METSÄ GROUP · METSÄ GROUP ANNUAL REVIEW 2019 1 Report of the Board of Directors Group financial...

METSÄ GROUPAnnual Review 2019

2

Report of the Board of Directors | Group financial statement | Parent company financial statement | Governance | Remuneration statement

Metsä Group is a forerunner in sustainable bioeconomy utilising renewable wood from sustainably managed northern forests. Metsä Group focuses on wood supply and forest services, wood products, pulp, fresh fibre paperboards and tissue and greaseproof papers.

In 2019, Metsä Group’s sales totalled EUR 5.5 billion, and it employs approximately 9,300 people. Metsäliitto Cooperative is the parent company of Metsä Group and is owned by approximately 103,000 Finnish forest owners.

Northern bioproducts to the world

SALESEUR MILLION

SALES BY MARKET AREA%

COMPARABLE OPERATING RESULTEUR MILLION

NET GEARING RATIO%

KEY FIGURES

19181716150

1,000

2,000

3,000

4,000

5,000

6,000

19181716150

200

400

600

800

1,000

COMPARABLE ROCE%

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3

6

9

12

15

18

EQUITY RATIO%

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10

20

30

40

50

60

19181716150

10

20

30

40

EMEA 73

APAC 19

Americas 8

1METSÄ GROUP ANNUAL REVIEW 2019


2 Review of the President and CEO4 Report of the Board of Directors 2019 *

FINANCIAL STATEMENTS

13 Consolidated statement of comprehensive income

14 Consolidated balance sheet15 Consolidated statement of changes in members’ funds16 Consolidated cash flow statement

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17 1. Accounting principles19 2. Profitability19 2.1 Segment information22 2.2 Sales23 2.3 Other operating income24 2.4 Operating expenses24 3. Remuneration24 3.1 Employee costs24 3.2 Remuneration paid to top management26 3.3 Share-based payments27 3.4 Pension obligations30 4. Capital employed30 4.1 Intangible assets33 4.2 Property, plant and equipment36 4.3 Biological assets36 4.4 Other investments37 4.5 Inventories38 4.6 Accounts receivables and other receivables38 4.7 Other non-current liabilities38 4.8 Accounts payable and other liabilities38 4.9 Provisions40 5. Capital structure and financial risks40 5.1 Equity

43 5.2 Financial income and expenses43 5.3 Other non-current financial assets44 5.4 Cash and cash equivalents44 5.5 Financial liabilities46 5.6 Management of financial risks52 5.7 Fair values of financial assets and

liabilities57 6. Income taxes59 7. Group structure59 7.1 Acquisitions, assets classified

as held for sale and operations disposed of

60 7.2 Investments in other companies63 7.3 Related party transactions63 8. Other notes63 8.1 Commitments and contingencies63 8.2 Events after the financial period

PARENT COMPANY FINANCIAL STATEMENTS

64 Parent company income statement65 Parent company balance sheet66 Parent company cash flow statement

NOTES TO THE PARENT COMPANY’S FINANCIAL STATEMENTS

67 1. Accounting principles68 2. Sales by market area68 3. Extraordinary items68 4. Other operating income69 5. Operating expenses70 6. Depreciation and impairment

charges70 7. Financial income and expenses71 8. Income taxes71 9. Intangible and tangible assets74 10. Investments75 11. Fair values of financial investments

in non-current assets

75 12. Receivables76 13. Members’ funds77 14. Provisions78 15. Deferred tax receivables

and tax liabilities78 16. Non-current liabilities79 17. Current liabilities80 18. Financial instruments81 19. Pending disputes and

commitments and contingencies81 20. Parent company shares

at 31 December 2019

83 The Board of Directors' proposal for the distribution of the profit

84 Auditor’s report

88 Comparable key figures 88 Reconciliation of operating result and EBITDA *89 Calculation of key ratios *90 Quarterly data91 Five years in figures92 Corporate governance statement 201999 Remuneration statement 2019102 Metsäliitto Cooperative's Representative Council103 Metsäliitto Cooperative's Supervisory Board104 Metsäliitto Cooperative’s Board of Directors106 Metsä Group Executive Management Team108 Financial reporting

* part of the Report of the Board of Directors

Contents

PUBLISHER

Metsä Group

These publications are available online at www.metsagroup.com.

Please email any feedback to [email protected] or communicate it to us via social media @MetsaGroup.

Metsä Group Sustainability Report 2019

We are Metsä Group 2019 Brochure

Metsä Group Annual Review2019

Metsä Board Annual Report2019

METSÄ BOARDVuosikertomus 2019

METSÄ GROUPVuosikatsaus 2019



METSÄ GROUPSustainability Report 2019

Me olemme

METSÄ GROUP2019

https://www.metsagroup.com/en/Pages/default.aspx

2


ECONOMIC FLUCTUATIONSare part of our business

The negative effect of the market situation was particularly visible in the pulp industry. Price levels were low also in the mechanical forest indus-try – in sawn timber as well as in (LVL) and plywood – and demand was low, particularly in Europe. The prices and demand for folding box-board and kraftliners as well as tissue and greaseproof papers remained at a good level in Metsä Group’s product segments.

Global trends with long-term impact on the demand for forest in-dustry products remain unchanged. The success of Finnish forestry and forest industry is based on the growing demand for renewable raw mate-rials, and the consumer products made from them, in our economically strengthening market areas with growing populations. To ensure our continued ability to respond to market needs, we must account for the challenges and requirements of all three aspects of sustainable develop-ment. Economic, social and ecological sustainability must be achieved in equilibrium, and with continuous performance improvement.

Diverse development projects and investments are the most impor-tant factors in achieving these goals. The development of our product portfolio is of utmost importance from the perspective of social and ecological sustainability. The use of material resources must be efficient and wise, meaning that we must increase our efficiency starting from product design. The functionality that our end customers look for in our products must be achieved with a minimum amount of raw mate-rials. Practical examples of this include developing construction indus-try materials based on LVL and the quality of paperboards to enable lighter fibre packaging, which Metsä Board has been engaged in for quite some time now. We invested in both of these sectors in 2019. A new LVL line started up in May in Punkaharju, whereas Metsä Board carried out a number of development investments in paperboard pro-duction and made a preliminary decision to invest in the renewal of the Husum pulp mill.

Following the extremely strong business cycle in 2018, many of Metsä Group’s business areas went through a weaker-than-average year in 2019. Even in this economic situation, however, the Group’s implemented investments and development programmes enabled profitable operations and allowed ongoing investments and other development projects to proceed according to plan.



Renewal based on the long-range planning of production units creates a ba-sis for both economic and ecological sustainability. During 2019, Metsä Group prepared significant investments in Kemi, Rauma and Husum. These planned investments would increase the mills’ capacity, particularly through energy effi-ciency and the reduction of fossil-based carbon dioxide emissions, and strongly support society’s goals in combating climate change.

Development work concerning new products has proceeded to the imple-mentation phase in both producing textile fibre and converting the side streams of wood processing. Through our innovation company Metsä Spring, we have invested in a new demo plant manufacturing textile fibre, where production will begin in early 2020. We have also invested in the growth phase of Woodio. Woodio produces bathroom components, such as washbasins, using the fines generated in the screening of wood chips as raw material.

FORERUNNER AS A PARTNER TO FOREST OWNERS

The three pillars of sustainability have a strong presence in daily work in the for-est industry. It is Metsä Group’s mission to provide the members of our coopera-tive with our services and the expertise of our personnel, so that they can manage their forest assets according to their goals. As climate and other environmen-tal issues take on an increasingly prominent role in the forest debate, we need far-reaching perspectives and reliable support for the sustainable management of commercial forests. Metsä Group’s core mission is to increase the value of Finn-ish forests. Achieving this goal requires balanced demand for all wood grades, as well as high-quality and diverse options for forest management.

Total harvesting volumes and the price levels of wood grades in Finland de-clined in 2019. Harvesting and transportation conditions were good for most of the year, changing somewhat weaker towards the end of it. Wood supply in the Baltic Sea region was ample, partly due to widespread insect damage in Conti-nental Europe and southern Sweden. Customer satisfaction among forest own-

ers remained good, and we signed a large amount of new agreements on forest asset management. Some 40% of the wood purchased from private forests was purchased digitally. In forest management services, digital sales accounted for nearly half of all sales.

DEVELOPMENT CONTINUES

The Group’s financial position is strong and stable. Our competitiveness is strong enough to withstand slower business cycle conditions. This means that we are continuing our development projects aiming to promote Finnish forestry and forest industry. In terms of the Group’s core mission, we must ensure our competitiveness in primary wood processing, such as sawn timber, LVL and ply-wood production as well as pulpwood’s conversion into pulp. Our products of the following processing phase – paperboards and tissue papers – are also im-portant for a balanced business structure. Metsä Group’s personnel, more than 9,000 committed professionals, are ready for work and renew.

