METSÄ BOARD Paper & Forest Products/Finland, December 18, 2012 Credit Research

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1 Credit Research Metsä Board Credit Research Credit recommendation B- Company description Metsä Board is a Finnish paperboard and paper producer. The company s business is divided into two segments: Paperboard and Paper and Pulp. The company is a leading producer of virgin fibre based cartonboard globally and also produces office and magazine papers. The company s paper and board production is backward integrated to pulp production. With a track record of bad acquisitions the company generated losses for years but is now on the back stretch of this restructuring and results are starting to show. Management agenda Metsä Board has been moving on two fronts in recent years restructuring the loss making paper operations and developing the packaging operations. A decade of restructuring is drawing to a close in paper. Operations being restructured still generate losses of some EUR 32m this year but 2013 should be clean. In paperboard Metsä Board has increased FBB capacity by 150,000 tons, or 20%, with three rebuilds and is accordingly looking to increase volumes in Cash flow/balance sheet Metsä Board s net debt has decreased in recent years primarily as a result of divestments. This process is now drawing to a close. We now expect Metsä Board s net debt to continue to decrease with improving operating cash flow. Net debt was EUR 580m at end of Q3, cash EUR 270m and liquidity EUR 536m. Refinancing for EUR 500m bond maturing in April 2013 was put in place in May through loan facilities. We expect the company to return to the bond market before long. Investment thesis We assign a credit recommendation of B- to Metsä Board. Metsä Board moves closer to realization of its transformation but clean figures will not be seen before We expect clear improvement in 2013, but expect particularly the Paper and Pulp business to be burdened by supply driven cyclical downturn in Latest change in credit recommendation Latest credit report on company Company vs Sector Business risk Financial risk Sovereign risk M&A risk Issuer rating S&P/Moody s/fitch N/A N/A Above Above Below Below B-/B3/N.A. Market cap, EURm 742 Next interim report 07-Feb-13 Web site Analyst Markku Järvinen markku.jarvinen@evli.com Telephone OUTSTANDING BONDS Issuer Name Coupon Maturity Curr Ask Px Ask Yield Z-Spread ISIN Amt Issued Issue Date Metsa Board OYJ /04/2013 EUR XS /03/2006 Metsa Board OYJ /06/2014 USD N/A /06/2002 All the important disclosures can be found on the last pages of this report. 1(11)

2 Metsä Board Packaging boards, pulp and paper Metsä Board is a Finnish paperboard and paper producer. The company s business is divided into two segments: Paperboard and Paper and Pulp. The company is a leading producer of virgin fibre based cartonboard globally and also produces office and magazine papers. The company s paper and board production is backward integrated to pulp production. With a track record of bad acquisitions the company generated losses for years but is now on the back stretch of this restructuring and results are starting to show. Metsä Board owns 25% of pulp producer Metsä-Botnia 25% and 2.0% in power utility Pohjolan Voima. The business performance FBB volume development drives Paperboard earnings Strategic review almost over in Paper and Pulp Metsä Board s Paperboard division is one of the largest producers of virgin fibre based cartonboards in Europe at its mills in Finland. Primary product is folding boxboard (FBB) where Metsä Board is the leading produce globally. The division also produces white kraftliner in Kemi for corrugated packaging solutions, as well as wallpaper and packaging paper. The division includes the remaining Specialty Paper operations. Results in Paperboard were in line with our expectations in Q3 with EBIT of EUR 28m with negative impacts from maintenance and restructured operations. There is no maintenance in Q4, and losses from operations still under restructuring should disappear in FBB order inflows have slowed down somewhat and deliveries are to be somewhat lower in Q4 with seasonality. FBB price is stable, linerboard prices up slightly in Q4. In Q3 FBB volumes increased 5%, we expect increasing trend to continue in Q1 that is seasonally strong for packaging. Full capacity of 935,000t is available in We are currently forecasting 85% capacity utilisation for 2013, leaving clear upside if capacity is filled. We expect pricing to remain stable. Metsä Board s Paper and Pulp division produces uncoated woodfree paper and coated papers at Husum in Sweden. The division is also responsible for sale of market pulp primarily from Kaskinen and Husum. Paper demand in developed markets, such as Western Europe and North America, declines structurally with readers and advertisers moving online from traditional magazines and especially newspapers. The paper operations have been heavily restructured in recent years, with several closures and divestments. The restructuring is now largely over. Q3 in the business was in line with expectations with sales of EUR 223m and EBIT of EUR 2m. Earnings were burdened by maintenance and there is no maintenance in Q4. In Q4 volumes are to be at least at Q3 level. While pulp price moves up, average pulp price in Q4 is to be slightly lower than in Q3. Paper prices are stable. Strong SEK burdens Husum. Focus on completing restructuring and increasing paperboard volume We expect FBB deliveries to increase Metsä Board will continue to seek exit from paper FBB demand exceeded M-real s capacity in In 2011 demand fell off, but M-real started adding capacity. Three rebuilds added 150,000 tons, or close to 20%. While fixed costs did not increase, filling the capacity has great operational leverage. In Q3 deliveries again increased 5% on Q2. However, in Q4 seasonal decrease is expected. We expect seasonal pick-up in Q and clear improvement in volumes in 2013 overall. However, we are currently only forecasting 85% capacity utilisation for 2013, leaving clear upside if capacity is filled. We expect pricing to remain stable. We expect the Pulp & Paper business to break even in 2013 but return to red in 2014 with lower pulp and paper prices. We expect Metsä Board to continue to seek opportunities to exit paper businesses completely, namely by divesting Husum. M-real has also increased capacity at Husum in both pulp and paper. We expect slight increase in volumes in 2013, with slightly positive earnings impact. The paper operations to be 2(11)

