge accounting in accordance with IAS 39 as so-called cash flow received for it. Transaction costs are included in the original carrying hedge. A separately defined portion of the highly probable forecast amount of all financial liabilities. Subsequently, all financial liabilities cash flow of sales in USD, GBP and SEK is the object of hedge are measured at amortized cost using the effective interest method. accounting. A change in the fair value of a derivative hedge (currency Derivative contracts for which hedge accounting is not applied are forward contracts) proven effective is entered directly in sharehold- classified as ”Financial liabilities at fair value through profit or loss”. ers’ equity in the fair value reserve, and only after the realisation of Financial assets and liabilities are classified according to IAS 39 and the forecasted sales transaction it is entered in the income statement fair values are presented in the Note 28. as an adjustment of the hedged sales. Changes in the fair value of other currency derivatives to hedge foreign currency exposure are Derivative financial instruments and hedge accounting recognized under financial items in the income statement. The fair Derivative financial instruments are initially recognized in the bal- values of forward foreign exchange contracts are based on forward ance sheet as fair value, which equals to it’s cost and thereafter prices prevailing at the balance sheet date, and currency options are during their term-to-maturity are revalued at their fair value. Gains stated at market rates in accordance with the Black&Scholes mod- and losses resulting from recognition at fair value are treated in el’s fair value. accounting as required with regard to the intended use of the deriv- The hedging of a net investment in a foreign entity is dealt with ative in question. Derivatives are initially classified either as 1) Hedges in the books like cash flow hedge. Changes in the fair value of a of the exposure to changes in fair value of receivables, liabilities or derivative and loan hedge proven effective are recognized directly firm commitments, 2) Hedges of the cash flow from a highly prob- against the translation differences accumulated in shareholders’ able forecast transaction, 3) Hedges of a net investment in a foreign equity. The ineffective portion of the hedge as well as the effect of entity, 4) Derivatives to which it has been decided not to apply hedge the interest rate element of forward exchange contracts are recorded accounting or 5) Derivatives used for trading. Derivatives that do not in financial income and expenses in the income statement. qualify for hedge accounting are classified as financial assets or financial liabilities at fair value through profit or loss. Interest hedging When applying hedge accounting, at the inception of a hedging To hedge the fair value of separately defined loans with derivatives relationship the Group has documented the relationship between contracts (interest rate swaps and currency swaps), the Group has the hedged item and the hedging instruments as well as the hedg- applied hedge accounting in accordance with IAS 39 as so-called fair ing strategy observed. To meet the requirements of hedge account- value hedge. Changes in the fair value of both defined loans and ing, the Group has also continuously carried out effectiveness test- derivative contracts that meet the criteria for effective hedge accounting to verify that changes in the fair value of the hedging instrument ing are recognized in financial income and expenses through profit for each hedging relationship cover effectively enough, with respect and loss. The fair value of loans is calculated in respect of interest to the hedged risk, any changes in the fair value of the hedged item. rate risk and currency risk elements, but any changes in the com- Changes in the fair value of derivatives that meet the criteria for pany’s credit risk premium have not been taken into account. fair value hedging are recognised through profit and loss. Changes Moreover, to hedge its interest rate exposure, the Group has partly in the fair value of a hedged asset or liability item are presented applied hedge accounting in accordance with IAS 39 to hedging of similarly in terms of the hedged risk. Changes in the fair value of contractual cash flows of floating interest rates of loans as so-called the effective portion of derivative instruments that meet the criteria cash flow hedge. A change in the fair value of derivative contracts for cash flow hedging are recognised directly in a hedging reserve (interest rate swaps) is entered directly in shareholders’ equity in in equity. The gains and losses recognised in equity are transferred fair value reserve. to the income statement in the period in which the hedged item is All other interest rate derivatives, to which hedge accounting is entered in the income statement. When the criteria for hedge not applied, are stated at their fair value, and changes in fair value accounting are no longer fulfilled, a hedging instrument matures or are recognized under financial items in the income statement. The is sold or when the gain or loss accrued from hedging the cash flow fair values of forward rate agreements, interest rate futures and remain in equity until the forecast transaction takes place. However, options are based on quoted market rates at the balance sheet date, if the forecast hedged transaction is no longer expected to occur, the and interest rate swaps and currency swaps are measured at the gain or loss accrued in equity is recognised immediately in the income present value of future cash flows, with the calculation based on statement. The fair value of derivatives is disclosed in current non- market interest rate yield curve. interest-bearing receivables or liabilities. The fair values of derivatives classified in accordance with the applied accounting practice

NOTES TO THE FINANCIAL STATEMENT 47 Commodity risk hedging Group no longer has rights of possession or control on the product. To hedge its electricity price risk exposure, the Group has partly Usually, this refers to the moment on which the product has been applied hedge accounting in accordance with IAS 39 as so-called delivered to the customer in accordance with the agreed terms of cash flow hedge. A separately defined portion of the highly probable delivery. forecast cash flow of electricity purchases in Finland and Sweden is the object of hedge accounting. A change in the fair value of a deriv- The Group’s terms of delivery are based on the Incoterms 2000 ative hedge (forward electricity contracts) proven effective is entered delivery terms, a compilation of definitions of delivery terms pub- directly in shareholders’ equity in fair value reserve, and only after lished by the International Chamber of Commerce. The Group’s most the realisation of the forecast electricity purchases sales it is entered common delivery terms concerning sales are: in the income statement as an adjustment of the hedged purchases - D terms, according to which the Group has to deliver the products or sales. The ineffective part of electricity derivatives classified to to the agreed destination. The sale is concluded at the moment of hedge accounting and other commodity derivatives hedging com- delivery to the buyer at the agreed destination at the agreed time. modity price risk are recognized at market rates at the balance sheet - C terms, according to which the seller arranges and pays for date, and changes in fair value are entered in the income statement transport to the agreed destination and certain other expenses. under ”Other income and expenses”. However, the Group’s responsibility for the products ends after the Embedded derivatives are valued at fair value, and changes in products have been handed over to the carrier in accordance with fair value are entered under financial items in the income statement. the term used. The sale is concluded at the moment when the The amount of embedded derivatives at the M-real Group is insig- seller hands the goods over to the carrier for transport to the nificant. agreed destination. - F terms, according to which the buyer arranges for the transport Segment reporting and is responsible for it. The sale is concluded when the products The Group’s operating segments are comprised of the Group’s busi- have been delivered to the buyer’s carrier. ness areas. The business areas produce different products and services, and they are managed as separate units. If local rules result in invoicing that deviates from the rules specified The operating segments are reported uniformly with internal above, the impact of such income has been calculated and adjusted. reporting submitted to the chief operational decision-maker. The Revenue from the sale of services is recorded when the services Corporate Management Team has been appointed as the chief have been rendered. Dividend income is recognised when the right operational decision-maker in charge of allocating resources to the to receive a payment is established. Interest income is recognised operating segments and evaluating their performance. by applying the effective interest rate method. The same accounting policies are applied in segment reporting as for the Group as a whole. Transactions between segments are Delivery and handling costs based on market prices. All sales and other transactions between Costs arising from the delivery and handling of goods are recorded segments are eliminated on consolidation. in materials and services in the income statement.

Non-current assets held for sale and discontinued Research and development expenditure operations Research and development expenditure is recognized as an expense An asset item/operation is classified as held for sale when the amount at the time it is incurred. Development expenditure is capitalized if corresponding to its carrying value will be generated primarily from it is probable that a development project will generate future eco- sale of the asset item. nomic benefit and the costs can be measured reliable. Capitalized Asset items classified as held for sale are measured at the lower development costs are amortised over their expected useful future of their carrying amount and fair value less costs to sell. Asset items lives. To date, M-real does not have capitalized development expend- classified as held for sale are not depreciated or amortized. iture. A discontinued operation is one which the Group has disposed of or that is classified as held for sale and represents a separate major Borrowing costs line of business or geographical area of operations. The profit or Borrowing costs are generally recognized as an expense in the period loss from discontinued operations after tax is shown as a separate in which they are incurred. When an item of property, plant and item in the consolidated income statement. equipment is involved in a major and long-term investment project, the borrowing costs directly due to the acquisition and construction Recognition of income of the asset are included in the asset’s cost. Sales include income from the sale of products and services as well as raw materials and supplies corrected for indirect taxes, discounts Income taxes and other sales adjustment items. Income from the sale of goods is Tax expense in the income statement is comprised of the current recognised as income when the risks and benefits associated with tax and deferred taxes. Current tax and deferred tax that relates to the ownership of the product are transferred to the buyer and the items that are recognised in comprehensive income shall be recog-

48 NOTES TO THE FINANCIAL STATEMENT nised in comprehensive income. Income taxes are recorded on an Emission rights accrual basis for the taxable income of each reporting unit, applying Allowances received by the governments free of charge have initially the tax rate in force in each country at that time. Taxes are adjusted been recognised as intangible assets and the corresponding govern- for any taxes for previous periods. ment grant as advance payment in liabilities based on fair value at Deferred taxes and tax assets are calculated on all the temporary the date of initial recognition. Allowances are measured at its cost differences between the accounting value and the tax base. Deferred or at their fair value if less. Allowances are not amortized. The emis- tax liabilities are not recognised when the asset or liability in ques- sions produced are recognised as cost and as liability together with tion is one that is originally entered at the carrying amount and does the corresponding government grant as income both based on the not concern the merging of business operations, and the recognition value at the date of initial recognition. So rights consumed that are of such an asset or liability does not have an impact on the account- within the original range have no positive or negative effect on profit ing result or taxable income at the date of the transaction. No deferred for the period. The costs of purchasing additional rights to cover taxes are recognised for non-deductible goodwill, and no deferred excess emissions or the sale of unused rights have effect on profit. taxes are recognised for undistributed profits of subsidiaries to the extent that the difference will not likely realise in the predictable Other intangible assets future. The cost of patents, licences and trademarks having a finite useful The greatest temporary differences result from impairment on life is capitalized in the balance sheet under intangible assets and property, plant and equipment, fair value of available-for-sale finan- amortized on a straight-line basis over their useful lives in 5–10 cial assets and derivative instruments, defined benefit plans, unused years. tax losses and measurement at fair value in connection with acqui- The estimated economic lives of intangible assets are reviewed sitions. at each balance sheet date and if they differ significantly from previ- Deferred taxes have been calculated by applying the tax rates in ous estimates, the depreciation periods are altered accordingly. force by the balance sheet date. Tax assets are recognized to the extent that it is probable that taxable profit will be available against which a deductible temporary difference can be utilized. Property, plant and equipment Property, plant and equipment is measured at original cost. The Intangible assets property, plant and equipment of acquired subsidiaries is measured at fair value at the time of the purchase. Property, plant and equip- Goodwill ment is presented in the balance sheet at cost less accumulated Goodwill is the amount by which the cost exceeds the Group’s share depreciation and impairment losses. For investments in property, of the identifiable net assets of the acquired subsidiary at the date plant and equipment requiring a long construction time, the interest of acquisition. Goodwill arising from the acquisition of subsidiaries incurred during construction is capitalized in the balance sheet as is included in intangible assets. Goodwill is tested annually for impair- part of the asset for the time that is necessary for bringing the asset ment and recognised on the balance sheet at cost less accumulated to working condition for its intended use. impairment losses. Impairment losses from goodwill are not can- Property, plant and equipment is depreciated on a straight-line celled. The book value of goodwill associated with a divested company basis over the following expected useful lives: influences the capital gain or loss. Goodwill is allocated to cash-generating units for impairment Buildings and constructions 20–40 years testing. Goodwill is allocated to those units or groups of units which Machinery and equipment are expected to benefit from the merger of business operations Heavy power plant machinery 20–40 years where the goodwill has emerged, specified by reporting segments. Other heavy machinery 15–20 years Lightweight machinery and equipment 5–15 years Other intangible assets Other tangible assets 5–20 years

Computer software Land and water areas are not depreciated. If the significant parts of Expenditure on developing and building significant new computer an item of property, plant and equipment have useful lives of differ- software programs are recognized in the balance sheet as an intan- ing length, each part is depreciated separately. gible asset and amortized over its useful life, which is not to exceed The estimated economic lives are reviewed at each balance sheet five years. Direct expenses to be capitalized include consultancy and date and if they differ significantly from previous estimates, the expert advisory fees paid to outside parties, software licences depreciation periods are altered accordingly. obtained for the application, staff costs to the extent that they can Subsequent costs of an item of property, plant and equipment be allocated directly to the project as well as other direct costs. shall be recognised as an asset if and only if it is probable that future Maintenance and operating expenditure related to computer software economic benefits associated with the item will flow to the entity and EDP applications is recorded as an expense in the reporting and the cost of the item can be measured reliably. The carrying period in which it has been incurred. amount of a component which has been replaced with new a com-

NOTES TO THE FINANCIAL STATEMENT 49 ponent shall be derecognised. All other repair and maintenance financial period with regard to any reasons for cancelling the impair- expenditures are recognised in profit and loss as incurred. ment. Gains and losses arising on the sale and decommissioning of items of property, plant and equipment are calculated as the differ- Biological assets ence between the net revenue obtained and the carrying amount. Biological assets (living trees) are measured at fair value less the Capital gains and losses are included in operating profit in the income estimated expenses of making a sale. The fair value of a stand of statement. trees, excluding young seedlings, is based on the present value of When a non-current item of property, plant and equipment is expected cash flows (revenue and expenses). The calculations take classified as held for sale, the recording of depreciation on said asset into account the future growth of the stand as well as the environ- is discontinued. A non-current asset held for sale is measured at mental protection-related limits on the forests. The calculation of the lower of the carrying amount or the fair value less the expenses income from fellings and silvicultural costs is based on the prevail- necessary to make the sale. ing price level as well as the company’s view of the future trend in prices and costs. Changes in the fair value of a stand of trees are Government grants included in operating profit during the financial period. At 31 Decem- Government grants received for the purpose of purchasing property, ber M-real has no biological assets any more. plant and equipment and similar are entered as deferred income in balance sheet liabilities and recognized in other operating income Inventories during the actual useful life of the asset. Other grants are recorded Inventories are measured at the lower of cost and net realizable as other operating income in the income statement for the financial value. The cost of finished and semi-finished products comprises periods during which they are matched with the corresponding raw materials, direct labour expenses, other direct expenses as well expenses. as an appropriate share of fixed and variable production overheads. The normal capacity of the production facilities is used as the divisor Leases in allocating overheads to the different production units. Leases on property, plant and equipment for which the Group The value of inventories is determined using the FIFO (first-in, assumes substantially all the risks and rewards incident to owner- first-out) method or, alternatively, the weighted average cost method ship of the asset are classified as finance lease agreements. A finance depending on the nature of the inventories. Net realizable value is lease agreement is recognized in the balance sheet at an amount the estimated selling price that is obtainable less the costs of com- equal at the inception of the lease to the fair value of the leased pletion and the costs necessary to make the sale. property or, if lower, at the present value of the minimum lease payments. The corresponding lease payment liability is recorded in Accounts receivables interest-bearing liabilities under other non-current liabilities. An Accounts receivables are measured at the expected net realizable asset obtained on a finance lease is depreciated over the useful life value, which is the original invoicing value less estimated impairment of the asset or, if shorter, the lease term. Lease payments are split provisions on the receivables. Impairment test is carried for all between financial expenses and a reduction in the lease liabilities. receivables at bankruptcy or overdue over 180 days, when there is Lease agreements in which the risks and rewards incident to a justifiable reason to assume that the Group will not receive pay- ownership remain with the lessor are treated as other lease agreement for the invoiced amount according to the original terms. ments (operating leases). Lease payments under an operating lease are recognized as an expense in the income statement on a straight- Provisions line basis over the lease term. A provision is recognized in the balance sheet when the Group has a legal or constructive obligation as a result of a past event and it is Impairment of assets not included in financial assets probable that settlement of the obligation will require a financial No depreciation is recognised for assets with an unlimited useful payment or cause a financial loss, and a reliable estimate can be life, such as goodwill; they are annually tested for impairment. made of the amount of the obligation. Where the effect of the time Depreciated assets are always tested for impairment when events value of money is material, the amount of a provision is the present or changes in conditions indicate that it is possible that the monetary value of the expenditures expected to be required to settle the obli- amount corresponding to the book value of the assets might not be gation. If some or all of the expenditure required to settle a provision recoverable. The amount by which the book value of the asset exceeds is expected to be reimbursed by another party, the reimbursement the recoverable amount is recognised as an impairment loss. The is recorded in the balance sheet as a separate asset, but only if it is recoverable amount is the higher of the fair value of the asset less virtually certain that reimbursement will be received. expenses arising from its sale or its service value. Assets are classified for testing for impairment to the lowest levels at which the Restructuring cash flows can be separately identified (cash-generating units). A restructuring provision is recorded for the financial period when Assets not included in financial assets, apart from goodwill, for which the Group has incurred a legal or constructive obligation to make a impairment losses are recognised, are reviewed at the end of each payment. Termination payments are recorded when a detailed plan

50 NOTES TO THE FINANCIAL STATEMENT has been made of the restructuring and the main points of the plan Share-based payment have been communicated to the employees who are affected by the A share-based incentive programme in which the payments are arrangement. made either with equity instruments or cash has been established for the company’s top executives. The benefits issued in connection Onerous contracts with the scheme are measured at fair value at the date of granting A provision is recognised for an onerous contract, when the unavoid- them and charged to the income statement evenly during the vest- able costs of meeting the obligations under the contract exceed the ing period. In schemes where the payments are made in cash, the economic benefits expected to be received under it. entered liability and change in its fair value is correspondingly scheduled as expenses. The effect of the schemes on profit is presented Environmental obligations under employee costs. Costs arising from environmental remediation which do not increase present or future revenue are recorded as annual expenses. Envi- Earnings per share ronmental liabilities are recorded in accordance with present envi- Undiluted earnings per share are calculated using the weighted ronmental protection laws and regulations when it is probable that average number of shares during the reporting period. In calculat- the obligation which has arisen and its amount can be estimated ing earnings per share adjusted for the effect of dilution, the average reasonably. number of shares is adjusted for the dilution effect of any equity instruments that have been issued. In calculating earnings per share, Employee benefits earnings are taken to be the reported earnings attributable to the parent company’s shareholders. Earnings, both undiluted and Pension benefits adjusted for the effect of dilution, are calculated separately for con- Pension plans are classified as either defined benefit or defined tinuing and discontinued operations. contribution plans. Under a defined contribution plan, the Group pays fixed contributions to a separate unit. The Group has no legal Dividends payable or constructive obligation to pay further contributions if the recipient Dividends payable by the company are recorded as a decrease in of the payments is not able to pay the pension benefits in question. equity in the period during which shareholders, in a general meet- All plans that do not meet these requirements are considered defined ing, have approved the dividend for payment. contribution plans. Contributions paid to defined contribution pension plans are expensed in the period to which they relate. Comparative figures The Group’s obligations associated with defined benefit pension Where necessary, comparative figures have been classified to con- plans have been calculated separately for each plan using the Pro- form to changes in presentation in the current year. jected Unit Credit Method. Pension expenditure is expensed for the employees’ period of service based on calculations made by authorised actuaries. In calculating the current value of the pension obligation, the market return of high-quality bonds issued by the company is used as the discount rate. The maturity of the bonds and treasury bills essentially corresponds to the maturity of the calculated pension obligation. The pension plan assets measured at fair value at the balance sheet date, unrecognised actuarial gains and losses and retroactive work performance are deducted from the present value of the pension obligation to be recognised in the balance sheet. Actuarial gains and losses are recognised in the income statement over the expected average remaining working lives of the employees to the extent that such gains and losses exceed the greater of 10 per cent of the present value of the benefit obligation and 10 per cent of the fair value of any plan assets. Expenditure based on retroactive work performance is charged to the income statement in fixed instalments over the period during which they are paid-up. If the benefits are paid-up immediately, they are immediately charged to the income statement. Gains and losses resulting from the restriction of a defined benefit plan or performance of the obligation are recognised at the time of the restriction or fulfilment.

NOTES TO THE FINANCIAL STATEMENT 51 2 Key accounting estimates applied in the ﬁnancial be fulfilled. The expense measured at the time of granting the shares statements and discretion used in the accounting is based on an estimate of the number of shares to which a right is principles believed to arise at the end of the vesting period. Changes in the estimates are recognised in the income statement. A total of EUR 0.2 million was recognised as an expense on the financial period Preparing IRFS-compliant financial statements requires the use of ended on 31 December 2010. certain key accounting estimates. In addition, it requires the management to use its discretion in applying the accounting principles. Financial instruments at fair value The estimates made and discretion-based decisions are continuously A fair value is determined for financial instruments not traded on an evaluated, and they are based on prior experience and other factors, open market using valuation methods. Discretion is used in select- such as expectations concerning future events. The expectations are ing the various methods and making assumptions based primarily considered to be reasonable, taking the circumstances into account. on the market conditions prevailing at the end date of each reporting The topics that are associated with key assumptions and estimates period. The greatest item at fair value not traded on an open market in terms of consolidated financial statements and areas that require is the investment in Pohjolan Voima shares, reported under availa- significant discretion are described below. ble-for-sale financial assets. Their price is determined based on realised transactions and an analysis of discounted cash flows. The Key accounting estimates carrying amount of available-for-sale financial assets would be estimated to be EUR 11 million lower or EUR 8 million higher should Impairment testing the rate used for discounting the cash flows differ by 10 per cent TThe Group annually tests the goodwill and intangible assets not yet from the rate estimated by the management. The carrying amount ready for impairment. Testing for impairment is carried out for other of available-for-sale financial assets would be estimated to be EUR long-term assets if there are indications that the value of the assets 37 million higher or EUR 38 million lower, if energy prices used for might be impaired. The recoverable amounts of cash-generating calculating the fair value differ by 10 per cent from prices estimated units are based on calculations of value in use. These calculations by the management. require that estimates are made. The Zanders cash-generating unit that is included in the Speciality Papers operating segment gener- Provisions ated an impairment loss of EUR 28 million in 2010. The carrying A provision is recorded when the Group has a legal or constructive amount of the units were reduced to correspond to their recoverable obligation as a result of a previous event and it is probable that the amount. In Office Papers’ Husum Papermill some EUR 9 million liability for payment will realise. The provisions are determined based impairment loss made earlier was reversed. A sensitivity analysis on previous experience. A provision for restructuring is made when of the substantial assumptions used in the impairment testing and M-real has composed a detailed restructuring plan and communi- the impact of changes in them on the amount of impairment is pre- cated about the matter. A recorded provision illustrates the manage- sented in Note 8. ment’s best estimate of the current value of future expenses, but actual expenditure may differ from the estimate. Provisions amounted Pension plans to EUR 42 million on M-real’s balance sheet on 31 December 2010. The current value of the pension obligations depends on various factors that are determined using various actuarial assumptions. Income taxes The discount rate is also included in the assumptions used in deter- The management’s discretion is required for determining the taxes mining the net expenditure (or income) arising from pension plans. based on the result for the period, deferred tax assets and liabilities Changes in these assumptions have an effect on the carrying amount and the extent to which deferred tax assets are recorded. The Group’s of the pension obligations. balance sheet at 31 December 2010 did not include any deferred tax The appropriate discount rate is determined at the end of each assets recognised for confirmed losses. The Group is subject to year. This is a rate that should be used in determining the current income taxation in several countries. Estimating the total amount value of the future cash flows estimated to be required to fulfil the of income taxes at the level of the entire Group requires significant pension obligations. In determining the appropriate discount rate, discretion. The final amount of tax is uncertain in terms of several the interest rates of long-term treasury notes or similar instruments business operations and calculations. The Group forecasts future are taken into consideration. Other key assumptions concerning tax audits and recognises liabilities based on estimates on whether pension obligations are based on the current market conditions. further taxes will need to be paid. If the associated final tax differs from the originally recorded amounts, the difference has an effect Share-based reward scheme on both the tax assets and liabilities based on the taxable income The share-based incentive arrangements granted to the Group’s for the period and deferred tax assets and liabilities in the period key employees are measured at fair value at the time of granting. during which they are observed. The fair value is charged to the income statement over the vesting period during which all the requirements for the right to arise must

52 NOTES TO THE FINANCIAL STATEMENT Key discretion-based decisions in applying the accounting 3 Management of ﬁnancial risks policies The financial risks associated with business operations are managed Inventories in accordance with the financial policy endorsed by the Board of The Group regularly reviews its inventories for situations where the Directors and the senior management of the company. The policy inventories exceed their real value, contain downgraded items or defines focal instructions on the management of foreign currency, their market value falls below the acquisition cost, and records a interest rate, liquidity and counterparty risks, and for the use of deduction item that reduces the carrying amount of the inventories derivative financial instruments. Correspondingly, commodity risks in the case of such deductions. The management must make esti- are managed according to the company’s commodity risk policy. The mates of the future demand for the products for the purpose of such purpose is to protect the company against major financial and com- review. Any changes in these estimates might lead to an adjustment modity risks, to balance the cash flow and to allow the business units in the carrying amount of the inventories in future periods. M-real’s time to adjust their operations to changing conditions. balance sheet included inventories amounting to EUR 391 million Metsä Group Financial Services Oy (Metsä Finance) is specialized on 31 December 2010. in finance and functions as the Group’s internal bank. M-real’s holding in Metsä Finance is 51 per cent and Metsäliitto Cooperative’s Accounts receivables holding is 49 per cent. Financial operations have been centralised Accounts receivables are recognised according to the original invoiced to Metsä Finance, which is in charge of managing the Group com- amount less impairment losses and refunds due to returns. Impair- panies’ financial positions according to the strategy and financial ment losses are recognised on a case-by-case basis and based on policy, providing necessary financial services and acting as an advi- previous experience when there is objective proof that the receivable sor in financial matters. cannot be collected in full. If the customers’ financial position weak- ens so that it affects their solvency, further impairment losses might Foreign currency risk need to be recognised for future periods. M-real’s balance sheet at The Group’s foreign currency exposure consists of the risks associ- 31 December 2010 included trade receivables amounting to EUR ated with foreign currency flows, translation risk of net investments 360 million and impairment losses recorded for trade receivables in foreign entities and economic currency exposure. Most of the amounting to EUR 2 million. Group’s costs are incurred in the euro zone and to some extent in Sweden, but a significant part of the sales is in other currencies. Impairment of equity investments classified as Sales revenue may therefore vary because of changes in exchange available-for-sale financial assets rates, while production costs remain unchanged. Product prices are The question when the value of available-for-sale equity investments also often quoted in currencies other than the home currency. The is impaired is solved according to the guidelines of IAS 39. This foreign currency transaction exposure is consisting of foreign cur- requires the use of significant discretion, e.g., in terms of for how rency denominated sales revenue and costs. The exposure is includ- long and to what extent the fair value of the investment has been ing foreign currency denominated balance sheet exposure consist- lower than the acquisition cost. In addition, it is necessary to estimate ing of sales receivables and accounts payable and a quarter share the financial position of the investment object regarding the near- of the annual contracted or estimated net currency cash flow. future outlook of the business operations, such as the profitability The main currencies of the Group’s foreign currency transaction of the industry and sector, to find out whether there is objective proof exposure are the US dollar, the British pound and the Swedish korma. of impairment. Should it be considered that the reduction of the fair A strengthening of the dollar and the pound has a positive impact value to below the acquisition cost is entirely or partially significant on the financial result and a weakening a negative impact. A weak- and prolonged, an additional after tax loss of EUR 209 million would ening of the Swedish krona has a positive impact on the result. Other be recognised in the financial statements for 2010 when the changes significant currencies are AUD, CAD, CHF, DKK and NOK. The hedg- in fair value associated with impaired available-for-sale financial ing policy is to keep an amount corresponding to three months’ cash assets recognised under equity are charged to the income statement. flows of all contractual or estimated currency flows consistently hedged. The hedging policy is to keep the balance sheet exposure and a quarter of annual cash flow of contracted or estimated currency flows consistently hedged. The hedging level can, however vary between 0–12 months as the financial policy has defined separate risk mandates for deviating from the norm hedging. The Board of Directors decides on significant changes in the hedging level if they see a reason to deviate from the norm set out in the financial policy. The amount of currency-specific hedging depends on current exchange rates and market expectations, on the interest rate differences between the currencies and the significance of the exchange

