EUR 3.00 (Board s proposal)

Transcription

1 Annual Report 2007

2 Our net sales increased 26% and totaled EUR 6,250 million. Brazilian aggregates producer Pedreiras Basalto has been Metso s customer for over 15 years. Basalto s Product Manager Darci R. Braga inspects the quality of the aggregate. Our operating profit (EBIT) rose 27% and was EUR million. Our orders received grew 22% to EUR 6,965 million. Earnings per share EUR 2.69 Metso s Markku Ristikaarto (left) and UPM Wisaforest s Raimo Lahtinen focus on the plant s production optimization and continuously maintaining full capacity. Number of personnel increased 5% to nearly 27, 000. Dividend/share EUR 3.00 (Board s proposal) Metso supplied Alholmens Kraft s biofuelfired power plant with a circulating fluidized bed boiler. Metso s Product Engineer Mikko Lehtiniemi participated in the project. We have customers in more than 100 countries. Zhang Dongji from Tiger Forest & Paper Group (left) and Metso s Fan Ze at Yueyang paper mill in China. Metso has supplied the mill s papermaking line and automation.

3 TABLE OF CONTENTS Metso in brief 2 Management discussion on strategy 4 Operating environment 10 Risks and risk management 16 Business areas 22 Business areas at a glance 22 Metso Paper 24 Metso Minerals 28 Metso Automation 32 Financial statements 38 Table of contents 38 Board of Directors report 39 Consolidated financial statements 48 Financial indicators 112 Parent company financial statements 115 Shares and shareholders 118 Auditor s report 124 Quarterly information 125 Governance 129 Corporate governance and management 129 Board of Directors 136 Executive Team 138 Investor information 140 Investor relations 140 For shareholders 142 Contact and additional information 144 ANNUAL REPORT AND SUSTAINABILITY REPORT 2007 ON OUR WEB SITE: READ MORE ABOUT METSO AND SUSTAINABILITY: METSO ANNUAL REVIEW 07

4 METSO IN BRIEF Our customers success brings us profitable growth Metso has supplied crushers and grinding mills to Newcrest Mining s Telfer gold mine in Australia. Stora Enso s Christina Leth and Metso s Seppo Rikkinen inspect the paper quality at the Kvarnsveden mill in Sweden. Metso is a global engineering and technology corporation with 2007 net sales of over EUR 6 billion. Metso s share (MEO1V) is listed on the OMX Nordic Exchange Helsinki. We are the market leader in pulp and paper technology and in systems for rock and minerals processing and metal recycling. We are also among the leading suppliers of automation and control solutions for the energy and process industry. With approximately 27,000 highly skilled employees, we serve customers in well over 100 countries. We are a global company with operations in more than 50 countries and production in 19 countries and on every continent. Growth through partnership Our purpose statement Engineering Customer Success reflects the direct correlation between our own talent and expertise and our customers success. We enhance the competitiveness of our customers and advance sustainable industrial development. We aim to deliver efficient, high-quality and environmentally-sound solutions that meet our customers needs. Our efforts are supported by our global network of experts, close and long-term collaboration with customers, and our solid technology and process know-how. We deliver our purpose through our values: customer success, profitable innovation, professional development and personal commitment. Our purpose, our values and our code of conduct form a solid foundation for our strategy, which aims to secure the continuity of our profitable growth. By following the roadmap of profitable growth, we can achieve our vision of becoming the industry benchmark. Global services Just like us, also our customers companies in the paper, board and pulp industry, the mining and construction industry, the metal recycling industry, and the energy industry operate in different parts of the world. Our customers in the new emerging markets are investing in new production capacity. In our traditional market areas of Europe and North America, the emphasis is on process efficiency and production optimization. Our experts in our three business areas Metso Paper, Metso Minerals and Metso Automation serve customers around the world. Close to customers Our success is based on customer satisfaction, continuous improvement of our own operational excellence, a global presence and technology leadership. We aim to strengthen our presence near our customers, expand our services business and better utilize our extensive environmental technology expertise. We are committed to securing the success of our customers every day, everywhere. Metso Expect results. READ MORE ABOUT OUR BUSINESS AREAS: p BUSINESS AREAS AT A GLANCE p METSO PAPER p METSO MINERALS p METSO AUTOMATION READ MORE ABOUT OUR STRATEGY, VALUES AND CODE OF CONDUCT: > About us 2 METSO ANNUAL REVIEW 07

5 METSO IN BRIEF We have a global scope of operations Our production, sales and service units Our sales and service units, no production Orders received by market area Orders received EUR 6,965 million (2006: EUR 5,705 million) Other Nordic countries 8% (2006: 7%) Finland 7% (2006: 6%) Rest of the world 7% (2006: 6%) Asia-Pacific 22% (2006: 27%) Other European countries 29% (2006: 22%) North America 15% (2006: 19%) South and Central America 12% (2006: 13%) Net sales by market area Net sales EUR 6,250 million (2006: EUR 4,955 million) Other Nordic countries 8% (2006: 6%) Finland 7% (2006: 7%) Rest of the world 5% (2006: 5%) Asia-Pacific 24% (2006: 20%) Other European countries 25% (2006: 28%) North America 17% (2006: 20%) South and Central America 14% (2006: 14%) Net sales by customer industry Personnel by area Personnel 26,837 (2006: 25,678) Paper and board 31% Other 1% Energy 14% Construction 15% Pulp 12% Mining 22% Metal recycling 5% Finland 35% (2006: 36%) Rest of the world 5% (2006: 5%) Asia-Pacific 10% (2006: 9%) South and Central America 10% (2006: 10%) Other Nordic countries 14% (2006: 14%) Other European countries 12% (2006: 12%) North America 14% (2006: 14%) Net sales, EUR million 7000 Growth +26% Metso Paper +40% Metso Minerals +19% Metso Automation +14% Operating profit, EUR million Valmet Automotive (22%) 0 0 Operating margin, % % METSO ANNUAL REVIEW 07

6 MANAGEMENT DISCUSSION ON STRATEGY Committed to continuous profitable growth We are continuing to pursue profitable growth. We are driving growth specifically by strengthening our global presence, enhancing our services business and expanding our offering in environmental technology. Naturally, we will also continue our operational excellence programs in areas like quality, productivity, sourcing, supply chain optimization and sales management. I believe these efforts continue to benefit both our customers and shareholders alike, says Jorma Eloranta, President and CEO of Metso Corporation. METSO ANNUAL REVIEW 07

7 MANAGEMENT DISCUSSION ON STRATEGY Orders received and order backlog, EUR million * Orders received Order backlog Total shareholder return (TSR), % 04 * Year 2003 presented in accordance with Finnish GAAP In our daily business our primary focus is on providing results for our customers. We believe that Metso can grow profitably when our customers succeed. Our customer promise is crystallized into two words: Expect results. In my view, our promise for our shareholders should be no different the best year ever for us gives a strong foundation to build on this promise. Our profitable growth strategy yielded value for our customers and new development opportunities for us. Continued favorable market demand encouraged our customers to expand their production capacity and to choose us for rebuilds, process optimizations and other services. The growth across our businesses was very solid in 2007, with a 26-percent net sales increase on the previous year. About half of the growth was organic, deriving mostly from the continuing mining supercycle as well as construction and energy industry investments. Emerging markets contributed significantly to our growth. The favorable market situation could have allowed even more robust growth, but we encountered some capacity constraints. Especially our units for mining equipment, valves and power boilers were forced into a balancing act with new order intake and delivery times. Our profitability improved, thanks to strong volume growth together with continued strict cost control and programs to enhance our operational excellence. We also developed our delivery capacities and strengthened our services business. In 2007, the Total Shareholder Return (TSR) on Metso s share, which takes into account the share price development and the dividend paid, was only 1.5 percent. The decrease from previous years was mainly due to the general turmoil in the global stock markets, which resulted in a decline in Metso s share price towards the end of the year. Our dividend proposal to the 2008 Annual General Meeting is EUR 3 per share (EUR 1.65 ordinary dividend and EUR 1.35 extra dividend), which corresponds to a dividend yield of 8 percent. The proposal reflects the Board s confidence in Metso s strengths and future. Even with this record-high dividend, we will have sufficient resources for needed investments and Metso s further development. We operate in an attractive, EUR 45 billion target market We closed last year with a strong order backlog of EUR 4.3 billion. This, together with the continuing favorable market situation especially in the emerging markets and in the mining and energy segments, gives us good visibility into In all our key customer industries, the growth is driven by the emerging markets, most notably China, South America and Eastern Europe. The GDP growth in these areas, the rapid urbanization and the concentration of the world s production capacity due to clear cost advantages provide continuous opportunities for our customers in mining, construction, paper and board, pulp as well as power and energy industries. Our target market totals EUR 45 billion, and we have clearly expressed our intention to be an even stronger technology and market leader in our selected segments. Strengthening our global presence Metso today is quite different from the company it was just a few years back. We are, for example, more geographically diversified. Last year, we received orders from customers in well over 100 countries. I am especially pleased with the continuing solid growth in emerging markets, which last year accounted for 43 percent of all orders received. All in all, our business volumes in these markets have more than doubled since I believe it is only a matter of time until these areas account for the majority of our business. The success of the transformation into a more global company is measured in our ability to be the best choice for each of our customers, regardless of their geographic location. At the same time, we must find an operating model that enhances our competitiveness. I believe that the right decision for us is not to move everything to low-cost countries but to find the optimum balance for our presence between developed and emerging markets. It is natural that we expand our operations in areas like China, India and South America where our customers are experiencing strong growth. Similarly, as the demand for our construction and mining solutions increased in Eastern Europe last year, we moved briskly to open new customer service outlets for that market. METSO ANNUAL REVIEW 07

8 MANAGEMENT DISCUSSION ON STRATEGY Global presence Order backlog as of Dec 31, % 13% 16% 50% 50% 100% 0 Number of personnel as of Dec 31, PRESENCE COUNTS: Stronger presence creates new business opportunities % Asia-Pacific South and Central America 6% 10% Other emerging areas Emerging market total 24% 76% 100% Other countries Total Metso Net sales growth by market area, EUR million % +83% Finland Other Nordic countries Personnel growth by area % +13% Other Europe North America South and Central America +1 % +4 % +4 % +4% +25% +50% +14% Asia-Pacific Other countries +10 % +20 % % Finland Other Nordic countries Other Europe North America South and Central America Asia-Pacific Other countries It is also in the interest of our customers that we centralize our product development activities or the production of certain advanced key components to the unit that is most capable of operating competitively on a global level. Often these units are located in our traditional markets, as our recent investments in Finland show. Last year we invested approximately EUR 100 million, including acquisitions, to enhance our delivery capabilities and to serve our customers closer and more efficiently, all over the world. Acquisitions to accelerate profitable growth In line with our strategy, we evaluate mergers and acquisitions to accelerate our profitable growth. We target acquisitions that would have a good strategic fit for us by establishing a stronger presence in certain markets, strengthening our services business or enhancing our technology offering. Our recent acquisitions follow this pattern successfully. Acquisition of the Aker Kvaerner Pulping and Power businesses in 2006 contributed very strongly to our technology offering. Today we are a full-scope supplier with the latest technology for the pulp industry. What is more, the acquired power boiler business has technology that benefits from the current boom to utilize renewable energy sources, such as biomass or waste. In 2006 and 2007, we strengthened our metal recycling technology business with three complementary acquisitions in the United States, the world s largest metal recycling market. These acquisitions, like our other smaller acquisitions to advance our services presence, can be considered organic because they expand our offering and market position from day one. Our solid balance sheet allows us to continue profitable growth through mergers and acquisitions. With the current high cycle, target companies with a good financial fit for us aren t that easy to find, but I am confident that our prudent acquisition process will continue to yield results. Our goal is that these complementary acquisitions are EPS-enhancing as early as the second year and support the achievement of Metso s financial targets. More resources for the services business Our services business has grown from a EUR 1.4 billion business in 2004 to over EUR 2 billion last year, accounting for about onethird of our 2007 net sales and even more of our profits. The year-on-year volume growth of services showed a healthy increase of 9 percent, which is getting close to the over 10 percent annual growth target. METSO ANNUAL REVIEW 07

9 MANAGEMENT DISCUSSION ON STRATEGY Active acquisition approach Driving growth Purpose Engineering Customer Success Values Customers success Profitable innovation Personal commitment Professional development Talent and competence development Innovation and strategic R&D Sufficient investments development Environmental business Services business growth Global presence Continued operational excellence improvement Quality Productivity Procurement Cost optimization Sales excellence Vision We want to become the industry benchmark Improving profitability To accelerate the growth pace, we have invested in our service facilities and new service people across the globe and finalized a couple of complementary acquisitions. Today we have over 9,000 service professionals working all around the world. Our wear and spare parts business forms a solid basis for our services offering. We have, however, further expanded the services business scope beyond the traditional aftermarket concept to include even maintenance agreements, and also process agreements through which we will help customers optimize the use of their equipment. To further boost services growth, we are continuing to innovate new business concepts and service products. A major supplier of environmental technology Some 60 percent of our business can be considered environmental business as defined by the OECD. Our environmental technology comprises products, solutions and services that improve the environmental performance of our customers production processes. The growth of the environmental business is driven by worldwide concern of climate change, rising energy and raw material prices and ever-stricter environmental legislation, which sets new requirements on material efficiency, emissions and other environmental issues. For example, in China, environmental legislation is driving paper and pulp mills to adopt the best available technology. Consequently, new, world-class, competitive paper and pulp mills are replacing hundreds, even thousands, of old, small mills. We must also be capable of meeting customer needs in other emerging markets where new, startup companies and mills want to invest in leading-technology that is scaled to their level of production volumes and investment value without sacrificing end-product quality or serviceability of the equipment. In environmental technology, the R&D focus is on renewable energy and bioenergy, energy efficiency, water management, recycling and process optimization, emission management and life cycle services. In the services business, we are using advanced materials technology in our new spare and wear parts products. Financial targets and achievements We are seeing great long-term growth potential in environmental technology. In 2007, about one-third of our R&D efforts were directed to this area. In the years to come, the share of environmental R&D will definitely increase and we must also more actively promote our solutions and services on this front. At the same time, we are seeking new ways to cooperate with external research institutes and other technology forerunners. Stringent focus on operational excellence Also going forward, operational excellence issues will remain a focus. Through continuous improvement and a number of projects implemented throughout Metso, we are pursuing cost control, higher margins, better overall quality and operational efficiency. My estimate is that top-level quality management across a business network can Target Net sales growth > 10% 17% 17% 26% Operating profit margin > 10% 7.9% 9.2% 9.3% Investment grade credit rating Solid No Yes Yes Dividend of annual earnings per share > 50% 83% 52% 112% METSO ANNUAL REVIEW 07 7

10 MANAGEMENT DISCUSSION ON STRATEGY We expect that the overall favorable market situation will continue for Metso this year. Net sales, EUR million Operating profit (loss), EUR million % * (100) 03* (2) * Year 2003 presented in accordance with Finnish GAAP Operating margin, % 2003 excluding goodwill impairment 2004 excluding reversal of the Finnish pension liability (TEL) affect the operating profit of any given unit by 2 5 percentage points, in some cases even more. It seems that strict cost control has become standard procedure at Metso: In 2007, SG&A costs were down to 16% of our net sales, even though our growth has required investments in personnel, knowhow and R&D. We are also putting a lot of focus on management of our supplier network while focusing ourselves on the manufacture of key components and final assembly. In 2007, procurements accounted for 67 percent of our net sales, compared to 59 percent in At the same time, we have decreased the number of suppliers and encouraged our partners to establish their own subsupplier networks. This approach naturally calls for stricter emphasis on supply chain and quality management, but it also provides more flexibility for us. Our continuous improvement programs, together with more global operations and expanded services business, have strengthened our capability to deliver sustainable earnings across business cycles. People make the results All our improvement initiatives are directly dependent on Metso people around the world, on their skills and commitment. The market situation does have an impact on any company s operations, but in my opinion Metso s future and success will be built by the continuously improving job performance of our nearly 27,000 employees. The increasingly global nature of our operations sets new demands for our talent and performance management. The significance of this issue is clear across Metso: The Metso strategy dialogue 2007, which included some 400 top managers, identified retaining and attracting competent and high-performing employees as a key success factor for us. New business competencies and mindset are also required to meet our strategic goals. To this end, in 2007 we initiated the Human Capital 2010 program. The vision of the program is to ensure that all Metso employees have the prerequisites to perform up to his or her potential. This will require enhanced processes and tools for performance and compensation management so that individual and business targets are clearly linked to strategy and good performance gets properly rewarded. We are also putting more focus on talent management and human resource planning to ensure that we have right people at right places at right times. All this will require better HR management systems. Human Capital 2010 is a true high-impact program for Metso, and I have great expectations for the results we will be seeing in the near future. Delivering results for customers and shareholders The focus in Metso s development has clearly shifted towards securing future growth without compromising our positive profitability development. The most immediate growth opportunities for us derive from emerging markets where our customers continue to expand their production capacity. This, together with our strong installed base in our traditional markets, will provide new growth opportunities for our services business. Longer-term, very interesting growth avenues for Metso lie within environmental technology. For us, the most profitable, quickest and least risky path is to actively grab the organic growth opportunities, for example, within our minerals, flow control and power businesses. Our commitment to this is evidenced by our expanded capital expenditure plan of more than EUR 200 million for A large part of this will be directed into strengthening our presence in emerging markets, both in capital equipment and services. Even after these investments, our balance sheet will be strong enough to METSO ANNUAL REVIEW 07

11 MANAGEMENT DISCUSSION ON STRATEGY Balance sheet structure, EUR million Gearing and equity to assets, % Return on equity and capital employed, % (10) 0 03* * (20) 03* Total equity Fixed assets Net interest-bearing Goodwill Gearing Return on equity (ROE) liabilities Net working capital Equity to assets Return on capital employed (ROCE) * Year 2003 presented in accordance with Finnish GAAP accommodate complementary acquisitions, should value-enhancing acquisition candidates emerge from our screening process. We expect that the overall favorable market situation will continue for Metso this year. We estimate that this year, at comparable exchange rates, our net sales will grow by about 10 percent and our operating profit margin will be about 10 percent. Shareholders can expect us to do our best to continue to build long-term profitable growth for years to come. Jorma Eloranta President and CEO Key figures, EUR million Net sales 4,955 6,250 Services, % of net sales Operating profit % of net sales Profit before taxes % of net sales Profit % of net sales Gross capital expenditure (excl. business acquisitions) Business acquisitions, net of cash acquired Earnings per share, EUR Adjusted earnings per share, EUR 1) Dividend per share, EUR * Balance sheet total 4,968 5,254 Return on capital employed (ROCE), % Return on equity (ROE), % Equity to assets ratio, % Gearing, % Cash flow from operations Free cash flow Research and development expenses Orders received 5,705 6,965 Order backlog, December 31 3,737 4,341 Personnel, December 31 25,678 26,837 1) In 2006, Metso recognized nonrecurring deferred tax assets totaling EUR 87 million (impact to EPS EUR 0.61). * Board s proposal METSO ANNUAL REVIEW 07

12 OPERATING ENVIRONMENT We operate in growing markets Rakesh Kumar Dabbas (left) and Jhumman Ram make screens for crusher units at Metso Minerals Bawal factory in India. The focus of our growth is shifting to emerging markets. In more traditional markets we are growing in the services business, in particular. The market growth for our products and services is shifting from our traditional market areas in Europe and North America to emerging areas, such as Asia, South America and Eastern Europe. Population and economic growth in emerging areas are boosting the consumption of metals and minerals, infrastructure construction, the demand for paper and packaging materials and energy consumption. The high rate of migration from rural areas to major growth centers is escalating the need for infrastructure investments and energy. This development offers growing markets for the products and services we provide. Target markets by customer industry We have divided our target markets into six customer segments: The paper and board industry, the mining industry, the construction industry, the pulp industry, the energy industry and the metal recycling industry. Of these, the mining, construction, metal recycling and energy industries are experiencing rapid growth worldwide. There is strong growth in the paper, board, and pulp industries in emerging markets, but the growth has stabilized in mature markets. We estimate the total value of our target markets to be EUR 45 billion. Our target markets encompass the customer industries or the parts of them that use machines, equipment or services manufactured or provided by us or our competitors. We estimate the share of the services business to be EUR 18 billion of the total markets. Paper and board industry We estimate the size of our paper and board industry target market to be about EUR 10 billion, of which our market share is about 20 percent. The demand for paper and board machines and the related services is estimated to grow at a rate of 3 4 percent per year. Investments in new machines and equipment are focused mainly in Asia and South America. The demand in the paper and board industry in Europe and North America is mainly for rebuilds to improve machinery and equipment performance as well as for maintenance and service of equipment. In recent years, over half of the world s new paper and board production capacity has been built in China, where consumption is growing as a result of the rising standard of living, the growing demand for printed material, and the growth in the manufacturing industry, which uses packaging materials. Another demand driver is the rebuild needs of older equipment. It is estimated that also India s strong economic growth will drive investments in paper and packaging material production in coming years. In 2007, our orders received from the paper and board industry increased by approximately 10 percent. 10 METSO ANNUAL REVIEW 07

13 OPERATING ENVIRONMENT The demand for energy and process automation is expected to grow about 10 percent per year. Metso Automation s Cathy Chen (left), Daniel Wen and Richard Sui from our office in Beijing. We are one of the few globally operating suppliers for the construction industry. Sales Manager Manjunath K works in Bangalore, India. We estimate the total value of our target markets to be EUR 45 billion, and the services business share of that is EUR 18 billion. Mining industry We estimate the size of our mining industry target market to be about EUR 13 billion, of which our market share is over 10 percent. The demand for mining industry machinery and equipment is estimated to grow almost 9 percent per year. The rapid economic growth in emerging countries has led to a strong demand for minerals during the recent years. The focus of the mining industry s increased investments has been in the Southern Hemisphere, particularly in Brazil, Chile, South Africa and Australia. The growth in demand and high minerals prices have increased mining investments also in the Northern Hemisphere, for example in Mexico, Canada and Russia. The high utilization rates of mines, in turn, have increased the demand for the services and maintenance business globally. The mining industry s willingness to invest depends on, among other things, changes in the balance of supply and demand for metals and in the prices for metals and minerals. With economic growth in emerging countries estimated to remain strong, the resulting economic upturn also in the mining industry is estimated to stretch far into the next decade. In 2007, our orders received from the mining industry increased by approximately 10 percent. Construction industry We estimate the size of our construction industry target market to be about EUR 5 billion, of which we estimate our market share to be approximately 20 percent. The markets for construction industry-related machinery and equipment are estimated to grow 4 6 percent per year. GDP and population growth increase all kinds of construction, particularly infrastructure construction, and thus boost the demand for aggregates. For example, China, Russia and India have major roadway projects under way over the next years. Also Eastern Europe is investing in the development of its road network. In the United States, substantial public funding has been allocated to improve the transportation infrastructure, including the road network. Other significant infrastructure projects, such as the construction of ports and dams, increase the demand for our equipment. Our customer base is divided into two groups: construction material companies that produce aggregates and equipment contractors. Both customer segments also require different kinds of services. In 2007, our orders received from the construction industry increased more than 20 percent. Pulp industry We estimate the size of our target market related to the chemical and mechanical pulp production to be about EUR 4 billion, METSO ANNUAL REVIEW 07 11

14 OPERATING ENVIRONMENT Metso s target markets EUR 45 billion Orders received by customer industry Pulp and Paper EUR 14 billion (Metso market share ~20%) Paper and Board EUR 7 billion Fiber EUR 4 billion Pulp and Paper automation EUR 3 billion Mining and Construction EUR 19 billion (Metso market share ~15%) Construction EUR 5 billion Mining EUR 13 billion Recycling EUR 1 billion Energy EUR 12 billion (Metso market share 5 10%) Oil & Gas upstream EUR 6 billion Power Generation EUR 3 billion Energy and Process Automation EUR 3 billion Paper and board 29% Other 1% Energy 17% Construction 15% Pulp 9% Mining 24% Metal recycling 5% of which our market share is about 20 percent. Today mechanical pulp is produced mainly in production facilities integrated with paper and board mills. The demand for pulp production lines, machinery and related services is estimated to grow at a rate of 3 4 percent per year. The markets for new production mills for the chemical pulp industry are concentrated to South America and Southeast Asia where the raw material used is the fast-growing, short-fiber eucalyptus and acacia grown on plantations. Also Russia has several ongoing pulp mill projects utilizing its forest resources. The demand in Europe and North America is focused on pulping line rebuilds and services to optimize productivity and processes. Rebuilding an existing plant is a cost-efficient way to increase a mill s productivity and energy efficiency. In 2007, our orders received from the pulp industry decreased by approximately 10 percent. Population and economic growth in emerging markets is increasing the construction of roads e.g. and thus driving the demand for aggregates. Energy industry We estimate the size of our energy industry target market to be EUR 12 billion, of which we estimate our market share to be some 5 to 10 percent depending on the customer segment. We have divided our energy industry target market into three customer segments: oil and gas upstream, power generation, and energy and process automation. It is estimated that the markets for oil and gas upstream-related flow control solutions will grow robustly in the short term and over 5 percent per year in the long term. The demand for oil and gas is driven by the growing consumption of energy and traffic fuels in emerging markets. New refining capacity is being built particularly in the Middle East and Asia. The high price of oil and refined oil products has also fueled the modernization of aging production plants. The demand for power plant boilers is estimated to grow almost 10 percent per year. The growing importance of local energy sources and renewable natural resources is well suited to our power generation solutions. The demand for bioenergy is increasing all over the world as more ecofriendly alternatives are pursued to replace fossils fuels that cause greenhouse gases. The demand for energy and process automation is estimated to grow almost 10 percent per year. Efficient management of energy production and its environmental impact requires diverse solutions for production automation and flow control. The development of energy saving technologies is among the new, interesting growth areas to us, and is related to all our customer industries. In 2007, our orders received from the energy industry tripled due to the acquisition of the Power business from Aker Kvaerner at the end of Metal recycling industry We estimate the size of the metal recycling industry target market to be about EUR 1 billion, of which we estimate our market share to be approximately 30 percent. The markets for machinery and equipment related to metal recycling are estimated to grow over 5 percent per year. Recycled material accounts for about 40 percent of the raw materials used in the world s steel production. In the future, the growth will be bolstered by the rapidly climbing prices for non-renewable raw Our services business focuses on the service and maintenance, the supply of spare and wear parts, and machine rebuilds, process optimizations and consulting. materials, such as iron ore, changes in environmental legislation, and the increasing awareness of the limited scope of natural resources and the harmfulness of emissions. Today metal recycling is growing about 50 percent faster than steel production. The metal recycling industry is most advanced in North America and Europe. Growth areas are the Eastern European countries, China and Russia. The huge volumes of recycled materials exported from the United States and Europe to China have partly increased the global market price for scrap metal. In 2007, our orders received from the metal recycling industry increased by almost 20 percent. 12 METSO ANNUAL REVIEW 07

15 OPERATING ENVIRONMENT Metso has been operating in Brazil for nearly one hundred years. Paulo Ribeiro (left) and Ricardo Carpinski work at Metso Paper s service center in Sorocaba, Brazil. Factors affecting our customers investment decisions Our paper, board and pulp industry customers are emphasizing the return on investment (ROI) in their investment decisions. That is why they are aiming to continuously reduce the investment and operating costs of their production lines to secure their competitiveness. This is visible especially in Europe and North America where the markets are hardly growing and our customers are struggling with overcapacity and cost pressures. In recent years our customers have increased their investments in minimizing the environmental impact of their processes. Changes in pulp and paper consumption, price trends in pulp and in different grades of paper and board, capacity utilization of manufacturers and reorganizations in their production structures, as well as changes in environmental legislation and energy and raw material prices, among other things, affect the demand for our products. The most significant factor affecting the demand for minerals has been the strong economic growth in China and other emerging economies. Mining companies have tried to respond to the higher demand by increasing the production capacity of their existing mines and by initiating new mining projects. High prices for minerals Our target is to increase our services business by over 10 percent annually. have also stimulated interest in mining projects previously considered unprofitable. The mining sector s shortage of labor will stabilize the capacity growth for the longer term. GDP and population growth increase infrastructure construction and thus the demand for aggregates. Stricter environmental requirements limit the use of natural gravel and sand, but increase the use of crushed rock and also recycled aggregates. Increased energy consumption, aging power plants and environmental awareness are boosting the demand for modern power plant boilers as well as process and equipment automation for the energy industry. Rising energy prices have improved the outlook for energy production based on renewable resources. The metal recycling industry s willingness to invest is affected by factors like the price trends in recycled metals, environmental awareness and the increased use of recycled metals as a raw material for the steel industry. We are one of the leading suppliers in our industry We are one of the world s leading suppliers of paper, board and pulping lines. We have delivered about half of the world s paper machine capacity, about 40 percent of the tissue machine capacity and about a third of the board machine capacity. We have delivered about 40 percent of the recovery boilers used in the pulp industry and about one quarter of the world s industrial-sized bio- and multi-fuel fluidized bed boilers. In power generation, we are experts in utilizing wood-based raw materials in particular. We are the global market leader in special analyzers, consistency transmitters, and control and automated valves for the pulp and paper industry. We are the world s third largest supplier of automation solutions for the pulp and paper industry, and a significant supplier of automation for power plants in Europe. We are one of the world s leading suppliers of rock and minerals processing systems and recycling systems for metals and construction materials. We have supplied about half of Europe s and the USA s grinding mills and metal recycling capacity, close to one third of the rock crushing capacity, and almost 10 percent of the screening capacity. Our services business focuses on the service and maintenance of our extensive METSO ANNUAL REVIEW 07 13

16 OPERATING ENVIRONMENT base of installed equipment, the supply of spare and wear parts, machine rebuilds, process optimizations and consulting. Our target is to increase our services business by over 10 percent annually. The services business requires local presence and resources close to customers. Accordingly, we are establishing new service centers and strengthening our customer service both in mature and emerging markets. In recent years, our new equipment deliveries have grown faster than the services business. This new machine base gives us the opportunity to accelerate our services business growth. Our goal is to conclude long-term service agreements on as many of these new equipment and lines as possible. Competitive situation We have only a few significant competitors in new large-scale paper and board production lines. In the smaller paper and board machines, the services business and tissue machines, however, we have several competitors. In addition to previous references, critical factors in paper, board and tissue machine sales include machine production capacity, technology, the supplier s process know-how, delivery times, price, service availability, and environmental aspects. The key competitive factors in the Demand trends for Metso s products , indexed e Recycling 5% 2009e 2010e Construction 6% 2011e Valves 6% 2012e services business are, in particular, operating close to customers, speed of service, knowhow, price, availability and technology. In the mining industry, our main competitors in sales of new machines and complete production plants are global companies. Additionally, we also have local and regional competitors, especially in lighter equipment. Our key competitive factors include longterm customer relations, a global presence, high machine performance and durability, solid technology and service expertise, knowledge of the customer s entire production process, delivery reliability and an extensive base of installed equipment. The competitive arena in the services business is significantly more fragmented than in new equipment sales. Local customer service and the availability of high-quality spare and wear parts are critical in the services business. The competitive arena in the construction industry is fragmented. We are one of the few globally operating equipment suppliers for the construction industry. The majority of our competitors are local or regional suppliers. Our key competitive factors are mainly the same as in the mining industry: long-term customer relations based on the installed equipment base combined with local customer service, solid technology and knowledge of the customer s entire production process. 2013e 2014e Note: All figures nominal, including inflation Sources: Freedonia, ARC, Pöyry, European Renewable Energy Council, Metso estimates Mining 9% Distributed Control Systems 8% Power 7% Kraft pulp 4% Paper & Board 4% Mining Power Distributed Control Systems Valves Construction Recycling Kraft pulp Paper & Board In new pulping lines for the pulp industry, we have only a few significant competitors, but a single machine can have several competitors. In the services business, we have several competitors, ranging from local companies to global operators. In the pulp industry, our key competitive factors are technology and process know-how, previous references and the ability to deliver complete pulping production lines, from wood processing to baling. Strong automation know-how complements our offering. Numerous companies manufacture flow control solutions for the oil and gas industry. Some of these competitors are Our key competitive factors are high quality and good reputation, an extensive installed base, a comprehensive product and services offering, and technology know-how. global companies operating in multiple sectors, but many are specialized in specific niche products or application areas. Our key competitive factors include reliable and technically advanced products, reliability as a supplier, long-term customer relationships, references for demanding applications, and a global market presence. In power generation, mainly in the fluidized bed boiler technology we represent, there are just a few significant global competitors, but our solutions also compete with other power generation technologies. The key competitive factors in power generation are the supplier s process knowhow, life-cycle costs, technology and cost efficiency. Eco-friendly energy production solutions based on the use of biomass offer us new, interesting growth opportunities. We are a frontrunner in biomass-fired fluidized bed boiler technology for the pulp and 14 METSO ANNUAL REVIEW 07

17 OPERATING ENVIRONMENT Metso Minerals has decided to double the capacity of its crusher factory in Tianjin, China. Quality Inspector Liang Zhi Gang s work requires concentration. paper industry and the power generation sector. In energy and process automation systems, our competitors are mainly major multinational companies. The key competitive factors include the reliability and usability of equipment and systems, application know-how, availability of customer support, and long-term customer relations and references. In the metal recycling industry, we are the market leader both in Europe and in North America where we have several small regional and local competitors in one or two product groups. Additionally, a few of our competitors in the metal recycling industry operate globally and have product and service offerings that are partially similar to ours. Our key competitive factors are the high quality and good reputation of our products, an extensive base of installed machines, a comprehensive product and services offering, and technology know-how. Expected CAGR in Metso s key customer segments, % Mining Gas Oil Fiber Paper & Board Aggregates 2 0 North America Sources: Freedonia, Jaakko Pöyry, IEA, Raw Materials Group Latin America 2 0 Western Europe Other Europe Africa & Middle East Russia & CIS China Asia Oceania METSO ANNUAL REVIEW 07 15

18 RISKS AND RISK MANAGEMENT Risk management secures the continuity of our business Howard Emmett, Mill Manager of the New Thames mill, and Metso s Project Manager Ilpo Turunen are satisfied with the measures taken to boost efficiency at the New Thames mill in Kent, Great Britain. The objective of risk management is to support the achievement of our goals and to secure the continuity of our business. In the effort to achieve our goals, risks can be either threats or untapped opportunities. Risk management principles and responsibilities The objective of our risk management is to support the achievement of our goals and to secure the continuity of our operations. We define risk as a combination of probability and consequences of the occurrence. Strategic risks and, to some extent, financial risks, are considered to create also opportunities to develop our business, but any operational risks and hazard risks that materialize have a negative effect on our operations. We estimate that our level of risks in proportion to the type and scope of our operations is at an acceptable level. Metso s Board of Directors approves the risk management principles. Additionally, it ensures that the planning, information and control systems in place for risk management are sufficient and support our business objectives. The Board s Audit Committee assesses the adequacy of risk management and ensures that it is consistent with our corporate governance principles. Metso s Risk Management Team annually confirms the business area-specific risk management program. The Risk Management function is responsible for the implementation of the risk management program and policy and for the development of Metso-wide risk management procedures and guidelines. The business area presidents are responsible for the management of risks related to the operations of their own business areas. Corporate Treasury manages the currency and other financial risks related to our operations and secures the availability of equity and debt capital with competitive terms. Corporate Treasury functions as a counterparty to the business areas operating units in arrangements relating to financing and centrally manages external funding. It is also responsible for managing financial assets and for proper hedging measures. We take measures to manage and limit the potential adverse effects of risks. However, if risks do materialize, they could have material adverse effects on our business, financial condition and operating result or on the value of our shares and other securities. Strategic risks Business development risks The main business development risks are those related to new markets and business opportunities, to personnel competence, and mergers and acquisitions. An important part of our business development is the expansion of our operations in emerging markets. We are increasing our presence where our customer base is growing, and we aim to take full advantage of the growth potential, particularly in Brazil, Russia, India and China (the so-called BRIC countries). The development of personnel competence and utilizing the potential of skilled personnel are critical for the development of our business operations. In addition to personnel training programs, we annually map out our key executives, their possible deputies and successors as well as the need for any new management resources. Business development risks also include acquisition-related risks, which we take into account through the use of the Metso 16 METSO ANNUAL REVIEW 07

19 RISKS AND RISK MANAGEMENT Metso s most significant risks Our most significant risks are strategic and operational threats and opportunities: The impact of business cycles and emerging markets on our business operations The impacts of mergers and acquisitions Recruiting and committing skilled personnel Strengthening global presence The impacts of global and regional unrest Intellectual property rights of our products Growth opportunities in energy and environmental technology Net sales Risk is a threat and an opportunity Strategic risks Financial risks Operational risks Hazard risks Threats and opportunities Threats Time Risk management implementation PROACTIVE Risk map We categorize risks on the risk map and define risk management principles and responsible parties. Risk assessment All our business areas make an annual risk assessment. Corrective measures The business areas operative management and the Risk Management Team ensure that our business areas initiate measures based on the results of the risk assessment. PREVENTIVE Risk management evaluation The business area risk management functions work with an external insurance broker to evaluate the functioning of risk management at our key units in accordance with a 3-year plan. INSTRUCTIONS Crisis management The primary goal of crisis management at Metso is the safety of our personnel. We also aim to reduce the adverse financial impact of the crisis and to restore our status, operations and organization to the pre-crisis situation. REACTIVE Insurance programs We have prepared for property, business interruption, transport and liability risks through local and global insurance schemes. Liability risks include damage caused by our operations and products as well as management liabilities. Metso s total riskbearing capacity is taken into consideration when defining deductible amounts. Other control processes Our efficient and functioning internal control systems ensure the reliability of our financial reporting. In the maintenance and development of our ways of operating and controls, we take into consideration the related general guidelines and legislative requirements. Quality systems We use ISO 9001 and OHSAS quality systems and ISO environmental system. These tools are used in correcting deviations that pose a risk and were detected in the units internal audits. PROTECTIVE METSO ANNUAL REVIEW 07 17