3 discontinued at Alizay, Gorsmühle and Äänekoski generated losses of EUR 27m (ex NRI) in Q is to be clean of such losses. Financial performance Coming out of a decade of restructuring Metsä Board, at the time M-real, had a strategy to become the leading European producer of coated fine papers in the late 1990s. Towards this goal the company made many acquisitions, most significant of which were acquisitions of Modo Paper in 2000 and Zanders Feinpapiere in The strategy was a failure and the operations generated significant losses. Since 2001 the company has made divestments worth EUR 3.6bn. Major divestments include sale of Graphic Papers to Sappi and Map Merchants to Sequana. Metsä Board has also received significant cash in the reorganisation of ownership of Botnia, much of this from its parent Metsä Group, but also from UPM and lastly Itochu. Since 2007 some 2.2m tons of paper capacity has also been closed. Strategy in fine papers was abandoned and the focus is now on packaging, particularly folding box board where Metsä Board is the leading producer. The company is now coming out of a decade of restructuring. Earnings suffered with the financial crisis in 2009, but improved in 2010 with recovery in cartonboard demand, high pulp prices and positive FX development was clearly softer but moving towards completion of restructuring has improved earnings in Metsä Board moves closer to realization of its transformation but clean figures will not be seen before In 2012 losses from operations being restructured are expected to amount EUR 32m. We thus expect clear improvement in 2013, but expect particularly the Paper and Pulp business to be burdened by supply driven cyclical downturn in EUR m Net sales and EBITDA-% % % % Source - Metsä Board & Evli estimates Net sales EBITDA-% 0 % Net debt and liquidity Net debt to continue to decrease Metsä Board s net debt has decreased in recent years primarily as a result of divestments. The divestment process has now drawn to a close with only potential divestment of Husum remaining. However, we now expect Metsä Board s net debt to continue to decrease with improving operating cash flow. Net debt was EUR 580m at end of Q3. 3(11)