NOTES TO THE FINANCIAL STATEMENT 53 rate risk for the financial result. The transaction exposure is mainly depreciates more than the amount of the risk figure in a month. The hedged by forward transactions but also by the use of foreign cur- risk mandates regarding hedging decisions have been defined by rency loans and currency options. restricting the company management’s powers by linking them to Hedge accounting in accordance with IAS 39 is applied partially maximum currency-specific hedging level changes and to a VaR to the hedging of the currency transaction exposure, which allows limit. Possible strategic decisions which exceed the policy risk lim- fair value changes of hedges designated to hedge accounting to be its are made by the Board of Directors. The limit set for the M-real entered directly in shareholders’ equity in fair value reserve. At the Group’s foreign currency risk is EUR 12 million (25) and the VaR is end of the reporting period, the foreign exchange transaction expo- at the end of the reporting period EUR 1.9 million (7.9). Average dur- sure had been hedged 4.8 months on average (2009 4.9). During the ing the period has been EUR 2.9 million (8.8). The Value-at-Risk reporting period, the hedging level has varied between 4 and 6 months method has also been used to assess the market risk of Metsä (3–5). The dollar’s hedging level was 4.5 months (7.2), of which the Finance’s trading operations. Trading volume has been relatively low portion of hedge accounting was 1.4 months (1.8). The Swedish during the reporting year: Metsä Finance’s average VaR (of one day krona’s hedging level was 5.5 months (4.7), of which the portion of at 99%) was only EUR 0.07 million in 2010 (0.34). The volumes and hedge accounting was 3.2 months (3.6). The pound’s hedging level fair values of derivatives used in the management of foreign currency was 4.9 months (2.5), of which the portion of hedge accounting was risks are presented in Notes no. 29. 3.0 months (1.4). Hedges allocated to hedge accounting have been used to hedge the portion of highly probable forecast sales of the Interest rate risks currency transaction exposure. The interest rate risk is related mainly in the interest bearing receiv- The translation risk of a net investment in a foreign entity is gen- ables and loans and currency hedging. Interest bearing receivables erated from the consolidation of the equity of subsidiaries and asso- and loans are presented in Notes no. 25. The most significant cur- ciated companies outside the euro area into euros in the consolidated rencies in risk management are the euro, the US dollar, the British financial statements. According to the updated financial policy, 0–100 pound and the Swedish krona. The objective of the interest rate risk per cent (50–100) of equity should be hedged. The translation risk policy is to minimise the negative impact of interest rate changes on of equity has been hedged through the use of forward transactions the result and the financial position, and to optimise financing costs and foreign currency loans and major exposures have been mostly within the framework of risk limits. The effect of interest rate changes kept hedged. During the reporting period, on average 79 per cent on financial costs depends on the average interest fixing time of (93) of the equity position was hedged and at the end of the reporting interest bearing assets and liabilities, which is measured in the Group period 70 per cent (96). Hedge accounting in accordance with IAS is by duration. As duration diminishes the rise of interest rates affects applied to the hedging of the equity exposure. This allows the more quickly the interest expenses of financial liabilities. The matu- exchange gains and losses of effective hedging to be entered into rity of the loan portfolio can be influenced, e.g., by adjusting between the equity offsetting translation differences. floating-rate and fixed-rate loans and by using interest rate deriva- The Group applies the Value-at-Risk method to assess the risk tives. The Group uses in its interest rate risk management interest of its open foreign currency positions. The VaR is calculated on the rate swaps, interest rate futures and interest rate options. deviation from the balance sheet exposure plus the quarter of annual The average interest duration norm based on the Group’s finan- foreign currency exposure hedge norm defined in the financial cial policy is 6 months. The duration can, however, deviate from the policy. A 99 per cent confidence level on one month period is applied hedging policy norm so that the decision of a deviation exceeding to the VaR risk figure, i.e., the VaR indicates that with a 1 per cent four months has to be made by the Board of Directors. The average probability the market value of the open foreign currency position duration of loans was 9.4 (6.4) months at the end of the year. During

Exchange rate trends Interes rate trends %

1.6 7 6 1.4 5 1.2 4 1.0 3 2 0.8 1 0.6 0 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

EUR/USD EUR/GBP Euribor 3 months USD 3 months GBP 3 months

54 NOTES TO THE FINANCIAL STATEMENT the reporting period duration has varied between 6 and 10 months and only after the realisation of electricity purchases in the income (2–7). At the end of 2010, an increase of one per cent in interest rates statement as an adjustment of the purchases. would increase interest rate costs of the next 12 months by EUR 3.7 Approximately a quarter of M-real’s mills’ purchase of fuel is million (3.4). based on natural gas. The hedging of natural gas price risks has The Group is exposed to a risk of change in the value of deriva- been done with physical, fixed-price contracts. In Finland only the tives due to a change in market prices when using interest rate oil-related portion of the contract has been fixed. The prices of derivatives, since according to IAS 39 derivatives must be valued to natural gas have typically been fixed to Fuel-Oil and/or Gas-Oil prices. their fair value in the balance sheet. However, the partial application In addition, the prices of gas supply to Finland have been fixed to the of hedge accounting will balance the effects of changes in the mar- development of coal import price and the energy price index. The ket value of derivatives on the financial result. The Group is applying premise of natural gas price risk hedging is, however, to hedge only fair value hedge accounting in accordance with IAS 39 to fixed-rate the oil-related part of the contract by using oil derivatives and fixed- loans which have been converted by interest rate and currency swaps priced physical supply contracts. The hedging strategy is based on to floating-rate financing. In addition, the Group is applying cash flow a risk policy according to which Metsäliitto Energy makes the hedg- hedge accounting in accordance with IAS 39 to the major part of the ing decisions with the support of Metsä Finance, and the Group Board interest rate swaps by which floating-rate financing has been con- of Directors makes significant strategic decisions. verted to fixed-rate financing. The gross nominal volume of interest Approximately 70 per cent of electricity hedges (70) have been rate derivatives at the time of financial statements (including cur- carried out by using physical supply contracts and 30 per cent (30) rency swap contracts) is EUR 1,304 million (1,033), of which the as so-called financial hedges by using electricity derivatives. At the portion of reversed contracts is EUR 490 million (300). Of the deriv- end of the year, about 90 per cent (90) of financial hedges have been atives portfolio, EUR 637 million (534) is allocated to hedge account- designated to hedge accounting. All natural gas price risk hedges ing, and the portion of derivatives recognized in the balance sheet have so far been implemented by using physical supply contracts. through profit or loss is EUR 177 million (199). The maturity of inter- According to the pulp price risk hedging policy a Group company est rate swap and currency swap contracts varies between 1–10 may selectively hedge its price risk either by financial hedges through years (1–5). Metsä Finance or fixed-price physical contracts. Hedge accounting in accordance with IAS is applied within the pulp price risk manage- Commodity risk ment. There are no valid price risk hedges at the end of 2010 within In the hedging of commodity risks the Group applies risk manage- M-real Group. ment policies defined separately for each selected commodity. The volumes and fair values of derivatives used in the manage- According to the policy, the management of commodity risks with ment of commodity risks are presented in Notes no. 29. regard to financial hedges is accomplished by Metsä Finance based on the strategy approved by Board of Directors of M-real. So far the Liquidity risk commodity hedging policy has been applied to the management of Liquidity risk is defined as the risk that funds and available funding the price risks of electricity and natural gas and also transactions become insufficient to meet business needs, or that extra costs are related to Emission rights have been managed by Metsä Finance. incurred in arranging the necessary financing. Liquidity risk is The pulp price risk hedging policy has been adopted during 2010. monitored by estimating the need for liquidity needs 12–24 months M-real’s target in managing the electricity price risk is to balance ahead and ensuring that the total liquidity available will cover a main the effect of changes in the price of electricity on the Group’s result part of this need. According to the financial policy, the liquidity reserve and financial position. The main principle is to hedge the electricity must at all times cover 80–100 per cent of the Group´s liquidity purchase exposure, which consists of the difference of factory- requirement for the first 12 months and 50–100 per cent of the fol- specific electricity consumption estimates and power plant produc- lowing 12–24 months liquidity requirement. The objective is that at tion shares in the possession of the Group. With regard to the Finn- the most 20 per cent of the Group’s loans, including committed credit ish and Swedish electricity procurement, the hedge strategy is facilities, are allowed to mature within the next 12 months and at implemented in cooperation with Metsäliitto Energy service unit least 35 per cent of the total debt must have a maturity in excess of centralized through Metsä Finance. The hedges of electricity price four years. When the financial markets are functioning normally risk in Central Europe are implemented according to instructions from the company’s point of view, the target is to avoid keeping extra and by Metsäliitto Energy in co-operation with local production units liquidity as liquid funds and instead maintain a liquidity reserve as either by physical contracts or by financial contracts through Metsä committed credit facilities outside the balance sheet. Finance. M-real hedges the electricity price risk actively by setting The cornerstone of liquidity risk management is to manage the the hedging norm at 80 per cent-, 40 per cent-, 20 per cent- and Group’s operative decisions in such a way that targets concerning 0 per cent- share of the estimated net position (80%, 50%, 30% and indebtedness and sufficient liquidity reserve can be secured in all 20%) during the first, second, third and fourth successive 12-month economic conditions. Liquidity risk is also managed by diversifying periods. Hedge accounting in accordance with IAS 39 has been applied the use of capital and money markets to decrease dependency on partially to electricity hedging. Consequently the fair value of hedges any single financing source. The optimisation of the maturity struc- allocated to hedge accounting is entered in equity in fair value reserve ture of loans is also emphasized in financial decisions. During the

NOTES TO THE FINANCIAL STATEMENT 55 last years liquidity and especially the capital structure of the Group interim financial statements. The Corporate Credit Committee has been strengthened through the change in the ownership struc- reviews and sets all major credit limits which are not supported by ture of Metsä-Botnia and other divestments. credit insurance and/ or other security. Liquidity continues at a good level. The available liquidity was EUR M-real implements regular impairment tests for customer 415 million (776) at the end of the reporting period, of which EUR 7 accounts receivables. Credit loss impairment is booked when a cus- million (279) was committed credit facilities and EUR 408 million tomer enters legal bankruptcy, or becomes past due for more than (497) liquid funds and investments. EUR 218 million of liquid assets 6 months (180 days) without a valid payment plan or other valid and investments are assets deposited by other Metsäliitto Group’s reasons. Credit loss provisions for the year were EUR 1.6 million businesses in M-real’s subsidiary Metsä Finance. The raising of (2009 5.8), below the historical annual average from 2000 to 2009 of pension loans and pension insurance arrangements have reduced EUR 3.6 million (excluding discontinued business in Graphics, EUR the amount of committed credit facilities. In addition the Group had 1.4 million). Approximately EUR 1 million of credit loss provisions other interest-bearing receivables EUR 116 million (136). The Group made in 2009 were reversed due to payments made or dividends had also at its disposal short-term, uncommitted commercial paper received from bankruptcies. The portion of overdue client receivables programmes and credit lines amounting to EUR 519 million (529). of all sales receivables is at the time of financial statements 8.2 per At the end of 2010, the liquidity reserve covers fully the forecasted cent (8.3), of which 0.4 per cent (0.6) is overdue between 90–180 days financing need of 2010 and also the major part of financing need of and 0.1 per cent (0.4) over 180 days. The specification of doubtful 2011 and 2012. On the longer term the re-financing need is crucially receivables is in Notes no. 20. affected by the cash flow development, investments and possible The geographical structure of the accounts receivable is diversi- future divestments. 10 per cent (25) of long-term loans and commit- fied and is reflecting the external sales structure presented in the ted facilities fall due in a 12 month period and 13 per cent (24) have Segment information. Largest sources of credit risk exist in Great a maturity of over four years. The average maturity of long-term Britain, Belgium, Germany, Italy and France (54 per cent of total loans is 2.7 years (2.4). The share of short-term financing of the receivables). The share of largest individual customer (individual Group’s interest bearing liabilities is 16 per cent (4). companies or groups of companies under common ownership) credit risk exposure of M-real at the end of 2010 represented 19 per cent Counterparty risk (15) of total accounts receivable. 41 per cent (42) of accounts receiv- Financial instruments carry the risk that the Group may incur losses able was owed by ten largest customer groups (individual companies should the counterparty be unable to meet its commitments. Such or groups of companies under common ownership). risk is managed by entering into financial transactions only with The improvement in customer payment behaviour that begun in most creditworthy counterparties and within pre-determined limits. the 4th quarter of 2009, continued in 2010 and was at an acceptable During the reporting period, credit risks of financial instruments did level throughout the year. The decline in credit insurance credit not result in any losses. Cash at bank and in hand, and other invest- limits first reported in 2008 and which continued to worsen in 2009 ments have been spread to several banks and commercial papers was reversed from the second quarter of 2010 as the insurers rec- of several institutions. Counterparty limits have been revised during ognised that many of their earlier assessments in forest products the year by taking into account the needs of the company and the related manufacturing and distribution had been incorrect. At the view on the financial position of the used counterparties. Derivatives end of 2010, more than 95 per cent of M-real’s trade receivables (64) trading is regulated by the standardised ISDA contracts made with were again covered by credit insurance limits (excluding energy). the counterparties. M-real’s internal analysis of the real risk of customer solvency con- The Group’s sales receivables carry a counterparty risk that the tinued to support the reinstatement of credit insurance to allow sales Group may incur losses should the counterparty be unable to meet while controlling credit risk where credit insurance was not granted. its commitments. Credit risk attached to sales receivables is managed on the basis of the credit risk management policies approved Managing the capital by operative management. Accounts receivable performance is fol- Terms capital and capital structure are used to describe investments lowed monthly by Corporate Risk Management Team and Corporate made in the company by its owners and retained earnings (together Credit Committee. Credit quality of customers is assessed at regu- equity) and debt capital (liabilities) as well as the relation between lar intervals based on the customers’ financial statements, payment them. In managing its capital structure, the Group aims at maintain- behaviour, credit agencies and credit ratings agencies. Individual ing an efficient capital structure that ensures the Group’s operational credit limits are reviewed at least annually. From time to time, as conditions in financial and capital markets in all circumstances deemed necessary by management, Letters of Credits, bank and despite the fluctuations typical to the sector. The company has a parent company guarantees and Credit insurance are used to miti- credit rating for its long-term financing. Certain central target values, gate credit risk. Credit limits are approved according to credit risk which correspond to standard requirements set by financing and management policy with approval limits of varying values across the capital markets, have been defined for the capital structure. No Group. Due to the ongoing challenging economic environment, credit target level has been defined for the credit rating. The Group’s limits have been reviewed on a more regular basis than in previous capital structure is regularly assessed by the Group’s Board of Direc- years. Customers have generally been cooperating by providing tors and its Audit Committee. The Group monitors the development

56 NOTES TO THE FINANCIAL STATEMENT of its capital structure through a key ratio that describes net gearing. The objective of the Group is to maintain its net gearing ratio below the level of 100 per cent on average over the trade cycle. The key ratios describing the capital structure and the capital amounts used for the calculation of the key ratio were on 31.12.2010 and 31.12.2009 the following:

2010 2009 Net gearing ratio, % 83 84 Interest-bearing borrowings 1,350 1,410 ./. Liquid funds 408 497 ./. Interest-bearing current receivables 115 136 827 777

Equity attributable to shareholders of parent company 994 916 + Non-controlling interest 5 8 999 924

In the company’s certain loan contracts a minimum limit of 30 per cent has been set for the Group’s equity ratio and a maximum limit of 120 per cent for the Group’s net gearing ratio. With regard to defining the equity, the calculation formula of key ratios as defined in the loan contracts deviates from the calculation formulas presented in the Annual Report. This is due to the fact that in loan contracts business value and deferred tax liabilities are taken into account when calculating the key ratio. Also the formula for calculating net gearing in the loan contracts deviates from the formula presented in the Annual report. This is caused by a EUR 300 million non- recurring write-off exclusion in the calculation of the key ratio. Other covenants in the Group’s loan agreements are customary terms and conditions including for example a negative pledge, restrictions on major asset disposals, limitations on subsidiary indebtedness, restrictions on changes of business and mandatory prepayment obligations upon a change of control of the Group. The Group has been in compliance with its covenants during the accounting periods 2010 and 2009. The capital structure’s key ratios calculated according to what is specified in the loan contracts were on 31.12.2010 and 31.12.2009 approximately the following:

2010 2009 Equity ratio, % 38 35 Net gearing ratio, % 64 63

In case the company could not meet its obligations as defined by the above mentioned key ratios and in order to avoid a breach of contract that could have and adverse effect on the company’s financial position, it would need to renegotiate its financial arrangements, payback its loans or get its debtors to give up their claims to meet these obligations.

NOTES TO THE FINANCIAL STATEMENT 57 Hedging of foreign exchange transaction exposure 31 Dec. 2010 Annual transaction exposure Other Other 2010 2009 USD GBP SEK NOK DKK AUD long short Total Total Transaction exposure, net (mill. currency units) 567 239 -3,237 183 195 51 Transaction exposure,net (EUR million) 427 278 -359 23 26 39 16 -1 1,170 952 Transaction exposure hedging (EUR million) -162 -113 164 -6 -6 -14 -4 0 -469 -388 Hedging at the end of the year (months) 4.5 4.9 5.5 2.8 2.9 4.3 3.2 2.2 4.8 4.9 Average hedging in 2010 (months) 5.2 4.6 5.4 3.8 2.7 4.1 3.2 2.4 4.9 4.3

Hedging of net investments in a foreign entity 31 Dec. 2010 Equity exposure 2010 2009 GBP SEK Other Total Total Equity exposure (mill. currency units) 7 2,931 Equity exposure (EUR million) 8 327 13 348 263 Equity hedging (EUR million) -8 -236 0 -244 -259 Hedging at the end of the year, (%) 100 72 0 70 99 Average hedging in 2010, (%) 97 79 34 79 93

Interest rate risk/duration and re-pricing structure of loans (incl. Interest rate derivatives) 31.12.2010 31.12.2009 Average Interest rate Re-pricing structure of interest rates of loans Average Interest rate Loan amount Duration interest rate sensitivity *) Loan amount Duration interest rate sensitivity *) (EUR million) (months) (%) (EUR million) 1–4/2011 5–8/2011 9–12/2011 2012 2013 2014 –>2014 (EUR million) (months) (%) (EUR million) 1,350 9.4 5.1 3.7 850 204 60 27 31 130 48 1,410 6.4 6.0 3.4

*) Interest rate sensitivity is an estimate of the effect of an interest rate change of one percent in one direction on net interest cost based on year end exposure

Hedging of electricity price risk exposure 31.12.2010 31.12.2009 GWh GWh Electricity exposure, net 2011 1,160 1,110 Electricity hedging 2011 985 991 Hedging at the end of the year (%) 85 89

Electricity price risk is hedged based on defined risk management policy on a time horizon of four years either by physical contracts or by financial contracts. The table is applying only to the hedging of electricity price risk of the following year. The net electricity exposure has been calculated by taking into account the own and associated companies´ electricity production.

Currency breakdown for loans Foreign currency breakdown for currency exposure

EUR 91% USD 37% USD 8% GBP 24% Others 1% SEK 31% AUD 3% NOK 2% Others 3%

58 NOTES TO THE FINANCIAL STATEMENT Market risk sensitivity at 31 Dec. 2010 31.12.2010 Impact on equity exposure and annual transaction exposure 31.12.2010 Impact on Impact on annual Impact on Impact on annual transaction financial Impact on net equity of transaction exposure assets and net equity foreign entities exposure (cash flow) EUR million liabilities of foreign entities incl. hedging (cash flow) incl. hedging Interest rate risk (100 bp rise in interest rates) Effect on profit 1.1 -3.7 -2.5 Effect on other change in equity 0.2 Commodity risk (electricity price + 20%) Effect on profit 0.4 -6.0 1.6 Effect on other change in equity 7.2 FX risk (USD - 10%) Effect on profit 5.2 -42.4 -26.3 Effect on other change in equity 4.7 FX risk (GBP - 10%) Effect on profit -0.4 -27.8 -16.5 Effect on other change in equity 7.7 -0.8 FX risk (SEK - 10%) Effect on profit -1.8 36.1 19.7 Effect on other change in equity 14.2 -32.7 -9.1

Market risk sensitivity at 31 Dec. 2009 31.12.2009 Impact on equity exposure and annual transaction exposure 31.12.2009 Impact on Impact on annual Impact on Impact on annual transaction financial Impact on net equity of transaction exposure assets and net equity foreign entities exposure (cash flow) EUR million liabilities of foreign entities incl. hedging (cash flow) incl. hedging Interest rate risk (100 bp rise in interest rates) Effect on profit 1.1 -3.4 -1.9 Effect on other change in equity 0.5 Commodity risk (electricity price + 20%) Effect on profit 0.3 -3.6 3.8 Effect on other change in equity 7.1 FX risk (USD - 10%) Effect on profit 9.0 -31.0 -12.4 Effect on other change in equity 4.5 FX risk (GBP - 10%) Effect on profit -3.5 -22.0 -17.5 Effect on other change in equity 3.6 -1.0 FX risk (SEK - 10%) Effect on profit 2.6 31.9 19.5 Effect on other change in equity 15.3 -24.8

Items with + sign = positive effect = increase of assets / decrease of liabilities / increase of cash flow Items with – sign = negative effect = decrease of assets / increase of liabilities / decrease of cash flow

IFRS 7 requires an entity to disclose a sensitivity analysis for each type of Group is presenting figures describing the effects of the risk variables to its market risk to which the entity is exposed at the reporting date, showing how equity exposure and annual transaction exposure (cash flow) to present a profit or loss and equity would have been affected by changes in the relevant broader picture about market risks of interest rates, electricity prices and risk variable that were reasonably possible at that date. The Group has rec- foreign exchange rates. Annual cash flows are based on estimates, but not ognized interest rates, electricity prices and foreign exchange rates as its existing commercial contracts. The impact on net equity has reduced due to key market risks and has set 1 per cent interest rate rise, 20 per cent rise in sale of Botnia´s operations in Uruguay. Including equity hedging the impact electricity price and 10 per cent weakening of USD, GBP and SEK as reason- is minor. The weakening of USD and GBP has a negative impact on annual ably possible risk variables. These currencies represent about 80 per cent cash flow and the weakening of SEK has a positive impact. Hedges reduce of Group’s annual transaction exposure. The nature of the market price risk this impact depending on hedging strategy. The rise of electricity price has is relatively linear so that the size of effects of opposite market price changes a negative impact on cash flow. As according to hedging policy the electricity do not essentially differ from the presented figures. price risk of the nearest year has mostly been hedged, the impact including The scenarios have been calculated by using regular principles of calcu- hedges remains minor. When the cash flow of the nearest year and all elec- lating market values of financial instruments described in the Group Account- tricity hedges have been taken into account, the calculatory impact is slightly ing policies. Figures at the reporting date reflect quite well the average positive. market risk conditions throughout the reporting period. Additionally, the

NOTES TO THE FINANCIAL STATEMENT 59 4 Segment information

The Corporate Management Team is the chief operational decision- Consumer Packaging business area is an innovative supplier of maker. The Corporate Management Team has determined that the high-performance primary fibre-based paperboards, speciality operating segments are based on the reports used by the manage- papers and related packaging services. It serves carton printers, ment team in strategic decision-making. The Corporate Management converters, brand owners and merchants for end-uses such as Team monitors the business operations based on the operating seg- beautycare, cigarettes, consumer durables, foods, healthcare, graph- ments. The sales of the reporting segments are mainly generated ics and wallcoverings. by sales of board and paper, but the sales of the Market Pulp and Energy operating segment includes sales of pulp to external cus- Office Papers business area is one of the European leading office tomers and sales of energy from the pulp mills and through energy paper producers. It produces, markets and sells a range of high companies owned by M-real. quality uncoated fine papers for use in offices and homes. Office The accounting principles for the segment information are equal Papers’ products are used for printing and copying, as well as for to those of the Group. All inter-segment sales are based on market forms, envelopes, manuals and various business communications. prices and eliminated in consolidation. The reporting result is operating result. Segment assets and Speciality Papers business area is a leading European speciality liabilities are capital items directly used by the segments in their paper producer. The core of the business is formed by the Zanders business operations or items that based on reasonable ground can mills, Reflex and Gohrmühle, in Germany. M-real’s speciality papers be allocated to the segments. The goodwill arising from business are used e.g. for brochures, direct mail, annual reports, catalogues, combination have been allocated to the operating segments based art books, posters, calendars and labels. The costumers are print- on matching principle. Unallocated capital items consist of tax and ers, publishers, advertising agencies and paper merchants. financial items and other common group items. Investments consist of additions of tangible and intangible assets used over a longer Market Pulp and Energy reporting unit includes mainly pulp sales period than one year and acquisition of shares. to external parties. Additionally, a minor part of the entity consists of energy sales from the pulp mills or through M-real energy hold- Reportable segments ings. Consumer Packaging Office Papers Other operation includes Head Office, Sales net-operation, Group Speciality Papers IT services and hedge accounting of sales revenue. Market Pulp and Energy Other operation

The Group has not aggregated segments when identifying the reportable segments. Segment sales from external customers by geographical area are based on the geographical location of the customer and segment assets and capital expenditure by geographical location of the assets.

Sales by operating segment 2010 2009 EUR million External Internal Total External Internal Total Consumer Packaging 1,174 1 1,175 968 0 968 Office Papers 658 0 658 542 1 543 Speciality Papers 302 1 303 352 0 352 Market Pulp and Energy 434 0 434 508 0 508 Other operations 37 161 198 62 127 189 Elimination -163 -163 -128 -128 Continuing operations 2,605 2,605 2,432 2,432

60 NOTES TO THE FINANCIAL STATEMENT Operating result and return on capital employed by operating segment 2010 2009 Return on Return on Operating capital Operating capital EUR million result employed, % result employed, % Consumer Packaging 135 19.4 51 6.9 Office Papers 14 2.8 -104 -21.1 Speciality Papers -54 -49.1 -151 -55.8 Market Pulp and Energy 36 6.0 -91 -12.2 Other operations 15 28 Continuing operations, total 146 5.7 -267 -8.9

Share of results from associated companies -24 -16

Finance costs, net -74 -75 Income taxes -21 27 Discontinued operations 0 -23 Result for the period 27 -354

Other operations include in 2010 gain of disposal of Sappi Ltd’s shares EUR some EUR 76 million, which was recorded in other operations´operating 8 million and EUR 6 million gain from patents sold to Sappi Ltd. Speciality result. EUR 7 million of hedging gain was also recognised as income. At the Papers include EUR 7 million gain related to partial divestment of Reflex mill same time Metsä-Botnia disposed 77 per cent of its shares in Pohjolan Voima to Metsä Tissue and Office Papers include some EUR 7 million gain related Oy. Market Pulp and Energy´s 2009 operating profit includes M-real’s share to electricity cerficates disposed. (30%) of realised fair value and capital gain of the deal, EUR 18 million. Speciality Papers include EUR 8 million cost provision connected with the Market Pulp and Energy included in 2009 EUR 14 million connected to restructuring of M-real Zanders and partial divestment of the Reflex mill to the plan to permanently close down the Alizay pulp mill and EUR 4 million Metsä Tissue. Market Pulp and Energy include EUR 4 million additional cost associated with the closure of the Metsä-Botnia Kaskinen mill. Office Papers provision relating to the closure of Alizay pulp. Other Operations include EUR include EUR 9 million related to profit improvement measures at the Husum 10 million gain related to reversal of provision in connection with IT arrange- mill. Speciality Papers include EUR 8 million related to profit improvement ment. programme at the Zanders’ Reflex mill. Other oparations include EUR 12 M-real’s joint venture Metsä-Botnia sold in December 2009 its Uruguay million cost provision associated with the terminated IT contract. business to UPM-Kymmene Oyj. M-real’s share (30%) of the gain on sale was

Assets, liabilities and goodwill by operating segment Assets Liabilities Goodwill EUR million 2010 2009 2010 2009 2010 2009 Consumer Packaging 911 833 200 157 5 5 Office Papers 679 552 122 121 8 8 Speciality Papers 183 255 119 121 Market Pulp and Energy 691 644 61 77 Other operations 342 546 185 252 Elimination -46 -119 -46 -119 Unallocated 357 421 1,477 1,599 Total 3,117 3,132 2,118 2,208 13 13

Capital expenditure, depreciation and impairment charges by operating segment Capital expenditure Depreciation Impairment charges EUR million 2010 2009 2010 2009 2010 2009 Consumer Packaging 25 11 54 77 11 12 Office Papers 20 22 38 58 -9 47 Speciality Papers 6 11 11 20 25 66 Market Pulp and Energy 14 19 26 38 15 32 Other operations 1 10 3 6 -8 0 Total 66 73 132 199 34 157

Assets and liabilities of segments have been changed according to the renewed allocation of Metsä-Botnia.

Segment assets include goodwill, other intangible assets, tangible assets, Capital employed is segment assets less segment liabilities. The formula biological assets, investments in associated companies, inventories, accounts for calculation of return on capital employed: Segment: Operating profit/ receivables and prepayments and accrued income (excl. interest and income Capital employed (average) *100. Group: Profit from continuing operations tax items) Segment liabilities include non-interest-bearing liabilities (excl. before tax + interest expenses, net exchange gains/losses and other financial interest and income tax items). expenses/Total assets ./. non-interest-bearing liabilities (average)*100.

NOTES TO THE FINANCIAL STATEMENT 61 In the following tables are presentented information of sales, assets and investments by geographical areas.

Geographical segments External sales by Total non-current Capital expenditure destination assets by country by country EUR million 2010 2009 2010 2009 2010 2009 Germany 445 410 71 103 4 5 Belgium 264 226 0 0 Great Britain 233 218 0 0 1 Finland 212 263 1,212 1,218 31 23 France 146 153 20 21 4 11 Italy 132 99 0 0 Russia 90 94 0 0 Switzerland 88 70 0 0 Austria 77 55 69 91 4 5 The Netherlands 73 90 0 0 Sweden 69 63 366 326 23 15 Spain 65 56 0 0 Poland 52 35 0 0 Other Europe 191 197 1 0 USA 114 103 0 0 Uruguay 0400 13 Asia 255 152 0 0 Other countries 99 144 0 0 Total 2,605 2,432 1,739 1,759 66 73

Non-current assets include other assets but derivatives, deferred tax receivables and assets related to defined benefit pension plans.

Personnel at year end by country Personnel by business segment, average 2010 2009 2010 2009 Finland 1,783 1,824 Consumer Packaging 1,512 1,517 Germany 1,073 1,228 Office Papers 1,264 1,424 Sweden 891 980 Speciality Papers 1,138 1,550 France 353 396 Market Pulp and Energy 301 271 Austria 197 203 Metsä-Botnia - 501 Great Britain 45 44 Other operations 557 650 The Netherlands 22 45 Group total 4,772 5,913 Other countries 174 380 Group total 4,538 4,903 Market Pulp and Energy’s personnel include in 2010 personnel at Hallein Pulp mill and personnel at Kaskinen pulp mill. 2009’s figures have been restated respectively. Personnel average in 2009 include M-real’s share 30 per cent of Metsä-Botnia’s personnel. Group’s income from one customer exceeded to some EUR 540 (536) million or some 21 (22 ) per cent of total sales. The sales included in Market Pulp and Energy, Office Paper, Consumer Packaging, Speciality Paper segments and other operations.