20 RISKS AND RISK MANAGEMENT Metso s Risk Map Risk category Strategic Risks Business development risks Business environment risks Market risks Technology risks Political, economic, cultural and legislative development Global climate, environmental and other phenomena Financial Risks Liquidity Interest rate risks Currency risks Credit and counterparty risks Operational Risks Organization and managementrelated risks Information security risks Production, process and productivity risks Business interruption risks Profitability risks Project activity risks Contract and liability risks Crisis situations Illegal acts Hazard Risks Occupational health and safetyrelated risks Personnel security risks Environmental risks Fire and other disasters Natural events Premises security risks Examples of risks New markets and business opportunities. Ownership structure. Life cycle of products and production facilities. Competence of employees. Natural resources, raw material and energy supply and availability. Mergers and acquisitions. Customer reputation. Supplier reputation. Brand and values. Cycles in the global economy and customer industries. Changes in customers and customer demands. Customer mergers. Changes in customer product management, specific product requirements and environmental factors. Competition. Business intelligence and competitor analyses. Technology vision, R&D capability and future competence requirements. IPR management. Global political development, political unrest, terrorism, wars. Cultural and religious factors. Financial and environmental legislation. Changes within regional climate. Epidemics. Short-term liquidity, risks in availability of funds. Risks in pricing. Credit ratings. Changes in market interest rates and interest margins influencing financing costs, returns on financial investments and valuation of derivative contracts. Exchange rate variations affecting the prices of raw materials and production commodities purchased in nondomestic currencies. Exchange rate variations affecting the prices of end products for export and cost competitiveness of the products. Equity of subsidiaries outside the euro zone. Credit risks pertaining to trade activities. Counterparty liquidity and reliability. Lack of effective organization, key persons, competence, resources and management. Inappropriate recruits. High rotation of personnel. Loss of data. Lack of confidentiality, integrity, availability, authenticity, non-repudiation and non-accountability. Production, sales, marketing, innovation, delivery and process risks. Lack of environmental and risk management, customer relationship work, efficiency and follow-up issues. Machinery breakdown. Supply chain management, outsourcing, dependencies and logistics risks. Profitability assessment and quotation calculation risks. Schedule, payment terms, project team and supplier risks. Quality, contract and payment terms, product technology and safety risks. Product liability risks. Lack of crisis management capability; reactive organizations, SOS services and effective cooperation. Fraud, misconduct and crime. Work-related illness, accidents and job well-being-related risks. Kidnapping, theft, violence and murder. Leak, spill and explosion. Fire, explosion and traffic/cargo accident. Wind, storm, hail, hurricane, tornado, typhoon, winter storm, snow, extreme cold, drought, wild fire, flood, lightning, earthquake, mudslide, surge storm, tsunami and volcanic eruption. Break-in, theft, arson and vandalism. We categorize risks on the risk map and define risk management principles and responsible parties. In assessing the impact of the risks, we take into consideration the probability of the risk as well as the impact on our net sales and results. We actively monitor these risks. Acquisition Process and our thorough due diligence process. Business environment risks Business cycles in the global economy and in our customer industries influence the demand for our products as well as our financial conditions and operating result. The development of the fast growing markets, in particular, has a significant impact on our growth opportunities. Metso Paper and Metso Automation are affected by the development of the pulp and paper industry and the energy industry. Metso Minerals is dependent on developments in the construction industry and particularly on the level of infrastructure investments. Metso Minerals business is also affected by business cycles in the mining industry. We believe that in the long-term the effects of business cycles are offset by the geographical scope of our operations and by the range of the customer industries we serve. Also demand for new equipment 18 METSO ANNUAL REVIEW 07

21 RISKS AND RISK MANAGEMENT Risk profile Operating guidelines and principles Responsibility Metso s strategy and business plans, Corporate governance, Patents and intellectual property rights, Intellectual property policy, Metso s values, Code of Conduct, Principles of sponsorship, Accounting principles, Risk management policy. Corporate and business area management, Risk management organization Corporate treasury policy. Corporate management, Corporate Treasury, Corporate Finance, Corporate Legal Matters Corporate governance, Information security principles, Production guidelines, Business interruption risk analyses, Treasury policy, Project activity safety guidelines, Safety manuals, Contractual guidelines, Code of Conduct, Guidelines on preventing misconduct, Guidelines on compliance with antitrust legislation, Corporate insurance program, Crisis management instructions Corporate and business area management, HR organization, Production management, Risk management organization, Internal Audit, IT Occupational health and safety guidelines, Certification principles, Travel safety guidelines, Rescue plans, Premises security guidelines, Corporate insurance program Business area management, HR and Occupational health and safety organization, Risk Management Organization, Environmental function, Rescue organization, Real estate management organization low average high tends to be more affected by business cycles than the demand for services, which we are proactively aiming to increase. We have increased the flexibility of our cost structure through collaboration with subcontractors and by focusing our own operations on the manufacture and assembly of core components. Market risks Changes in the demand of our customer industries affect our operations. Such changes may be related to, for instance, strategy changes in our customer companies, product development and product requirements, or to environmental aspects. We have several competitors in different business areas and products. We aim to differentiate ourselves from competitors through quality, reliability, local presence and availability, as well as by providing a high-level of technological and environmental know-how and long-term commitment to our customers. METSO ANNUAL REVIEW 07 19

22 RISKS AND RISK MANAGEMENT We seek to increase our local presence and subcontracting in rapidly growing markets, such as China, India and Brazil. In these areas, we are also closely monitoring developments in the product and service offering of our local competitors. Technology risks Our technology risks are related to technological competence and research and product development. The use of new technology may temporarily increase our qualityrelated costs. In research and product development we utilize our Metso Innovation Process, a project management model that guides the development process for new products or services. In accordance with the process, a business plan is created for every development project and its feasibility is assessed at different stages of the process. In the business plan, we define the responsibilities and roles of the different functions as well as the relevant aspects related to the product s intellectual property rights and environmental impact. We protect our products and intellectual property rights related to our business through patents and trademarks. We have identified the potential copying of certain Metso Minerals products as a significant risk in emerging markets. Political, economic, cultural and legislative trends Global political development, political unrest, terrorism and armed conflicts are risks to our operations. Our operations are also affected by the environmental legislation of different countries, which may complicate the sales of our products and increase our costs. On the other hand, more demanding legislation creates opportunities to offer our customers new solutions that improve energy-efficiency, reduce emissions, promote recycling and meet more stringent environmental standards. We have our own manufacturing and supplier networks in many emerging markets. Sudden political, economic and/or legislative changes, especially in the BRIC countries (Brazil, Russia, India, China), could adversely affect our business. The risks related to these emerging markets are offset by the wide geographical and industrial scope of our operations, as well as by the stable services business in Europe and North America. Phenomena related to climate change and environment Emissions from our own production are within the permit limits set by authorities. When planning our energy needs and products, we take into account risks related to climate change as well as rising energy prices. The pursuit for solutions to solve problems due to climate change is a big opportunity for us because we can offer our customers products and processes that are increasingly eco-efficient and help them to significantly reduce their energy consumption and emissions. Our main tools for environmental management are the processes ensuring compliance with environmental legislation and the ISO compliant environmental management systems. Operational risks Organizational and management risks We continuously assess the human resources and organizational structures of our businesses. By doing so we aim to ensure organizational efficiency and competence and to manage and avoid risks, such as inappropriate recruiting, an imbalance in the age structure of our personnel and a high personnel turnover rate. Availability of personnel and high turnover in new and emerging markets is a risk that we seek to manage with proactive personnel management. The most significant risk in terms of personnel structure is at Metso Minerals because recruiting new, skilled employees during a high business cycle could be difficult. We seek to anticipate this in our successor and recruiting planning, and we have promoted the sector and the company, for instance at universities. Information security risks Our operations are dependent on external, internal and integrated information technology services and solutions. We aim to use reliable information technology solutions and information security management to avoid exposure to data loss or to compromising the confidentiality, usability or integrity of information. Production, process and productivity risks Profitable growth requires us to focus on improving productivity. We are developing our operations in growing markets: Procurements are being shifted to low-cost countries, and we are developing e.g. purchases, research and development activities, manufacturing, design and maintenance closer to our customers. To maintain production safety and productivity, we apply ISO 9001 quality management and ISO environmental management systems or similar processes in our key production units. Business interruption risks Increasing global contract manufacturing not only challenges us to manage a functional supplier network, it also requires us to assess the ways of operating, the quality and the local impact of our cooperation partners. Supply problems with our raw material suppliers can influence the price and availability of the raw materials used in our products. The price and availability of steel and iron scrap, which are important raw materials, fluctuate according to market demand. Rising steel and iron scrap prices can have an adverse effect on our operations. Rising energy, oil and metal prices mainly increase the demand for our products, but price fluctuations can indirectly and adversely effect our operations if they decrease our customers willingness to invest. The direct risks associated with raw materials procurement have decreased in recent years because in our operations we have increasingly focused on the manufacture and assembly of key components. On the other hand, the importance of and risks related to suppliers and subcontractors have increased. On short notice, we may not be able to find alternative suppliers for some of our subcontractors. Project activity risks Our operations consist partly of large project deliveries. These deliveries can involve project-specific risks related to, for example, delivery schedules, equipment start-up, production capacity and endproduct quality. In some projects, risks may also arise from new technology included in the deliveries. The risks of individual projects are generally insignificant, considering the entire scope of our business. Large-scale projects and equipment transactions are subject to the risk that we fail to estimate the actual costs of the trans- 20 METSO ANNUAL REVIEW 07

23 RISKS AND RISK MANAGEMENT Risk management in 2007 Our business areas carried out an annual risk assessment. Compared to the 2006 results, our strategic and operational risks had slightly increased, which reflects the increased risk of a possible turn in the current good business cycle. Risks related to the organization and management, employee safety and management of crisis situations had decreased. We worked with our insurance broker to evaluate the risk management at nine of our units. We are now placing special attention on the management of data and premises security risks and business interruption risks. According to the results, our overall risk management was at a good level. We developed our business interruption risk management. We systematically assessed the business interruption risks at 35 key units, and we mapped out ways to manage them. In accordance with our business development, we centralized Metso-wide global personnel development processes and programs, which also boost the efficiency of risk management. The programs particularly concentrate on the development of management skills. We are also implementing programs related to special areas, such as the development of project management, procurement and the services business. In managing financial risks, we focused on managing currency risks and securing the availability of funding in line with our strategic growth targets. The increased uncertainty of the financial markets has emphasized the importance of diverse sources of funding in managing liquidity risks. We continued risk management collaboration with Finnish and international organizations. An important part of the collaboration is to develop global crisis risk management. We continued internal communications and training on the content of our Risk Management Policy and ways of operating. We integrated risk management training as part of the training programs for our employees responsible for the different risk sub-areas. We developed our risk management guidelines, tools database and our reporting system. Important tasks in risk management in 2008 include the further integration and unification of the different insurance programs of our business areas and the development of a tool for use in assessing risks. action accurately enough at the offer stage and to determine the appropriate transaction price. To manage risks related to pricing and delivery terms, we apply various quality systems, operating guidelines, standard conditions and profitability analyses that take into account the key factors of the transaction. Contract and product liability risks We are occasionally involved in product liability claims typical for companies in comparable industries. The claims for compensation are covered by insurance policies. We aim to reduce product liability risks by improving product safety through investments in product development, automation and customer training and through detailed sales contract terms. Illegal activities To prevent illegal activities, such as fraud, misconduct or criminal acts, Metso s values and Code of Conduct have been a focus in our personnel training. We are using internal procedures, supervision, audits and practical tools to reduce our exposure to these risks. Hazard risks Occupational health and safety risks We have taken precautions against risks through occupational health and safety guidelines, certification principles, travel safety guidelines, rescue planning and premises security instructions. We have also prepared for the materialization of risks in Metso s insurance program. Financial risks Securing the continuity of our operations requires the assurance of sufficient funding in all circumstances. The most significant financial risks affecting our financial result are currency risks. Currency risks Exchange rate fluctuations affect our business, although the geographical scope of our operations decreases the significance of any individual currency. The impact of exchange rate fluctuations is directly visible in transactions in which the invoicing currency is different from the currency of the manufacturing costs. In addition to the euro, the most important currencies we use in our invoicing include the U.S. dollar, the Swedish krona, the Canadian dollar and the Brazilian real. Exchange rate fluctuations may also weaken the cost competitiveness of our products compared to competitor products manufactured in other currency areas. The indirect effect of exchange rate fluctuation is visible when translating the net sales and financial results of our subsidiaries outside the euro zone into euros. Changes in the exchange rates may increase or decrease our net sales or results even though no real change has occurred. Our units are required to hedge in full the currency exposures that arise from firm delivery and purchase agreements. In addition, they can hedge anticipated foreign currency denominated cash flows by taking into account the significance of such cash flows, the competitive situation and other possibilities to adjust. Hedging operations are handled centrally through Metso s Corporate Treasury. Upper limits, calculated on the basis of their potential impact on profits, have been set for Corporate Treasury s open currency exposures. These limits cover net exposures from transfers between operating units and items arising from financing activities. READ MORE ABOUT OUR FINANCIAL RISK MANAGEMENT: p , Notes to Financial Statements, Note 2 READ MORE ABOUT OUR RISK MANAGEMENT: > Governance > Risk management METSO ANNUAL REVIEW 07 21

24 BUSINESS AREAS Business areas at a glance Metso Paper Pulping, papermaking and power generation technologies Products and services Production lines, machinery and equipment for paper, tissue and board production and finishing for mechanical and chemical pulp production Power plant boilers and environmental protection equipment Know-how and maintenance services Customers Paper, tissue and board producers Mechanical and chemical pulp producers Power producers Main competitors Papermaking, board and pulping lines: Andritz, HPD, Voith, Wuhan Equipment for the power generation industry: Alstom, Austrian Energy & Environment, Foster Wheeler Global market position Papermaking, board and pulping lines Fluidized bed boiler technology for the power generation industry Business area President Bertel Langenskiöld Business lines Fiber, Paper & Board, Tissue, Power Number of employees Dec 31, 2007: 11,694 (2006: 11,558) Metso Minerals Rock and minerals processing systems, metal recycling technology Products and services Crushers, grinding mills, screens and conveyors Track- and wheel-mounted crushing and screening equipment Mineral separation equipment Metal recycling equipment Know-how and maintenance services; spare and wear parts Customers Mining industry Quarries and contractors Construction industry Metal- and municipal waste-recycling industry Main competitors Mining industry: FLSmidth, Outotec, ThyssenKrupp, Sandvik Construction industry: Terex, Sandvik, Astec Metal recycling industry: Sierra International Machinery, Harris Waste Management Group, Isenmann Siebe, Wendt Corporation Global market position Rock and minerals processing systems Metal recycling systems.. 1 Business area President Matti Kähkönen Business lines Construction, Mining, Recycling Number of employees Dec 31, 2007: 10,446 (2006: 9,433) Metso Automation Measurement, flow control and automation technologies Products and services Energy and process industry automation and information management application networks and systems Production process measurement systems and analyzers Control valves and smart shut-off valves Know-how and maintenance services Customers Mechanical and chemical pulp producers Paper and board producers Energy, oil and gas industries Main competitors System suppliers: ABB, Honeywell, Emerson Process Management, Siemens AG, Invensys, Yokogawa Valve suppliers: Emerson Process Management, Dresser, Flowserve, Samson Global market position Pulp and paper industry special analyzers and consistency transmitters 1 control valves automation solutions... 3 Power plant automation <10 Business area President Pasi Laine Business lines Process Automation Systems, Flow Control Number of employees Dec 31, 2007: 3,564 (2006: 3,352) 22 METSO ANNUAL REVIEW 07

25 BUSINESS AREAS Net sales by market area Net sales by customer industry & Services Orders received by market area Other Nordic countries 10% (2006: 6%) Finland 11% (2006: 10%) Rest of the world 2% (2006: 2%) Asia-Pacific 33% (2006: 26%) Other European countries 20% (2006: 28%) North America 12% (2006: 16%) South and Central America 12% (2006: 12%) Paper, 55% of net sales Power, 19% of net sales Pulp, 26% of net sales Other Nordic countries 11% (2006: 7%) Finland 10% (2006: 8%) Rest of the world 2% (2006: 4%) Asia-Pacific 29% (2006: 41%) Other European countries 31% (2006: 15%) North America 9% (2006: 17%) South and Central America 8% (2006: 8%) Net sales EUR 2,925 million (2006: EUR 2,092 million) Services, 29% of net sales New equipment, 71% of net sales Orders received EUR 3,109 million (2006: EUR 2,276 million) Net sales by market area Net sales by customer industry & Services Orders received by market area Other European countries 28% (2006: 25%) Other Nordic countries 8% (2006: 6%) Finland 3% (2006: 3%) North America 19% (2006: 23%) Mining, 54% of net sales Other Nordic countries 7% (2006: 8%) Finland 3% (2006: 2%) Other European countries 28% (2006: 25%) North America 19% (2006: 20%) Rest of the world 8% (2006: 8%) Asia-Pacific 16% (2006: 17%) South and Central America 18% (2006: 18%) Construction, 35% of net sales Metal recycling, 11% of net sales Rest of the world 11% (2006: 8%) Asia-Pacific 15% (2006: 17%) South and Central America 17% (2006: 20%) Net sales EUR 2,607 million (2006: EUR 2,199 million) Services, 40% of net sales New equipment, 60% of net sales Orders received EUR 3,075 million (2006: EUR 2,655 million) Net sales by market area Net sales by customer industry & Services Orders received by market area Other Nordic countries 3% (2006: 3%) Other European countries Finland 23% (2006: 22%) 20% (2006: 21%) Pulp and Paper, 50% of net sales Other Nordic countries 3% (2006: 3%) Finland 18% (2006: 20%) Other European countries 23% (2006: 22%) Rest of the world 6% (2006: 5%) Asia-Pacific 15% (2006: 14%) South and Central America 6% (2006: 6%) North America 27% (2006: 29%) Energy, 50% of net sales Rest of the world 9% (2006: 7%) Asia-Pacific 18% (2006: 15%) North America 23% (2006: 28%) South and Central America 6% (2006: 5%) Net sales EUR 698 million (2006: EUR 613 million) Services, 22% of net sales New equipment, 78% of net sales Orders received EUR 763 million (2006: EUR 717 million) METSO ANNUAL REVIEW 07 23

26 24 METSO ANNUAL REVIEW 07 SP Newsprint communicates regularly with Metso s experts. Pictured are Dublin Mill Production Manager Mark Haser (right) and Metso Paper s Air Systems Application Specialist Dan Thomas

27 METSO PAPER Expect results WE ARE A GLOBAL SUPPLIER OF TECHNOLOGY SOLUTIONS AND EQUIPMENT FOR THE PULPING, PAPERMAKING AND POWER GENERATION INDUSTRIES. OUR MAINTENANCE AND OTHER EXPERT SERVICES IMPROVE THE EFFICIENCY OF OUR CUSTOMERS PROCESSES THROUGHOUT THEIR ENTIRE LIFE CYCLE. Metso Paper In 2007, we clearly improved our profitability and successfully integrated the Pulping and Power businesses acquired from Aker Kvaerner. Our new factory and new service centers in China support our growth. We strengthened our services business through corporate acquisitions. Growth from the power generation industry Our net sales increased by 40 percent during the year. Without the acquired Pulping and Power businesses, the growth was 5 percent. The value of our orders received increased by 37 percent compared to the previous year. About one third of the growth was organic and the rest was from corporate acquisitions. There was an increase in orders especially in Europe, and in emerging markets the orders remained at a good level. In particular, China s markets for paper and board machines were good. Demand for our board machines in Europe was fair. The demand for products delivered by the Power business line to the power generation industry was excellent. Our order backlog increased by 6 percent from the previous year, and the order intake of the Power business line in particular increased clearly. However, the Power business line s order intake was limited by a shortage of capacity. During the year we initiated several measures to increase the capacity. We integrated the Pulping and Power businesses acquired from Aker Kvaerner into our operations. The acquisition enables us to deliver complete pulp and paper mills, modernizations and maintenance services. Additionally, the Power business line s knowhow in energy production based on biomass and other solid fuels brings us new, interesting business opportunities. Demand for new machines and machine rebuilds is likely to remain at its current level in upcoming years. Growth of our services business may be slightly limited by the restructuring measures of European and US paper and pulp producers. On the other hand, we expect maintenance services of the installed machine base in emerging markets to grow quickly. Our most significant opportunities for growth are in the services business, in extensive deliveries of integrated pulp and paper mills, in deliveries of board machines and their rebuilds, and in power generation solutions based on environmentally friendly biofuels. We are supporting the growth through complementary corporate acquisitions. Our operative profitability has improved steadily We clearly improved our operational performance during the year. Our earnings before interest, tax and amortization (EBITA) increased to EUR million and were 6.3 percent of net sales. Overall, Metso Paper s operative profitability has improved steadily and in line with our targets. However, the profitability of our panelboard business did not meet our targets. Consequently, we divested the majority of the panelboard business with two transactions. The refiner-related operations in Sweden, remained in Metso s ownership and were integrated into Metso Paper in January Coinciding with the divestments, the Panelboard business line was discontinued. The cost savings from the synergies of the acquired and integrated Pulping and Power businesses were approximately EUR 14 million in We estimate that synergy benefits of EUR million will be realized in full in The amortization of intangible assets resulting from the acquisition was EUR 36 million in 2007, and it will decrease in 2008 to EUR 20 million. During 2007 we implemented several measures to improve our cost competitiveness and to boost the METSO ANNUAL REVIEW 07 25

28 METSO PAPER KEY FIGURES EUR million EUR million NET SALES NET SALES 2,092 2,925 OPERATING PROFIT OPERATING PROFIT % OF NET SALES % OF NET SALES CAPITAL EMPLOYED, Dec 31 CAPITAL EMPLOYED, Dec GROSS CAPITAL EXPENDITURE GROSS CAPITAL EXPENDITURE RESEARCH AND DEVELOPMENT EXPENSES RESEARCH AND DEVELOPMENT EXPENSES ORDERS RECEIVED ORDERS RECEIVED 2,276 3,109 ORDER BACKLOG, Dec 31 ORDER BACKLOG, Dec 31 2,225 2,363 PERSONNEL, Dec 31 PERSONNEL, Dec 31 11,558 11,694 efficiency of our production structure. In Italy, we converted our Como unit into a service unit. In Sweden and Finland, we streamlined the overlapping functions resulting from the acquisition of the Pulping business from Aker Kvaerner. In Sweden, we started negotiations on the conversion of the Kamfab factory in Karlstad into a service unit and on the closure of the Grästorp unit. Additionally, our Paper and Board business line made a decision to lay off a total of 250 employees in several locations in Finland, 350 in Sweden, 50 elsewhere in Europe and 40 in North America. As a combined effect of all our above-mentioned measures, the number of our personnel in Europe and in North America will decrease by about 700 people. These restructuring measures resulted in non-recurring expenses totaling approximately EUR 27 million in During the year, we focused on quality management as well as on developing our operating methods and processes to improve productivity. We invested in pilot paper machines, and we developed new, standardized products and concepts. We are continuing efforts to ensure steady improvements in profitability, which is supported, among other things, by growing our services business. We are concentrating on standardizing our components and improving prototype production processes, as well as lowering our quality-related costs and boosting the efficiency of our project deliveries. We are pursuing additional savings by developing global production and supply chains. Acquisitions support services business growth Our goal is to continue to clearly grow our services business, which in 2007 grew by 31 percent. Most of the growth was from the acquired Pulping and Power businesses. Organic growth without the effect of currency changes was 8 percent. We estimate the new paper and board machine base installed in China to increase our services business in the next few years. In China, we doubled the capacity of our Wuxi service center, and we made a decision to build a new service center in Guangzhou. To improve customer services among the U.S. power generation customers, we will establish a new service center in Lancaster, South Carolina, and expand the service center in Fairmont, West Virginia. To strengthen our services business, during the year we acquired Mécanique et Dépannage Industriels s.a.r.l., a French company specializing in maintenance services, and Bender Holdings Limited, a service company from Great Britain. Additionally, we acquired the Optimum Screw Press technology of the Canadian Advanced Fiber Technology. We are aiming to grow our services business through corporate acquisitions also in the future. Lower production costs and higher energy efficiency are important goals of our R&D Reducing our customers production costs and boosting the eco-friendliness of processes, especially the energy efficiency, are important goals of our R&D. Our research and technology development costs in 2007 were EUR 69 million, and ACHIEVEMENTS IN 2007 Power business line s strong growth and improved profitability. Integration of Pulping and Power businesses acquired from Aker Kvaerner. Strong order backlog by Paper and Board business line. we had 490 employees working in R&D. Our employees submitted over 700 invention disclosures, which resulted in about 150 new patent applications. We introduced several new and improved products to the markets during the year. A good example of our continuous technology development is the energy-efficient, high-capacity recovery boiler. We also developed a cost-efficient machine concept for standardized liner and fluting boards, primarily meant for the Chinese markets. We expanded the machine-rebuild-related Val product family with former solutions suitable for different paper and board grades. To support our services business, among other things we developed various roll service packages and roll coatings. To minimize our customers energy costs, we also introduced an energy analysis service. During the year we delivered our first ValZone calender, which uses a heated 26 METSO ANNUAL REVIEW 07

29 METSO PAPER metal belt on the surface to be calendered. The new calender improves the quality of the end product and brings raw materials savings. In tissue machines, we took into use technology that improves press efficiency and reduces the amount of energy needed for paper drying. We launched a project that aims to develop new solutions to more effectively utilize pulp and paper mill bio-waste flows and other bio-raw materials. We estimate that the solutions may be applicable in the production of energy and bio-based traffic fuels, for instance. We strengthened our global presence close to our customers We are developing our global presence and increasing our production and supply and delivery chains close to our customers in Asia and South America. With the acquired Pulping and Power businesses, our foothold in South America s pulp and energy production markets was strengthened substantially. The paper machine factory we acquired in Shanghai in August 2006 supports our growth in the Chinese markets. In the first phase, the factory is producing paper and board machine sections mainly for deliveries in China. The factory s production has started as planned, and we have increased the number of employees at the factory from 400 to 700. In Finland, we decided to expand the power boiler production facilities in Lapua, and we are also increasing the number of working hours for production and subcontracting. At the Jyväskylä foundry, we are increasing the production capacity for paper machine rolls. We expect the market situation to remain unchanged. Economic growth in Asia, especially in China, is accelerating the demand for paper and board, and pulp production capacity will increase in South America and Asia as a result of the good availability of lowcost raw materials. We expect continued excellent demand for power plants utilizing renewable energy sources. GOALS FOR 2008 Improving profitability of project business. Services business growth. Development of Chinese operations. Net sales, EUR million * Operating profit, EUR million 03* Operating profit EBITA Operating margin, % excluding reversal of the Finnish pension liability (TEL) % 8 Orders received & order backlog, EUR million * Orders received Order backlog Fabrica de Papel San Francisco mill in Mexicali, Mexico, has been so satisfied with the Advantage DTC 100 TS tissue machine that it placed a repeat order for a similar machine from Metso in January Metso Paper s Jan L Larsson (left) and Jan Eriksson (right) discussing with Mill Manager Darío Palma y Meza Espinoza. Services, EUR million * % of external net sales % * Year 2003 presented in accordance with Finnish GAAP METSO ANNUAL REVIEW 07 27

30 28 METSO ANNUAL REVIEW 07 Soma Enterprise is facilitating faster connectivity in India by building roads with quality aggregates and manufactured sand. Soma Enterprise s General Manager for Rock Prosessing C.K.R. Prasad and Metso Minerals Applications Manager Shyam Prasad at Soma s site in Karnataka state, India.

31 METSO MINERALS Expect results WE ARE A GLOBAL SUPPLIER OF SOLUTIONS, EQUIPMENT AND SERVICES FOR THE CONSTRUCTION, MINING, AND RECYCLING INDUSTRIES. OUR SOLUTIONS COVER PROCESSING SYSTEMS FOR AGGREGATES, ORE AND INDUSTRIAL MINERALS, AND RECYCLING SYSTEMS FOR CONSTRUCTION MATERIALS AND METALS. Metso Minerals Our market demand was good in 2007, and our deliveries to the mining industry in particular increased. To meet the good demand, we invested in increasing production capacity in Brazil, India and China. In addition to organic growth, we made two corporate acquisitions supporting the metal recycling business. Our growth continued in the good demand situation During the year we exploited the excellent demand in the mining and metal recycling industries and the good demand in the construction industry, and our net sales increased by 19 percent from the previous year. Our deliveries to the mining industry increased the most compared to the previous year. Geographically, the growth was fast particularly in Eastern Europe, where infrastructure construction has progressed briskly, and many countries, s uch as Ukraine and Kazakhstan, expanded and modernized mines and initiated new mining projects. To improve our customer service, we adopted a customer segment-oriented operating model at the beginning of the year. Under this model, our three business lines have customer segment-specific responsibility for their own operational development, production, supply chain and services strategy. The model enables us to track the results by customer segment more effectively and to adjust our strategy more quickly if needed. In the good demand situation our growth was limited by our own and our subcontractors production capacity constrains as well as the competition amongst our customers and competitors for skilled workers. We recruited new employees for all the business lines. We increased our number of employees by about 1,000 during the year. In Tampere, Finland, we commissioned a new assembly hall for crushing plants. In Columbia, South Carolina, the United States, the customer service center and the assembly line for mobile crushing and screening equipment, inaugurated at the end of 2006, came on stream during the year. At the end of 2007, the unit had 130 employees. We also made decisions to expand production capacity and subcontracting in growing markets. We estimate the demand for metals to remain strong and mining industry investments to continue brisk also in upcoming years. Development projects for road networks and other infrastructure are driving the good demand for our products in the construction industry. At year end, our order backlog was 32 percent higher than in the previous year, thereby supporting the net sales growth target of over 10 percent also for We are aiming for organic growth by increasing our equipment sales and by developing our services business. We aim to support the growth through complementary corporate acquisitions. Our profitability improved Our operating profit rose significantly and was 13.9 percent of net sales. Our profitability was reduced by the weakening of the US dollar, because we import construction equipment to this market from countries whose currency has strengthened against the US dollar. METSO ANNUAL REVIEW 07 29

32 METSO MINERALS KEY FIGURES EUR million EUR million NET SALES NET SALES 2,199 2,607 OPERATING PROFIT OPERATING PROFIT % OF NET SALES % OF NET SALES CAPITAL EMPLOYED, Dec 31 CAPITAL EMPLOYED, Dec ,106 GROSS CAPITAL EXPENDITURE GROSS CAPITAL EXPENDITURE RESEARCH AND DEVELOPMENT EXPENSES RESEARCH AND DEVELOPMENT EXPENSES ORDERS RECEIVED ORDERS RECEIVED 2,655 3,075 ORDER BACKLOG, Dec 31 ORDER BACKLOG, Dec 31 1,277 1,690 PERSONNEL Dec 31 PERSONNEL, Dec 31 9,433 10,446 Our new customer segment-oriented operating model had a favorable impact especially on the Construction business line. The Construction business line s orders received increased strongly especially in the new markets. The long-lasting good demand increased the pressure to boost our delivery capacity. Production and delivery efficiency as well as quality have become our key profitability factors. We are continuing efforts to improve our productivity. Growth in the services business Our services business grew by 12 percent from 2006 due to the good demand. We hired more professionals, particularly for sales and customer service. To support the growth of our services business, we aim for long-term service agreements with our mining customers. A significant move in this direction was the five-year service agreement we signed with Codelco, the Chilean national mining company. The agreement includes maintenance services for the equipment delivered by Metso and other suppliers, process optimization services, wear and spare parts replacement for crushers and grinding mills, spare and wear parts supply, and service tools, vehicles and labor. Main focus in R&D is on boosting equipment performance In our research and product development activities we focus particularly on designing business concepts and products related to new life-cycle services and on environmental technology. We concentrate on improving equipment performance, and integrating process technology and automation into existing products. Materials technology also plays an important role in the development of life-cycle services. Our new research center encompassing a testing facility and a rock laboratory was completed at the end of the year in Tampere, Finland. We also opened a new process technology center in Sorocaba, Brazil. One example of our new products for the construction industry is a Lokotrack mobile crushing plant with improved mobility and availability. The crusher has an active setting control, which opens the crushing cavity upon hitting non-crushable material. The setting control increases the crusher s availability, especially in recycling applications. We also introduced to the markets a solution connecting the crusher s control system to the plant s automation system. The solution enables the crusher to be monitored and controlled directly from the plant s central control room. Among the new products we launched for the Recycling business line is a more user friendly baler for the Lindemann product family. The baler increases the capacity of the recycling process and adds efficiency to the cutting process. ACHIEVEMENTS IN 2007 Effective implementation of the new customer segment-focused operating model and strategy. Significant increase in profitability and orders received. Improved productivity. The Metso equipment runs steadily and reliably at Newcrest Mining s Telfer goldmine in Australia. Business Manager Colin Lake from Newcrest Mining Limited. 30 METSO ANNUAL REVIEW 07

33 METSO MINERALS We strengthened our global presence We are stregthening our market position and service capacity in growing markets, particularly in India, China and Russia. We are developing our operations also in the South American markets, where we already have a strong foothold. In 2007, we decided to expand our production capacity in India, China and Brazil. We made a decision to double the capacity of the crusher plant in Tianjin, China. In Sorocaba, Brazil, we are expanding the crusher production plant. We also developed our subcontractor network in China to increase our delivery capacity. We strengthened our metal recycling business with the March acquisition of Bulk Equipment Systems and Technologies Inc., a North American metal recycling technology supplier, and the October acquisition of Mueller Engineering Inc., a services and equipment supplier of high-voltage drive systems for the North American metal recycling industry. The acquisitions strengthened our position as North America s leading provider of services for metal recycling plants and supplier of critical core components for metal shredder plants. Infrastructure construction and investments in the mining and the metal recycling industries increased significantly during the year in Ukraine, where we opened a new sales and service unit. We expect active investments in the road networks, expansion and optimization of old mines and the opening of new mines to continue worldwide. GOALS FOR 2008 Defining and effectively implementing the customer service strategy in all business lines. Completion of major expansion and development investments. Profitable growth and continuous improvement of productivity. Net sales, EUR million (100) * Operating profit (loss), EUR million 03* Operating profit (loss) Operating margin, % excluding goodwill impairment 2004 excluding reversal of the Finnish pension liability (TEL) % 20 Orders received & order backlog, EUR million (5) 0 03* Orders received Order backlog The French scrap iron processing company Menut Recyclage s Jean (left) and Jacques Menut have become acquainted with Metso Minerals Project Manager Michel Plaza. Metso supplied Menut recycling plant with a shredder. Services, EUR million * % of external net sales % * Year 2003 presented in accordance with Finnish GAAP METSO ANNUAL REVIEW 07 31

34 32 METSO ANNUAL REVIEW 07 Brazil s largest oil and energy company Petrobras REVAP refinery relies on Metso s valves and automation solution. Petrobras Technical Assistant Rui Nunes Mascarenhas (left) and Metso Automation s Process and Energy Automation Maintenance Technician Isaias do Espírito Santo.

