Stora Enso Interim Review January–September 2013

STORA ENSO OYJ INTERIM REVIEW 22 October 2013 at 13.00 EET 

Q3/2013 (compared with Q3/2012)

Operational EBIT slightly higher at EUR 184 (EUR 178) million.

• Operational ROCE 9.0% (8.2%).
• Net debt to the last twelve months’ operational EBITDA improved to 2.5 (2.8).
• Cash flow from operations EUR 331 (EUR 312) million. Liquidity further strengthened to EUR 2.1 (EUR 1.7) billion.

Q3/2013 (compared with Q2/2013)

• Operational EBIT significantly higher at EUR 184 (EUR 124) million mainly due to lower costs.

Q1-Q3/2013 (compared with Q1-Q3/2012)

• Operational EBIT at EUR 426 (EUR 472) million.
• Solid cash flow from operations at EUR 776 (EUR 781) million.

Transformation

• Consumer board machine in Guangxi, China is expected to be operational in the beginning of 2016, as previously announced.
• Montes del Plata Pulp Mill is expected to begin the mill start-up process during the first months of 2014, provided the main contractors continue to deliver on their updated schedules.

Streamlining and structure simplification

• EUR 200 million streamlining and structure simplification programme announced on 23 April 2013 proceeding as planned.

Outlook

• In Q4/2013 sales are expected to be lower than the EUR 2 727 million and operational EBIT clearly lower than the EUR 158 million in Q4/2012. Renewable Packaging and Building and Living are expected to experience usual seasonal weakness in operational EBIT in Q4/2013. Historically, Renewable Packaging has typically generated around 85% of its operational EBIT during the first three quarters of the year. The weak demand and price situation in European paper markets is expected to continue in Q4/2013.

Summary of Third Quarter Results*

* Data for the comparative periods have been restated following adoption of the amended IAS 19 Employee Benefits standard. Data for the comparative periods have been restated in all tables affected by IAS 19. For further details, please see Basis of Preparation on page 13.
** Operational EBIT comprises the operating profit excluding NRI and fair valuations of the segments and Stora Enso’s share of the operating profit excluding NRI and fair valuations of its equity accounted investments (EAI). 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 EAI. 


Stora Enso Deliveries and Production

* Stora Enso’s net market pulp position is expected to be about 1.2 million tonnes for 2013.
 

Key Figures

Operational EBIT comprises the operating profit excluding NRI and fair valuations of the segments and Stora Enso’s share of the operating profit excluding NRI and fair valuations of its equity accounted investments (EAI). 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 EAI.

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.

 

Reconciliation of Operational Profitability

* Group’s share of operational EBIT of equity accounted investments (EAI).
** Fair valuations and non-operational items 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 (EAI) and Group's share of tax and net financial items of EAI.


Q3/2013 Results (compared with Q3/2012)

Breakdown of Sales Change Q3/2012 to Q3/2013

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

Sales at EUR 2 556 million were EUR 138 million lower than a year ago as sales of paper products declined. Operational EBIT was EUR 184 million.

Lower volumes and lower sales prices in local currencies for paper grades decreased operational EBIT by EUR 25 million and EUR 28 million, respectively. Higher volumes in packaging improved operational EBIT by EUR 15 million. Paper and board production was curtailed by 8% (8%) and sawnwood production by 1% (10%) to manage inventories.

Overall variable costs were EUR 28 million lower, mainly due to lower prices for wood raw material and pulp. Fixed costs were reduced by EUR 26 million.

The operational result from equity accounted investments decreased by EUR 7 million, mainly due to Veracel.

The average number of employees at 28 300 was 870 lower than a year ago. The number of employees decreased mainly in Sweden and Finland due to closures and restructurings. The average number of employees increased by 410 in China.

The Group recorded non-recurring items (NRI) with a negative net impact of approximately EUR 23 million on operating profit and a positive impact of approximately EUR 3 million on income tax in its third quarter 2013 results. The NRI are related to restructuring provisions due to the streamlining and structure simplification project announced on 23 April 2013, and release of provisions recorded in previous periods.