ILKKA HÄMÄLÄPresident and CEO

The Group’s financial position is strong and stable. Our competitiveness is strong enough to withstand slower business cycle conditions.

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Report of the Board of Directors 2019BALANCE SHEET AND FINANCING

2019 2018 2017

Equity ratio, % 56.2 53.1 45.0

Net gearing ratio, % 10 13 34

Interest-bearing net liabilities, EUR million 373.6 463.3 992.6

Metsä Group’s liquidity has remained strong. Total liquidity at the end of De-cember was EUR 2,022.2 million (1,940.1). This consisted of EUR 1,090.0 mil-lion (1,083.9) in liquid assets and investments, and EUR 932.2 million (856.3) in off-balance sheet committed credit facility agreements.

The Group’s liquidity reserve is complemented by uncommitted commercial paper programmes and credit facilities amounting to EUR 161.5 million (160.8).

Cash flow from operations was EUR 657.8 million (882.2). EUR 112.9 mil-lion was tied up in working capital (255.4 tied up). The deduction of EUR 27.4 million in trade and other receivables as well as the deduction of EUR 14.3 mil-lion in inventories decreased working capital. The deduction of EUR 154.5 mil-lion in trade payables and other liabilities increased working capital.

The Group’s equity ratio at the end of December was 56.2%, and its net gear-ing ratio was 10% (53.1 and 13, respectively). Interest-bearing net liabilities were EUR 374 million (463.3).

In September, Metsä Board agreed on a bank financing arrangement consist-ing of a five-year drawn loan of EUR 150 million and a five-year multicurrency standby credit facility of EUR 200 million, with two one-year extension options and an increase option of EUR 50 million. The margin of the standby credit fa-cility is tied to responsibility targets based on Metsä Board’s selected sustainabil-ity objectives for 2030. The funds from the new arrangement were withdrawn in October, and they replaced the drawn loan of EUR 50 million and the undrawn standby credit facility of EUR 150 million, maturing in March 2020. Metsä Board has investment grade credit ratings by S&P Global and Moody’s Investor Service. The company’s rating by S&P Global is BBB-, with a stable outlook. The company’s rating by Moody’s is Baa3, with a stable outlook.

At the end of December, the equity ratio of the parent company Metsäliit-to Cooperative was 88.7%, and net gearing ratio was -20.7% (85.2 and -18). In August–December, Metsäliitto Cooperative acquired Metsä Board Corporation B shares to a value of EUR 82.5 million from the market based on the Board of Directors’ authorisation. The number of shares totalled 17,060,588, and the av-erage price was EUR 4.83 per share. Following the share acquisition, Metsäliitto Cooperative holds 45.68% of Metsä Board’s shares and 66.25% of the voting rights conferred by shares.

In 2019, Metsäliitto Cooperative’s members’ capital increased by a total of EUR 146.5 million (120.4). The value of participation shares grew by EUR 11.2 million (11.3) and that of additional shares A by EUR 130.2 million (111.7). The value of additional shares B grew by EUR 5.1 million (-2.6).

PERSONNEL 2019 2018 2017

Personnel, average 9,624 9,464 9,399

Personnel expenses, EUR million 630.4 634.7 620.5

Personnel at end of year 9,265 9,310 9,126

- of whom in Finland 4,929 4,834 4,764

SALES AND RESULTEUR million 2019 2018 2017

Sales 5,473.4 5,709.1 5,040.0

EBITDA 789.7 1,127.8 830.7

- comparable EBITDA 799.0 1,133.4 819.7

Operating result 374.3 843.0 581.0

- comparable operating result 494.9 848.5 566.1

% of sales 9.0 14.9 11.2

Result before tax 315.7 769.1 506.2

Result for the period 238.9 612.7 403.9

Metsä Group's sales in 2019 totalled EUR 5,473.4 million (2018: 5,709.1). Sales declined due to, among other things, pulp prices and paperboard delivery vol-umes, both lower than in the year before.

The comparable operating result declined by 42% from the previous year and was EUR 494.9 million (848.5), or 9.0% (14.9) of sales. The decrease in the operating result was mainly due to raw material and production costs, which were higher than in the comparison period, as well as the decline in the sales prices of pulp. Exchange rate fluctuations after hedging had a positive impact of around EUR 104 million on the operating result of the financial year, compared to 2018. This was largely due to the US dollar being approximately 5% stronger than in the previous year.

Items affecting comparability in 2019 totalled EUR -120.6 million (-5.6) and consisted mainly of impairments in the amount of EUR 111.4 million. The most significant item was an impairment loss of around EUR 102 million recognised by Metsä Tissue, of which some EUR 77 million was allocated to the Metsä Group level after elimination. Items affecting comparability also include a EUR 19 million impairment related to the modernisation of Metsä Board’s Husum pulp mill and an approximately EUR 21 million item affecting comparability related to the divestment of Metsä Tissue’s napkin business, of which some EUR 20 million was allocated to the Metsä Group level after elimination.

Metsä Group’s operating result (IFRS) was EUR 374.3 million (843.0). Share of results from associated companies and joint ventures was EUR 3.3 million (7.0), financial income was EUR 5.3 million (2.4), exchange rate differences in financing were EUR -6.4 million (-6.3), and financial expenses totalled EUR 60.8 million (77.0).

The result before taxes was EUR 315.7 million (769.1), and taxes includ-ing changes in deferred tax liabilities totalled EUR 76.8 million (156.4). The Group’s effective tax rate was 24.3% (20.3). The net result for the financial peri-od was EUR 238.9 million (612.7).

The return on capital employed was 7.3% (16.6), and the return on equity was 6.4% (18.5). The comparable return on capital employed was 9.6% (16.8), and the comparable return on equity was 9.7% (18.7).

% 2019 2018 2017

Return on capital employed 7.3 16.6 12.6

- comparable ROCE 9.6 16.8 12.3

Return on equity 6.4 18.5 14.5

- comparable ROE 9.7 18.7 14.0



Metsä Group employed an average of 9,624 people in 2019 (9,464). At the end of December, the Group had 9,265 employees (9,310), of whom 4,929 (4,834) were based in Finland and 4,336 (4,476) were based abroad. The turnover of permanent employees was 8.3% (6.5), and the average duration of employment for the whole personnel was 16.3 years (16.0). Personnel expenses totalled EUR 630.4 million (634.7), of which paid salaries and remuneration, including share-based payments, were EUR 431.0 million (437.8).

The parent company Metsäliitto Cooperative employed 1,926 people at the end of December (1,924). The parent company paid EUR 90.0 million in sala-ries and remuneration (91.6).

Future retirements are being prepared for with retirement forecasts and re-source plans based on the forecasts. When necessary, Metsä Group initiates ap-prenticeships and invests in on-the-job learning.

The section Report on non-financial key figures contains further information about personnel development and safety at work.

MEMBERS

At the end of December, Metsäliitto Cooperative had 103,618 members (103,420). In 2019, 2,980 new members joined the cooperative, and 2,782 members cancelled their membership. At the end of 2019, the forest area owned by the members totalled 5.421 million hectares (5.265).

INVESTMENTSEUR million 2019 2018 2017

Capital expenditure 259.6 271.9 607.7

% of sales 4.7 4.8 12.1

Investments in Finland 178.2 172.3 519.6

Metsä Group’s additions to intangible and tangible fixed assets in January–De-cember were EUR 259.6 million (271.9), which includes EUR 14.9 million of acquired business operations’ fixed assets and EUR 25.8 million of investments in leased property, plant and equipment.

The new Kerto LVL® line at Metsä Wood’s Punkaharju mill started up in April and was inaugurated in May. The production capacity of Punkaharju’s new line is 65,000 cubic metres and it increases the mill’s production of Kerto LVL by ap-proximately 50%. The total value of the investment was around EUR 52 million, of which roughly EUR 20 million was allocated to 2019.

At the Äänekoski mill, Metsä Board invested in a new sheet-cutting line, which increased the annual capacity of the sheet-cutting facility by 35,000 tonnes to 120,000 tonnes. The investment’s value was approximately EUR 11 million, and it was allocated primarily to 2019.

Investments in the first phase of the modernisation of Metsä Board’s Husum pulp mill in 2019 amounted to EUR 21 million. The total value of the invest-ment’s first phase is approximately EUR 320 million, which will be spread over 2019–2022.

Metsä Fibre commenced the expansion of the debarking department in Jout-seno, which will increase the mill’s softwood debarking capacity. The value of the investment is approximately EUR 30 million, and it will be completed in the spring of 2020. Metsä Fibre also replaced the electrostatic precipitator of Kemi’s recovery boiler and initiated a project to reduce the particulate emissions of Joutseno’s lime kiln.

Metsä Fibre sawmills invested in production efficiency and the improvement of performance capacity during the year. Next-generation X-ray machines went into operation at the Merikarvia, Renko and Vilppula sawmills.