35 METSO AUTOMATION Expect results WE ARE A GLOBAL SUPPLIER OF FIELD CONTROL TECHNOLOGY, AUTOMATION SOLUTIONS AND LIFE-CYCLE SERVICES FOR THE ENERGY AND PROCESS INDUSTRY AND THE PULP AND PAPER INDUSTRY. Metso Automation The demand for our products was good in Our net sales grew strongly and our profitability remained at a good level. To meet the brisk demand, we strengthened our delivery network and our delivery capacity. We introduced new products for process measurements, control and analysis. Orders from the energy and process industry increased We continued our profitable growth during the year. Our net sales increased by 14 percent and our order intake by 6 percent. Orders from the energy and process industry increased. Growth was seen particularly in big project deliveries to global oil and gas industry customers. Demand in the pulp and paper industry was stable, and we maintained our strong position as a supplier of automation solutions for the industry. Orders received increased significantly in Europe, the Middle East, Asia, and South America. The demand situation was good, but our growth was limited by both our own and our suppliers high utilization of production capacity and the supply of components. We did, however, strengthen our delivery capability by increasing our production capacity and subcontracting resources during the year. To secure growth, we also developed our services business, we opened new service centers and we recruited new experts. The strong, year-end order backlog provides a solid foundation for organic growth also in Rising energy consumption and high oil prices in particular are fueling energy and process industry investments in our products. In 2008, we will also continue efforts to grow through acquisitions. Our profitability remained good Our profitability remained good, and our operating profit was 14.2 percent of net sales. The good sales volume impacted our profitability positively in 2007, while price increases in raw materials had a negative impact. To improve productivity, we invested in an Enterprise Resource Planning (ERP) system covering the entire supply chain; the system will be taken into use gradually from 2009 onwards, and it will help us to improve the delivery capacity and transparency of our supply chain as well as promote the growing of our services and project business. Our goal is to continue our profitable growth by offering our customers new products and services. We are expanding our sales network and increasing production capacity close to our customers. Services business focus is on availability and performanceenhancing solutions The volume of our services business grew by 8 percent during the year. We opened a new service center in Brazil and increased the number of experts at other service centers. Our goal is to grow the services business both in mature markets and emerging markets. METSO ANNUAL REVIEW 07 33

36 METSO AUTOMATION KEY FIGURES EUR million EUR million NET SALES NET SALES OPERATING PROFIT % OF NET SALES % OF NET SALES CAPITAL EMPLOYED, Dec 31 OPERATING PROFIT CAPITAL EMPLOYED, Dec GROSS CAPITAL EXPENDITURE GROSS CAPITAL EXPENDITURE 9 14 RESEARCH AND DEVELOPMENT EXPENSES RESEARCH AND DEVELOPMENT EXPENSES ORDERS RECEIVED ORDERS RECEIVED PERSONNEL, Dec 31 PERSONNEL, Dec 31 3,352 3,564 ORDER BACKLOG, Dec 31 ORDER BACKLOG, Dec 31 We are continuing to strengthen our service organization and network so that we can service as much of our installed equipment as possible. We offer our customers services to cover the entire life cycle of their production processes and ensure good availability and enhanced performance. Our new products raise our customers productivity In our product development, our goal is to continuously renew our products and to improve their competitiveness. We aim to maintain our position as a significant automation supplier to the pulp and paper industry and to expand our product portfolio for energy and process industry customers. We introduced several new products to the markets during the year. One example for the Kajaani product family is an analyzer that improves the productivity and quality of the fiber process. Another new product is an automation solution for the metsodna family; the product integrates new, advanced reporting and analyzing tools to improve the performance monitoring of process controls and field devices. These attributes improve our competitiveness also as a supplier of automation for the energy industry. Additionally, we introduced a new valve for the Neles product family, which combines the best features of proven linear and rotary valve technologies. The new paper-quality measuring solutions in the IQ family complement our previous measuring methods. ACHIEVEMENTS IN 2007 Deliveries to the energy and process industries grew strongly. Growth originated from a wide geographical area, our operations grew in new market areas. Big project deliveries to major, global oil and gas industry customers increased. We maintained our strong position as a supplier of automation solutions for the pulp and paper industry. Alholmens Kraft s biofuel-fired power plant in Pietarsaari, Finland, uses a fluidized bed boiler and an automation system supplied by Metso. In the power plant s control room are Metso s Product Engineer Mikko Lehtiniemi (left), Alholmens Kraft s Shift Manager Pekka Ollikainen and Metso s Sales Manager Jouni Kimmi. 34 METSO ANNUAL REVIEW 07

37 METSO AUTOMATION Global presence strengthens our competitiveness We strengthened our delivery capacity in mature markets and increased the number of our sales and customer service personnel in emerging markets in South America, Asia, the Middle East and Eastern Europe. We expanded our valve production capacity in all our plants. Additionally, we improved our competitiveness by boosting engineering resources in India, China and Brazil. We estimate power plant investments to grow particularly in China, North America, Europe and India. New capital investments in the paper and pulp industry are being seen mainly in Asia and South America. In North America and Europe, the focus is on uppgrading pulp and paper mill automation solutions. The demand is expected to continue to be very brisk in the energy and process industries. We are expanding our operations and local subcontracting in emerging markets and, consequently, also improving our price competitiveness. We are adding new delivery channels and enhancing the efficiency of our distribution network on all markets. We are further strengthening our engineering network for automation systems, and we will start the mechanized assembly of automation systems in China. Increase deliveries to the energy and process industries. Maintain our strong market position as a supplier of automation solutions for the pulp and paper industry. Increase presence in new market areas. GOALS FOR 2008 Net sales, EUR million * Operating profit, EUR million * Operating profit Operating margin, % 03* Orders received excluding reversal of the Finnish pension liability (TEL) 07 % 15 Orders received & order backlog, EUR million Order backlog Automation supplied by Metso monitors WAV Errichtungs- und Abfallbehandlungs-GmbH s process that turns municipal waste into energy in Wels, Austria. Metso Automation s Project Manager Christian Pescher and WAV s Deputy Operation Manager Hans Schöffmann in the power plant s boiler building. Services, EUR million * % of external net sales % * Year 2003 presented in accordance with Finnish GAAP METSO ANNUAL REVIEW 07 35

38 business areas Major events in 2007 Metso Paper Metso Minerals In January, we launched a new customer segment-oriented business model. In March, Boliden s Aitik mine in Gällivare, Northern Sweden, ordered a grinding system valued at about EUR 39 million. We acquired Bulk Equipment Systems and Technologies Inc., an American technology provider for the metal recycling industry, and thus strengthened our position in the world s largest metal recycling market in North America. In July, Gold Reserve Inc. ordered minerals processing equipment valued at EUR 47 million for its Brisas gold-copper project in Venezuela. Metso Automation In March, we received a big valve order to Qatar from the joint venture formed by Chiyoda of Japan and Technip of France. The value of the order is over EUR 10 million, and it is our single biggest valve order. International Paper & Sun Cartonboard Co., Ltd. ordered a large-scale delivery of automation solutions for the liquid packaging board production line under construction in Shandong, China. In May, we launched the Neles Rotary- Globe control valve, which is designed for In February, Oji Paper of Japan placed an order with us for a large OptiConcept papermaking line valued at more than EUR 100 million. We inaugurated the rebuilt pilot paper machine PM 2 at the Rautpohja Paper Technology Center in Jyväskylä, Finland. In March, we opened a new Roll Service Center in Zaragoza, Spain. In April Bertel Langenskiöld started as President of Metso Paper. In May, Celulose Beira Industrial (Celbi) ordered pulp mill equipment valued at about EUR 130 million for its mill in Portugal. We launched the new Advantage DCT 60 tissue machine. We received a EUR 100 million order for a papermaking line from Henan Puyang Longfeng Paper in China. In June, we acquired the French maintenance company Mécanique et Dépannage Industriels. In July, we announced that we are investing in Metso Power business line s production capacity at our Lapua factory in Finland. We acquired Bender Holdings Limited and its subsidiaries in Great Britain. With the acquisition, we became the market leader in Yankee cylinder grinding and coating services. In September, Mondi Packaging ordered a containerboard production line worth about EUR 100 million. We sold our panelboard press business in Germany to Siempelkamp, and initiated strategic collaboration with them. In October, our Technology Days were held for the first time in Latin America, in In August, we signed a service agreement with the Chilean mining company Codelco. The agreement concerns the process plant of Codelco s Andina Division. In September, Arcelor Mittal Steel ordered minerals processing equipment valued at EUR 22 million for the Kryviy Rih concentrator plants in Ukraine. In October, we decided to expand our manufacturing and production capacities and our office premises in India at the Bawal factory in Haryana and at the steel foundry in Ahmedabad. We acquired Mueller Engineering Inc. and strengthened our position as a service provider for North a wide range of applications and industries. We decided to invest in a new ERP solution covering the entire supply chain. In June, we signed a long-term supply agreement for the automation modernization project of the Petrobras REVAP refinery in Brazil. In July, we opened a new Service Center in Guaíba, in Rio Grande do Sul state, Brazil. The Service Center supports pulp and paper industry customers as well as oil and gas industry customers. We received an order Atibaia, Brazil. Portucel ordered an almost 500,000 t/a uncoated fine paper production line for its mill in Portugal. The Paper Industry Technical Association (ATIP) in France chose our iroll as the winner of the innovation contest for In November, we initiated an evaluation of the restructuring of our production resources at Grästorp and in Karlstad, Sweden. We agreed on supplying a power boiler for Stora Enso s new combined heat and power plant at the Langerbrugge mill in Belgium. In December, we made a decision to reduce the number of our Paper and Board business line s personnel in Finland by 250. The foundation stone of our new service center was laid in Guangzhou, China. American metal recycling plants and as a supplier of core components for shredder plants. In November we opened a new Process Technology Center in Sorocaba, São Paulo state, Brazil. In December, we reported our investment to double our manufacturing capacity at the Tianjin factory in China. We signed a five-year contract with SKF Logistics Services on the logistics and warehousing operations for spare and wear parts in the European construction market. for close to 300 control valves for a sea-water desalination plant in Saudi Arabia. In October, we received an order for automation solutions for the Ma An Shan power plant being built in Anhui Province, China. In December, Neste Oil ordered a comprehensive automation package for its second biodiesel plant. We received a nearly EUR 10 million automation solution order for the Shouguang Chenming mill in China. 36 METSO ANNUAL REVIEW 07

39 Financial Statements 2007

40 METSO CORPORATION Financial Statements 2007 Board of Directors Report Consolidated Statements of Income Consolidated Statement of Recognized Income and Expense Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Changes in Shareholders Equity Notes to Consolidated Financial Statements * Accounting principles Financial risk management Critical accounting estimates and judgements Selling, general and administrative expenses Other operating income and expenses, net Personnel expenses and the number of personnel Depreciation and amortization Financial income and expenses, net Income taxes Acquisitions Disposals of businesses and discontinued operations Earnings per share Intangible assets and property, plant and equipment Investments in associated companies Available-for-sale equity investments Percentage of completion Inventory Interest bearing and non-interest bearing receivables Financial assets and liabilities Cash and cash equivalents Equity Share-based payments Long-term debt Provisions Short-term debt Trade and other payables Post-employment benefit obligations Mortgages and contingent liabilities Lease contracts Derivative financial instruments Principal subsidiaries Business area and geographic information Audit fees Lawsuits and claims New accounting standards Events after balance sheet date Financial Indicators Formulas for Calculation of Indicators Exchange Rates Used Financial statements presented in the Annual Report are condensed from the audited financial statements of Metso Corporation and comprise the consolidated accounts of Metso, the Board of Directors report, as well as the income statement, balance sheet and statement of changes in shareholders equity of the Parent Company. Audited financial statements, including also notes to the Parent Company, are available on our website Parent Company Statement of Income, FAS Parent Company Balance Sheet, FAS Parent Company Statement of Changes in Shareholders Equity, FAS Shares and Shareholders Auditor s Report Quarterly Information * The accompanying notes form an integral part of these Financial Statements. 38

41 BOARD OF DIRECTORS REPORT Board of Directors Report Net sales grew by 26 percent and EBITA margin exceeded 10 percent. Operating environment and demand for products The market situation for Metso s products and services was favorable throughout the year. The uncertainty that characterized the financial markets from the summer onwards had no material effect on the investment decisions of Metso s customers. The weakening of the United States economic outlook did not have material impact on Metso s orders received as the share of the United States in Metso s total order intake has decreased in recent years to just over 10 percent. Order intake grew most substantially in Europe, where the rapid increase in the importance of Eastern Europe and Russia was notable. Growth was strong also in Asia, South Africa and the Middle East. In the United States, Metso s volume of new orders received remained at the level of the previous year. The demand for paper and board machines was satisfactory during the year, and is expected to continue along the same lines due to strong economic growth in Asia. The steady growth in the consumption of tissue, especially in emerging economies, kept the demand for tissue machines at a satisfactory level. The demand for fiber lines remained satisfactory, but no final decisions on complete pulp production lines were made after the first half-year. Power boilers utilizing renewable energy sources continued to be in high demand, but related decision-making was limited by high capacity utilization among suppliers. The demand for Metso Paper s services continued to be satisfactory in both paper and board machines and in power plants. Paper and board machines accounted for almost one half of orders received, and power boilers for about one quarter. The demand for Metso Minerals construction equipment and solutions was good. Demand was supported by ongoing development projects concerning road networks and other transportation infrastructure around the world and especially in emerging economies. The sales growth of construction equipment and solutions were particularly substantial in Eastern Europe and solid also in the United States, where new orders remained at almost the previous year s level. The construction equipment market is expected to continue to be good. The demand for mining equipment and services was excellent in all market areas. The investment plans of mining companies indicate that demand will also remain strong in the future. The demand in the metals recycling industry was excellent, thanks to increased recycling and the high prices of metals, and this trend is expected to continue. The mining industry accounted for over 50 percent of orders received, construction for about one third and metals recycling for about 10 percent. At Metso Automation, the market for process automation systems for the pulp and paper industry was satisfactory all year, and growth is expected to take place in the Eastern European, Chinese and South American markets. Demand was satisfactory for pulp and paper industry flow control solutions, and excellent in the power, oil and gas industries. The markets for process automation systems in power production were good and are expected to grow. The power, oil and gas industries increased their share of orders received to over 50 percent. Orders received and order backlog In 2007, Metso s orders received grew by 22 percent on the previous year, and totaled EUR 6,965 million. The Pulping and Power businesses acquired at the end of 2006 contributed about one half to the increase. Orders received grew in all business areas. Excluding the effect of exchange rate translation, the increase in orders received would have been about 3 percentage points higher. Metso s order backlog increased by 16 percent on the end of 2006 and was EUR 4,341 million at the end of Net sales Metso s net sales in 2007 grew by 26 percent on the comparison period and totaled EUR 6,250 million. Excluding the effect of exchange rate translation, the increase in net sales would have been about 3 percentage points higher. About half of the growth was organic and the rest resulted from acquisitions. The net sales of the services business (previously the aftermarket business) increased by 19 percent, and accounted for 33 percent of the Corporation s net sales (35 percent in 2006). The decrease in the relative share of the services was due to the acquired Pulping and Power businesses, in which the share of the services is below Metso s average. The countries in which Metso had the highest net sales in 2007 were the United States, Brazil, China, Finland and Sweden. Financial result Metso s 2007 earnings before interest, tax and amortization (EBITA) improved clearly and were EUR million, or 10.2 percent of net sales (EUR million and 9.7% 39

42 BOARD OF DIRECTORS REPORT in 2006). EBITA improved in all business areas, both in terms of euros and in relation to net sales. This improvement was mainly due to increased delivery volumes, but also to the profitability improvement measures taken at Metso Paper. Metso s operating profit for 2007 was EUR million, or 9.3 percent of net sales (EUR million and 9.2% in 2006). Operating profit includes a EUR 36 million amortization of intangible assets related to the acquisition of the Pulping and Power businesses. Metso s net financial expenses for 2007 were EUR 33 million (EUR 36 million). Net financial expenses include EUR 7 million in foreign exchange gains. Metso s profit before taxes was EUR 547 million (EUR 421 million). The profit attributable to shareholders in 2007 was EUR 381 million (EUR 409 million), corresponding to earnings per share (EPS) of EUR 2.69 (EUR 2.89 per share). In 2006, Metso recognized in the income statement a nonrecurring deferred tax asset of EUR 87 million related to its operations in the United States, which lowered the tax rate for 2006 and improved EPS by EUR Metso s tax rate for 2007 was 29.8 percent, and it is estimated to be at approximately 30 percent in Metso s return on capital employed (ROCE) was 26.1 percent (22.5%) and return on equity (ROE) was 25.4 percent (30.9%). Financial indicators for the years are presented on pages Cash flow and financing Metso s net cash generated by operating activities in 2007 was EUR 294 million (EUR 442 million). As a result of the strong growth of the order backlog and net sales, inventories increased in all business areas. Growth in inventories was partly offset by growth in advances received and accounts payable. Net working capital increase for the full year was EUR 286 million. Metso s free cash flow for 2007 was EUR 198 million (EUR 364 million). Net interest-bearing liabilities totaled EUR 540 million at the end of December (EUR 454 million). Metso s gearing was 33.4 percent and the equity to assets ratio was 37.7 percent. In April, Metso paid out dividends of EUR 212 million for In October, Moody s Investor Service upgraded Metso s long-term rating from Baa3 to Baa2 and estimated the rating outlook as stable. In May, Standard & Poor s Rating Services upgraded the corporate credit rating of Metso from BBB to BBB and the short-term rating from A 3 to A 2. Standard & Poor s also upgraded the rating of Metso s senior unsecured debt from BB+ to BBB. Standard & Poor s estimated the rating outlook as stable. Capital expenditure In 2007 Metso s gross capital expenditure grew by 21 percent from 2006 and was EUR 159 million excluding acquisitions (EUR 131 million). The most significant investments were for extensions or establishments of production plants and service centers, and for new enterprise resource planning (ERP) systems. About one third of the capital expenditure was related to investments increasing capacity necessitated by strong volume growth. Metso is investing in the expansion of its paper industry service units in Guangzhou and Wuxi, China, and the boiler service units in Lancaster, South Carolina, and in Fairmont, West Virginia, the United States. During the year, Metso invested in the expansion of crusher manufacturing in Tampere, Finland and in Tianjin, China. In India, investments were made to increase assembly capacity in Bawal and to expand foundry capacity in Ahmedabad. The units in Shanghai, China, and Helsinki, Finland expanded their production capacity for flow control equipment. In Finland, the roll delivery capacity in Jyväskylä and the boiler rebuild and maintenance capacity in Lapua were expanded. Additionally, extension of office facilities in New Delhi, India is underway to cater for the needs of all Metso units operating in India. In Brazil, Metso opened a new process technology center to offer R&D and testing services relating to mineral processing. A research center including a pilot plant and rock laboratory for construction business was completed in Tampere late last year. An investment project for an ERP system covering the entire supply chain was started at Metso Automation. The system will be introduced in stages, starting in An ERP system is also being developed at Metso Minerals. It is estimated that, excluding acquisitions, Metso s gross capital expenditure for 2008 will exceed EUR 200 million. The increase will be due to the capacityincreasing investments necessitated by volume growth and development of Metso s global presence. Holding in Talvivaara Mining Company Ltd Metso s 3.4 percent holding in Talvivaara Mining Company Ltd is classified in the balance sheet as an availablefor-sale investment. In December 2007, Metso sold 1.2 million of the company s shares and recognized a capital gain of almost EUR 5 million. At the end of December, Metso s holding was valued at approximately EUR 31 million. Metso s holding relates to a joint R&D project with Talvivaara Mining Company to develop rock processing and bulk materials handling processes. Acquisitions and divestments In March 2007, Metso acquired the North American metals recycling technology provider, Bulk Equipment Systems and Technologies Inc., located in Cleveland, Ohio. The acquisition price was approximately EUR 9 million. The company s net sales in 2006 were EUR 8 million and it employs approximately 40 people. In June 2007, Metso strengthened its services to the paper industry by acquiring Mecanique et Dépannage Industries s.a.r.l. (MDI) in France. MDI employs 30 people. The transaction price was less than EUR 1 million. 40

43 BOARD OF DIRECTORS REPORT In July 2007, Metso acquired Bender Holdings Limited and its subsidiaries in the United Kingdom. As a result of the acquisition, Metso became the global market leader in Yankee cylinder grinding and coating services for tissue machines. The transaction price was EUR 16 million, excluding the acquired cash assets. The company employs 97 people and its net sales in 2006 amounted to approximately EUR 24 million. In October 2007, Metso acquired Mueller Engineering Inc (MEI), the leading provider of equipment and services for high voltage drive systems to the North American metal recycling industry. The acquisition price was approximately EUR 6 million. In 2006, MEI s net sales were EUR 10 million, and it employed some 20 people. In March 2007, Metso sold the majority of Metso Paper AG in Delémont, Switzerland. Metso remained as a minority shareholder. The company has about 70 employees and annual net sales of approximately EUR 10 million. In September 2007, Metso sold the assets of its German panelboard press business to G. Siempelkamp GmbH & Co. KG. The 65 employees of Metso Panelboard GmbH were transferred to Siempelkamp. The transaction price was EUR 7 million. Metso booked a small gain on the sale in the third quarter. Changes in the corporate structure Since the beginning of 2007, Metso has had three business areas. Metso Paper s business was reorganized as of June 1, 2007 into the following business lines: Paper and Board, Tissue, Fiber, Power and Panelboard. The Panelboard business line was discontinued as a separate business line in January The operations of Metso Minerals were reorganized as of January 1, 2007 in accordance with the three main customer segments into the Construction, Mining and Recycling business lines. Metso Automation s business lines are Flow Control and Process Automation Systems. Acquisition and integration of the Pulping and Power businesses Metso closed the acquisition of Aker Kvaerner s Pulping and Power businesses on December 29, The acquisition price was EUR 336 million, including EUR 6 million in expenses related to the acquisition and EUR 53 million in net cash. Integration of the acquired businesses into Metso Paper has proceeded according to plan. Metso estimates that the annual cost savings achievable through synergies will amount to EUR million from 2008 onwards. The cost savings for the first year were realized sooner than expected, and approximately EUR 14 million of the annual savings materialized already in The nonrecurring expenses resulting from integration of the acquired businesses are estimated to be approximately EUR 10 million, of which EUR 9 million was recognized in As a result of integration, the number of employees was reduced by about 160 by the end of December. The total number of redundancies are estimated to be about 220 people. The amortization of intangible assets resulting from the transaction amounted to EUR 36 million in It is estimated that intangible assets will be amortized by EUR 20 million in 2008, and by EUR 13 million annually thereafter until they are fully amortized. Research and development Metso s research and development focuses on environmental technology, technology related to the services business and the development of smart applications. In 2007, Metso s R&D expenses totaled EUR 117 million, i.e. 1.9 percent of net sales (EUR 109 million and 2.2%). R&D employed 923 people (839) in Metso s personnel made almost 850 invention disclosures (710), which led to over 220 patent applications (220). At the end of the year approximately 2,800 Metso inventions were protected by patents (2,500). The objectives of Metso Paper s product development are to lower customers production costs, decrease the environment impact of their processes and improve energy efficiency. During the year, Metso Paper introduced a renewed, more energy-efficient recovery boiler, and developed a standardized, more cost-effective machine concept for liner and fluting board production, especially for the Chinese market. The Val product family developed for machine rebuilds was expanded with forming solutions suitable for paper and board grades and with the launch of a new calender that saves raw material. The maintenance business was supported by the development of new roll surfaces and service and analysis packages. New press technology, which enhances press efficiency and reduces the energy used in paper drying, was introduced for tissue machines. The central themes of Metso Minerals R&D operations are the development of new business concepts and products related to lifecycle services, and environmental technology. In addition, there is a focus on enhancing equipment performance and combining process technology and automation in current products. Materials technology also plays a significant role in the development of lifecycle services. Metso Minerals product innovations included a Lokotrack mobile crusher designed for use in construction projects, in which the mobility and utilization rate of the crusher was improved. In the recycling business, a Lindemann baling press was launched. The new solution increases the capacity of recycling processes and makes cutting more efficient. Metso Automation seeks, through its product development projects, to strengthen its position as a significant automation supplier for the pulp and paper industry and to expand the product range for energy and power generation customers. The product innovations included an analyzer for the Kajaani product 41

44 BOARD OF DIRECTORS REPORT family that enhances the productivity and quality of fiber processes and a new version of the metsodna automation network that includes reporting and analysis tools that improve the performance tracking of process controls and field equipment. These properties will improve Metso Automation s competitiveness also as an energy industry automation supplier. The product innovations also include a valve for the Neles product family that combines the best technological properties of linear seated valves and rotary valves. The new paper grade measurement solutions of the IQ product family complement earlier measurement systems. Environment and environmental technology The environmental impact of Metso s own production is minor and relates mainly to the consumption of raw materials, the use of energy, emissions to the air, water consumption and waste. Metso seeks to reduce environmental hazards through continuous development and by decreasing the use of power, materials and hazardous substances. Metso s R&D develops products and solutions that reduce the environmental impact of Metso s customer industries. Many of Metso s environmental technology solutions have been developed in close cooperation with customers. Metso offers environmental solutions related to energy efficiency, air quality, waste management, recycling and recovery of raw materials, water efficiency, water treatment and process optimization. Environmental technology is a strategic growth area for Metso, and an increasing proportion of net sales stems from environmental solutions delivered to the customers. Over one half of Metso s net sales are classified as environmental business, using the OECD definition. Metso s strategy highlights the importance of environmental solutions. Risks and business uncertainties Metso s operations are affected by various strategic, operational, hazard and financial risks. Metso takes measures to manage and limit the potential adverse effects of these risks. However, if such risks materialized, they could have material adverse impact on Metso s business, financial situation and operating result or on the value of shares and other securities. Metso s risk assessments take into consideration the probability and effects of the risks on net sales and financial results. The risk level is estimated to be currently acceptable in proportion to the type and scope of Metso s operations. This section features a brief description of Metso s most significant strategic and operational risks. Business cycles in the global economy and customer industries affect the demand for Metso s products and the company s financial situation. In particular, development of economies in the BRIC countries (Brazil, Russia, India and China) has a significant influence on Metso s growth potential. For example, as China is the primary market for new paper and board machines, any major variations in demand in China affect Metso Paper s profitability. Metso s wide geographical scope of operations and several different customer industries even out business cycle changes in the long run. In general, orders of new equipment are more susceptible to cyclical changes than the services business. Consequently, Metso is actively growing its services business. In recent years, Metso has increased the flexibility of its cost structure by subcontracting more and focusing in its own operations on producing and assembling key components. Metso has its own manufacturing and subcontracting networks in many emerging economies. Sudden political, economic and/or legislative changes, especially in the BRIC countries, can interrupt business. Metso s operations are also affected by the environmental legislation of various countries, which may complicate the sale of Metso s products and increase costs. On the other hand, the tighter environmental standards introduced by new legislation open up possibilities to offer customers new solutions that improve energy-efficiency, reduce emissions and promote recycling. Metso s technology risks are related to technological competence, research and product development. The use of new technology may temporarily increase qualityrelated costs. Metso protects its products and businessrelated intellectual property rights through patents and trademarks. By continuously assessing human resources and organizational structures, Metso aims to ensure organizational efficiency and competence and to avoid and manage risks such as unsuitable recruiting, imbalance in the age structure and excessive personnel turnover. The supply problems of raw material suppliers may increase the costs and availability of the raw materials used in Metso s products. For example, steel and iron scrap are among the most important raw materials, and their prices and availability vary depending on the market demand. Substantial fluctuations in the prices of steel and iron scrap may have an adverse effect on Metso s operations. Increases in the prices of electricity, oil and metals mainly serve to boost the demand for Metso s products, but such price fluctuations may indirectly have an adverse effect, if they decrease the investment willingness of customers. The direct risks associated with raw materials procurement have decreased in recent years, because Metso has increasingly focused on manufacturing and assembling core components. On the other hand, outsourcing has increased the importance of and risks related to suppliers and subcontractors. The delivery times for Metso s products have lengthened due to the strong growth in orders received. Because of this, the risk exists that material and other costs may increase substantially during the delivery period and affect Metso s profitability to a larger extent than what is estimated today. In the current situation of strong 42

45 BOARD OF DIRECTORS REPORT demand, the short supply of certain components and the scarcity of subcontractor resources, particularly at Metso Minerals and Metso Automation, may also result in extended delivery times. Metso s operations partly consist of large-scale project deliveries. These may involve project-specific risks concerning delivery schedules, equipment startup, production capacity and end-product quality. In some projects, risks may also arise from new technology included in the deliveries. However, the risks related to any single project are not generally substantial, considering the scope of the company s business. General uncertainty on the financial markets is not estimated to have a material effect on the demand for Metso s products and services. This uncertainty may, however, affect the timing of certain customer projects or the demand in certain geographical areas. Securing the continuity of Metso s operation requires that sufficient financing be ensured under all circumstances. Of the financial risks that affect Metso s profit, currency exchange rate risks are the most substantial. Exchange rate changes affect the business, although the geographical diversity of operations decreases the significance of any single currency. Exchange rate changes can have a direct impact in situations in which the invoicing currency is different from the currency of the costs. Subpoena from the United States Department of Justice requiring Metso to produce documents In November 2006, Metso Minerals Industries, Inc., which is Metso Minerals U.S. subsidiary, received a subpoena from the Antitrust Division of the United States Department of Justice calling for Metso Minerals Industries, Inc. to produce certain documents. The subpoena relates to an investigation of potential antitrust violations in the rock crushing and screening equipment industry. Metso is cooperating fully with the Department of Justice. During 2007 Metso recognized about EUR 4 million in costs from the investigation. Personnel At the end of the year, Metso employed 26,837 people. This was 1,159 more than at the end of 2006 (25,678 people). The number of personnel grew most in emerging markets where Metso is actively increasing its presence. In 2007, Metso employed an average of 26,269 people. The main drivers behind personnel increases have been the investments in delivery and service capability required by strong growth. Metso Paper s personnel increased in Asia-Pacific due to production capacity expansions, but this was offset by personnel decreases in Europe and North America due to efficiency improvement measures. Metso Minerals number of personnel grew strongly in Finland, France, Chile, the United States, India and Russia as a result of growth investments. Metso Automation s personnel increased mainly through the rises in the production capacity of the Flow Control business line in Finland and China. The salaries and wages of Metso employees are determined on the basis of local collective and individual agreements, employee performance and job evaluations. Basic salaries and wages are complemented by performance-based compensation systems. In 2007, the total amount of salaries and wages paid was EUR 1,036 million (EUR 914 million in 2006). The increase was primarily due to the acquisition of Pulping and Power businesses. Financial targets and dividend policy Metso s financial targets remained unchanged in The average annual net sales growth target is more than 10 percent. Growth will be attained both organically and through value-enhancing complementary acquisitions. Major acquisitions with a significant impact on Metso will come on top of this 10 percent growth target. The operating profit margin target (EBIT-%) is more than 10 percent. Furthermore, Metso s target is that its key financial indicators, capital structure and cash flow metrics will support solid investment grade credit ratings. Metso s dividend policy is to distribute at least 50 percent of annual earnings per share as dividends or in other forms of repatriation of capital. Decisions of the Annual General Meeting On April 3, 2007 the Annual General Meeting of Metso Corporation approved the accounts for 2006 as presented by the Board of Directors and discharged the members of the Board of Directors and the President and CEO from liability for the 2006 financial year. In addition, the Annual General Meeting approved the proposals of the Board of Directors to amend the Articles of Association and to authorize the Board of Directors to resolve Personnel by area Change % Finland 9,281 9,386 1 Other Nordic countries 3,580 3,602 1 Other European countries 3,067 3,183 4 North America 3,715 3,865 4 South and Central America 2,439 2, Asia-Pacific 2,262 2, Other countries 1,334 1,421 7 Total 25,678 26,

46 BOARD OF DIRECTORS REPORT on a repurchase of the Corporation s own shares and on a share issue. More information on the authorizations of the Board of Directors is presented in Shares and Shareholders section on pages The Annual General Meeting decided to establish a Nomination Committee of the Annual General Meeting to prepare proposals for the following Annual General Meeting in respect of the composition of the Board of Directors and the remuneration of directors. The Nomination Committee consists of representatives appointed by the four biggest shareholders along with the Chairman of the Board of Directors as an expert member. Matti Kavetvuo was re-elected as the Chairman of the Board and Jaakko Rauramo was re-elected as the Vice Chairman of the Board. Eva Liljeblom, Professor at the Swedish School of Economics and Business Administration, Helsinki, Finland, was elected as a new member of the Board. The Board members re-elected were Svante Adde, Maija-Liisa Friman, Christer Gardell and Yrjö Neuvo. The term of office of Board members lasts until the end of the following Annual General Meeting. The Annual General Meeting decided that the annual remuneration of Board members would be EUR 80,000 for the Chairman, EUR 50,000 for the Vice Chairman and the Chairman of the Audit Committee and EUR 40,000 for the members. It was also decided that the meeting fee, including committee meetings, would be EUR 500 per meeting. PricewaterhouseCoopers Oy, Authorized Public Accountants, was re-elected to act as the Auditor of Metso until the end of the next Annual General Meeting. The Annual General Meeting decided to pay a dividend of EUR 1.50 per share for the financial year, which ended on December 31, The dividend was paid to shareholders who were entered in Metso s shareholder register maintained by the Finnish Central Securities Depository on the record date for dividend payment, April 10, The dividend was paid on April 17, Board committees At its assembly meeting the Board of Directors elected from its midst the members of the Audit Committee and Compensation Committee. The Board s Audit Committee consists of Maija-Liisa Friman (Chairman), Svante Adde and Eva Liljeblom. The Board of Directors assigned Svante Adde as the financial expert of the Audit Committee. The Board s Compensation Committee consists of Matti Kavetvuo (Chairman), Jaakko Rauramo, Christer Gardell and Yrjö Neuvo. Shares, options and share capital A total of 35,000 shares were subscribed with Metso Corporation s 2003A stock options during the period February 8 March 21, The resulting increase in share capital of EUR 59,500 was entered in the Finnish Trade Register on March 29, The shares became subject to trading on the OMX Nordic Exchange Helsinki together with the existing shares on March 30, The right to receive dividends and other shareholder rights of the new shares commenced on the registration date. At the end of 2007, Metso s share capital was EUR 240,982, and the number of shares was 141,754,614. The number of shares includes 60,841 Metso shares held by the Parent Company and 206,539 Metso shares held by a limited partnership consolidated in Metso s consolidated financial statements. Together these represent 0.19 percent of all the shares and votes. The average number of shares outstanding in 2007, excluding Metso shares held by the company, was 141,460,012. After cancellations and exercised options there remains a total of 100,000 year 2003A options in Metso s stock options program, all of them held by Metso s subsidiary, Metso Capital Ltd. Metso s market capitalization, excluding Metso shares held by the company, was EUR 5,282 million on December 31, Share ownership plan Metso has a share ownership plan for The maximum number of shares to be allocated to the incentive plan is 360,000 Metso shares. The share ownership plan for the year 2006 was allocated to 60 Metso managers. Based on the 2006 earnings period, 99,961 shares corresponding to 0.07 percent of Metso shares were distributed at the end of March Members of Metso s Executive Team received 25,815 shares. Metso s Board of Directors decided in February 2007 to allocate the 2007 share ownership plan to a total of 81 Metso managers. The potential reward from the plan was to be based on the operating profit for 2007 of Metso and its business areas. The share ownership plan was to cover a maximum of 125,500 Metso shares in Members of the Metso Executive Team were to be allocated a maximum of 26,500 shares of this total. If the average trade-weighted price of the Metso share during the first two full weeks of March 2008 exceeded EUR 48, the number of shares to be granted under the 2007 plan would be decreased by a corresponding ratio. Payment of the potential rewards will be decided during the first quarter of Metso s Board of Directors decided in February 2008 on the number of shares to be allocated for 2008 and the criteria for earning them. The potential reward from the plan will be based on the operating profit of Metso and its business areas for In 2008, the share ownership plan will cover a maximum of 130,000 Metso shares, corresponding to 0.09 percent of all Metso shares. Metso s entire Executive Team is covered by the 2008 share ownership plan, and a maximum of 26,000 shares has been allocated to Executive Team members. The maximum reward from the plan is limited to each 44

47 BOARD OF DIRECTORS REPORT person s annual salary, which is calculated for the plan s purposes by multiplying the person s monthly base salary for the share distribution month by a factor of The payment of rewards, if any, will be decided during the first quarter of Metso s listing on the NYSE, SEC registration and related reporting obligations have been terminated In July, 2007 Metso decided to apply for the delisting of its share and deregistration in the United States. The final day for trading in Metso s American Depositary Shares (ADS) on the New York Stock Exchange was September 14, Metso filed a Form 15F with the U.S. Securities and Exchange Commission (SEC) on September 17, 2007 to terminate its reporting obligations under the U.S. Securities Exchange Act. Termination became effective on December 17, Metso maintains its American Depositary Receipt (ADR) facility with the Bank of New York, and Metso s ADSs are traded over-the-counter (OTC) under the symbol MXCYY in the United States. Metso s ordinary shares will continue to trade on the OMX Nordic Exchange Helsinki. Metso publishes in English on its website ( com) materials that are required to be made public pursuant to Finnish law, or required to be publicly filed with its primary trading market or required to be distributed to securities holders. BUSINESSES Metso Paper EUR million Net sales 2,092 2,925 EBITA % of net sales Operating profit % of net sales Orders received 2,276 3,109 Order backlog, Dec. 31 2,225 2,363 Personnel, Dec ,558 11,694 Aker Kvaerner s Pulping and Power businesses were acquired on December 29, 2006, and the acquired balance sheet was consolidated to Metso on December 31, The acquired businesses had no effect on Metso s income statement for 2006 and are therefore not included in the comparative segment information except for order backlog and personnel as at December 31, Metso Paper s net sales grew by 40 percent on the comparison year and totaled EUR 2,925 million. About onethird of the growth was organic, and two-thirds were related to the acquisition of the Pulping and Power businesses. Organic growth was strongest at the Paper and Board and the Power business lines. Metso Paper s services business grew by 31 percent. Excluding the acquired Pulping and Power business and the effect of exchange rate translation, the growth of the services business was about 8 percent. The services business accounted for 29 percent of net sales (30% in 2006). During 2007, Metso Paper carried out acquisitions supporting the services business, invested in service centers in China, and signed a large-scale service agreement with a Plattling Papier paper mill it had delivered in Germany. The favorable development of Metso Paper s profitability continued, and EBITA for the entire year was EUR million, or 6.3 percent of net sales (EUR million and 5.0% in 2006). The improvement was mainly due to strong volume growth and effective control of fixed costs. Metso Paper s operating profit was EUR million, or 4.7 percent of net sales (EUR 89.8 million and 4.3% in 2006). The operating profit in 2007 was weakened by the EUR 36 million amortization of intangible assets related to the acquisition of the Pulping and Power businesses. The value of orders received by Metso Paper increased by 37 percent on the comparison period and totaled EUR 3,109 million. The order intake growth was very strong in the Power business line, in which the value of orders received exceeded EUR 800 million in Orders received by the Paper and Board business line also increased notably, while the orders received by the Fiber and Tissue business lines decreased from the comparison year. The most significant orders for the year included pulp mill equipment for Votorantim Celulose e Paper in Brazil and Celbi in Portugal, a printing paper line for Henan Puyang Longfeng Paper in China, and an uncoated fine paper production line for the Portucel Group in Portugal. At the end of the year, the order backlog was EUR 2,363 million, which was 6 percent more than at the end of In 2007, Metso Paper carried out a number of measures to improve cost competitiveness and increase the efficiency of the production structure. This resulted in decisions to reduce the company s personnel by almost 700 persons, mainly in Europe and North America. Of the reductions, some 250 affect the Finnish operations, about 350 the Swedish operations, 50 the rest of Europe and a further 40 North America. At the same time, the number of personnel increased in Asia by 240 people, strengthening Metso Paper s presence in emerging markets, close to its customers. About 220 of the personnel reductions are related to the integration of the Pulping business. The personnel negotiations related to the reductions have mainly been completed and the related decisions have been made. The nonrecurring costs resulting from these measures recorded in 2007 were approximately EUR 27 million, of which about EUR 9 million were related to the integration of the acquired Pulping business and the remaining EUR 18 million to other efficiency improvement measures. About EUR 17 million of these nonrecurring costs were realized in the fourth quarter, and slightly less than EUR 5 million of this was related to the integration of the acquired Pulping business. 45

48 BOARD OF DIRECTORS REPORT Metso Minerals EUR million Net sales 2,199 2,607 EBITA % of net sales Operating profit % of net sales Orders received 2,655 3,075 Order backlog, Dec. 31 1,277 1,690 Personnel, Dec. 31 9,433 10,446 Metso Automation EUR million Net sales EBITA % of net sales Operating profit % of net sales Orders received Order backlog, Dec Personnel, Dec. 31 3,352 3,564 Metso Minerals net sales rose by 19 percent on the comparison year and totaled EUR 2,607 million. The growth was strongest in the Mining business line. Net sales of the Construction business line also increased clearly, by over 10 percent on the previous year. The Recycling business line s growth was slightly below 10 percent. Metso Minerals services business grew by 12 percent, and accounted for 40 percent of the net sales (43% in 2006). The operating profit of Metso Minerals increased to EUR million and was 13.9 percent of net sales (EUR million and 13.5%). This improvement was mainly due to the strong growth in net sales, offsetting the negative impact of cost increases and the growth in the relative share of project deliveries. All business lines improved their operating profit on the preceding year. It is estimated that the continued strengthening of the euro decreased Metso Minerals operating margin for 2007 by almost one percentage point. The value of orders received by Metso Minerals increased by 16 percent and totaled EUR 3,075 million. The growth in order intake was strong across all business lines. From the beginning of 2007, Metso Minerals applied a new customer-oriented operating model, which had a favorable impact especially on the order intake of the Construction business line. Geographically, the growth was strongest in Eastern Europe, South Africa and China. The largest orders in 2007 included bulk materials handling equipment for Alcoa in Brazil, a grinding system for Boliden in Sweden, grinding equipment for Osisko Exploration in Canada, minerals processing equipment for Gold Reserve in Venezuela, and minerals processing equipment for Arcelor Mittal Steel in the Ukraine. The order backlog increased by 32 percent on the end of 2006 and was EUR 1,690 million at the end of Metso Automation s net sales increased by 14 percent on the comparison year and totaled EUR 698 million. The growth mainly originated from deliveries of flow control systems for the energy industry. Deliveries of automation systems were at the previous year s level. The services business grew by 8 percent and accounted for 22 percent of net sales (23% in 2006). Metso Automation s operating profit improved notably to EUR 98.8 million and was 14.2 percent of net sales. This improvement was mainly due to the strong growth in net sales, offsetting the negative impact of increases in raw material prices and the growth in the relative share of project deliveries. The value of new orders received by Metso Automation increased by 6 percent on the comparison period and totaled EUR 763 million. The growth mainly originated from orders with the power, oil and gas industry. In the second half of the year, order intake in the Flow Control business was limited by the strong order backlog and the high capacity utilization. The largest orders in 2007 included valves for the Chiyoda-Technip Joint Venture in Qatar, automation modernization for the REVAP refinery of Petrobras in Brazil, and an automation solution for Shouguang Chenming s mill in China. Metso Automation s order backlog was 20 percent stronger than at the end of 2006 and totaled EUR 332 million. Valmet Automotive Valmet Automotive s net sales were EUR 85 million in The operating profit was EUR 8 million, or 9.4 percent of net sales. About half of the operating profit is attributable to non-recurring income. During the year, Valmet Automotive manufactured an average of 110 vehicles per day and a total number of cars manufactured during 2007 is 24,006 (32,393 cars in 2006). At the end of 2007, the number of Valmet Automotive s personnel was 789, which was 224 less than one year before, when the number of personnel was adjusted to meet the needs of production. 46