Net financial expenses at EUR 56 million were EUR 7 million lower than a year ago. The net interest expense increased by EUR 8 million due to the slightly higher average gross debt level, lower capitalised interest and lower interest income. The fair valuation of interest rate derivatives had a positive impact of EUR 12 million. The net foreign exchange impact in the third quarter in respect of cash, interest-bearing assets and liabilities and related hedges was EUR 7 (EUR -1) million. During the quarter, a EUR 99 million loan note issued by Papyrus Holding AB, classified in the balance sheet as an available-for-sale investment, was derecognised as a result of the Group receiving a cash prepayment of EUR 40 million, with the terms on the remaining portion of the loan being changed through mutual agreement. The new loan note has been classified in the balance sheet as a non-current loan receivable. A net fair valuation loss of EUR 5 million related to the changes in the note terms was recorded in the third quarter of 2013.

Breakdown of Capital Employed Change Q3/2012 to Q3/2013

The operational return on capital employed was 9.0% (8.2%). Excluding the ongoing strategic investments in Biomaterials and Renewable Packaging the operational return on capital employed would have been 10.4% (9.5%).

January–September 2013 Results (compared with January–September 2012)
Sales decreased by EUR 148 million year-on-year due to lower sales of paper grades. Operational EBIT decreased by EUR 46 million due to clearly lower prices in local currencies and lower deliveries in paper grades. However, fixed costs were reduced, and fibre and chemical costs were clearly lower.

Q3/2013 Results (compared with Q2/2013)
Sales decreased by EUR 161 million, but operational EBIT improved from EUR 124 million in the second quarter to EUR 184 million in the third quarter. Sales prices and volumes remained stable, but energy and especially fixed costs decreased, partly due to seasonality.

Capital Structure

* Operative fixed assets include property, plant and equipment, goodwill, biological assets, emission rights, available-for-sale operative shares and other intangible assets.
 

Financing Q3/2013 (compared with Q2/2013)
Total unutilised committed credit facilities were unchanged at EUR 700 million, and cash and cash equivalents net of overdrafts remained strong at EUR 2 096 million, which is EUR 289 million more than for the previous quarter. In addition, Stora Enso has access to various long-term sources of funding up to EUR 600 million.

In September 2013 Stora Enso drew a EUR 140 million seven-year loan from the European Investment Bank (EIB) to be used for research and development. The interest rate of the loan is 3.3%. There are no financial covenants in the terms of the new loan.

During the third quarter of 2013, Stora Enso repurchased EUR 34 million of the 5.125% bond notes due in June 2014. Following the repurchase, the aggregate nominal amount of the outstanding notes is EUR 347 million. In addition, a bond maturing in August 2013 with a nominal amount of EUR 25 million was repaid.

The ratio of net debt to the last twelve months’ operational EBITDA was 2.5 (2.7).

The debt/equity ratio at 30 September 2013 was 0.51 (0.55). The decrease is primarily due to net profit and cash flow generation in the third quarter of 2013 and EUR 77 million increase in the value of Stora Enso’s shareholding in PVO owing to higher electricity prices.

Cash Flow

Q3/2013 cash flow
Third quarter 2013 cash flow from operations remained solid at EUR 331 million. Receivables decreased by EUR 90 million. Payments from the previously announced restructuring provisions were EUR 30 million. Inventories and payables were unchanged.

Capital Expenditure for January–September 2013
Additions to fixed and biological assets in the first three quarters of 2013 totalled EUR 249 million, which is 57% of depreciation in the same period. Investments in fixed assets and biological assets had a cash outflow impact of EUR 275 million in the first three quarters of 2013.

The EUR 25 million equity injection into Montes del Plata, a joint venture in Uruguay, and EUR 30 million cost of acquiring a 35% shareholding in Bulleh Shah, a joint venture in Pakistan, totalled EUR 55 million in the first three quarters of 2013.

The main capital expenditure projects ongoing during the first three quarters of 2013 were Montes del Plata and the Ostrołęka containerboard machine.
 

Capital Expenditure, Equity Injections and Depreciation Forecast 2013

* Capital expenditure includes approximately EUR 40-80 million for the project in Guangxi, China.