62 NOTES TO THE FINANCIAL STATEMENT 5 Disposed and discontinued operations 7 Operating expenses

There were no acquisitions or disposals during 2010. M-real disposed in EUR million 2010 2009 December 2008 the Graphic Papers businesses for EUR 750 million. Graphic Change in stocks of finished goods and Papers business has been accounted as a discontinued operations and it´s work in progress 34 -71 post-tax profit and loss on disposal have been recognised as a separate item after continued operations. During 2010 the net costs in discontinued oper- Materials and services ations related sold Graphic Papers-business were EUR 0 million, some EUR Purchases during the financial period 1,685 1,377 + 2 million related to IT arrangements and some EUR - 2 million related to Change in inventories -18 24 logistics arrangements. Logistics expenses 278 299 In 2009 the adjustment on the selling price and other items had a nega- External services 77 101 tive effect of EUR 26 million on the result of discontinued operations. 2,022 1,801

Discontinued operations, result Employee costs 2010 2009 Wages and salaries 209 254 Graphic Papers Social security costs Adjustment on the selling price and other items 0 -23 Pension costs Income statement, total 0 -23 Defined contribution plans 4 0 Defined benefit plans 20 23 Other employee costs 79 129 6 Other operating income 103 152 Employee costs, total 312 406

Share of profit from associated companies EUR million 2010 2009 Share of Metsä-Botnia’s net result 78 2 Gains on disposal 32 143 Rental income 3 3 Other operating expenses Service revenue 26 37 Rents 12 17 Government grants 17 22 Purchased services 96 107 Other allowances and subsidies 2 2 Other operating expenses 71 195 Other operating income 28 45 Total 179 319 Total 108 252

The most signifigant gains on disposals were the gain of EUR 8 million of External services include production related services and logistics expenses shares in Sappi Ltd, some EUR 6 million gain related to patents sold to Sappi, of sold products. In 2009 logistics expenses of sold products were partly EUR 7 million profit on sale in Speciality Papers related to partial divestment showed in other operating expenses. 2009’s figures have been restated to of Reflex mill and some 7 million in Office Papers in Husum related to elec- match new grouping. Other operatin expenses include among others other tricity cerficates disposed. than production related services, energy costs, real estate costs and admin- In 2009 M-real’s joint venture Metsä-Botnia disposed its Uruguay busi- istration costs. ness. M-real’s share of gain on sale was EUR 83 million. At the same time The research and development costs in continuing operations during the Metsä-Botnia’s ownership was restructured, in which M-real’s ownership financial period 2010 were EUR 5 million and in 2009 EUR 7 million. rose from 30 percent to 33 per cent. M-real sold three per cent to its parent company Metsäliitto and recorded some EUR 33 million profit on sale. In Main auditors fees addition Metsä-Botnia sold 77 per cent of its shares in Pohjolan Voima Oy. The fees paid to PricewaterhouseCoopers are shown in the table below. The M-real recorded 30 per cent share of the profit or EUR 18 million. audit fees are paid for the audit of the annual and quarterly financial statements for the group reporting purposes as well as the audit of the local statutory financial statements. Tax consultancy fees are the fees paid for tax consultancy services and the like.

EUR million 2010 2009 Audit fees 1 1 Tax consultancy 0 0 Other fees 0 1 Total 1 2

NOTES TO THE FINANCIAL STATEMENT 63 The remuneration paid to the members of the Board of Directors and Pension commitments to management the Corporate Management Team The CEO of the parent company has the right to retire on a pension at the The remuneration paid to the members of the Board of Directors and share- age of 62 years. The cost of lowering the retirement age or supplementing holding. statutory pension security are generally covered by voluntary pension insurance. The expenses of the Management Team member´s defined pension 2010 2009 plans were EUR 0.3 million (2009 EUR 0.1 million) and the expenses of their Shareholding EUR EUR defined contribution plans were EUR 0.6 million (EUR 0.6 million). The Group Kari Jordan has no off balance sheet pension liabilities on behalf of management. Chairman - 86,616.49 32,125 When the service contract of the CEO is terminated by the Board, the CEO Martti Asunta is entitled to receive discharge compensation equal to his 18-month salary. Vice chairman 23,900 73,514.04 28,625 In addition, in case the Company or its business is divested, the CEO is enti- Mikael Aminoff 22,095 55,299.34 - tled to resign from his assignment against discharge compensation equal to Kirsi Komi 9,400 56,299.34 - his 24-month salary. The period of notice is six months. The period of notice Kai Korhonen 126,860 59,799.34 75,905 for other members of The Corporate Management Team is six months. For other members of The Corporate Management Team, the period of additional Liisa Leino 96,715 59,299.34 56,305 severance compensation varies from six to eighteen months in case of sev- Juha Niemelä 96,715 59,799.34 79,405 erance due to other reasons than member related Antti Tanskanen 96,715 58,799.34 76,905 The parent company has no commitments on behalf of persons belong- Erkki Varis 54,800 59,299.34 57,805 ing to the above-mentioned bodies or those who have previously belonged Total 527,200 568,725.91 407,075 to them. At 31 December 2010, the Company´s CEO, the Deputy CEO or the members of the Board had no loans outstanding from the Company or its Former members of the Board subsidiares. Heikki Asunmaa - 18,100 Erkki Karmila 3,000.00 77,905 Rainer Lillandt 3,500.00 25,100 Arimo Uusitalo - 1,500 6,500.00 122,605

Total 575,225.91 529,680

M-real’s Annual General Meeting held on 12 March 2009 decided that one half of the remuneration will be paid in cash while the other half is paid in the company’s B-series shares to be acquired from the stock exchange between 16 and 20 March 2009. Board members Kari Jordan, Martti Asunta and Runar Lillandt, who all receive remuneration from largest shareholder Metsäliitto Cooperative, renounced their right to the annual remuneration. Salaries and emoluments paid to The Corporate Management Team were EUR 3,406,419.41 (2009 EUR 2,655,301.27). CEO Mikko Helander’s salary including benefits was 1,429,370.95 (EUR 756,261.28). According to the M-real’s pay scheme, executives can be paid a performance-related reward amounting to not more than 6 months’ salary. In addition to salaries and bonuses they are also entitled to participate in the company´s share based incentive program. Currently 9 executives are included in the program. The expenses recognised for share based payments were EUR 0.2 million (2009 none) (note 35). Chairman of the Board Kari Jordan and CEO Mikko Helander are taking part in the shareholding system of Metsäliitto Group’s Executive Management via Metsäliitto Management Oy (Note 35). The number of M-real’s B-shares allocated via Metsäliitto Management Oy to Chairman of the Board Kari Jordan is 1,763,867 and to CEO Mikko Helander is 881,933. Other members of The Corporate Management Team own 62,959 M-real’s shares.

64 NOTES TO THE FINANCIAL STATEMENT 8 Depreciation, amortization and Impairment of Assets impairment charges M-real carries out a full impairment test at least once a year, during the last quarter based on the situation of 30 September. In addition, a sensitivity analysis is made each quarter. Should the sensitivity analysis indicate impair- EUR million 2010 2009 ment, a full test will be initiated. The Audit Committee reviews the sensitiv- Depreciation ity analyses or impairment testing results quarterly. Other intangible assets 7 10 Buildings 22 31 Testing principles Machinery and equipment 100 155 The accounting values of asset items or cash generating units are evaluated Other tangible assets 3 3 for possible value depreciation. Cash generating units are reporting segments Total 132 199 or smaller units to which a utility value can be defined to. In 2010 the cash generating units are the same as in 2009 testing, except for Simpele Paper. The paper machine in Simpele was closed down in December 2010. If there Impairment charges are indications of value depreciation of an asset item or cash-generating Goodwill 33 unit, or if the unit’s accounting value includes or it has been allocated good- Other intagible assets 1 will, it is evaluated how much money the asset item or CGU can accumulate. Buildings 36 36 The sum that can be accumulated is the utility value based on the cash flow Machinery and equipment -3 85 against the asset item or CGU, or its net sales price. In 2010 testing all accu- Other tangible assets 1 2 mulated utility values are based on the cash flow against the asset or CGU, Total 34 157 except for Myllykoski Paper, which is tested based on its net sales price. The cash flow that the CGUs under testing can accumulate is based on Depreciation and impairment charges, total 166 356 five-year forecasts and the evenly-growing cash flows that follows them. The essential testing assumptions are M-real management’s estimates Goodwill impairments by segment and projections as well as 3rd party forecasts.The key factors affecting the Speciality Papers 33 projections are development of average paper and board prices, delivery Total 33 volumes, foreign exchange rates, and capacity utilisation rates, cost development of key raw materials such as wood, pulp,chemicals and energy, the Other Impairments by segment development of personnel costs and other fixed costs as well as the discount rate. The key factors are similar to those used in 2009 testing. Furthermore Consumer Packaging 11 12 the realisation of savings and efficiency improvement measures as well as Office Papers -9 47 decided renewal investments have a significant impact on projected cash Speciality Papers 25 33 flows. Market Pulp and Energy 15 32 M-real’s share of the cash flow and accounting value of Metsä-Botnia are Other Operations -8 allocated to CGUs in the proportion of their pulp purchases. Total 34 124 For the situation on 30 September 2010 and for previous goodwill impairment tests the cash flows consequent to the 5-year projected cash flows are Impairment charges made at closure of Kangas’ paper machine 2 were partly based on a 2 per cent fixed annual growth rate. Average values for the key reversed (EUR 8 million) in June based on sales agreement of paper machine assumptions (price, volume, variable costs) during the projection period have 2. Impairment charges made in M-real Zanders’ Reflex paper mill were been used as initial point for the cash flows following the forecast period. reversed (EUR 3 million) based on agreement to sell the mill partly to Metsä The fixed costs are based on the projected costs for the fifth year. Tissue in September. The discount rate used is M-real’s Weighted Average Cost of Capital In December some EUR 9 million reversal of impairment charge in Office (WACC). When calculating WACC the cost of debt takes into account market Papers and some EUR 28 million impairment charge in Speciality Papers based view on M-real’s risk premium. Both the cash flows and the discount were recognised because of impairment test. In addition in December an rate are calculated after tax, which means that the established discounted impairment charge of EUR 15 million was recognised in Market Pulp and cash flows and utility values are before tax as set out in IAS 36. For testing Energy due to fact that some buildings were retired from active use perma- carried out concerning situation 30 September 2010, the WACC after taxes nently and an impairment charge of some EUR 11 was recognised in Con- was 6.25 per cent (2009: 7.83%) and for Botnia 6.08 per cent (6.67%). Man- sumer Packaging related to closure of paper machine in Simpele. agement’s view is that the risk factors regarding future cash flows do not Due to impairment test in 2009 impairment charges of EUR 113 million differ materially from one CGU to another. were recognised, EUR 33 million on goodwill in Speciality Papers and EUR 80 million other impairment, of which EUR 33 million in Speciality Papers’ Zanders paper mill in Germany and EUR EUR 47 million in Office Papers’ Alizay paper mill in France. In 2009 testing all accumulated utility values are based on the cash flow against the asset or CGU. In 2009 in Alizay pulp mill an impairment of EUR 28 million was recognised related to the planned permanent closure of Alizay pulp mill. In Metsä- Botnia’s Kaskinen mill an impairment of EUR 16 million was recognised related to the closure of the mill based on M-real’s 30 per cent share. Of these, EUR 12 million was recognised in Consumer Packaging and EUR 32 million in Market Pulp and Energy.

NOTES TO THE FINANCIAL STATEMENT 65 The goodwill impairment test results are evaluated by comparing the Cash Gener- (3) recoverable amount (V) with the carrying amount of the CGU (B) as follows: ating Unit (1) (2) Required change in (CGU) V – B1) Key assumption order for V to equal B Zanders 0 - Increasing end product - No change required Ratio average price on 5-year V B tive increase 2%) V 5–10% > B - WACC based on interest - No change required V 10–15% > B rates and risk premiums V 15–20% > B at the time of testing Alizay 0 - Increasing end product – No change required V 20–50% > B average price on 5-year V 50% > B projection period (cumulative increase 3%) The most important CGUs of M-real Group, the goodwill allocated to them - WACC based on interest – No change required as of 31 December 2010 as well as their testing result as of 30 September rates and risk premiums 2010: at the time of testing Myllykoski 0 - Net selling price - No change required Goodwill Paper Oy Cash Generating Unit (EUR million) Test result (V-B)/B 35% Folding boxboard mills 1) 15 over 50% 1) EUR million 1) Kemiart Liners 11 over 50% Kyro Paper 1) 1 20–50% Husum PM6 & PM7 8 over 50% Alizay 1) 1 0–5%, Husum PM8 & Äänekoski Paper 1) 3 over 50% Zanders 0 <0%, impairment Market Pulp and Energy 1) 6 over 50% Myllykoski Paper Oy 35 per cent 0 0–5% M-real Group total 45

1) The amount includes the goodwill from M-real’s holding in Metsä-Botnia, which is shown in ”Investments in associated companies” in the balance sheet.

In the following CGUs a reasonably possible change in a key assumption results in a situation where the carrying amount of the CGU exceeds the recoverable amount. Assumptions to which the recoverable amount of the CGU is most sensitive are listed in the table. When considering the resulting effects of changes in other assumptions it was concluded that there are not correlations between assumptions that would materially change the result of the testing. The pricing of end products is mainly driven by the demand and supply balance, and that the cost base changes do not have a significant impact on product pricing.

66 NOTES TO THE FINANCIAL STATEMENT 9 Financial income and expenses 10 Income taxes

EUR million 2010 2009 EUR million 2010 2009 Exchange differences Income taxes for the financial period 14 3 Commercial items 2 1 Income taxes for previous periods 0 -2 Hedging/hedge accounting not applied -7 3 Change in deferred taxes 7 -27 The ineffectiveness from hedges of Other 0 -1 net investment in foreign operations -3 0 Total 21 -27 Other items -1 1 Total -9 5 Income tax reconciliation

Other financial income Result before taxes 48 -358 Interest income on loans, other receivables Computed tax at Finnish statutory rate of 26% 13 -93 and cash and cash equivalents 12 25 Difference between Finnish and foreign rates 0 0 Dividend income 0 0 Tax exempt income 0 -33 12 25 Non-deductible expenses 3 2 Valuation of financial assets and liabilities Impairment of goodwill 0 8 Gains and losses on financial assets or liabilities at Previous years tax losses used during the period -8 0 fair value through profit or loss (held for trading) 0 1 Tax losses with no tax benefit 27 88 Impairment charges from financial assets 0 -30 Share of profit from associated companies -14 4 Impairment charges from financial liabilities 0 31 Income taxes for previous periods 0 -2 Gains and losses on derivatives/hedge accounting Other 0 -1 not applied -2 3 Income tax expense 21 -27 Gains and losses on hedging instrument in fair value hedges 6 13 Effective tax rate, % 43.8 7.5 Fair value adjustments of hedged item in fair value hedges -5 -6 Total -1 12

Interest expenses from financial liabilities carried at amortized cost using the effective interest method -74 -109

Other financial expenses -2 -8 Interest and other financial expenses, total -76 -80

Valuation of financial assets and liabilities and interest and other financial expenses, total -77 -105

M-real repurchased in 2009 from the market its own senior floating rate notes in the total par value of EUR 60 million. A gain of approximately EUR 31 million was booked in financial income in 2009. In connection with divestment of Graphic Papers in December 2008, M-real received EUR 220 million in interest-bearing vendor notes from Sappi. In August 2009 M-real agreed with Sappi that Sappi will repay the vendor notes at the price of 86.5 per cent of their nominal value. This early repayment resulted in an approximately EUR 30 million loss that was booked in financial expenses in 2009.

NOTES TO THE FINANCIAL STATEMENT 67 11 Other items of comprehensive income

2010 2009 Recorded in Recorded in other items of other items of Comprehensive Reclassifi- Comprehensive Reclassifi- EUR million income cation Total EUR million income cation Total Cash flow hedges Cash flow hedges Currency flow hedges Currency flow hedges recorded in equity 6 recorded in equity 7 transferred to income state- transferred to income statement's sales -6 ment's sales 15 Interest flow hedges Interest flow hedges recorded in equity 0 recorded in equity -1 transferred to income state- transferred to income statement's financial items 0 ment's financial items 0 Commodity hedges Commodity hedges recorded in equity 10 recorded in equity 3 transferred to income state- transferred to income statement's purchases 0 ment's purchases 2 Total 16 -6 10 Total 9 17 26 Available for sale investments Available for sale investments recorded in equity recorded in equity -97 Share of result in associated 35 transferred to income state- companies 1 ment’s other operating income -18 transferred to income state- Total -97 -18 -115 ment’s other operating income -7 Translation differences 17 Total 36 -7 29 Net invest hedge -12 Translation differences 42 Total 5 5 Share of result in associated Total -83 -1 -84 companies 1 Net invest hedge -30 Total 13 13 Total 65 -13 52 Income tax relating to components of other comprehensive income 2009 EUR million Before taxes Taxes After taxes Cash flow hedges 26 -7 19 Income tax relating to components Available for sale investments -115 30 -85 of other comprehensive income 2010 Translation differences 5 4 9 EUR million Before taxes Taxes After taxes Total -84 27 -57 Cash flow hedges 10 -3 7 Available for sale investments 29 -7 22 Translation differences 13 8 21 Total 52 -2 50 12 Earnings per share

In 2010 available for sale investments after taxes (22) include share of profit from associated companies EUR 1 million and translation differences after Result for the period, EUR million 2010 2009 taxes (21) EUR 1 million. from continuing operations 28 -335 from discontinued operations 0 -23 Total 28 -358

Adjusted number of shares (average) in thousands 328,166 328,166

Basic and diluted earnings per share, EUR from continuing operations 0.09 -1.02 from discontinued operations 0.00 -0.07 Total 0.09 -1.09

68 NOTES TO THE FINANCIAL STATEMENT 13 Intangible and tangible assets

Intangible assets Other Intangible Construction in EUR million Goodwill assets progress Total Acquisition costs, 1 Jan. 2010 13 180 193 Translation differences 11 Increase Decrease -8 -8 Transfers between items 11 Acquisition costs, 31 Dec. 2010 13 174 187

Accumulated depreciation and impairment charges, 1 Jan. 2010 -148 -148 Translation differences -1 -1 Accumulated depreciation on deduction and transfers 8 8 Depreciation for the period -7 -7

Accumulated depreciation and impairment charges, 31 Dec. 2010 -148 -148

Book value, 1 Jan. 2010 13 32 45 Book value, 31 Dec. 2010 13 26 39

Acquisition costs, 1 Jan. 2009 51 197 0 248 Translation differences 0000 Increase 010010 Decrease -5 -27 -32 Transfers between items 0000 Acquisition costs, 31 Dec. 2009 46 180 0 226

Accumulated depreciation and impairment charges, 1 Jan. 2009 -146 -146 Translation differences 0 0 0 Accumulated depreciation on deduction and transfers 0 9 9 Depreciation for the period 0 -10 -10 Impairment charges -33 -1 -34 Accumulated depreciation and impairment charges, 31 Dec. 2009 -33 -148 -181

Book value, 1 Jan. 2009 51 51 0 102 Book value, 31 Dec. 2009 13 32 0 45

In 2009 goodwill in Speciality Papers was impaired by EUR 33 million.

The carrying value and the fair value of emission rights included in intangible assets was on 31 December EUR 11 million (10). In addition intangible assets include among others computer software, patents and licenses.

NOTES TO THE FINANCIAL STATEMENT 69 Tangible assets Land and Machinery and Other tangible Construction in EUR million water areas Buildings equipment assets progress Total Acquisition costs, 1 Jan. 2010 60 859 3,730 75 9 4,733 Translation differences 17 143 4 1 165 Increase 2 28 0 33 63 Decrease -10 -66 0 0 -76 Transfers between items -3 1 0 -8 -10 Acquisition costs, 31 Dec. 2010 60 865 3,836 79 35 4,875

Accumulated depreciation and impairment charges, 1 Jan. 2010 -34 -593 -2,929 -47 -3,603 Translation differences -14 -104 -3 -121 Accumulated depreciation on deduction and transfers 19 51 1 71 Depreciation for the period -22 -100 -3 -125 Impairment charges and reversed impairment charges -36 3 -1 -34 Accumulated depreciation and impairment charges, 31 Dec. 2010 -34 -646 -3,079 -53 3,812

Book value, 1 Jan. 2010 26 266 801 28 9 1,130 Book value, 31 Dec. 2010 26 219 757 26 35 1,063

Land and Machinery and Other tangible Construction in EUR million water areas Buildings equipment assets progress Total Acquisition costs, 1 Jan. 2009 113 1,048 4,158 87 28 5,434 Translation differences 7 57 2 0 66 Increase 7 3 47 1 11 69 Decrease -60 -194 -547 -15 -15 -831 Transfers between items -5 15 0 -15 -5 Acquisition costs, 31 Dec. 2009 60 859 3,730 75 9 4,733

Accumulated depreciation and impairment charges, 1 Jan. 2009 -34 -601 -2,941 -50 -3,626 Translation differences -6 -41 -1 -48 Accumulated depreciation on deduction and transfers 81 293 9 383 Depreciation for the period -31 -155 -3 -189 Impairment charges and reversed impairment charges -36 -85 -2 -123 Accumulated depreciation and impairment charges, 31 Dec. 2009 -34 -593 -2,929 -47 -3,603

Book value, 1 Jan. 2009 79 447 1,217 37 28 1,808 Book value, 31 Dec. 2009 26 266 801 28 9 1,130

Impairment charges made at closure of Kangas’ paper machine 2 were partly Due to impairment test in 2009 impairment charges of EUR 113 million reversed (EUR 8 million) in June based on sales agreement of paper machine were recognised, EUR 33 million on goodwill in Speciality Papers and EUR 2. Impairment charges made in M-real Zanders’ Reflex paper mill were 80 million other impairment, of which EUR 33 million in Speciality Papers’ reversed (EUR 3 million) based on agreement to sell the mill partly to Metsä Zanders paper mill in Germany and EUR EUR 47 million in Office Papers’ Tissue in September. Alizay paper mill in France. In 2009 testing all accumulated utility values are In December some EUR 9 million reversal of impairment charge in Office based on the cash flow against the asset or CGU. Papers and some EUR 28 million impairment charge in Speciality Papers In 2009 in Alizay pulp mill an impairment of EUR 28 million was recognised were recognised because of impairment test. In addition in December an related to the planned permanent closure of Alizay pulp mill. In Metsä- impairment charge of EUR 15 million was recognised in Market Pulp and Botnia’s Kaskinen mill an impairment of EUR 16 million was recognised Energy due to fact that some buildings were retired from active use perma- related to the closure of the mill based on M-real’s 30 per cent share. Of nently in Hallein and an impairment charge of some EUR 11 was recognised these, EUR 12 million was recognised in Consumer Packaging and EUR 32 in Consumer Packaging related to closure of papermachine in Simpele. million in Market Pulp and Energy. Pledges and real estate mortgages for loans from financial institutions, pension loans and other lliabilities amounted to EUR 135 million (109). The capitalization of interest expenses in 2010 was EUR 0 million (0).

70 NOTES TO THE FINANCIAL STATEMENT At 31 December 2010 tangible assets include assets acquired under finance 15 Investments in associated lease agreements

Machinery EUR million 2010 2009 and At 1 Jan. 210 63 EUR million equipment Total Share of results in associated companies 54 -14 Acquisition costs 39 39 Dividend received -1 0 Accumulated depreciation -21 -21 Increases 0 162 Decreases 0 -1 Book value, 1 Jan. 2010 21 21 Translation differences 1 0 Book value, 31 Dec. 2010 18 18 At 31 Dec. 265 210

At 31 December 2009 tangible assets include assets acquired under finance Share of results from associated companies includes an impairment loss of lease agreements EUR -16 million related to M-real’s holding on Myllykoski Paper Oy. In 2009 the result included a loss of EUR -11 million from the Sunila pulp mill divested Machinery by Myllykoski Paper. and Due the restructuring of M-real’s joint venture Metsä-Botnia in December EUR million equipment Total 2009, M-real changed Metsä-Botnia’s consolidation method from IAS 31 Acquisition costs 39 39 (Interests in Joint Ventures) to IAS 28 (Investments in Associated). Line increases includes the effect of Metsä-Botnia’s changed consolidation method Accumulated depreciation -18 -18 in 2009. Unamortized amount of goodwill for associated companies at 31 Dec 2010 Book value, 1 Jan. 2009 24 24 was EUR 32 million (45). The decrease of goodwill comes from impairment Book value, 31 Dec. 2009 21 21 of Myllykoski Paper.

Biggest associated companies Additions include assets of EUR 0 million (EUR 1 million) acquired under Liabil- Gain/ Owner- finance lease agreements. Country Assets ities Sales loss ship, % Metsä-Botnia Group Finland 996 325 1,365 272 30 Kirkniemen Kartano 14 Biological assets Oy Finland 7 2 0 0 48 Myllykoski Paper Oy Finland 137 141 275 -24 35 Plastirol Oy Finland 22 6 26 2 39 Biological assets, forest assets, have been recognised at fair value. The Other 2 0 4 0 change in fair value will be recognised yearly as income/cost in income state- Total 1,164 474 1,670 250 ment. Due the restructuring of M-real’s joint venture Metsä-Botnia in Decem- ber, M-real changed Metsä-Botnia’s consolidation method from IAS 31 None of the associated companies were listed. (Interests in Joint Ventures) to IAS 28 (Investments in Associated). From 8.12.2009 on M-real has not anymore biological assets. M-real had forest Transaction and balances with associated companies assets in Finland and in Uruguay. EUR million 2010 2009 Sales 0 1 EUR million 2010 2009 Purchases 2 4 At 1 Jan. 57 Interest income 0 0 Purchases during the period 8 Interest expenses 0 0 Sales during the period -1 Receivables Harvested during the period -5 Current receivables 8 7 Gains and losses arising from changes in fair values -1 Liabilities Disposal -54 Current liabilities 2 2 Decrease 0 Translation differences -4 Transactions with Metsä-Botnia include in transactions with sister compa- At 31 Dec. 0 nies (Note 36).

NOTES TO THE FINANCIAL STATEMENT 71 16 Available for sale investments

EUR million 2010 2009 Available for sale financial assets Shares in other companies Listed companies 039 Other companies 314 278 314 317 Total 314 317

Fair value hierarchy of financial assets and liabilities 2010 Note Level1 Level2 Level3 Total Financial assets at fair value through profit or loss, non-current 16 Available for sale financial assets 16 0 314 314 Financial assets at fair value through profit or loss, current 20 1 1 Derivative financial assets 29 8 13 21

Derivative financial liabilities 29 0 36 36

2009 Note Level1 Level2 Level3 Total Financial assets at fair value through profit or loss, non-current 16 Available for sale financial assets 16 39 278 317 Financial assets at fair value through profit or loss, current 20 1 1 Derivative financial assets 29 2 22 24

Derivative financial liabilities 29 3 41 44

Financial assets and liabilities measured at fair value based on Level 3 Assets have been categorised according to IFRS 7 Paragraph 27 A and 27 B. EUR million 2010 2009 Opening balance 278 408 Level 1 is including assets valued based on quoted prices in active markets Total gains and losses in profit or loss 0 18 Level 2 is including assets valued based on inputs that are observable for the Total gains and losses in other comprehensive asset either directly or undirectly income 35 -121 Level 3 is including inputs that are not based on observable market data Purchases 1 Settlements 0 -27 Available for sale financial assets consist of listed companies and other Closing balance 314 278 companies. The fair value of listed companies are based on public quotation for shares at the Balance sheet date. The most significant ownership of listed companies was some two percentage stake of South African company Sappi Limited, which M-real received as a part of the Graphic papers business disposal in 2008. These shares were disposed in 2010. The realised fair value and capital gain was some EUR 8 million. The fair value of these shares in previous year was EUR 38 million.

72 NOTES TO THE FINANCIAL STATEMENT The most important shareholding of not quoted companies (Level 3) 17 Non-current ﬁnancial assets consists of 2.5 per cent stake in Finnish energy company Pohjolan Voima Oy. Pohjolan Voima Oy produces electricity and heat for its shareholders in Fin- land. Pohjolan Voima trades with its shareholders and the prices paid to EUR million 2010 2009 Pohjolan Voima Oy for energy are based on production costs, which generally Interest-bearing receivables are lower than the market prices. The Group has right for some 6.4 per cent Loans from Group companies 49 49 proportion in Olkiluoto nuclear power plant (Pohjolan Voima´s B shares), Loans from associated companies 0 some 6.4 percentage proportion in Meripori coal-fired power plant (C2 shares). Other loan receivables 5 4 Group has some 1.8 per cent proportion in new nuclear power plant under 54 53 construction at Olkiluoto. The group also have some 88 per cent right to use energy produced by Hämeenkyron Voima Oy (Pohjolan Voima’s G10 shares). Non-interest bearing receivables The ownership in Pohjolan Voima Oy is measured (by series of shares) at fair Loans from Group companies 4 4 value quarterly by using the weighted average of discounted cash flow method Loans from associated companies 0 0 and the valuation based on earlier transactions. The fair value of the com- Other loan receivables 0 0 parative year was measured based on discounted cash flow method. The Defined benefit pension plans (Note 23) 1 1 WACC used was 4.66 (4.67) percentage. 12 months rolling averages have 55 been used for the energy price estimates, which evens out the short-term Total 59 58 energy price fluctuations. The changes in fair value less deferred tax calculated with Finnish tax rate are recorded in fair value reserve in equity. The acquisition value of shares in Pohjolan Voima Oy is EUR 28 million (26) and In connection with divestment of Graphic Papers in December 2008, M-real the fair value EUR 310 million (273). The fair value of nuclear power shares received EUR 220 million in interest-bearing vendor notes from Sappi. In (B and B2 shares) was some EUR 312 (277) million, of which EUR 283 (255) August 2009 M-real agreed with Sappi that Sappi will repay the vendor notes million B shares and EUR 29 (22) million B2 shares and coal-fired power at the price of 86.5 per cent of their nominal value. This early repayment shares (C2 shares) some EUR -4 (-4) million and G shares some EUR 2 mil- resulted in an approximately EUR 30 million loss that was booked in financial lion (0). expenses in 2009. The shareholder agreement prevents free selling of shares with others Loans from Group companies are loans granted to parent company than shareholders. Metsäliitto and to other subsidiaries of Metsäliitto. M-real’s joint venture Metsä-Botnia disposed in December 2009 77 per cent of its Pohjolan Voima Shares as part of restructuring of Metsä-Botnia. A realised fair value and capital gain from the sale of EUR 18 million (30 percent share) was recorded. Other shares in not quoted companies, where the fair value cannot be measured reliably are carried at cost less any impairment losses.

