Report on 1995 operations

REPORT ON 1995 OPERATIONS Invoiced sales SEK 57,106 million (48,894) Income after net financial items SEK 8,020 million (3,217) Income per share SEK 16.70 (6.35) Equity/assets ratio 48 percent (41) Return on shareholders' equity 20 percent (8) Proposed dividend SEK 3.75 (2.00) Sales and earnings The Group's invoiced sales amounted to SEK 57,106 million (SEK 48,894 million in 1994). After adjustment for divested units, invoicing increased by SEK 9,078 million, corresponding to a 19-percent rise. The increase was due to improved prices for pulp and paper products. Income after net financial items amounted to SEK 8,020 million (3,217). Adjusted for capital gains, income amounted to SEK 7,719 million (2,719). The increase in income derives from improved sales prices and the effects of the rationalization measures implemented in recent years. The return on capital employed, after deduction for tax liabilities, was 22 percent (10). The return on shareholders' equity was 20 percent (8). Net income, after tax and minority shares, was SEK 5,367 million (2,038). Tax for the 1995 fiscal year amounted to SEK 2,605 million. Income per share was SEK 16.70 (6.35). Market situation Demand for most forest industry products weakened during the fourth quarter, due to inventory reductions and declining business conditions. This situation continued in January. However, the pattern is not uniform. Inventory build-ups of paper pulp are continuing. The orders situation continues to be weak for fine papers and coated magazine paper (LWC). Within the board and packaging paper product area, demand has increased at the beginning of 1996. However, it is still too early to draw any firm conclusions. For the newsprint and uncoated magazine paper (SC) product areas, which account for approximately one third of STORA's production capacity, demand remains good. For sawn timber products, the situation has stabilized somewhat following the weaker trend since spring 1995. The market for building products remains weak. Power Deliveries of electric power were slightly lower than during the preceding year, due to the mild winter in 1994/95. Water levels in the reservoirs were low at the beginning of the year. The strong spring floods improved the situation by the summer. The dry autumn in combination with the normal-to-cold winter in 1995/96 has resulted in water levels currently being at their lowest for 15 years. Average prices were slightly higher than 1994. Earnings improved. Snow-fall precipitation in Norway and Sweden is currently extremely low, which in combination with low margins has resulted in a nervous power market, with rising prices for summer and autumn. Forest and sawn timber Access to wood was favorable during 1995. Felling from volumes purchased from private forest owners increased. Extraction from the Group's own forests amounted to 93 percent of the preceding year's level. Earnings from forest operations exceeded those of 1994 as a result of higher prices and unchanged cost levels. Wood prices declined. The high rate of production in Swedish and Finnish sawmills exceeded demand, which led to stockpiling and falling prices for sawn timber. During the autumn, production rates and inventory levels were reduced. Subsequently, sales prices for spruce stabilized at a level that is about 25 percent lower than at year-end 1994. For pine, the price has yet to stabilize, but the level is around 20 percent lower than at the beginning of 1995. Reduced delivery volumes and higher raw material costs led to sawn timber operations showing a loss. Pulp As a result of the high demand for paper and board, and the limited addition of new capacity, the pulp market remained strong during the first half of the year. Subsequently, the market was affected by uncertainty in the fine papers and board areas, which are the main customer segments for paper pulp. Producer inventories in Scandinavia and North America increased from approximately 1,000,000 tons at mid-year to slightly more than 1,900,000 at year-end. Sales prices increased in several stages during the year and in October were USD 1,000 per ton for long-fiber pulp and ECU 735 for short-fiber pulp. Thereafter, prices deteriorated amounting at year-end to USD 925 and ECU 690, respectively. Additional price falls have subsequently occurred. Demand for chemical fluff pulp was favorable during 1995. The high sales prices during the year improved the earnings of this product area. Printing papers The market for printing papers remained strong through October 1995. Subsequently, LWC (coated magazine paper) noted lower demand, while the favorable demand for newsprint and SC (uncoated magazine paper) continued. Deliveries of newsprint to Europe increased in total by 2 percent. Deliveries to Europe from Canada declined by 23 percent. Certain newspaper publishers reduced their paper consumption by using lower grammages and smaller formats. This trend was offset through the increased utilization of newsprint in advertising leaflets and other printed materials. Sales prices were raised on two occasions, and increased in total by 36 percent. New price increases averaging 5-10 percent have been agreed with effect from January 1, 1996. Consumption of SC increased by 10 percent in Europe. The favorable market conditions were due to the introduction of several new weekly magazines and increased utilization of advertising leaflets. The restart of the PM1 in Langerbrugge in June meant that the trend of STORA's shipments exceeded market growth. Sales prices developed in line with newsprint and increased by a total of 31 percent. Since January 1, 1996, prices have increased by an average of 2-5 percent. For LWC demand in Europe increased by 5 percent. Demand was favorable through the first three quarters of the year, but declined in the final quarter, com- pared with 1994. The deterioration was attributable to decreased demand within the offset area and increased printer inventories. During the first three quarters of the year, STORA's deliveries were restricted by the available capacity. Three price increases were implemented during the year, which raised the level by slightly more than 20 percent. Since October prices have been exposed to severe pressure as a result of the conservative market trend. Technical office papers (carbonless paper and thermal papers) noted market growth through September 1995. Subsequently, the trend of demand has been decreasing, due to inventory reductions among wholesalers and printers. Deliveries into the market decreased by 2 percent for carbonless paper and by 5 percent for thermal papers. Prices were raised during the first half of the year but the deterioration in market conditions towards the end of the year created tough price competition. Earnings