BUSINESS DEVELOPMENT

Metsä Group’s innovation company Metsä Spring invests expertise and funds in concepts that advance sustainable bioeconomy through innovation. The objec-

tive of the investments is to strengthen the development of new business op-erations based on forests. In 2019, Metsä Spring made a capital investment in Woodio, a company that develops and manufactures 100% waterproof wood composite products. Woodio marks the second investment made by Metsä Spring. Through its first investment, Metsä Spring participated in developing a new method for converting pulp into textile fibres.

In April, Metsä Fibre started a pre-engineering project related to the con-struction of a bioproduct mill in Metsä Group’s current mill area in Kemi. If implemented, the bioproduct mill will produce around 1.5 million tonnes of softwood and hardwood pulp annually, in addition to many other bioproducts. The new mill is intended to replace the current pulp mill in Kemi, which has an annual capacity of around 620,000 tonnes. The value of the investment is around EUR 1.5 billion.

In September 2019, Metsä Fibre filed the Kemi bioproduct mill’s environ-mental permit application with the Regional State Administrative Agency for Northern Finland. The response to the application is expected in early 2020.

In addition, Metsä Fibre has filed an EIA report pursuant to the Act on Envi-ronmental Impact Assessment Procedure with the Lapland Centre for Econom-ic Development, Transport and the Environment (ELY Centre). The investment decision on the new bioproduct mill will not be made until the summer of 2020 at the earliest, after which the construction of the mill would begin. The mill could start up in the first half of the 2020s.

In April 2019, a pre-engineering project concerning the construction of a new sawmill in Rauma was launched. The aim is to create favourable conditions for building the world’s most modern and efficient pine sawmill, where the use of new technology and data is brought to a significantly higher level than in ex-isting sawmills. If realised, the value of the investment would be approximately EUR 200 million. The possible investment decision on the construction of the sawmill is expected in the first half of 2020.

In April, Metsä Board started a pre-engineering project related to the first phase of the renewal of its Husum pulp mill in Sweden, which would include the construction of a new recovery boiler and turbine to replace the old ones. The total value of the investment which will be spread over 2019–2022, would be approximately EUR 320 million. The second phase is scheduled to be imple-mented during the 2020s, and involves replacing the mill’s two current fibre lines with one new line. The mill’s annual pulp capacity of around 750,000 tonnes would remain unchanged after the investment, but its cost competitiveness would improve considerably.

In August, Sweden’s competent authority, the County Administrative Board (Länsstyrelsen), decided that the planned new recovery boiler requires an amendment to the current environmental permit. Corresponding permit pro-cesses in Sweden typically take 6–12 months. Metsä Board is applying for an amendment to the current environmental permit and expects to be able to make the final investment decision on the renewal’s first phase during the second quar-ter of 2020 at the earliest.

In April 2019, Metsä Tissue published its new strategy, which includes the Fu-ture Mill programme. The programme aims to increase the long-term industrial efficiency and environmental performance of the tissue paper business. As part of the programme, Metsä Tissue applied for a new environmental permit in Ma-riestad, Sweden, in September. The first phase of the plan involves a new tissue paper machine, as well as an automated warehouse and office building for the Mariestad mill. The estimated value of the potential investments, which would be implemented in 2021–2023, would be approximately EUR 230 million.

BUSINESS AREAS

WOOD SUPPLY AND FOREST SERVICESMetsä Forest’s sales were EUR 1,972.9 million (1,983.4), and the comparable operating result was EUR 27.4 million (32.3). Compensation from Metsähal-litus for litigation expenses had a positive effect of EUR 3.3 million on the first-quarter result.

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Wood Supply and Forest Services 2019 2018

Sales, EUR million 1,972.9 1,983.4

EBITDA, EUR million 35.7 36.6

- comparable EBITDA 35.7 36.6

Operating result, EUR million 27.4 32.3

- comparable operating result 27.4 32.3

% of sales 1.4 1.6

Comparable ROCE, % 16.3 20.7

Investments, EUR million 22.9 4.2

Personnel at end of period 838 844

The supply of wood in Finland was weaker in 2019 than in 2018. Log prices started to decline at the beginning of the year, and the prices of pulpwood began to decline in the third quarter. The prices evened out towards the end of the year. The volume of purchased wood was markedly lower in 2019 than in 2018.

A strong supply of wood marked the year 2019 in the Baltic Sea region. Supply grew particularly in softwood pulpwood due to insect damage in Central Europe. The supply of birch pulpwood in proportion to demand also increased towards the end of the year, and the market balanced. Oversupply was substantial in the log mar-ket during the second half of the year as a result of the poor market situation of sawn timber. Poor harvesting conditions reduced the oversupply towards the end of the year.

Throughout the year, Metsä Forest bought all grades of wood through both standing and delivery sales across Finland. Demand focused particularly on fell-ing sites to be harvested when the ground is unfrozen. The purchasing of energy wood continued to focus on crown wood.

Metsä Forest delivered a total of 34.7 million cubic metres (36.4) of wood to its customers in 2019. Approximately 86% of this amount went to the industrial sector in Finland.

A total of 40% of the wood acquired by Metsä Forest from private forest own-ers was purchased through digital means. In the sales of forest management ser-vices, the figure was 48%.

Members of Metsäliitto Cooperative received 70% in advance funding for thinning fit for summer harvesting for wood trades carried out between 8 Febru-ary and 30 April 2019. The campaign was implemented successfully and met its goals. In September, Metsä Forest launched a new pine and spruce mixed culti-vation service for forest owners.

WOOD PRODUCTS INDUSTRYMetsä Wood's sales in 2019 were EUR 434.2 million (441.7). The comparable operating result was EUR 7.2 million (16.6).

Wood Products Industry 2019 2018

Sales, EUR million 434.2 441.7





% of sales 1.7 3.8



Personnel at end of period 1,510 1,506

Metsä Wood’s sales in 2019 declined, in both engineered wood products and the UK business, by 2% from the comparison period. In engineered wood products, the delivery volumes of Kerto LVL products grew, but the delivery volumes of plywood products declined from the comparison period. The average sales prices of birch plywood and Kerto LVL products remained close to the previous year’s levels, whereas the prices of spruce plywood rose. The delivery volumes of the UK business declined from the level of the previous year.

Due to the uncertain market situation in engineered wood products, production was adjusted at all mills. Furthermore, a strike and lockout brought production to

a halt at all mills in Finland in December. As a result, the company was not able to fully utilise the additional capacity generated by investments. In the UK business, the uncertainty around Brexit weakened consumer confidence and demand.

The profitability of business activities compared to the year before weakened due to the production adjustment implemented in response to slower markets, as well as due to the strike and lockout. In addition, costs arising from the ramp-up of strategic investments burdened profitability, along with production challenges and higher wood costs. The profitability of the UK business improved from the comparison period.

PULP AND SAWN TIMBER INDUSTRYMetsä Fibre’s sales amounted to EUR 2,236.0 million (2,469.1). The comparable operating result was EUR 248.6 million (668.8).

Pulp and Sawn Timber Industry 2019 2018






% of sales 11.1 27.1



Personnel at end of period 1,279 1,210

Sales and the operating result declined compared to the previous year due to the lower sales prices of pulp and sawn timber and an increase in the prices of raw materials. The growth in the sales volumes of both pulp and sawn timber and the strengthening of the US dollar had a positive impact on sales and the result.

Exchange rate fluctuations including hedges had a positive effect of EUR 58 million on the operating result of the financial year, compared to the previous year.

The volume of pulp delivered by Metsä Fibre totalled 2,993,000 tonnes (2,816,000), while its overall annual production stood at 2,948,000 tonnes (2,973,000).

Overall demand for market pulp was higher than in the previous year. De-mand for softwood pulp, in particular, increased. Paper and paperboard produc-tion was strong in China, whereas in Europe, the production of printing and writing paper declined. This is why pulp consumption grew in China and de-clined substantially in Europe.

The average market prices of both long and short-fibre pulp throughout the year were lower than in the year before. The USD-denominated average mar-ket prices of long-fibre pulp in 2019 decreased by 16% in Europe and by 27% in China. The USD-denominated average market prices of short-fibre pulp in Europe decreased by 17% compared to the average prices of the previous year.

PAPERBOARD INDUSTRYMetsä Board’s sales were EUR 1,931.8 million (1,944.1). The comparable oper-ating result was EUR 184.4 million (251.9).

Paperboard Industry 2019 2018






% of sales 9.5 13.0



Personnel at the end of period 2,351 2,352

Items affecting comparability during the financial period totalled EUR -3.6 million and comprised the following items: a EUR 3.3 million capital gain on a non-operating investment in shares; the Äänevoima shares sold to Metsä Fibre,



which had a net impact of EUR 6.8 million on the operating result; EUR 5.5 million from the sale of land area not related to business operations; and a EUR -19.1 million impairment recognised in the assets of the Husum pulp mill.