NOTES TO THE FINANCIAL STATEMENT 73 18 Deferred taxes

Reconciliation of deferred tax assets and liabilities during the period in 2010 Charged in Charged in income Translation other items of As at 31 Dec. EUR million As at 1 Jan. 2010 statement differences comprehensive income 2010 Deferred tax assets Pension obligation and other provisions 1 0 1 Intercompany margins 2 0 2 Unused tax losses and tax credit 10 -10 0 Other temporary differences 5 0 5 Deferred tax assets, total 18 -10 8 Netting against liabilities -15 10 -5 Deferred tax assets in Balance sheet 3 0 3

Deferred tax liabilities Appropriations 102 -5 7 104 Available for sale financial assets recorded at fair value 66 7 73 Equity hedging 8 -8 Other temporary differences 9 -6 1 3 7 Deferred tax liabilities, total 177 -3 8 2 184 Netting against assets -15 10 0 -5 Deferred tax liabilities in Balance sheet 162 7 8 2 179 Deferred tax liabilities, net -159 -7 -8 -2 -176

Other temporary differences in deferred tax assets comes mostly from finance lease arrangements.

Reconciliation of deferred tax assets and liabilities during the period in 2009 Charged in Charged in income Translation other items of As at 31 Dec. EUR million As at 1 Jan. 2009 statement Disposals differences comprehensive income 2009 Deferred tax assets Pension obligation and other provisions 2 -1 1 Intercompany margins 3 -1 2 Unused tax losses and tax credit 10 10

Other temporary differences 14 0 -3 0 -6 5 Deferred tax assets, total 29 -1 -4 0 -6 18 Netting against liabilities -24 3 0 6 -15 Deferred tax assets in Balance sheet 5 2 -4 0 0 3

Deferred tax liabilities Appropriations 150 -30 -21 3 102 Available for sale financial assets recorded at fair value 97 -1 -30 66 Equity hedging 3 -3 Other temporary differences 9 -1 1 0 0 9 Deferred tax liabilities, total 256 -28 -21 3 -33 177 Netting against assets -24 3 0 6 -15 Deferred tax liabilities in Balance sheet 232 -25 -21 3 -27 162 Deferred tax liabilities, net -227 27 17 -3 27 -159

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax relates to the same taxation authority on either the same taxable entity or different taxable entity, which intend to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously. On 31 December 2010 the net operating loss carry- forwards amounted to EUR 0 (35) million, for which tax assets have been recognised. In 2009 some EUR 10 million tax asset has been recognised. The operating loss carry-forwards mainly in Germany, France, Austria and Finland for which deferred tax assets have not been recognised due to uncertainty of the utilization of these loss carry-forwards amounted to appr. EUR 1,060 (1,040) million. These loss carry-forwards do not expire. The deferred tax assets for these non recognised loss carry-forwards amounted to appr. EUR 300 (290) million. Other temporary differences in deferred tax assets comes mostly from finance lease arrangements. Some EUR 46 million of the losses will expire in 2019–20. The rest do not expire.

74 NOTES TO THE FINANCIAL STATEMENT 19 Inventories Doubtful accounts receivables Accounts receivables are recorded net of the following allowances for doubtful accounts: EUR million 2010 2009 EUR million 2010 2009 Raw materials and consumables 144 114 At 1 Jan. 7 5 Work in progress 16 15 Increases 1 9 Finished goods and goods for sale 223 181 Decreases -2 -7 Advance payments 8 3 At 31 Dec. 6 7 391 313 Accounts receivables, overdue The cost of inventories recognised as expense and included in materials and No overdue 329 275 services was EUR 1 million (0). Overue less than 90 days 30 22 between 90–180 days 1 2 20 Accounts receivables and other receivables more than 180 days 0 1 Total 360 300

EUR million 2010 2009 Prepayment and accrued income Financial assets at fair value through profit or loss Current (current) Employee costs 1 0 At 1 Jan. 1 16 Interest 4 2 Increses 1 0 Insurance 0 0 Changes in fair values 0 0 Others 10 22 Decrease -1 -15 Total 15 24 At 31. Dec. 1 1

Financial assets at fair value through profit or loss are mainly bonds, clas- 21 Cash and cash equivalents sified entirely as held for trading.

Interest-bearing loan receivables EUR million 2010 2009 Loans from Group companies 54 75 Current investments 259 256 Loans from associated companies 7 7 Cash at bank and in hand 149 241 Other loan receivables 1 1 Total 408 497 62 83 Accounts receivables and other non-interest- bearing receivables Current investments are certificates of deposits and time deposits with From Group companies original maturities less than three months. Accounts receivables 12 3 Other receivables 0 26 Prepayment and accrued income 16 3 28 32 From associated companies Accounts receivables 0 0 00 From others Accounts receivables 360 300 Other receivables 50 57 Prepayment and accrued income 15 24 425 381 Accounts receivables and other receivables 516 497

Receivables from the Group companies are receivables from parent company Metsäliitto and from other subsidiaries of Metsäliitto. There are no loan receivables from the managing directors of the Group companies, members of the Board of Directors and their deputies as well as persons belonging to similar bodies. Metsäliitto Management Oy has been established for the shareholding programme of the members of Metsäliitto Group’s Executive Management (The note 35). Metsäliitto Management Oy has been established for the shareholding programme of the members of Metsäliitto Group’s Executive Management (see note 35).

NOTES TO THE FINANCIAL STATEMENT 75 22 Shareholders´ equity

Changes in share capital Share capital Share premium account Total EUR million Series A Series B At 1 Jan. 2009 62 496 667 1,225 2009 no changes At 31 Dec. 2009 62 496 667 1,225 2010 no changes At 31 Dec. 2010 62 496 667 1,225

Each series A share entitles its holder to twenty (20) votes at a General Meeting of Shareholders, and each series B share entitles the holder to one (1) vote. All shares carry the same right to receive a dividend. M-real’s A shares can be converted to B shares if shareholder or representative of the nominee registered shares makes a written request of the conversion to the company. The conversion does not include additional consideration.

Number of shares Series A Series B Total At 1 Jan. 2009 36,339,550 291,826,062 328,165,612 2009 no changes At 31 Dec. 2009 36,339,550 291,826,062 328,165,612 2010 no changes At 31 Dec. 2010 36,339,550 291,826,062 328,165,612

The Annual General Meeting on 13 March 2008 resolved to delete from the company’s Articles of Association the section concerning the par value of the company’s shares. All shares are paid-in.

Fair value and other reserves 23 Post-employment beneﬁts EUR million 2010 2009 Fair value reserve 221 192 Legal reserve and reserves stipulated by the Arti- M-real operates a number of defined benefit pension plans and defined cles of Association 2 2 contribution plans in different countries, which are arranged in accordance Total 223 194 with local regulations and practices. Most of them are defined contribution plans. The most significant pension plan in Finland is the statutory Finnish Share premium account employee pension scheme (TYEL) according to which benefits are linked The amount exceeding the par value of shares received by the company in directly to the employee´s earnings. connection with share issue are recognised in share premium account. In Finland there are pension schemes which are funded by contributors to insured schemes or to Metsäliitto Employees’ Pension Foundation. The Legal reserve and reserves stipulated by the Articles of Association Metsäliitto Employees’ Pension Foundation scheme is a defined benefit plan. Legal reserve and reserves stipulated by the Articles of Association have There are other defined contribution pension plans in Finland, too. been created and accumulated as a result of resolution by the General Meet- ing of Shareholders. Pension and other post-employment benefits EUR million 2010 2009 Fair value reserve Defined benefit pension plans 73 74 The reserve include the effective portion of fair value based on hedge account- Defined contribution pension plans 11 14 ing applied to interest, currency and commodity derivatives and the fair value Net liability 84 88 change of available for sale financial assets less deferred tax.

Translation differences Overfunded plan shown as asset 1 1 Translation differences include translation differences arising on translation Total liability in balance sheet 85 89 of subsidiaries in other currencies than euro and gains and losses arising on hedging of net investments in these subsidiaries less deferred tax, when requirements of hedgeaccounting have been fulfilled.

Dividends After Balance sheet day The Board of Directors has not proposed any dividend to pay.

76 NOTES TO THE FINANCIAL STATEMENT Defined benefit pension plans Major categories of plan assets as a percentage of total plan assets, % EUR million 2010 2009 Equity securities 38 38 The amounts recognised in the balance sheet Debt securities 21 20 Present value of funded obligations 45 42 Real estate 14 15 Present value of unfunded obligations 67 67 Bonds 17 18 112 109 Others 10 9 Total 100 100 Fair value of plan assets -40 -36 Unrecognised actuarial gains and losses 2 1 Amounts for the current and previous periods Net liability in balance sheet 74 74 Present value of defined benefit obligations -112 -109 Fair value of plan assets 40 36 The amounts recognised in the income statement Funded status -72 -73 Current service cost 3 3 Interest cost 5 6 Experience adjustments on plan liabilities 1 0 Expected return on plan assets -2 -2 Experience adjustments on plan assets 2 -2 Net actuarial losses (gains) recognised in year -2 -7 Profit/loss curtailment 0 0 Total included in employee costs 4 0 The principal actuarial assumptions used: The actual return on plan assets was EUR 4 million in 2010 (2009 EUR 6 mil- 2009 2009 lion) Finland Discount rate % 4.25 4.75 Changes in the present value of defined benefit obligations Expected return on plan assets % 5.7 3.5 Defined benefit obligation as at 1 Jan. 109 112 Future salary increases % 0.0 0.0 Current service cost 3 3 Future pension increases % 1.4 2.1 Interest cost 5 6 Expected average remaining working years of staff 0 0 Contribution by plan participations 1 0 Actuarial losses (gains) recognised in year 1 0 UK Disposals 0 0 Discount rate % 5.4 5.7 Curtailments and settlements 0 0 Expected return on plan assets % 6.84 6.80 Benefits paid -7 -11 Future salary increases % 4.5 4.3 Other adjustments -1 0 Future pension increases % 3.5 3.3 Translation differences 1 -1 Expected average remaining working years of staff 12 13 Defined benefit obligation as at 31 Dec. 112 109 Germany Changes in the fair value of plan assets Discount rate % 5.3 5.8 Fair value of plan assets as at 1 Jan. 36 31 Expected return on plan assets % n/a n/a Expected return on plan assets 2 2 Future salary increases % 2.5 2.5 Actuarial losses (gains) recognised in year 2 4 Future pension increases % 2.0 2.0 Contribution by plan participants 1 1 Expected average remaining working years of staff 12 12 Contribution by the employer 0 1 Disposals 0 0 Austria Settlements 0 0 Discount rate % 5.1 5.0 Benefits paid -2 -2 Expected return on plan assets % n/a n/a Translation differences 1 -1 Future salary increases % 2.02 0 Fair value of plan assets as at 31 Dec. 40 36 Future pension increases % 2 2.11 Expected average remaining working years of staff 19 20 Group expects to contribute EUR 2 million to its defined benefit pension plans in 2011. Switzerland Discount rate % 3.0 3.3 Expected return on plan assets % 3.5 3.5 Future salary increases % 1.5 1.5 Future pension increases % 0.5 0.5 Expected average remaining working years of staff 6 7

NOTES TO THE FINANCIAL STATEMENT 77 24 Provisions

Environmental Other EUR million Restructuring obligations provisions Total At 1 Jan. 2010 87 1 16 104 Translation differences 2002 Increases 21 1 4 26 Decreases -67 0 -4 -71 Unused amounts reversed -20 0 0 -20 Effect of discounting 1001 At 31 Dec. 2010 24 2 16 42

The most significant increase in provision was EUR 16 million cost provision 25 Borrowings in the Speciality Papers business area related to the planned closure of two machines at the Reflex mill and to the reorganisation of the Reflex and Gohrsmühle organisations. EUR 8 million release of the provision was rec- EUR million 2010 2009 ognised in September as a result of partial divestment of the Reflex mill to Non-current interest-bearing financial liabilities Metsä Tissue and lower reorganisation expenses at Gohrsmühle. EUR 12 Bonds 687 729 million release of cost provision related to IT arrangements made earlier Loans from financial institutions 47 73 was recognised in March. EUR 4 million additional cost provision in Market Pension loans 204 61 Pulp and Energy business area relating to the closure of the Alizay pulp mill Finance lease liabilities 25 27 was recognised in July. Other liabilities 53 53 Other provisions include provisions related leases, taxes, guarantees and Total 1,016 943 legal action. The non-current portion of total provision was some EUR 35 million and current portion some EUR 7 million. The non-current portion will Current interest-bearing financial liabilities mostly be paid during year 2012. Current portion of long-term debt 111 406 Short-term loans 3 3 Bill of exchange payable 2 2 Other liabilities 218 56 Total 334 467

Interest-bearing financial liabilities, total 1,350 1,410

Interest-bearing financial assets Non-current Loan receivables 53 53 53 53

Current Financial assets at fair value through profit or loss 1 1 Loan receivables and other receivables 62 83 Current investments at amortized cost 259 256 Cash at bank and in hand 149 241 470 580

Interest-bearing financial assets, total 523 633

Interest-bearing net liabilities, total 827 777

78 NOTES TO THE FINANCIAL STATEMENT Maturity of repayment and interest payment of financial liabilities 31.12.2010 EUR million Book value 2011 2012 2013 2014 2015 2016- Bonds and debentures 739 Repayment -51 -103 -494 -91 0 0 Interest payment -61 -56 -30 -4 0 0 Loans from financial institutions 74 Repayment -28 -24 -20 -2 0 0 Interest payment -1 -10000 Pension loans 233 Repayment -29 -28 -39 -29 -20 -88 Interest payment -14 -12 -10 -7 -6 -12 Finance lease liabilities 28 Repayment -3 -2 -2 -1 -1 -19 Interest payment 0 00000 Other non-current interest-bearing liabilities 53 Repayment 0 0 -49 0 0 -4 Interest payment -1 -1 -1000 Non-current interest-bearing liabilities, total 1,127 Repayments in 2011 -111 Non-current interest-bearing liabilities in balance sheet 1,016

Total Repayment -111 -157 -604 -123 -21 -111 Interest payment -77 -70 -41 -11 -6 -12 Current interest-bearing liabilities 223 Repayment -223 Interest payment Accounts payables and other liabilities 426 Repayment -418 -3 -2 -1 -2 Total liabilities 1,776 Repayment -752 -160 -606 -124 -21 -113 Interest payment -77 -70 -41 -11 -6 -12 Guarantees agreements Derivative financial instrument liabilities 36 Interest rate swaps, interest payment 13 137111 Currency derivatives, interest payment -2,095 -10000 Commodity derivatives, interest payment 000000 Derivative financial instrument liabilities total -2,082 127111 Derivative financial instrument assets 20 Interest rate swaps, interest payment 000000 Currency derivatives, interest payment 2,08720000 Commodity derivatives, interest payment 530000 Derivative financial instrument assets total 2,09250000 Derivative financial instrument net of cash 10 177111

NOTES TO THE FINANCIAL STATEMENT 79 Maturity of repayment and interest payment of financial liabilities 31.12.2009 EUR million Book value 2010 2011 2012 2013 2014 2015- Bonds and debentures 1,068 Repayment -339 -52 -101 -492 -84 0 Interest payment -70 -62 -57 -31 -4 0 Loans from financial institutions 98 Repayment -25 -28 -25 -20 0 0 Interest payment -1 -10000 Pension loans 99 Repayment -39 -11 -20 -20 -10 0 Interest payment -7 -5 -4 -2 0 0 Finance lease liabilities 31 Repayment -3 -3 -2 -1 -1 -20 Interest payment -1 -1 -1 0 0 -1 Other non-current interest-bearing liabilities 53 Repayment 0 0 0 -49 0 -4 Interest payment 0 -1 -1 -1 0 0 Non-current interest-bearing liabilities, total 1,349 Repayments in 2010 -406 Non-current interest-bearing liabilities in balance sheet 943

Total Repayment -406 -94 -148 -582 -95 -24 Interest payment -79 -70 -63 -34 -4 -1 Current interest-bearing liabilities 61 Repayment -61 Interest payment 0 Accounts payables and other liabilities 399 Repayment -387 -9 0 0 -1 -2 Total liabilities 1,809 Repayment -854 -103 -148 -582 -96 -26 Interest payment -79 -70 -63 -34 -4 -1 Guarantees agreements Derivative financial instrument liabilities 44 Interest rate swaps, interest payment 10 11 12600 Currency derivatives, interest payment -2,652 -3 -1000 Commodity derivatives, interest payment -1 -31000 Derivative financial instrument liabilities total -2,643 5 12600 Derivative financial instrument assets 24 Interest rate swaps, interest payment 000000 Currency derivatives, interest payment 2,63942000 Commodity derivatives, interest payment 100000 Derivative financial instrument assets total 2,64042000 Derivative financial instrument net of cash -3 9 14600

80 NOTES TO THE FINANCIAL STATEMENT Bonds 26 Other non-current liabilities EUR million Interest % 2010 2009

2002–2012 9.20 103 101 EUR million 2010 2009 2002–2014 9.40 90 84 Non-current liabilities to Group companies 0 0 2004–2011 3.325 30 30 Non-current liabilities to others 2004–2011 3.506 10 10 Accruals and deferred income 1 0 2004–2011 3.58 12 12 Other liabilities 7 12 2006–2010 5.59 0 339 Total non-interest-bearing non-current liabilities 8 12 2006–2013 8.75 494 492 739 1,068 Liabilities to Group companies are liabilities to parent company Metsäliitto and other subsidiaries of Metsäliitto. Maturity of finance lease liabilities Non-current accruals and deferred income The present value Others 1 0 Minimum of minimum lease payments lease payments Total 1 0 EUR million 2010 2009 2010 2009 Not later than 1 year 3433 1–2 years 2323 27 Accounts payable and other liabilities 2–3 years 2222 3–4 years 2211 4–5 years 1211EUR million 2010 2009 Later than 5 years 19 21 19 21 Current liabilities to Group companies 29 34 28 31 Accounts payable 58 36 Other liabilities 1 15 Future finance charges 1 3 Current liabilities to associated companies The present value of Accounts payable 2 2 minimum lease pay- Other liabilities 0 0 ments 28 31 Current liabilities to others Advance payments 6 6 Accounts payable 137 115 The most significant finance lease agreements are power plant Äänevoima Other liabilities 68 115 Oy´s power plants. Äänevoima´s contract periods vary between 10 and 15 years. All finance lease liabilities will be due in 2017 at the latest. These Accruals and deferred income 143 92 leases contain renewal and purchase options. Total 415 381

Liabilities to Group companies are liabilities to parent company Metsäliitto and other subsidiaries of Metsäliitto.

Current accruals and deferred income Periodizations of employee costs 46 42 Interests 14 15 Accruals of purchases 46 30 Others 37 5 Total 143 92

NOTES TO THE FINANCIAL STATEMENT 81 28 Financial assets and liabilities classiﬁed according to IAS 39 and fair values

Financial assets 31.12.2010 Fair value Available Derivatives through for sale Loans and at hedge Amortised Total book EUR million Note profit & loss fin. assets receivables accounting cost value Fair value Non-current investments 16 314 314 314 Other non-current financial assets 17 59 59 61 Accounts receivables and other receivables 20 1 515 516 516 Cash and cash equivalent 21 408 408 408 Derivative financial instruments 29 14 7 21 21 Total 15 314 982 7 1,317 1,320

Financial liabilities Non-current interest-bearing financial liabilities 25 1,016 1,016 1,072 Other non-current financial liabilities 26 888 Current interest-bearing financial liabilities 25 334 334 336 Accounts payable and other financial liabilities 27 363 363 363 Derivative financial instruments 29 12 24 36 36 Total 12 24 1,722 1,758 1,816

Financial assets 31.12.2009 Fair value Available Derivatives through for sale Loans and at hedge Amortised Total book EUR million Note profit & loss fin. assets receivables accounting cost value Fair value Non-current investments 16 317 317 317 Other non-current financial assets 17 58 58 58 Accounts receivables and other receivables 20 1 496 497 497 Cash and cash equivalent 21 497 497 497 Derivative financial instruments 29 24 24 24 Total 25 317 1,051 1,393 1,393

Financial liabilities Non-current interest-bearing financial liabilities 25 943 943 830 Other non-current financial liabilities 26 12 12 12 Current interest-bearing financial liabilities 25 467 467 458 Accounts payable and other financial liabilities 27 333 333 333 Derivative financial instruments 29 18 26 44 44 Total 18 26 1,755 1,799 1,677

Accounts receivables and other receivables do not include advance payments, calculated by market rate. The discount rates applied are between 0.8–6.6 deferred tax assets and periodizations of employee costs (note 20). Accounts per cent (2009 0.4–21.2). Of interest bearing liabilities 83 per cent (84) is payable and other financial liabilities do not include advance payments, subject to variable rates and the rest to fixed rates. The average interest rate deferred tax liabilities and periodizations of employee costs (note 27). of interest-bearing liabilities at the end of 2010 was 5.1 per cent (2009: 6.0 In M-real Group all interest-bearing liabilities are valued in the balance per cent). The fair values of accounts and other receivables and accounts sheet at amortised cost based on effective interest method. Fair values in payables and other liabilities are not essentially deviating from the carrying the table are based on present value of cash flow of each liability or assets amounts in ther balance sheet.

82 NOTES TO THE FINANCIAL STATEMENT 29 Derivatives

Derivatives Nominal value Fair value Derivatives/ hedge Derivatives Fair value Cash flow Equity accounting held for EUR million Assets Liabilities Total hedges hedges hedges not applied trading 2010

Interest forward agreements 8.5 0.1 -0.1 -0.1 Interest rate options Interest rate swaps 1,239.7 4.8 9.0 -4.2 -4.3 -0.6 1.1 -0.3 Interest rate derivatives 1,248.2 4.8 9.1 -4.3 -4.3 -0.6 1.1 -0.4

Currency forward agreements 2,074.9 8.1 17.4 -9.3 5.1 -15.7 1.2 Currency option agreements 17.5 0.1 -0.1 -0.1 Currency swap agreements 56.1 8.9 -8.9 -8.9 Currency derivatives 2,148.5 8.1 26.4 -18.3 -8.9 5.1 -15.7 1.1

Electricity derivatives. 76.1 7.4 7.4 6.6 0.8 Pulp derivatives Other commodity derivatives 7.1 0.1 0.3 -0.2 -0.2 Commodity derivatives 83.2 7.5 0.3 7.2 6.6 0.6 Derivates total 3,479.9 20.4 35.8 -15.4 -13.2 11.1 -15.7 2.8 -0.4

Nominal value also includes closed contracts to a total amount of EUR 1,787 million.

2009

Interest forward agreements 4.0 -0.1 0.1 0.1 Interest rate options Interest rate swaps 976.5 3.9 7.3 -3.4 -5.0 -1.2 2.8 Interest rate derivatives 980.5 3.9 7.2 -3.3 -5.0 -1.2 0.0 2.9

Currency forward agreements 2,634.9 18.6 24.0 -5.4 5.5 -12.6 1.7 Currency option agreements 118.5 0.1 -0.1 -0.1 -0.1 Currency swap agreements 52.1 9.3 -9.3 -9.3 Currency derivatives 2,805.5 18.6 33.4 -14.8 -9.3 5.5 -12.6 1.6 -0.1

Electricity commodity egreements 174.9 1.6 2.8 -1.2 -3.3 2.1 Pulp commodity agreements. Other commodity agreements 7.9 0.3 -0.3 -0.3 Commodity derivativesl 182.8 1.6 3.1 -1.5 -3.3 1.8 Derivates total 3,968.8 24.1 43.7 -19.6 -14.3 1.0 -12.6 6.3

Nominal value also includes closed contracts to a total amount of EUR 2,159 million.

NOTES TO THE FINANCIAL STATEMENT 83 30 Maturity analysis of cash ﬂow hedge accounting

Result of the hedging instrument is booked to the income statement at the realization of the cash flow. Contractual maturities of hedging instruments equals to the hedged cash flow.

EUR million 31.12.2010 EUR million 31.12.2009 Highly probable Contractual Highly probable Highly probable Contractual Highly probable Periods when the forecasted foreign currency interest commodity Periods when the forecasted foreign currency interest commodity cash flow are expected to occur cash flows cash flows cash flows cash flow are expected to occur cash flows cash flows cash flows Q 1 98.9 -0.1 -4.8 Q 1 63.8 -0,1 -1.9 Q 2 75.6 -0.1 -4.8 Q 2 59.9 -0,1 -5.0 Q 3 36.0 0.0 -4.8 Q 3 26.6 -0,1 -5.0 Q 4 0.0 0.0 -4.8 Q 4 16.3 0,0 -1.9 Total in 2011 210.5 -0.2 -19.2 Total in 2010 166.5 -0,3 -13.8 2012 -1.9 2011 -0,2 -18.3 2013 -0.8 2012 -7.3 2014 2013

Cash flows total 210.5 -0.2 -29.7 Cash flows total 166.5 -0,4 -39.5 Total nominal values of Total nominal values of derivatives directed to derivatives directed to hedge accounting 210.5 30.0 29.7 hedge accounting 166.5 30.0 39.5

31 Notes to Consolidated cash ﬂow statement

EUR million 2010 2009 Adjustments to the profit Taxes 21 26 Depreciation, amortization and impairment charges 166 356 Share of results in associated companies -54 14 Gains and losses on sale of fixed assets -32 -148 Finance costs, net 73 74 Provisions -66 2 108 324

Change in working capital Inventories -78 122 Accounts receivables and other receivables -33 116 Accounts payable and other liabilities 25 -98 -86 140

Disposals of subsidiaries M-real did not dispose any subsidiaries in 2010 or 2009.

84 NOTES TO THE FINANCIAL STATEMENT 32 The Principal Subsidiaries 31 December 2010

Country Group’s holding, % Number of shares Shares and participations owned by the Group Metsäliitto Cooperative Finland 179,171

Shares in subsidiaries In Finland Alrec Boiler Oy *) Finland 24.92 899 Oy Hangö Stevedoring Ab Finland 100.00 150 Kemiart Liners Oy Finland 100.00 2,000,000 Logisware Oy Finland 100.00 4,500 OOO Peterbox Russia 100.00 M-real International Oy Finland 100.00 10,000 Metsä Group Financial Services Oy Finland 51.00 25,500

In other countries M-real Deutsche Holding GmbH Germany 100.00 M-real Fine B.V. The Netherlands 100.00 1,000 M-real Holding France SAS France 100.00 520,000 M-real IBP Deals Americas Ltd USA 100.00 50 M-real IBP Deals Europe S.A. Belgium 100.00 1,000 M-real NL Holding B.V. The Netherlands 100.00 15,350 M-real Reinsurance AG Switzerland 100.00 19,997 M-real Sverige Ab Sweden 100.00 10,000,000 M-real UK Holdings Ltd Great Britain 100.00 146,750,000

* Consolidation as a subsidiary under shareholders’ agreement.

NOTES TO THE FINANCIAL STATEMENT 85 Country Group’s holding, % Number of shares

Subgroups in Finland

M–real International Oy M-real Benelux B.V. The Netherlands 100.00 2,000 M-real Benelux n.v./s.a Belgium 100.00 2,921 M-real Board and Paper OOO Russia 100.00 100 M-real CZ, s.r.o. Czech Republic 100.00 M-real Deutschland GmbH Germany 100.00 1 M-real France SAS France 100.00 8,211 M-real Hellas Ltd Greece 51.00 306 M-real Hong Kong Ltd Hong Kong 100.00 100 M-real Shanghai Ltd China 100.00 M-real Ibéria S.A. Spain 100.00 147,871 M-real Ireland Ltd Ireland 100.00 5,000 M-real Italia s.r.l. Italy 100.00 100,000 M-real Kft Hungary 100.00 30 M-real ( Middle East & North Africa) Ltd Cyprus 100.00 742,105 M-real Polska Sp. Z o.o. Poland 100.00 232 M-real Nordic A/S Denmark 100.00 36 M-real Nordic AB Sweden 100.00 1,000 M-real Singapore Pte Ltd Singapore 100.00 10,000 M-real Schweiz AG Switzerland 100.00 100 M-real UK Ltd Great Britain 100.00 2,400 M-real USA Corporation USA 100.00 180

Subgroups in other countries M-real Holding France SAS M-real Alizay SAS France 100.00 3,203,210 M-real Alizay SNC France 100.00 40,000,000

M-real Deutsche Holding GmbH M-real Zanders GmbH Germany 100.00 2,800,000 M-real New Jersey Service Co. USA 100.00 BGE Eisenbahn Verkehr GmbH1) Germany 40.00 Metsäliitto Energie GmbH Germany 80.00 M-real Hallein AG Austria 98.60 69 M-real NL Holding B.V M-real IBP Deals (China) Ltd China 100.00 M-real IBP HK Ltd Hong Kong 100.00 7,009,900

M-real UK Holdings Ltd M-real UK Services Ltd Great Britain 100.00 115,800,001

1) Consolidation as a subsidiary according to agreement

86 NOTES TO THE FINANCIAL STATEMENT 33 Joint ventures

Joint ventures have been consolidated using line-by-line method proportion- At balance sheet day M-real owns 30 per cent of Metsä-Botnia. M-real ate to the M-real Group’s holding. Group’s consolidated Income statement changed the whole Metsä-Botnia’s consolidation method from IAS 31 (Inter- and Balance sheet included assets, liabilities, income and costs as follows: ests in Joint Ventures) to IAS 28 (Investments in Associated) from 8 Decem- ber 2009 on. EUR million 2010 2009 Non-current assets 22 24 Current assets 5 4 Assets total 27 28

Non-current liabilities 25 26 Current liabilities 4 3 Liabilities total 29 29

Sales 15 345 Expenses 16 293 The profit for the period -1 55

Significant joint ventures: Group’s holding, % Oy Metsä-Botnia Ab 30.0 Äänevoima Oy 56.25 56.25

In December 2009 Metsä-Botnia’s ownership was restructured. Metsä- Botnia acquired some 9.2 per cent of its own shares. M-real’s ownership rose by three per cent to 33 per cent. M-real sold three per cent to its parent company Metsäliitto and recorded some EUR 33 million profit on sale.

