Stora Enso Interim Review January-June 2011

STORA ENSO OYJ INTERIM REVIEW 21 July 2011 at 13.00 EET

• EUR 228 million quarterly operating profit excluding NRI and fair valuations, up by 7% year-on-year due to significantly higher sales prices, offset by cost inflation and unfavourable exchange rates.
• Continued efficiency improvement path with announced plans in Fine Paper and Logistics – Q2 NRI total negative EUR 32 million.
• Quarterly ROCE excluding NRI and fair valuations 10%.
• Balance sheet with debt/equity at 0.41 and liquidity at EUR 996 million remained strong.
• Full year 2011 cost inflation forecast unchanged at approximately 4%, continuing actions to mitigate cost inflation.
• Increasing uncertainty in European economy – operating profit excluding NRI and fair valuations in the third quarter is expected to be in approximately the same range as Q2 2011.

Summary of Second Quarter Results

Fair valuations include equity incentive schemes, synthetic options net of realised and open hedges, CO2 emission rights and valuations of biological assets related to forest assets in equity accounted investments.
NRI = Non-recurring items. These are exceptional transactions that are not related to normal business operations. The most common non-recurring items are capital gains, additional write-downs, or reversals of write-downs, provisions for planned restructuring and penalties. Non-recurring items are normally specified individually if they exceed one cent per share.

Markets
Compared with Q2/2010

Industry inventories were higher for fine paper, slightly higher for magazine paper and wood products, and lower for newsprint.

Compared with Q1/2011

Industry inventories were significantly higher for uncoated magazine paper, higher for coated magazine paper and uncoated fine paper, slightly higher for wood products, and lower for newsprint and coated fine paper.

Stora Enso Deliveries and Production

*Stora Enso’s net market pulp position will be about 1 million tonnes for 2011.


 Breakdown of Sales Change Q2/2010 to Q2/2011

*Wood, energy, RCP, by-products etc.
**Asset closures, major investments, divestments and acquisitions

Key Figures

NRI = Non-recurring items. These are exceptional transactions that are not related to normal business operations. The most common non-recurring items are capital gains, additional write-downs or reversals of write-downs, provisions for planned restructuring and penalties. Non-recurring items are normally specified individually if they exceed one cent per share.
Fair valuations include equity incentive schemes, synthetic options net of realised and open hedges, CO2 emission rights, and valuations of biological assets related to forest assets in equity accounted investments.

Reconciliation of Operating Profit

Q2/2011 Results (compared with Q2/2010)
Operating profit at EUR 228 million excluding non-recurring items and fair valuations was EUR 15 million higher than a year ago. This represents an operating margin of 8.1% (7.9%).

Price increases in local currencies and a favourable product mix increased operating profit by EUR 239 million. Paper and board production was curtailed by 6% (8%) and sawnwood production by 3% (5%) of capacity.

The costs of pulpwood, chemicals, RCP, pulp and sawlogs were higher than a year ago, but productivity improvements and cost savings partly compensated for the cost increases. The overall net impact of the increase in variable costs in local currencies was a negative EUR 128 million.

Exchange rates had negative impacts on sales and on costs totalling EUR 48 million, after hedges.

Decreased volumes had a negative impact on operating profit of EUR 32 million mainly due to the deteriorated pulp balance and maintenance.

The share of the operational results of equity accounted investments amounted to EUR 11 (EUR 11) million, with the largest contributions from Tornator and Bergvik Skog.

The Group recorded a net negative EUR 32 million of non-recurring items at operating profit level in the second quarter of 2011 due to continued restructuring and efficiency improvement plans as announced on 12 July 2011.

Net financial items were EUR -35 (EUR -23) million. Net interest expenses increased from EUR 24 million to EUR 28 million. Net foreign exchange losses amounted to EUR 1 (gain EUR 6) million and the net loss from other financial items totalled EUR 6 (EUR 5) million.

Group capital employed was EUR 8 839 million on 30 June 2011, a net increase of EUR 636 million mainly due to an increase of EUR 330 million in working capital primarily to optimise wood costs and secure short-term wood availability, EUR 240 million of impairment reversal in the fourth quarter of 2010 and an increase of EUR 180 million in the PVO valuation. The increase was partly offset by EUR 220 million due to low capital expenditure compared with depreciation.