Streamlining and structure simplification programme to cut EUR 200 million from fixed costs
The streamlining and structure simplification programme, which is intended to achieve annual net fixed cost savings of EUR 200 million after compensating for inflation in addition to cost takeout in the second quarter of 2014 versus actual 2012 is proceeding according to plan. The full impact of the net cost savings is expected from the second quarter of 2014 onwards.

About 40% of the cost reduction actions specific to this programme were completed by the end of the third quarter of 2013. The impact on Stora Enso’s result for 2013 is expected to be limited. The non-recurring one-time costs related to the programme in the first nine months of 2013 totalled EUR 88 million, including EUR 45 million in the third quarter of 2013. Most of the remaining non-recurring costs were announced in the third quarter of 2013. The number of employees was reduced by 770 by the end of the third quarter.

Near-term Outlook
In the fourth quarter of 2013 sales are expected to be lower than the EUR 2 727 million and operational EBIT clearly lower than the EUR 158 million in the fourth quarter of 2012. Renewable Packaging and Building and Living are expected to experience usual seasonal weakness in operational EBIT in the fourth quarter of 2013. Historically, Renewable Packaging has typically generated around 85% of its operational EBIT during the first three quarters of the year. The weak demand and price situation in European paper markets is expected to continue in the fourth quarter 2013.
 

Segments Q3/13 compared with Q3/12

Printing and Reading
Printing and Reading is a world-class responsible supplier of paper from renewable sources for print media and office use. Its wide offering serves publishers, retailers, printing houses, merchants, converters and office suppliers, among others. Printing and Reading produces newsprint, book paper, SC paper, coated paper and office paper.
 

* Operational ROOC = 100% x Operational EBIT/Average operating capital
 

• Sales prices in local currencies and product mix had a clearly negative impact on the results. Delivery volumes were lower than a year ago as paper demand remained weak in Europe.
• Pulp costs were significantly lower due to lower bleached hardwood kraft pulp (BHKP) consumption at Oulu Mill and the long stoppage in the third quarter of 2012 at Veitsiluoto Pulp Mill, which distorted the year-on-year comparison. Fixed costs were clearly lower than a year ago.
• Stora Enso is investing some EUR 14 million in pulp mill modernisation at Oulu Mill in Finland. The investment will improve the mill’s environmental performance and cost efficiency.
   

Markets

                                                                                 

Biomaterials
Biomaterials offers a variety of pulp grades to meet the demands of paper, board and tissue producers. Pulp made from renewable resources in a sustainable manner is an excellent raw material with many different end uses. Biomaterials comprises mainly plantations, the Group’s joint-venture Veracel and Montes del Plata pulp mills, Nordic stand-alone pulp mills, the Pulp Competence Centre and the Biorefinery.
 

* Operational ROOC = 100% x Operational EBIT/Average operating capital

• The Enocell Pulp Mill annual maintenance stoppage and the unfavourable currency impacts and additional costs, including writing down of capitalised costs and settlement of past legal disputes, at Veracel Pulp Mill decreased operational EBIT.
• Montes del Plata Pulp Mill (MDP) is expected to begin the mill start-up process during the first months of 2014, provided the main contractors continue to deliver on their updated schedules. In 2014 Stora Enso’s share of MDP’s production is expected to be approximately half a million tonnes, a reduction from the earlier estimate of 650 000 tonnes that assumed start-up by the end of September 2013. The primary focus is to have an excellent mill commissioning, which is key to a successful ramp-up.

Markets

Building and Living
Building and Living provides wood-based innovations and solutions for everyday living and housing needs. The product range covers all areas of urban construction, from supporting structures to interior design and environmental construction. Further-processed products include massive wood elements and housing modules, wood components and pellets, in addition to a variety of sawn timber goods.
 

* Operational ROOC = 100% x Operational EBIT/Average operating capital
 

• Global sales prices in local currencies were clearly higher than a year ago.
• Sales volume increased by 6%, costs decreased.
• Stora Enso cross-laminated timber (CLT) elements will be used to build a two-storey wooden-framed administrative building for the Nordic World Ski Championships in Sweden.
   