NOTES TO THE FINANCIAL STATEMENT 87 34 Contingent liabilities

EUR million 2010 2009 EUR million 2010 2009 For own liabilities Unconditional purchase agreement Liabilities secured by pledges Tangible assets Pension loans 100 0 Payments due in following 12 months 0 0 Pledges granted 52 0 Payments due later 2 1 Liabilities secured by mortgages 21 Loans from financial institutions 0 31 Other purchases Pension loans 126 75 Payments due in following 12 months 1 1 Other liabilities 6 0 Payments due later 0 0 Real estate mortgages 132 106 11 Liabilities secured by chattel mortgages Joint ventures Loans from financial institutions 3 3 Chattel mortgages 3 3 Proportionate interest in joint ventures unconditional purchase agreement, On behalf of Group companies tangible assets, was EUR 0 million (0). Pledged assets 13 0 On behalf of associated companies Guarantee liabilities 0 0 35 On behalf of others Share based payment Guarantee liabilities 1 2 Other liabilities As security for other commitments 0 0 Share incentive scheme 2008–2010 Leasing liabilities On 16 January 2008, M-real’s Board of Directors decided to adopt a share Payments due in following 12 months 2 2 incentive scheme for 2008–2010. The scheme offers target groups the pos- Payments later than the following 12 months 3 2 sibility to be awarded M-real Corporation’s B-shares for achieving the goals set for three incentive periods, each of one calendar year. The size of the Total bonus awarded under the share incentive scheme is linked to the Group’s Pledges 65 0 operating profit (EBIT, 50 per cent weight) and the return on capital employed Real estate mortgages 135 109 (ROCE, 50 per cent weight). The size of the bonus awarded for vesting period Guarantees 1 2 2009 is linked to adjusted cashflow (cashflow 2) and for 2010 to EBIT and Promissory notes 0 0 adjusted cashflow (cashflow 2). The bonus payable under the share incentive Other liabilities 0 0 scheme is paid in the form of M-real Corporation’s B-shares. In addition, an Leasing liabilities 5 4 amount corresponding at maximum to the value of the shares is paid in cash Total 206 115 to cover taxes. The achievement of the target set for the period involved determines how large a share of the maximum bonus is paid to key personnel. The bonus is not paid if the person concerned ceases to be employed Pledges granted are sister company’s shares (Metsä-Botnia) before the award is paid. The person concerned must also continue to own the shares at least two years after the date of the award payment. Other lease commitments On 16 of December 2010 the Board of Directors of M-real Corporation has resolved on a new share-based incentive plan directed to the M-real Corpo- M-real leases various offices and warehouses under non-cancellabe operat- ration executives. The plan includes three three-year earning periods, cal- ing lease agreements. Some contracts are renewable at the end of the lease endar years 2011—2013, 2012—2014 and 2013—2015. The Board of Directors period. will decide on the earnings criteria and on targets to be established for them at the beginning of each earning period. The potential reward from the plan for the earning period 2011—2013 will be based on the M-real Corporation’s Equity Ratio and the development of Return on Capital Employed (ROCE) and Earnings before Interest and Taxes (EBIT). Each earning period is followed by subsequent two-year restriction period during which the participant is not entitled to transfer or dispose of the shares. The potential reward from the earning period 2011—2013 will be paid partly in M-real Corporation series B shares and partly in cash in 2014. The proportion to be paid in cash will cover taxes and tax-related costs arising from the reward. In the starting point the plan concerns 9 people including the members of the M-real Cor- porate Management Team. The rewards to be paid on the basis of the plan for the first earning period are in total maximum of approximately 1,000,000 M-real Corporation series B shares.

88 NOTES TO THE FINANCIAL STATEMENT Share incentive scheme 2008–2010 Issued by Board’s decision Date of issue 16.1.2008 Instrument Equity-based reward scheme 2008 *) 2009 *) 2010 *) Total Maximum number of shares 90,000 70,000 82,500 242,500 Maximum number of shares in cash 90,000 70,000 82,500 242,500 Exercise date 16.1.2008 5.2.2009 3.2.2010 Vesting period starts 1.1.2008 1.1.2009 1.1.2010 Vesting period ends 31.12.2008 31.12.2009 31.12.2010 Obligation to hold shares, years 2 2 2 Conditions of vesting requirements obligation to work obligation to work obligation to work Criteria EBIT,ROCE Cashflow2 EBIT,Cashflow2 Date of vesting requirement 1.1.2011 1.1.2012 1.1.2013 Maximum validity, years 3 3 3 Payment shares and cash Binding time left, years 0 1 2 Number of key personnel (31.12.2010) 0 7 6 Realisationprice, eur 0 0 0 Fair value measuring**)

Share price at grant date, EUR 2.54 0.45 1.80 Fair value of share at grant date*) EUR 2.42 0.45 1.80 Assumed dividends 0.12 0.00 0.00 Share price at the end of financial period**), EUR 0.69 2.38 2.54 Fair value at end of financial period 0 142,588 124,775 267,363 Effect on result and financial position

Expense for 2010, share based payment 69,757 38,970 108,727 Expense for 2010, share based payment, settled as equity 9,967 16,163 26,130 At the end 38,970 38,970

Amounts 1.1.2010 Outstanding at the beginning of period 70,000 0 70,000 Changes during the period Shares granted 82,500 82,500 Shares forfeited 25,000 25,000 Shares exercised 52,061 52,061 Shares expired 17,939 17,939

Amounts 31.12.2010 Outstanding at the end of period 52,061 57,500 109,561 Exercisable at the end of the period 0 57,500 57,500

*) The amounts in the table reflect the numbers of shares to be given on the Metsäliitto Management Oy base of sharebased payment. M-real has also committed not to pay more Metsäliitto Management Oy has been established for the shareholding pro- than the value of shares in cash (tax-portion). gramme of the members of Metsäliitto Group’s Executive Management. The **) The fair value of the share-settled part at exercise date was the market members of the Executive Management own the entire stock of the company. price of M-real’s B-share less any dividend paid before the payment of the The company is consolidated in Metsäliitto Group (not M-real Group) as a reward. Correspodningly, the fair value of the cash-settled part is estimated unit established for a special purpose. The purpose of Metsäliitto Manage- on every balance sheet date until the end of incentive period. The fair value ment Oy is to acquire M-real Corporation B shares from the market or of share-based payment is recognised to the amount based on best possible members of the Executive Management at market prices. The share acqui- estimate of the reward, which is believed to be granted. The expense recog- sitions have been financed using capital inputs of a total of EUR 3,850,000, nised for share based payments was EUR 0.1 million (0). of which the capital input of Kari Jordan, Chairman of the Board of M-real is

NOTES TO THE FINANCIAL STATEMENT 89 36 Related party transactions

EUR 1 million and President and CEO Mikko Helander’s EUR 500,000, and a M-real´s ultimate parent company is Finnish Metsäliitto Cooperative. At 31 loan of EUR 15,400,000 granted by Metsäliitto Cooperative. Shares have been December 2010 Metsäliitto owned 38.8 per cent of M-real´s shares and 60.5 purchased for Kari Jordan for approximately EUR 5 million and for Mikko per cent of the voting rights. Helander for approximately EUR 2.5 million. The loan granted by Metsäliitto Cooperative will be repaid in its entirety The significant other subsidiaries of Metsäliitto with whom M-real had busi- by 31 March 2014. If the validity of the arrangement is continued one year at ness activities are as follows: a time in 2013, 2014, 2015 or 2016, the loan period will be extended correspondingly. Metsäliitto Management Oy has the right to repay the loan pre- Metsä Tissue Group maturely at any time. Metsäliitto Management Oy is obligated to repay the Metsä-Botnia Group loan prematurely by selling the M-real Corporation B shares it holds if the Metsäliitto Sverige Ab stock exchange price of M-real Corporation B share exceeds a certain level Metsäliitto France defined in the arrangement for an extended period of time. The arrangement will remain in force until the end of 2013 and beginning The principal subsidiaries of M-real are listed in the Note 32. of 2014, at which time the intention is to dismantle the arrangement in a manner to be decided later. The arrangement can be dismantled by merging In December 2009 Metsä-Botnia’s ownership was restructured. Metsä- the company with M-real Corporation or selling the M-real Corporation B Botnia acquired some 9.2 per cent of its own shares. M-real’s ownership rose shares held by the company to Metsäliitto, a party designated by Metsäliitto by three per cent to 33 per cent. M-real sold three per cent to its parent or a third party and liquidating the company or by selling the shares of the company Metsäliitto for EUR 49 million and recorded some EUR 33 million company to Metsäliitto. The arrangement will be extended one year at a time profit on sale in other operating income. if, in October–November 2013, 2014, 2015 or 2016, the stock exchange price At balance sheet day M-real owns 30 per cent (30 per cent) and Metsäliitto of the M-real Corporation B share is lower than the average price at which 53 per cent (53 per cent) of the shares in Metsä-Botnia. Metsä-Botnia has Metsäliitto Management Oy acquired the M-real Corporation B shares it been consolidated using line-by-line method proportionate to the M-real´s owns. and Metsäliitto´s holding according to IAS 31, Interests in Joint Ventures, The assignment of the M-real Corporation B shares owned by Metsäliitto (income statement till 8 December 2009. From 8 December 2009 on M-real Management Oy is restricted during the validity of the arrangement. As a consolidates Metsä-Botnia according to IAS 28 (Investments in Associated). rule, the ownership of members of the Executive Management in Metsäliitto Related party transactions with Metsä-Botnia include from 8 December 2009 Management Oy will remain in force until the dismantling of the arrange- on in transactions with sister companies. ment. The total wood purchases from Metsäliitto were EUR 101 million in 2010 In the M-real Group, the arrangement is processed as a share incentive (192). The price used was market price. scheme. Valuation is performed once after the essential terms and condi- M-real Zanders partly disposed Rexlex mill to Metsä Tissue. The capital tions of the arrangement have been agreed upon. gain was some EUR 7 million and was recognised in other operating income. In 2010, EUR 0.1 million was recognised as expense in the Group’s income Metsä Group Financial Services Oy owned by M-real (51 per cent) and statement in connection with Metsäliitto Management Oy’s share ownership Metsäliitto (49 per cent) is Group’s internal bank. The interest rates are programme. market based.

Transactions with Transactions with EUR million parent company sister companies 2010 2009 2010 2009 Sales 3 14 36 8 Other operating income 4 35 10 2 Purchases 126 192 713 136 Interest income 7 -1 2 2 Interest expenses 0210

Receivables Non-current receivables 49 49 4 4 Current receivables 26 29 56 78 Liabilities Non-current liabilities 0000 Current liabilities 5 16 272 90

There are no doubtful receivables in the receivables from group companies. And no bad debt was recognised during the period. No security has been given for group liabilities. The compensations paid to management are presented in the Note 7 and 35. The new shareholding system of members of Metsäliitto Group’s Execu- tive Management, Metsäliitto Management Oy (see Note 35). The parent company has no commitments on behalf of management nor receivables from management. Transactions with associated companies are presented in the Note 15. Joint ventures are presented in the Note 33.

90 NOTES TO THE FINANCIAL STATEMENT 37 Environmental affairs 38 Events after the Balance sheet date

EUR million 2010 2009 M-real started a new EUR 70 million profit improvement programme. The Income statement programme focuses on improving profitability of the paper business, as well Materials and services 10 18 as decreasing the variable costs of all businesses. The earlier-announced Employee costs profit improvement impact of the Simpele and Kemi board investments and Wages and fees 2 4 the closure of speciality paper production at Simpele are included in the new Other employee costs 1 1 profit improvement programme. The full effect of the programme on operat- Depreciation 9 13 ing profit, EUR 70 million, is estimated to be reached from 2012 onwards. Other operating expenses 3 2 The positive result impact in 2011 is expected to be approximately EUR 30 25 38 million. Cost inflation is expected to accelerate in 2011. The combined result Balance sheet impact of M-real’s new profit improvement programme and the previous Tangible assets years’ programmes is in 2011 estimated to be EUR 90 million positive, which is expected to mostly offset the cost inflation. Acquisition costs, 1 Jan. 320 406 The annual folding boxboard capacity of the Äänekoski and Kyröskoski Increases 7 5 mills is planned to be increased by a total of approximately 70,000 tonnes. Decreases -91 The total value of the planned investments is some EUR 30 million. The Depreciation -239 -223 Kyroskoski investment is planned to be completed in late 2011 and the Ääne- Book value, 31 Dec. 88 97 koski investment in spring 2012. Related to the planned investment M-real will start statutory negotiations at the Äänekoski board mill on 18 February Provisions 2011 covering the mill workers in total of about 130 people. The maximum Environmental obligations 2 1 personnel reduction need is estimated to be 10 people. Kyröskoski investment is expected to have no personnel impact. Following the planned invest-

CO2 emission allowances, continuing operations ments, the annual production capacity is to increase to 190,000 tonnes at Possession of emission allowances, 1,000 tonnes 819 836 Kyröskoski and to 240,000 tonnes at Äänekoski. Production is planned to be Emission produced (2009 verified), 1,000 tonnes 778 867 directed to food packaging. Even after these planned investments, M-real The sales of emission allowances (EUR million) 6.5 7.0 has good potential to further increase the production capacity of the Kyröskoski and Äänekoski mills should the market situation so require.

Only additional identifiable costs that are primarily intended to prevent, reduce or repair damage to the environment are included environmental costs. Environmental expenditures are capitalised if they have been incurred to prevent or reduce future damage or conserve resources and bring future economic benefits. 2009 figures include M-real’s share (30%) of Metsä-Botnia’s Emission allowances till 8 December only.

NOTES TO THE FINANCIAL STATEMENT 91 Calculation of key ratios

Profitability Profit from continuing operations before tax – direct taxes Return on equity (%) = Shareholders’ equity (average) Profit from continuing operations before tax + interest expenses, net exchange gains/losses and Return on capital employed (%) = other financial expenses Total equity + interest-bearing borrowings (average)

Financial position Shareholders’ equity Equity ratio (%) = Total assets – advance payments received Interest-bearing borrowings Gearing ratio (%) = Shareholders’ equity Interest-bearing borrowings – liquid funds – interest-bearing receivables Net gearing ratio (%) = Shareholders’ equity Shareholders’ equity + deferred tax liabilities Covenant equity ratio (%) = Total assets – advance payments received Interest-bearing borrowings – liquid funds – interest-bearing receivables Covenant gearing ratio (%) = Shareholders’ equity + cumulative impairment losses (max EUR 300 million)

Share performace indicators Profit attributable to shareholders of parent company Earnings per share = Adjusted number of shares (average) Equity attributable to shareholders of parent company Shareholders´equity per share = Adjusted number of shares at 31 December Dividends Dividend per share = Adjusted number of shares at 31 December Dividend per share Dividend per profit (%) = Earnings per share Dividend per share Dividend yield (%) = Share price at 31 December Adjusted share price at 31 December Price/earnings ratio (P/E ratio) (%) = Earnings per share Adjusted share price at 31 December P/BV (%) = Shareholders’ equity per share Total traded volume per share (EUR) Adjusted average share price = Average adjusted number of shares traded during the financial year

Market capitalization = Number of shares x market price at 31 December

Other key figures Internal financing of capital Net cash flow arising from operating activities = expenditure (%) Gross capital expenditure Net cash flow arising from operating activities + net interest expenses Interest cover = Net interest expenses Net cash flow arising from operat- = Net cash flow arising from operating activities in the cash flow statement ing activities

92 CALCULATION OF KEY RATIOS Parent company accounts (Finnish accounting standards, FAS)

Income statement

EUR million Note 1.1–31.12 .2010 1.1–31.12 .2009

Sales (1) 1,181 942 Change in stocks of finished goods and in work 21 -3 Other operating income (2) 61 95

Materials and services Raw materials and consumables Purchases during the financial period -743 -584 Change in inventories 3-3 External services (3) -162 -125 -902 -712 Employee costs (4) Wages and salaries -58 -54 Social security expenses Pension expenses -15 -16 Other social security expenses -32 -31 -105 -101 Depreciation, amortisation and impairment charges (5) Depreciation according to plan -61 -66 Impairment charges -11 -72 -66 Other operating expenses -94 -137 Operating result 90 18

Financial income and expenses (6, 7) Interest income from non-current investments Income from Group companies 72 Income from associated companies 225 Other interest and similar income Other interest and similar income 29 43 Net exchange gains/losses -36 -15 Write-downs on non-current investments -119 -332 Other interest and similar expenses -86 -112 -205 -189 Loss before extraordinary items -115 -171

Extraordinary income and expenses (8) Extraordinary income 13 13 Loss before appropriations and taxes -102 -171

Appropriations Change in depreciation differences 62 50 Income taxes (9) Loss for the financial period -40 -121

PARENT COMPANY ACCOUNTS (FINNISH ACCOUNTING STANDARDS, FAS) 93 Parent company accounts

Balance sheet

EUR million Note 31.12.2010 31.12.2009 EUR million Note 31.12.2010 31.12.2009 ASSETS EQUITY AND LIABILITIES Non-current assets Shareholders´equity (17) Intangible assets (10) Share capital 558 558 Intangible rights 13 18 Share premium account 664 664 Other capitalized expenditure 4 5 Retained earnings -343 -222 17 23 Loss for the financial period -40 -121 839 879 Tangible assets (11) Land and water areas 12 13 Appropriations Buildings 124 135 Accumulated depreciation difference 139 200 Machinery and equipment 333 378 Other tangible assets 4 4 Provisions (18) Advance payment and construction in Provisions for pensions 9 10 progress 15 2 Other provisions 17 50 488 532 26 60

Investments (12) Liabilities Shares in Group companies 626 626 Non-current (19, 20, 21) Receivables from Group companies 84 84 Bond loans 691 736 Shares in associated companies 98 158 Loans from financial institutions 41 63 Other shares and holdings 30 60 Pension loans 198 61 838 928 Other liabilities 2 4 1,343 1,483 932 864

Current assets Current (19, 20, 22, 23) Inventories Bond loans 52 339 Raw materials and consumables 36 32 Loans from financial institutions 22 22 Work in progress 2 2 Pension loans 29 39 Finished goods and goods for resale 92 72 Advance payments 4 3 Advance payment 4 2 Accounts payable 57 49 134 108 Payables to Group companies 131 148 Payables to associated companies 1 1 Receivables (13, 14, 15, 16) Other liabilities 10 9 Current Accruals and deferred income 61 51 Accounts receivables 157 123 367 661 Receivables from Group companies 596 879 Receivables from associated companies 7 7 1,299 1,525 Other receivables 18 21 Prepayment and accrued income 41 41 819 1,071

Cash and cash equivalents 7 2

Total assets 2,303 2,664 Total equity and liabilities 2,303 2,664

94 PARENT COMPANY ACCOUNTS Parent company accounts

Cash ﬂow statement

EUR million 2010 2009

Cash flow from Operating Activities Operating profit 90 18 Adjustments to operating profit a) 11 16 Change in net working capital b) -40 4 Interest -56 -66 Dividends received 7 227 Other financial items -104 -22 Taxes 0 Net cash flow from operations -92 177

Investments Purchase of shares -2 -365 Purchase of other fixed assets -26 -16 Sale of shares 41 142 Sale of other fixed assets 28 8 Increase in other non-current investments Decrease in other non-current investments 255 Total cash used in investments 41 24

Cash flow before financing -51 201

Financing Increase in non-current liabilities 160 60 Decrease in non-current liabilities -386 -423 Increase (-) or decrease (+) in interest-bearing non-current receivables 299 -341 Increase (-) or decrease (+) in interest-bearing current receivables -30 90 Dividends paid Group contribution 13 16 Total financing 56 -598

Change in liquid funds 5 -397 Liquid funds at 1 Jan. 2 399 Liquid funds at 31 Dec. 72 a) Adjustments to operating profit Depreciation 72 66 Gains (+) or losses (-) on sale of fixed assets -26 -43 Change in provisions -35 -7

Total 11 16 b) Change in net working capital Increase (-) or decrease (+) in stocks -27 15 Increase (-) or decrease (+) in non-interest bearing receivables -46 64 Increase (+) or decrease (-) in non-interest bearing current liabilities 33 -75 Total -40 4

PARENT COMPANY ACCOUNTS 95 Parent company accounting policies

M-real Corporation’s financial statements have been prepared in Property, plant and equipment and depreciation accordance with Finnish accounting standards (FAS). The carrying values of property, plant and equipment are based on original acquisition costs less depreciation according to plan and Sales impairment losses. Sales are calculated after deduction of indirect sales taxes, trade discounts and other items adjusting sales. Straight-line depreciation according to plan is based on the estimated useful life of the asset as follows: Exchange rate differences Foreign exchange gains and losses have been booked to net exchange Buildings and constructions 20–40 years gains/losses under financial income and expense. Open and actual Heavy power plant machinery 20–40 years foreign exchange differences hedging sales are recorded immediately Other heavy machinery 15–20 years to financial income and expenses in the income statement. Lightweight machinery and equipment 5–15 years Other items 5–10 years Transactions in foreign currency Transactions in foreign currency have been booked at the exchange Depreciation is not recorded on the purchase cost of land and water rate on the day of the transaction. areas. At the balance sheet date, receivables and liabilities denominated in foreign currency have been translated into euros at the exchange Leasing rate quoted by the European Central Bank at the balance sheet date. Lease payments are treated as rental expenses.

Pensions and pension funding Environmental expenditure Statutory pension security is handled by pension insurance compa- Environmental expenditure comprises the specifiable expenses of nies outside the Group. In addition to statutory pension security, environmental protection measures aiming primarily at combating, some salaried employees have supplementary pension arrange- remedying or alleviating environmental damage. ments which are either insured, arranged through the Metsäliitto Employees’ Pension Foundation or are an unfunded liability of the Extraordinary income and expenses company. The Metsäliitto Employees’ Pension Foundation is fully Group contribution, paid and received, are presented in the income funded based on the current value of its assets. statement as extraordinary items, only. The tax effect of extraordinary Pension insurance premiums have been periodized to correspond items is presented in the notes to the financial statements. to the accrual-based wages and salaries given in the financial statements. Appropriations Finnish tax legislation offers the possibility to deduct expenses pre- Research and development expenditure maturely from the profit for the financial year and to transfer them Research and development expenditure is recorded as an expense to the balance sheet as provisions. The items are taken into account in the relevant financial period. in tax filings only if they have been entered in the accounts. These items are presented in the appropriations in the income statement. Inventories Among such items are depreciation on property, plant and equipment Inventories are measured at the lower of cost or net realizable value. in excess of plan, which is stated as a depreciation difference in the In measuring inventories, the FIFO principle is observed or, alterna- balance sheet and as a change in the depreciation difference in the tively, the weighted average price method. income statement.

Provisions Future costs and losses to which the Group is committed and which are likely to be realized are included in the income statement under the appropriate expense heading and in the balance sheet under provisions for future costs whenever the precise amount and the time of occurrence are not known and in other cases they are included in accrued liabilities. These can be, for example, the pension liability or costs of discontinued operations and restructuring costs.

96 PARENT COMPANY ACCOUNTING POLICIES Notes to the parent company ﬁnancial statements

EUR million 2010 2009 EUR million 2010 2009

1. Sales 6. Financial income and expenses Owing to the Group structure, the sales of the parent company Dividend income 7 227 has not been broken down by segments and market. Interest income from non-current investments 11 17 Other interest income 18 26 2. Other operating income Write-downs on non-current investments -119 -332 Rental income 2 2 Interest expenses -84 -106 Gains on disposal of fixed assets 26 43 Other financial expenses -2 -6 Service revenue 6 7 -169 -174 Government grants 1 2 Net exchange differences -36 -15 Other allowances and subsidies 16 21 Financial income and expenses, total -205 -189 Other 10 20 61 95 7. Exchange differences in Income statement Exchange differences on sales 4 1 3. External services Exchange differences on purchases 0 Logistics expenses 111 82 Exchange differences on financing -40 -16 Other external services 51 43 Exchange differences, total -36 -15 162 125 External services include production related services and logistics 8. Extraordinary income and expenses expenses of sold products. In 2009 logistics expenses of sold Extraordinary income 0 products were partly showed in other operating expenses. 2009’s Group contribution received 13 0 figures have been restated to match new grouping. Other operat- 13 ing expenses include among others other than production related 9. Income taxes services, energy costs, real estate costs and administration costs. Income taxes for the financial period 0 0 Income taxes for previous periods 4. Empoyee costs 00 Wages and salaries for working hours 58 54 Pension expenses 15 16 Income taxes on ordinary operations 0 0 Other social security expenses 32 31 Income taxes on extraordinary items 0 0 105 101 Salaries and emoluments paid to management Managing director and their alternates 1.4 0.8 10. Intangible assets Members of the Board and deputies 0.6 0.5 Intangible rights 2.0 1.3 Acquisition costs, 1 Jan. 109 111 Main auditors fees Increases 5 5 Fees paid to Pricewaterhouse Coopers were as Transfers between items follows: Decreases -10 -7 Audit fees 0.3 0.2 Acquisition costs, 31 Dec. 104 109 Tax consultancy Accumulated depreciation, 1 Jan. -91 -85 Other fees 0.0 0.2 Accumulated depreciation on deduction and 0.3 0.4 transfers 4 The audit fees are paid for the audit of the annual and quarterly financial Depreciation for the period -4 -6 statements. Tax consultancy fees are the fees paid for the consultancy Accumulated depreciation, 31 Dec. -91 -91 services and the like. Book value, 31 Dec. 13 18

5. Depreciation according to plan and impairment charges Goodwill Depreciation according to plan Acquisition costs, 1 Jan. 20 20 Intangible rights 4 6 Acquisition costs, 31 Dec. 20 20 Goodwill Accumulated depreciation, 1 Jan. -20 -20 Other capitalized expenditure 1 1 Depreciation for the period Buildings and constructions 9 9 Accumulated depreciation, 31 Dec. -20 -20 Machinery and equipment 46 49 Book value, 31 Dec. Other tangible assets 1 1 Total depreciation according to plan 61 66 Impairment changes Machinery 11 Depreciation difference -56 -50 Total depreciation 16 16

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 97 EUR million 2010 2009 EUR million 2010 2009

Other capitalized expenditure Other tangible assets Acquisition costs, 1 Jan. 15 15 Acquisition costs, 1 Jan. 9 9 Increases Increases Decreases Decreases 0 Acquisition costs, 31 Dec. 15 15 Acquisition costs, 31 Dec. 9 9 Accumulated depreciation, 1 Jan. -10 -9 Accumulated depreciation, 1 Jan. -5 -5 Accumulated depreciation on Accumulated depreciation on deduction and transfers deduction and transfers Depreciation for the period -1 -1 Depreciation for the period 0 Accumulated depreciation, 31 Dec. -11 -10 Accumulated depreciation, 31 Dec. -5 -5 Book value, 31 Dec. 4 5 Book value, 31 Dec. 4 4

11. Tangible assets Construction in progress Land and water areas Acquisition costs, 1 Jan. 2 3 Acquisition costs, 1 Jan. 13 12 Increases 15 3 Increases 1 Transfers between items -2 -3 Decreases -1 Decreases -1 Acquisition costs, 31 Dec. 12 13 Acquisition costs, 31 Dec. 15 2 Book value, 31 Dec. 12 13 Book value, 31 Dec. 15 2

Buildings The undepreciated portion of capitalized interest expenses under the Acquisition costs, 1 Jan. 262 261 balance sheet item ”Buildings and constructions” at 31 Dec. 2010 was Increases 1 1 EUR 0.0 million (2009: EUR 0.0 million) and under the balance sheet item Transfers between items ”Machinery and equipment” it was EUR 1.7 million (2009: EUR 2,1 million). There were no capitalized interest expenses during the 2010 financial year Decreases (2009 EUR 0,0 million). Acquisition costs, 31 Dec. 263 262 Accumulated depreciation, 1 Jan. -127 -117 12. Investments Accumulated depreciation on Shares in Group companies deduction and transfers Acquisition costs, 1 Jan. 626 590 Depreciation for the period -12 -10 Increases 362 Accumulated depreciation, 31 Dec. -139 -127 Decreases -1 Book value, 31 Dec. 124 135 Write-down -325 Acquisition costs, 31 Dec. 626 626 Machinery and equipment Book value, 31 Dec. 626 626 Acquisition costs, 1 Jan. 1,201 1,190 Increases 11 8 Shares in associated companies Transfers between items 1 3 Acquisition costs, 1 Jan. 158 255 Decreases -6 Write-down -60 Acquisition costs, 31 Dec. 1,207 1,201 Decreases -97 Accumulated depreciation, 1 Jan. -823 -773 Acquisition costs, 31 Dec. 98 158 Accumulated depreciation on Book value, 31 Dec. 98 158 deduction and transfers Depreciation for the period -51 -50 Other shares and holdings Accumulated depreciation, 31 Dec. -874 -823 Acquisition costs, 1 Jan. 60 60 Book value, 31 Dec. 333 378 Increases 2 3 Production machinery and equipment, 31 Dec. 324 370 Decreases -32 -3 Acquisition costs, 31 Dec. 30 60 Book value, 31 Dec. 30 60