Total deliveries of paperboard declined and were 1,791,000 (1,830,000) tonnes. Folding boxboard deliveries were 1,207,000 (1,215,000) tonnes. Deliv-eries of white kraftliner declined and were 584,000 (616,000) tonnes. Muted demand, particularly in Europe, during the first half of the year decreased the delivery volumes of Metsä Board’s white kraftliner. Metsä Board’s market pulp deliveries remained stable and were 460,000 (457,000) tonnes.

The higher sales prices of paperboards, and those of folding boxboard in par-ticular, had a positive effect on the operating result in 2019. Correspondingly, profitability was weakened by market pulp prices, which declined globally.

The production costs of paperboard and pulp grew from the previous year. Cost inflation in 2018 was rapid, and the prices of raw materials remained high in 2019.

Exchange rate fluctuations including hedges had a positive effect of EUR 48 million on the operating result of the financial year, compared to the previous year. Metsä Board’s share of the comparable operating result of its associated company Metsä Fibre was EUR 45.3 million (124.5).

Earnings per share were EUR 0.41 (0.57). Comparable earnings per share were EUR 0.41 (0.58). The return on equity was 10.9% (16.3), and the comparable return on equity was 11.0% (16.7). The return on capital employed was 10.2% (14.0), and the comparable return on capital employed was 10.4% (14.4).

TISSUE AND GREASEPROOF PAPERSMetsä Tissue’s sales amounted to EUR 1,060.0 million (1,039.8). Sales in-creased, mainly due to higher sales prices.

Tissue and Greaseproof Papers 2019 2018




Operating result, EUR million -63.4 36.3


% of sales 6.9 3.5



Personnel at the end of period 2,702 2,865

The comparable operating result was EUR 73.4 million (36.3). The improved result was attributable to Metsä Tissue’s efficiency measures, an increase in sales prices and lower raw material costs.

Metsä Tissue updated its strategy in 2019. Company carried out an opera-tional review aiming to improve internal efficiency, reduce complexity and focus on the tissue business as part of the strategy.

As part of the operational review, Metsä Tissue conducted impairment testing in accordance with IAS 36 during the second quarter. As a result, company rec-ognised an impairment loss of EUR 102.5 million mainly with regard to good-will. In addition, the company recognised EUR 6.6 million of expenses affecting comparability in relation to cooperation negotiations it held during the year.

The strategic review of the napkin business that began in December 2018 was completed in December 2019. At that time, Metsä Tissue made an agree-ment on the sale of its napkin business to keeeper Group, part of Mutares Group. The transaction covers the properties, machinery, equipment and in-ventories of the Stotzheim mill, located in Germany, as well as the Fasana and Mondial brands.

The mill’s personnel are expected to transfer into the employment of the new owner as existing employees. A negative EUR 21.0 million impact on the op-erating result of the fourth quarter of 2019, to be treated as an item affecting comparability, was recognised as a result of the arrangement. The finalisation of the transaction requires the approval of Germany’s competition authority, and the finalisation has been planned to take place in the first quarter of 2020.

RESEARCH AND DEVELOPMENT

Metsä Group’s research, development and innovation activities are focused on resource efficiency, the potential of renewable raw materials and on increasing the value of products.

In 2019, the Group’s research and development costs were EUR 15.4 million (18.2), corresponding to 0.3% of sales (0.3).

EUR million 2019 2018 2017

R&D expenses 15.4 18.2 17.8

% of sales 0.3 0.3 0.4

The research and development work aims to create new products and services, exploit new technologies and ensure the competitiveness of Metsä Group’s business oper-ations. Our customers are at the centre of all development work, and the customer feedback is taken advantage of in the continuous improvement of operations.

Metsä Group engages in active cooperation with universities, research institutes, the suppliers of technical solutions and high-growth companies. Metsä Group also operates in the EU’s research and development networks. Innovations and develop-ment programmes play a central role in the development process of new products.

Metsä Spring Oy, the innovation company established by Metsä Group in 2018, is tasked with finding and developing new forest-based bioeconomy and circular economy business concepts in cooperation with partners. Through Metsä Spring, Metsä Group invests expertise and funds in business ideas which renew the Group’s ecosystem in the long term.

METSÄ FORESTMetsä Forest developed technological applications that increase the efficiency of operations and improve customer experience, and also participated actively in the industry’s joint development projects.

Metsä Forest developed a new operational data system for the purposes of wood supply and expanded an digital service channel towards the authorities.

In the Efforte project, Metsä Forest took part in the development of preci-sion forestry and site index determination, as well as in modelling gravel roads’ suitability for transport. Metsä Forest participated in the PuuMaVesi project of the Finnish Environment Institute, which develops new water protection meth-ods for forestry. Metsä Forest also took part in developing new operator training concepts and student recruitment models.

Metsä Forest initiated a programme for ecological sustainability as part of its forest services and launched a new service for forest regeneration relying on the mixed cultivation of pine and spruce.

METSÄ WOODThe development of Metsä Wood’s plywood products focused on the durable surface solutions for the needs of construction and transport industry custom-ers. Research was also continued with biologically sustainable, ecological and fireproofed products. For Kerto LVL products, the development focused on de-veloping new solutions for element construction and for solutions demanding greater strength.

The use of the digital metsawood.online service expanded. The service allows customers to order Metsä Wood’s products and track the progress of their orders and deliveries. The Open Source Wood platform launched by Metsä Wood has been developed further to facilitate the design of wood structures. The service aims to accelerate the growth of wood construction in urban environments and to drive particularly the use of prefabricated wood elements in construction.

Metsä Wood’s online service allows architects and structural engineers to share their wood element construction designs and concepts and to collaborate with other professionals of wood construction.

METSÄ FIBREMetsä Fibre’s development work is guided by a three-year development plan for products and production processes. The focal points of this development plan

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are resource efficiency, fibre and wood technology know-how generating added value for customers, and the development of new bioproducts. From these per-spectives, the company began to develop a future pulp mill and sawmill concepts in cooperation with technology suppliers and research partners in 2018. These future technology concepts will be utilised in both the development of existing mills and in new investment projects.

METSÄ BOARDDemand for recyclable packaging materials that replace plastic is increasing. In 2019, Metsä Board launched the eco-barrier paperboard, which provides a me-dium-strong barrier against moisture and grease and which is, like other paper-boards, recyclable. Metsä Board also continues to develop other barrier solutions and investigates the exploitation of dispersion coating and biobased coating solutions, as well as their commercial potential.

The market is changing, and there will be increased legislation and regulations related to packaging. This requires diligence and agility in development work, testing and commercialisation. Metsä Board aims for a large volume in its solu-tions, to give them global significance. Lightweight paperboards are resource-ef-ficient. By reducing the weight of packaging without making compromises on their strength, we can reduce the carbon footprint throughout the chain. In the spring 2019, Metsä Board renewed its selection of folding boxboards to be able to provide its customers with increasingly consistent quality and new opportu-nities for reducing packaging weights and promoting brands.

Metsä Board engages in close cooperation with international brand owners and packaging converters. With the help of expert services, we are deepening our cooperation with customers even further. The Excellence Centre for paperboard and packaging design, which will be opened in Äänekoski in 2020, will intensify the cooperation with customers and accelerate product development projects.

The Excellence Centre will focus on packaging design, training, research and measurements related to product safety, and product development projects. In addition, the Excellence Centre will conduct packaging simulations and wide-scale tests on the properties of packaging, as well as efficiency analyses on pack-aging conversion. As part of the development work, we are expanding our col-laboration with research organisations and other companies.

METSÄ TISSUECustomer- and consumer-driven product development is one of the strategic cornerstones of Metsä Tissue, a producer of tissue and greaseproof papers. Im-proving product quality, developing the fibre raw material, ensuring the availa-bility of high-quality tissue paper products and reducing the use of plastic are some of Metsä Tissue’s strategic goals. We aim to use a minimum amount of plastic per delivered paper product. In packaging wraps, we are looking for al-ternatives to plastic.

Metsä Tissue follows the industry actively and pursues new solutions with its supplier network. In 2019, Metsä Tissue introduced a tissue paper package made of recycled plastic and a renewable raw material to the Finnish market. The recycled plastic derives from plastic recycled by the industrial sector and con-sumers. The renewable raw material, ethanol, is a by-product of sugar produc-tion. The increase in environmental awareness and an interest in well-being and health are examples of trends that influence Metsä Tissue’s product de-velopment.

REPORT ON NON-FINANCIAL INFORMATION

BUSINESS MODELMetsä Group consists of Metsäliitto Cooperative, its two businesses Metsä Forest and Metsä Wood, and the cooperative’s subsidiaries Metsä Fibre, Metsä Board and Metsä Tissue. At the end of 2019, Metsäliitto Cooperative held 45.68% of the listed company Metsä Board’s shares and 66.25% of the votes. Metsäliitto Cooperative’s holding in Metsä Fibre’s shares is 50.1%. Metsä Tissue is a fully-owned subsidiary of Metsäliitto Cooperative.