49 BOARD OF DIRECTORS REPORT Short-term outlook The favorable market situation for Metso s products and services is expected to continue. However, general uncertainty about the growth of the global economy may have an impact on the realization of certain customer projects and the demand in certain geographical areas. No significant changes are expected in Metso Paper s market situation in The demand for new paper, board and tissue machines and fiber lines is expected to remain at the current level, although issues related to our customers financing and required permits may in some cases have an impact on timing of projects. In China, the main factor affecting customer investments in new equipment is the growth of paper and board consumption, which is estimated to continue at a rapid rate. In Europe and North America, demand is expected to focus mainly on machine rebuilds and services. The demand for power plants utilizing renewable energy sources is estimated to continue at an excellent level in Metso s main market areas; Europe and North America. Metso Paper aims to substantially grow its services business, and the demand for services is expected to remain satisfactory. Metso Minerals favorable market situation is expected to continue in The demand for mining products, metal recycling equipment and services business is expected to continue at an excellent level. Investments in industrials and commercial facilities, infrastructure, services and housing are forecast to remain buoyant, particularly in emerging economies. As a result, it is expected that the demand for metals will remain strong and that the investment activity of Metso s customers will remain excellent. In the construction sector, demand for Metso Minerals equipment relating to aggregates production is estimated to remain good. Construction demand will be bolstered by ongoing development projects concerning road networks and other transportation infrastructure around the world. The demand for Metso Automation s products in the pulp and paper industry is expected to be good in In the power, oil and gas industries, the demand for process automation systems is expected to be good and the demand for flow control systems excellent. Energy industry investments are driven by the increased consumption of energy and high oil prices due to global economic growth. In 2008, Metso targets to achieve, at comparable exchange rates, net sales growth of about 10 percent compared to 2007, and to reach an operating profit margin level of about 10 percent. The profit performance estimates are based on Metso s current market outlook, order backlog and business scope. Board of Directors proposal for the distribution of profit The Parent Company s distributable funds totaled EUR 713,240, on December 31, 2007, of which the net profit for the year was EUR 518,795, The Board proposes to the Annual General Meeting that a dividend of EUR 3.00 per share be distributed for the year ended on December 31, 2007, and that the rest be retained and carried further. The proposed EUR 3.00 dividend consists of an ordinary dividend of EUR 1.65 and an extra dividend of EUR It is proposed that the record date for the payment of dividends will be April 7, 2008 and that the dividend will be paid on April 15, All the shares outstanding on the dividend record date will be entitled to a dividend, except for the treasury shares held by the Parent Company. Annual General Meeting 2008 The Annual General Meeting of Metso Corporation will be held at 3 p.m. on Wednesday, April 2, 2008 at the Marina Congress Center in Helsinki. Helsinki, February 6, 2008 Metso Corporation s Board of Directors 47

50 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Income Year ended December 31, EUR million Note Net sales 32 4,221 4,955 6,250 Cost of goods sold 6, 7 (3,110) (3,659) (4,702) Gross profit 1,111 1,296 1,548 Selling, general and administrative expenses 4, 6, 7 (794) (846) (972) Other operating income and expenses, net 5, Share in profits and losses of associated companies 14, Operating profit % of net sales 7.9% 9.2% 9.3% Financial income and expenses, net 8 (43) (36) (33) Profit on continuing operations before tax Income taxes on continuing operations 9 (72) (11) (163) Profit on continuing operations Profit on discontinued operations, net of taxes Profit Profit attributable to minority interests Profit attributable to equity shareholders Profit Earnings per share from continuing operations Basic, EUR Diluted, EUR Earnings per share from discontinued operations Basic, EUR Diluted, EUR Earnings per share from continuing and discontinued operations Basic, EUR Diluted, EUR

51 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Recognized Income and Expense Year ended December 31, EUR million Note Cash flow hedges, net of tax 21, 30 (11) 16 (2) Available-for-sale equity investments, net of tax 15, Currency translation on subsidiary net investments (59) (29) Net investment hedge gains (losses), net of tax 21 (21) 22 (2) Defined benefit plan actuarial gains (losses), net of tax 27 (21) 2 (1) Other Net income (expense) recognized directly in equity 8 (16) (10) Profit Total recognized income (expense) for the year Total recognized income (expense) attributable to minority interests Total recognized income (expense) attributable to equity shareholders Total recognized income (expense) for the year

52 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets Assets As at December 31, EUR million Note Non-current assets Intangible assets 13 Goodwill Other intangible assets Property, plant and equipment 13 1,042 1,023 Land and water areas Buildings and structures Machinery and equipment Assets under construction Financial and other assets Investments in associated companies Available-for-sale equity investments 15, Loan and other interest bearing receivables 18, Available-for-sale financial investments 18, Deferred tax asset Other non-current assets 18, Total non-current assets 1,973 1,897 Current assets Inventories 17 1,112 1,410 Receivables Trade and other receivables 18, 19 1,218 1,274 Cost and earnings of projects under construction in excess of advance billings Loan and other interest bearing receivables 18, Available-for-sale financial investments 18, Tax receivables ,530 1,680 Cash and cash equivalents Total current assets 2,995 3,357 Assets held for sale Total assets 4,968 5,254 50

53 CONSOLIDATED FINANCIAL STATEMENTS Shareholders equity and liabilities As at December 31, EUR million Note Equity 21 Share capital Share premium reserve Cumulative translation adjustments (45) (76) Fair value and other reserves Retained earnings Equity attributable to shareholders 1,444 1,608 Minority interests 6 7 Total equity 1,450 1,615 Liabilities Non-current liabilities Long-term debt 19, Post-employment benefit obligations Deferred tax liability Provisions Other long-term liabilities Total non-current liabilities Current liabilities Current portion of long-term debt 19, Short-term debt 19, Trade and other payables 19, 26 1,238 1,307 Provisions Advances received Billings in excess of cost and earnings of projects under construction Tax liabilities Total current liabilities 2,610 2,682 Liabilities held for sale Total liabilities 3,518 3,639 Total shareholders equity and liabilities 4,968 5,254 51

54 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Cash Flows Year ended December 31, EUR million Note Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities Depreciation and amortization (Gain) loss on sale of fixed assets 5 (18) (6) (2) (Gain) loss on sale of subsidiaries and associated companies 11 (17) (10) (4) Gain on sale of available-for-sale equity investments 5 (2) (1) (7) Share of profits and losses of associated companies 14 (1) (1) (3) Interests and dividend income Income taxes Other non-cash items Change in net working capital, net of effect from business acquisitions and disposals (170) (18) (286) Interest paid (55) (45) (45) Interest received Dividends received Income taxes paid (50) (68) (114) Net cash provided by (used in) operating activities Cash flows from investing activities: Capital expenditures on fixed assets 13 (104) (129) (159) Proceeds from sale of fixed assets Business acquisitions, net of cash acquired 10 (14) (277) (55) Proceeds from sale of businesses, net of cash sold Investments in associated companies 14 (2) 0 Proceeds from sale of associated companies Investments in available-for-sale equity investments (1) (2) 0 Proceeds from sale of available-for-sale equity investments Investments in available-for-sale financial investments (166) (23) 0 Proceeds from sale of available-for-sale financial investments Increase in loan receivables (2) (4) (2) Decrease in loan receivables Net cash provided by (used in) investing activities (90) (227) (176) Cash flows from financing activities: Share options exercised Redemption of own shares 21 (11) Dividends paid (48) (198) (212) Hedging of net investment in foreign subsidiaries (2) (6) 15 Net borrowings (payments) on short-term debt (2) 90 (37) Proceeds from issuance of long-term debt Principal payments of long-term debt (156) (165) (87) Principal payments of finance leases (6) (3) (3) Net cash provided by (used in) financing activities (136) (179) (202) Net increase (decrease) in cash and cash equivalents (62) 36 (84) Effect of changes in exchange rates on cash and cash equivalents 13 (6) (2) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

55 CONSOLIDATED FINANCIAL STATEMENTS Change in net working capital, net of effect from business acquisitions and disposals Year ended December 31, EUR million (Increase) decrease in assets and increase (decrease) in liabilities: Inventory (178) (215) (335) Trade and other receivables (139) (194) (64) Percentage of completion: recognized assets and liabilities, net Trade and other payables Total (170) (18) (286) Breakdown of business combinations is presented in note

56 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Changes in Shareholders Equity EUR million Share capital Share premium reserve Cumulative translation adjustments Fair value and other reserves Retained earnings Equity attributable to shareholders Minority interests Total equity Balance at December 31, (48) ,002 Effect of adopting amendment to IAS 19 (6) (6) (6) Balance at January 1, (48) Cash flow hedges, net of tax (11) (11) (11) Available-for-sale equity investments, net of tax Currency translation on subsidiary net investments Net investment hedge gains (losses), net of tax (21) (21) (21) Defined benefit plan actuarial gains (losses), net of tax (21) (21) (21) Other Net income (expense) recognized directly in equity 39 (11) (20) 8 8 Profit Total recognized income (expense) for (11) Dividends (48) (48) (48) Share options exercised Share-based payments Other 1 1 Balance at December 31, (9) , ,265 Cash flow hedges, net of tax Available-for-sale equity investments, net of tax Currency translation on subsidiary net investments (59) (59) (59) Net investment hedge gains (losses), net of tax Defined benefit plan actuarial gains (losses), net of tax Other Net income (expense) recognized directly in equity (36) 17 3 (16) (16) Profit Total recognized income (expense) for 2006 (36) Dividends (198) (198) (198) Share options exercised Redemption of own shares (11) (11) (11) Share-based payments Other 1 (1) 0 (2) (2) Balance at December 31, (45) , ,450 54

57 CONSOLIDATED FINANCIAL STATEMENTS EUR million Share capital Share premium reserve Cumulative translation adjustments Fair value and other reserves Retained earnings Equity attributable to shareholders Minority interests Total equity Balance at December 31, (45) , ,450 Cash flow hedges, net of tax (2) (2) (2) Available-for-sale equity investments, net of tax Currency translation on subsidiary net investments (29) (29) (29) Net investment hedge gains (losses), net of tax (2) (2) (2) Defined benefit plan actuarial gains (losses), net of tax (1) (1) (1) Other Net income (expense) recognized directly in equity (31) 20 1 (10) (10) Profit Total recognized income (expense) for 2007 (31) Dividends (212) (212) (212) Share options exercised Redemption of own shares Share-based payments Other (1) 1 0 (2) (2) Balance at December 31, (76) , ,615 55

58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Notes to Consolidated Financial Statements 1 Accounting principles Description of businesses Metso is a global technology corporation, which designs, develops and produces systems, automation solutions, machinery and equipment for process industries. The main customer industries are the pulp and paper industries, power producers, mining, construction and energy industries. Metso s operations are divided into three business areas: Metso Paper, Metso Minerals and Metso Automation. In April 2005, Metso Drives, a manufacturer of paper machinery drives and industrial gears as well as wind turbine gears, was sold to CapMan, a Finnish private equity investor, and the business is presented as Discontinued operation separate from Continuing operations. In December 2006, Metso acquired the Pulping and Power businesses of Aker Kvaerner, a Norwegian group. The businesses were transferred to Metso on December 29, 2006 and are reported under Metso Paper business area. Basis of preparation The consolidated financial statements, prepared in accordance with International Financial Reporting Standards ( IFRS ) as adopted by the EU, include the financial statements of Metso Corporation (the Parent Company ) and its subsidiaries (together with the Parent Company, Metso or the Company ). There are no differences between IFRS as adopted by the EU, as applied in Metso, and IFRS as written by the IASB. Metso Corporation was formed in 1999 as a result of the merger of Rauma Corporation and Valmet Corporation. The merger was consummated on July 1, 1999 and is accounted for by the pooling-ofinterests method. From January 1, 2007 onwards Metso has applied IFRS 7, which supersedes the disclosure requirements of IAS 32, while the presentation requirements remain unchanged and related amendment to IAS 1 Capital disclosures. The previous years data has been disclosed accordingly. In 2007, Metso changed the accounting of actuarial gains and losses to apply the amendment of IAS 19 allowing for immediate recognition of actuarial gains and losses in the shareholders equity. The previous years data has been restated accordingly. Until December 31, 2004, the consolidated financial statements were prepared in accordance with the Finnish Generally Accepted Accounting Principles ( FAS or Finnish GAAP ). Use of estimates The preparation of financial statements, in conformity with IFRS, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting convention The financial statements are prepared under the historical cost convention, except for assets and liabilities classified as fair valued through profit and loss and available-for-sale investments, which are recognized at fair value. Loan and other receivables are recorded at cost and discounted to the present value. Principles of consolidation Subsidiaries The consolidated financial statements include the financial statements of the Parent Company and each of those companies in which it owns, directly or indirectly through subsidiaries, over 50 percent of the voting rights or in which it is in a position to govern the financial and operating policies of the entity. The companies acquired during the financial period have been consolidated from the date Metso acquired control. Subsidiaries sold have been included up to their date of disposal. All intercompany transactions are eliminated as part of the consolidation process. Minority interests are presented in the consolidated balance sheets within equity, separate from the equity attributable to shareholders. Minority interests are separately disclosed in the consolidated statements of income. Acquisitions of companies are accounted for using the purchase method. The cost of an acquisition is measured at fair value over the assets given up, shares issued or liabilities incurred or assumed at the date of acquisition including any costs directly attributable to the acquisition. The excess acquisition cost over the fair value of net assets acquired is recognized as goodwill (see also intangible assets). If the cost of acquisition is less than the fair value of the group s share of the net assets acquired, the difference is recognized directly through profit and loss. Associated companies and joint ventures The equity method of accounting is used for investments in associated companies in which the investment provides Metso the ability to exercise significant influence over the operating and financial policies of the investee company. Such influence is presumed to exist for investments in companies in which Metso s direct or indirect ownership is between 20 and 50 percent of the voting rights. Investments in associated companies are initially recognized at cost. Investments in joint ventures in which Metso has the power to jointly govern the financial and operating activities of the investee company are accounted for using the equity method. Under the equity method, the share of profits and losses of associated companies and joint ventures is presented separately in the consolidated statements of income. Metso s share of post-acquisition retained profits and losses of associated companies and joint ventures is reported as part of investments in associated companies in the consolidated balance sheets. 56

59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Foreign currency translation The financial statements are presented in euros, which is the functional currency of the Parent Company. Transactions in foreign currencies are recorded at the rates of exchange prevailing at the date of the transaction. At the end of the accounting period, unsettled foreign currency transaction balances are valued at the rates of exchange prevailing at the balance sheet date. Trade flow related foreign currency exchange gains and losses are recorded in other operating income and expenses, net, unless the foreign currency denominated transactions have been subject to hedge accounting, in which case the related exchange gains and losses are recorded in the same line item as the hedged transaction. Foreign exchange gains and losses associated with financing are entered as a net amount under financial income and expenses, net. The statements of income of subsidiaries with a functional currency different from the presentation currency are translated into euro at the average exchange rates for the financial year and the balance sheets are translated at the exchange rate of the balance sheet date. The resulting translation differences are recorded in the cumulative translation adjustment line item in equity. The resulting translation differences from subsidiary net investments are recognized through the Consolidated Statement of Recognized Income and Expense (SORIE) to the cumulative translation adjustments. When Metso hedges the equity of its foreign subsidiaries with foreign currency loans and with financial derivatives, the translation difference is adjusted by the currency effect of hedging instruments and recorded through the SORIE in equity, net of taxes. When a foreign entity is disposed of the accumulated translation difference is reversed through SORIE and recognized in the consolidated statements of income as part of the gain or loss on the sale. Derivative financial instruments Derivatives are initially recognized in the balance sheet at fair value and subsequently measured at their fair value at each balance sheet date. Derivatives are designated at inception either as hedges of firm commitments or forecasted transactions (cash flow hedge), or as fair value hedges of assets or liabilities, or as hedges of net investment in a foreign operation (net investment hedge), or as derivatives at fair value through profit and loss that do not meet the hedge accounting criteria. In case of hedge accounting, Metso documents at inception the relationship between the hedging instruments and hedged items according to its risk management strategy and objectives. Metso also tests the effectiveness of the hedge relationships at hedge inception and quarterly both prospectively and retrospectively. Derivatives are classified as non-current assets or liabilities when the remaining maturity is more than 12 months and as current assets or liabilities when the remaining maturity is less than 12 months. Cash flow hedge Metso uses cash flow hedge accounting for certain interest rate swaps, foreign currency forward contracts and for electricity forwards. Metso designates only the currency component of the foreign currency forward contracts as a hedging instrument. Both at hedge inception and at each balance sheet date an assessment is performed to ensure the continued effectiveness of the designated component of the derivatives in offsetting changes in the fair values of the cash flows of hedged items. Metso assesses the effectiveness of the fair value changes of the electricity forwards to offset the changes in the fair value changes of the underlying forecasted electricity purchases in different countries on an ongoing basis. The effective portion of the derivatives is recognized through SORIE in the hedge reserve of equity and reversed through SORIE to be recorded through profit and loss concurrently with the underlying transaction being hedged. The gain or loss relating to the ineffective portion of the derivatives or to a portion, which has not been designated as a hedging instrument, is reported under other operating income and expenses, net. Should a hedged transaction no longer be expected to occur, any cumulative gain or loss previously recognized under equity is reversed through SORIE to profit and loss. Net investment hedge Metso hedges its net foreign investments in certain currencies to reduce the effect of exchange rate fluctuations. The hedging instruments are mainly foreign currency loans and foreign currency forward contracts. Both realized and unrealized exchange gains and losses measured on these instruments are recorded, net of taxes, through SORIE in a separate component of equity against the translation differences arising from consolidation to the extent that these hedges are effective. The interest portion of derivatives qualifying as hedges of net investment is recognized under financial income and expenses, net. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in financial income and expenses, net, together with the changes in the fair value of the hedged asset or liability that are attributable to the hedged interest rate risk. Derivatives at fair value through profit and loss Certain derivative instruments do not qualify for hedge accounting. These instruments, which have been contracted to mitigate risks arising from operating activities, include for example foreign currency forward contracts, interest rate swaps and swap agreements for nickel. Changes in the fair value of interest rate swaps are recognized in interest expenses, and changes in the fair value of other derivative instruments are recognized in other operating income and expenses, net. Fair value estimation The fair value of the foreign currency forward contracts is determined using forward exchange market rates at the balance sheet date. The fair value of the interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of the commodity forwards and swaps are based on quoted market prices at the balance sheet date. The fair value of options is determined using Black-Scholes valuation model. 57

60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Employee benefits Share-based payments Metso operates various share-based compensation schemes, including share ownership plan and option programs for its key personnel. The equity-settled share awards are valued based on the market price of Metso s share as of the grant date, and recognized as an employee benefit expense over the vesting period with corresponding entry in other reserves of the equity. The liability resulting from the cash-settled transactions is measured based on the fair value of Metso s share as of the balance sheet date and accrued as an employee benefit expense with corresponding entry in the current liabilities until the settlement date. The fair value of options is either based on quoted market price, if available, or a value obtained using valuation models. When the options are exercised, the proceeds received, net of transaction costs are recognized in the fund for invested nonrestricted equity. Non-market vesting conditions (such as operating profit targets) are included in assumptions about the amount of share-based payments that are expected to vest. At each balance sheet date, Metso revises its estimates of the amount of share-based payments that are expected to vest. The impact of the revision to previous estimate is recognized through profit and loss with corresponding adjustment to equity and current liabilities, as appropriate. Pensions and coverage of pension liabilities Metso has several different pension schemes in accordance with local regulations and practices in countries where it operates. In certain countries, the pension schemes are defined benefit plans with retirement, disability, death, and other post retirement benefits, such as health services, and termination income benefits. The retirement benefits are usually based on the number of service years and the salary levels of the final service years. The schemes are generally funded through payments to insurance companies or to trustee-administered funds as determined by periodic actuarial calculations. In addition, certain companies within Metso have multiemployer pension arrangements and defined contribution pension schemes. The contributions to defined contribution plans and to multi-employer and insured plans are charged to profit and loss concurrently with the payment obligations. In the case of defined benefit plans, the liability arising from the plan is the present value of the defined benefit obligation as of the balance sheet date, adjusted by the fair value of the plan assets and by the unamortized portion of past service cost. Independent actuaries calculate the defined benefit obligation by applying the projected unit credit method under which the estimated future cash flows are discounted to their present value using the interest rates approximating the terms of the pension engagement. The cost of providing retirement and other post retirement benefits to the personnel is charged to profit and loss concurrently with the service rendered by the personnel. Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions and amendments to plans are recognized through SORIE in shareholders equity. Revenue recognition Revenues from goods and services sold are recognized, net of sales taxes and discounts, when substantially all the risks and rewards of ownership are transferred to the buyer, or when legal title of the goods and responsibility for shipment has transferred to the buyer. The transfer of risk takes place either when the goods are shipped or made available to the buyer for shipment, depending on the delivery terms clause of the contract. The credit worthiness of the buyer is verified before engaging into a sale. However, should a risk of non-payment arise after revenue recognition, an allowance for non-collectability is established. Percentage-of-completion method Sales and anticipated profits under engineering and construction contracts are recorded on a percentage-of-completion basis. The stage of completion is determined either by units of delivery, which are based on predetermined milestones and on the realized value added (contract value of the work performed to date) or by the cost-to-cost method of accounting. Estimated contract profits are recorded in earnings in proportion to recorded sales. In the cost-to-cost method, sales and profits are recorded after considering the ratio of accumulated costs to estimated total costs to complete each contract. In certain cases, subcontractor materials, labor and equipment, are included in sales and costs of goods sold when management believes that Metso is responsible for the ultimate acceptability of the project. Changes to total estimated contract costs and losses, if any, are recognized in the period in which they are determined. Service revenue Revenues from short-term service contracts are recognized once the service has been rendered. Revenues from long-term service contracts are recognized using the output method. Sales with repurchase commitments If the conditions of a sales contract with repurchase commitment indicate that the transfer of risks and rewards has not taken place at initial delivery of equipment and transfer of ownership, the revenue is deferred. The monies received for the machines, net of the guaranteed amount, are recognized over the contract term as lease income concurrently with the depreciation of the equipment until the expiry of the resale right. If the repurchase commitment expires unexercised, the remaining deferred revenue is recognized as income. Trade-ins Sales, against which trade-ins are accepted, are recorded at contract price. Any reduction between the agreed trade-in price and its recorded value in the inventory is recognized in cost of goods sold concurrently with the sale. Government grants Government grants relating to acquisition of property, plant and equipment are deducted from the acquisition cost of the asset and recognized in profit and loss as a reduction of the depreciation charge of the related asset. Other government grants are deferred and recognized in profit and loss concurrently with the costs they compensate. Other operating income and expenses, net Other operating income and expenses, net, comprise income and expenses, which do not directly relate to the operating activity of businesses within Metso or which arise from unrealized and realized changes in fair value of foreign currency 58

61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS denominated financial instruments associated with the operating activity, including forward exchange contracts. Such items include gains and losses on disposal of assets, other than those, which qualify as discontinued operations, costs related to significant restructuring programs, and foreign exchange gains and losses, excluding those, which qualify for hedge accounting and those, which are reported under financial income and expenses, net. Income taxes Income taxes presented in the consolidated statements of income consist of current and deferred taxes. Current taxes include estimated taxes corresponding to the group companies results for the financial year, and adjustments of taxes for previous years. A deferred tax liability or asset has been determined for all temporary differences between the tax bases of assets and liabilities and their amounts in financial reporting, using the enacted tax rates effective for the future years. The deferred tax liabilities are recognized in the balance sheet in full, and the deferred tax assets are only recognized when it is probable that there will be sufficient taxable profit against which the asset can be utilized. No deferred tax liability has been recognized for undistributed earnings of domestic subsidiaries (i.e., Finnish) since such earnings can be transferred to the Parent Company without tax consequences. Metso does not provide deferred income taxes on undistributed earnings of foreign subsidiaries, except in situations where Metso has elected to distribute earnings, which become subject to additional non-recoverable taxes triggered by a distribution. Earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity shareholders of the Company by the weighted average number of ordinary shares in issue during the year, excluding own shares. The diluted earnings per share are calculated by applying the treasury stock method, under which earnings per share data is computed as if the warrants and options were exercised at the beginning of the period, or on the issuance of warrants and options, if that occurs later during the period, and as if the funds obtained thereby were used to purchase common stock at the average market price during the period. In addition to the weighted average number of ordinary shares outstanding, the denominator includes the incremental shares obtained through the assumed exercise of the warrants and options. The warrants and options have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the warrants and options. Intangible assets Intangible assets, which comprise mainly goodwill, trademarks, patents and licenses, are stated at historical cost less accumulated amortization and impairment loss, if any. Intangible assets with indefinite useful lives, such as goodwill and trademarks, are not amortized, but tested annually for impairment. Amortization of intangible assets Amortization of intangible assets with a definite useful life is calculated on a straight-line basis over the expected economic lives of the assets as follows: Patents and licenses Computer software Technology Customer relationships Other intangibles 5 10 years 3 5 years 3 15 years 3 12 years < 1 15 years Expected useful lives are reviewed at each balance sheet date and if they differ significantly from previous estimates, the remaining amortization periods are adjusted accordingly. The carrying value of intangible assets subject to amortization is reviewed for impairment whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A previously recognized impairment loss may be reversed if there is a significant improvement to the circumstances having initially caused the impairment, however not to a higher value than the carrying amount, which would have been recorded had there been no impairment in prior years. Impairment of intangible assets with indefinite useful lives The carrying value of goodwill for each business area and of other intangible assets with indefinite useful lives are reviewed annually or more frequently for impairment, if the facts and circumstances, such as declines in sales, operating profit or cash flows or material adverse changes in the business climate, suggest that its carrying value may not be recoverable. The testing of goodwill is performed at the cash generating unit level, whereas the testing of an intangible asset with an indefinite useful life is either performed as part of a cash generating unit or separately if the asset generates independent cash flows. The annual testing may be performed using previous year s recoverable amounts of the cash generating units if there has not been significant changes to the assets and liabilities of the cash generating unit, if in the previous testing the recoverable value clearly exceeded the carrying values tested, or if the likelihood that the current recoverable value would be less than the current carrying value of the cash generating unit is remote. Metso uses a discounted cash flow analysis to assess the fair value of intangible assets subject to testing. A previously recognized impairment loss on goodwill is not reversed even if there is a significant improvement in circumstances having initially caused the impairment, whereas an impairment loss on an intangible asset with an indefinite life may be reversed should there be a significant improvement to cash flows compared to the projections having generated the impairment loss in the first place. However, the impairment loss may not be reversed to exceed the carrying amount, which would have been recorded had there been no impairment in prior years. Research and development Research and development costs are mainly expensed as incurred. Research and development costs comprise salaries, administration costs, depreciation and amortization of tangible and intangible fixed assets. Development costs meeting certain capitalization criteria under IAS 38 are capitalized and amortized during the expected economic life of the underlying technology. Property, plant and equipment Property, plant and equipment are stated at historical cost, less accumulated depreciation and impairment loss, if any. Land and water areas are not depreciated. 59

62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Depreciation and amortization is calculated on a straight-line basis over the expected useful lives of the assets as follows: Buildings and structures Machinery and equipment years 3 20 years Expected useful lives are reviewed at each balance sheet date and if they differ significantly from previous estimates, the remaining depreciation periods are adjusted accordingly. Subsequent improvement costs related to an asset are included in the carrying value of such asset or recognized as a separate asset, as appropriate, only when the future economic benefits associated with the costs are probable and the related costs can be separated from normal maintenance costs. Metso reviews property, plant and equipment to be held and used by the company for impairment whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment of property, plant and equipment and capital gains and losses on their disposal are included in other operating income and expenses, net. A previously recognized impairment on property, plant and equipment is reversed only if there has been a significant change in the estimates used to determine the recoverable amount, however not to exceed the carrying value, which would have been recorded had there been no impairment in prior years. Capitalization of interest expenses The interest expenses of self-constructed investments are capitalized in Metso s financial statements. The capitalized interest expense is amortized over the estimated useful life of the underlying asset. Leases Leases for property, plant and equipment, where Metso has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in long-term debt, and the interest element is charged to profit and loss over the lease period. Property, plant and equipment acquired under finance leases are depreciated over the useful life of the asset or over the lease period. Leases of property, plant and equipment, where the lessor retains a significant portion of the risk and rewards, are classified as operating leases. Payments under operating leases are expensed as incurred. Financial assets Metso classifies its financial investments into the following categories: assets and liabilities at fair value through profit and loss (derivatives), loans and receivables and available-for-sale financial assets. The classification is determined at the time of the acquisition depending on the intended purpose. Available for sale financial assets are further classified into available-for-sale equity investments and available-for-sale financial investments. Loans and receivables are classified into loans and other interest bearing receivables and other receivables, which are not interest bearing. Purchases and sales of available-for-sale financial assets are recognized at fair value including transaction costs on the settlement date. At each balance sheet date, Metso assesses whether there is objective evidence of an available-for-sale financial asset or of a group of assets under this category being impaired. In case of prolonged significant decline in the fair value of such an asset compared to its acquisition value, the accumulated net loss is reversed from equity and recognized in the income statement. Available-for-sale equity investments Available-for-sale equity investments include mainly shares in listed companies. Available-for-sale equity investments are carried at fair value, based on quoted closing prices as of the respective balance sheet date. Unrealized gains and losses arising from changes in fair value are recognized through SORIE in the fair value reserve of equity. Gains and losses at disposal and potential impairment are recorded in the profit and loss and the accumulated change in fair value previously recorded in the fair value reserve of equity is reversed through SORIE. Unlisted shares, for which fair values cannot be measured reliably, are recognized at cost less impairment, if any. Available-for-sale financial investments Non-current available-for-sale financial investments Available-for-sale financial investments, which are reported under non-current assets and which have been contracted as part of the cash management of Metso, comprise investments in financial instruments, e.g. bonds, commercial papers and time deposits with maturities exceeding one year at acquisition or with an undefined maturity and which the company plans to hold for more than one year. The instruments are fair valued quarterly and the change in fair value is recognized through SORIE in the fair value reserve of equity. Gains and losses at disposal and potential impairment are recorded in profit and loss and the accumulated change in fair value previously recorded in the fair value reserve of equity is reversed through SORIE. Current available-for-sale financial investments Available-for-sale financial investments, which are reported under current assets, comprise highly liquid investments, which have been contracted as part of the cash management of Metso and which do not qualify as cash and cash equivalents. They are fair valued quarterly and the change in fair value is recognized in the fair value reserve of equity. Gains and losses at disposal and potential impairment are recorded in profit and loss and the accumulated change in fair value previously recorded in the fair value reserve of equity is reversed through SORIE. Loans and receivables Loan and other interest bearing receivables comprise interest bearing trade and loan receivables. Other non-interest bearing receivables are not material and comprise non-interest bearing loan receivables. Loans and receivables are presented as noncurrent when their maturity, at the time of their inception, exceeds one year. Loans and receivables are recorded at cost and discounted to the present value. They are subject to regular and systematic review as to collectability. If a loan receivable is estimated to 60

63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS be partly or totally unrecoverable, a provision is made for the shortfall between the carrying value and the present value of the expected cash flows. Interest income on loan and other interest bearing receivables is included in financial income and expenses, net. Inventories Inventories are stated at the lower of historical cost calculated on an average cost basis or net realizable value. Costs include purchase costs as well as transportation and processing costs. The costs of finished goods include direct materials, wages and salaries plus social costs, subcontracting and other direct costs. In addition, production costs include an allocable portion of production and project administration overheads. Net realizable value is the estimated amount that can be realized from the sale of the asset in the normal course of business after allowing for the costs of realization. Inventories are shown net of a reserve for obsolete and slow-moving inventories. A reserve is established and a corresponding charge is taken to profit and loss in the period in which the loss occurs based upon an assessment of technological obsolescence and related factors. Trade-in equipment received is recorded as inventory at the lower of cost or net realizable value. Trade receivables Trade receivables are recognized at original invoice amount to customers and reported in the balance sheet, net of allowance for doubtful receivables. The allowance, which is expensed under selling, general and administrative expenses, is recorded on the basis of periodic reviews of potential non-recovery of receivables by taking into consideration individual customer credit risk, economic trends in customer industries and changes in payment terms. Bad debts are written off when official announcement of receivership, liquidation or bankruptcy is received confirming that the receivable will not be honored. If extended payment terms, exceeding one year, are offered to customers, the invoiced amount is discounted to its present value and interest income is recognized over the credit term. Cash and cash equivalents Cash and cash equivalents consist of cash in banks and other liquid investments with original maturity of three months or less. Assets classified as held-for-sale Non-current assets and discontinued operations are classified as held-for-sale and stated at the lower of carrying value and the fair value less cost to sell, if their carrying value is recovered principally through a sale transaction rather than through a continuing use. A discontinued operation results from the management s decision and commitment to dispose of a separate business for which the related assets, liabilities and operating results can be distinguished both operationally and for financial reporting purposes. When specific criteria for the held-for-sale classification has been met, the non-current assets are recorded at the lower of carrying value or fair value less cost to sell, and noncurrent assets subject to depreciation or amortization are no longer amortized. The assets and liabilities of a disposal group classified as held-for-sale are presented in the balance sheet separate from assets and liabilities related to continuing operations as of the date the operation qualified as discontinued. The results of discontinued operations, net of taxes and the gain or loss on their disposal are presented for all periods separate from continuing operations in the consolidated statements of income. Balance sheet data from periods preceding the qualifying disposal decision is not reclassified. Own shares Own shares are valued at historical acquisition price and have been deducted from equity. Should such shares be subsequently sold or reissued, the consideration received, net of any directly attributable transaction costs and related income tax, is recorded in the equity. Dividends Dividends proposed by the Board of Directors are not recognized in the financial statements until they have been approved by the shareholders in the Annual General Meeting. Long-term debt Long-term debt is initially recognized at fair value, net of transaction costs incurred. Debt is classified as current liability unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Capitalization of transaction costs related to issuance of debt instruments Transaction costs arising from issuance of debt instruments are included in the carrying value of the debt, and amortized using the effective interest method over the period of the respective liability. Capitalization of transaction costs related to exchange of debt instruments Transaction costs arising from exchange of debt instruments are included in the carrying value of the debt and amortized using the effective interest method over the remaining period of the modified liability provided that the new conditions obtained through the exchange do not substantially differ from those of the original debt. The assessment of whether the conditions are substantially different is based on a comparison of the discounted present value of the cash flows under the new terms and the present value of the remaining cash flows of the original financial liability. Provisions Provisions, for which settlement is expected to occur more than one year after the initial recognition, are discounted to their present value and adjusted in subsequent closings for the time effect. Restructuring costs A provision for restructuring is recognized only after management has developed and approved a formal plan to which it is committed. Employee termination benefits are only recognized when the representatives of employees or individual employees have been informed of the intended measures in detail and the related compensation packages can be reliably measured. The costs included in a provision for restructuring are those costs that are either incremental or incurred as a direct result of the plan or are the result of a continuing contractual obligation with no continuing economic benefit to Metso or a 61

64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS penalty incurred to cancel the contractual obligation. Restructuring expenses are recognized in either cost of goods sold or selling general and administrative expenses depending on the nature of the restructuring expenses. Should there be a Metso or business area wide restructuring program, the related costs are recognized in other operating income and expenses, net. Restructuring costs can also include other costs incurred as a result of the plan, which are recorded under other operating income and expenses, net, such as asset write-downs. Environmental remediation costs Metso accrues for losses associated with environmental remediation obligations when such losses are probable and can be estimated reliably. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed virtually certain. Warranty costs An accrual is made for expected warranty costs. The adequacy of this accrual is reviewed periodically based on an analysis of historical experience and anticipated probable warranty liabilities. 2 Financial risk management As a global company Metso is exposed to a variety of business and financial risks. Financial risks are managed centrally by the Corporate Treasury under annually reviewed written policies approved by the Board of Directors. Treasury operations are monitored by the Treasury Management Team chaired by CFO. Corporate Treasury functions as counterparty to the operating units, manages centrally external funding and is responsible for the management of financial assets and appropriate hedging measures. Corporate Treasury identifies, evaluates and hedges financial risks in close co-operation with the operating units. The objective of financial risk management is to minimize potential adverse effects on Metso s financial performance. Liquidity and refinancing risk and capital structure management Liquidity or refinancing risk arises when a company is not able to arrange funding at terms and conditions corresponding to its creditworthiness when needed. Sufficient cash, short-term investments and committed and uncommitted credit facilities are maintained to protect short-term liquidity. Diversification of funding among adequate number of financial institutions is used to safeguard the availability of liquidity at all times. At the end of 2007 (end of 2006 respectively) cash and cash equivalents amounted to EUR 267 million (EUR 353 million), available-for-sale investments to EUR 5 million (EUR 15 million) and committed undrawn credit facilities to EUR 500 million (EUR 500 million). Liquidity risk management excludes interest bearing trade receivables and similar financial instruments, as they are not considered active risk management tools within the responsibility of Corporate Treasury. Similarly, non-interest-bearing liabilities such as trade and other payables are not included in liquidity management. Metso s refinancing risk is managed by balancing the proportion of short-term and long-term debt as well as the average remaining maturity of long-term debt. As at December 31, 2007, the repayments and interests on Metso s liabilities and cash flows from derivative contracts were as follows: EUR million <1 year 1 5 years >5 years Long-term debt Repayments Interests Short-term debt Repayments 97 Interests 2 Trade payables 856 Other liabilities 435 Forward exchange contracts / outflow 1, Forward exchange contracts / inflow (1,246) (145) Net settled interest rate and commodity derivatives (2) 0 Total 1, Detailed information of balance sheet items is presented in other notes to consolidated financial statements. Capital structure management in Metso comprises both equity and interest bearing debt. The objectives are to safeguard the ongoing business operations and optimize the cost of capital. Metso has a target to maintain a solid investment grade credit rating. The ratings are currently: Moody s Baa2 Standard & Poor s BBB / A 2 (Outstanding bonds and EMTN program BBB ) There are no prepayment covenants in Metso s financial contracts that would be triggered by changes in credit rating. Metso is in compliance with all covenants and other terms of its debt instruments. Capital structure is assessed regularly by the Board of Directors and managed operationally by Corporate Treasury. Capital structure ratios are included in financial indicators for years on page 113 in these financial statements. The formulas for calculating the financial indicators are presented on page

65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest rate risk Interest rate risk arises when changes in market interest rates and interest margins influence finance costs, returns on financial investments and valuation of interest bearing balance sheet items. Interest rate risks are managed through balancing the ratio between fixed and floating interest rates and duration of debt and investment portfolios. Additionally, Metso may use derivative instruments such as forward rate agreements, swaps, options and futures contracts to mitigate the risks arising from interest bearing assets and liabilities. The interest rate risk is controlled by the Corporate Treasury and measured using sensitivity analysis and duration of long term debt. The Macaulay Duration of long term debt was 2.1 years on December 31, 2007 (2.7 years). At the end of 2007 the balance sheet items exposed to interest rate risk were interest bearing assets of EUR 279 million (EUR 376 million) and interest bearing debt of EUR 819 million (EUR 830 million). 75% (80%) of interest bearing debt was denominated in EUR. In the interest rate risk, the basis for the sensitivity analysis is an aggregate corporate level interest rate exposure, composed of interest bearing assets, interest bearing debt and financial derivatives, such as interest rate swaps, which are used to hedge the underlying exposures. For all interest bearing debt and assets to be fixed during next 12 months a one percentage point (100 basis points) move upwards or downwards in interest rates with all other variables held constant would increase or decrease Metso s net interest expenses, net of taxes, in next 12 months by EUR 0.5 million (decrease or increase EUR 0.1 million). A one percentage point (100 basis points) move upwards or downwards in all interest rates with all other variables held constant would have following effects, net of taxes, in income statement and equity: EUR million Effects in income statement / / equity + / / 2.3 Change in the fair value in income statement comprises derivatives, the fair value of which is directly recognized through profit and loss. The interest rate sensitivity for fixed rate debt does not affect the income statement as such debt is carried at amortized cost. Change in the fair value in equity includes derivatives qualifying as effective cash flow hedge instruments for long-term floating rate debt. Foreign exchange risk Metso operates globally and is exposed to foreign exchange risk in several currencies, although the geographical diversity of operations decreases the significance of any individual currency. Over 60% of Metso s net sales originate from outside euro zone; the main currencies being USD, EUR, SEK, BRL, AUD and CAD. Transaction exposure Foreign exchange transaction exposure arises when a business unit has commercial or financial transactions and payments in other than its own functional currency, and when related cash inflow and outflow amounts are not equal or concurrent. In accordance with the Treasury Policy, operating units are required to hedge in full the foreign currency exposures that arise from firm sales and purchase commitments. Future cash flows denominated in a currency other than the functional currency of the unit are hedged with internal foreign exchange contracts with the Corporate Treasury for periods, which do not usually exceed two years. The majority of the hedged future currency cash flows relate to foreign currency denominated order backlog. In addition, units can hedge anticipated foreign currency denominated cash flows. Corporate Treasury monitors the net position of each currency and decides to what extent a currency position is to be closed. Corporate Treasury is however responsible for entering into external forward transaction whenever operating unit chooses to apply hedge accounting. Upper limits have been set on the open currency exposures managed by the Corporate Treasury; limits have been calculated on the basis of their potential profit impact. To manage the foreign currency exposure Corporate Treasury may use forward exchange contracts, foreign exchange swaps and options. Total foreign exchange transaction exposure at the end of the year was as follows: EUR million Operational items Financial items (182) (273) Hedges (265) (370) Total exposure The aggregate corporate-level currency exposure is the basis for the sensitivity analysis of foreign exchange risk. This exposure, net of respective hedges, is composed of all assets and liabilities denominated in foreign currencies, projected cash flows for unrecognized firm commitments, both shortand long-term sales and purchase contracts and anticipated operational cash flows to the extent their realization has been deemed highly probable. This analysis excludes net foreign currency investments in subsidiaries together with instruments hedging these investments. Assuming the euro to appreciate or depreciate ten percent against all other currencies, the impact on cash flows, net of taxes, derived from the year-end net exposure as defined above would be a corresponding decrease or increase of EUR 2.5 million (EUR 8.0 million). A sensitivity analysis of financial instruments as required by IFRS 7, excludes following items: projected cash flows for unrecognized firm commitments, advance payments, both short- and long-term purchase contracts and anticipated operational cash flows. Because of the large diversity of currencies, the table below presents the aggregate effects, net of taxes, of a + / 10% change in EUR foreign exchange rate against all other currencies: EUR million Effects in income statement + / / 31.0 equity + / / 6.5 Effect in equity is the fair value change in derivatives contracts qualifying as cash flow hedges for unrecognized firm commitments. Effect in income statement is the fair value change for all other financial instruments exposed to foreign 63