January–June 2011 Results (compared with January–June 2010)
Sales increased by EUR 556 million year-on-year. Operating profit excluding non-recurring items and fair valuations increased by EUR 144 million or 43%. Significantly higher sales prices in local currencies and a favourable product mix more than compensated for higher variable costs.

Q2/2011 Results (compared with Q1/2011)
Sales were up by 3% or EUR 90 million on the previous quarter. Operating profit excluding non-recurring items and fair valuations was EUR 20 million lower than in the previous quarter at EUR 228 million. The overall negative impact of maintenance was EUR 37 million greater than in the previous quarter. Higher sales prices and volumes were offset by higher variable costs. Fixed costs excluding maintenance stoppages remained favourable.

Capital Structure

Financing Q2/2011 (compared with Q1/2011)
Cash flow from operations remained healthy at EUR 207 (EUR 163) million despite the increase in working capital mainly due to a decrease in accounts payable. Cash flow after investing activities was EUR 122 (EUR 106) million. Interest-bearing net liabilities of the Group increased by EUR 160 million to EUR 2 561 million due to dividend payment.

Total unutilised committed credit facilities remained unchanged at EUR 700 million, and cash and cash equivalents net of overdrafts remained strong at EUR 996 million, which is EUR 112 million less than at the end of the previous quarter. In addition, Stora Enso has access to various long-term sources of funding up to EUR 600 million.

The debt/equity ratio at 30 June 2011 was 0.41 (0.38) due to dividend payment.

On 4 April 2011 Stora Enso announced that it had signed a loan facility agreement with the International Finance Corporation (IFC) to extend the maturity of USD 128 million in syndicated loans under its existing facility with IFC. The extension prolongs the maturity by three years to June 2014.


Cash Flow

Capital Expenditure for January–June 2011
Capital expenditure for the first half of 2011 totalled EUR 143 million, which is 52% of depreciation in the same period. The capital expenditure forecast for the Group for the full year 2011 has changed from the earlier estimate of EUR 550 million to approximately EUR 500 million with no impact on strategic project timings. Annual depreciation in 2011 will be about EUR 570 million. The equity injection into Montes del Plata, a joint venture in Uruguay, will be approximately EUR 120 million. Close to 80% of capital expenditure including equity injections is allocated for the strategic high-return growth areas in 2011.

The main projects during the first half of 2011 were power plants.

Near-term Outlook
Demand (compared with Q3/2010)
Demand is forecast to be stable for consumer board, industrial packaging, newsprint and coated magazine paper, and weaker for uncoated magazine paper and fine paper. Demand for wood products is predicted to be slightly weaker, mainly due to increased customer inventories. As before, production will be curtailed if necessary in order to optimise earnings and working capital.

Prices (compared with Q2/2011)
Consumer board prices are forecast to be stable, however the product and geographical mix is expected to decrease cartonboard average prices. Industrial packaging prices are forecast to be stable. Newsprint prices in Europe are anticipated to be slightly higher, and the negotiations regarding European-wide price increases are currently ongoing. Magazine paper prices in Europe are predicted to be slightly higher and fine paper prices stable with an unfavourable geographical and product mix. The fine paper price increases announced will not have a material impact during the third quarter as they are expected to take effect only in September. Prices for wood products are forecast to be stable.

In the third quarter of 2011, as in the second quarter, foreign exchange rates are expected to have a negative impact on the results. The Group expects its cost inflation excluding internal actions to remain unchanged at approximately 4% for the full year 2011. Actions continue to mitigate cost inflation.

There is increasing uncertainty in the European economy. Operating profit excluding NRI and fair valuations in the third quarter of 2011 is forecast to be in approximately the same range as the second quarter of 2011.

Segments Q2/11 compared with Q2/10

Consumer Board
Consumer Board manufactures all major types of consumer board, such as liquid packaging board, food service board, graphical board and cartonboard for packaging food, cigarettes, pharmaceuticals, cosmetics and luxury products.

* Excluding non-recurring items and fair valuations ** ROOC = 100% x Operating profit/Operating capital
*** Excluding pulp

·         Stora Enso is taking a significant step forward in renewable materials innovation by building a pre-commercial plant at Imatra in Finland to produce microfibrillated cellulose. The new type of renewable material will be used in existing and new unique fibre-based paper and board products, barrier materials, and other potential future applications.

• Stora Enso announced the investment of approximately EUR 90 million in Skoghall Mill in Sweden.
• Stora Enso and Alucha Recycling Technologies have received the European Union’s LIFE environment award for developing and investing in innovative recycling technology in Stora Enso’s Barcelona Mill.
• There will be an annual maintenance stoppage at Imatra Mills in Finland during the third quarter of 2011.
  