Metsäliitto Cooperative is the parent company of Metsä Group, owned by some 103,618 forest owners. The owner-members provide Metsä Group with a substantial stock of first-rate wood raw material, which gives the operations a stable and long-term basis.

Metsä Group focuses on wood supply and forest services, timber products, pulp, fresh fibre paperboards, and tissue and greaseproof papers. Metsä Group’s mills are located in Finland, Sweden, Estonia, Russia, Poland, Slovakia, the Unit-

MAIN SUSTAINABILITY FIGURES 2019 2018 2017

Non-financial key figures

Employees and management

Training on the Group’s Code of Conduct among the entire personnel, % 95 1) 95 91

Lost-time accident frequency rate (LTA1) per million hours worked 5.9 6.4 5.9

Work-related fatalities 1 1 1

The amount of carbon stored in forests, %

Increasing the amount of carbon stored in forests in 2018–2030

Increase of area subject to regeneration; target +30% 0 - -

Increase of area subject to pre-commercial thinning; target +30% 0 - -

Increasing the amount of carbon stored in products in 2018–2030

Increase of the volume of wood products; target +30% -4.3 - -

Safeguarding biodiversity

High stumps left on thinning and regeneration sites; target 90% 79 71 -

Retention trees on harvesting sites; target 100% 94 - -

Share of certified wood 85 88 88

Production units, %

Share of fossil free fuels in production 90 90 88

Utilisation of production side streams; target 100% 92 94 92

Improving use of process water; target -25% per product tonne in 2018–2030 2 - -

Products and supply chain, %

Fossil free raw materials and packaging materials, target 100% 99.7 99.6 -

Responsible suppliers; target 100%

Commitment to the Supplier Code of Conduct 93 92 -

Compliance analysed 77 - -

Responsibility analysed 53 - -

Traceability of raw materials; target 100% 89 - -

1) The Group’s Code of Conduct was renewed in 2019.



duced tonne from the level of 2018. The use of process water decreased by 2% per produced tonne from the level of 2018 during 2019.

In 2019, 90% (90) of the fuels used by Metsä Group were bio-based (Scope 1). The fossil CO2 emissions from production were 716,600 (693,900) tonnes and biogenic CO2 emissions 9,980,000 (9,038,000) tonnes in 2019 (Scope 1).

In 2019, 92% (94) of production side streams was utilised. The side streams are primarily utilised as materials and secondarily for energy. Metsä Group con-tinues the work to decrease the amount of waste that currently cannot be uti-lized and is therefore landfilled.

There were some cases where the environmental permit limits were exceeded at the production units in 2019. No deviations resulting in a significant environ-mental impact occurred.

Sustainability and the objective for fossil free operations also guide Metsä Group’s product development. Our objective is that by 2030, the Group will not use any raw materials or packaging materials that are based on fossil oil. By the end of 2019, 99.7% of the raw materials and packaging materials used were fossil free. Fossil free solutions are sought, among other things, to replace the oil-based latex used in paperboards and the phenol-based glues used in wood products.

Sustainability of the supply chain is one of the areas of development. Metsä Group’s objective is to ensure the sustainability of all suppliers and the traceabil-ity of raw materials by 2030. Supplier sustainability is managed and monitored, through risk analyses, background checks, audits and self-assessments, as well as the suppliers’ commitment to Metsä Group’s Supplier Code of Conduct. These also take into account issues related to, e.g., corruption, the use of child labour and human rights violations. By the end of 2019, the Supplier Code of Conduct covered 93% of our purchases. Of the raw materials, 89% were traceable.

In management and the development of the company’s own operations, Metsä Group pays special attention to ethics and the promotion of a culture of doing the right thing. The ethical way of working was supported in 2019 through the new Code of Conduct. During 2019, 95% of the personnel3) participated in training for the new Code of Conduct, and 2,984 people participated in advanced class-room training. The Group is currently developing an ethics barometer that will examine the ethics of the operations more extensively.

DUE DILIGENCE, POLICIES GUIDING THE OPERATIONS AND

MANAGEMENT SYSTEMS

The values guiding Metsä Group’s operations are based on our Code of Con-duct. The Code of Conduct is further refined by 16 policies that deal with, among other things, the personnel, equality, the environment, procurement, data protection and communication. Metsä Group is committed to anti-corrup-tion and anti-bribery work and respect for human rights, both in its own opera-tions and the operations of its partners.

To support the ethical way of working, the Group has made available an anon-ymous whistleblowing channel through which both the personnel an external stakeholders can report any defects or misconduct. All breaches and suspected breaches brought to the attention of the Group are investigated, and the most significant of them are dealt with by the Compliance committee. In 2019, a total of 49 cases (41) were processed by the Compliance committee. They were related to, among other things, suspected misconduct, conflicts of interests, privacy vio-lations and various events involving the personnel.

All of the Group’s production units have an ISO 9001 quality system and an ISO 14001 environmental system in place, as well as a Chain of Custody system enabling reliable verification of the amount of certified wood in the products. In addition, a certified OHSAS 18001 occupational health and safety system and an ISO 50001 energy efficiency system are in place in several of the Group’s pro-duction units. The new version of the ISO 50001 system was adopted at some of Metsä Tissue’s mills in Germany in 2019, and during 2020, its use will extend to all production units of the Group. Metsä Tissue’s mill in Mänttä is using the ISO 45001 occupational health and safety management system. All of Metsä Fibre’s pulp mills and Metsä Board’s mills, as well as nearly all Metsä Tissue’s

ed Kingdom and Germany. The Group’s main market area is Europe, and it pur-sues growth especially in North America, Asia and Oceania. Approximately 73% of sales derived from the EMEA region, while 19% of sales derived from the APAC region and 8% from the Americas. Metsä Group employs approximately 9,300 people in about 30 countries.

SUSTAINABILITYMetsä Group has commited on the development of the sustainability and we are building a path to a climate neutral society. Metsä Group uses resources wisely and operates in accordance with the principles of sustainable circular bioeconomy.

Sustainability is a strategic part of the management and continuous improve-ment of the Group and its business areas. Sustainability management at Metsä Group is guided by the Group’s Code of Conduct, which covers sustainable forest management, environmental issues related to the operations, matters re-lated to the personnel and social responsibility, respect for human rights, and an-ti-corruption and anti-bribery measures. The cooperative’s Board of Directors is the highest level in the administrative structure for sustainability management. The cooperative’s Board of Directors approves policies and long-term strategic sustainability objectives. The President and CEO is in charge of the strategic management of sustainability. The Group’s Executive Management Team is re-sponsible for sustainability in each business area. The management team for the sustainability process is responsible for the deployment and monitoring of sus-tainability actions in the business areas and support functions. With the renewal of the management model, sustainability has become a more concrete part of business operations and their processes, from sustainably managed forests to the global market. Sustainability management, development and results will be de-scribed comprehensively in the Group’s Sustainability Report.

Climate change is affecting Metsä Group’s operations and development, as well as the development of the business environment. Metsä Group is taking the importance of the mitigation of climate change into account at every stage of the value chain: in the forests, at the production units and in the products. Risks and opportunities related to climate change are described in the risk review section of this report, and more extensively in the Sustainability Report.

At the beginning of 2019, the Group adopted new strategic sustainability objectives extending to 2030, with the focus on mitigating climate change. The strategic objectives are in line with substantial sustainability issues related to the business. Reaching the ambitious objectives will require significant investments, the development and harmonisation of operations and the adoption of new solu-tions of us. We operate in accordance with the principles of sustainable circular bioeconomy.

One of Metsä Group’s sustaibility objectives is to increase the amount of carbon stored in forests and products by 30% compared to 2018. The Group supports the strong growth of forests through sustainable forest management measures. Metsä Group has set an objective of increasing the amount of wood products that store carbon for a long time. The Group’s objective is also to safe-guard the biodiversity of forest nature, which is supported by clearly increasing the amount of decaying wood in forests.

The wood Metsä Group uses always comes from sustainably managed forests, and its origin is always fully known. In 2019, 85% (88) of the wood used was either PEFC™ or FSC® certified.2) High stumps were left with the forest owner’s permission at more than 79% (71) of the processed regeneration and thinning sites. Retention trees were left at 94% of the regeneration sites. Retention trees are left at all regeneration sites that are covered by forest certification. In the long run, high stumps and retention trees increase the amount of standing and fallen decaying wood in forests and support biodiversity in forests by offering a habitat for a wide variety of species.

Concerning production, Metsä Group aims to have fossil free mills by 2030. With the end of the use of fossil fuels in production, fossil carbon dioxide emis-sions will also decrease to zero (scope 1). Resource efficiency is important to Metsä Group. The Group’s objective is to make full use of the production side streams. For the use of process water, our objective is a decrease of 25% per pro- 2) The FSC license code is FSC-C014476.