66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS exchange risk including derivatives, which qualify as cash flow hedges, to the extent the underlying sales transaction, recognized under the percentage of completion method, has been recognized as revenue. Translation or equity exposure Foreign exchange translation exposure arises when the equity of a subsidiary is denominated in currency other than the functional currency of its respective parent company. The major translation exposures are in SEK, USD, BRL and CAD. As of December 31, 2007 (December 31, 2006 respectively) Metso had hedged 32% (66%) of USD, 92% (87%) of SEK and 67% (76%) of CAD denominated net investments to reduce the effect of exchange rate fluctuations. The hedging instruments are foreign currency loans and forward exchange contracts. A sensitivity analysis of financial instruments includes forward exchange contracts and foreign currency loans qualified as net investment hedges. A 10% change in EUR foreign exchange rate against all other currencies would have an effect of EUR 29.2 million, net of taxes (EUR 26.3 million) in equity. Commodity risk Metso is exposed to variations in prices of raw materials and of supplies including energy. Metso units identify their commodity price hedging needs and hedges are executed through the Corporate Treasury using approved counterparties and instruments. For commodity risks separate hedging limits are defined and approved. Hedging is done on a rolling basis with a declining hedging level over time. Electricity exposure in the Scandinavian units has been hedged with electricity forwards and fixed price physical contracts, which are designated as hedges of highly probable future electricity purchases. Hedging is focused on the estimated energy consumption for the next 12-month period with some contracts extended to approximately three years. Execution of electricity hedging has been outsourced to an external broker. As of December 31, 2007 Metso had outstanding electricity forwards amounting to 356 GWh (475 GWh). To reduce its exposure to the volatility caused by the surcharge for certain metal alloys (Alloy Adjustment Factor) comprised in the price of stainless steel charged by its suppliers, Metso has entered into average-price swap agreements for nickel. The Alloy Adjustment Factor is based on monthly average prices of its components of which nickel is the most significant. Metso traded its first nickel swaps in March 2007 and as of December 31, 2007 Metso had outstanding nickel swaps amounting to 396 tons. The following table on the sensitivity analysis of the commodity price based on financial instruments under IFRS 7 comprises the net aggregate amount of commodities bought through forward contracts and swaps but excludes the anticipated future consumption of raw materials and electricity. A 10% parallel change upwards or downwards in commodity price curves would have following effects, net of taxes: EUR million Electricity effect in equity + / / 1.3 Electricity effect in income statement + / / 0.0 Nickel effect in income statement + / 1.4 As hedge accounting is applied, the effective portion of electricity forwards is recognized in equity. The ineffective portion is recognized through the income statement. Hedge accounting is not applied to nickel agreements and the change in the fair value is recorded in the income statement. Other commodity risks are not managed using financial derivative instruments. Credit and counterparty risk Credit or counterparty risk is defined as the possibility of a customer or a financial counterparty not fulfilling its commitments towards Metso. Metso s operating units are primarily responsible for credit risks pertaining to sales activities. The units assess the credit quality of their customers, taking into account their financial position, past experience and other relevant factors. Metso s Corporate Treasury provides centralized services related to customer financing and seeks to ensure that the principles of the Treasury Policy are adhered to with respect to terms of payment and required collateral. Metso has no significant concentrations of credit risks. The maximum credit risk equals to the carrying value of trade and loan receivables. The aging structure of trade receivables is shown in note 18. Counterparty risk arises also from financial transactions agreed upon with banks and financial institutions. The risk is managed by careful selection of banks and other counterparties, by counterparty specific limits and netting agreements such as ISDA (Master agreement of International Swaps and Derivatives Association). The compliance with counterparty limits is regularly monitored. 64

67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 Critical accounting estimates and judgements The preparation of the consolidated financial statements requires management to make estimates and judgements affecting the amounts reported in the consolidated financial statements and accompanying notes. These estimates and judgements, based on historical evidence and plausible future scenarios, are continually evaluated. Following assets and liabilities include a high degree of management estimate and assumptions and their carrying value can therefore materially differ from current value within the next financial year. Trade receivables Metso s policy is to maintain an allowance for bad debt based on the best estimate of the amounts that are potentially uncollectable at the balance sheet date. The estimates are based on a systematic, on-going review and evaluation performed as part of the credit-risk evaluation process. As part of this evaluation, Metso takes into account the history of collections, the size and compositions of the receivable balances, current economic events and conditions and other pertinent information. Inventory Metso s policy is to maintain an allowance for slow-moving and obsolete inventory based on the best estimate of such amounts at the balance sheet date. The estimates are based on a systematic, on-going review and evaluation of inventory balances. As part of this evaluation, Metso also considers the composition and age of the inventory as compared to anticipated future needs. Revenue recognition Metso delivers complete installations to its customers, where the moment of signing a sales contract (firm commitment) and the final acceptance of a delivery by the customer may take place in different financial periods. In accordance with its accounting principles, Metso applies the percentage of completion method ( POC method ) for recognizing such long-term delivery contracts. In year 2007, approximately 38 percent of the net sales were recognized under the POC method, which is based on predetermined milestones and where the revenue is recognized based on the estimated realized value added or on the cost-to-cost method. A projected loss on a firm commitment is recognized in income, when it becomes known. The estimated revenue, the costs and profit, together with the planned delivery schedule of the projects are subject to regular revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Although Metso has significant experience using the POC method, the total costs estimated to be incurred on projects may change over time due to changes in the underlying project costs structures, which may ultimately affect the revenue recognized. Therefore, the POC method is not applied for recognizing sales commitments where the final outcome of the project and related cost structure cannot be pre-established reliably. Accounting for income taxes As part of the process of preparing its consolidated financial statements, Metso is required to estimate the income taxes in each of the jurisdictions and countries in which it operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue and cost reserves, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. The likelihood for the recovery of deferred tax assets from future taxable income is assessed, and to the extent the recovery is not considered likely the deferred asset is adjusted in accordance. Significant management judgement is required in determining the provision for income taxes and the deferred tax assets. Metso has recorded net deferred tax assets of EUR 103 million as of December 31, 2007, adjusted by EUR 9 million for uncertainties related to its ability to utilize some of the deferred tax assets, primarily consisting of operating losses carried forward and deductible temporary differences for certain foreign subsidiaries and the final outcome of tax audits in some subsidiaries. The adjustment is based on Metso s estimates of taxable income by country in which it operates, and the period over which the deferred tax assets will be recoverable based on estimated future taxable income and planned tax strategies to utilize these assets. In the event that actual results differ from these estimates, the deferred tax asset may need to be adjusted in coming financial years. Allocation of excess purchase price to acquired assets In accordance with the accounting principles, excess purchase price has been allocated to acquired assets and assumed 65

68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS liabilities. Whenever feasible, Metso has used as a basis for such allocations readily available market values to determine the fair value basis. However, when this has not been possible, as often is the case with non-current intangible assets and certain assets with no active markets or available price quotations, the valuation has been based on past performance of such asset and expected future cash generating capacity. The appraisals, which have been based on current replacement costs, discounted cash flows and estimated selling prices depending on the underlying asset, require management to make estimates and assumptions of the future performance and use of these assets and their impact on the financial position. Any change in our future business priorities and orientations may affect the planned outcome of initial appraisals. Impairment testing The carrying value of identifiable intangible assets with indefinite economic life and goodwill is tested annually or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. The carrying values of property, plant and equipment and intangible assets, subject to depreciation and amortization are reviewed for impairment whenever there are indications that their carrying values could exceed their value in use or disposal value if disposal is considered as a possible option. Triggering events for impairment reviews include the following: material permanent deterioration in the economic or political environment of the customers or of own activity; significant under-performance relative to expected historical or projected future performance; and significant changes in Metso s strategic orientations affecting the business plans and previous investment policies. The accounting policy related to the impairment tests is based on numerous estimates. The valuation is inherently judgmental and highly susceptible to change from period to period because it requires Metso to make assumptions about future supply and demand related to its individual business units, future sales prices and achievable cost savings. The value of the benefits and savings expected from the efficiency improvement programs are inherently subjective. The fair value of the reporting units is determined using a derived weighted average cost of capital as the rate to discount estimated future cash flows. This rate may not be indicative of actual rates obtained in the market. A one percent increase in the discount rates applied for determining the fair values of the cash generating units would have reduced the total fair value of units tested by little over 13 percent and would not have indicated any impairment needs. Reserve for warranty costs The warranty reserve is based on the history of past warranty costs and claims for machines and equipment under warranty. The typical warranty period is 12 months from the date of customer acceptance of the delivered equipment. For larger projects, the average warranty period is two years. For sales involving new technology and long-term delivery contracts, additional warranty reserves can be established on a case by case basis to take into account the potentially increased risk. Pensions In accordance with IAS 19, the pension benefit expense is based on assumptions that include the following: a weighted average expected return on plan assets. Actual return on plan assets may differ significantly based on market activity. an assumed discount rate to be used in the calculation of the current year pension expense and pension liability balance. This rate may not be indicative of actual rates realized in the market. estimated rates of future pay increases. Actual increases may not reflect actual future increases. Based on the significant change in the Company s structure and the uncertainty of the global market place, these estimates are difficult to project. The actuarial experience that differs from the assumptions and changes in the assumptions can result in gains and losses, which are directly recognized in shareholders equity. A one percent increase in the expected return on plan assets would have reduced pension benefit expense by approximately EUR 2 million, and a one percent decrease in the expected return on plan assets would have increased pension benefit expense by approximately EUR 3 million for the year ended December 31, Share-based payments Share-based payment plans and related incentive programs include vesting conditions such as operating profit targets and service year requirements subsequent to the grant date. Such non-market vesting conditions are included in assumptions about the number of shares that are expected to vest. At each balance sheet date, the management revises its estimates for the number of shares that are expected to vest. As part of this evaluation, Metso takes into account the changes in the forecasted performance of the company and its business areas, the expected turnover of the personnel benefiting from the incentive plan and other pertinent information impacting the number of shares to be vested. 66

69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial instruments In accordance with IFRS 7 on the disclosure requirements of financial instruments, the management is obliged to make certain assumptions of the future cash in and out flows arising from financial instruments and of the calculation of the sensitivity of such instruments: it is impossible to predict the movements of different currencies in relation to one another, hence the realized cash in and out flows of a foreign currency denominated financial instruments and their impact to the consolidated bank and cash can materially differ from the forecasted flows as calculated at the balance sheet date. the sensitivity is calculated by assuming a change in one of the risk factors of a financial instrument, such as interest or currency. It is not likely that the future volatility of a risk factor will develop in accordance with the test assumptions and that only one factor would be impacted. The sensitivity analysis does not either take into account the timing of the change. sensitivity analysis is based on the risk exposures at the balance sheet date. The final outcome can be affected by other factors, such as future profitability and its impact to borrowing costs, which are not included in sensitivity analysis. The management has also had to assume that the fair values of derivatives, especially foreign currency denominated derivatives at balance sheet date materially reflect the future realized cash in or out flow of such instruments. When calculating the sensitivity, Metso has chosen to use market conventions in assuming a 100 basis point variation in interest rates, 10% change in currency parities and in commodity prices because this provides better comparability from one period to another and information on the volatility to users of financial statements. Metso is aware that such assumptions may not be realistic when compared to past volatility; they are not intended to reflect the future development of the volatility. The management has chosen not to use past volatility as this could mislead the users of financial statements to assume the analysis reflect management s view on the future volatility of the financial instruments. 4 Selling, general and administrative expenses Year ended December 31, EUR million Marketing and selling expenses (435) (468) (521) Research and development expenses, net (89) (94) (112) Administrative expenses (270) (284) (339) Total (794) (846) (972) Research and development expenses, net, consist of following: Year ended December 31, EUR million Research and development expenses, total (96) (109) (117) Capitalized development costs 0 (1) 0 Capital expenditure Grants received Depreciation and amortization (7) (6) (6) Research and development expenses, net (89) (94) (112) 67

70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 Other operating income and expenses, net Year ended December 31, EUR million Gain on sale of subsidiaries and businesses 1) Gain on sale of fixed assets 2) Gain on sale of available-for-sale equity investments Rental income Foreign exchange gains 3) Change in fair value of derivatives 4) Reversal of Finnish pension liability 5) 5 Other income Other operating income, total Nonrecurring expenses related to 2003 restructuring program 2) Nonrecurring expenses related to 2004 restructuring program (7) 0 0 Impairment of goodwill 6) (7) Loss on sale of fixed assets 0 (1) Write-downs on fixed assets (8) (6) (5) Foreign exchange losses 3) (11) (14) (19) Change in fair value of derivatives 4) (10) (4) (6) Other expenses (1) (6) (17) Other operating expenses, total (34) (36) (48) Other operating income and expenses, net ) Gain on disposal of Metso Powdermet AB in the year ended December 31, 2006 and gain on sale of the assets of Metso Panelboard s press and energy business in Hannover, Germany, for the year ended December 31, ) In the year ended December 31, 2005, the gain on sale of fixed assets was EUR 18 million, and included EUR 3 million resulting from a sale of assets related to outsourcing of activities as part of the Metso 2003 restructuring program. 3) Includes foreign exchange gains and losses resulting from trade receivables and payables and related derivatives. 4) For more information on derivative instruments, see note 30. 5) Due to certain changes introduced in 2004, the Finnish TEL disability portion was classified as defined contribution plan in December Initially, the liability under IAS 19 amounted to EUR 61 million, net of taxes of EUR 24 million. The Finnish pension liability reversal of EUR 57 million, net of taxes of EUR 23 million, was recorded as income in the last quarter of The remaining liability of EUR 4 million, net of taxes of EUR 1 million was recorded as income during ) Goodwill impairment charge related to Metso Panelboard business, for more information on goodwill impairment see note Personnel expenses and the number of personnel Personnel expenses: Year ended December 31, EUR million Salaries and wages (854) (909) (1,033) Pension costs, defined contribution plans (77) (79) (89) Pension costs, defined benefit plans 1) (10) (9) (8) Reversal of Finnish pension liability (TEL) 1) 5 Other post-employment benefits 1) (3) (4) (3) Share-based payments 0 (5) (3) Other indirect employee costs (143) (162) (203) Total (1,082) (1,168) (1,339) 1) For more information on pension costs, see note

71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Board remuneration: Year ended December 31, EUR thousand Serving board members December 31, 2007: Matti Kavetvuo (73) (87) (89) Jaakko Rauramo (50) (57) (56) Svante Adde (31) (49) (50) Maija-Liisa Friman (47) (58) (59) Christer Gardell (38) (48) Eva Liljeblom (38) Yrjö Neuvo (38) (48) Jukka Leppänen 1) (6) (7) Former board members: Satu Huber (40) (49) (12) Juhani Kuusi (40) (9) Risto Hautamäki (8) Pentti Mäkinen 1) (18) (2) Total (307) (393) (407) 1) Has attended meetings as a personnel representative, no voting right. According to the resolution of the Annual General Meeting held on April 3, 2007, the annual fees are as follows: Chairman of the Board EUR 80,000, Vice Chairman and Chairman of the Audit Committee EUR 50,000, and other members EUR 40,000 each. In addition, an attendance fee of EUR 500 per meeting is paid to all members for meetings of the Board and its Committees. Compensation for traveling expenses and daily allowances are paid in accordance with Metso s travel policy. Remuneration paid to Chief Executive Officer and Executive Team: Year ended December 31, EUR thousand Salaries and other short-term employee benefits (2,233) (3,195) (2,682) Share-based payments (2,147) Total (2,233) (3,195) (4,829) Metso has subscribed pension plans for senior management for retirement at the age of 60, the beneficiaries include some members of the corporate Executive Team and certain senior executives. For the years ended December 31, 2005, 2006 and 2007, the pension insurance premium payments totaled approximately EUR 1.4 million, EUR 1.4 million and EUR 1.8 million, respectively. In 2007, President and CEO Jorma Eloranta s annual fixed salary was EUR 512,096. In addition, a bonus of EUR 249,530 based on year s 2006 result was paid. In 2006 his annual fixed salary was EUR 486,580 and bonus based on previous year s result EUR 236,291. In addition, he benefited from a company car and a telephone. Mr. Eloranta is part of the remuneration and commitment program for Metso s management. During 2007, the remuneration paid to him was EUR 415,848, consisting of 5,000 Metso shares and a cash-settled portion. In 2004, Mr. Eloranta was granted a total of 100,000 Metso 2003A option rights. In 2006 he sold 50,000 options and in the beginning of 2007 further 33,000 options. Eloranta subscribed Metso shares with 15,000 options in 2006 and with 2,000 in the beginning of At the end of 2007, he did not have Metso options. According to his employment contract, Jorma Eloranta s age of retirement is 60 years with a pension benefit amounting to 60 percent of the higher of his average monthly salary for four or ten service years prior to retirement. In case of termination of contract, he is entitled to compensation equal to 24 months salary. Board share ownership in Metso: Serving board members December 31, 2007: Matti Kavetvuo Year ended December 31, 2007 Jaakko Rauramo 4,205 Svante Adde Maija-Liisa Friman 1,500 Christer Gardell Eva Liljeblom 800 Yrjö Neuvo 3,400 Jukka Leppänen 1) 520 Total 10,425 1) Has attended meetings as a personnel representative, no voting right. 69

72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Number of personnel at end of year: Metso Paper 8,852 11,558 11,694 Metso Minerals 8,785 9,433 10,446 Metso Automation 3,169 3,352 3,564 Valmet Automotive 1,068 1, Corporate Office and other Corporate Office and others total 1,372 1,335 1,133 Continuing operations 22,178 25,678 26,837 Discontinued operations Metso total 22,178 25,678 26,837 Average number of personnel during the period: Metso Paper 9,078 9,617 11,690 Metso Minerals 8,549 9,083 9,917 Metso Automation 3,247 3,269 3,477 Valmet Automotive 865 1, Corporate Office and other Corporate Office and others total 1,172 1,395 1,185 Continuing operations 22,046 23,364 26,269 Discontinued operations 359 Metso total 22,405 23,364 26,269 7 Depreciation and amortization Depreciation and amortization expenses consist of the following: Year ended December 31, EUR million Intangible assets (16) (17) (56) Property, plant and equipment Buildings and structures (22) (21) (19) Machinery and equipment (64) (67) (73) Total (102) (105) (148) Depreciation and amortization charged against operations by activity are as follows: Year ended December 31, EUR million Cost of goods sold (60) (65) (91) Selling, general and administrative expenses Marketing and selling (9) (6) (14) Research and development (7) (6) (6) Administrative (26) (28) (37) Total (102) (105) (148) 70

73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 Financial income and expenses, net Year ended December 31, EUR million Financial income Dividends received 1) Interest income Other financial income Net gain (loss) from foreign exchange 4 (1) 7 Financial income total Financial expenses Interest expenses (52) (44) (46) Interest expenses on financial leases (1) (1) (1) Other financial expenses (10) (10) (11) Financial expenses total (63) (55) (58) Financial income and expenses, net (43) (36) (33) 1) Includes dividends from associated companies and from available-for-sale equity investments. 9 Income taxes The components of income taxes are as follows: Year ended December 31, EUR million Current tax (expense) benefit (61) (85) (109) Deferred tax (expense) benefit (11) 74 (54) Income taxes, total (72) (11) (163) The differences between income tax (expense) benefit computed at Finnish statutory rate and income tax (expense) benefit provided on earnings are as follows: Year ended December 31, EUR million Income before taxes from continuing operations Income tax (expense) benefit at Finnish statutory rate (76) (109) (142) Income tax for prior years (1) (4) 4 Difference between Finnish and foreign tax rates (11) (12) (31) Benefit of operating loss carryforward Operating losses with no current tax benefit (1) (4) (1) Non-deductible expenses and tax exempt income (2) (2) (2) Deferred tax asset attributable to the U.S. subsidiaries 1) 87 Other (3) 0 4 Income tax (expense) benefit (72) (11) (163) 1) In the year ended December 31, 2006 Metso recorded a deferred tax asset of EUR 87 million for operating loss carry-forwards, net deductible temporary differences and unused tax credits attributable to the U.S. subsidiaries in full. At December 31, 2005 no deferred tax asset was recorded for these items due to the uncertainty of their utilization. 71

74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Reconciliation of deferred tax balances: EUR million 2006 Deferred tax assets Balance at beginning of year Charged to income statement Charged to shareholders equity Translation differences Acquisitions and disposals Balance at end of year Tax losses carried forward (6) Fixed assets 13 (3) 10 Inventory Provisions Accruals Pension provisions 1) (1) (2) 28 Other Total deferred tax assets (7) (2) Offset against deferred tax liabilities 2) (30) (1) (31) Net deferred tax assets (7) (2) Deferred tax liabilities Purchase price adjustments 26 (6) Fixed assets 13 (2) 11 Other 11 (1) Total deferred tax liabilities 50 (9) Offset against deferred tax assets 2) (30) (1) (31) Net deferred tax liabilities 20 (10) Deferred tax assets, net (11) (3) (35) Deferred tax assets Tax losses carried forward 111 (63) (4) (3) 41 Fixed assets Inventory 26 4 (1) 29 Provisions 20 3 (1) 22 Accruals 33 (2) (2) 29 Pension provisions 1) 28 (3) (1) (1) 23 Other 41 (3) 7 (5) 40 Total deferred tax assets 269 (60) 2 (13) 198 Offset against deferred tax liabilities 2) (31) (23) (54) Net deferred tax assets 238 (83) 2 (13) 144 Deferred tax liabilities Purchase price adjustments 56 (7) 5 54 Fixed assets Other Total deferred tax liabilities 88 (6) Offset against deferred tax assets 2) (31) (23) (54) Net deferred tax liabilities 57 (29) Deferred tax assets, net 181 (54) (6) (13) (5) 103 1) Deferred tax assets on pension provisions for the years ended December 31, 2005 and 2006 have been amended to correspond the change in accounting policy. 2) Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. A deferred tax liability on undistributed profits of subsidiaries located in countries where distribution generates tax consequences is recognized when it is likely that earnings will be distributed in the near future. For the years ended December 31, 2006 and 2007, respectively, earnings of EUR 136 million and EUR 119 million would have been subject to recognition of a deferred tax liability, had Metso regarded a distribution in the near future as likely. 72

75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Tax losses carried forward At December 31, 2007, Metso recorded a deferred tax asset of EUR 41 million on the net operating loss carry-forwards amounting to EUR 201 million (of which EUR 64 million is attributable to Finnish, EUR 43 million to U.S. and EUR 33 million to German subsidiaries). At December 31, 2006 the amount of losses was EUR 384 million (of which EUR 164 million were attributable to Finnish, EUR 77 million to U.S. and EUR 51 million to German subsidiaries). Approximately one third of losses has no expiration date and the remaining part expires mainly between years 2015 and The operating loss carry-forwards for which no deferred tax assets are recognized due to uncertainty of the utilization of these carry-forwards amounted to EUR 30 million and EUR 21 million for the years ended December 31, 2006 and 2007, respectively. These losses expire mainly in the years Tax losses carried forward and related deferred tax assets as at December 31 stated by the most significant countries are as follows: EUR million Tax losses carried forward Potential deferred tax asset Not recorded Deferred tax asset 2006 Finland USA Germany Other Total Finland USA 1) Germany Other Total ) Main part of the remaining losses concern state taxes. 73

76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10 Acquisitions Acquisitions in 2007 Metso Minerals acquired North American metal recycling provider, Bulk Equipment Systems and Technologies Inc (B.E.S.T. Inc), on March 30, The acquisition price was approximately EUR 9 million. Excess purchase price of EUR 3 million was allocated to intangible assets, representing the fair values of the acquired customer base, brands, technology and order backlog. The remaining excess purchase price of EUR 7 million represents goodwill associated to Metso s improved position in the North American metal recycling market. On June 27, 2007, Metso Paper acquired Mecanique et Dépannage Industries s.a.r.l. (MDI), a French company supplying maintenance services to the paper industry. The purchase price was less than EUR 1 million. Metso Paper acquired on July 18, 2007 a UK based service provider Bender Holdings Limited with its subsidiaries. The purchase price was EUR 16 million, net of cash acquired. Excess purchase price of EUR 10 million was allocated to intangible assets, representing the fair values of acquired technology, customer base and existing long-term contracts. The remaining excess purchase price of EUR 6 million is goodwill related to Metso s improved position in the worldwide market for services to pulp and paper industry. Metso Minerals strengthened its metal recycling business by acquiring Mueller Engineering Inc. in the USA on October 31, Mueller Engineering is a shredder plant service provider specializing in servicing the drive motors and related equipment critical to the functioning of the shredder. The purchase price was EUR 6 million. Excess purchase price of EUR 3 million was allocated to intangible assets representing the fair values of acquired customer base, technology and order backlog and the remaining EUR 4 million represents goodwill arising from the leading market position gained on metal recycling plant services in North America. Had these acquisitions taken place on January 1, 2007, Metso s net sales and net profit would have increased by EUR 26 million and EUR 3 million, respectively. Summary information on acquisitions made in 2007: EUR million Carrying value Fair value allocations Fair value Intangible assets Property, plant and equipment 2 2 Inventories 2 2 Trade and other receivables 8 8 Deferred tax liabilities (1) (5) (6) Other liabilities assumed (7) (7) Non-interest bearing net assets Cash and cash equivalents acquired 4 4 Debt assumed (1) (1) Purchase price (36) (36) Goodwill 29 (11) 18 Purchase price settled in cash (36) Cash and cash equivalents acquired 4 Cash outflow on acquisitions (32) Metso recognized intangible assets relating to the acquired businesses as follows: EUR million Amortization periods Fair value Technology 3 to 10 years 4 Customer relationships 3 to 8 years 8 Order backlog 10 months to 6 years 2 Brands not amortized 1 Other intangible assets 2 to 3 years 1 Total 16 74

77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Acquisition of Pulping and Power businesses in 2006 Metso acquired the Pulping and Power businesses from Aker Kvaerner on December 29, The final asset values of the businesses were agreed upon in July 2007 and the revised purchase price amounted to EUR 336 million including EUR 6 million in expenses related to the acquisition and EUR 53 million of net cash. The resulting purchase price adjustment of EUR 23 million was settled in July. The total excess purchase price decreased by EUR 6 million from the initial assessment and amounted to EUR 379 million, whereof EUR 154 million was allocated to intangible assets, representing the fair values of acquired customer base, technology and order backlog. The related deferred tax liability was EUR 41 million. The remaining excess purchase price of EUR 266 million represents goodwill, which reflects the value of assembled workforce, significant synergy benefits and widened business portfolio offering Metso potential to expand its operations into new markets and customer segments. Had the acquisition occurred on January 1, 2006, Metso s net sales for 2006 would have increased by EUR 600 million. Details of the acquired net assets and goodwill are as follows: EUR million Carrying value Fair value allocations Fair value Intangible assets Property, plant and equipment Inventories Trade and other receivables Other assets Minority interests Advances received (214) (214) Deferred tax liabilities (4) (41) (45) Other liabilities assumed (175) (175) Non-interest bearing net assets (96) Cash and cash equivalents acquired Debt assumed (195) (195) Purchase price (330) (330) Costs related to acquisition (6) (6) Goodwill 379 (113) 266 Purchase price settled in cash (307) Settlement of acquired debt (195) Costs related to acquisition (6) Cash and cash equivalents acquired 248 Cash outflow on acquisition for 2006 (260) Purchase price adjustment paid in July 2007 (23) Total cash outflow on acquisition (283) Metso recognized intangible assets relating to the acquired businesses as follows: EUR million Amortization periods Fair value Technology 5 to 15 years 55 Customer relationships 11 to 12 years 69 Order backlog 6 months to 2 years 30 Other intangible assets 5 years 5 Total

78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other acquisitions in 2006 In August 2006, Metso acquired a Chinese paper machine manufacturer Shanghai-Chenming Paper Machinery Co. Ltd. at a cash consideration of EUR 12 million and debt assumed of EUR 19 million. The company was consolidated into Metso Paper from September 2006 onwards. Additionally, Metso acquired minor service related businesses in Sweden for a purchase consideration of EUR 4 million and the remaining minority interest of 35% in Metso-SHI Co. Ltd. in Japan at a price of EUR 2 million. No excess purchase price was allocated to intangible assets from the other acquisitions made in Summary information on other acquisitions made in 2006: EUR million Carrying value Intangible assets 4 Property, plant and equipment 24 Inventories 5 Trade and other receivables 0 Other assets 1 Minority interests 2 Advances received (6) Deferred tax liabilities 0 Other liabilities assumed (8) Non-interest bearing net assets 22 Cash and cash equivalents acquired 2 Debt assumed (19) Purchase price (18) Goodwill 13 Purchase price settled in cash (18) Cash and cash equivalents acquired 2 Cash outflow on acquisitions (16) 76

79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11 Disposals of businesses and discontinued operations Disposals of businesses Metso sold the assets of its press and energy business in Hannover, Germany, to Siempelkamp Energy Systems GmbH in September The business was part of Metso Paper s Panelboard business line. The transaction price was EUR 7 million. Metso sold the majority of Metso Paper AG in Delémont, Switzerland, in March Metso Paper remained as a minority shareholder in the company. The transaction price net of cash sold was EUR 2 million. Metso finalized in December 2006 the divestment of Metso Powdermet AB in Sweden to Sandvik AB for EUR 13 million. Metso recorded a tax-free gain of EUR 10 million on the divestment. None of these businesses qualified as separate business line within Metso, hence was not classified as discontinued operations. The gains on these disposals are reported under Other operating income and expenses, net. Discontinued operations Metso Drives, a manufacturer of paper machine drives and other industrial gears as well as wind turbine gears, was sold to the funds managed by Finnish private equity investor CapMan as of April 8, The transaction price was EUR 98 million resulting in a gain on sale of EUR 17 million. The business disposals were as follows: Year ended December 31, EUR million Cash and cash equivalents Intangible assets 1 0 Property, plant and equipment Goodwill 7 Other assets Minority interests Liabilities sold (33) (4) (3) Net assets of disposed businesses Gain on disposal Total consideration Consideration received in cash Cash and cash equivalents disposed of (3) 0 (1) Cash inflow on disposals Income statement for discontinued operations (no operations were classified as discontinued in 2006 and 2007): Year ended December 31, EUR million Net sales 26 Expenses (26) Profit before tax 0 Income taxes 0 Profit after tax 0 Gain on the disposal of the disposal group before tax 17 Taxes 0 Gain on the disposal of the disposal group after tax 17 Profit on discontinued operations, net of taxes 17 Cash flows provided by (used in) discontinued operations (no operations were classified as discontinued in 2006 and 2007): Year ended December 31, EUR million Cash flows provided by (used in) operating activities 2 Cash flows provided by (used in) investing activities 0 Cash flows provided by (used in) financing activities (2) Cash flows provided by (used in) discontinued operations 0 77

80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12 Earnings per share Earnings per share are calculated as follows: Basic Basic earnings per share are calculated by dividing the profit attributable to equity shareholders of the Company by the weighted average number of ordinary shares in issue during the year, excluding own shares. Year ended December 31, EUR million (except for number of shares and per share amounts) Profit attributable to equity shareholders, continuing operations Profit attributable to equity shareholders, discontinued operations 17 Profit attributable to equity shareholders, continuing and discontinued operations Weighted average number of shares issued and outstanding (in thousands) 139, , ,460 Basic earnings per share, continuing operations, EUR Basic earnings per share, discontinued operations, EUR 0.12 Basic earnings per share, continuing and discontinued operations, EUR Diluted The diluted earnings per share have been calculated by applying the treasury stock method, under which earnings per share data is calculated as if the warrants and options were exercised at the beginning of the period, or on the issuance of warrants and options, if that occurs later during the period, and as if the funds obtained thereby were used to purchase common stock at the average market price during the period. In addition to the weighted average number of shares outstanding, the denominator includes the incremental shares obtained through the assumed exercise of the warrants and options. The warrants and options have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the warrants and options. Year ended December 31, EUR million (except for number of shares and per share amounts) Profit attributable to equity shareholders, continuing operations Profit attributable to equity shareholders, discontinued operations 17 Profit attributable to equity shareholders, continuing and discontinued operations Weighted average number of shares issued and outstanding (in thousands) 139, , ,460 Adjustment for share options (in thousands) Weighted average number of diluted shares issued and outstanding (in thousands) 139, , ,460 Diluted earnings per share, continuing operations, EUR Diluted earnings per share, discontinued operations, EUR 0.12 Diluted earnings per share, continuing and discontinued operations, EUR

81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13 Intangible assets and property, plant and equipment EUR million 2006 Goodwill Patents and licences Capitalized software Other intangible assets Intangible assets total Acquisition cost at beginning of year Translation differences (7) 0 (1) (1) (9) Business acquisitions Disposals of businesses 0 0 Capital expenditure Reclassifications 1) 5 7 (7) 5 Decreases (7) (21) 0 (1) (29) Acquisition cost at end of year ,136 Accumulated depreciation and amortization at beginning of year (40) (15) (35) (90) Translation differences Business acquisitions (3) (2) (1) (6) Disposals of businesses 0 0 Reclassifications Decreases Depreciation and amortization charges for the year (7) (5) (5) (17) Accumulated depreciation at end of year (34) (22) (38) (94) Net book value at end of year , Acquisition cost at beginning of year ,136 Translation differences (9) (1) 0 (1) (11) Business acquisitions Disposals of businesses (1) (1) (2) Capital expenditure Reclassifications 4 3 (7) 0 Decreases (3) (1) (7) (11) Acquisition cost at end of year ,164 Accumulated depreciation and amortization at beginning of year (34) (22) (38) (94) Translation differences Business acquisitions Disposals of businesses Reclassifications Decreases Depreciation and amortization charges for the year (7) (6) (43) (56) Accumulated depreciation at end of year (38) (28) (75) (141) Net book value at end of year ,023 1) Includes reclassifications between intangible assets and assets under construction of EUR 5 million for the year ended December 31,

82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EUR million 2006 Land and water areas Buildings and structures Machinery and equipment Assets under construction Property, plant and equipment total Acquisition cost at beginning of year , ,741 Translation differences (1) (7) (18) (1) (27) Business acquisitions Disposals of businesses 0 0 Capital expenditure Reclassifications 1) (41) (5) Decreases (1) (25) (162) 0 (188) Acquisition cost at end of year , ,719 Accumulated depreciation and amortization at beginning of year (260) (900) (1,160) Translation differences Business acquisitions (4) (44) (48) Disposals of businesses 0 0 Reclassifications 2 (2) 0 Decreases Depreciation and amortization charges for the year (21) (67) (88) Accumulated depreciation at end of year (261) (843) (1,104) Net book value at end of year Acquisition cost at beginning of year , ,719 Translation differences (1) (9) (15) 0 (25) Business acquisitions Disposals of businesses (2) 0 (2) Capital expenditure Reclassifications (31) 0 Decreases (3) (9) (61) (1) (74) Acquisition cost at end of year , ,762 Accumulated depreciation and amortization at beginning of year (261) (843) (1,104) Translation differences Business acquisitions (1) (5) (6) Disposals of businesses 2 2 Reclassifications Decreases Depreciation and amortization charges for the year (19) (73) (92) Accumulated depreciation at end of year (273) (855) (1,128) Net book value at end of year ) Includes reclassifications between intangible assets and assets under construction of EUR 5 million for the year ended December 31, For information on pledged assets, see note

83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangible assets arising from fair value allocations relating to acquired businesses: EUR million 2006 Order backlog Technology Patents Customer relation ships Brands Other intangibles Acquired intangible assets total Acquisition cost at beginning of year Translation differences Business acquisitions Decreases (2) (2) Acquisition cost at end of year Accumulated depreciation and amortization at beginning of year (1) (2) 0 (3) Translation differences Decreases Depreciation and amortization charges for the year (1) (1) 0 (2) Accumulated depreciation at end of year 0 (3) 0 (3) Net book value at end of year Acquisition cost at beginning of year Translation differences (1) 0 (1) Business acquisitions Decreases (24) (24) Acquisition cost at end of year Accumulated depreciation and amortization at beginning of year 0 0 (3) 0 (3) Translation differences Decreases Depreciation and amortization charges for the year (24) (7) (1) (6) (38) Accumulated depreciation at end of year 0 (7) (4) (6) (17) Net book value at end of year Other intangible assets with indefinite useful life, i.e. brands, amounted to EUR 15 million and EUR 16 million for the years ended December 31, 2006 and 2007, respectively. They relate to Metso Minerals business area and have been recognized in connection with business acquisitions. Economic useful life could not to be determined at the time of the acquisition, and the management has assessed them to have indefinite useful lives based on their continuous competitive advantage to the business. The brands are actively used in promoting the products. They are subject to annual impairment test concurrently with that of the goodwill. For the year ended December 31, 2007 the amortization expense related to the intangible assets recognized through business acquisitions was EUR 38 million. The future amortization expense is expected to amount to EUR 23, EUR 16, EUR 16, EUR 15 and EUR 12 million for the years 2008, 2009, 2010, 2011 and 2012, respectively. 81