4 3000 EUR m Net Debt 600 EUR m Refinancing needs (Q3/2012) > Source - Metsä Board & Evli estimates Source - Metsä Board Refinancing of EUR 500m bond now in place At the end of Q3/ 12 Metsä Board s cash totalled EUR 270m and liquidity EUR 536m. EUR 296 million of the liquid assets and investments were assets deposited by other Metsä Group businesses in Metsä Finance. EUR 600m term loan and revolving credit facility agreement with a syndicate of five banks and certain Finnish institutional investors was announced in May. The agreement will be utilized to refinance the EUR 500m bond maturing in April Facilities include EUR 100m RCF available immediately and EUR 500m term loans available from late March Maturity of the RCF is three years, EUR 150m of term loans matures at end June 2014 and EUR 350m at end of March In addition, Metsä Board has EUR 500m of unutilised commercial paper programmes. 20x 18x 16x 14x 12x 10x 8x 6x 4x 2x 0x Net debt / EBITDA E 13E 14E Source Metsä Board & Evli estimates EBITDA / Interest expenses 7x 6x 5x 4x 3x 2x 1x 0x E 13E 14E Source - Metsä Board & Evli estimates Cash flow Operating cash flow to improve in 2013 We expect Metsä Boards s cash flow from operations to improve in 2013 with higher paperboard volumes and removal of losses from operations still being restructured. Capex guidance for 2012 is EUR 60-70m and we expect a level close to this going forward. Metsä Board has no major investment plans. We expect operating cash flow in 2014 to suffer from lower pulp and paper prices but to remain above 2012 level. The company last paid a dividend on its 2007 results. We do not expect the company to pay a dividend for 2012, but do expect dividend payments to resume on 2013 results. Indicative credit recommendation B- credit recommendation We assign a credit recommendation of B- to Metsä Board. While Metsä Board still has a presence in the declining European paper industry, the company s primary source of cash flow is the structurally stable packaging business. Through its 25% ownership in Botnia Metsä Board is backward integrated in pulp. With restructuring of loss-making operations drawing to a close we expect net debt to continue decreasing. 4(11)

5 Metsä Board has following 2 corporate bonds in the market at the moment. The refinancing of the 2013 bond is in place through syndicated credit facility and an RCF. EUR 500m Fixed 8.750% Notes due 1 April 2013 USD 121m Fixed 9.400% Notes due 25 June 2014 We expect credit metrics for Metsä Board to continue to improve going forward. However, the company for the time being only has one liquid bond on the market and that is maturing in three months. While the refinancing is in place through loan facilities we expect M-real to return to the bond markets before long. 5(11)

6 SWOT ANALYSIS Strengths Leading asset and raw material base in cartonboards Self-sufficiency in pulp through Metsä Fibre (Botnia) Opportunities Volume growth in folding boxboard (FBB) Further capacity expansion at current production units Production expansion in Asia Weakness Exposure to decline in paper demand in Europe Weak profitability track record Threats Fall in demand and pricing of cartonboard Supply increases in pulp and packaging Adverse economic and FX development GRAPHS Business mix 2011 Geographical mix 2011 Others Paper and Pulp 47 % Paperboa rd 53 % USA Other Europe 8 % Switzerland Asia 1 Germany 15 % UK 10 % Finland 9 % Source - Metsä Board Spain Poland 3 % Austria 3 % Russia Source Metsä Board Sweden France 5 % The Netherlands Italy 6 % Belgium 5 % Debt Structure Owners Other 8 % Loans from Metsä Group 26 % Bonds 48 % Others 4 Metsäliitto 40 % Source Metsä Board Pension loans 18 % Mtk 1 % OP-Suomi Pienyhtiöt 1 % VER 1 % Source - Metsä Board On November OP-Focus Erkki Etola Metsäliitto Management Varma 5 % Ilmarinen 6(11)

7 INCOME STATEMENT, EURm E 2013E 2014E Sales 3,499 3,236 2,432 2,605 2,484 2,120 2,217 2,236 EBITDA EBIT Net financials Net result BALANCE SHEET, EURm Equity 1,830 1, Total debt 2,336 2,106 1,410 1,350 1, Cash Net debt 1,867 1, CASH FLOW, EURm Cash flow from operations CAPEX Free cash flow after CAPEX Dividends Free cash flow after CAPEX and dividends KEY RATIOS Sales growth, % EBITDA growth, % EBITDA margin, % EBIT margin, % Gearing, % Equity ratio, % Net debt / EBITDA EBITDA / net financials FFO / net debt, % GUIDANCE Metsä Board s operating result for the fourth quarter of 2012, excluding non-recurring items, is expected to be roughly at the third quarter of 2012 level. 7(11)