3) The figure does not include the personnel of Metsä Tissue GmbH Stotzheim due to the sale of a business that will take place in the first quarter of 2020.

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mills have either ISO 22000, FSSC 22000, BRC or IFS in place as the certified management system for food safety.

The Group’s subsidiaries have environmental liabilities related to former oper-ations at industrial sites that have since been closed down, sold or leased, as well as at decommissioned landfill sites. Financial provisions for the cost of land re-habilitation work have been made in cases where it has been possible to measure the Group’s liability for land contamination.

SOCIAL RESPONSIBILITYAs a responsible employer, Metsä Group promotes management practices based on values and leadership that supports growth. Ensuring the personnel’s well-be-ing, health and capacity to work throughout their career plays a key role, and performance at work is supported through a broad variety of means. At Metsä Group, everyone has the opportunity to develop their competences and partici-pate in the entire Group’s development work.

New development programmes were initiated, for instance, in the areas of leadership and supervisory work. In addition, employees over 55 years of age or with a more than a 30-year career are offered coaching aiming to strengthen pro-fessional skills and promote their capacity to work during a lengthy career from the perspectives of well-being at work, performance, learning ability and moti-vation. Early support discussions and the measures agreed in them are used to support employees with difficulties in coping with their work as early as possible.

Metsä Group invests in a high-quality recruitment process that aims to en-sure that the best talent in the industry seeks employment in the Group.

The systematic development of the employer image and collaboration with edu-cational institutions continues. In addition to sponsored classes and school collab-oration, young people are offered the opportunity to visit the Group’s production units and felling sites through the 4H cooperation. The Group also supports entre-preneurship training provided to young people. Metsä Group continued its active participation in such initiatives as the Mahdollisuuksien metsä school campaign.

In 2019, the voluntary turnover rate of permanent employees was 3.9% (3.5). Metsä Group complies with an equality policy, the rules of which apply to recruit-ment, career opportunities, training and remuneration, among other things.

Systematic efforts in safety at work support the continuous development of operations and the achievement of the Group's objectives. High-quality pro-active safety work, risk identification, intervention in unsafe working and the importance of personal risk assessments play a key role. The aim is to reduce the lost-time accident frequency rate by 10% each year. The long-term objective is zero accidents by 2030. During the reporting period, one extremely regrettable workplace accident leading to the death of an external company’s employee took place at our production unit. The work to improve safety continues.

In 2019, the lost-time accident frequency rate decreased by 8.0% from the previous year, and was 5.9 (6.4). Absences due to illness within the Group amounted to 4.4% (4.0) of the theoretical regular working hours. The target in terms of absences due to illness is less than 3%.

Metsä Group conducted employee satisfaction surveys. The Group-level re-sult on a scale of 4–10 was 8.3 (8.2). The survey also provides a supervisor index, which was 8.2 (8.2). The results are used in work aiming to improve the person-nel’s job satisfaction and well-being at work and the implementation of strategy, as well as in work aiming to improve the efficiency of business areas.

RISK MANAGEMENT AND RISKS

Metsä Group’s risk management is systematic and proactive, and it assesses and manages business-related risks, threats and opportunities. Risk management is governed by the risk management policy confirmed by the Board of Directors of Metsä Group’s parent company Metsäliitto Cooperative, and by Metsä Group’s corporate governance system.

Metsä Group assesses strategic, operational, financial and liability risks as part of its continuing operations, and carries out risk assessments in connection with the annual planning and strategy processes. The risk assessment in the annual planning process reviews profitability-related risks involving sales, expenses, the

operating environment, and development projects, as well as liability and dam-age risks. In the risk assessment that is part of the strategy process, the business areas review risks related to the implementation of their business strategies. In addition, the Group’s Executive Management Team reviews the most significant risks as part of its executive management work.

Metsä Group prepares for risks by appointing the people in charge of key risk management measures. Risks that exceed the Group’s risk-bearing capacity have been transferred with insurance, derivatives and other contracts to insurance companies, banks and other counterparties. Significant damage risks are covered with the Group’s property, interruption, liability, transport damage, cyber and credit insurance policies.

The results of the risk management process are reported to the Board of Directors and the Board’s Audit Committee on a regular basis. The risk assess-ments conducted in 2019 identified the following risks and uncertainties that have a potential impact on Metsä Group’s business operations and profitability:

UNCERTAINTY IN THE DEVELOPMENT OF THE ECONOMYThe situation and development of the world economy and Europe’s economy affect the demand for Metsä Group’s wood products, pulp and paperboard. Growth expectations for 2020 are low for both the world economy and the euro area. Tensions caused by the trade war between the United States and China have abated to some degree, but the threat of regional conflicts may increase un-certainty in the global economy. The potential effects of the UK’s exit from the EU are a source of uncertainty in the euro area. A slowdown in the economic growth in China may have an impact on the demand for Metsä Group’s prod-ucts and on the growth outlook for the markets.

RESTRICTIONS ON INTERNATIONAL TRADE Possible changes in the industrial and trade policies of leading industrialised countries may lead to broader trade restrictions and thereby subdue growth in the world economy more than anticipated, and even reduce global trade flows. Potential new protectionist measures may have an impact on the demand for forest industry products and, consequently, on Metsä Group’s result.

GEOPOLITICAL RISKSThe impact of existing geopolitical risks and crises in the world may manifest as changes in regional security situations and living conditions and also in the glob-al economy. The predictability of these risks is poor, and their impact may emerge either very rapidly or over a long period of time. The international sanctions re-lied on in crisis management may also have a direct or indirect impact on the demand for forest industry products and, therefore, on Metsä Group’s business.

CLIMATE-RELATED RISKSIn the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), climate risks are divided into 1) transition risks, i.e., risks arising from the transition into a low-carbon economy, and 2) physical risks related to changes in temperatures and precipitation, for example. At Metsä Group, these climate risks concern particularly forests, as well as the use of energy and water. Should they ma-terialise, climate risks could have a negative impact on Metsä Group’s profitability.

The most important transition risks include increasing regulation, require-ments for new technology as well as a market and reputation risk, if the compa-ny fails to respond to the changed market environment in an effective manner. EU regulation may steer the future use of forests. Increased regulation aiming to mitigate climate change and reduce greenhouse gas emissions may, furthermore, increase costs and result in substantial change requirements applicable to pro-duction technology. The supply and demand of products in a low-carbon econo-my may differ from the current situation.

Physical climate risks can be further divided into acute weather phenomena and more permanent, long-term changes. Extreme weather phenomena may weaken the availability of the process water needed by mills and result in production breaks. As the climate grows warmer, the most significant risks influencing forests and the availability of wood raw material are the weakening of harvesting conditions as winters grow shorter and the increase of various kinds of damage caused by insects.



Climate change mitigation and the transition to a low-carbon economy are strongly visible in Metsä Group’s sustainability objectives. The core of these ob-jectives consists of a transition to the use of entirely fossil free energy in produc-tion, abandoning the use of raw materials based on fossil oil and increasing the efficiency of energy and water consumption. Measures related to the objectives help Metsä Group manage climate risks. At the same time, they open up new opportunities for Metsä Group in the changed operating environment.

RISKS ASSOCIATED WITH THE AVAILABILITY OF FINANCING At Metsä Group, the main financial risks in business operations are primarily relat-ed to currencies, interest rates, liquidity, counterparty risks and the use of deriva-tive instruments. Financial risks are governed according to the financial policy con-firmed by the Board of Directors of Metsäliitto Cooperative. The goal is to secure sales margins, reduce uncertainty, improve predictability, balance the cash flow and give business units time to adjust their operations to the changed circumstances.

Access to capital and the price of capital are largely dependent on the conditions prevailing in the financial market and the Group’s own financial situation. Metsä Group’s good financial situation and the stable situation in the financial market have kept the availability and price of financing at a good level. Should access to financing grow weaker or were its price to increase significantly, it could also have a negative impact on the cost and availability of the external capital needed by the Group.

Metsä Group prepares for the refinancing risk by utilising a variety of financ-ing sources, by scheduling loans to have a balanced maturity profile and by start-ing refinancing processes well before the loans mature. The Group’s liquidity is strong. At the end of 2019, Metsä Group had undrawn committed credit facili-ties of approximately EUR 930 million available.

CHANGES IN MEMBERS’ CAPITAL AND ADDITIONAL MEMBERS’ CAPITALA member of Metsäliitto Cooperative who wishes to cancel their membership is entitled to receive a refund of their participation share payment and the ad-ditional contribution payment. The member may also receive a refund of the additional contributions based on a written claim. Based on the Cooperative’s rules, the amount of members’ participation share payments and additional con-tributions that can be refunded is equivalent to one third of the distributable equity in accordance with the most recent balance sheet adopted by the Annual General Meeting. Refunds of members’ capital that are larger than usual may have an adverse effect on Metsä Group’s financial position.