Markets

Renewable Packaging
Renewable Packaging offers fibre-based packaging materials and innovative packaging solutions for consumer goods and industrial applications. Renewable Packaging operates throughout the value chain, from pulp production to production of materials and packaging, and recycling. It comprises three business units: Consumer Board, Packaging Solutions and Packaging Asia.

 

* Operational ROOC = 100% x Operational EBIT/Average operating capital
 

• Higher sales volumes and lower variable costs, especially for wood, more than offset the impact of a less favourable mix.
• Ramp-up of the new containerboard machine at Ostrołęka in Poland is proceeding as planned.
• The consumer board machine in Guangxi, China is expected to be operational in the beginning of 2016, as previously announced. Approvals from MOFCOM (Ministry of Commerce of People’s Republic of China) are expected to be received before the end of 2013.
• There will be an annual maintenance stoppage at Skoghall and Fors mills in Sweden during the fourth quarter of 2013.

Markets

Other
The segment Other includes the Nordic forest equity accounted investments, Stora Enso’s shareholding in Pohjolan Voima, operations supplying wood to the Nordic mills and Group shared services and administration.
 

• Variable costs were lower for Wood Supply in the third quarter of 2013.
  
   

Short-term Risks and Uncertainties
The main short-term risks and uncertainties relate to the economic situation in Europe, the ability of certain countries to refinance excessive debts and further increasing imbalance in the European paper market.

Energy sensitivity analysis: the direct effect of a 10% increase in electricity, heat, oil and other fossil fuel market prices would have a negative impact of approximately EUR 15 million on operational EBIT for the next twelve months, after the effect of hedges.

Wood sensitivity analysis: the direct effect of a 10% increase in wood prices would have a negative impact of approximately EUR 200 million on operational EBIT for the next twelve months.

Chemicals and fillers sensitivity: the direct effect of a 10% increase in chemical and filler prices would have a negative impact of approximately EUR 69 million on operational EBIT for the next twelve months.

A decrease of energy, wood or chemical and filler prices would have the opposite impact.

Foreign exchange rates sensitivity analysis for the next twelve months: the direct effect on operational EBIT of a 10% strengthening in the value of the US dollar, Swedish krona and British pound against the euro would be about positive EUR 102 million, negative EUR 84 million and positive EUR 50 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 7 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. The case has now been closed by the judge and will not be reported further.

During construction of Veracel Pulp Mill, a supplier won the international tendering to supply part of the mill. The proposal included an element to make the plant eligible for a Drawback Suspension Tax Benefit which would provide exemptions on imports. One of the conditions of the drawback was that funds used to pay the supplier be raised outside Brazil. At the same time, part of the mill construction was financed locally. Following a tax inspection at the supplier, Federal Tax Authorities issued a tax infraction note against the supplier intended to cancel the drawback benefits. The supplier presented its defence and the appeal is still pending a decision from the Administrative Tax Entity Court. In parallel, the supplier filed an arbitration proceeding against Veracel in order to determine which company shall be responsible for eventual damages if the supplier is found guilty. In September 2013 the International Chamber of Commerce Arbitration Court decided that Veracel and the supplier shall share liability for any potential damages in the ratio Veracel 75% and the supplier 25%. Veracel’s exposure amounts to approximately BRL 90 million (EUR 30 million). No provisions have been made in either Veracel’s or Stora Enso’s accounts for this case.

Class Action Lawsuits in USA
In the context of magazine paper sales in the USA in 2002 and 2003, Stora Enso Oyj (SEO) and Stora Enso North America (SENA) were 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. In December 2010 a US federal district court granted a motion for summary judgement dismissing the direct purchaser class action claims on SEO and SENA. Following appeal, a federal court of appeals on 6 August 2012 upheld the district court’s ruling as to SEO, but reversed the district court’s ruling as to SENA and referred that part of the case back to the district court for a jury trial to determine whether SENA’s conduct did violate the federal antitrust laws. The trial of the case against SENA was scheduled to begin in August 2013. Because Stora Enso disposed of SENA in 2007, Stora Enso’s liability, if any, would have been determined by the provisions in the SENA Sales and Purchasing Agreement. On 17 July 2013, Stora Enso reached an agreement (which is subject to approval by the US federal district court) to settle the cases filed by the direct magazine paper purchasers without any admission of liability by SENA or SEO. Stora Enso has paid into escrow USD 8 million to cover the cost of settling those claims, which cost has been recorded in the third quarter 2013 accounts. The only remaining case that is pending, filed on behalf of indirect purchasers of publication paper in the California state court, has been stayed pending final resolution of the direct purchaser case. In previous periods the cases were disclosed as a contingent liability.