98 PARENT COMPANY ACCOUNTING POLICIES EUR million 2010 2009 EUR million 2010 2009

Receivables from group companies 14. Current receivables Acquisition costs, 1 Jan. 84 119 Receivables from Group companies Increases 988 Accounts receivables 15 5 Decreases -1,023 Loan receivables 553 333 Transfers between items Other receivables 18 524 Acquisition costs, 31 Dec. 84 84 Prepayment and accrued income 10 17 Book value, 31 Dec. 84 84 Receivables from associated companies Accounts receivables Receivables from associated companies Loan receivables 7 7 Acquisition costs, 1 Jan. Accrued income Increases Other receivables Decreases Accounts receivables 157 123 Transfers between items Loan receivables Acquisition costs, 31 Dec. Other receivables 18 21 Book value, 31 Dec. Prepayment and accrued income 41 41 819 1,071 Other receivables Acquisition costs, 1 Jan. 220 15. Prepayment and accrued income Increases Insurance Transfers between items -220 Taxes 37 37 Acquisition costs, 31 Dec. Others 4 4 Book value, 31 Dec. 41 41

Investment, total 16. Interest-bearing receivables Acquisition costs, 1 Jan. 928 1,244 Loan receivables and other non-current assets 84 84 Increases 2 1,353 Liquid funds and other current assets 567 861 Decreases -32 -1,344 651 945 Transfers between items Write-down -60 -325 17. Shareholders’ equity Acquisition costs, 31 Dec. 838 928 Share capital, 1 Jan. Book value, 31 Dec. 838 928 Series A shares 62 62 Series B shares 496 496 Share capital, 31 Dec. 558 558 13. Loan receivables from management Share premium account, 1 Jan./31 Dec. 664 664 There are no loan receivables from the managing directors, members of the Board of Directors and their deputies as well as persons belonging to Restricted equity, total 1,222 1,222 similar bodies. Retained earnings, 1 Jan. -343 -222 Dividends paid Loss for the period -40 -121 Retained earnings, 31 Dec. -383 -343

Unrestricted equity, total -383 -343

Shareholders’ equity, total 839 879

PARENT COMPANY ACCOUNTING POLICIES 99 EUR million 1.1. Increase Decrease 31.12. EUR million 2010

18. Provisions 20. Non-current debts with amortization plan Provisions for pension 2 1 3 Provisions for unemploy- Bonds ment pension costs 8 3 -5 6 2011 52 Restructuring 32 2 -24 10 2012 103 Provision for rental costs 5 1 -1 5 2013 497 Other provisions 13 1 -12 2 2014 91 60 8 -42 26 2015 2016 EUR million 2010 2009 Total, at the end of the financial period 743

19. Liabilities Loans from financial institutions Non-current 2011 22 Non-interest-bearing 2 4 2012 23 Interest-bearing 930 860 2013 18 932 864 2014 2015 Current 2016 Non-interest-bearing 188 155 Total, at the end of the financial period 63 Interest-bearing 179 506 367 661 Pension loans 2011 29 Bonds Interest-% EUR million 2012 28 2002–2012 9.20 103 101 2013 39 2002–2014 9.40 91 85 2014 28 2004–2011 3.33 30 30 2015 18 2004–2011 3.51 10 10 2016 84 2004–2011 3.58 12 13 Total, at the end of the financial period 226 2006–2010 5.59 339 2006–2013 9.25 497 497 Total Total 743 1,075 2011 103 2012 154 2013 555 2014 119 2015 18 2016 84 Total, at the end of the financial period 1,033

21. Non-current liabilities 2010 2009 Other liabilities Bonds 691 736 Loans from financial institutions 41 63 Pension loans 198 61 Other liabilities 2 4 932 864

22. Current liabilities Liabilities from Group companies 131 148 Liabilities from associated companies 1 1 Other liabilities Bonds 52 339 Loans from financial institutions 22 22 Pension loans 29 39 Advance payment 4 3 Accounts payable 57 49 Other liabilities 10 9 Accruals and deferred income 61 51 367 661

100 PARENT COMPANY ACCOUNTING POLICIES EUR million 2010 2009 EUR million 2010 2009

23. Accruals and deferred income 25. Environmental items Current Income statement Insurance 4 4 Materials and consumables 4 3 Personnel expenses 16 15 Employees costs Interests 12 13 Wages and salaries 1 1 Accruals of purchases 4 11 Social security costs Freight costs 1 1 Depreciation 3 3 Discounts 15 13 Other operating charges 2 2 Others 9 -6 10 9 61 51 Balance sheet Intangible and tangible assets 24. Contingent liabilities Acquisition costs, 1 Jan. 69 69 For own liabilities Increases 1 1 Liabilities secured by pledges Decreases -1 Depreciation -33 -29 Pension loans 100 Book value, 31 Dec. 37 40 Pledges granted 52 Liabilities secured by mortgages Provisions Loans from financial institutions 31 Other provisions 2 1 Pension loans 126 75 Other liabilities 6 Real estate mortgages 132 106 Only additional identifiable costs that are primarily intended to prevent, reduce On behalf of Group companies or repair damage to the environment are included environmental costs. Pledges 13 Environmental expenditures are capitalised if they have been incurred to prevent or reduce future damage or conserve resources and bring future Guarantees 1,338 1,557 economic benefits. On behalf of others Guarantees 1 Leasing commitments Payments due in the following year 1 1 Payments due in subsequent years 2 1 Total Real estate mortgages 132 106 Pledges 65 Guarantees 1,338 1,559 Leasing liabilities 3 2 1,538 1,666

PARENT COMPANY ACCOUNTING POLICIES 101 The Board´s proposal for the distribution of proﬁts

The distributable funds of the parent company are EUR -382,932,705.40 of which the result for the period is EUR -40,145,050.84. The Board of Directors proposes to the Annual General Meeting that no dividend to be paid and the result for the period to be transferred to the retained earnings account.

No material changes have been taken place in respect of the company´s financial position after the balance sheet date. The liquidity of the company is good.

Espoo, 10 February 2011

Kari Jordan Martti Asunta Mikael Aminoff

Kirsi Komi Kai Korhonen Liisa Leino

Juha Niemelä Antti Tanskanen Erkki Varis

Mikko Helander CEO

102 THE BOARD´S PROPOSAL FOR THE DISTRIBUTION OF PROFITS Auditor’s Report (Translation from the Finnish Original)

To the Annual General Meeting of auditing practice in Finland. Good auditing International Financial Reporting Standards M-real Corporation practice requires that we plan and perform (IFRS) as adopted by the EU. We have audited the accounting records, the the audit to obtain reasonable assurance financial statements, the report of the Board about whether the financial statements and Opinion on the Company’s Financial of Directors and the administration of M-real the report of the Board of Directors are free Statements and the Report of the Corporation for the year ended 31 December, from material misstatement, and whether Board of Directors 2010. The financial statements comprise the the members of the Board of Directors of the In our opinion, the financial statements and consolidated statement of financial position, parent company or the Managing Director the report of the Board of Directors give a statement of comprehensive income, state- are guilty of an act or negligence which may true and fair view of both the consolidated ment of changes in equity and statement of result in liability in damages towards the and the parent company’s financial perform- cash flows, and notes to the consolidated company or whether they have violated the ance and financial position in accordance financial statements, as well as the parent Limited Liability Companies Act or the arti- with the laws and regulations governing the company’s balance sheet, income statement, cles of association of the company. preparation of the financial statements and cash flow statement and notes to the finan- An audit involves performing procedures the report of the Board of Directors in Fin- cial statements. to obtain audit evidence about the amounts land. The information in the report of the and disclosures in the financial statements Board of Directors is consistent with the Responsibility of the Board of and the report of the Board of Directors. The information in the financial statements. Directors and the Managing Director procedures selected depend on the auditor’s The Board of Directors and the Managing judgment, including the assessment of the Other Opinions Director are responsible for the preparation risks of material misstatement, whether due We support that the financial statements and of consolidated financial statements that give to fraud or error. In making those risk the consolidated financial statements should a true and fair view in accordance with Inter- assessments, the auditor considers internal be adopted. The proposal by the Board of national Financial Reporting Standards control relevant to the entity’s preparation of Directors regarding the consideration of the (IFRS) as adopted by the EU, as well as for financial statements and report of the Board annual result and the payment of dividend is the preparation of financial statements and of Directors that give a true and fair view in in compliance with the Limited Liability Com- the report of the Board of Directors that give order to design audit procedures that are panies Act. We support that the Members of a true and fair view in accordance with the appropriate in the circumstances, but not for the Board of Directors and the Managing laws and regulations governing the prepara- the purpose of expressing an opinion on the Director of the parent company should be tion of the financial statements and the report effectiveness of the company’s internal con- discharged from liability for the financial of the Board of Directors in Finland. The trol. An audit also includes evaluating the period audited by us. Board of Directors is responsible for the appropriateness of accounting policies used appropriate arrangement of the control of and the reasonableness of accounting esti- the company’s accounts and finances, and mates made by management, as well as Espoo, 28 February 2011 the Managing Director shall see to it that the evaluating the overall presentation of the accounts of the company are in compliance financial statements and the report of the PricewaterhouseCoopers Oy with the law and that its financial affairs have Board of Directors. Authorised Public Accountants been arranged in a reliable manner. We believe that the audit evidence we have obtained is sufficient and appropriate to pro- Auditor’s Responsibility vide a basis for our audit opinion. Johan Kronberg Our responsibility is to express an opinion on Authorised Public Accountant the financial statements, on the consolidated Opinion on the Consolidated Financial financial statements and on the report of the Statements Board of Directors based on our audit. The In our opinion, the consolidated financial Auditing Act requires that we comply with statements give a true and fair view of the the requirements of professional ethics. We financial position, financial performance, and conducted our audit in accordance with good cash flows of the group in accordance with

AUDITOR’S REPORT (TRANSLATION FROM THE FINNISH ORIGINAL) 103 Corporate Governance statement

This statement describing the corporate gov- of Directors, the CEO and the Deputy CEO. General Meeting ernance of M-real Corporation (M-real or In addition, a Corporate Management Team The General Meeting of Shareholders is the Company) has been issued as a separate assists the CEO in the operative management Company’s highest decision-making body statement pursuant to Section 6 of Chapter of the Company and coordinating its opera- where shareholders use their decision-mak- 2 of the Securities Markets Act and is pub- tions. The tasks and responsibilities of the ing power. Each shareholder is entitled to lished concurrently with the Company’s different bodies are specified pursuant to the participate in a General Meeting by following financial statements and Report of the Board Finnish Companies Act. the procedure described in the notice to the of Directors. In M-real’s existing organisation, business General Meeting. M-real is a Finnish public limited company areas are defined such that each business whose A and B series shares are subject to area is responsible for its own sales as well According to the Finnish Companies Act, the public trading on the Mid Cap list of NASDAQ as production, and thus has a clear profit General Meeting decides on the following OMX Helsinki Ltd. (Helsinki Stock Exchange). responsibility. M-real’s business areas are matters, among others: M-real’s administration is governed by Finn- Consumer Packaging, Office Papers, Speci- ish laws and the regulations and rules set ality Papers, and Market Pulp and Energy. ǩ amending the Articles of Association out pursuant to such laws. M-real also fol- ǩ approving the financial statements lows the rules and recommendations of the Application of the Finnish Corporate ǩ profit distribution Helsinki Stock Exchange as applicable to Governance Code ǩ mergers and demergers listed companies. As a Finnish listed company, M-real applies ǩ acquisition and transfer of own shares M-real prepares its financial statements the Finnish Corporate Governance Code ǩ appointing the members of the Board and and interim reports according to the Inter- (www.cgfinland.fi). This statement is compli- specifying their compensation and the national Financial Reporting Standards ant with recommendation 51 of the code. compensation for Board committee mem- (IFRS). The financial statement documents M-real deviates from recommendation 26 of bers are prepared and published in Finnish and the code as follows: Erkki Varis, member of ǩ appointing the auditor and specifying its English. the Audit Committee, is the former Managing compensation. M-real’s headquarters are located in Director of the Company’s associated com- Espoo, Finland. The Company’s registered pany Oy Metsä-Botnia Ab (until 2008) and is Shareholders are entitled to put forward a domicile is Helsinki. thus not independent of the Company in matter pertaining to the General Meeting to terms of an overall evaluation. The Board of be addressed when the shareholder delivers M-real’s administration and Directors considers it important for the Audit a written request to this effect so well in governance structure Committee to have specific know-how and advance that the matter can be included in The Company’s statutory bodies include the competence in the Company’s industry in the the notice to the meeting. In addition, the General Meeting of Shareholders, the Board prevailing circumstances. shareholder has a right to present questions

Corporate Governance in M-real

SHAREHOLDERS’ MEETING

BOARD OF DIRECTORS INSIDER GUIDELINES

BOARD COMMITTEES Financial and Nomination and Audit Committee Compensation Committee

CEO INTERNAL AUDITING AUDITING INTERNAL | AUDITING CORPORATE DEPUTY TO CEO MANAGEMENT TEAM

104 CORPORATE GOVERNANCE STATEMENT on the items on the agenda of the General ǩ accepting the annual operational plan phone meetings. The attendance rate of the Meeting. ǩ monitoring how company accounting, members was 93 per cent (97 in 2009). A shareholder is entitled to participate in asset management and risk control are a General Meeting when he/she is included arranged Composition and independence of the in the register of shareholders eight (8) work- ǩ deciding on significant investments, busi- Board of Directors ing days before the General Meeting. An ness acquisitions, divestments and clo- The composition and number of members Annual General Meeting takes place each sures of operations of the Board of Directors must facilitate effec- year in June at the latest. ǩ deciding on considerable investments and tive fulfilment of the Board’s tasks. The com- An Extraordinary General Meeting will financing arrangements position of the Board of Directors takes into convene if the Board finds it necessary, or if ǩ deciding on the transfer and pledging of account the development phase of the Com- the auditor or shareholders representing at the Company’s significant real property pany, the special requirements of the indus- least 10 per cent of all shares deliver a writ- ǩ deciding on the granting of donations, or try and the needs of the Company’s opera- ten request to this effect in order to process on the CEO’s authority concerning them tions. Both sexes are represented in the a specified matter. ǩ granting and cancelling the right to rep- Board of Directors. A member of the Board resent the Company and the authority to must possess the competence required by Board of Directors sign on behalf of the Company the task and the opportunity to allocate suf- The Board of Directors is responsible for the ǩ monitoring that the company’s Articles of ficient time for the task. Company’s administration and arranging the Association are complied with; convening According to the Articles of Association, Company’s operations properly according to the General Meeting and monitoring that a minimum of five and a maximum of ten applicable laws, the Articles of Association the decisions made by the General Meet- regular members shall be appointed to the and good corporate governance. Taking into ing are implemented Board of Directors by the shareholders by account the scope and quality of the Com- ǩ signing and presenting the annual finan- the Annual General Meeting for a one-year pany’s operations, the Board takes care of cial statements to the Annual General period at a time. The number of consecutive matters that are far-reaching and unusual, Meeting for approval, and preparing a pro- terms is not limited. At present, the Board and do not belong to the Company’s day-to- posal for the use of profits has nine regular members. The Board day business operations. The Board super- ǩ approving the essential policies, regula- appoints a Chairman and a Vice Chairman vises M-real’s operations and management tions and guidelines governing the busi- from among its members. The Annual Gen- and decides on the corporate strategy, major ness operations eral Meeting of 2010 appointed the following investments, the Company’s organisation ǩ deciding on who are permanent insiders persons as members of the Board of Direc- structure and significant financing matters. in the company and accepting the Com- tors: The Board supervises the proper arrange- pany’s insider rules ment of the Company’s operations, and it ǩ publishing or authorizing the CEO to pub- Mr Kari Jordan, born 1956, Chairman, M.Sc. ensures that accounting and asset manage- lish all such information that is likely to (Econ.) ment control, financial reporting and risk have an impact on the Company’s share Mr Martti Asunta, born 1955, Vice Chairman, management have been organised in an value, or which otherwise has to be made M.Sc. (For.) appropriate manner. public according to the Finnish Securities Mr Mikael Aminoff, born 1951, M.Sc. (For.) Markets Act. Ms Kirsi Komi, born 1963, independent mem- For its operations, the Board of M-real has ber, L.L.M. a written working order. In accordance with The working order of the Board of Directors Mr Kai Korhonen, born 1951, independent its working order, the Board’s functions is presented in full on the M-real website member, M.Sc. (Eng.) include: (www.m-real.com/lnvestor Relations/Cor- Ms Liisa Leino, born 1960, independent porate Governance). The Board can delegate member, M.Sc. (Nutrition) ǩ appointing the CEO and accepting the matters in its general responsibility to the Mr Juha Niemelä, born 1946, independent appointment of Corporate Management CEO and correspondingly take charge of member, M.Sc. (Econ.) Team members, and ensuring that the decision-making regarding a task of the CEO. Mr Antti Tanskanen, born 1946, independent CEO takes care of the company’s day-to- On an annual basis, the Board assesses member, Ph.D. (Econ.) day administration according to the regu- its own operations and the Company’s admin- Mr Erkki Varis, born 1948, independent of lations and guidelines given by the Board istration principles and decides on necessary significant shareholders, M.Sc. (Eng.) ǩ appointing members to the Audit, Nomina- changes (if any). tion and Compensation Committees and The Board convenes on a regular basis. The Nomination and Compensation Commit- accepting their working orders In the financial year 2010, the Board held a tee has proposed to the Annual General ǩ processing and accepting the corporate total of 15 meetings, four of which were Meeting of 2011 that all current Board mem- strategy and its main policies bers be re-elected.

CORPORATE GOVERNANCE STATEMENT 105 A majority of the members of the Board the Audit Committee reviews the internal eral Meeting a proposal on the number of of Directors are independent of both the control and management systems and mon- Board members, Board composition and Company and its significant shareholders. itors the progress of financial risk reporting Board member compensation. The Commit- Board member Antti Tanskanen has acted and the auditing of the accounts. The Audit tee also recommends, prepares and pro- as member (independent of operative man- Committee assesses the efficiency and scope poses to the Board the CEO’s (and the Deputy agement) continuously for more than 12 of internal auditing, the company’s risk man- CEO’s) nomination, salary and compensation, years. Tanskanen is a known Board profes- agement, key risk areas and compliance with and further evaluates and provides the Board sional who enjoys a reputation of trust applicable laws and regulations. The com- and the CEO with recommendations concern- throughout the society and has several other mittee gives a recommendation to the Board ing management rewards and compensation positions of trust outside the Company. concerning the appointment of auditors to systems. Therefore, the Board of Directors has deemed the Company. The Audit Committee also The Committee consists of five Board Tanskanen independent of the Company and processes the annual plan for internal audit- members. It convenes on a regular basis at its significant shareholders based on an over- ing and the reports prepared on significant least once a year. The Committee chairman all evaluation. auditing. provides the Board with the proposals issued To assess the independence and impar- The Audit Committee consists of four by the Committee. The tasks and responsi- tiality of the members of the Board of Direc- Board members of whom three are inde- bilities of the Nomination and Compensation tors, the members shall notify the Company pendent of the Company and its significant committee have been specified in the com- of circumstances that may have an impact shareholders. Since the Annual General mittee’s working order, which the Board on the member’s ability to act without conflict Meeting of 2010, Kai Korhonen has been approves. of interest. In situations where the Board of chairman of the Audit Committee, with Kirsi Since the Annual General Meeting of 2010, Directors processes a business or other con- Komi, Antti Tanskanen and Erkki Varis as Kari Jordan has been chairman of the Nom- tractual relationship or connection with members. ination and Compensation Committee, with Metsäliitto Cooperative or its other subsidi- The committee members must have ade- Mikael Aminoff, Martti Asunta, Liisa Leino ary, the Board of Directors acts, if necessary, quate expertise in accounting and financial and Juha Niemelä as members. without those of its members who are statement policies. The Audit Committee The Nomination and Compensation Com- dependent of Metsäliitto Cooperative. convenes on a regular basis, at least four mittee convened five times during 2010 and times a year, including a meeting with the the attendance rate of the members was on Board committees Company’s auditor. The committee chairman average 83 per cent (90 per cent in 2009). Board committees provide assistance to the provides the Board with a report on every Board of Directors, preparing matters for meeting of the Audit Committee. The tasks CEO which the Board is responsible. The Board and responsibility areas have been specified CEO Mikko Helander, born 1960, M.Sc.(Eng.), of Directors appoints an Audit Committee in the committee’s working order which the is responsible for the daily management of and a Nomination and Compensation Com- Board has approved. the Company’s administration according to mittee from among its members. Every year When necessary, the following persons the guidelines and instructions given by the after the Annual General Meeting, the Board are also represented in the Audit Committee Board. In addition, the CEO is responsible for of Directors appoints each committee’s chair- meetings as summoned by the Committee: ensuring that the Company’s accounting has man and members. The Board of Directors the auditor, Chief Executive Officer and Chief been carried out according to applicable laws and its committees can also seek assistance Financial Officer as well as other manage- and that asset management has been organ- from external advisors. ment representatives and external advisors. ised in a reliable manner. The CEO manages Final decisions concerning matters The Audit Committee convened five times the Company’s daily business and is respon- related to the tasks of the committees are during 2010 and the attendance rate of the sible for controlling and steering the business made by the Board of Directors on the basis members was on average 95 per cent (100 areas. of committee proposals, excluding proposals per cent in 2009). The CEO has a written CEO contract made directly to the General Meeting by the approved by the Board. The Board monitors Nomination and Compensation Committee. Nomination and Compensation the CEO’s performance and provides a per- Committee formance evaluation once a year. Audit Committee The task of the Nomination and Compensa- The contractual retirement age of the CEO The Audit Committee is responsible for tion Committee is to assist the Board of is 62 years. The Company has commissioned assisting the Board of Directors in ensuring Directors in matters related to the appoint- an additional pension insurance policy for that the Company’s financial reporting, cal- ment and compensation of the Company’s the CEO, covering the period between the culation methods, annual financial state- CEO, the Deputy CEO and the senior manage- contractual retirement and the statutory ments and other financial information made ment and prepare matters related to the retirement age of 63 years and entitling the public by the Company are correct, balanced, reward schemes for employees. In addition, CEO to receive a pension compensation equal transparent and clear. On a regular basis, the Committee prepares for the Annual Gen- to 60 per cent of his salary at the time of

106 CORPORATE GOVERNANCE STATEMENT retirement. According to Finnish pension ment Team, which consists of Mikko The Corporate Management Team con- legislation, a person has the option to retire Helander, CEO, together with business area venes at the Chairman’s invitation once a between the ages of 63 to 68. executives Mika Joukio (Consumer Packag- month, as a rule, and also otherwise when The Board appoints and discharges the ing), Seppo Puotinen (Office Papers), Heikki necessary. CEO. The Board can discharge the CEO with- Husso (Speciality Papers) and Soili Hietanen On 31 December 2010, neither Board out a specific reason. The CEO can also (Market Pulp and Energy) who report to members nor the CEO or the Deputy to the resign from his assignment. The mutual term Helander. In addition, the Corporate Manage- CEO had monetary loans from the Company of notice is six months. The Board may, how- ment Team includes Matti Mörsky, CFO, and or its subsidiaries, and no security arrange- ever, decide to discharge the CEO without a Mika Paljakka, SVP, HR. Mikko Helander acts ments existed between them. period of notice. as Chairman to the Corporate Management When the service contract of the CEO is Team. Ms Sari Pajari, M.Sc. (Eng.) has been Internal control, internal auditing and terminated by the Board, the CEO is entitled appointed as member of the Corporate Man- risk management to receive discharge compensation equal to agement Team as of April 1, 2011 with Profitable business requires that operations his 18-month salary. In addition, in case the responsibility for business development. are monitored continuously and with ade- Company is divested, the CEO is entitled to Each Corporate Management Team mem- quate efficiency. M-real’s internal manage- resign from his assignment against a dis- ber has a written employment or service ment and control procedure is based on the charge compensation equal to his 24-month contract. With the exception of the CEO, Finnish Companies Act, regulations and rec- salary. members of the Corporate Management ommendations for listed companies, the Team have no special pension arrangements Articles of Association and the company’s Deputy to the CEO which would deviate from applicable pension own approved principles and policies. The Mika Joukio, Executive Vice President of the legislation. With the exception of the CEO, functionality of the company’s internal con- Consumer Packaging business area, also the term of notice of Corporate Management trol is evaluated by the company’s internal acts as Deputy to the CEO. The Deputy to the team members is six months. auditing. Internal control is carried out CEO is responsible for carrying out the CEO’s The Corporate Management Team’s tasks throughout the organisation. Internal control tasks when the CEO is unable to perform his and responsibilities include planning invest- methods include internal guidelines and duties. ments, specifying and preparing the Com- reporting systems. pany’s strategic guidelines, allocating The following describes the principles, Corporate Management Team resources, controlling routine functions and objectives and responsibilities of M-real’s In the operative management of M-real, the preparing matters to be reviewed by the internal control, risk management and inter- CEO is assisted by the Corporate Manage- Board. nal auditing.