COMPETITIVE ENVIRONMENTIn the global market for forest industry products, the balance of supply and de-mand has a significant impact on the market prices of products. Changes in the economic situation, an increase in the capacity of competitors and competition over market shares may reduce the market prices of products. Product prices may increase as a result of cuts in capacity or industry consolidation. Significant cur-rency fluctuations also have an impact on the market balance of forest industry products and companies’ competitiveness.

PULP MARKET SITUATION Metsä Fibre’s pulp production capacity is more than 3 million tonnes of bleached softwood and hardwood pulp per year. The result of the pulp business has a significant impact on the profitability of Metsä Group as a whole. In the global pulp market, increasing competition and new production capacity may have a negative effect on pulp market prices, and thus an adverse effect on Metsä Group’s entire business operations and business result.

CREDIT RISKS AND OTHER COUNTERPARTY RISKSThe management of credit risks related to commercial activities is the responsi-bility of the business areas and Metsä Group’s centralised credit control. Cred-it control defines the internal credit limits set for customers and the payment terms together with the management of business operations. The majority of credit risks are covered by insurance contracts made with credit insurance com-

panies. Metsä Group’s customer credit risk was at a normal level in 2019. Credit risks were reduced with enhanced credit control measures and processes.

The main principles of credit control are defined in the credit guidelines of the risk management policy confirmed by the Board of Directors of Metsä Group’s parent company, Metsäliitto Cooperative. The operational management of the Group and the business operations participate in the assessment of credit risks and in making final decisions on credit, if needed.

In money market investments, derivatives and loans, only counterparties that have been defined in the Group’s financial policy, meet the creditworthiness cri-teria or have been separately designated by a Board decision are approved.

BUSINESS DEVELOPMENTMetsä Group’s business operations are developed, for instance, through customer segmentation, technical product development, the modernisation of product port-folios, value-added services offered to customers and new sales channels. The objec-tives of business development projects and investments include growing the busi-ness, expanding the product portfolio and strengthening the market position of the company. Should the completion of the development projects and investments be delayed or should production-related or commercial targets not be reached, the im-pact could be adverse on the result of the business in question and the whole Group.

Metsä Group has established the venture capital company Metsä Spring Ltd., which has the role of finding and developing new business ideas that could func-tion as part of Metsä Group’s business ecosystem in the future. Metsä Spring in-vests in the further development of the Group’s own ideas and in external start-ups that are aiming to introduce new products to the market. Investments are made in high-risk ventures that may require the construction of a demo plant, such as the textile fibre demo plant to be constructed in Äänekoski. If the devel-opment projects invested in are not technically or commercially successful, there may be a risk of the write-down of the investment.

PRODUCTION INPUT COST AND AVAILABILITY RISKSSignificant or unforeseen changes in the cost or potential problems with the availability of Metsä Group’s most important production inputs, such as wood, energy and chemicals, may reduce profitability and threaten the continuity of operations and the implementation of planned development investments. If the planned development investments are implemented, there will be risks related to increasing the wood supply amounts in particular.

Changes in exchange rates may also have an effect on the costs of some pro-duction inputs. The Group aims to hedge against these risks by making long-term supply agreements and related derivatives contracts. A steep increase in logistics costs may also have an adverse effect on Metsä Group’s profitability. In addition, any changes in the legislation, regulations or taxation related to the most important production inputs may result in significantly increased costs.

LIABILITY RISKSThe business involves liability risks, such as contractual, environmental and product liability risks. Liability risks are mitigated by way of unified business processes, contract training, management practices, quality control and trans-parent operations.

CONTINUITY RISKSThe continuity of mills’ production may be impacted by, for instance, large-scale fires, significant equipment malfunctions, serious accidents, extreme weather phe-nomena and environmental damage. Any serious malfunctions in IT systems, labour disputes, availability problems in the most important raw materials and disruptions in the logistics chain may furthermore suspend the entire business or parts thereof.

In terms of damage risk, the Group engages in active risk management work with insurance companies, including regular risk assessments conducted at mills and in the supply chain.

Interruptions in production or the supply chain may have an effect on the continuity of customer service and on delivery reliability. If such interruptions continue for a long period of time, the resulting financial losses may be very sub-

12


stantial and result in the permanent loss of customers. The business areas, mills and Group services have drawn up continuity and recovery plans in preparation for the realisation of these risks. Metsä Group’s crisis management plan guides management in crisis situations within the Group, business areas and mills.

CORPORATE SECURITY RISKSRisks to corporate security include defects and neglect in personal and occupa-tional safety and the management of financial misconduct, any negative infor-mation manipulation and cyber threats, threats affecting the supply chains, and the adequacy of internal control. Operating processes related to corporate secu-rity and the guidelines, training and internal control related to the management of threat factors are developed continuously, and exercises on the management of crisis situations are organised on a regular basis.

PERSONNEL RISKS Metsä Group pays attention to ensuring the availability and retention of qual-ified personnel. The Group prepares for risks related to generational shifts and other personnel risks by means of management coaching, personnel de-velopment programmes, successor plans and the development of its employer image. The maintenance of working capacity, successor planning and having multiskilled employees are also part of the management of personnel risks.

GOVERNANCE

Metsäliitto Cooperative is a Finnish cooperative and the parent company of Metsä Group. It is owned by 103,618 forest-owner members. In 2019, the com-bined forest area owned by the members totalled 5,421,000 hectares (5,265,000).

Metsäliitto Cooperative’s governing bodies are the Representative Council, the Supervisory Board, the Board of Directors and the CEO, who acts as the President and CEO of Metsä Group. The members of Metsäliitto Cooperative elect the members of the Representative Council in an election held every four years. The members of the Supervisory Board are elected by the Representative Council. The Supervisory Board elects the members of Metsäliitto Cooperative’s Board of Directors, and the Board of Directors appoints the CEO of Metsäliitto Cooperative and the President and CEO of Metsä Group.

The Representative Council uses the supreme decision-making power be-longing to the members of Metsäliitto Cooperative in matters it is responsible for pursuant to the law and the rules of Metsäliitto Cooperative. The rules of Metsäliitto Cooperative specify the tasks of the Supervisory Board. Its main task is to ensure that Metsäliitto Cooperative is managed in accordance with the rules and the decisions of the Representative Council and the Supervisory Board.

According to the rules of Metsäliitto Cooperative and in accordance with legislation, the Board of Directors is charged with ensuring that Metsäliitto Cooperative and Metsä Group’s operations and governance are appropriately arranged. The Board of Directors has authority over strategic and other deci-sions with far-reaching consequences. In the 2019 financial period, Metsäliitto Cooperative’s Board of Directors was composed of eight members, one of whom was a woman. According to the overall assessment by the Board of Directors, all members of the Board, with the exception of the President and CEO, were inde-pendent of Metsäliitto Cooperative. The Board of Directors convened 11 times in 2019, and the percentage of attendance in the meetings by Board members was 98%. Metsäliitto Cooperative has a CEO, who also acts as the President and CEO of Metsä Group, unless otherwise decided by the Supervisory Board. The President and CEO manages the operations of Metsä Group in its entirety. The President and CEO is charged with the management of the operations of Metsä Group in accordance with the law and the rules of the Cooperative, as well as the decisions and instructions of the administrative bodies. The President and CEO is assisted by the Group’s Executive Management Team.

Metsäliitto Cooperative’s Board of Directors has determined the principles applicable to the diversity of the Board. According to the principles, the success-

ful management of the tasks of the Board of Directors requires a diverse compo-sition, diverse competence and experience, as well as consideration of the per-sonal qualities of individual members. It is Metsäliitto Cooperative’s goal that both genders be represented on the Board of Directors.

The Supervisory Board’s Nomination Committee observes the principles concerning diversity when preparing proposals for the Supervisory Board on the composition of the Board of Directors. The realisation of the principles is reported on yearly in the Corporate Governance Statement.

A separate Corporate Governance Statement has been issued and published simul-taneously with the financial statements and this Report of the Board of Directors.

EVENTS AFTER THE REPORTING PERIODProduction at all Metsä Group’s Finnish units was suspended on 27 January 2020 due to Finnish Paperworkers’ Union’s and Industrial Union’s strikes. The Paperworkers’ Union’s strike in chemical forest industry lasted until 10 Febru-ary 2020. Industrial Union’s strike in mechanical forest industry lasted until 23 February 2020.

NEAR-TERM OUTLOOK

Wood demand will focus on stands to be harvested when the ground is un-frozen, and on crown wood in terms of energy wood. The demand for forest man-agement services remains good. The insect damage in Central Europe will continue to have an impact on the wood trade.