84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assets leased under financial lease arrangements are included in property, plant and equipment as follows: EUR million 2006 Buildings and structures Machinery and equipment Property, plant and equipment total Acquisition cost at end of year Accumulated depreciation at end of year (11) (4) (15) Net book value at end of year Acquisition cost at end of year Accumulated depreciation at end of year (13) (5) (18) Net book value at end of year Capitalization of interest expenses EUR million Net capitalized interest at beginning of year 1 1 Amortization of capitalized interest expense 0 0 Net capitalized interest at end of year 1 1 Goodwill impairment Metso assesses the value of the goodwill for impairment annually or more frequently, if facts and circumstances indicate the need, using fair value measurement techniques, such as the discounted cash flow methodology. The testing is performed on the cash generating unit level. The recoverable amount of a cash generating unit is based on value-in-use calculations. In the discounted cash flow method, Metso discounts forecast performance plans to their present value. The performance plans, which include four years of projection, are calculated in the annual strategy process and subsequently approved by Metso s management and the Board of Directors. In addition to the projection period, the discounted cash flows include an additional year, which is extrapolated from the average performance of the projection period adjusted for cyclicality of each cash generating unit. The growth rate reflecting the long-term average growth rate of businesses subject to testing, was determined to be 1.7% in 2005, 2006 and The forecast sales and production volumes are based on current structure and existing property, plant and equipment of Metso. The most significant assumptions are the market and product mix. Values assigned to key assumptions reflect past experience. Data on growth, demand and price development provided by various research institutions are utilized in establishing the assumptions for the projection period. The discount rate is the derived weighted average cost of capital for the cash generating unit, calculated as the opportunity cost to all capital providers weighted by their relative contribution to the cash generating unit s total capital and the risk associated with the cash flow and the timing of the cash flow. The discount rates vary between the cash generating units. The comparison methods and other estimation techniques are utilized to verify the reasonableness of the value derived from the discounted cash flow. As a result of the performed annual impairment tests, no impairment losses were recognized in In the last quarter of 2006, subsequent to past under-performance, the management reviewed the outlook and strategy of Metso Panelboard, reported under Metso Paper. The present value of the cash flows based on the reviewed performance plans indicated an impairment risk in the carrying value of the goodwill and an impairment loss of EUR 7 million was recognized. 82

85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of changes in Metso s goodwill by business area is as follows: EUR million 2006 Derived weighted average cost of capital applied Balance at beginning of year Translation difference and other changes Impairment loss Balance at end of year Metso Paper 12.2% 12.5% (7) 356 Metso Minerals 12.1% 12.3% Metso Automation 14.9% 15.0% Total 12.1% 15.0% (7) 768 EUR million 2007 Derived weighted average cost of capital applied Balance at beginning of year Translation difference and other changes Impairment loss Balance at end of year Metso Paper 10.4% 10.6% 356 (4) 352 Metso Minerals 10.6% Metso Automation 11.4% 20 (1) 19 Total 10.4% 11.4% The acquisition of Aker Kvaerner s Pulping and Power businesses as of December 31, 2006 increased goodwill by EUR 266 million in Metso Paper. For more information on acquisitions, see note Investments in associated companies EUR million Investments in associated companies and joint ventures Acquisition cost at beginning of year 9 6 Translation differences 0 0 Increases 0 0 Disposals and other decreases (3) 0 Acquisition cost at end of year 6 6 Equity adjustments in investments in associated companies and joint ventures Equity adjustments at beginning of year Share of results 1 3 Translation differences (2) (1) Dividend income (2) (1) Disposals and other changes 5 (1) Equity adjustments at end of year Carrying value of investments in associated companies and joint ventures at end of year

86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As at December 31, Carrying Carrying EUR million Ownership value Ownership value Allimand S.A. 35.8% % 5 Valmet-Xian Paper Machinery Co. Ltd. 48.3% % 6 Shanghai Neles-Jamesbury Valve Co. Ltd 50.0% % 5 Avantone Oy 48.2% 0 Others 3 3 Total investments in associated companies and joint ventures Shanghai Neles-Jamesbury Valve Co. Ltd is classified as joint venture because Metso has, together with the other shareholder, joint power to govern the company. The amounts representing Metso s share of the assets and liabilities, net sales and results of the associated companies and joint ventures, which have been accounted for using the equity method are presented below: Year ended December 31, EUR million Assets Liabilities Net sales Profit (loss) Related party transactions The following transactions were carried out with associated companies and joint ventures and the following balances have arisen from such transactions: Year ended December 31, EUR million Net sales Purchases Receivables Payables Available-for-sale equity investments As at December 31, Number Carrying Number Carrying EUR million (except for number of shares) of shares Ownership value of shares Ownership value Tamfelt Corporation 726, % 8 726, % 8 Talvivaara Mining Company Ltd. 10, % 2 7,616, % 31 Other shares and securities 5 6 Total available-for-sale equity investments The available-for-sale equity investments have changed as follows: EUR million Carrying value as at January Additions 2 0 Changes in fair values 2 38 Disposals (1) (8) Carrying value as at December Talvivaara Mining Company Ltd was listed in London Stock Exchange during 2007, following a public share offering. In connection with the offering, Metso Minerals Oy increased its holding as a result of converting its holding of convertible loans to shares. 84

87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16 Percentage of completion Net sales recognized under the percentage of completion method amounted to EUR 1,450 million, or 29 percent of net sales, in 2006 and EUR 2,362 million, or 38 percent of net sales, in The percentage was highest in the Metso Paper business area, where it accounted for 50 percent in 2006 and 60 percent in Information on balance sheet items of uncompleted projects at December 31, 2006 and 2007 is as follows: EUR million 2006 Cost and earnings of uncompleted projects Billings of projects Projects where cost and earnings exceed billings 1,296 1, Projects where billings exceed cost and earnings Net 2007 Projects where cost and earnings exceed billings 1,514 1, Projects where billings exceed cost and earnings 1,125 1, Inventory As at December 31, EUR million Materials and supplies Work in process Finished products Total inventory 1,112 1,410 The cost of inventories recognized as expense was EUR 3,598 million and EUR 4,611 million for the years ended December 31, 2006 and 2007, respectively. Allowance for inventory obsolescence has changed as follows: As at December 31, EUR million Balance at beginning of year Impact of exchange rates (3) (2) Additions charged to expense Increase from business acquisitions 0 0 Realized reserve (9) (4) Deductions / other additions (2) (3) Balance at end of year For additional information on allowances, see also note 3. 85

88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18 Interest bearing and non-interest bearing receivables EUR million Interest bearing receivables As at December 31, Noncurrent Current Total Noncurrent Current Total Loan receivables Available-for-sale financial investments Trade receivables Total Non-interest bearing receivables Loan receivables Trade receivables Prepaid expenses and accrued income Derivative financial instruments Other receivables Total 33 1,218 1, ,274 1,296 Metso actively manages its cash by investing in financial instruments with varying maturities. Instruments, such as commercial papers, exceeding maturity of three months are classified as Available-for-sale financial investments. Allowance for doubtful notes and receivables has changed as follows: As at December 31, EUR million Balance at beginning of year Impact of exchange rates (2) (1) Additions charged to expense Increase from business acquisitions 1 0 Realized reserve (6) (5) Deductions / other additions (3) (6) Balance at end of year For additional information on allowances, see also note 3. Analysis of trade receivables by age: As at December 31, EUR million 2007 Trade receivables, not due at reporting date 705 Trade receivables 1 30 days overdue 152 Trade receivables days overdue 60 Trade receivables days overdue 30 Trade receivables days overdue 23 Trade receivables more than 180 days overdue 29 Total

89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19 Financial assets and liabilities Financial assets and liabilities divided by categories were as follows as of December 31: EUR million Financial assets/liabilities at fair value through profit and loss Loans and receivables Availablefor-sale financial assets Financial liabilities measured at amortized cost Carrying value Fair value 2006 Non-current assets Available-for-sale equity investments Loan receivables Available-for-sale financial investments Trade receivables Derivative financial instruments Other receivables Carrying value by category Current assets Loan receivables Available-for-sale financial investments Trade receivables Derivative financial instruments Other receivables Carrying value by category 17 1, ,230 1,230 Non-current liabilities Bonds Loans from financial institutions Finance lease obligations Other long-term debt Derivative financial instruments Other liabilities Carrying value by category Current liabilities Current portion of long-term debt Loans from financial institutions Other short-term debt Trade payables Derivative financial instruments Other liabilities Carrying value by category 1 1,462 1,463 1,453 87

90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EUR million Financial assets/liabilities at fair value through profit and loss Loans and receivables Availablefor-sale financial assets Financial liabilities measured at amortized cost Carrying value Fair value 2007 Non-current assets Available-for-sale equity investments Loan receivables Available-for-sale financial investments Trade receivables Derivative financial instruments Other receivables Carrying value by category Current assets Loan receivables Available-for-sale financial investments Trade receivables Derivative financial instruments Other receivables Carrying value by category 18 1, ,276 1,276 Non-current liabilities Bonds Loans from financial institutions Finance lease obligations Other long-term debt Derivative financial instruments Other liabilities Carrying value by category Current liabilities Current portion of long-term debt Loans from financial institutions Other short-term debt Trade payables Derivative financial instruments Other liabilities Carrying value by category 16 1,410 1,426 1,426 88

91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20 Cash and cash equivalents As at December 31, EUR million Bank and cash Commercial papers and other investments Total cash and cash equivalents Equity Metso Corporation s fully paid share capital entered in the trade register was EUR 240,923, and EUR 240,982, as at December 31, 2006 and 2007, respectively. Share amounts Number of outstanding shares, January 1 141,593, ,358,773 Share options exercised 65,000 35,000 Redemption of own shares by a partnership (MEO1V Incentive Ky) (300,000) Shares granted from share ownership plan 93,461 Number of outstanding shares, December ,358, ,487,234 Treasury shares held by the Parent Company 60,841 60,841 Shares administered by a partnership (MEO1V Incentive Ky) 300, ,539 Total number of shares, December ,719, ,754,614 The number of shares subscribed with Metso s 2003A stock options in 2006 and 2007 was 65,000 and 35,000, respectively. The subscription price was EUR 8.70 per share and as a result of these share subscriptions, Metso s share capital increased in 2006 and 2007 by EUR 110,500 and 59,500, respectively. Metso has outsourced the administration of the share ownership plan to a partnership (MEO1V Incentive Ky) included in Metso s consolidated financial statements. In 2007, 93,461 shares, which have been transferred from the partnership to beneficiaries, were granted within the share ownership plan. The acquisition price of the treasury shares acquired in 1999 was EUR 654,813 and the acquisition price of 206,539 own shares, acquired in 2007 and held by the partnership, was EUR 7,599,334. The acquisition price of own shares is recognized in the treasury stock. Metso Corporation s Board of Directors proposes to the Annual General Meeting to be held on April 2, 2008 that a dividend of EUR 3.00 per share be distributed for the year ended December 31, The dividend consists of an ordinary dividend of EUR 1.65 and an extra dividend of EUR These financial statements do not reflect this dividend payable of EUR 425 million. The 206,539 shares held by MEO1V Incentive Ky are also entitled to dividend. Fair value and other reserves Hedge reserve includes the fair value movements of derivative financial instruments which qualify as cash flow hedges. Fair value reserve includes the change in fair values of assets classified as available-for-sale. Share options and shares granted are presented in fair value reserve. Legal reserve consists of restricted equity, which has been transferred from distributable funds under the Articles of Association, local company act or by a decision of the shareholders. Other reserves consist of a distributable fund held by the Parent Company. 89

92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in fair value and other reserves: EUR million Treasury stock Hedge reserve Fair value reserve Legal reserve Other reserves Balance as of January 1, 2005 (1) Total Cash flow hedges Fair value gains, net of taxes (4) (4) Transferred to profit and loss, net of taxes Net sales (7) (7) Available-for-sale equity investments Fair value gains, net of taxes 2 2 Transferred to profit and loss, net of taxes (2) (2) Share-based payments 0 0 Balance as of December 31, 2005 (1) (7) Cash flow hedges Fair value gains, net of taxes Transferred to profit and loss, net of taxes Net sales (8) (8) Available-for-sale equity investments Fair value gains, net of taxes 2 2 Transferred to profit and loss, net of taxes (1) (1) Redemption of own shares (11) (11) Share-based payments 1 1 Other 1 1 Balance as of December 31, 2006 (12) Cash flow hedges Fair value gains, net of taxes 4 4 Transferred to profit and loss, net of taxes Net sales (8) (8) Cost of goods sold / Administrative expenses 2 2 Available-for-sale equity investments Fair value gains, net of taxes Transferred to profit and loss, net of taxes (6) (6) Share-based payments Other 7 (8) (1) Balance as of December 31, 2007 (8) Foreign currency translation included in the shareholders equity: EUR million Cumulative translation adjustment as of January 1 (9) (45) Change in foreign currency translation (59) (29) Hedging of net investment denominated in foreign currency 28 (5) Tax effect (6) 3 Transfer of translation differences 1 Cumulative translation adjustment as of December 31 (45) (76) 90

93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22 Share-based payments In 2007 Metso had one share ownership plan and one options program. Share ownership plan The Board of Directors of Metso decided in December 2005 upon a share ownership plan for the strategy period. The share ownership plan is part of the remuneration and commitment program of the management and covers a maximum of 360,000 own shares. The share ownership plan covers three earning periods i.e. calendar years 2006, 2007 and The incentives consist of both shares and cash. The cash-settled portion is dedicated to cover taxes and tax-related payments of the beneficiaries. The main earnings triggers are the operating profit targets and four years of service subsequent to grant date. The operating profit targets and potential personal earnings triggers are set separately for each year. A maximum share price is determined annually for the share ownership plan. The final amount of the granted shares is based on the average share price during the first two full weeks of March. If the share price exceeds the maximum, the number of shares awarded shall be reduced by a corresponding ratio. Share ownership plan during earnings period 2006 The equity-settled portion for the earnings period 2006 is recognized over the vesting period i.e. from 2006 until March 2010 based on the average share price on the grant dates of EUR The maximum share price determined for the plan was EUR 38. The average price for the Metso share was EUR during the two full weeks of March Share ownership plan during earnings period 2007 The maximum share price for earnings period 2007 is EUR 48. On the grant dates, the average price for the Metso share was EUR Beneficiaries and granted shares of the share ownership plan as at December 31, 2007: Plan 2006 Metso Executive Team Shares Other beneficiaries Shares Beneficiaries total Shares total Granted 7 25, , ,961 Returned (4) (6,500) (4) (6,500) At end of year 7 25, , ,461 Plan 2007 Maximum granted 6 26, , ,110 Total at the end of year 52, , ,571 Costs recognized for the share ownership plan: EUR thousand Plan 2006 Plan 2007 Total 2006 Metso Executive Team (1,365) (1,365) Other beneficiaries (3,466) (3,466) Total (4,831) (4,831) 2007 Metso Executive Team (187) (685) (872) Other beneficiaries (182) (2,059) (2,241) Total (369) (2,744) (3,113) Total (5,200) (2,744) (7,944) The compensation expense for the shares, which is accounted for as equity-settled, is recognized as an employee benefit expense with corresponding entry in equity. The cost of the equity-settled portion, which will be evenly recognized during the required service period, is based on the market price of Metso s share on the grant date. The compensation expense resulting from the cash-settled transaction is recognized as an employee benefit expense with a corresponding entry in short-term liabilities. The cash-settled portion is fair valued at each balance sheet date based on the prevailing share price and accrued until the settlement date. 91

94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2003 options program As at December 31, 2007, Metso had one options program: the 2003 options program. The Board of Directors have reserved the remaining 100,000 of 2003A options for future needs, and they are held by Metso s subsidiary Metso Capital Ltd. President and CEO Jorma Eloranta was granted 100,000 year 2003A options in In 2006 he sold 50,000 and in the beginning of 2007 further 33,000 options. Eloranta subscribed Metso shares with 15,000 options in 2006 and with 2,000 options in the beginning of A options have been listed on the main list of the Helsinki Stock Exchange since May 2, The share subscription price for the 2003A options is EUR 8.70 and the share subscription period is April 1, 2006 April 30, Changes and average exercise prices related to the year 2003 options program are as follows: Average exercise price EUR/share As at December 31, 2006 Average 2007 Amount exercise of price options EUR/share Amount of options Beginning of year , ,000 Granted Forfeited Exercised 8.70 (65,000) 8.70 (35,000) Expired End of year ,000 The fair value of 2003A options granted in 2004 was EUR 4.47 each determined using the Black Scholes valuation model. The variables applied in the Black Scholes model were as follows: Share price, EUR Exercise price, EUR Volatility, % Risk-free interest rate, % 3.29 Expected annual dividends, EUR Expected life in years 5.17 The volatility measured at the standard deviation of expected share price returns is based on statistical analysis of daily historical share prices over last five years Long-term debt Long-term debt consists of the following at December 31: Carrying values Fair values EUR million Bonds Loans from financial institutions Finance lease obligations Other long-term debt Less current maturities Total The fair values of long-term debt are equal to the present value of their future cash flows. 92

95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Bonds: EUR million Nominal interest rate Dec. 31, 2007 Effective interest rate Dec. 31, 2007 Original loan amount in currency Outstanding carrying value at December 31, USD % 6.46% EUR Private placements issued under EMTN program, maturing % EUR Bonds total Less current maturities 83 Bonds, long-term portion Metso has a Euro Medium Term Note Program (EMTN) of EUR 1 billion, under which EUR 443 million and EUR 509 million expressed in carrying value were outstanding at the end of 2006 and 2007, respectively. EUR 262 million of the outstanding amount were public bonds and EUR 247 million private placements. USD denominated bond registered with the U.S. Securities and Exchange Commission which had an outstanding notional amount of USD 109 million matured according to its terms in Loans from financial institutions consist of bank borrowings with either fixed or variable interest rates. A major share of loans is either EUR, USD of SEK denominated. The interest rates vary from 1.0% (EUR) to 6.3% (CNY). The loans are payable from year 2008 to Interest rates of the finance lease obligations vary from 4.0% (EUR) to 12.5% (ZAR). Since 2006 Metso has had a revolving five-year loan facility of EUR 500 million with a syndicate of 14 banks. The facility was undrawn at the end of 2006 and Contractual maturities of interest bearing debt as at December 31, 2007 are as follows: EUR million Bonds Loans from financial institutions Finance lease obligations Other long-term debt Repayments Interests Repayments Interests Repayments Interests Repayments Interests Repayments Interests Repayments Interests Later The maturities of derivative financial instruments are presented in note 30. Total 93

96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24 Provisions As at December 31, EUR million Non-current Current Total Non-current Current Total Warranty and guarantee liabilities Accrued restructuring expenses Environmental and product liabilities Other provisions Total The provisions, including both non-current and current ones, have changed as follows during the financial year 2007: EUR million Balance at beginning of year Impact of exchange rates Additions charged to expense Increase from business acquisitions Realized reserve Reversal of reserve/ other changes Balance at end of year Accrued restructuring expenses 1) 32 (1) 10 (10) (8) 23 Environmental and product liabilities (2) (1) 6 Total 38 (1) 13 (12) (9) 29 1) Other changes in restructuring expenses include EUR 4 million of early retirement plans resulting from the acquisition of Pulping business in Sweden, which have been reclassified to pension liabilities. Provisions, for which the expected settlement date exceeds one year from the moment of their recognition, are discounted to their present value and adjusted in subsequent periods for the time effect. Accrued restructuring expenses The costs included in a provision for restructuring are those costs that are either incremental and incurred as a direct result of the formal plan approved and committed by management, or are the result of a continuing contractual obligation with no continuing economic benefit to Metso or a penalty incurred to cancel the contractual obligation. Provision also includes other costs incurred as a result of the plan, such as environmental liabilities and costs to transfer operations to new locations. Environmental and product liabilities Metso accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. The amounts of accruals are adjusted later as further information develops or circumstances change. As at December 31, 2007, environmental liabilities amounted to EUR 3 million. It included clean-up costs for soil and water contamination at various sites in the Unites States previously operated by Metso Minerals and clean-up costs for groundwater contamination at a site in Belgium previously owned by Metso Panelboard. Metso is occasionally involved in product liablity claims. As at December 31, 2007, provisions for product liabilities amounted to EUR 3 million. Warranty and guarantee provisions The provisions for warranty and guarantee liabilities have changed as follows during the financial year 2007: EUR million Balance at beginning of year Impact of exchange rates Increase for current year s deliveries Increase for previous years deliveries Increase from business acquisitions Deductions Balance at end of year Warranty and guarantee provisions 194 (3) (102) 193 Metso issues various types of contractual product warranties under which it generally guarantees the performance levels agreed in the sales contract, the performance of products delivered during the agreed warranty period and services rendered for a certain period or term. The warranty liability is based on historical realized warranty costs for deliveries of standard products and services. The usual warranty is 12 months from the date of customer acceptance of the delivered equipment. For larger projects, the average warranty period is two years. For more complex contracts, including long-term projects sold by Metso Paper and Metso Minerals, the warranty reserve is calculated contract by contract and updated regularly to take into consideration any changes in the potential warranty liability. 94

97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 Short-term debt Other interest bearing short-term debt consists of the following at December 31: EUR million Loans from financial institutions Domestic commercial paper financing Total The weighted average interest rate applicable to short-term borrowing at December 31, 2006 and 2007 was 4.0% and 3.3%, respectively. In 2008, interest amounting to EUR 2 million is expected to be paid concurrently with respective principals on the short-term debt presented above. Metso has established a short-term Euro Commercial Paper program of EUR 150 million and a domestic commercial paper program amounting to EUR 300 million. Domestic commercial papers worth EUR 89 million and EUR 15 million were outstanding as of December 31, 2006 and 2007, respectively. 26 Trade and other payables Trade and other payables consist of the following at December 31: EUR million Trade payables Accrued interests 6 8 Accrued personnel costs Accrued project costs Short-term derivatives 1 16 Other Total 1,238 1,307 The maturities of payables rarely exceed six months, except for short-term derivatives, which mature within 12 months. The maturities of trade payables are largely determined by local trade practices and individual agreements between Metso and its supplier. Accrued project costs may be settled after six months depending on the issuance of the supplier invoice when the costs arise from work performed by third parties. The accrued personnel costs, which include holiday pay, are settled in accordance with local laws and stipulations. 95

98 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27 Post-employment benefit obligations The companies within Metso have various pension schemes pursuant to local conditions and practices of the countries in which they operate. Some of these programs are defined benefit schemes with retirement, healthcare, death, jubilee and termination income benefits. The benefits are generally a function of years of employment and salary with Metso. The schemes are mostly funded through payments to insurance companies or to trustee-administered funds as determined by periodic actuarial calculations. Metso uses December 31 as measurement date for its defined benefit arrangements. The discount rates applied are based on yields available on high quality ( AA rated) corporate bonds. If such reference is not available, the rates are based on government bond yields as of the balance sheet date. The terms of corporate and government bonds are consistent with the currency and the estimated term of the pension obligations. Change in accounting policy Prior to January 1, 2007 Metso had applied the corridor method in recognizing the actuarial gains and losses related to its defined post-employment schemes. Under the corridor method, the accumulated actuarial gains and losses are expensed over the expected average remaining working lives of employees in the plan. On January 1, 2007 Metso adopted the Amendment to IAS 19 Actuarial Gains and Losses, Group Plans and Disclosures permitting the recognition of all actuarial gains and losses in the period in which they occur outside the income statement directly in the shareholders equity. This policy was adopted to improve the transparency of Metso s financial statements. After the change pension liabilities are recognized in the balance sheet in full. The change in accounting policy was recognized retrospectively in accordance with the transitional provisions of the amendment. The comparatives have been restated. The change decreased the shareholders equity by EUR 27 million, net of tax of EUR 13 million and EUR 24 million, net of tax of EUR 10 million, and increased the pension liability by EUR 40 million and EUR 34 million for the years ended December 31, 2005 and 2006, respectively. The main changes were following: Under corridor method Under new accounting policy EUR million Defined benefit obligation Fair value of plan assets (234) (246) (234) (246) Net benefit obligation Unrecognized actuarial gains and losses (42) (36) Unrecognized asset Unrecognized past service cost Net amount recognized Expense (income) recognized in income statement The amounts recognized as of December 31 in the balance sheet are following: Pension benefits, domestic Pension benefits, foreign Other postemployment benefits EUR million Present value of funded obligations Fair value of plan assets (7) (7) (239) (243) Present value of unfunded obligations Unrecognized asset 2 2 Unrecognized past service cost 2 1 Net liability recognized Amounts in the balance sheet: Liabilities Assets (2) Net liability recognized

99 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Movements in the net liability recognized in the balance sheet are as follows: Foreign pension and other postemployment benefits Pension benefits, domestic EUR million Net liability at beginning of year Liability for new plans covered 1 9 Acquisitions (disposals) 14 (1) Net expense recognised in the income statement Employer contributions (1) (1) (23) (22) Gain (loss) recognized through Statement of Recognized Income and Expense 0 0 (3) 0 Translation differences (9) (8) Net liability at end of year The amounts recognized in the income statement were as follows: EUR million Year ended December 31, Pension benefits, domestic Pension benefits, foreign Other postemployment benefits Service cost Interest cost Expected return on plan assets (1) 0 0 (15) (15) (18) Amortization Past service cost (1) Immediate recognition due to asset ceiling 1 0 (Gains) losses on immediate settlements (3) 0 (1) (2) 0 0 Expense (income) recognized in income statement (2) Actual return (loss) on plan assets (2) The amounts recognized in the Statement of Recognized Income and Expense (SORIE) were following: Year ended December 31, Pension benefits, domestic Pension benefits, foreign Other postemployment benefits EUR million Experience (gain) loss on assets 0 0 (8) 0 Actuarial (gain) loss on liabilities due to change in assumptions (1) 0 0 Actuarial (gain) loss on liabilities due to experience 0 2 (1) Loss as result of asset ceiling 1 0 Total (gain) loss recognized in the SORIE 0 0 (3) 1 0 (1) The cumulative amount of actuarial gains and losses recognized in the SORIE amounted to net loss of EUR 38 million, EUR 35 million and EUR 35 million for the years ended December 31, 2005, 2006 and 2007, respectively. 97

100 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The changes in the value of the defined benefit obligation are as follows: Pension benefits, domestic Pension benefits, foreign Other postemployment benefits EUR million Defined benefit obligation at beginning of year Service cost Interest cost Losses (gains) on curtailment 0 0 Plan participant contributions Past service cost Acquisitions (disposals) 15 (1) Adjustment to coverage 1) Actuarial (gain) loss due to change in assumptions (1) 0 0 Actuarial (gain) loss due to experience 0 2 (1) Settlements (3) (1) (1) Translation differences (19) (20) (5) (4) Benefits paid (17) (19) (3) (3) Defined benefit obligation at end of year ) In the year ended December 31, 2007, includes EUR 4 million early retirement plans subseqent to the acquisition of Pulping business in Sweden and EUR 7 million of reclassification of existing plans in North America. The changes in the fair value of the plan assets during the year are as follows: Foreign pension and other postemployment benefits Pension benefits, domestic EUR million Fair value of assets at beginning of year Adjustments for new plans covered 2 2 Settlements (2) (1) 0 Acquisitions 1 Actual return on plan assets Plan participant contributions 1 1 Employer contributions Benefits paid (20) (22) Translation differences (17) (16) Fair value of assets at end of year The major categories of plan assets as a percentage of total plan assets as at December 31 are as follows: Equity securities 50% 42% Bonds 43% 53% Other 7% 5% The expected return on plan assets is set by reference to historical returns on each of the main asset classes, current market indicators such as long term bond yields and the expected long term strategic asset allocation of each plan. Summarized information on pension liabilities, plan assets for the four periods is as follows: EUR million Present value of defined benefit obligations at December Fair value of plan assets at December Deficit Unrecognized asset Unrecognized past service cost

101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The principal actuarial assumptions at December 31 (expressed as weighted averages): Domestic Foreign Benefit obligation: discount rate 4.50% 5.00% 5.28% 5.58% Benefit obligation: rate of compensation increase 3.70% 4.81% 3.65% 3.79% Benefit obligation: rate of pension increase 2.10% 2.10% 1.08% 1.50% Expense in income statement: discount rate 4.50% 4.50% 5.34% 5.32% Expense in income statement: rate of compensation increase 3.77% 3.70% 3.66% 3.68% Expense in income statement: expected return on plan assets 5.40% 6.14% 7.81% 7.55% Expense in income statement: rate of pension increase 2.10% 2.10% 0.89% 1.30% The expected contributions in 2008 shall amount to EUR 2 million to domestic plans and EUR 19 million to foreign plans. The life expectancy of the participants is based on regularly updated mortality tables, which reflect the life expectancy of the local population. The mortality tables used for the major defined benefit plans are following: Finland Gompertz model with Finnish TEL parameters Germany Heubeck RT 2005 G United Kingdom PXA92 year of birth Canada UP94 projected to 2010/2015 United States of America RP2000 projected to 2015 An increase of one percentage point in the assumed health care cost trend would increase the accumulated post-employment benefit obligation by EUR 2 million at December 31, It would increase the sum of the service and interest cost by EUR 0.3 million for A decrease of one percentage point in the assumed health care cost trend would decrease the accumulated post-employment benefit obligation by EUR 2 million at December 31, It would decrease the sum of the service and interest cost by EUR 0.2 million for The health care cost trend is expected to fall to 5% over the next four years by one percentage point per annum. 99

102 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28 Mortgages and contingent liabilities Mortgages and contingent liabilities consist of the following at December 31: EUR million On own behalf Mortgages Pledged assets 0 0 On behalf of associated companies Guarantees On behalf of others Guarantees 6 11 Other commitments Repurchase commitments 5 4 Other contingencies 5 4 Total The mortgages given as security for own commitments relate to industrial real estate and other company assets. The mortgage amount on corporate debt has been calculated as the amount of corresponding loans. The nominal value of the mortgages at December 31, 2007 was EUR 4 million higher than the amount of the corresponding loans. The repurchase commitments represent engagements whereby Metso agrees to purchase back equipment sold to customer. The conditions triggering the buy back obligation are specific to each sales contract. The amounts in the above schedule comprise the agreed value in full of each repurchase commitment. Metso Corporation has guaranteed obligations arising in the ordinary course of business of many of its subsidiaries up to a maximum of EUR 1,100 million and EUR 1,301 million as of December 31, 2006 and 2007, respectively. 29 Lease contracts Metso leases offices, manufacturing and warehouse space under various noncancellable leases. Certain contracts contain renewal options for various periods of time. Minimum annual rentals for leases in effect at December 31 are shown in the table below: Operating leases Finance leases EUR million Less than 1 year years years years years Over 5 years Total minimum lease payments Future financial expenses (4) (4) Total net present value of finance leases Net present value of annual rentals for finance leases in effect at December 31 are shown in the table below: EUR million Less than 1 year years years years years 1 1 Over 5 years 6 4 Total net present value of finance leases Total rental expenses amounted to EUR 30 million, EUR 34 million and EUR 31 million in the years ended December 31, 2005, 2006 and 2007, respectively. Annual repayments of principal are presented in the maturities of long-term debt, see note

103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 Derivative financial instruments Notional amounts and fair values of derivative financial instruments as at December 31 were as follows: EUR million Notional amount Fair value, assets 2006 Fair value, liabilities Fair value, net Forward exchange contracts 1) 1, Cross-currency swaps Currency swaps Interest rate swaps Option agreements Bought Sold Electricity forward contracts 2) Nickel swap contracts 3) Total EUR million Notional amount Fair value, assets 2007 Fair value, liabilities Fair value, net Forward exchange contracts 1) 1, Cross-currency swaps Currency swaps Interest rate swaps Option agreements Bought Sold Electricity forward contracts 2) (3) 5 Nickel swap contracts 3) (3) Total Some 43% of notional amount (50% at the end of 2006) qualified for cash flow hedge accounting. 2) Notional amount GWh 3) Notional amount tons The notional amounts indicate the volumes in the use of derivatives, but do not indicate the exposure to risk. 101

104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Derivative financial instruments recognized in balance sheet as at December 31 are presented below: EUR million Assets Liabilities Assets Liabilities Interest rate swaps cash flow hedges Interest rate swaps fair value hedges Interest rate swaps non-qualifying hedges Forward exchange contracts cash flow hedges Forward exchange contracts net investment hedges Forward exchange contracts non-qualifying hedges (2) Electricity forward contracts cash flow hedges (3) Nickel swaps - non-qualifying hedges 3 Cross-currency swaps non-qualifying hedges Options non-qualifying hedges 0 0 Total derivatives In As the at December years ended 31, December 2007, the maturities 31, 2006 and of financial 2007, respectively, derivatives are the As following at December (expressed 31, 2007, as notional the fixed amounts): interest rates of swaps there was no ineffectiveness related to the cash flow hedges, varied from 4.9% to 6.1%. The main floating rates were Euribor which would have resulted in an immediate recognition of an and Libor. ineffective portion in the income statement. EUR million and after Forward exchange contracts 1, Cross-currency swaps 0 Interest rate swaps Interest rate futures contracts Option agreements Electricity forward contracts 1) Nickel swap contracts 2) ) Notional amount GWh 2) Notional amount tons 102

105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 Principal subsidiaries The following is a list of Metso s principal subsidiaries ranked by the number of employees. These companies accounted for 88 percent and 82 percent of total net sales for the years ended December 31, 2006 and 2007, respectively. % of net sales Total personnel Metso Paper Oy Finland ,416 Metso Automation Oy Finland 4.5 1,563 Metso Brazil Indústria e Comércio Ltda Brazil 4.5 1,538 Metso Minerals Industries Inc. USA 7.5 1,318 Metso Minerals (South Africa) Pty. Ltd. South Africa 1.5 1,087 Metso Minerals Oy Finland 5.1 1,051 Metso Paper USA Inc. USA 3.7 1,031 Metso Power Oy Finland Metso Paper Sundsvall AB Sweden Valmet Automotive Oy Finland Metso Paper Technology (Shanghai) Co. Ltd. China Metso Automation USA Inc. USA Metso Lindemann GmbH Germany Metso Minerals (Chile) SA Chile Metso Paper Karlstad AB Sweden Metso Minerals (France) SA France Metso Power AB Sweden Metso Minerals (Wear Protection) AB Sweden Metso Paper Valkeakoski Oy Finland Metso Minerals (India) Private Ltd. India Metso Foundries Jyväskylä Oy Finland Metso Minerals (Australia) Ltd. Australia Metso Minerals Canada Inc. Canada Metso Paper Pori Oy Finland Metso Minerals (Sala) AB Sweden Metso ND Engineering (Pty) Ltd. South Africa Metso Automation (Shanghai) Co. Ltd. China Metso Paper Ltd. Canada Metso Fiber Karlstad AB Sweden Metso Minerals (Kiruna) AB Sweden Scandinavian Mill Service S.L. Spain Metso Paper Sulamericana Ltda Brazil Metso Paper (China) Co. Ltd. China Metso Minerals (Mexico) SA de CV Mexico Metso Shared Services Oy Finland Metso Minerals (UK) Ltd. Great Britain Metso Paper Service SA France Metso Kamfab AB Sweden Metso Minerals (Tianjin) Co. Ltd. China Metso Minerals (Finland) Oy Finland Metso Minerals (Norway) A/S Norway Metso Minerals (Peru) SA Peru Metso Mill Service AB Sweden Metso Automation S.A.S. France Metso Paper (Thailand) Co. Ltd. Thailand Metso Minerals (Germany) GmbH Germany Metso Minerals (Matamata) Ltd. New Zealand Metso Foundries Karlstad AB Sweden Metso Automation do Brasil Ltda Brazil ZAO Metso Minerals (CIS) Russia

106 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32 Business area and geographic information Corporate structure Metso Corporation is a supplier of process industry machinery and systems, as well as know-how and aftermarket services. Metso s business areas are global in scope with operations in over 50 countries. The principal production plants are located in Finland, Sweden, France, Germany, the United Kingdom, Canada, the United States, China, India, South Africa and Brazil. In 2007 the operations were organized into the following three business areas: Metso Paper a global supplier for pulp and paper industry and power generation processes, machinery, equipment and related know-how and services. This involves not only new production lines and rebuilds, but also process improvements, optimizations and various other services. Metso Paper operated under five business lines in 2007: Paper and Board, Tissue, Fiber, Power and Panelboard. Metso acquired Aker Kvaerner s Pulping and Power businesses as of December 29, 2006 and they were consolidated into Metso Paper business area. The balance sheet of Pulping and Power operations is included in Metso Paper as of December 31, The acquisition had no effect on the 2006 income statement. Metso Minerals designs, develops and manufactures equipment and total solutions, as well as services solutions for rock and minerals processing industries. In 2007, its operations were managed through three business lines: Construction, Mining and Recycling. Metso Automation designs, develops and supplies both process automation and field solutions for automation and information management in selected process industries through its two business lines: Process Automation Systems and Flow Control. Corporate Office and other is comprised of the parent company and holding companies located in the United States and in Sweden as well as financial shared service centers in Finland and in Canada. Valmet Automotive is reported as a separate holding unit. Transfer pricing in intra-metso transactions is primarily based on market prices. In some cases, cost-based prices are used, thereby including the margin (cost plus method). The financial performance of the segments is measured through their ability to generate operating profit both in absolute figures and as percentage of net sales. Financial income and expenses, net, and income taxes are not allocated to segments but included in the profit (loss) of Corporate Office and other. The treasury activities of Metso are coordinated and managed by the Corporate Treasury in order to utilize the cost efficiency benefits retained from pooling arrangements, financial risk management, bargaining power, cash management, and other measures. Tax planning aims at the minimization of Metso s overall tax cost and it is based on the legal structure and the utilization of holding company structure as applicable. Segment assets comprise intangible assets, property, plant and equipment, investments in associated companies, joint ventures, available-for-sale equity investments, inventories and non-interest bearing operating assets and receivables. They exclude interest-bearing assets, including also cash and cash equivalents, income tax receivables and deferred tax assets, which are included in the assets of Corporate Office and other. Segment liabilities comprise non-interest bearing operating liabilities and exclude income tax liabilities and deferred tax liabilities, which are included in the liabilities of Corporate Office and other. Interest-bearing liabilities are not allocated to segments, but included in the liabilities of Corporate Office and other. Non-cash write-downs include write-offs made to the value of notes, receivables, and inventories and impairment and other write-offs recognized to reduce the value of intangible assets, property, plant and equipment and other assets. Gross capital expenditure comprises investments in intangible assets, property, plant and equipment, associated companies, joint ventures and available-for-sale equity investments including additions through business acquisitions. Information about Metso s reportable segments as of and for the years ended December 31, 2005, 2006 and 2007 is presented in the following tables. 104

107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EUR million 2005 Metso Paper Metso Minerals Metso Automation Valmet Automotive Corporate Office and other Eliminations External net sales 1,839 1, ,221 Intra-Metso net sales (47) Net sales 1,842 1, (47) 4,221 Metso total Other operating income and expenses, net (1.6) Share in profits and losses of associated companies (1.7) 1.3 Operating profit (loss) (22.6) % of net sales n/a 7.9 EBITA (20.9) % of net sales n/a 8.3 Amortization Depreciation Gross capital expenditure (including business acquisitions) Non-cash write-downs Intangible assets and property, plant and equipment ,178 Investments in associated companies Available-for-sale equity investments Inventories and other non-interest bearing assets ,032 Interest bearing assets Deferred tax assets Total assets 1,241 1, ,917 Non-interest bearing liabilities ,844 Interest bearing debt Deferred tax liability Total liabilities ,652 Capital employed ,053 Orders received 2,164 1, (52) 4,745 Order backlog 1, (42) 2,