Corporate Management Team

Mikko Helander CEO

Sari Pajari Senior Vice President, Business Development* Matti Mörsky CFO Mika Paljakka HR

Mika Joukio Seppo Puotinen Heikki Husso Soili Hietanen SVP SVP SVP SVP Consumer Packaging Office Papers Specialty Papers Market Pulp and Energy Deputy to the CEO

*as of 1.4.2011

CORPORATE GOVERNANCE STATEMENT 107 Internal control attended by senior management of the Com- are adhered to, how property is protected Being a listed company, M-real’s internal pany and of the business area in question. and how efficiently resources are used. Inter- control is steered by the Finnish Companies The result will be reported to the Board and nal auditing also acts as an expert in devel- Act and Securities Market Act, other laws the Corporate Management Team each opment projects related to its task area and and regulations applicable to the operations month. The Company’s internal guidelines prepares special reports at the request of and the rules and recommendations of the provide detailed descriptions on the report- the Audit Committee or operative manage- Helsinki Stock Exchange, including the Cor- ing and control rules and the reporting pro- ment. porate Governance Code. External control is cedure. Internal auditing operates under the carried out by M-real’s auditor and the Credit control in M-real has been central- supervision of the Audit Committee and the authorities. ised under a Credit Committee, which con- CEO. Audit observations, recommendations In M-real, internal control covers financial venes at least each quarter. The development and the progress of measures are reported reporting and other monitoring. Internal con- of trade receivables is monitored in each to the management of the target audited, the trol is implemented by the Board and opera- sales company by credit controllers under company management and the auditor. Every tive management as well as the entire per- the supervision of the Group VP of Credits. six months, internal auditing reports its sonnel. Internal control aims to ensure Counterparty-specific credit limits are set auditing measures, plans and operations to achieving the goals and objectives set for the within the boundaries of the credit policy the Audit Committee. company; economical, appropriate and effi- confirmed by the Board in cooperation with The action plan of internal auditing is pre- cient use of resources; correct and reliable centralised credit control and business area pared for one calendar year at a time. The financial information and other management management. aim is to allocate the auditing to all functions information; adherence to external regula- Authorisation rights concerning expenses, and units at certain intervals. Auditing is tions and internal policies; security of oper- significant contracts and investments have annually allocated to areas that are in a key ations, information and property in an ade- been specified continuously for different position regarding the evaluated risk and the quate manner; and the arrangement of organisation levels according to the decision- company’s objectives at the time. The topical- adequate and suitable manual and IT sys- making authority policy confirmed by the ity and appropriateness of the action plan are tems to support operations. Board and the authority separately granted processed with the Company’s management Internal control is divided into (i) proactive by the CEO and other management person- every six months. control, such as the specification of corporate nel. Investment follow-up is carried out by The scope and coordination of the auditing values, general operational and business the Group’s financial administration accord- operations are ensured through regular com- principles; (ii) daily control, such as opera- ing to the investment policy confirmed by the munication and information exchange with tional systems and work instructions related Board. After pre-approval, investments are other internal assurance functions and the to operational steering and monitoring; and taken to the management teams of the busi- auditor. When necessary, internal auditing (iii) subsequent control, such as management ness areas and the Corporate Management uses external service providers for temporary evaluations and inspections, comparisons Team within the framework of the annual additional resourcing or special expertise for and verifications with the aim of ensuring investment plan. Most significant invest- carrying out demanding evaluation tasks. that the goals are met and that the agreed ments are separately submitted for Board operational and control principles are fol- approval. Investment follow-up reports are Risk management lowed. The corporate culture, governance compiled each quarter. Risk management is an essential part of and the approach to control together create M-real’s standard business planning and the basis for the entire process of internal Internal auditing leadership. Risk management belongs to control. Internal auditing assists the Board and CEO daily decision-making, operations follow-up with their control tasks by evaluating the and internal control, and it promotes and Monitoring of the financial reporting quality of internal control maintained in order ensures that the objectives set by the Com- process, credit control and to achieve the Company’s objectives. In addi- pany are met. authorisation rights tion, internal auditing supports the organisa- Linking business management efficiently The financial organisations of the business tion by evaluating and ensuring the function- with risk management is based on the oper- areas and the central administration are ality of business processes, risk management ational principles confirmed by the Board; responsible for financial reporting. The units and the management and administration the aim of the principles is to maintain risk and business areas report the financial fig- systems. management as a process that is well ures each month. The business areas’ control The key task of internal auditing is to defined, understandable and sufficiently functions check their units’ monthly perform- assess the efficiency and suitability of inter- practical. Risks and their development are ance and report them further to central nal control concerning the company’s func- reported on a regular basis to the Board’s administration. Business area profitability tions and units. In its assignment, internal Audit Committee. Centralised risk manage- development and business risks and oppor- auditing evaluates how well the operational ment also takes care of the coordination and tunities are discussed in monthly meetings principles, guidelines and reporting systems

108 CORPORATE GOVERNANCE STATEMENT competitive bidding of M-real’s insurance corporate security and its continuous devel- (EUR 46,000). In addition, Pricewaterhouse- coverage. opment, as well as crisis management and Coopers has received EUR 350,000 (EUR 1.1 The most crucial objective of risk manage- continuity and recovery plans. According to million) for services not related to the actual ment is to identify and evaluate those risks, the risk management policy and principles, auditing of the accounts. threats and opportunities which may have adequate risk management forms a neces- an impact on the implementation of the strat- sary part of the preliminary review and imple- egy and on how short-term and long-term mentation stages of projects which are finan- objectives are met. A separate risk review is cially or otherwise significant. also included in the most significant investment proposals. The tasks of M-real’s risk management are to The business areas regularly evaluate and monitor the risk environment and related ǩ ensure that all identified risks with an changes as part of their normal operational impact on personnel, customers, products, planning. The risks identified and their con- property, information assets, corporate trol is reported to the company’s manage- image, corporate responsibility and oper- ment, Audit Committee and the Board at least ational capacity are controlled according twice a year. Business risks also involve to applicable laws and on the basis of best opportunities, and they can be utilised within available information and financial aspects the boundaries of the agreed risk limits. ǩ ensure that the company’s objectives are Conscious risk-taking decisions must always met be based on an adequate evaluation of the ǩ fulfil the expectations of stakeholders risk-bearing capacity and the profit/loss ǩ protect property and ensure disruption- potential, among other things. free business continuity Risk management responsibilities in ǩ optimise the profit/loss possibility ratio M-real are divided among different functions. ǩ ensure the management of the company’s The Board is responsible for the Company’s overall risk exposure and minimise the risk management and confirms the Com- overall risks. pany’s risk management policy; the Audit Committee evaluates the adequacy of the The most significant risks and uncertainties Company’s risk management and the essen- that the company is aware of are described tial risk areas and provides the Board with in the Report of the Board of Directors. related proposals. The CEO and the Manage- ment Team are responsible for the specifica- Audit tion and adoption of the risk management According to M-real’s Articles of Association, principles. They are also responsible for the Company has one auditor who shall be ensuring that the risks are taken into account an auditing firm authorised by the Central in the company’s planning processes and Chamber of Commerce of Finland. The Gen- that risk reporting is adequate and appropri- eral Meeting appoints the auditor each year. ate. The Vice President of Risk Management According to the decision made by the Annual reports to the CFO and is responsible for the General Meeting in spring 2009, the Com- Company’s risk management process devel- pany’s auditor is PricewaterhouseCoopers opment, coordination, the implementation Oy which appointed Johan Kronberg, APA, of risk evaluation and the essential insurance as the auditor with main responsibility. The decisions. Business areas and support func- Audit committee controls the appointment tions identify and evaluate the essential risks procedure of the auditors and provides the related to their own areas of responsibility Board and the General Meeting with a rec- in their planning processes, prepare for ommendation for the appointment of the them, take necessary preventive action and auditor. report on the risks as agreed. In 2010, PricewaterhouseCoopers Oy M-real’s essential risk management ele- received EUR 359,000 (EUR 279,000 in 2009) ments include implementing a comprehen- in auditing compensation, Pricewaterhouse- sive corporate risk management process that Coopers internationally altogether EUR supports the entire business, protecting 876,000 (EUR 1.1 million) and other auditing property and ensuring business continuity, firms outside Finland were paid EUR 117,000

CORPORATE GOVERNANCE STATEMENT 109 Salary and remuneration report

This salary and remuneration report of be paid in the Company’s B series shares to Short-term compensation M-real Corporation (M-real or the Company) be acquired from the stock exchange between The monthly salary of CEO Mikko Helander has been issued pursuant to Recommenda- 1 and 30 April 2010. As a result, the Chairman is EUR 39,793. The salary includes car and tion 47 of the Finnish Corporate Governance received 14,300, the Vice Chairman 12,100 mobile phone benefits. In addition, the Board Code of June 15, 2010 and it has been pub- and each Board member 9,400 B-series may, in accordance with the managing direc- lished on the Company’s website on March shares. The amount of the cash consideration tor’s service contract, decide that the CEO 1, 2011. In accordance with the Company’s corresponds to the estimated withholding receives bonus pay based on his overall per- practice the salary and remuneration report tax. In addition, the Annual General Meeting formance and corresponding to his six-month is updated two times every calendar year as resolved to pay to the members a fee of EUR salary. In 2010, the CEO received a total of a starting point, however, always in March in 500 per each attended Board and committee EUR 1,429,371 in salary, bonuses and other connection with the annual Corporate Gov- meeting. The Nomination and Compensation benefits, of which EUR 497,849 was fixed ernance Statement. Committee of the Board of Directors has compensation and EUR 931,522 was bonus proposed to the Annual General Meeting pay, including bonus pay in accordance with Decision-making and principles of convening on March 23, 2011 that the Board the CEO’s service contract as well as a sep- remuneration remuneration be kept unchanged and also arate compensation approved by the Board The purpose of the management’s compen- that the practice of paying the remuneration of Directors in August 2010 and relating to sation system is to compensate the manage- in shares and in cash be continued. Board the CEO’s withdrawal from the Company’s ment in a fair and competitive way for a suc- remuneration has been paid in shares and 2010 share bonus system and the simultane- cessful and profitable implementation of the cash since 2009. ous joining to Metsäliitto Group’s manage- Company’s strategy. The objective of remu- ment share ownership scheme. neration is also to encourage management Managing Director in the development of the Company’s strategy The CEO has a written service contract Long-term compensation and business to thereby act for the benefit approved by the Board. The Board monitors The CEO takes part in the management own- the Company. the CEO’s performance and provides a per- ership scheme of Metsäliitto Group’s execu- The Board approves the salary and com- formance evaluation once a year. The Board tive management, through which he indirectly pensation of the CEO and the principles appoints and discharges the CEO. The Board owns shares in the Company. As a conse- applied in the compensation of other Corpo- can discharge the CEO without a specific quence, Helander is not entitled to the share rate Management Team members. The Board reason. The CEO can also resign from his bonus for the 2010 financial period under the further approves the structures and basis for assignment. The mutual term of notice is six Company’s own share bonus system. the Company’s remuneration and incentive months. The Board may, however, decide to Helander has in August 2010 invested schemes. The Nomination and Compensation discharge the CEO without a period of notice. approximately EUR 500,000 of his own funds Committee assists the Board in matters When the service contract of the CEO is ter- in Metsäliito’s new management holding relating to management remuneration, con- minated by the Board, the CEO is entitled to company, in which he is a co-owner together ditions of employment and engagement of receive discharge compensation equal to his with other Metsäliitto Group’s executive man- management members as well as prepares 18-month salary. In addition, in case the agement members. The holding company Board decisions relating to management Company or its business is divested, the CEO entitled Metsäliitto Management Ltd. has in remuneration. is entitled to resign from his assignment August 2010 purchased M-real’s B series The CEO decides on matters related to against discharge compensation equal to his shares using its own capital and additional the compensation of other senior manage- 24-month salary. debt capital obtained from Metsäliitto Coop- ment members in accordance with the prin- The contractual retirement age of the CEO erative. Altogether 881,933 B shares pur- ciples approved and guidance issued by the is 62 years. The Company has commissioned chased for the aggregate purchase price of Board. an extra pension insurance policy for the approximately EUR 2.5 million have been CEO, covering the period between the con- indirectly allocated to the CEO. Helander is Financial benefits tractual and statutory retirement age of 63 tied to the holding company and, as a result, years and entitling the CEO to receive pension to an indirect ownership of M-real’s shares Board of Directors compensation equal to 60 per cent of his until the end of 2013, at which time the man- The Annual General Meeting 2010 resolved salary at the time of retirement (calculated agement ownership system is planned to be to maintain the remuneration of the mem- in accordance with Finnish pension laws). terminated and dismantled. The system will, bers of the Board of Directors unchanged. The cost to the Company of the CEO’s pension however, be extended for one year at a time Thus, the Chairman receives an annual insurance policy amounted in 2010 to approx- if, in October–November 2013, 2014, 2015 or remuneration of EUR 76,500, the Vice Chair- imately EUR 255,000 (EUR 130,000 in 2009). 2016, the price of M-real’s B shares is lower man EUR 64,500 and members EUR 50,400. In case the service relationship of the CEO is than the average price at which Metsäliitto One half of the remuneration was decided to terminated prior to retirement, the CEO is Management Ltd. originally acquired such be paid in cash while the other half was to entitled to a free policy. shares. Upon dismantling of the system, the

110 SALARY AND REMUNERATION REPORT loan granted by Metsäliitto Cooperative to tive 6-month salaries. The bonus pay is by a two-year restriction period during which the management holding company becomes defined and decided by the Board and was in a participant is not entitled to transfer or due. The remaining funds will be distributed the financial year 2019 based on the Com- dispose of the shares. to the participating shareholders in accord- pany’s and its business areas’ (business area The potential reward from the earning ance with the shareholdings. The manage- heads) operating results (EBIT) and cash flow period 2011–2013 will be paid in 2014 partly ment holding company also has the right to development. The 2011 bonus pay will be in the company’s B series shares and partly prematurely repay the loan. determined on the basis of the Company’s in cash. The proportion to be paid in cash will Should Helander prior to the above point and its business areas’ operating results cover taxes and tax-related costs. At the in time either resign or his service relation- (EBIT), as determined by the Board of Direc- beginning the plan concerns 9 people, includ- ship with the Company is terminated by the tors. ing members of the Corporate Management Board of Directors, he is entitled to receive Team. The maximum reward to be paid for from the management holding company the Long-term compensation the first earning period corresponds to the funds he has personally invested in such M-real has implemented a share-based purchase price of approximately 1,000,000 company, however, no possible value reward system for its senior management B series shares. increase. The transfer of M-real’s B shares for the years 2008–2010. The possible annual owned by Metsäliitto Management Ltd. is reward produced by the system has been restricted during the entire validity of the based on M-real’s operating results (EBIT) system. and cash flow development as decided by the Board of Directors. The possible reward is Corporate Management Team partially paid in M-real’s B-shares and par- Also other Corporate Management Team tially in cash. The amount of cash compensa- members have written employment con- tion corresponds to the amount of withhold- tracts. The term of notice of Corporate ing tax. The maximum amount of shares Management Team members is six months. available for 2010 was 165,000 B-shares Termination of employment without cause (140,000 in 2009). In 2010, the targets defined entitles members of the Corporate Manage- by the Board materialized in the level of 100 ment Team to receive discharge compensa- per cent (73 per cent in 2009 and zero in 2008) tion equal to their 6 to 18-month salary. entitling a full share based remuneration in Excluding the CEO, Corporate Manage- the same proportion. The shares include a ment Team members have no extraordinary lock-up condition restricting their transfer pension arrangements which would deviate for two years following the end of the earning from applicable pension legislation. Accord- period. The system covered in 2010 the Com- ing to Finnish pension legislation, a person pany’s management team members exclud- has the option to retire between the ages of ing the managing director. 63 to 68. The Finnish TyEL pension system In December 2010, the Board of Directors provides for a retirement benefit based on resolved on a new share-based incentive years of service and earnings according to plan. The aim of the plan is to combine the the prescribed statutory system. For pur- objectives of shareholders and executives in poses of the Finnish pension system earnings order to increase the value of the Company, include salary, bonuses and fringe benefits to commit the executives to perform the but exclude share or stock option based mutual strategy, and to offer them a com- income. petitive reward plan based on share ownership. The plan consists of three three-year Short-term compensation earning periods, calendar years 2011–2013, In 2010, other Corporate Management Team 2012–2014 and 2013–2015. At the beginning members received a total of EUR 1,977,048 of each period, the Board of Directors will (EUR 1,899,040 in 2009) in salary and bonuses decide on the earnings criteria and define of which EUR 1,469,132 (EUR 1,544,139) were targets. The potential reward from the plan fixed salaries and benefits (car and mobile for the earning period 2011–2013 will be phone) and EUR 507,917 (EUR 354,901) based on M-real Group’s equity ratio and the bonuses. The members of the Corporate development of return on capital employed Management Team are entitled to bonus pay (ROCE) and earnings before interest and corresponding to a maximum of their respec- taxes (EBIT). Each earning period is followed

SALARY AND REMUNERATION REPORT 111 Board of Directors

Kari Jordan Shares owned in M-real Corporation Mikael Aminoff ǩ Nokia Siemens Networks, General b. 1956 31.12.2010: directly 0, through Metsäliitto b. 1951 Counsel, member of the Executive M.Sc. (Econ) Management Oy 1,763,867 B shares M.Sc. (Forestry) Board (2007–2010) Chairman of the Board (2005–) Agriculture and Forestry entrepreneur Nokia Corporation: ǩ Vice President, Legal & member of ǩ President and CEO of the Metsäliitto Martti Asunta Member of the Board (2010–) Networks Business Group (”NET”) Group (2006–) b. 1955 Leadership Team and other NET senior ǩ CEO of Metsäliitto Cooperative (2004–) M.Sc. (Forestry) ǩ Member of the Supervisory Board of management forums (1999–2007) ǩ Vice Chairman of the Board of Metsä- Member of the Board and Vice Chairman of Metsäliitto Cooperative (2001–) ǩ Senior Legal Counsel & Head of Euro- liitto Cooperative (2006–) the Board (2008–) ǩ Member of the Board of Directors of pean Practice Group (1998) ǩ Chairman of the Board of Metsä Tissue Metsäliitto Cooperative (2008–) ǩ Vice President, Contracts (Dallas, USA) Corporation (2004–) ǩ Chairman of the Board of Metsäliitto ǩ Member of the Delegation of Pellervo- (1995–1996) ǩ Member of the Board of Oy Cooperative (2008–) Seura (2009–) ǩ Legal Counsel (1992–1995, 1997) Metsä-Botnia Ab (2004–) and Chairman ǩ Member of the Board of Vapo Oy (2008– ǩ Vice Chairman of the Board of Rannikko of the Board (2006–) 2009) Forestry Centre Shares owned in M-real Corporation ǩ Member of the Board of Confederation ǩ Member of the Board of Oy Metsä- 31.12.2010: 9,400 B shares of Finnish Industries EK (2005–) and Botnia Ab (2008–) Shares owned in M-real Corporation Vice Chairman of the Board (2009–) ǩ Member of the Board of Metsä Tissue 31.12.2010: 22,095 B shares ǩ Vice Chairman of the Board of Finnish Corporation (2008–) Kai Korhonen Forest Industries Federation and ǩ Member of the Board of Pellervo-Seura b. 1951 member of Federation’s Working Group (2008–), Chairman of the Board (2010–) Kirsi Komi M.Sc. (Eng), eMBA (2005–) and Chairman of the Board b. 1963 (2009–) Shares owned in M-real Corporation LL.M, Master of Laws Member of the Board (2008–) ǩ Member of the Supervisory Board 31.12.2010: 23,900 B shares Independent Board Member of Varma Mutual Pension Insurance Member of the Board (2010–) Company (2006–) Independent Board member ǩ Senior Executive Vice President, Stora Enso (1998–2007) Holds several positions of trust in founda- ǩ Finnish Red Cross Blood Service, ǩ Member of the Supervisory Board of tions and non-profit associations. member of the Board (2010–) Ilmarinen Mutual Pension Insurance Company (2006–2008)

Martti Kari Asunta Mikael Kirsi Jordan Aminof Komi

112 BOARD OF DIRECTORS ǩ Vice Chairman of the Board of Finnish ǩ Member of the Supervisory Board of ǩ CEO, UPM-Kymmene Corporation Erkki Varis Forest Industries Federation (2006– Varma Mutual Pension Insurance (1994–2004) b. 1948 2007) Company (2007–) ǩ Chairman of the Board of Veikkaus Oy M.Sc. (Eng) ǩ Member of the Board of American ǩ Member of the Board of Juho Leino (2001–) Forest & Paper Association (2000–2003) Foundation (2008–) ǩ Member of the Board of Powerflute Oyj Member of the Board (2009–) ǩ Member of the Board of German Pulp ǩ Managing Director of Nurmi Group & (2005–) Independent of significant shareholders and Paper Association (1995–2000) Perkko Oy (2003–2004) ǩ Member of the Board of Green ǩ Business Director of Sitra (2002–2003) Resources AS (2008–), Chairman of the ǩ Member of the Board of Pohjolan Voima Shares owned in M-real Corporation ǩ Business Director of Gillette Central Board (2009–) Oy (2000–2009) 31.12.2010: 126,860 B shares East Europe (1999–2002) ǩ President and CEO of Oy Metsä-Botnia ǩ Managing Director of Gillette/Braun Shares owned in M-real Corporation Ab (1997–2008) (1996–1999) 31.12.2010: 96,715 B shares ǩ Member of the Metsäliitto Group Liisa Leino ǩ Various positions in marketing of Nestlé Executive Management Team (2002– b. 1960 Finland Oy (1989–1996) 2008) M.Sc. (Nutrition) Antti Tanskanen ǩ Managing Director of Oy Metsä-Rauma Shares owned in M-real Corporation b. 1946 Ab (1994–1996) Member of the Board (2009–) 31.12.2010: 96,715 B shares Ph.D. (Econ) ǩ Deputy to CEO of Oy Metsä-Botnia Ab Minister (1990–1994) ǩ Full-time Chairwoman of the Board of ǩ Managing Director of Oy Metsä-Botnia Directors of Leinovalu Oy (2006– Juha Niemelä Member of the Board (1992–) Ab, Kaskinen mill (1984–1990) ǩ Member of the Board of Confederation b. 1946 Independent Board member ǩ Member of A/S Baltic Pulp Supervisory of Finnish Industries EK (2011–) M.Sc. (Econ) Board (2004–2008) ǩ Member of the Board of the Federation Doctor of Sciences in Economics and ǩ Chairman and CEO, OP Bank Group ǩ Member of the Competitiveness Com- of Finnish Technology Industries (2011–) Technology h.c. (1997–2006) mittee of the Finnish Forest Industries ǩ Deputy member of the Board of Varma ǩ Chairman of the Board of the State Federation (2007–2008) Mutual Pension Insurance Company Member of the Board (2007–) Pension Fund (2009–) ǩ Chairman of the Board of Suomen (2011–) Independent Board member ǩ Chairman of the Board of the University Laatukeskus ry (2005–2007) ǩ Member of the Board of Rautaruukki Oyj of Helsinki (2010–) ǩ Chairman of the Board of Botnia S.A. (2007–) ǩ Chairman, Confederation of European (2003–2008) ǩ Member of the Board of Alko Oy (2009–) Paper Industries (CEPI) (2000–2002) Shares owned in M-real Corporation 31.12.2010: 96,715 B shares Shares owned in M-real Corporation 31.12.2010: 54,800 B shares

Juha Liisa Erkki Antti Niemelä Kai Leino Varis Tanskanen Korhonen

BOARD OF DIRECTORS 113 Management team of M-real Corporation

Mikko Helander Matti Mörsky Shares 31.12.2010: 3,540 B shares. Seppo Puotinen b. 1960 b. 1952 b. 1955 M.Sc. (Eng) M.Sc. (Eng) Lic Tech Chief Executive Officer Chief Financial Officer Mika Joukio Senior Vice President, Head of Office Papers b. 1964 Joined the Metsäliitto Group in 2003 and Joined M-real in 1981. Corporate manage- MSc (Tech), MBA Worked in Metsä-Serla in 1986–2000 and M-real in 2006. Chairman of the M-real ment team member as of 2006. Senior Vice President, joined M-real again in 2004. Corporate Corporate Management Team as of 2006. ǩ Product development and sales posi- Head of Consumer Packaging management team member as of 2005. ǩ Project Engineer and Production tions, Oy Fiskars Ab’s plastic industry Deputy to CEO ǩ Assistant in applied mechanics, Manager, Valmet (1984–1990) (1978–1980) University of Oulu (1981–1985) ǩ Managing Director, Kasten Hövik ǩ duties in corporate planning, G.A. Joined M-real in 1990. Corporate manage- ǩ researcher, KCL, Finland (1985–1986) (1990–1993) Serlachius Oy (1981–1982) ment team member as of 2006. ǩ various positions in business develop- ǩ Head of Projects, Coaters and ǩ Project manager, Stuart Edgar Ltd ǩ Various positions in management and ment, marketing and operational Calanders, Valmet (1993) (1982–1986) development tasks at Metsä-Serla and responsibility in Metsä-Serla: i.e. Vice ǩ Head the operations, Valmet Rotomec ǩ General Manager, T-Drill Inc. (1986–1987) M-real since 1990: Assistant Production President, Cartons Division, Corrugated S.p.a., Italy (1994–1997) ǩ various positions in business Manager (1990–1996), Production and Folding Carton operations (1999) ǩ Vice President and Chief Executive, development and in M&A projects in Manager (1996–2001), Metsä-Serla Tako ǩ Managing Director, SCA Packaging, Calander business, Valmet Corporation Metsä-Serla, i.e. Vice President, Board Mill Finland, Russia and the Baltic countries (1997–1999) Business Development (1987) ǩ Vice President and Mill Manager, M-real (2000–2002) ǩ President, Valmet Converting Group, UK ǩ General Manager, Hygiene Division of Äänekoski Board Mill (2001–2004) ǩ President, SCA’s Containerboard (1999–2003) Holmen Hygiene AB (1989) ǩ Senior Vice President, Corporate Division, Brussels (2002–2004) ǩ Chief Executive Officer, Metsä Tissue ǩ General Manager, Kitchen Furniture Logistics and Supply Chain (2004–2005) ǩ Executive Vice President, Corporate Corporation (2003–2006) Division, Metsä-Serla (1992) ǩ Vice President and Mill Manager, M-real Strategy & Sales Services, M-real ǩ Chief Executive Officer and chairman of ǩ General Manager, Rantasalmi Kyro Board and Paper Mill (2005–2006) (2004–2005) the corporate management team, Loghouses (1994) ǩ Vice President and Mill Manager, M-real ǩ Senior Vice President, Head of Office M-real (2006–). ǩ Senior Vice President, Business Kyro Board and Paper Mill and M-real Papers business area (2005–) and Vice Development, M-real (1999–2009) Tako Board Mill (2006) President and Mill Manager, M-real Shares 31.12.2010: directly 0, through ǩ Chief Financial Officer, M-real ǩ Senior Vice President, Head of Consumer Husum, Sweden (2009–). Metsäliitto Management Oy 881,933 (May 2009–). Packaging business area (2006–) and B shares Deputy to CEO (2009–). Shares 31.12.2010: 1,000 A shares, 13,882 B shares. Shares 31.12.2010: 20,395 B shares.

Mikko Mika Matti Helander Paljakka Mörsky Sari Pajari

114 MANAGEMENTMANAGEMENT TEAMTE AM OFOF M-REALM-REAL CORPORATIONCORPOR ATION Heikki Husso ǩ Senior Vice President, Zanders Speciality ǩ Vice President, Technology Manager, ǩ CIO, Senior Vice President, Metsäliitto b. 1961 Papers (January–June 2009) Coated Fine Paper Mills (2001–2004) Group (2009–2011). M.Sc. (Eng) ǩ Senior Vice President, Head of Speciality ǩ Vice President, Production and Senior Vice President, Head of Speciality Papers business area (June 2009–). Technology, Commercial Printing (2005) Shares 31.12.2010: no ownership. Papers ǩ Senior Vice President Production and Shares 31.12.2010: 4,565 B shares. Technology, M-real Commercial Printing Joined M-real in 1989. Corporate manage- (2005–2007) Mika Paljakka ment team member as of 2009. ǩ Senior Vice President, Production and b. 1968 ǩ Production and Development Engineer, Soili Hietanen Technology, M-real Graphic Papers Lic Econ and BA, MSc (Educ) Technical Customer Service Engineer, b. 1954 (2007–2009) Senior Vice President, Human Resources and Metsä-Serla Kangas Paper Mill, Finland Ph.D. (Tech) ǩ Senior Vice President, Head of Market Total Quality Management (1989–1991) Senior Vice President, Pulp and Energy business area (2009–). ǩ Quality Manager, Metsä-Serla Kangas Head of Market Pulp and Energy Joined the Metsäliitto Group in 2000. Paper Mill (1991–1992) Shares 31.12.2010: no ownership. Corporate management team member as ǩ Sales and Marketing Manager, Speciality Joined M-real in 1986. Corporate manage- of 2008. papers, Metsä-Serla Kangas Paper Mill ment team member as of 2009. ǩ Human Resources Development Man- (1992–1997) ǩ Post graduate studies, research and Sari Pajari ager, Perlos Corporation (1994–2000) ǩ Sales and Marketing Director, Speciality lecturing (1979–1984) b. 1968 ǩ Human Resources Development Man- papers, MD Papier, Germany (1997– ǩ Project Engineer, PI Consulting, Finland M.Sc. (Tech) ager and Senior Vice President, Human 2000) (1984–1986) Senior Vice President, Resources, Oy Metsä-Botnia Ab (2000– ǩ Marketing Director, Digital printing ǩ Laboratory Engineer, Laboratory of Business Development (as of 1.4.2011) 2002) papers, Metsä-Serla, Germany (2000) Paper Chemistry, Äänekoski, Finland, ǩ Vice President, Business Development, ǩ Business Development Director, (1986–1989) Joined M-real in 2011. Corporate manage- M-real (2002–2003) Zanders Feinpapiere AG, Germany ǩ Research and Development Manager, ment team member as of 2011. ǩ Senior Vice President, Human (2001) Äänekoski Paper Mill (1989–1994) ǩ Various positions (Consultant, Senior Resources & Management, Finnforest ǩ Vice President, Mill Manager, ǩ Production Manger, M-real Äänekoski Consultant, Vice President ) at Jaakko Corporation (2003–2008) M-real Zanders Reflex mill, Germany Paper Mill (1994–1997) Pöyry Consulting in Finland and USA ǩ Senior Vice President, Human Resources (2001–2008) ǩ Research and Development Coordinator, (1990–2000) and Total Quality Management, M-real ǩ Managing Director, M-real Zanders M-real Paper Group, Äänekoski (1997– ǩ Principal Consultant, PwC Management (2008–) and Metsä-Botnia (2009–). GmbH, Managing Director, M-real 2001) Consulting (2000–2002) Deutsche Holding GmbH (2004–) ǩ Research and Development Coordinator, ǩ Principal Consultant and Business Shares 31.12.2010: 19,577 B shares. ǩ Labour Relations Director, M-real M-real Paper Group, Espoo, Finland Development Executive, IBM Corporation Deutsche Holding GmbH (2004–2008) (2000–2002) (2002–2007) ǩ Vice President, Mill Manager, M-real ǩ Director, Group ICT, Metsäliitto Group Zanders, Gohrsmühle mill (2005–2008) (2007–2009)

Heikki Mika Husso Seppo Joukio Soili Puotinen Hietanen

MANAGEMENTMANAGEMENT TEAMTEAM OFOF M-REALM-REAL CORPORATIONCORPOR ATION 115 Shares and shareholders

Share capital and shares The market value of the A and B shares Directors’ interest at 31 December 2010 totaled EUR 845 million at the year-end. Shareholdings of the Board of Directors and The company’s paid-in share capital on the At year-end, Metsäliitto Cooperative the Corporate Management Team are pre- balance sheet date was EUR 557,881,540.40 owned 38.8 per cent of M-real Corporation’s sented on pages 112–115. and consisted of 328,165,612 shares. The shares, and the voting rights conferred by company has two series of shares. The these shares was 60.5 per cent. International Board of Directors’ authority to issue number of series A shares was 36,339,550 investors’ holdings were 14 per cent. shares and the number of series B shares The Board of Directors has authority to 291,826,062. Each series A share entitles its Flaggings in 2010 increase the share capital through one or holder to twenty (20) votes at a General Meet- On 8 April 2010, the holdings of Norway’s more rights issues and/or more issues of ing of Shareholders, and each series B share Central Bank (Norges Bank) in M-real convertible bonds such that in the rights entitles the holder to one (1) vote. All shares dropped to 4.4 per cent of the share capital issue or issue of convertible bonds, accord- carry the same right to receive a dividend. and 1.4 per cent of the voting rights. ing to Finnish Companies Act, Chapter 10 a M-real’s A shares can be converted to B total maximum of 58,365,212 M-real Corpo- shares if shareholder or representative of Impact of change in control ration B shares can be subscribed for, and the nominee registered shares makes a writ- Many of M-real’s financing agreements that the company’s share capital can be ten request of the conversion to the company. include a clause under which its loans will increased by a total maximum of EUR The conversion does not include additional mature before their stated maturity if any 99,220,860.40 consideration. new party will acquire control of M-real. In The authorization will confer the right to addition, shareholders agreements include disapply shareholders’ pre-emptive right to Stock Exchange listings and share a provision under which M-real must offer subscribe for new share and/or issues of price development its shares in such companies for sale to the convertible bonds and to decide on the sub- In 2010, the highest price of M-real’s B shares other shareholders in such companies in scription prices and other terms and condi- on the NASDAQ OMX Helsinki Ltd was EUR case of M-real’s change of control. According tions. Shareholder’s preemptive subscription 3.26, the lowest EUR 1.46, and the average to the shareholders agreement for Oy Metsä- rights can be disapplied providing that there price EUR 2.44. At year-end, the price of the Botnia Ab, the shareholders must offer their is a significant financial reason for the com- B share was EUR 2.54. In 2009, the average shares for sale to the other shareholders in pany to do so, such as strengthening of the price was 0.66, and at year-end 1.53. The case of their change of control. A possible company’s balance sheet, making possible trading volume of B shares in 2010 was EUR decrease of the voting rights of Metsäliitto business structuring arrangements or taking 894 million, or 125 per cent of the share Cooperative in M-real below 50 per cent other measures for developing the company’s capital. would not alone, however, obligate M-real to business operations. offer its shares in Oy Metsä-Botnia Ab. Dividend policy M-real’s dividend policy is stable and reward- ing to shareholders, and aims at paying a Changes in share capital and numbers of shares 1.1.2000– 31.12.2010 dividend of at least 1/3 of the Company’s Numbers Share capital, earnings per share on average over the busi- of shares EUR million 1999 Share capital, 31 Dec.1999 138,999,425 233.8 ness cycle, nonetheless taking into account 2000 Change in nominal value the Company’s gearing target. 5 May 2000, from share premium funds 2.5 Share capital, 31 Dec. 2000 138,999,425 236.3 2001 Rights issue 35,000,000 59.5 Rights issue 5,000,000 8.5 Share capital, 31 Dec. 2001 178,999,425 304.3 2002–2003 No changes Share capital, 31 Dec. 2003 178,999,425 304.3 2004 Rights issue 148,633,415 252.7 Rights issue 532,772 0.9 Share capital, 31 Dec. 2004 328,165,612 557.9 2005–2010 No changes Share capital, 31 Dec. 2010 328,165,612 557.9