The outlook for the demand for Kerto LVL and birch plywood products will continue to be uncertain, but the outlook in terms of the demand for spruce plywood products is slightly better. Delivery volumes are fore-cast to experi-ence seasonal growth in the UK market during the first quarter. The uncertainty brought about by Brexit will continue.

The pulp market is expected to balance as the de-mand for market pulp con-tinues to increase, especial-ly in the Asian market, and producers’ inventory levels continue to decrease. The sawn timber market is ex-pected to improve as demand continues to increase, especially in China, and supply reaches a normal level compared to demand.

Metsä Board’s paperboard deliveries are in the first quarter expected to be ap-proximately at the same level as in fourth quarter of 2019. The market prices of fold-ing boxboard and white kraftliner in local curren-cies are expected to remain stable.

Changes in exchange rates, including the impact of hedges, will during the first quarter have a slightly positive impact for Metsä Board compared to the fourth quarter of 2019 and a positive impact compared to the first quarter of 2019. Production costs are ex-pected to remain stable.

Metsä Tissue aims to improve its profitability and grow in its main markets, close to its customers. Growth is sought by way of strong customer cooperation as well as development and a streamlining of the product portfolio. The demand for tissue and greaseproof papers is expected to remain stable in all market are-as. The demand for tissue paper is expected to in-crease particularly in Central Europe, and demand for greaseproof papers is expected to grow in Asia.

Comparable operating results is in the first quarter of 2020 expected to weak-en from the fourth quarter of 2019 due to the strikes at Finnish mills.

THE BOARD OF DIRECTORS’ PROPOSAL FOR THE DISTRIBUTION OF THE PROFIT

Metsäliitto Cooperative’s Board of Directors has decided to propose that an in-terest of 6.5% for 2019 be paid on the statutory capital invested by members (7.5% for 2018), 6.0% (7.0) on additional members’ capital A and 2.0% (2.5) on additional members’ capital B. In total, the proposed distribution of profit would amount to around EUR 72 million (74.1).

The Board's proposal will be discussed in March by Metsäliitto Cooperative's Supervisory Board, which will issue a statement on the matter to the Represent-ative Council convening in April.



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

EUR million Note 1–12/2019 1–12/2018

Sales 2.1, 2.2 5,473.4 5,709.1

Change in stocks of finished goods and work in progress -17.4 54.0

Other operating income 2.1, 2.3 59.2 58.1

Materials and services 2.1, 2.4 -3,733.3 -3,688.0

Employee costs 2.1, 3.1 -630.4 -634.7

Depreciation, amortisation and impairment charges 2.1, 4.1, 4.2 -415.5 -284.8

Other operating expenses 2.1, 2.4 -361.9 -370.8

Operating result 374.3 843.0

Share of results from associated companies and joint ventures 3.3 7.0

Net exchange gains/losses 5.2 -6.4 -6.3

Other financial income 5.2 5.3 2.4

Interest and other financial expenses 5.2 -60.8 -77.0

Result before tax 315.7 769.1

Income taxes 6 -76.8 -156.4

Result for the period 238.9 612.7

Other comprehensive income 5.1, 6

Items that will not be reclassified to profit and loss

Items relating to adjustments of defined benefit plans -15.7 4.2

Fair value of financial assets through other comprehensive income -13.5 31.2

Income tax relating to items that will not be reclassified 5.1 -6.6

Total -24.0 28.8

Items that may be reclassified subsequently to profit and loss

Cash flow hedges -17.8 5.1

Currency translation differences 3.1 -21.3

Share of comprehensive income of joint venture 0.0

Income tax relating to items that may be reclassified 3.7 -1.2

Total -11.0 -17.4

Other comprehensive income, net of tax -35.0 11.4

Total comprehensive income for the period 203.9 624.1

Result attributable to:

Members of parent company 111.4 371.8

Non-controlling interest 127.5 240.9

238.9 612.7

Total comprehensive income attributable to:

Members of parent company 90.0 373.6

Non-controlling interest 113.9 250.5

203.9 624.1

The notes are an integral part of these financial statements.

14


CONSOLIDATED BALANCE SHEET

EUR million Note 31 Dec. 2019 31 Dec. 2018

ASSETS

Non-current assets

Goodwill 4.1 429.4 508.8

Other intangible assets 4.1 228.1 242.8

Tangible assets 4.2 2,817.0 2,847.6

Biological assets 4.3 2.9 3.0

Investments in associated companies and joint ventures 7.2 68.3 65.8

Other investments 4.4 271.1 285.1

Other non-current financial assets 5.3 20.5 27.5

Deferred tax receivables 6 27.7 26.9

Derivative finacial instruments 5.7 2.0 11.1

3,867.1 4,018.6

Current assets

Inventories 4.5 979.6 990.8

Accounts receivables and other receivables 4.6 720.6 776.9

Tax receivables based on the taxable income for the period 8.7 7.6

Derivative finacial instruments 5.7 28.7 14.7

Cash and cash equivalent 5.4 1,090.0 1,083.9

2,827.6 2,873.7

Assets classified as held for sale 7.1 32.3 1.1

Total assets 6,727.0 6,893.4

MEMBERS' FUNDS AND LIABILITIES

Equity attributable to members of parent company

Members' capital 5.1 1,199.0 994.7

Translation differences 5.1 -30.7 -34.8

Fair value and other reserves 5.1 728.7 492.8

Retained earnings 1,029.8 1,297.8

2,926.8 2,750.5

Non-controlling interest 7.2 848.5 905.0

Total members' funds 3,775.3 3,655.6

Non-current liabilities

Deferred tax liabilities 6 296.1 290.8

Post employment benefit obligations 3.4 81.8 77.1

Provisions 4.9 17.7 21.4

Borrowings 5.5 1,142.7 1,098.8

Other liabilities 4.7 2.3 5.9

Derivative financial instruments 5.7 20.8 12.2

1,561.4 1,506.2

Current liabilities

Provisions 4.9 4.1 5.2

Current borrowings 5.5 312.3 453.4

Accounts payable and other liabilities 4.8 1,034.8 1,204.7

Tax liabilities based on the taxable income for the period 7.4 65.8

Derivative financial instruments 5.7 16.9 2.0

1,375.4 1,731.1

Liabilities classified as held for sale 7.1 14.9 0.5

Total liabilities 2,951.7 3,237.8

Total members' funds and liabilities 6,727.0 6,893.4




CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' FUNDSEquity attributable to members of parent company

EUR million NoteMembers'

capitalTranslationdifferences

Fair valueand other

reservesRetainedearnings Total

Non-controlling

interest Total

Members' funds 1 Jan. 2018 813.4 -19.5 228.6 1,229.1 2,251.6 729.1 2,980.7

Result for the period 371.8 371.8 240.9 612.7

Other comprehensive income, net after tax 5.1, 6 -15.3 14.2 2.9 1.8 9.6 11.4

Total comprehensive income -15.3 14.2 374.7 373.6 250.5 624.1

Transactions with owners

Interest on members' capital and dividends paid 5.1 -51.0 -51.0 -78.9 -129.9

Change in members' capital 5.1 181.3 0.0 -8.3 173.1 173.1

Transfer from retained earnings to the reserve for invested unrestricted equity

5.1 250.0 -250.0 0.0 0.0

Share based payments 3.3 3.4 3.4 1.1 4.5

Sold shares from non-controlling interest,which did not change the controlling right

7.2 0.0 -0.2 -0.2 3.3 3.1

Members' funds 31 Dec. 2019 994.7 -34.8 492.8 1,297.8 2,750.5 905.0 3,655.6

Members' funds 1 Jan. 2019 994.7 -34.8 492.8 1,297.8 2,750.5 905.0 3,655.6

Result for the period 111.4 111.4 127.5 238.9

Other comprehensive income, net after tax 5.1, 6 4.1 -14.4 -11.1 -21.4 -13.6 -35.0

Total comprehensive income 4.1 -14.4 100.4 90.0 113.9 203.9

Transactions with owners

Interest on members' capital and dividends paid 5.1 -64.4 -64.4 -84.5 -148.9

Change in members' capital 5.1 204.3 -9.1 195.2 195.2

Transfer from retained earnings to the reserve for invested unrestricted equity

5.1 0.0 250.0 -250.0 0.0 -39.9 -39.9

Share based payments 3.3 -9.3 -9.3 -1.4 -10.7

Acquired shares from non-controlling interest,which did not change the controlling right

7.2 0.4 -34.9 -34.5 -47.6 -82.2

Sold shares from non-controlling interest,which did not change the controlling right

7.2 0.0 -0.6 -0.7 3.1 2.4

Members' funds 31 Dec. 2019 1,199.0 -30.7 728.7 1,029.8 2,926.8 848.5 3,775.3


16


CONSOLIDATED CASH FLOW STATEMENTEUR million Note 1–12/2019 1–12/2018

Cash flow from operating activities

Result for the period 238.9 612.7

Adjustments to the result 531.8 525.0

Interest received 4.8

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