108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EUR million 2006 Metso Paper Metso Minerals Metso Automation Valmet Automotive Corporate Office and other Eliminations External net sales 2,088 2, ,955 Intra-Metso net sales (68) Net sales 2,092 2, (68) 4,955 Metso total Other operating income and expenses, net (11.0) Share in profits and losses of associated companies (1.7) 0.9 Operating profit (loss) (28.7) % of net sales n/a 9.2 EBITA (26.6) % of net sales n/a 9.7 Amortization Depreciation Gross capital expenditure (including business acquisitions) Non-cash write-downs Intangible assets and property, plant and equipment ,657 Investments in associated companies Available-for-sale equity investments Inventories and other non-interest bearing assets 1,214 1, ,663 Interest bearing assets Deferred tax assets Total assets 2,106 1, ,968 Non-interest bearing liabilities 1, ,631 Interest bearing debt Deferred tax liability Total liabilities 1, ,518 Capital employed ,280 Orders received 2,276 2, (67) 5,705 Order backlog 2,225 1, (41) 3,

109 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EUR million 2007 Metso Paper Metso Minerals Metso Automation Valmet Automotive Corporate Office and other Eliminations External net sales 2,919 2, ,250 Intra-Metso net sales (65) Net sales 2,925 2, (65) 6,250 Metso total Other operating income and expenses, net (11.5) Share in profits and losses of associated companies Operating profit (loss) (26.5) % of net sales n/a 9.3 EBITA (24.7) % of net sales n/a 10.2 Amortization Depreciation Gross capital expenditure (including business acquisitions) Non-cash write-downs Intangible assets and property, plant and equipment ,657 Investments in associated companies Available-for-sale equity investments Inventories and other non-interest bearing assets 1,282 1, ,110 Interest bearing assets Deferred tax assets Total assets 2,153 2, ,254 Non-interest bearing liabilities 1,479 1, ,779 Interest bearing debt Deferred tax liability Total liabilities 1,479 1, ,639 Capital employed 674 1, ,434 Orders received 3,109 3, (67) 6,965 Order backlog 2,363 1, (44) 4,

110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net sales to unaffiliated customers by destination: EUR million Finland Other Nordic countries Other European countries North America South and Central America Asia- Pacific Rest of the world , , ,378 1, , ,561 1, , ,250 Metso total Metso s exports, including sales to unaffiliated customers and intra-group sales from Finland, by destination: EUR million Other Nordic countries Other European countries North America South and Central America Eliminations Asia- Pacific Rest of the world , , ,057 Total Intangible assets and property, plant and equipment by location: EUR million Finland Other Nordic countries Other European countries North America South and Central America Asia- Pacific Rest of the world , , ,657 Metso total Gross capital expenditure (excluding business acquisitions) by location: EUR million Finland Other Nordic countries Other European countries North America South and Central America Eliminations Asia- Pacific Rest of the world Eliminations Metso total 33 Audit fees Year ended December 31, EUR million Audit Tax consulting Other services Total

111 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34 Lawsuits and claims Several lawsuits and claims based on various grounds, including product liability lawsuits and claims in the United States as well as normal risks of legal disputes concerning deliveries, are pending against Metso Corporation in various countries. However, management does not believe that the outcome of these actions, claims and disputes will have a material adverse effect on Metso in view of the grounds presented for the claims, provisions made, insurance coverage in force and the extent of Metso s total business activities. Pending asbestos litigation As of December 31, 2007, there had been a total of 653 complaints alleging asbestos injuries filed in the United States in which a Metso entity is one of the named defendants. Where a given plaintiff has named more than one viable Metso unit as a defendant, the cases are counted by the number of viable Metso defendants. Of these claims, 199 are still pending and 454 cases have been closed. Of the closed cases, 51 were by summary judgment, 305 were dismissed, and 98 were settled. The outcome of the pending cases is not expected to materially deviate from the outcome of the previous claims. Hence, management believes that the risk caused by the pending asbestos lawsuits and claims in the United States is not material in view of the extent of Metso s total business operations. Other claims Metso Panelboard Oy is the defendant in arbitration proceedings being carried out in accordance with the ICC rules of arbitration in Singapore in which Metso s Chinese customer by the name of Sichuan Guodong Construction Co. Ltd. is claiming compensation on account of an alleged delay and alleged defects in the delivery of equipment for a chipboard line. The plaintiff s total original claim amounted to approximately EUR 54 million, of which about EUR 43 million concerned consequential damages. The delivery agreement contains a clause excluding liability for consequential damages. Subsequently, the plaintiff has revised its claim so as to include a claim in damages of approximately EUR 14.5 million and claim of recovery of purchase price of approximately EUR 12 million. Metso Panelboard has denied the claims and presented a counterclaim amounting to approximately EUR 2.8 million in order to collect the last installment according to the agreement and to pay for additional works related to the delivery. A provision of EUR 1.5 million has been established as a consequence of the claim. Subpoena from U.S. Department of Justice requiring Metso to produce documents In November 2006, Metso Minerals Industries, Inc., which is Metso Minerals U.S. subsidiary, received a subpoena from the Antitrust Division of the United States Department of Justice calling for Metso Minerals Industries, Inc. to produce certain documents. The subpoena relates to an investigation of potential antitrust violations in the rock crushing and screening equipment industry. Metso is co-operating fully with the Department of Justice. Metso recognized about EUR 4 million in costs from the investigation for the year ended December 31, 2007 and has not made any provision related to this investigation as at December 31,

112 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 New accounting standards IFRS 8 In November 2006, IASB issued IFRS 8 Operating Segments, which requires the company to adopt the management approach to reporting on the financial performance of its operating segments. Thus, the information to be reported would be what management uses internally for evaluating segment performance. Metso is currently evaluating the effects to its financial statements, however it expects the standard not to impact its current segment structure. IFRS 8 is effective for annual financial statements for periods beginning on or after January 1, Earlier adoption is permitted. Metso will apply the standard for the financial year beginning on January 1, IFRIC 14 IASB has published IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The interpretation is applied to post-employment defined benefit plans and other long-term defined benefit plans under IAS 19, if the plan includes minimum funding requirements. The interpretation also clarifies the criteria for recognition of an asset on future refunds or reductions in future contributions. Metso does not expect the new requirements to have a material impact to its financial statements. IFRIC 14 is effective for annual financial statements for periods beginning on or after January 1, The interpretation is still subject to endorsement by the European Union. Pending on endorsement by the European Union Metso should apply the standard for the financial year beginning on January 1, IAS 1 (Revised) IASB has published IAS 1 (Revised) Presentation of Financial Statements. The revised standard is aimed at improving users ability to analyze and compare the information given in financial statements by separating changes in equity of an entity arising from transactions with owners from other changes in equity. IAS 1 (Revised) is effective for annual financial statements for periods beginning on or after January 1, The standard is still subject to endorsement by the European Union. Provided the standard is endorsed by the European Union before end of 2008, Metso will apply the standard for the financial year beginning on January 1, IFRS 3 (Revised) IASB has published IFRS 3 (Revised), Business combinations. The revised standard continues to apply the acquisition method to business combinations, with some significant changes such as expensing of transaction costs. In addition, all payments to purchase a business are to be recorded at fair value at the acquisition date, with some contingent payments subsequently remeasured at fair value through income. Goodwill may be calculated based on the parent s share of net assets or it may include goodwill related to the minority interest. Metso is currently evaluating the effects to its financial statements. IFRS 3 (Revised) is effective for annual financial statements for periods beginning on or after July 1, The standard is still subject to endorsement by the European Union. Provided the revision receives the endorsement by the European Union, Metso will apply the standard for the financial year beginning on January 1, IAS 23 (Amended) IASB has published Amendment to IAS 23 Borrowing Costs, which requires an entity to capitalize borrowing costs directly attributable to the acquisition, construction or production of qualifying asset as part of the cost of that asset. A qualifying asset can be intended for its own use (self-constructed asset) or for sale. The option of immediately expensing those borrowing costs will be removed. The amendment does not change the accounting policy applied by the group to self-constructed assets and therefore, should not have material impact on the group s financial statements, however the implementation of the amendment to qualifying assets for sale is under review and its effects are being evaluated by Metso. The amendment is effective for annual periods beginning on or after January 1, The standard is still subject to endorsement by the European Union. Provided the amendment receives the endorsement by the European Union, Metso will apply the standard for the financial year beginning on January 1, IAS 27 (Revised) IASB has published IAS 27 (Revised), Consolidated and separate financial statements. The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control. They will no longer result in goodwill or gains and losses. The standard also 110

113 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value and a gain or loss is expensed. Metso is currently evaluating the effects to its financial statements. IAS 27 (Revised) is effective for annual financial statements for periods beginning on or after July 1, The standard is still subject to endorsement by the European Union. Provided the amendment receives the endorsement by the European Union, Metso will apply the standard for the financial year beginning on January 1, IFRS 2 (Amended) IASB published in January 2008 an amendment to IFRS 2 Share-based payments clarifying the accounting of vesting conditions and cancellations. Vesting conditions are limited to service and performance conditions, other features are not vesting conditions and only impact the grant date fair value. Cancellations, whether by the Company or by other parties, receive similar accounting treatment. Metso is currently evaluating the effects of the amendment to its financial statements. The amendment is effective for annual financial statements for periods beginning on or after January 1, The standard is still subject to endorsement by the European Union. Pending on the endorsement by the European Union, Metso will apply the standard for the financial year beginning on January 1, Events after balance sheet date Metso divested certain panelboard operations Metso disposed of certain parts of the panelboard business, which was part of Metso Paper business area, to Dieffenbacher GmbH + Co. KG, Germany. The transaction was finalized as of January, 31, The divestment is in line with Metso Paper s strategy to develop profitability. The panelboard operations in Nastola, Finland, with all its 60 employees and part of the operations in Sundsvall, Sweden, with 40 employees were transferred to Dieffenbacher. The refiner-related operations in Sundsvall, Sweden, remained in Metso s ownership. The transaction value will not be disclosed. The transaction does not have a significant impact on Metso s net income. Metso acquires Mitsubishi Heavy Industries paper machinery technology On February 15, 2008, Metso announced that Metso Paper and Mitsubishi Heavy Industries (MHI) have reached an agreement under which MHI s paper machinery technology will be transferred to Metso Paper. The value of contract, which is subject to regulatory approvals, will not be disclosed. The transaction enchances Metso Paper s services business especially in Japan. 111

114 FINANCIAL INDICATORS Financial Indicators EUR million FAS 2003 Net sales 4,250 3,602 4,221 4,955 6,250 Net sales change, % (9.4) n/a Operating profit (loss) (229) % of net sales (5.4) Profit on continuing operations before tax n/a % of net sales n/a Profit on continuing operations n/a % of net sales n/a Profit (loss) n/a Profit (loss) attributable to equity shareholders (258) IFRS 2004 IFRS 2005 IFRS 2006 IFRS 2007 Exports and international operations 3,724 3,302 3,879 4,652 5,795 % of net sales Amortization Depreciation Depreciation and amortization % of net sales Goodwill amortization and impairment EBITA % of net sales EBITDA % of net sales Financial income and expenses, net % of net sales Interest expenses, net % of net sales Interest cover (EBITDA) 2.1x 5.3x 10.2x 15.8x 22.1x Gross capital expenditure (excl. business acquisitions) % of net sales Business acquisitions, net of cash acquired Net capital expenditure (excl. business acquisitions and disposals) % of net sales Cash flow from operations Free cash flow 1) Research and development % of net sales

115 FINANCIAL INDICATORS EUR million FAS 2003 Balance sheet total 3,823 3,572 3,917 4,968 5,254 Equity attributable to shareholders 1, ,258 1,444 1,608 Total equity 1, ,265 1,450 1,615 Interest bearing liabilities 1, Net interest bearing liabilities 1, Capital employed 2,299 1,925 2,053 2,280 2,434 Return on equity (ROE), % (21.3) Return on capital employed (ROCE), % (8.7) Equity to assets ratio, % Gearing, % Debt to capital, % IFRS 2004 IFRS 2005 IFRS 2006 IFRS 2007 Orders received 4,256 3,989 4,745 5,705 6,965 Order backlog, December 31 1,505 1,705 2,350 3,737 4,341 Average number of personnel 27,400 24,363 22,405 23,364 26,269 Personnel, December 31 26,240 22,802 22,178 25,678 26,837 1) The calculation of free cash flow has been revised: Only capital expenditure related to maintenance, and not the capital expenditure related to growth investments increasing capacity, is deducted from net cash provided by operating activities. FCF for the years ended December 31, 2006 and 2007 is presented in accordance with the revised concept, prior comparison periods have not been restated. Formulas for calculation of financial indicators are presented on the following page. 113

116 FINANCIAL INDICATORS Formulas for Calculation of Indicators Formulas for calculation of financial indicators Formulas for calculation of share-related indicators EBITA: Operating profit + amortization + goodwill amortization and impairment Earnings/share: Profit Average number of shares during period EBITDA: Operating profit + depreciation and amortization + goodwill amortization and impairment Return on equity (ROE), %: Profit Total equity (average for period) 100 Free cash flow/share: Free cash flow Average number of shares during period Equity/share: Equity attributable to shareholders Number of shares at end of period Return on capital employed (ROCE), %: Profit before tax + interest and other financial expenses Balance sheet total non-interest bearing liabilities (average for period) Gearing, %: Net interest bearing liabilities Total equity Equity to assets ratio, %: Total equity Balance sheet total advances received Capital employed: Balance sheet total non-interest bearing liabilities Free cash flow: Operating cash flow capital expenditures on maintenance investments + proceeds from sale of fixed assets Debt to capital, %: Interest bearing liabilities Total equity + interest bearing liabilities 100 Dividend/share: Dividend distribution Number of shares at end of period Dividend/earnings, %: Dividend per share Earnings per share Effective dividend yield, %: Dividend per share Share price on December 31 P/E ratio: Share price on December 31 Earnings per share Average share price: Total value of shares traded in euro Number of shares traded during period Market capitalization: Total number of shares share price at end of period Interest cover (EBITDA): EBITDA Financial income and expenses, net Exchange rates used Average rates Year-end rates USD (US dollar) SEK (Swedish krona) GBP (Pound sterling) CAD (Canadian dollar) BRL (Brazilian real)

117 PARENT COMPANY FINANCIAL STATEMENTS Parent Company Statement of Income, in accordance with Finnish Accounting Standards (FAS) Year ended December 31, EUR million Net sales Other operating income 2 3 Personnel expenses (9) (12) Depreciation and value adjustments (1) (1) Other operating expenses (21) (17) Operating loss (29) (27) Financial income and expenses, net Profit before extraordinary items Group contributions Profit before appropriations and taxes Income taxes for the period 0 (1) Change in deferred taxes 7 (27) Profit

118 PARENT COMPANY FINANCIAL STATEMENTS Parent Company Balance Sheet, FAS Assets As at December 31, EUR million Non-current assets Intangible assets 1 1 Tangible assets 1 1 Investments Shares in Group companies 2,107 2,101 Other investments Total non-current assets 2,282 2,442 Current assets Long-term receivables Short-term receivables Securities 55 8 Cash and cash equivalents Total current assets Total assets 2,689 3,270 Shareholders equity and liabilities As at December 31, EUR million Shareholders equity Share capital Share premium reserve Legal reserve Other reserves Retained earnings Total shareholders equity 1,014 1,321 Liabilities Long-term liabilities Current liabilities 1,104 1,273 Total liabilities 1,675 1,949 Total shareholders equity and liabilities 2,689 3,

119 PARENT COMPANY FINANCIAL STATEMENTS Parent Company Statement of Changes in Shareholders Equity, FAS EUR million Share capital Share premium reserve Legal reserve Reserve for own shares Other reserves Retained earnings Balance at January 1, ,094 Total Dividends (48) (48) Share options exercised Net income (1) (46) (47) Balance at December 31, ,070 Dividends (198) (198) Share options exercised Net income Balance at December 31, ,014 Dividends (212) (212) Share options exercised Other (8) 8 Net income Balance at December 31, ,

120 SHARES AND SHAREHOLDERS Shares and Shareholders Shares and share capital On December 31, 2007, Metso Corporation s fully paid share capital entered in the trade register was EUR 240,982, and it was divided into 141,754,614 shares. Metso has one class of shares and each share entitles its holder to one vote at the Annual General Meeting and to an equal amount of dividend. Metso s shares are registered in the Finnish book-entry system. The share capital increase resulting from share subscriptions with Metso s year 2003 options, totaling EUR 59,500, was entered in the trade register on March 29, If all remaining 100,000 year 2003A options are used to subscribe for shares, Metso s share capital will increase to EUR 241,152, and the number of shares to 141,854,614. Shares that can be subscribed for with options correspond to 0.07 percent of the Corporation s shares and of the voting rights produced by these shares. Share ownership plan On December 31, 2007, MEO1V Incentive Ky, a limited partnership company that administers Metso s share ownership plan and is included in Metso s consolidated financial statements, held 206,539 Metso shares, which is enough to implement the share ownership plan. The Parent Company holds 60,841 treasury shares, which were repurchased in 1999 at a total price of EUR 654,813. The aggregate of the above-mentioned shares is 267,380 shares, or 0.19 percent of the Corporation s share capital. Board authorizations On April 3, 2007, the Annual General Meeting authorized Metso s Board of Directors to make decisions on the repurchase and conveyance of the Corporation s own shares, on the issuance of new shares and on the conveyance of the Corporation s own shares held by the Corporation. Authorization to repurchase and convey the Corporation s own shares The Annual General Meeting authorized the Board of Directors to decide on the repurchase of a maximum of 5,000,000 of the Corporation s own shares. The Corporation s own shares may be acquired using nonrestricted equity through public trading on the OMX Nordic Exchange Helsinki, at the market price of the share prevailing at the time of acquisition. The Board has not exercised the authorization. The Corporation s own shares so acquired may be held, cancelled or conveyed by the Corporation. The shares so acquired may be used as consideration in acquisitions or other arrangements concerning the Corporation s business, in financing investments or as part of the Corporation s share ownership plan. Authorization to decide on a share issue The Board of Directors has been authorized to decide on issuing up to a maximum of 15,000,000 new shares and on conveying up to a maximum of 5,000,000 of the Monthly turnover and average share price on the OMX Nordic Exchange Helsinki EUR million 50 EUR 50 Metso s and competitors * share price performance , EUR Monthly turnover OMXH Portfolio index, scaled Average monthly share price Metso s average monthly share price, EUR Share price development of the competitors, scaled * ABB, Andritz, Astec, Atlas Copco, Emerson, Sandvik, Terex

121 SHARES AND SHAREHOLDERS Corporation s own shares. The new shares may be issued and own shares held by the Corporation may be conveyed either against payment or for no consideration. The Board may also decide on a share issue for no consideration to the Corporation itself. The number of shares issued to the Corporation shall not exceed 5,000,000, including the number of own shares acquired by the Corporation by virtue of the authorization to repurchase the Corporation s own shares. The new shares can be issued and the own shares held by the Corporation can be conveyed to the Corporation s shareholders in proportion to their present holding or by means of a share offering, waiving the preemptive subscription rights of the shareholders, if there is a weighty financial reason for the Corporation to do so. Such reasons may include using the shares as consideration in acquisitions or other arrangements concerning the Corporation s business, to finance investments or as part of the Corporation s share ownership plan. A share offering may take place without consideration only if there are particularly weighty reasons to do so from the Corporation s point of view and considering the benefit of all of the Corporation s shareholders. The Board has not exercised the authorization. Market capitalization and trading Metso Corporation s shares have been listed on the OMX Nordic Exchange Helsinki (OMXH: MEO1V) since July 1, The listing of Metso s American Depository Shares (ADS) on the New York Stock Exchange began on July 1, 1999 and ended on September 14, Trading with the Corporation s American Depository Receipts continues in the United States OTC markets under the code MXCYY. The listing of year 2003A options began on the OMX Nordic Exchange Helsinki on May 2, 2006 (MEO1VEW103). Metso Corporation s share price on the OMX Nordic Exchange Helsinki decreased by 2 percent in 2007 from EUR to EUR At the same time, the OMX Nordic Exchange Helsinki portfolio index rose by 8 percent. The highest quotation of Metso s share on the OMX Nordic Exchange Helsinki was EUR 49.95, and the lowest EUR The share price on December 31, 2007 was EUR 37.33, and the average trading price for the year was EUR The Corporation s end-of-year market capitalization was EUR 5,282 million, excluding treasury shares held by the Corporation. In 2007, 350,168,659 Metso shares were traded on the OMX Nordic Exchange Helsinki. The total turnover was EUR 14,508 million. The average daily trading volume was 1.4 million shares, or 32 percent higher than in percent of shares were traded during the year (relative turnover in 2006: 188 percent). In 2007, the highest price of Metso s American depository share (ADS) in the United States was USD 70.62, and the lowest USD The ADS price in the OTC trade on December 31, 2007 was USD By the end of the listing of Metso s share in the New York Stock Exchange on September 14, 2007, a total of 6,020,320 Metso American depository shares had been traded on the NYSE. The value of the trades was USD 344,470,524. Each ADS represents one share. The highest quotation for Metso s year 2003A options on the OMX Nordic Exchange Helsinki was EUR and the lowest EUR In 2007, a total of 33,000 of Metso s year 2003A options was traded on the OMX Nordic Exchange Helsinki. The value of the year 2003A options traded was EUR 1,019,850. By December 31, 2007, a total of 2,000 shares were subscribed with year 2003A options. The subscription price per share was EUR Earnings/share and dividend/share, EUR Equity/share, EUR Market capitalization, on December 31, EUR million (1) (2) * Earnings/share Dividend/share * Board s proposal Year 2003 presented in accordance with Finnish GAAP 119

122 SHARES AND SHAREHOLDERS Incentive systems Options programs Metso Corporation currently has one options program: the 2003 options program. In 2004, 100,000 year 2003A options were granted to Jorma Eloranta, President and CEO. In 2006 he sold 50,000 options and at the beginning of 2007 he sold a further 33,000 options. In 2006 Eloranta subscribed for Metso shares with 15,000 options and at the beginning of 2007 with 2,000 options. At the end of 2007, Jorma Eloranta held no Metso options. Metso s Board of Directors has reserved for potential further use 100,000 year 2003A options that are held by Metso Capital Ltd, a subsidiary of Metso. The share subscription price for a year 2003A option is EUR 8.70 and the subscription period is April 1, 2006 April 30, Share ownership plan Metso has a share ownership plan for the strategy period , and it is part of the remuneration and commitment program for the management of Metso and its business areas. The plan covers three earning periods, each of which lasts one calendar year, i.e. 2006, 2007 and The incentive will consist of both shares and cash. The share ownership plan covers a maximum total of 360,000 shares from Metso s treasury shares. Further information on the share ownership plan for the 2006 and 2007 earnings periods is presented in the Notes to the Financial Statements (Note 22 on page 91). Holdings of Metso s Board of Directors and executive management on December 31, 2007 At the end of 2007, the members of Metso s Board of Directors, Jorma Eloranta, President and CEO, and Olli Vaartimo, Executive Vice President and CFO and people in their immediate circle held a total of 41,399 Metso Corporation shares. These shares represent 0.03 percent of the Corporation s share capital and voting rights. Metso s statutory insiders with their holdings are presented on Metso s web site. Dividend policy Metso s dividend policy is to distribute at least 50 percent of earnings per share in annual dividends or in other forms of repatriation of capital to its shareholders. The Board of Directors will propose to the Annual General Meeting to be held on April 2, 2008 that a dividend of EUR 3.00 per share be paid for 2007, consisting of an ordinary dividend of EUR 1.65 and an extra dividend of EUR The proposed dividend corresponds to 112 percent of the profit attributable to the equity shareholders for the year. Therefore, the effective dividend yield is 8.0 percent. Shareholders At the end of 2007, Metso had 24,948 shareholders in the book-entry register, and the biggest of these was the State of Finland with an 11.1 percent holding. Nomineeregistered shares and shares in direct foreign ownership accounted for 66.8 percent (2006: 69.4%) of the total stock percent (14.4%) of the total stock was held by Finnish institutions, companies and foundations and 5.7 percent (5.1%) was held by Finnish private individuals. Further information regarding the biggest shareholders is available on Metso s web site. UP-TO-DATE INFORMATION ON METSO S SHARE PRICE, OWNERSHIP STRUCTURE AND THE SHAREHOLDINGS OF STATUTORY INSIDERS: 120

123 SHARES AND SHAREHOLDERS Share capital and share data EUR million (except for number of shares, per share data and share prices) Share capital, December Number of shares, December 31: Number of outstanding shares 136,189, ,189, ,593, ,358, ,487,234 Treasury shares held by the parent company 60,841 60,841 60,841 60,841 60,841 Shares administered by a partnership (MEO1V Incentive Ky) 300, ,539 Total number of shares 136,250, ,250, ,654, ,719, ,754,614 Average number of outstanding shares 136,189, ,189, ,639, ,580, ,460,012 Average number of diluted shares 136,189, ,192, ,665, ,600, ,460,012 Trading volume, OMX Nordic Exchange Helsinki 97,816, ,469, ,282, ,774, ,168,659 Trading volume, NYSE 1) 2,042,018 6,057,500 7,931,000 4,682,700 6,020,320 Trading volume, % of shares 2) Earnings/share from continuing operations, basic n/a Earnings/share from discontinued operations, basic n/a (0.11) 0.12 Earnings/share from continuing and discontinued operations, basic n/a Free cash flow/share 3) Dividend/share 4) Dividend 4) Dividend/earnings,% 4) neg Effective dividend yield,% 4) P/E ratio neg Equity/share Highest share price Lowest share price Average share price Share price, December Market capitalization, December 31 5) 1,318 1,588 3,274 5,406 5,282 1) Trading volume until September 14, ) Of the total amount of shares for public trading. 3) The calculation of free cash flow has been revised: Only capital expenditure related to maintenance is deducted from net cash provided by operating activities. FCF for the years ended December 31, 2006 and 2007 is presented in accordance with the revised concept, prior comparison periods have not been restated. 4) Proposal by the Board of Directors 5) Excluding treasury shares held by the Parent Company and shares administered by a partnership Formulas for calculation of share-related indicators are on page 114. FAS 2003 IFRS 2004 IFRS 2005 IFRS 2006 IFRS

124 SHARES AND SHAREHOLDERS Metso s biggest shareholders on December 31, 2007 Number of shares and votes % of share capital and voting rights 1 State of Finland 15,695, Varma Mutual Pension Insurance Company 4,520, Ilmarinen Mutual Pension Insurance Company 3,120, Odin funds 1,631, Odin Norden 1,106, Odin Forvaltnings AS 454, Odin Norden II 70, The State Pension Fund 1,300, OP funds 1,019, OP-Delta Fund 798, OP-Focus Non-UCITS Fund 150, OP-Finland Index Fund 48, OP-ryhmän Tutkimussäätiö 23, Svenska litteratursällskapet i Finland r.f. 922, Etera Mutual Pension Insurance Company 705, Eläke-Fennia Mutual Insurance Company 650, Sampo funds 588, Sampo Finnish Equity Fund 345, Sampo Finnish Institutional Equity Fund 133, Sampo European Balanced Fund 63, Sampo Pohjoisen Parhaat Fund 46, largest owner groups in total 30,152, Nominee-registered shares 92,837, Other shareholders 18,486, Treasury shares held by the Parent Company 60, Shares administered by a partnership (MEO1V Incentive Ky) 206, On shared account 10, Total 141,754, During 2007 there were no notifications from Metso s shareholders, whose holdings reached or exceeded 5 percent of Metso s share capital or voting rights. The only notification was from J.P. Morgan Chase & Co. which announced that the funds they managed held 6,996,732 Metso shares on February 13, 2007 corresponding to 4.94 percent of the paid up share capital of Metso Corporation. An up-to-date list of all flagging notifications made can be found at 122

125 SHARES AND SHAREHOLDERS Changes in number of shares and share capital, January 1, 2000 December 31, April 25, 2000 Conversion of share capital into euros. In addition to a transfer from the share premium reserve, treasury shares were declared void New shares subscribed with the Metso 1994 options, which were transferred from Valmet Corporation 2001 New shares subscribed with the Metso 1994 options, which were transferred from Valmet Corporation 2005 New shares subscribed with the Metso 2000A/B and 2001A/B options Change in number Change in share Number of shares of shares Share capital, EUR capital, EUR 135,317,275 (500,000) 230,039, ,611, ,457, , ,277, , ,250, , ,625, ,348, ,654,614 5,404, ,812, ,186, New shares subscribed with the Metso 2003A options 141,719,614 65, ,923, , New shares subscribed with the Metso 2003A options 141,754,614 35, ,982, , Breakdown of share ownership on December 31, 2007 Number of shares Shareholders % of shareholders Total number of shares and votes % of share capital and voting rights , , ,000 11, ,960, ,001-10,000 1, ,933, , , ,890, over 100, ,317, Total 24, ,639, Nominee-registered shares 19 92,837, Treasury shares held by the Parent Company 1 60, Shares administered by a partnership (MEO1V Incentive Ky) 1 206, On shared account 10, Number of shares issued 141,754, Breakdown by shareholder category on December 31, 2007 Finnish private investors 5.7% State of Finland 11.1% Finnish institutions, companies and foundations 16.4% Nominee-registered and non-finnish holders 66.8% ADDITIONAL INFORMATION: 123

126 AUDITOR S REPORT Auditor s Report To the shareholders of Metso Corporation We have audited the accounting records, the report of the Board of Directors, the financial statements and the administration of Metso Corporation for the period January 1 December 31, The Board of Directors and the President and CEO have prepared the consolidated financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, as well as the report of the Board of Directors and the parent company s financial statements, prepared in accordance with prevailing regulations in Finland, containing the parent company s balance sheet, income statement, cash flow statement and notes to the financial statements. Based on our audit, we express an opinion on the consolidated financial statements, as well as on the report of the Board of Directors, the parent company s financial statements and the administration. We conducted our audit in accordance with Finnish Standards on Auditing. Those standards require that we perform the audit to obtain reasonable assurance about whether the report of the Board of Directors and the financial statements are free of material misstatement. An audit includes examining on a test basis evidence supporting the amounts and disclosures in the report of the Board of Directors and in the financial statements, assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. The purpose of our audit of the administration is to examine whether the members of the Board of Directors and the President and CEO of the parent company have complied with the rules of the Companies Act. Consolidated financial statements In our opinion the consolidated financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view, as defined in those standards and in the Finnish Accounting Act, of the consolidated results of operations as well as of the financial position. Parent company s financial statements, report of the Board of Directors and administration In our opinion the parent company s financial statements have been prepared in accordance with the Finnish Accounting Act and other applicable Finnish rules and regulations. The parent company s financial statements give a true and fair view of the parent company s result of operations and of the financial position. In our opinion the report of the Board of Directors has been prepared in accordance with the Finnish Accounting Act and other applicable Finnish rules and regulations. The report of the Board of Directors is consistent with the consolidated financial statements and the parent company s financial statements and gives a true and fair view, as defined in the Finnish Accounting Act, of the result of operations and of the financial position. The consolidated financial statements and the parent company s financial statements can be adopted and the members of the Board of Directors and the President and CEO of the parent company can be discharged from liability for the period audited by us. The proposal by the Board of Directors regarding the disposal of distributable funds is in compliance with the Companies Act. Helsinki, February 15, 2008 PricewaterhouseCoopers Oy Authorised Public Accountants Johan Kronberg Authorised Public Accountant The auditor s report has been issued on the official financial statements of Metso Corporation. The condensed financial statements information presented in this annual report does not include all information of the official financial statements. 124

127 QUARTERLY INFORMATION Quarterly Information Consolidated statements of income EUR million 1 3/06 4 6/06 7 9/ / /07 4 6/07 7 9/ / Net sales 1,078 1,170 1,169 1,538 4,955 1,366 1,536 1,452 1,896 6,250 Cost of goods sold (778) (845) (857) (1,179) (3,659) (1,026) (1,138) (1,085) (1,453) (4,702) Gross profit , ,548 Selling, general and administrative expenses (206) (216) (189) (235) (846) (238) (248) (230) (256) (972) Other operating income and expenses, net 1 8 (3) (3) 6 (8) 1 Share in profits and losses of associated companies Operating profit % of net sales 8.8% 10.0% 10.3% 8.1% 9.2% 7.9% 9.7% 9.9% 9.5% 9.3% Financial income and expenses, net (7) (11) (10) (8) (36) (8) (10) (7) (8) (33) Profit before taxes Income taxes (21) 31 (26) 5 (11) (30) (41) (43) (49) (163) Profit Profit attributable to minority interests Profit attributable to equity shareholders Profit Earnings per share, EUR Adjusted earnings per share, EUR 1) ) In 2006, Metso recognized nonrecurring deferred tax assets totaling EUR 87 million, which improved the earnings per share by EUR Of the deferred tax assets, EUR 57 million was recognized in Q2/2006 (impact on EPS: EUR 0.40) and EUR 30 million in Q4/2006 (impact on EPS: EUR 0.21). METSO

128 QUARTERLY INFORMATION Consolidated balance sheets EUR million Non-current assets Mar. 31, 2006 June 30, 2006 Sep. 30, 2006 Dec. 31, 2006 Mar. 31, 2007 June 30, 2007 Sep. 30, 2007 Dec. 31, 2007 Intangible assets ,042 1,037 1,024 1,026 1,023 Property, plant and equipment Financial and other assets Total non-current assets 1,453 1,504 1,495 1,973 1,951 1,980 1,983 1,897 Current assets Inventories 963 1,031 1,135 1,112 1,276 1,383 1,479 1,410 Receivables 1,163 1,228 1,176 1,530 1,408 1,608 1,598 1,680 Cash and cash equivalents Total current assets 2,620 2,641 2,804 2,995 3,055 3,204 3,338 3,357 Assets held for sale Total assets 4,073 4,145 4,299 4,968 5,006 5,184 5,321 5,254 Equity Share capital Other shareholders equity 1,085 1,012 1,093 1,203 1,271 1,192 1,271 1,367 Minority interests Total equity 1,332 1,259 1,341 1,450 1,518 1,438 1,517 1,615 Liabilities Non-current liabilities Current liabilities 1,902 2,056 2,128 2,610 2,599 2,858 2,933 2,682 Liabilities held for sale Total liabilities 2,741 2,886 2,958 3,518 3,488 3,746 3,804 3,639 Total shareholders equity and liabilities 4,073 4,145 4,299 4,968 5,006 5,184 5,321 5,254 Net interest bearing liabilities Long-term interest bearing debt Short-term interest bearing debt Cash and cash equivalents (494) (382) (493) (353) (371) (213) (261) (267) Other interest bearing assets (141) (76) (65) (23) (23) (23) (13) (12) Total Equity to assets ratio, % Gearing, % METSO 07

129 QUARTERLY INFORMATION Net sales by business area EUR million 1 3/06 4 6/06 7 9/ / /07 4 6/07 7 9/ / Metso Paper , ,925 Metso Minerals , ,607 Metso Automation Valmet Automotive Corporate office and other Corporate office and others total Intra Metso net sales (10) (10) (15) (33) (68) (14) (13) (21) (17) (65) Metso total 1,078 1,170 1,169 1,538 4,955 1,366 1,536 1,452 1,896 6,250 Operating profit (loss) by business area EUR million 1 3/06 4 6/06 7 9/ / /07 4 6/07 7 9/ / Metso Paper Metso Minerals Metso Automation Valmet Automotive Corporate office and other (6.6) (3.9) (7.2) (11.0) (28.7) (4.7) (7.4) (5.5) (8.9) (26.5) Corporate office and others total (1.6) 0.1 (5.5) (10.0) (17.0) (0.3) (6.4) (3.8) (8.0) (18.5) Metso total Operating profit (loss), % of net sales by business area % 1 3/06 4 6/06 7 9/ / /07 4 6/07 7 9/ / Metso Paper Metso Minerals Metso Automation Valmet Automotive Corporate office and other n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Corporate office and others total n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Metso total EBITA by business area EUR million 1 3/06 4 6/06 7 9/ / /07 4 6/07 7 9/ / Metso Paper Metso Minerals Metso Automation Valmet Automotive Corporate office and other (6.1) (3.4) (6.8) (10.3) (26.6) (4.2) (6.9) (5.1) (8.5) (24.7) Corporate office and others total (1.1) 0.6 (5.1) (9.3) (14.9) 0.2 (5.9) (3.4) (7.5) (16.6) Metso total METSO

130 QUARTERLY INFORMATION EBITA, % of net sales by business area % 1 3/06 4 6/06 7 9/ / /07 4 6/07 7 9/ / Metso Paper Metso Minerals Metso Automation Valmet Automotive Corporate office and other n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Corporate office and others total n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Metso total Orders received by business area EUR million 1 3/06 4 6/06 7 9/ / /07 4 6/07 7 9/ / Metso Paper , , ,109 Metso Minerals , ,075 Metso Automation Valmet Automotive Corporate office and other Corporate office and others total Intra Metso orders received (17) (14) (17) (19) (67) (16) (15) (22) (14) (67) Metso total 1,437 1,390 1,321 1,557 5,705 1,664 2,090 1,440 1,771 6,965 Order backlog by business area EUR million Mar. 31, 2006 June 30, 2006 Sep. 30, 2006 Dec. 31, 2006 Mar. 31, 2007 June 30, 2007 Sep. 30, 2007 Dec. 31, 2007 Metso Paper 1,459 1,540 1,547 2,225 2,190 2,584 2,455 2,363 Metso Minerals 1,043 1,101 1,213 1,277 1,497 1,673 1,728 1,690 Metso Automation Valmet Automotive Corporate office and other Corporate office and others total Intra Metso order backlog (47) (52) (54) (41) (44) (48) (46) (44) Metso total 2,692 2,864 3,022 3,737 3,999 4,574 4,519 4,341 Personnel by business area Mar. 31, 2006 June 30, 2006 Sep. 30, 2006 Dec. 31, 2006 Mar. 31, 2007 June 30, 2007 Sep. 30, 2007 Dec. 31, 2007 Metso Paper 8,902 9,328 9,445 11,558 11,469 11,954 11,774 11,694 Metso Minerals 8,914 9,124 9,158 9,433 9,545 9,967 10,194 10,446 Metso Automation 3,170 3,341 3,315 3,352 3,379 3,564 3,523 3,564 Valmet Automotive 1,088 1,077 1,082 1, Corporate office and other Corporate office and others total 1,417 1,428 1,424 1,335 1,223 1,124 1,112 1,133 Metso total 22,403 23,221 23,342 25,678 25,616 26,609 26,603 26, METSO 07

131 GOVERNANCE Corporate governance and management We strive for consistent and transparent management. We commit to good corporate governance by implementing best practices and by complying with laws and regulations. In addition to laws and regulations, our operations are guided by our values and our Code of Conduct. Carlos Machado works as a Balancing Operator in Sorocaba, Brazil. The duties of Metso Corporation and its subsidiaries bodies are determined by Finnish law and by the corporate governance principles defined by Metso s Board of Directors. In our decision-making and governance, we comply with Finnish legislation and other regulations, the Articles of Association, and the regulations and guidelines of the OMX Nordic Exchange Helsinki. Metso also complies with the guidelines for insiders published by the OMX Nordic Exchange Helsinki as well as the corporate governance recommendation for listed companies issued by the OMX Nordic Exchange Helsinki, the Finnish Central Chamber of Commerce and the Confederation of Finnish Industry and Employers, effective July 1, 2004, with the exception that Metso does not have a nomination committee established by the Board of Directors. Instead, the Nomination Committee of the shareholders, established by the 2007 Annual General Meeting, prepares proposals for the 2008 Annual General Meeting with respect to Board composition and remuneration. Metso s share is listed on the OMX Nordic Exchange Helsinki. Trading of Metso s American Depositary Shares (ADSs) on the New York Stock Exchange ended on September 14, 2007, and the company s reporting obligations under the U.S. Securities Exchange Act were terminated on December 17, Our continued compliance with high standards of governance principles, transparent financial reporting and internal auditing protects owners of Metso s ordinary shares and ADSs. Metso s supreme decision-making body is the shareholders at the Annual General Meeting. The Board of Directors (Board) and the President and Chief Execu- METSO ANNUAL REVIEW