  

Consumer board sales were EUR 662 million, up 13% on the second quarter of 2010. Operating profit was EUR 85 million, up EUR 8 million on the second quarter of 2010. Higher sales prices and somewhat higher volumes compensated for higher chemical and fibre costs. The maintenance stoppage at Enocell Pulp Mill reduced pulp deliveries in the second quarter of 2011.

Markets

Industrial Packaging
Industrial Packaging manufactures corrugated packaging and containerboard, cores and coreboard, and also paper sacks, and sack and kraft paper.

* Excluding non-recurring items and fair valuations ** ROOC = 100% x Operating profit/Operating capital

• The new containerboard machine for the Ostrołęka project in Poland has been ordered.
• The Inpac International acquisition is expected to be completed during the third quarter of 2011.

Industrial packaging sales were EUR 240 million, down 7% on the second quarter of 2010. Operating profit was EUR 20 million, up EUR 2 million on the second quarter of 2010. Increased sales prices more than offset higher corrugated raw material costs. The laminating paper business was divested in July 2010.

Markets

Newsprint and Book Paper
Newsprint and Book Paper manufactures a wide range of standard and improved newsprint, and book and directory paper grades.

* Excluding non-recurring items and fair valuations ** ROOC = 100% x Operating profit/Operating capital

• The paper quality improvement investment at Sachsen Mill in Germany is proceeding as planned and scheduled to be completed by the end of the second quarter of 2012.
• There will be a maintenance stoppage at Hylte Mill in Sweden during the third quarter of 2011.
• Industry inventories were lower than in the second quarter of 2010 and the previous quarter.

Newsprint and book paper sales were EUR 335 million, up 3% on the second quarter of 2010. Operating profit was EUR 28 million, an improvement of EUR 34 million on a year ago as higher sales prices more than compensated for higher variable costs. Volumes were slightly lower than a year earlier as the permanent shutdown of the newsprint machines at Varkaus Mill in Finland at the end of the third quarter of 2010 and the newsprint machine at Maxau Mill in Germany at the end of November 2010 reduced production volumes.

Markets

Magazine Paper
Magazine Paper manufactures uncoated magazine paper mainly for periodicals and advertising, and coated matt, silk and glossy magazine paper for specialist and general interest magazines, supplements, home shopping catalogues and magazine covers.

* Excluding non-recurring items and fair valuations ** ROOC = 100% x Operating profit/Operating capital
*** Excluding pulp

• Industry inventories were slightly higher than a year ago, and higher for coated magazine paper and significantly higher for uncoated magazine paper than in the previous quarter.

Magazine Paper segment’s sales were EUR 517 million, down 3% on the second quarter of 2010 mainly due to lower pulp volumes. The annual maintenance stoppage at Skutskär Pulp Mill in Sweden was completed as planned. Operating profit was EUR 34 million, up EUR 12 million on a year ago as higher prices more than compensated for higher variable costs.

Markets

Fine Paper

Fine Paper manufactures high quality graphic and office paper for printers and publishers, merchants, envelope converters, office equipment manufacturers and office suppliers.

* Excluding non-recurring items and fair valuations ** ROOC = 100% x Operating profit/Operating capital
*** Excluding pulp

• Stora Enso announced that the Fine Paper Business Area planned to increase competitiveness by restructuring its operations. Co-determination negotiations are ongoing.
• Industry inventories for coated fine paper were higher than a year ago but lower than in the previous quarter.
• Industry inventories for uncoated fine paper were significantly higher than a year ago and also higher than in the previous quarter.
• During the third quarter of 2011 there will be annual maintenance stoppages at Varkaus and Oulu mills in Finland and at Suzhou Mill in China.
  
  

Fine paper sales were EUR 532 million, down 4% on the second quarter of 2010. Operating profit was EUR 49 million, down EUR 31 million on the previous year as higher sales prices could not compensate for higher variable costs, lower volumes and major maintenance costs. The annual maintenance stoppages at Nymölla Mill in Sweden and Uetersen Mill in Germany were completed as planned.

Markets

Wood Products

Wood Products manufactures wood-based products for construction and interior decoration, and solid biofuels for the energy sector. Its recyclable products are made from high quality renewable European pine or spruce.