8 COMPANY DESCRIPTION: Metsä Board is a paperboard producer and a paper supplier in Europe. The company s business is divided into two segments: Paperboard and Paper and Pulp INVESTMENT CASE: The company is a leading producers of virgin fibre based cartonboard globally and also produces office and magazine papers. The company s paper and board production is backward integrated to pulp production. With a track record of bad acquisitions the company generated losses for years but has now restructured its operations. The company is now at the back stretch of this restructuring and results are starting to show. Fragility of economy with impact on paper and board demand and prices remains the primary risk factor to our investment case. OWNERSHIP STRUCTURE SHARES EURm % Metsäliitto Cooperative 132,173, % Varma Mutual Pension Insurance Company 15,918, % Ilmarinen Mutual Pension Insurance Company 13,347, % Etola Erkki Olavi 7,200, % Metsäliitto Management Oy 6,790, % OP-Focus Fund 6,178, % The State Pension Fund 3,800, % OP-Suomi Pienyhtiöt 3,357, % Mtk Ry 3,177, % OP-Delta Fund 3,100, % Ten largest 195,043, % Residual 133,121, % Total 328,165, % EARNINGS CALENDAR February 07, 2013 May 07, 2013 August 01, 2013 November 06, 2013 OTHER EVENTS March 26, 2013 FY 2012 Results Q1 report Q2 report Q3 report AGM COMPANY MISCELLANEOUS CEO: Mikko Helander Revontulentie 6, FIN Espoo CFO: Matti Mörsky Tel: Tel IR: Juha Laine 8(11)

9 Important Disclosures Evli Research uses 12-month recommendations. Recommendations are defined by utilizing analytical techniques based on financial theory including (but not limited to) discounted cash flow analysis, comparative valuation and behavioural technical analyses of underlying market movements in combination with considerations of the market situation and the time horizon. The selection of valuation methods depends on different circumstances. Opinions may be altered on the basis of new information coming to light in the underlying company or changes in interest rates, changes in foreign exchange rates, other securities prices or market indices or outlook for the aforementioned factors or other factors that may change the conditions of financial markets. All credit recommendations mentioned in this report are Evli s own indicative credit recommendation estimates unless otherwise mentioned. Please also note that all descriptions of loan term/documentation structure and loan term/document features are also obtained from sources which Evli believes to be reliable, but Evli does not represent or warrant their accuracy. Please note that investors should go through the specific complete loan term/documentation before investing in any bonds and not base an investment decision based solely on information contained in this report. Evli is not a credit rating agency and our recommendations should not be used to any other purposes than information only. Definitions of credit recommendations: AAA Extremely strong credit quality. The lowest level of credit risk. AA+ / AA / AA Superior credit quality. Very strong capability to meet financial commitments. A+ / A / A Strong capacity to meet financial liabilities, but of lesser credit quality than AA. Somewhat more vulnerable to foreseeable events. BBB+ / BBB / BBB Moderate credit quality, but more subject to adverse economic conditions. BBB considered lowest investment grade BB+ / BB / BB Speculative, non investment grade credit risk. May be vulnerable to future events, but currently has financial flexibility to meet financial liabilities. B+ / B / B High level of uncertainty to meet financial commitments. Payment capacity vulnerable to deterioration in the business and economic environment. CCC+ / CCC / CCC Substantial credit risk. In danger of default. The graph above shows the distribution of Evli Research s recommendations of companies under coverage. If recommendation is not given, it is not mentioned here. Name of the analyst: Järvinen This research report has been prepared by Evli Bank Plc ( Evli ). None of the analysts contributing to this report have a position in the shares of the company, bonds issued by the company or related securities. Each analyst responsible for the content of this report assures that the expressed views accurately reflect the personal views of each analyst on the covered companies and securities. Each analyst assures that (s)he has not been, nor are or will be, receiving direct or indirect compensation related to the specific 9(11)

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