132 GOVERNANCE Metso s governance bodies Nomination Committee Audit Committee Board committees Compensation Committee Annual General Meeting of Shareholders Board of Directors President and CEO Auditors tive Officer (CEO) are responsible for the management of Metso. Other executives have an assisting and supporting role. The Board ensures good corporate governance principles within Metso. Annual General Meeting of Shareholders The Annual General Meeting is the supreme decision-making body of Metso. The Annual General Meeting of Shareholders is held once a year before the end of June. The Annual General Meeting decides on the matters stipulated in the Finnish Companies Act and the Articles of Association. Such issues include: Amendments to the Articles of Association Acceptance of the financial statements Use of the profit shown on the balance sheet, the repurchase and disposal of the Corporation s own shares Releasing from liability the members of the Board of Directors and the President and CEO Election of the Chairman, Vice Chairman and members of the Board of Directors and the decision of their compensation Election of the Auditor and the decision of compensation Shareholders are entitled to having an issue put on the Annual General Meeting s agenda, provided that such issue requires a decision by the Annual General Meeting according to the Finnish Companies Act. The request must be submitted in writing to the Board early enough so that the issue can be included in the meeting invitation. We publish a notice of the Annual General Meeting no more than two months and no less than 17 days before the meeting in at Metso Executive Team Business area Presidents Business area Boards least two newspapers published regularly in Helsinki, Finland, or we deliver it directly to shareholders when required by law. Additionally, we publish the notice on our web site. Shareholders must register their participation in the Annual General Meeting at the latest on the day specified in the meeting notice in order to participate in the Annual General Meeting The Annual General Meeting was held in Helsinki on April 3, A total of 529 shareholders representing about 27 percent of the company s votes participated in it either in person or by proxy. All members of the Board and Metso s President and CEO participated in the meeting. ANNUAL GENERAL MEETING DECISIONS: > Governance > Annual General Meeting Board of Directors Internal Audit The Board supervises the governance in the company and oversees the proper organization of operations, as well as steers and monitors Metso s operational management. Among other things, it decides on the strategy, the selection of key employees, major development projects, corporate acquisitions, investments, organization and financing policy. Our Board consists of 5 8 permanent members, which the Annual General Meeting of shareholders elects for a term of one year at a time. Individuals who have reached the age of 68 years cannot be elected to the Board. Main duties of the Board of Directors The Board s duties include the following: To approve Metso s long-term goals and strategy. To approve Metso s annual business and other major action plans. To nominate the President and CEO, the Presidents of the business areas and the members of the Metso Executive Team; to monitor and evaluate the performance of the President and CEO and to decide upon his remuneration and benefits. To approve the organizational structure and the main principles for the incentive systems. To approve the operating principles of Metso s different functions (including, among other things, corporate governance, risk management, financial control, financing, internal audit, information security, corporate communications, human resources), and to approve the code of conduct, values and environmental principles. To ensure that the supervision of the accounting and financial matters is properly organized, and to ensure proper preparation of the interim and annual financial statements. To ensure the adequacy of planning, information and control systems for monitoring the bookkeeping and handling of financial matters and risk management. To make proposals for and convene the Annual General Meeting. To decide upon other matters that do not belong to day-to-day operations or are of major importance, such as major investments, acquisitions and divestitures, and major joint ventures and loan agreements. The Board also decides upon guarantees given by Metso. 130 METSO ANNUAL REVIEW 07

133 GOVERNANCE Board member meeting participation January 1, 2007 December 31, 2007 Board of Directors Audit Committee Compensation Committee Matti Kavetvuo 13/13 3/3 Jaakko Rauramo 11/13 2/3 Svante Adde 13/13 7/7 Maija-Liisa Friman 11/13 7/7 Christer Gardell 13/13 2/3 Eva Liljeblom * 11/11 5/5 Yrjö Neuvo 13/13 3/3 Jukka Leppänen 12/13 Satu Huber ** 2/2 2/2 * Member of the Board of Directors since April 3, 2007, during her membership period of April 3 December 31, 2007 the Board convened 11 times and the Audit Committee 5 times. ** Member of the Board of Directors until April 3, 2007, during her membership period of January 1 April 3, 2007 the Board convened 2 times and Audit Committee 2 times. Pursuant to the Finnish Act on Personnel Representation in the Administration of Undertakings, a representative of personnel participates in the meetings as an invited expert with no voting rights or legal responsibility for the Board s decisions. The Board is convened by the Chairman, or in the Chairman s absence, by the Vice Chairman. The Board has a quorum when more than half of the members are present and one of these is the Chairman or the Vice Chairman. A decision of the Board shall be carried by a majority of those present or, in the case of a tie, the Chairman shall have the casting vote. The President and CEO and the Executive Vice President participate in the Board meetings as the presenting officials of issues, and the General Counsel as the Secretary of the Board. Metso s Executive Team members participate in the meetings when needed The 2007 Annual General Meeting elected seven members to our Board of Directors. Matti Kavetvuo was re-elected as Chairman and Jaakko Rauramo as Vice Chairman. Eva Liljeblom was elected as a new Board member. The Board members re-elected were Svante Adde, Maija-Liisa Friman, Christer Gardell and Yrjö Neuvo. Jukka Leppänen, the personnel representative, participated in the meetings of the Board as an invited expert. All members elected to Metso s Board were independent of the company and of its significant shareholders. The Board did not allocate to its members any specific operational focus areas to monitor. The Board met 13 times during its term, and the attendance at the meetings was 95 percent. Additionally, the Board made two unanimous Board resolutions without convening. In October 2007, the Board carried out a self-assessment of its performance. Committees Our Board has two permanent committees whose Chairman and members it elects annually: an Audit Committee and a Compensation Committee. Additionally, the 2007 Annual General Meeting decided to establish a Nomination Committee to prepare proposals for the 2008 Annual General Meeting with respect to Board composition and remuneration. Audit Committee The Audit Committee monitors our financial reporting and prepares issues for the Board related to the monitoring of our financial situation, reporting, auditing and risk management. The Audit Committee consists of at least three individuals, all of whom are elected by the Board from among its independent members. The members must have the qualifications necessary to perform the responsibilities of the Audit Committee. The Audit Committee Assesses Metso s draft financial statements, draft interim reports, accounting policies, significant or exceptional business transactions and management estimates Assesses compliance with laws and provisions and with internal instructions, as well as assesses the adequacy of internal control and risk management Approves the internal audit plan and follows up on internal audit reporting Prepares for the election of auditors, assesses and reviews the auditors reports with the auditors, and assesses the quality and scope of the audit. The Audit Committee convenes at least four times per year The Board s Audit Committee comprised Maija-Liisa Friman (Chairman), Satu Huber (until April 3, 2007), Eva Liljeblom (starting April 3, 2007) and Svante Adde (Financial Expert). The Audit Committee convened 7 times, and the member attendance was 100 percent. Executive Vice President and CFO Olli Vaartimo was the secretary of the Audit Committee. In addition to its regulatory duties, the Audit Committee monitored e.g. the launch of the new Metso Compliance program replacing the SOX 404 practices, approved the new policies for internal audit and financing, assessed the process for tax planning and discussed Metso s capital structure. Compensation Committee The Compensation Committee ensures the competitiveness of our remuneration and incentive systems. Among other things, it Evaluates the performance and compensation of the President and CEO Prepares proposals to the Board for the compensation of the President and CEO Decides upon the compensation of the officers reporting to the President and CEO Decides on the principles of the shortand long-term incentive systems METSO ANNUAL REVIEW

134 GOVERNANCE The Compensation Committee consists of at least three members, all of whom are elected by the Board from among its members. The Compensation Committee convenes at least twice per year. The President and CEO (except when issues relating to him are on the agenda) and Senior Vice President, Human Resource Management, who acts as the Compensation Committee s Secretary, also participate in the meetings The Board s Compensation Committee consisted of Matti Kavetvuo (Chairman), Jaakko Rauramo, Christer Gardell and Yrjö Neuvo. The Compensation Committee convened three times, and the member attendance was 89 percent. Taina Sopenlehto, Senior Vice President, Human Resource Management, was the secretary of the Compensation Committee. Its main tasks were the development of management compensation and incentives, defining and monitoring the principles of Metso s pension arrangements, defining the terms of and implementing the share ownership plan, realization of the 2007 bonus plan and planning of the 2008 bonus plan. Nomination Committee The Chairman of the Board as an expert member and the representatives appointed by the four biggest shareholders are elected to the Nomination Committee established by the Annual General Meeting. Should a shareholder choose not to use his right to appoint, the right to appoint is transferred to the next biggest shareholder In 2007, the right to appoint members was held by the four shareholders who on November 1, 2007 held the biggest part of all votes in the company. The Nomination Committee, which prepared the election of the 2008 Board members and their remuneration, consisted of Pekka Timonen, Director General, Ownership Steering Department, Prime Minister s Office (State of Finland); Mikko Koivusalo, Head of Capital Market Investments (Varma Mutual Pension Insurance Company); Harri Sailas, CEO (Ilmarinen Mutual Pension Insurance Company); and Lars Förberg, Managing Partner (Cevian Capital). The Nomination Committee elected from among its members Pekka Timonen as its Chairman. Matti Kavetvuo, Chairman of the Board, served as the Nomination Committee s expert member. The Nomination Committee convened three times and on January 10, 2008 provided Metso s Board of Directors its proposal on appointment of Board members and their related compensation for the 2008 Annual General Meeting. The Nomination Committee proposes that the number of Board members is seven, and that the current Board members Maija-Liisa Friman, Christer Gardell, Matti Kavetvuo, Yrjö Neuvo and Jaakko Rauramo be re-elected. Matti Kavetvuo is proposed to continue as Chairman of the Board and Jaakko Rauramo as Vice Chairman. It is also proposed that Mr. Jukka Viinanen and Mr. Arto Honkaniemi shall be elected as new members of the Metso Board. A personnel representative will participate as an external expert in the Metso Board meetings also in The new Board will invite the personnel representative as its external expert in April The Nomination Committee proposes the following annual fees to be paid: Chairman of the Board EUR 92,000, Vice Chairman of the Board EUR 56,000 and other Board members EUR 45,000. In addition, a fee of EUR 600 per meeting is paid to all members for the Board and Board committee meetings they attend. Board remuneration and other benefits in 2007 At the Annual General Meeting in 2007, it was decided that the annual fees paid to the Board members would remain the same as in 2006: Chairman of the Board EUR 80,000 Vice Chairman of the Board and Chairman of the Audit Committee EUR 50,000 Other Board members EUR 40,000 In addition to the annual fee, a fee of EUR 500 per meeting was paid to all Board members for each Board and Committee meeting they attend. Compensation for travel expenses and daily allowances was paid in accordance with Metso s travel policy. REMUNERATION PAID TO THE BOARD OF DIRECTORS FOR p , Notes to the Financial Statements, Note 6 President and CEO The President and CEO is in charge of the management of Metso s businesses in accordance with the Finnish Companies Act and the instructions given by the Board. The President and CEO is appointed by the Board and reports to the Board about e.g. the company s financial situation, business environment and other significant issues. The President and CEO prepares the matters on the agenda of the Board and its Committees and implements their decisions. The President and CEO guides and supervises the operations of Metso and its business areas. Additionally, the President Management remuneration in 2007, euros Fixed basic salary Bonus from previous year Share-based payment Fringe benefit President and CEO 512, , ,848 13,172 1,190, ,150 Other Executive Team members 1,269, ,346 1,731,203 76,277 3,638,153 2,458, Total 2006 Total 132 METSO ANNUAL REVIEW 07

135 GOVERNANCE and CEO acts as Chairman of the Metso Executive Team and Chairman of the business area boards. Metso Executive Team The President and CEO and other members appointed by the Board constitute Metso s Executive Team. The Metso Executive Team assists the President and CEO in the preparation of matters, such as business plans, strategy, policies and other matters of joint importance. Business Area Presidents The business area Presidents report to the President and CEO and keep him informed about their respective business area s financial situation, development and operating environment. They are in charge of the operative management of their respective business areas according to Metso s operating principles and targets. Business Area Boards and other boards Metso s President and CEO, as Chairman, and four other members constitute the business area boards. The business area boards ensure that operations in all companies within the business area are managed in accordance with prevailing laws, regulations and Metso s policies. Metso s President and CEO decides on the possible additional responsibilities of the boards of holding and other similar companies within Metso The Metso Ventures business area was dismantled on January 1, 2007, and its President, Vesa Kainu, retired on February 28, Bertel Langenskiöld started as President of Metso Paper on April 1, He was previously President of Metso Minerals and head of the integration of the Pulping and Power businesses acquired from Aker Kvaerner. Risto Hautamäki, who was President of Metso Paper prior to Langenskiöld, was repositioned to be in charge of key account projects in the pulp and paper industry and then retired at the beginning of Jorma Eloranta, Metso s President and CEO, and Olli Vaartimo, Metso s Executive Vice President and CFO, continued in their areas of responsibility. Matti Kähkönen continued as President of Metso Minerals and Pasi Laine as President of Metso Automation. The Executive Team met 11 times. Its main tasks were to implement and develop our profitable growth strategy and to compile a proposal for the Board on the company s strategy and related financial targets. Among other issues handled by the Executive Team were business results, market situation, major acquisitions, management processes, the development of human resources and compensation systems. Other important matters dealt with during the year were related to monitoring the development of the business areas joint IT administration and business infrastructure and back office operations projects. Management remuneration The Board of Directors decides on the salaries and other terms of employment of Metso s President and CEO and other members of the Executive Team. The salaries of the Executive Team members comprise a fixed basic salary and a performance bonus based on the financial result of Metso and/or the business area. Additionally, Metso has a share ownership plan for which the entire Executive Team is part of. Performance bonuses The Board of Directors annually confirms the terms upon which the performance bonuses are paid. For the President and CEO and for other Executive Team members, the maximum amount of the annual performance bonus is half of their pre-bonus taxable annual earnings, and the performance bonus can be based on operating profit as well as other key operational development objectives. The performance bonus paid to President and CEO Jorma Eloranta is tied to Metso s operating profit and to personal targets possibly set for him by the Board. In addition to his salary, his benefits include the use of a company car and a phone. METSO ANNUAL REVIEW

136 GOVERNANCE As with most members of the Executive Team, according to his contract, Jorma Eloranta s retirement age is 60 years. Eloranta s retirement pension is 60 percent of his average monthly salary during the past four or ten earning years, whichever results in a greater amount. If his contract is terminated, Eloranta is entitled to compensation equivalent to 24 months salary. Share ownership plan Metso s share ownership plan is part of the remuneration and commitment program for the management of Metso and our business areas. The incentives are based on the operating profit of Metso and our business areas. The incentives consist of shares and cash, with cash dedicated to cover taxes and taxrelated payments resulting from the share awards. The maximum number of shares to be allocated to the incentive program for the period is 360,000 Metso shares. Any deviation from the total number of shares, for example due to a significant corporate acquisition, requires a Board resolution about a new, separate share ownership plan. The 2006 share ownership plan covered a total of 60 of our managers, including the entire Metso Executive Team. By the end of March 2007, 99,961 shares, or about 0.07 percent of all company shares, were distributed. The Metso Executive Team s share of this was 25,815 shares. The 2007 share ownership plan covered a total of 81 of our managers. Our entire Metso Executive Team was included in the sphere of the plan. The plan covered a maximum total of 115,110 shares. The Metso Executive Team s share of this total was a maximum of 26,460 shares. If the value of Metso s share, determined as the average price of Metso s share during the first two full weeks of March 2008, exceeds EUR 48, the number of grantable shares for the 2007 plan will be decreased by a corresponding ratio. Metso s Board of Directors will decide on payment of the potential remuneration during the first quarter of The President and CEO received a 5.2% salary increase in The amount of his bonus for 2007 corresponded to approximately 6 months of his regular monthly earnings. In addition, in March 2008, Jorma Eloranta can receive a maximum of 6,300 Metso shares based on the 2007 share ownership plan. The 2008 share ownership plan is directed to a total of 100 Metso managers, and the entire Metso Executive Team is included in the incentive plan. The potential reward from the plan is based on the 2008 operating profit of Metso Corporation and its business areas. The share ownership plan in 2008 covers a maximum total of 130,000 shares from Metso s treasury shares. The Metso Executive Team s share of this total is a maximum of 26,000 shares. The Board of Directors has agreed that the maximum reward to be paid for the earning period 2008 shall be a key manager s annual gross salary (base salary + benefits, excluding bonuses and rewards paid on the basis of the share ownership plan ), calculated on the basis of a key manager s monthly gross salary (base salary + benefits, excluding bonuses and rewards paid on the basis of the share ownership plan ) of the month of the reward payment, multiplied by Metso s Board of Directors will decide of the Compensation Committee s proposal on the payment of the potential rewards during the first quarter of READ MORE ABOUT THE SHARE-BASED PAYMENTS: p , Notes to Financial Statements, Note 22 Option programs Metso currently has one option program from Under that program, Metso s subsidiary Metso Capital Ltd. holds 100,000 options, which can be used for purposes defined by the Board of Directors. In 2004, 100,000 stock options from the 2003 options program were transferred to President and CEO Jorma Eloranta. Eloranta sold 50,000 options in late 2006 and 33,000 options in early Additionally, he subscribed Metso shares with 15,000 options in late 2006 and 2,000 options in early The subscription period of options for the 2003 program will end on April 30, READ MORE ABOUT THE OPTIONS PROGRAM: p , Shares and shareholders p , Notes to Financial Statements, Note 22 Compliance with laws and Metso s Code of Conduct In all our business operations we comply with applicable laws and statutes as well as generally accepted practices. Additionally, our operations are guided by Metso s Code of Conduct and values. We require that each one of our employees is familiar with the legislation and operating guidelines of their own areas of responsibility. In conjunction with internal audits, we strive to ensure that everyone in the unit being audited is familiar with and complies with the laws, regulations and principles relating to their own work. In addition to Metso s management, the due course of operations is monitored by the Board s Audit Committee, which reports any misconduct to the Board of Directors. Internal Audit The duty of Metso s internal audit is to assess the efficiency and effectiveness of our operations. It ensures the reliability of financial and operational reporting, compliance with applicable laws and regulations, and proper management of the company s property. Internal audit supervises all our units and operations. It examines the functioning of internal control and proactively encourages the development of risk management in our various operations. Internal audit reports to the management of Metso, the auditors and the Board s Audit Committee. 134 METSO ANNUAL REVIEW 07

137 GOVERNANCE Metso Compliance program Metso s share was delisted from the New York Stock Exchange on September 14, 2007, and consequently our reporting obligation for compliance with the Sarbanes-Oxley Act (SOX), which affects all publicly listed companies in the United States, expired on December 17, In fall 2007, we replaced the SOX 404 reporting with the more flexible and lighter Metso Compliance program, which ensures that our company will continue to maintain a high standard of governance principles, financial reporting and internal controls. The Metso Compliance program is more comprehensive than the SOX 404 program because it affects all our units. Internal audit, assisted by trained Metso testers in different parts of our organization, is responsible for the testing of the units. Unlike with the SOX system, independent auditors will not issue a separate statement on the functionality of our internal controls. The first tests related to the Metso Compliance program were conducted in September During fall, a total of 21 units and IT systems were tested. The intention is to test 20 more units by April In the future, about 40 biggest units will be tested every two years, the smaller ones every three years. Reporting suspected financial misconduct We have guidelines on the prevention of financial misconduct. The guidelines define how suspicions of misconduct should be reported, how the issue is investigated and how it proceeds. Metso employees are encouraged to report suspected misconduct to their own supervisors or to other management or, if necessary, directly to internal audit. Additionally, Metso employees and partners can report suspicions of financial misconduct confidentially via the Whistleblower channel, which is maintained by an independent party. The report can be made via the Internet, by phone or by , also anonymously if necessary During 2007, we received five reports of suspected financial misconduct via the Whistleblower channel. Upon more careful investigation, none of the suspicions was classifiable as financial misconduct. One case of misconduct was revealed through direct contacts and in conjunction with internal audits. It was referred to the Board s Audit Committee for handling, in line with our guidelines on reporting misconduct. The case of misconduct did not have a significant impact on the financial results we reported. Auditors According to the Articles of Association, Metso has one auditor, which must be a firm of public accountants certified by the Central Chamber of Commerce. The Board s Audit Committee prepares the auditor selection process. The auditor s statutory obligation is to audit the company s accounting, the Board of Directors report, financial statements and administration for the financial year. The parent company s auditor must also audit the consolidated financial statements and other mutual relationships between Group companies. The auditors give Metso shareholders an Auditor s Report required by law in conjunction with our Annual Financial Statements. Additionally, auditors report regularly to the Board PricewaterhouseCoopers Oy, Authorized Public Accountants has been our auditor since In 2007, the principal auditor was Johan Kronberg. Audit fees, EUR million Audit Tax consulting Other services Total Insiders We comply with the OMX Nordic Exchange Helsinki Guidelines for Insiders, which entered into force on January 1, Our permanent insiders are not permitted to trade in the company s issued securities during the 21 days immediately prior to the publication of the company s interim reviews or financial statements release. For the statutory insiders (insiders with duty to declare) and their interest parties, the ownership of Metso s securities is public. Statutory insiders include the Chairman, Vice Chairman and members of the Board of Directors, the President and CEO and his deputy, the principally responsible auditor of a firm of public accountants, as well as the Executive Team members. Additionally, Metso also has permanent company-specific insiders and project-specific insiders whose securities ownership is not public. We update the register of our statutory insiders in the Finnish Central Securities Depository Ltd s Sire system, in which information on the ownership of securities can be obtained directly from the book-entry system. METSO S CORPORATE GOVERNANCE PRINCIPLES > Governance We publish all the information required by the disclosure obligations of listed companies, including press and stock exchange releases and financial reports, on our web site: METSO ANNUAL REVIEW

138 GOVERNANCE Board of Directors Matti Kavetvuo, born 1944 Metso Board member and Chairman of the Board since Chairman of Metso s Compensation Committee and expert member of the Nomination Committee. Independent Board member. Finnish citizen. M.Sc. in Engineering and B.Sc. in Economics and Business Administration. Metso shares Dec. 31, 2007 Matti Kavetvuo was President and CEO of Pohjola Insurance Group until his retirement in He was President and CEO of Valio Ltd. in , and President and CEO of Orion Corporation in Kavetvuo was employed by Instrumentarium Corporation in , serving as President in Positions of trust Chairman of the Board: Marimekko Corporation, Orion Corporation Vice Chairman of the Board: Alma Media Corporation Board member: Konecranes Plc Jaakko Rauramo, born 1941 Metso Board member since 1999, Vice Chairman of the Board since Member of Metso s Compensation Committee. Independent Board member. Finnish citizen. M.Sc. in Engineering. Honorary Doctorate in Engineering, Helsinki University of Technology. Metso shares Dec. 31, ,205 Jaakko Rauramo was the full-time Chairman of the Board of SanomaWSOY in He was President and CEO of SanomaWSOY in and President of Sanoma Corporation in Positions of trust Chairman of the Board: SanomaWSOY Corporation Board member: The Foundation of the Confederation of Finnish Industry and Employers, Reuters Founders Share Company Limited, Paley Center for Media (international council member) Chairman: National Board of Economic Defense, Expert group of State Ownership steering (Finland) Delegation member: The Research Institute of the Finnish Economy (ETLA), Finnish Business and Policy Forum (EVA) Svante Adde, born 1956 Metso Board member since Member and financial expert of Metso s Audit Committee. Independent Board member. Swedish citizen. B.Sc. in Economics and Business Administration Managing Director, Pöyry Capital Ltd., London. Metso shares Dec. 31, 2007 Svante Adde has been Managing Director of Pöyry Capital since September Previously, he worked as Managing Director of the London office at Compass Advisers, , as CFO of Ahlstrom Corporation in Helsinki, , and as Managing Director and Head of Nordic Corporate Finance at Lazard, a global investment bank. Before Lazard, Adde worked at Citigroup. Positions of trust Board member: Konecranes Plc, Brammer plc Maija-Liisa Friman, born 1952 Metso Board member since Chairman of Metso s Audit Committee. Independent Board member. Finnish citizen. M.Sc. in Engineering. Metso shares Dec. 31, ,500 Maija-Liisa Friman was President and CEO of Aspocomp Group Oyj in Prior to that she was Managing Director of Vattenfall Oy in and President of Gyproc Oy in Positions of trust Board member: TeliaSonera AB Member of Supervisory Board: Ilmarinen Mutual Pension Insurance Company 136 METSO ANNUAL REVIEW 07

139 GOVERNANCE Christer Gardell, born 1960 Metso Board member since Member of Metso s Compensation Committee. Independent Board member. Swedish citizen. MBA. Founder and Managing Partner, Cevian Capital. Metso shares Dec. 31, 2007 Christer Gardell founded Cevian Capital, a Swedish asset management company, in 2001 and has since worked as a Managing Partner in the company. In he was CEO of AB Custos. Previously, he was a Partner at Nordic Capital and McKinsey & Company. Eva Liljeblom, born 1958 Metso Board member since Member of Metso s Audit Committee. Independent Board member. Finnish citizen. D.Sc. (Econ.). Professor in Finance, Swedish School of Economics and Business Administration, Finland. Metso shares Dec. 31, Eva Liljeblom has been Professor in Finance since 1998 and, since 1999, head of the department of Finance and Statistics at Swedish School of Economics and Business Administration in Finland. She was Acting Professor in Finance and head of department in Liljeblom was associate Professor in Finance in In Liljeblom held a post-doc position in Finance at Stockholm School of Economics in Sweden. Positions of trust Board Member: Stockmann plc, Fennia Mutual Insurance Company, Municipality Finance Chairman: Investment Committee of the State Pension Fund, Finland Yrjö Neuvo, born 1943 Metso Board member since Member of Metso s Compensation Committee. Independent Board member. Finnish citizen. Professor, Ph.D. (EE). Metso shares Dec. 31, ,400 Yrjö Neuvo was Chief Technology Officer and a member of the Group Executive Board in Nokia in He retired from Nokia on January 1, Before joining Nokia, he was Professor at Tampere University of Technology, National Research Professor at the Academy of Finland and a visiting professor at Santa Barbara University in California, USA. Positions of trust Vice Chairman of the Board: Vaisala Group Representative of personnel Jukka Leppänen, born 1949 Jukka Leppänen participates in the meetings of Metso s Board of Directors as an invited expert, and his term of office is the same as the Board members term. Finnish citizen. Employee of Metso since Testing Engineer. Metso shares Dec. 31, Jukka Leppänen works as a Testing Engineer of Metso Automation s metsodna CR automation systems in Tampere, Finland. He is the shop steward for senior clerical employees and an industrial safety delegate. THE INFORMATION IS CURRENT AS OF DECEMBER 31, UPDATED INFORMATION: > Governance > Insiders > About us > Management > Board of directors METSO ANNUAL REVIEW

140 GOVERNANCE Executive Team Seated, from left: Jorma Eloranta, Olli Vaartimo Standing, from left: Pasi Laine, Bertel Langenskiöld and Matti Kähkönen. Jorma Eloranta, born 1951 President and CEO Chairman of the Executive Team Finnish citizen M.Sc. in Engineering Joined the company in 2004 Metso shares Dec. 31, ,300 Jorma Eloranta has been President and CEO of Metso since March He was President and CEO of Kvaerner Masa-Yards Inc. in He was President and CEO of Patria Industries Group in , Deputy Chief Executive of Finvest Group and Jaakko Pöyry Group in , and President of Finvest Ltd in Positions of trust Board member: Uponor Corporation, Technology Industries of Finland Chairman of Supervisory Board: Ilmarinen Mutual Pension Insurance Company Chairman of the Board: Finnish Section of the International Chamber of Commerce (ICC Finland) Chairman of the Advisory Board: Laatukeskus Excellence Finland Olli Vaartimo, born 1950 Executive Vice President and CFO and Deputy to the President and CEO Vice Chairman of the Executive Team Member of the Executive Team since 1999 Finnish citizen M.Sc. in Economics and Business Administration Joined the company in 1974 Metso shares Dec. 31, ,674 Olli Vaartimo has been Executive Vice President and CFO of Metso since He was President and CEO of Metso and Chairman of Metso s business area boards from September 2003 to March 2004, after which he returned to his duties as Metso s Executive Vice President and CFO and Deputy to the President. In Vaartimo was President of Metso Minerals and in President of Nordberg in the Rauma Corporation. In he was also Executive Vice President of Rauma Corporation. 138 METSO ANNUAL REVIEW 07

141 GOVERNANCE Matti Kähkönen, born 1956 President, Metso Minerals Member of the Executive Team since 2001 Finnish citizen M.Sc. in Engineering Joined the company in 1980 Metso shares Dec. 31, ,700 Matti Kähkönen has been President of Metso Minerals since He was President of Metso Automation in Kähkönen headed the Metso Automation Field Systems business line in and served as Division President of Neles Controls in Rauma Corporation in Pasi Laine, born 1963 President, Metso Automation Member of the Executive Team since 2006 Finnish citizen M.Sc. in Engineering Joined the company in 1998 Metso shares Dec. 31, ,000 Pasi Laine has been President of Metso Automation since Laine was President of Metso Automation s Field Systems Business Line in He was Senior Vice President of Metso Automation s Paper and Pulp Automation Solutions Business Unit in and Vice President of Process & Energy Business Unit in In he was Managing Director of Elsag Bailey Hartmann & Braun, and in , he held various positions at Valmet Automation in Finland, Canada, Germany and the UK. Corporate Office President and CEO Jorma Eloranta Corporate Communications Kati Renvall Corporate Development Kalle Reponen Human Resources Taina Sopenlehto Legal Matters Aleksanteri Lebedeff Stakeholder Relations Jukka Seppälä Technology, Quality and Environment Marko Hakovirta Executive Vice President and CFO Olli Vaartimo Business Infrastructure Development Hannu Kivimaa Finance Reijo Kostiainen IT Services Pauli Nuutinen Internal Audit Jarmo Kääriäinen Investor Relations Johanna Sintonen Treasury Pekka Hölttä Risto Hautamäki, President of Metso Paper until March 31, 2007, was a member of the Metso Executive Team until March 31, Vesa Kainu, President of Metso Ventures, was a member of the Metso Executive Team until February 28, Bertel Langenskiöld, born 1950 President, Metso Paper Member of the Executive Team since 2003 Finnish citizen M.Sc. in Engineering Joined the company in 2003 Metso shares Dec. 31, ,370 Bertel Langenskiöld has been President of Metso Paper since April Prior to that, from 2006 he was President of Metso Paper s Fiber Business Line and responsible for the integration of Aker Kvaerner s Pulping and Power -units at Metso. He was President of Metso Minerals in Langenskiöld was President and CEO of Fiskars Corporation in , and President of Tampella Power/Kvaerner Pulping, Power Division in Positions of trust Board member: Wärtsilä Corporation, Luvata International Oy THE INFORMATION IS CURRENT AS OF DECEMBER 31, UPDATED INFORMATION: > Governance > Insiders > About us > Management > Executive team METSO ANNUAL REVIEW

142 INVESTOR INFORMATION Investor Relations Mission and goals The main mission of our Investor Relations function is to support the correct valuation of our share by providing information related to our operations and operating environment, our strategy, objectives and financial situation so that capital market participants can form a balanced view of Metso as an investment. Investor Relations is also responsible for gathering and analyzing market information and investor feedback for use by our top executives and Board of Directors. The goal is to provide correct, adequate and up-to-date information regularly and impartially to all market participants. In our work the aim is for promptness, transparency and good service. Mode of operation Our Investor Relations function is responsible for investor communications as well as for daily contact with investors in cooperation with Corporate Communications. All investor requests are handled centrally through our Investor Relations function. Our investor communications include financial reports and our web site as well as investor meetings and seminars in which our top executives actively participate. We also organize a yearly Capital Markets Day for investors and analysts. Silent period We are not in contact with capital market representatives during the three-week period prior to publication of the annual or interim financial results. Investor Relations in 2007 In 2007 our top executives met with more than 640 professional investors and participated in eight investment seminars around the world. Our Capital Markets Day was held in May in Karlstad, Sweden. Contact information Johanna Sintonen, Vice President Tel: johanna.sintonen@metso.com Marja Kortesalo, Financial Communicator Tel: marja.kortesalo@metso.com Lilli Riikonen, Financial Communicator Tel: lilli.riikonen@metso.com Anne-Mari Ylikulppi, Assistant Tel: anne-mari.ylikulppi@metso.com North America Mike Phillips Senior Vice President, Finance and Administration, Metso USA Inc. Tel: mike.phillips@metso.com Investor Relations: metso.ir@metso.com 140 METSO ANNUAL REVIEW 07

143 INVESTOR INFORMATION Investment analysis To our knowledge, the following banks and brokerage firms evaluate Metso Corporation as an investment. This is not necessarily a complete list. Those listed here follow Metso on their own initiative, and we are not responsible for any statements they make. Finland ABN AMRO Securities Danske Markets Equities D. Carnegie Deutsche Bank Enskilda Securities EQ Evli Glitnir Handelsbanken Capital Markets Kaupthing Bank Landsbanki Pohjola Bank Rest of Europe ABG Sundal Collier CA Cheuvreux Citigroup Global Markets Credit Suisse Goldman Sachs HSBC JP Morgan Securities Lehman Brothers Merrill Lynch Morgan Stanley Standard & Poor s UBS Credit research Barclays Capital Citigroup Danske Bank Deutsche Bank Dresdner Kleinwort Wasserstein JP Morgan Securities Nordea Debt Capital Markets Pohjola Bank The Royal Bank of Scotland SEB Merchant Banking Société Générale CONTACT INFORMATION ON ANALYSTS FOLLOWING METSO: > Metso share > Analysts READ MORE ABOUT METSO AS AN INVESTMENT: METSO ANNUAL REVIEW

144 INVESTOR INFORMATION For shareholders Annual General Meeting The Annual General Meeting of Metso Corporation 2008 will be held at 3:00 p.m. on Wednesday, April 2, 2008 at Marina Congress Center (Katajanokanlaituri 6, Helsinki, Finland). Shareholders who are entered as shareholders in the Corporation s shareholder register maintained by the Finnish Central Securities Depository Ltd. by March 20, 2008 shall have the right to participate in the Annual General Meeting. The meeting will be held in Finnish, but simultaneous interpretation in English will be provided. Registration Registration of notices to attend begins on February 29, Shareholders who wish to participate in the meeting should notify the Corporation of their intention to participate by no later than 4:00 p.m. on March 27, A notice of participation can be submitted at by phone at , by fax at , or by mail to Metso Corporation, Soili Johansson, P.O. Box 1220, FI Helsinki. Notices of participation must be received by the above-mentioned deadline. Any powers of attorney should also be sent to the above address during the same registration period. Payment of dividends The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 3.00 per share* be paid for Dividends will be paid to those shareholders who are entered in the Corporation s shareholder register maintained by the Finnish Central Securities Depository Ltd. on the record date. * EUR 1.65 ordinary dividend and EUR 1.35 extra dividend. Payment of dividends Annual General Meeting April 2, 2008 Dividend ex-date April 3, 2008 Record date April 7, 2008 Date of dividend payment April 15, 2008* * Board proposal to the AGM Share symbols and units used in trading Metso Corporation has one share series. Metso s shares are listed on the OMX Nordic Exchange Helsinki and are registered in the Finnish Book Entry Register maintained by the Finnish Central Securities Depository. Trading in Metso s ADRs (American Depositary Shares) in the United States is carried out on the over-the-counter (OTC) market. Each Metso ADS represents one Metso share. The Bank of New York acts as the depository for Metso ADSs. OMX Nordic Exchange Helsinki Share Trading code: MEO1V Trading currency: Euro OTC trading in the USA ADS Trading code: MXCYY Trading currency: US Dollar Indexes Metso s shares are included in at least the following indexes: Bloomberg Europe 500, Bloomberg World, Dow Jones EURO STOXX, Dow Jones Industrial Goods, Dow Jones STOXX Global, FTSE All World, FTSE Multinationals, Global 1200 Industrial, HEX Capital Goods, HEX Eco Sectors, Nordic Capital Goods, OMX Helsinki, OMX Helsinki Benchmark, OMX Helsinki Capital Goods, OMX Nordic Large Cap, S&P Europe 350 Indices, S&P Global, S&P/Citigroup BMI Global Equities, VINX Bench, VINX Cap Goods, VINX Industrials. In addition, Metso s shares are included in the following sustainability indexes, among others: Dow Jones STOXX Sustainability, FTSE4Good, Ethibel Sustainability Index, ASPI Eurozone Index, Nordic Sustainability Index. Credit ratings Metso s credit ratings are: Standard & Poor s (May 15, 2007 ) Long-term credit rating: BBB, stable outlook Ratings for bonds and EMTN program: BBB Short-term rating: A 2 Moody s (October 31, 2007 ) Long-term rating: Baa2, stable outlook Distribution of financial information We will publish Metso s Annual Report and Sustainability Report for 2007 in Finnish and English. We will mail the reports to those who have ordered them. The reports are also published on our web site. We publish interim reviews in Finnish and English on our web site. Webcasts of the related news conferences can be viewed in English on our web site. We publish releases in Finnish and English, and they are available on our web site. 142 METSO ANNUAL REVIEW 07

145 INVESTOR INFORMATION Metso has supplied the complete pulp manufacturing process, from wood processing to baling, for the Zellstoff Stendal pulp mill in Germany. From left: Wolfgang Schubert, Metso Paper; Ralf Gollnick, Metso Partner; Steffen Ratzlow, Zellstoff Stendal; Bernd Schubert, Metso Partner. Publication dates of reviews and reports in 2008 Financial statements release 2007 February 6, 2008 Annual Report and Sustainability Report Week 11, 2008 Interim review for January March April 24, 2008 Interim review for January June July 24, 2008 Interim review for January September October 28, 2008 Ordering publications and releases You can order all our financial publications on our web site: > News & info > Order publications You can also order our interim reviews and releases directly to your address using the form found on the same web page. Our publications also can be ordered from Corporate Communications: Metso Corporation Corporate Communications P.O. Box 1220 FI Helsinki Tel: Fax: Change of address If you are a shareholder and your address changes, we request that you send written notification of this to the bank where your book-entry account is held. If your account is held at the Finnish Central Securities Depository Ltd s account operator, please send the notification to: Finnish Central Securities Depository Ltd. P.O. Box 1110, FI Helsinki Fax: (Free customer helpline Monday to Friday 9 a.m. 4 p.m. EET, tel , only in Finnish and Swedish) The change of address notification must include the shareholder s name, book-entry account number or date of birth, and both the old and new address. Metso ADS holders are requested to contact the Bank of New York: The Bank of New York, Investor Services P.O. Box 11258, Church Street Station New York, NY , USA Tel. (national): BNY ADRs or Tel. (international): shareowners@bankofny.com Internet: or If you are not a shareholder, please report your new address to Corporate Communications ot submit a change of address notification using the form on our web site: > News & info > Order publications READ MORE ABOUT METSO SHARES AND SHAREHOLDERS: p , Shares and shareholders METSO ANNUAL REVIEW