for the printing papers product area improved. Board and packaging paper Demand for packaging board was favorable during the first half of the year. Subsequently, demand weakened, primarily as a result of inventory reductions among converters and end-users. Reduced order bookings led to production stoppages at STORA and other suppliers. The underlying consumption of packaging remained favorable. Demand for corrugating materials decreased during the second half of the year. Liquid packaging board remained unaffected, showing continued favorable demand. Average prices for all of the products in the product area were higher than for the preceding year. The trend of prices increased through the late autumn, at which time demand came to a halt. Prices were subsequently depressed but production stoppages and the reduction of customer inventories are expected to result in the situation stabilizing during the first half of 1996. The product area's earnings improved, with the increase due to packaging paper and corrugating materials. Fine papers The high level of demand experienced during the beginning of the year declined in the second half due to inventory reductions at wholesalers and printing companies. Deliveries of fine papers in Europe decreased sharply during the third quarter. Calculated since the beginning of the year, deliveries of coated fine papers declined by 4 percent and of uncoated by 8 percent. It is estimated that inventory reductions have by now been largely completed, but demand remains conservative. Weakened demand has also been noted in overseas markets. The positive demand situation at the beginning of 1995 resulted in raised prices. Average prices for the year were higher than for 1994. The deterioration in the trend led to price adjustments, but price levels continue to be higher than at the corresponding point in time a year ago. As a result of the higher price levels, earnings for this product area improved. Wholesale operations Earnings improved in all of the Group's wholesaling units. The improvements were attributable to higher sales prices for fine papers and increased inventory sales, which led to improved margins. Building products With the exception of Denmark, all of the markets served by Building products weakened as of the beginning of the second quarter. Internal restructuring measures to meet the decrease in demand generated substantial costs. This resulted in continued losses. The action program of internal measures to improve profitability is continuing. Financial operations The financial markets were characterized by uncertainty and high volatility. The volume of activity in Business operations was therefore lower than previously. Earnings during the final quarter were the best achieved during the year. Earnings for 1995 were slightly lower than in 1994 but remained at a satisfactory level. Earnings do not include internal margins or the return on shareholders' equity. Changes and divestments Effective year-end 1994, sack manufacturers Pacsac and Robert Fleming were sold to AssiDomän during the first quarter of 1995. Furthermore, AssiDomän is gradually taking over responsibility for sales of unbleached sack paper from Skoghall up until mid-year 1996, when sack paper production on PM5 will be discontinued. In addition, STORA's holding (40 percent) in the German packaging company Bischof+Klein was sold to the company's principal owners. Effective mid-June, fine papers manufacturer Newton Falls in the U.S. was sold to Arjo Wiggins Appleton. In addition, Belgian envelope manufacturer Enveltec was sold to Bongs Fabriker AB. The sales resulted in capital gains totaling SEK 301 million. The minority holding outstanding in Celbi was acquired, whereby this company was consolidated as a wholly owned subsidiary from April 1, 1995. Financial position The Group's equity/assets ratio was 47.6 percent (41.1) and the debt/equity ratio was 0.4 times (0.6). Net indebtedness subsequently totaled SEK 10,755 million (16,199), a reduction of SEK 5,444 million. Net indebtedness includes pension liabilities of SEK 4,055 million (4,366). To protect the shareholders' equity in the Group, STORA maintains loans corresponding to its assets in individual currencies. This eliminates the risk that changes in exchange rates will affect the value of the Group's net foreign assets. Capital expenditures During the year, the decision was made to build a new board machine (KM8) at Stora Skoghall, Sweden, and a new paper machine (PM2) at the Stora Forest Industries plant in Canada. The new board machine, which is scheduled to be ready by the beginning of 1997, will have an annual capacity of 320,000 tons for the production of mainly liquid packaging board. The investment totals approximately SEK 3,100 million. As a result, STORA will consolidate its position as one of the leading producers of liquid packaging board. STORA's market share currently amounts to approximately 25 percent in Europe and 13-14 percent in the world market. Following this investment, the Stora Skoghall mill will have a clean structure and an annual capacity of 550,000 tons. The new paper machine in Canada is expected to be in operation during the beginning of 1998 and will have an annual capacity of 350,000 tons of uncoated magazine paper. The investment totals CAD 650 million (about SEK 3,100 million) and provides STORA with a strategically located machine, for primarily the North American market, and an advantageous cost structure. Moreover, STORA will become one of the main players within the uncoated magazine paper field. The Canadian facility will have a total annual capacity of 550,000 tons of magazine paper and newsprint. Both these investments are expected to meet the Group's high profitability requirements. Capital expenditures on fixed assets during the year amounted to SEK 5,455 million (3,249). Of this amount, SEK 3,852 million (2,046) was invested in Sweden. SEK 1,053 million of this latter sum relates to the investment in the new KM8 board machine. Depreciation according to plan totaled SEK 3,648 million (3,566). PersonnelThe average number of employees in the Group as at December 31, 1995 was 25,619 (26,858). Of the change since year-end, 254 positions related to divested units. Dividend proposal The Board of Directors proposes that a dividend of SEK 3.75 (2.00) per share be paid for the 1995 fiscal year. The level proposed is in line with the Group's policy, which is to distribute one third of net earnings during an economic cycle. Annual General MeetingSTORA's Annual General Meeting will be held on Tuesday, April 16, 1996 in Falun, Sweden. Falun, February 19, 1996 STORA KOPPARBERGS BERGSLAGS AB Lars-Åke Helgesson President and Chief Executive Officer

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