116 SHARES AND SHAREHOLDERS Major shareholders * 12/31/2010 A-series B-series Total Shares Votes Shareholders No. of shares No. of shares No. of shares % % 1 Metsäliitto Cooperative 25,751,535 101,677,045 127,428,580 38.83% 60.54% 2 Varma Mutual Pension Insurance Company 2,203,544 12,015,451 14,218,995 4.33% 5.51% 3 Etola Erkki Olavi 0 7,000,000 7,000,000 2.13% 0.69% 4 Metsäliitto Management Oy 0 6,790,887 6,790,887 2.07% 0.67% 5 Ilmarinen Mutual Pension Insurance Company 3,534,330 3,028,211 6,562,541 2.00% 7.24% 6 Maa- Ja Metsätaloustuottajain Keskusliitto Mtk Ry 1,704,249 1,437,230 3,141,479 0.96% 3.49% 7 Fim Forte Mutual Fund 0 2,525,040 2,525,040 0.77% 0.25% 8 The State Pension Fund 0 2,503,560 2,503,560 0.76% 0.25% 9 Nordea Fennia Fund 0 2,018,126 2,018,126 0.62% 0.20% 10 OP-Focus Fund 0 2,000,000 2,000,000 0.61% 0.20% 11 Alfred Berg Mutual Fund 0 1,927,045 1,927,045 0.59% 0.19% 12 Mutual Fund Fim Fenno 0 1,800,773 1,800,773 0.55% 0.18% 13 OP-Suomi Pienyhtiöt 0 1,300,000 1,300,000 0.40% 0.13% 14 Mutual Insurance Company Pension-Fennia 0 1,205,000 1,205,000 0.37% 0.12% 15 Erikoissijoitusrahasto Nordea Suomi 130/30 0 1,000,000 1,000,000 0.30% 0.10% 16 Gyllenberg Finlandia Fund 0 1,000,000 1,000,000 0.30% 0.10% 17 Veikko Laine Oy 0 928,485 928,485 0.28% 0.09% 18 ABN Amro Small Cap Mutual Fund 0 850,000 850,000 0.26% 0.08% 19 Hämäläinen Pertti Ensio 0 712,365 712,365 0.22% 0.07% 20 Gyllenberg Small Firm Fund 0 700,000 700,000 0.21% 0.07%

* Shareholders in the book-entry system. Does not include nominee registered shareholders

M-real A-share Number of Number of shares Number of shareholders % shares % Number of votes % 1–100 949 26.90 55,928 0.15 1,118,560 0.15 101–500 1,462 41.44 428,845 1.18 8,576,900 1.18 501–1000 567 16.07 475,057 1.31 9,501,140 1.31 1001–5000 479 13.58 1,005,523 2.77 20,110,460 2.77 5001–10000 35 0.99 252,590 0.70 5,051,800 0.70 10001–50000 29 0.82 611,294 1.68 12,225,880 1.68 50001–100000 2 0.06 190,585 0.52 3,811,700 0.52 100001–500000 1 0.03 126,070 0.35 2,521,400 0.35 500001– 4 0.11 33,193,658 91.34 663,873,160 91.34 Total 3,528 100 36,339,550 100 726,791,000 100 of which nominee registered 7 63,964 0.18 1,279,280 0.18 On waiting list, total 0 0 0 In joint accounts 00 Total in special accounts 00 Number issued 36,339,550 100 726,791,000 100

M-real B-share Number of Number of shares Number of shareholders % shares % Number of votes % 1–100 13,982 33.02 614,669 0.21 614,669 0.21 101–500 12,194 28.80 3,241,167 1.11 3,241,167 1.11 501–1000 5,483 12.95 4,487,434 1.54 4,487,434 1.54 1001–5000 7,681 18.14 18,814,105 6.45 18,814,105 6.45 5001–10000 1,523 3.60 11,422,279 3.91 11,422,279 3.91 10001–50000 1,238 2.92 25,286,060 8.67 25,286,060 8.67 50001–100000 121 0.29 8,627,414 2.96 8,627,414 2.96 100001–500000 90 0.21 18,907,521 6.48 18,907,521 6.48 500001– 30 0.07 200,425,413 68.68 200,425,413 68.68 Total 42,342 100 291,826,062 100 291,826,062 100 of which nominee registered 12 45,444,245 15.57 45,444,245 15.57 On waiting list, total 0 0 0 In joint accounts 00 Total in special accounts 00 Number issued 291,826,062 100 291,826,062 100

SHARES AND SHAREHOLDERS 117 M-real Shareholders M-real Voting Rights 31.12.2010 31.12.2010

Non-profitmaking organizations 3% Non-profitmaking organizations 4% Financial and insurance institutions 5% Financial and insurance institutions 2% Public communities 8% Public communities 14% Households 25% Households 12% Metsäliitto 39% Metsäliitto 61% Other companies 6% Other companies 2% Non-Finnish nationals 14% Other companies 5%

Share Price Development 2008–2010 Traded volume 2009–2010 index millions

120 80

90 60

60 40

30 20

0 0 2008 2009 2010 123456789101112123456789101112

M-real A M-real B Nasdaq OMX Helsinki Forest industry index A-share B-share

Earnings per share Shareholder’s equity per share Dividend yield EUR EUR %

0.5 6 2.0

0 5 1.5 4 -0.5 3 1.0 -1.0 2 0.5 -1.5 1 -2.0 0 0 06 07 08 09 10 06 07 08 09 10 06 07 08 09 10*

* Board’s proposal to the Annual General Meeting

118 SHARES AND SHAREHOLDERS Share performance 2010 2009 2008 2007 2006 Adjusted prices, EUR A share high 3.64 2.40 3.40 5.80 5.67 low 1.93 0.54 0.77 3.00 3.66 at year end 2.85 1.94 0.83 3.40 4.81 average 2.85 1.52 1.88 4.42 4.61

B share high 3.26 1.57 3.28 5.94 5.62 low 1.46 0.19 0.67 2.96 3.26 at year end 2.54 1.53 0.69 3.25 4.79 average 2.44 0.66 1.59 4.56 4.41

Trading in shares, units of NASDAQ OMX Helsinki A share 1,968,018 1,513,161 1,757,960 3,060,113 1,910,151 % of total no. of A shares 5.4% 4.2% 4.8 8.4 5.3 B share 365,284,851 497,931,005 634,548,405 511,653,806 522,205,654 % of total no. of B shares 125.2% 170.6% 217.4 175.3 178.9

Number of shares at the year end A share 36,339,550 36,339,550 36,339,550 36,339,550 36,339,550 B share 291,826,062 291,826,062 291,826,062 291,826,062 291,826,062 Total 328,165,612 328,165,612 328,165,612 328,165,612 328,165,612 Adjusted number of shares at year end 328,165,612 328,165,612 328,165,612 328,165,612 328,165,612 Market capitalization of shares at year end, EUR million 844.8 517.0 231.5 1,070.0 1,572.6 Number of shareholders* 43,937 42,766 40,555 38,067 39,984

* Shareholders in the book entry system. Does not include nominee registeres shareholders

Figures per share EUR million 2010 2009 2008 2007 2006 Calculation of earnings per share

Result from continuing operations before tax 48 -358 -204 -191 -280 – non-controlling interest 1 -4 -9 1 3 – taxation -21 27 34 23 11 + Result from discontinued operations 0 -23 -338 -27 -130 = Earnings 28 -358 -517 -194 -396

– Adjusted number of shares (average) 328,165,612 328,165,612 328,165,612 328,165,612 328,165,612

Earnings per share, EUR from continuing operations 0,09 -1.02 -0.55 -0.51 -0.81 from discontinuing operations 0,00 -0.07 -1.03 -0.08 -0.40 Earnings per share total, EUR 0,09 -1.09 -1.58 -0.59 -1.21 Shareholders’ equity per share, EUR 3,03 2.79 4.05 4.93 5.62 Divident per share, EUR 0,001) 0.001) 0.001) 0.06 0.06 Dividend per profit, % 0,0 0.0 0.0 -10.2 -5.0 Nominal value per share, EUR . - - 1.70 1.70 Dividend yield, % Series A 0,01) 0.01) 0.01) 1.8 1.2 Series B 0,01) 0.01) 0.01) 1.8 1.3 Price/earning ratio (P/E ratio) Series A 31,7 -1.8 -0.5 -5.8 -4.0 Series B 28,2 -1.4 -0.4 -5.5 -4.0 (P/BV), % Series A 94,1 69.5 20.5 60.9 76.8 Series B 83,8 54.8 17.0 58.2 76.5

1) Board of Directors proposes that no dividend is paid for 2010.

SHARES AND SHAREHOLDERS 119 Quaterly data

EUR million Total year Quarterly Sales 2010 2009 IV/2010 III/2010 II/2010 I/2010 IV/2009 III/2009 II/2009 I/2009 Consumer Packaging 1,175 968 303 305 310 257 255 250 237 226 Office Papers 658 543 181 164 153 160 132 133 131 147 Speciality Papers 303 352 66 75 80 82 73 80 82 117 Market Pulp and Energy 434 508 106 107 126 95 126 132 116 134 Other operations 198 189 55 53 44 46 59 56 40 34 Internal sales -163 -128 -46 -42 -37 -38 -39 -33 -21 -35 Sales 2,605 2,432 665 662 676 602 606 618 585 623

Operating result. excluding non-recurring items 2010 2009 IV/2010 III/2010 II/2010 I/2010 IV/2009 III/2009 II/2009 I/2009 Consumer Packaging 149 69 38 34 38 39 34 31 5 -1 Office Papers 5 -48 0 9 -4 0 0 -13 -18 -17 Speciality Papers -26 -51 -8 -7 -5 -6 -6 -11 -22 -12 Market Pulp and Energy 53 -54 12 16 16 9 -9 -14 -19 -12 Other operations -8 -66 -5 2 -2 -3 -12 -15 -16 -23 EBIT 173 -150 37 54 43 39 7 -22 -70 -65

Operating result and result before taxes 2010 2009 IV/2010 III/2010 II/2010 I/2010 IV/2009 III/2009 II/2009 I/2009 Consumer Packaging 135 51 24 34 38 39 33 31 4 -17 Office Papers 14 -104 9 9 -4 0 -54 -15 -18 -17 Speciality Papers -54 -151 -31 4 -21 -6 -78 -10 -23 -40 Market Pulp and Energy 36 -91 -1 12 16 9 -39 -15 -19 -18 Other operations 15 28 -576786-15-17-26 Operating result 1) 146 -267 -4 66 35 49 -52 -24 -73 -118

Share of results in associated companies -24 -16 -3 -1 -18 -2 -2 -1 -12 -1 Exchange gains/losses -9 5 -2 -1 0 -61220 Other financial income and expences -65 -80 -13 -19 -17 -16 -21 -49 -14 4 Result before taxes 48 -358 -22 45 0 25 -74 -72 -97 -115

Operating result. (% of sales) 2010 2009 IV/2010 III/2010 II/2010 I/2010 IV/2009 III/2009 II/2009 I/2009 Consumer Packaging 11.5 5.3 7.9 11.1 12.3 15.2 12.9 12.4 1.7 -7.5 Office Papers 2.1 -19.2 5.0 5.5 -2.6 0.0 -40.9 -11.3 -13.7 -11.6 Speciality Papers -17.8 -42.9 -47.0 5.3 -26.3 -7.3 -106.8 -12.5 -28.0 -34.2 Market Pulp and Energy 8.3 -17.9 -0.9 11.2 12.7 9.5 -31.0 -11.4 -16.4 -13.4 M-real 5.6 -11.0 -0.6 10.0 5.2 8.1 -8.6 -3.9 -12.5 -18.9

1) Metsä-Botnia’s net result is included in operating result starting from 8 December 2009

120 QUATERLY DATA 1,000 tonnes Full year Quarterly Deliveries 2010 2009 IV/2010 III/2010 II/2010 I/2010 IV/2009 III/2009 II/2009 I/2009 Consumer Packaging 1,390 1,212 344 353 372 321 327 315 296 274 Office Papers 909 790 248 212 212 237 198 199 190 203 Speciality Papers 246 342 49 57 66 74 68 76 80 118 Paper businesses total 1,155 1,132 297 269 278 311 266 275 270 321 Market Pulp and Energy 690 1,155 168 167 194 161 246 295 327 287

Production 2010 2009 IV/2010 III/2010 II/2010 I/2010 IV/2009 III/2009 II/2009 I/2009 Consumer Packaging 1,420 1,232 362 353 363 342 342 323 275 292 Office Papers 910 795 238 228 209 235 213 181 202 199 Speciality Papers 235 297 46 52 67 70 63 69 69 96 Paper mills total 1,145 1,092 284 280 276 305 276 250 271 295 Metsä-Botnia's pulp 1) 652 863 164 160 164 164 203 219 210 231 M-real's pulp 1,295 1,120 327 331 308 329 316 263 264 277

1) Corresponds to M-real’s ownership share of 30% in Metsä-Botnia

QUATERLY DATA 121 Production capacities

BOARD MILLS 1,000 tonnes Country Machines Folding boxboard Linerboard Total Tampere Finland 2 205 205 Kyröskoski Finland 1 150 150 Äänekoski Finland 1 210 210 Simpele *) Finland 1 220 220 Kemi Finland 1 375 375 Total 6 785 375 1,160

*) The investment, to be finalised in the summer of 2011 will increase the annual folding boxboard capacity of the mill by approximately 80,000 tonnes.

PAPER MILLS Coated Coated Uncoated Speciality 1,000 tonnes Country Machines magazine paper fine paper fine paper papers Total Äänekoski Finland 1 190 190 Kyröskoski Finland 1 105 105 Bergisch Gladbach Germany 2 120 120 240 Düren Germany 3 20 20 Husum Sweden 3 275 435 710 Alizay France 1 310 310 Total 11 275 190 865 245 1,575

PULP MILLS Chemical 1,000 tonnes Country pulp BCTMP Total Husum Sweden 690 690 Hallein Austria 160 160 Joutseno Finland 290 290 Kaskinen Finland 300 300 Total 850 590 1,440

METSÄ-BOTNIA **) Chemical 1,000 tonnes Country pulp Total Äänekoski Finland 500 500 Kemi Finland 590 590 Rauma Finland 630 630 Joutseno Finland 650 650 Total 2,370 2,370

**) M-real’s share of production capacity is 30%.

OTHER SHAREHOLDINGS Coated magazine paper 230 Myllykoski Paper Oyj, (share 35%), Finland Uncoated magazine paper 370 Myllykoski Paper Oyj, (share 35%), Finland

122 PRODUCTION CAPACITIES Ten years in ﬁgures

2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Income statement, EUR million Sales 2,605 2,432 3,236 3,499 3,698 3,342 5,522 6,044 6,564 6,923 - change % 7.1 -24.8 -7.5 -5.4 10.7 n/a -8.6 -7.9 -5.2 14.8 Exports from Finland 1,179 1,073 1,216 1,084 1,068 875 1,696 1,653 1,714 1,743 Exports and foreign subsidiaries 2,396 2,232 3,068 3,274 3,459 3,160 5,182 5,652 6,173 6,438 Operating profit 146 -267 -61 -49 -172 11 28 74 324 389 - % of sales 5.6 -11.0 -1.9 -1.4 -4.6 0.3 0.5 1.2 4.9 5.6 Profit from continuing operations before tax 1) 48 -358 -204 -191 -280 -117 -108 -80 134 154 - % of sales 1.8 -14.7 -6.3 -5.5 -7.6 -3.5 -2.0 -1.3 2.0 2.2 Result for the period from continuing operations 2) 27 -331 -170 -168 -270 -130 -125 -95 279 337 - % of sales 1.0 -13.6 -5.3 -4.8 -7.3 -3.9 -2.3 -1.6 4.2 4.9

Balance sheet, EUR million Balance sheet total 3,117 3,132 4,505 5,481 6,458 6,580 6,486 7,106 7,410 8,005 Shareholders´ equity 994 916 1,329 1,830 2,055 2,459 2,393 2,245 2,461 2,341 Non-controlling interest 5 8 58 52 63 45 37 19 75 60 Interest-bearing net liabilities 827 777 1,254 1,867 2,403 2,205 2,183 3,109 3,019 3,482

Dividends and figures per share Dividends, EUR million 0 3) 0 0 19.7 19.7 39.4 39.4 53.7 107.4 107.4 Dividend per share, EUR 0 3) 0 0 0.06 0.06 0.12 0.12 0.25 0.51 0.51 Dividend/profit, % 0 3) 0 0 -10.2 -5.0 -48.0 63.2 -58.8 166.7 109.1 Earnings per share, EUR 0.09 -1.09 -1.58 -0.59 -1.21 -0.25 0.19 -0.43 0.30 0.46 Shareholders´equity per share, EUR 3.03 2.79 4.05 5.58 6.26 7.49 7.29 10.56 11.57 11.014)

Key figures – Profitability Return on capital employed, total % 5.7 -8.9 -1.3 -0.8 -5.5 0.9 0.9 1.6 5.8 6.9 Return on equity, % 2.8 -28.6 -10.4 -8.5 -14.8 -4.0 -5.7 -3.8 3.0 4.74) Key figures – Financial position Equity ratio, % 32.1 29.6 30.8 34.4 32.8 38.1 37.5 31.9 34.2 30.04) Gearing ratio, % 135 153 152 124 132 101 103 151 133 1624) Net gearing ratio, % 83 84 90 99 113 88 89 137 119 1454) Net cash flow arising from operating Activities -69 81 -97 127 223 136 217 417 521 608 Internal financing on capital expenditure; EUR million -105 111 -76 50 53 31 89 105 168 82 Net interest expenses, EUR million 6) 64 92 156 148 109 81 130 166.9 142.3 194.3 Interest cover 6) -0.1 1.9 0.4 1.9 3.0 2.7 2.7 3.5 4.7 4.1

Other key figures Gross capital expenditure, EUR million 66 73 128 259 428 452 245 397 310 740 - % of sales 5) 2.5 3.0 3.2 5.9 9.9 11.9 4.4 6.6 4.7 10.7 R&D expenditure, EUR million 6) 5 7 10 14 18 22 28 27 26 27 - % of sales 5) 0.2 0.3 0.3 0.4 0.5 0.6 0.5 0.4 0.4 0.4 Personnel, average 6) 4,772 5,913 6,849 8,267 9,849 10,429 16,532 20,372 21,070 22,237 - of whom in Finland 1,842 2,173 2,437 2,824 3,344 3,423 5,263 6,178 6,328 6,406

* The 2004–2010 figures are calculated according to International Financial Reporting Standards (IFRS) and 2001–2003 according to Finnish Accounting Standards (FAS), but 2001–2004 figures have not been restated due to disposal of Map Merchant Group and the Graphic Papers Business. 1) The 2001–2003 figures profit before extraordinary items 2) The 2001–2003 figures profit before taxes and minority interest 3) Board of Directors proposes that no dividend is paid for 2010 4) The convertible subordinated capital notes are included in liabilities 5) The key ratio for 2005–2010 has been calculated for continuing operations only 6) From continuing operations for 2005–2010 Calculation of key ratios is presented on page 92

TEN YEARS IN FIGURES 123 Corporate responsibility data per production unit

Personnel Production 1000 t/a Emissions to air t/a

Board CO2 Sulphur NOX 31.12.2010 LTA FR Pulp and paper Particulates fossil (SO2) (NO2) Alizay, France 326 28 240 9.4 4,444 8.3 227 Gohrsmühle, Germany 688 5.5 185 6.1 260,181 541 430 Hallein, Austria 197 13 133 12 7,547 81 236 Husum, Sweden 864 17 655 670 244 69,669 355 1,334 Joutseno BCTMP, Finland 50 49 259 0 20,806 0 10 Kaskinen BCTMP, Finland 80 15 247 73 4,191 32 243 Kemiart Liners, Finland 98 13 353 0 1,339 0 0.59 Kyro, Finland 244 17 230 0 154,894 0.075 155 Reflex, Germany 319 8.1 84 0 63,872 0 74 Simpele, Finland 359 23 267 6.3 78,412 234 215 Tako Board, Finland 206 26 188 0 75,595 0.034 74 Äänekoski Board, Finland 167 15 206 1.1 3,501 8.2 46 Äänekoski Paper, Finland 248 33 175 1.2 4,853 11 52

LTA FR (Lost time accident Frequency Rate): Accidents at work/million working hours * ISO 14001 standard includes the Energy Efficiency System (EES)

124 CORPORATE RESPONSIBILITY DATA PER PRODUCTION UNIT Discharges to water t/a Waste t/a Management system Chain of Custody Total Phos- suspended Landfill Hazardous ISO ISO ISO COD BOD1 phorus Nitrogen solids waste (dry) waste 9001 14001* EMAS OHSAS 22000 PEFC FSC 158 16 2.8 32 59 1,396 74 x x x x 156521.96.2537790xx xxxx 4,519 580 6.4 17 458 626 9 xxxx x 9,866 694 25 170 701 135 900 x x x x 439 5.0 0.28 4.4 7.5 225 16 x x x x x 1,173 65.4 1.09 10.9 74 4,707 0 x x x x x 426331.2187319518xx xxxx 327 0.83 1.0 12 40 14 13 x x xxxx 68 27 1.4 0 27 69 64 x x x x x 349 17 1.6 14 30 8,291 21 x x xxxx 159730.91.2299240xx xxxx 542 218 0.83 9.9 167 48 4.6 x x xxxx 286 119 0.26 2.7 83 88 4.7 xxxx xx

CORPORATE RESPONSIBILITY DATA PER PRODUCTION UNIT 125 Financial reporting

M-real does not comment on its financial Investor relations Annual General Meeting performance or similar issues from the close M-real is committed to generating share- The Annual General Meeting of M-real will of each reporting period up to the publication holder value. M-real is set to improve its cost be held at Finlandia-talo, Helsinki hall, Man- of the report for said period, except for infor- efficiency and profitability and to intensify its nerheimintie 13e Helsinki, on Wednesday 23 mation on a change in the market situation operations and organization. M-real offers March 2011 at 4 p.m. EET. Shareholders and the rectification of incorrect information. up-to-date and easily utilizable information wishing to take part in the Annual General on the company regularly and openly. The Meeting and to exercise their right to vote Financial Information company aims to produce reliable and factual must be registered on 11 March 2011 on the Financial reports are published in English information concerning its operations and shareholders’ register of the company held and Finnish. Annual reports and other financial position as well as the near-term by Euroclear Finland Ltd. A shareholder has publications can be ordered from M-real outlook. All investors are treated equally. to give prior notice to the company not later Corporation by e-mail: M-real has described the general guidelines than by 10 a.m. on 18 March 2011 on the [email protected]. and defined the responsibilities with refer- company’s website at www.m-real.com; by M-real’s internet site www.m-real.com mate- ence to handling material information and e-mail to [email protected]; by tele- rial for investors is collected under the head- contacts with the financial market in its IR phone to +358 10 4654190 on weekdays ing Investor Relations. Stock exchange policy. The policy can be found in M-real’s between 1 p.m. and 3 p.m.; or by mail to releases, interim reports and financial infor- web pages www.m-real.com. M-real Corporation, Legal Services/ mation on these web pages are updated in Kansanen, P.O. Box 20, FI-02020 Metsä. real time. M-real company presentation on For shareholders’ information Possible proxy documents should be the site is updated when financial reports are M-real Corporation will publish financial delivered in originals to the above address published. Information on subjects such as reports in the year 2011 as follows. before the last date of registration. The Board M-real’s products, customer cases, sales of Directors presents that no divident is paid network and environmental issues and Thursday 10 February 2011 for the year 2010. organization can be found on the web pages. Financial results for 2010 Also, feedback can be sent through the company site. M-real’s general e-mail address Wednesday 4 May 2011 is [email protected]. Interim report January–March 2011

Shares Thursday 4 August 2011 The company has total of 328,165,612 shares. Interim report January–June 2011 Information on M-real Corporation’s shares is given in this report on pages 116–119. Wednesday 2 November 2011 M-real’s shares series A and B are quoted Interim report January–September 2011 on the Mid Cap list of NASDAQ OMX Helsinki Ltd. The trading codes of the shares are MRLAV and MRLBV, respectively.

Closed window Financial report Publication date 1 January to 10 February 2011 Financial results for 2010 Thu 10 February 2011 1 April to 4 May 2011 Interim report January–March Wed 4 May 2011 1 July to 4 August 2011 Interim report January–June Thu 4 August 2011 1 October to 2 November 2011 Interim report January–September Wed 2 November 2011

126 FINANCIAL REPORTING Share register Shareholder’s address, name and ownership changes are requested to be informed to that book-entry register which holds their book entry account.

Contact information EQUITY INVESTORS Matti Mörsky Tel. +358 10 465 4913 Fax +358 10 465 5232 [email protected]

EQUITY INVESTORS AND COMMUNICATIONS Juha Laine Tel. +358 10 465 4335 Fax +358 10 465 5232 [email protected] [email protected]

DEBT INVESTORS AND BANKER RELATIONSHIPS Ari-Pekka Latti Tel. +358 10 465 4255 Fax +35810 465 4695 [email protected]

Ilkka Punkari Tel. +358 10 465 5226 Fax +358 10 456 4695 [email protected]

General questions and comments on investor relations can be e-mailed to investor. [email protected] www.m-real.com

FINANCIAL REPORTING 127 Contact information

M-real Corporation BUSINESS AREAS Mills (Country) Head office Hallein (Austria) PO Box 20 Consumer Packaging Kaskinen (Finland) 02020 Metsä, Finland Hallituskatu 1 33200 Tampere Sales network (Country, city) Revontulentie 6 Finland Argentina and Uruguay (Buenos Aires) 02100 Espoo, Finland Tel. +358 10 4611 Australia (Melbourne) Tel. +358 10 4611 Fax +358 10 463 3158 Belgium (Brussels) Telefax +358 10 465 5232 Brazil (São Paulo) Mills (in Finland) Bulgaria (Sofia) Business ID 0635366–7 Joutseno Chile (Santiago) Kaskinen China (Hong Kong, Shanghai) www.m-real.com Kemiart Liners Costa Rica (San José) Kyro Cyprus (Paphos) Simpele Czech Republic (Prague) Tako Finland (Espoo, Tampere) Äänekoski France (Paris) Germany (Bergisch Gladbach, Frankfurt) Office Papers Greece (Athens) Van Boshuizenstraat 12 Iceland (Reykjavik) 1083 BA Amsterdam India (Mumbai) Netherlands Ireland (Dublin) Tel. +31 20 572 7500 Israel (Tel Aviv) Fax +31 20 572 7570 Italy (Milan) Japan (Tokyo) Mills (Country) Jordan (Amman) Alizay (France) Lebanon (Beirut) Husum (Sweden) Malta (San Gwann) Mexico (México) Speciality Papers Netherlands (Amsterdam) An der Gohrsmühle Peru (Lima) 51465 Bergisch Gladbach Poland (Warsaw) Germany Romania (Bucharest) Tel. +49 2202 15 0 Serbia (Belgrad) Fax +49 2202 15 2806 Singapore (Singapore) South Africa (Cape Town, Durban) Mills (Country) Spain (Madrid, Badajoz) Gohrsmühle (Germany) Syria (Damascus) Reflex (Germany) Turkey (Istanbul) United Kingdom (Chatham, Maidenhead) Market Pulp and Energy Ukraine (Kiev) Revontulentie 6 Hungary (Budapest) 02100 Espoo Russia (Moscow) Finland United States (Norwalk, CT) Tel. +358 1046 11 Fax +358 1046 54148 To locate contact details of local M-real sales offices, please visit company website www.m-real.com

128 CONTACT INFORMATION Publication information

Papers Cover: Galerie Art Silk 300 g/m2 Annual Report: Galerie Art Silk 130 g/m2 Financial Statements: Galerie Art Silk 115 g/m2

Graphic design and layout: Zeeland Branding Oy Photos: Jari Riihimäki 3D visualization: 3D Render Ltd Printer: Lönnberg Print

Additional copies: M-real Corporation Communications P.O. Box 20 02020 METSÄ Finland E-mail: [email protected]

Also available as PDF: www.m-real.com

The Annual Report is available in English and Finnish.