Legal Proceedings 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. The total claim against all the defendants amounts to approximately EUR 160 million and the secondary claim against Stora Enso to approximately EUR 85 million.

In addition, Finnish municipalities and private forest owners have initiated similar legal proceedings. The total amount claimed from all the defendants amounts to approximately EUR 75 million and the secondary claims and claims solely against Stora Enso to approximately EUR 25 million.

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

In August 2013 the Supreme Administrative Court gave its decision concerning the water treatment lagoon in the environmental permit related to the closure of Kemijärvi Pulp Mill. The Court ordered Stora Enso to deliver a new action plan for removing the majority of the sludge from the basin at the Kemijärvi site to the State Administrative Agency by the end of 2014. The Agency was ordered to evaluate the costs to Stora Enso against the environmental benefits. No provisions have been made in Stora Enso’s accounts for this case.

Changes in Group Management
On 17 September Stora Enso announced that it had appointed Seppo Parvi as its new Chief Financial Officer. He is currently Chief Financial Officer and Executive Vice President, Food and Medical Business Area, at Ahlstrom Corporation. He will join Stora Enso at the latest during the first quarter of 2014.

Share Capital
During the quarter no A shares were converted into R shares.

On 30 September 2013 Stora Enso had 177 146 372 A shares and 611 473 615 R shares in issue of which the Company held no A shares or R shares.


This report is unaudited.

Helsinki, 22 October 2013
Stora Enso Oyj
Board of Directors
 

Financials


Basis of Preparation
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 2012.

The Group has applied the following amendment effective from 1 January 2013 that requires restatement of previous financial statements:

• IAS 19 Employee Benefits (amendment) eliminates the ‘corridor method’, streamlines the presentation of changes in assets and liabilities arising from defined benefit plans and enhances the disclosure requirements arising from the standard. The Group has not applied the ‘corridor method’. The effects of this amendment on the Group financial statements are not material. The effects on the Condensed Consolidated Income Statement are the following:
   

Effects of Changes to IAS 19 Employee Benefits

The following standards have also been applicable for the first time effective from 1 January 2013:

• IAS 1 Presentation of Financial Statements (amendment) introduces changes to the presentation of items of other comprehensive income. Items that could be reclassified to profit or loss at a future point in time now have to be presented separately from items that will never be reclassified. The amendment affected presentation only and had no impact on the Group’s financial position or performance.
• IFRS 7 Financial Instruments: Enhanced disclosure requirements related to offsetting of financial assets and financial liabilities. The amendment might have some effect on presentation in the financial statements but had no impact on the Group’s financial position or performance.
• IFRS 13 Fair Value Measurement establishes the definition of fair value and introduces a single IFRS framework for measuring fair value while seeking to increase consistency and comparability by requiring disclosures about fair value measurements applied in the financial statements of an entity. The application of IFRS 13 has not materially affected the fair value measurements carried out by the Group. The new standard also requires specific disclosures on fair values, some of which replace existing disclosure requirements in other standards. Some of these disclosures are specifically required for financial instruments, thereby affecting the interim financial statement. The additional disclosures are included in this Interim Review.
• IAS 12 Income Taxes (amendment) provides additional regulation on deferred tax in the case of recovery of underlying assets. The amendment is not relevant to the Group.
• IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine introduces accounting treatment for stripping costs arising in the mining industry. The interpretation is not relevant to the Group.
   

All figures in this Interim Review have been rounded to the nearest million, unless otherwise stated.


Condensed Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Cash Flows
 

Property, Plant and Equipment, Intangible Assets, Goodwill and Biological Assets

Borrowings

Condensed Consolidated Statement of Financial Position

* PPE = Property, Plant and Equipment

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
NCI = Non-controlling Interests                                      EAI = Equity Accounted Investments