* Excluding non-recurring items and fair valuations ** ROOC = 100% x Operating profit/Operating capital

• Following the co-determination negotiations at Kopparfors Sawmill in Sweden, Stora Enso announced in June 2011 that Kopparfors Sawmill and the pellet mill would be permanently closed down by the end of 2011.
• The pre-manufactured construction element investment at Ybbs Sawmill in Austria and Imavere pellet plant investment in Estonia are proceeding according to plan. These projects are expected to be completed in the third quarter of 2012 and fourth quarter of 2011, respectively.
• Following the weakening of market conditions, industry inventories were slightly higher than in the second quarter of 2010 and the previous quarter.
• Annual maintenance stoppages in several sawmills in the Nordic countries are ongoing in the third quarter of 2011.
• On 21 July 2011 Stora Enso announced a combined heat and power (CHP) plant investment at Zdírec Mill in the Czech Republic.

Wood product sales were EUR 465 million, up 10% on the second quarter of 2010. Operating profit was EUR 35 million, up EUR 5 million on a year earlier. Higher sales prices were partly offset by higher wood costs.

Markets

Short-term Risks and Uncertainties
The main short-term risks and uncertainties are related to increased economic uncertainty.

Energy sensitivity analysis for 2011: the direct effect on 2011 operating profit of a 10% increase in electricity, oil and other fossil fuel market prices would be about negative EUR 26 million annual impact, after the effect of hedges.

Wood sensitivity analysis for 2011: the direct effect on 2011 operating profit of a 10% increase in wood prices would be about negative EUR 232 million annual impact.

Pulp sensitivity analysis for 2011: the direct effect on 2011 operating profit of a 10% increase in yearly average pulp prices would be about positive EUR 54 million annual impact.

A decrease of energy, wood or pulp prices would have the opposite impact.

Foreign exchange rates sensitivity analysis for the next twelve months: the direct effect on operating profit of a 10% strengthening in the value of the US dollar, Swedish krona and British pound against the euro would be positive EUR 107 million, negative EUR 82 million and positive EUR 54 million annual impact, respectively. Weakening of the currencies would have the opposite impact. These numbers are before the effect of hedges and assuming no changes occur other than a single currency exchange rate movement.

Veracel
On 11 July 2008 Stora Enso announced that a federal judge in Brazil had issued a decision claiming that the permits issued by the State of Bahia for the operations of Stora Enso’s equity accounted investment Veracel were not valid. The judge also ordered Veracel to take certain actions, including reforestation with native trees on part of Veracel’s plantations and a possible BRL 20 million (EUR 9 million) fine. Veracel disputes the decision and has filed an appeal against it. Veracel operates in full compliance with all Brazilian laws and has obtained all the necessary environmental and operating licences for its industrial and forestry activities from the competent authorities. In November 2008 a Federal Court suspended the effects of the decision. Veracel has not recorded any provision for the reforestation or the possible fine.

On 30 September 2009 a judge in the State of Bahia issued an interim decision ordering the State Government of Bahia not to grant Veracel further plantation licences in the municipality of Eunápolis in response to claims by a state prosecutor that Veracel’s plantations exceeded the legal limits, which Veracel disputes. Veracel’s position is supported by documentation issued by the State environmental authority.

Class Action Lawsuits in USA
In the context of magazine paper sales in the USA in 2002 and 2003, Stora Enso was sued in a number of class action (and other civil) lawsuits filed in the USA by various magazine paper purchasers that claimed damages for alleged antitrust violations. On 14 December 2010 a US federal court granted a motion for summary judgement that Stora Enso had filed seeking dismissal of the direct purchaser class action claims. The ruling, which the plaintiffs have appealed, means that the court has ruled in favour of Stora Enso and found the direct purchaser class action claims to be without legal foundation. Further, most of the indirect purchaser actions have been dismissed by a consent judgement, subject, however, to being reinstated if the plaintiffs’ appeal in the direct cases is successful. The ruling, if it stands on appeal, will also provide a strong legal basis for final dismissal of all remaining civil cases. No provisions have been made in Stora Enso’s accounts for these lawsuits.

Legal Proceeding in Finland
On 3 December 2009 the Finnish Market Court fined Stora Enso for competition law infringements in the market for roundwood in Finland from 1997 to 2004. Stora Enso did not appeal against the ruling.

On 31 March 2011 Metsähallitus of Finland initiated legal proceedings against Stora Enso, UPM and Metsäliitto claiming compensation for damages allegedly suffered due to the competition law infringements amounting altogether to EUR 283 million.

Stora Enso denies that Metsähallitus suffered any damages whatsoever and will forcefully defend itself. No provisions have been made in Stora Enso’s accounts for this lawsuit.

Share Capital
During the quarter 762 A shares were converted into R shares. The shares were recorded in the Finnish trade register on 16 May 2011.

On 30 June 2011 Stora Enso had 177 149 022 A shares and 612 389 477 R shares in issue of which the Company held no A shares and 918 512 R shares with a nominal value of EUR 1.6 million. The holding represents 0.12% of the Company’s share capital and 0.04% of the voting rights.

Changes in shareholdings
Norges Bank was lending out certain Stora Enso shares and therefore the number of shares in Stora Enso Oyj held by Norges Bank (The Central Bank of Norway) was temporarily less than 5% of the paid-up share capital and the number of shares in Stora Enso Oyj in April and May 2011.

Decisions of the Annual General Meeting on 20 April 2011
The AGM approved a proposal by the Board of Directors that the Company distribute a dividend of EUR 0.25 per share for the year 2010.

The AGM approved a proposal that the Board of Directors shall have seven members and that of the current members of the Board of Directors, Gunnar Brock, Birgitta Kantola, Mikael Mäkinen, Juha Rantanen, Hans Stråberg, Matti Vuoria and Marcus Wallenberg be re-elected members of the Board of Directors until the end of the following AGM. Carla Grasso was not seeking re-election.

The AGM approved a proposal that the current auditor Authorised Public Accountants Deloitte & Touche Oy be re-elected auditor of the Company until the end of the following AGM. The AGM approved a proposal that remuneration for the auditor be paid according to invoice approved by Financial and Audit Committee.

The AGM approved a proposal that a Nomination Board be appointed to prepare proposals concerning (a) the number of members of the Board of Directors, (b) the members of the Board of Directors, (c) the remuneration for the Chairman, Vice Chairman and members of the Board of Directors and (d) the remuneration for the Chairman and members of the committees of the Board of Directors.

Decisions by Board of Directors
At its meeting held after the AGM, the Stora Enso Board of Directors re-elected from among its members Gunnar Brock as its Chairman and Juha Rantanen as Vice Chairman.

Birgitta Kantola (chairwoman), Gunnar Brock and Juha Rantanen were re-elected as members of the Financial and Audit Committee.

Gunnar Brock (chairman), Hans Stråberg and Matti Vuoria were re-elected as members of the Remuneration Committee.


This report is unaudited.

Helsinki, 21 July 2011
Stora Enso Oyj
Board of Directors



Financials

Basis of Preparation
Except as described below, this unaudited interim financial report has been prepared in accordance with the accounting policies set out in International Accounting Standard 34 on Interim Financial Reporting and in the Group’s Annual Report for 2010.

The following amendments to standards and interpretations were adopted from 1 January 2011 but had no impact on the Group financial statements:

• IAS 24 Related Party Disclosure – Revised definition of related parties
• IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments requires the extinguishment of a financial liability by the issue of equity instruments to be measured at fair value with the difference between the fair value of the instrument issued and the carrying value of the liability extinguished being recognised in profit or loss.
• Amendments to IFRS – Through the annual improvements process, the minor and non-urgent changes are collected into one ensemble and implemented at the beginning of the year. In addition, the IASB has published a few other small amendments which have also been implemented at the beginning of the year. These changes and amendments effective from 1 January 2011 relate to nine standards and interpretations. They did not have a significant effect on the Group financial statements.

Condensed Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Cash Flows

Property, Plant and Equipment, Intangible Assets and Goodwill

Borrowings

Condensed Consolidated Statement of Financial Position

Items designated with “O” comprise Operating Capital
Items designated with “I” comprise Interest-bearing Net Liabilities
Items designated with “T” comprise Net Tax Liabilities

Statement of Changes in Equity

CTA = Cumulative Translation Adjustment
OCI = Other Comprehensive Income

Commitments and Contingencies

Purchase Agreement Commitments

Fair Values of Derivative Financial Instruments

Nominal Values of Derivative Financial Instruments

Sales by Segment

Operating Profit/Loss by Segment excluding NRI and Fair Valuations

* Fair valuations include equity incentive schemes, synthetic options net of realised and open hedges, CO2 emission rights, and valuations of biological assets related to forest assets in equity accounted investments.

NRI by Segment