Report on 1996 operations

REPORT ON 1996 OPERATIONS Invoiced sales SEK 45,161 million (57,106) Income after net financial items SEK 2,349 million (8,020) Net income after tax SEK 1,560 million (5,367) Income per share SEK 4.85 (16.70) Proposed dividend SEK 3.75 (3.75) Sales and earnings The Group's invoiced sales amounted to SEK 45,161 million (SEK 57,106 million in 1995). The difference was due to a 5-percent decrease in delivery volumes and to a deterioration in the price of virtually all products. In addition, the appreciation in the value of the Swedish krona (SEK) had an adverse effect on sales of SEK 2,750 million. The units divested during the year, Stora Building Products and Newton Falls, accounted for another SEK 2,785 million of the downturn. Income after net financial items amounted to SEK 2,349 million (8,020). Income includes a nonrecurring loss of SEK 37 million (income: 301). The Group's earnings were negatively affected by lower prices and delivery volumes in an amount of SEK 4,700 million and by SEK 750 million due to the appreciation of the SEK. Earnings were additionally affected by the extensive investment program currently in progress within the Group. Start-up and fine-tuning operations resulted in additional costs. The financial net improved to an expense of SEK 510 million (expense: 954) as a result of reduced borrowing and decreasing interest rates. The stronger SEK contributed SEK 90 million towards the improvement in the financial net. No interest was capitalized in connection with ongoing investment projects. Net income, after tax and minority shares, was SEK 1,560 million (5,367). Tax for the 1996 fiscal year amounted to SEK 770 million (2,605), or 33 percent (32) of income before taxes. The Group's income per share was SEK 4.85 (16.70). The return on capital employed, after deduction for tax liabilities, was 7 percent (22). The return on shareholders' equity was 5 percent (20). The operating cash flow was positive and totaled SEK 2,643 million (7,832), of which currency translation accounted for SEK 788 million (922). After deduc- tions for net financial items, taxes and dividends, the Group's interest- bearing net indebtedness rose by SEK 1,658 million. Markets and deliveries A weak economic trend in Europe affected the markets for paper and board. This was aggravated by inventory reductions and savings measures among customers during the first half of the year. Delivery volumes recovered during the second six months and for comparable units volumes were about 8 percent above the level for the first half. Demand in the U.S. was slightly better due to a stronger economic trend. Following a weak start to the year, order bookings for fine papers and uncoated magazine paper (SC) and coated magazine paper (LWC) improved during the second half. This applied particularly to LWC paper. Orders received for board and packaging paper improved gradually during the year. The market for pulp remained weak throughout the year. The market for sawn timber improved during the second six months. Translated into SEK, average prices for STORA's pulp, paper and board products were 12 percent lower than in 1995. STORA's shipments of pulp, paper and board decreased by 5 percent and amounted to 6,342,000 tonnes (6,662,000). The Group maintained its market shares. The level of finished goods inventories in tonnes remained unchanged. Power Electricity consumption in Sweden totaled slightly more than 140 TWh, which was in line with the preceding year. The cold start to the year resulted in very high electricity utilization and a slight increase in the level of consumption was noted for the year as a whole. The reason for the increase not being higher was due to the warmer conditions at the end of the year. The insignificant spring run-off and the dry summer led to high electricity prices. Prices stabilized towards the end of the year. Strong precipitation during November improved reservoir levels, which were low earlier but are now largely normal again in our area. However, levels in the Scandinavian system as a whole remain low. As a result of the low precipitation at the beginning of the year, STORA's hydro power production declined by 25 percent. Most of the decrease was replaced by increased nuclear power production, coal and oil-based power, at higher costs. During the autumn, further participations were acquired in the Forsmark power group corresponding to 110 GWh, with access as of January 1, 1997. A refinancing of Kopparkraft was implemented during the year, which will improve earnings as from and including 1997 (Further details available under "Other"). Forest and sawn timber The wood market is currently characterized by good access to pine and deciduous pulpwood, spruce pulpwood is in balance, while there is a slight shortage of saw timber. The supply of wood from forest owners is low. Felling in the Group's own forests remained at the same level as during 1995. Average wood prices were lower, compared with the preceding year. Building activity in the domestic market remained low, while Japan and the U.S. reported growth. Deliveries of sawn timber from CIS countries remained at a low level. The market for spruce products was better than for pine. Demand for sawn timber improved during the autumn. The new market, Japan, accounted for 4 percent of STORA's total spruce timber shipments. In relation to the bottom level noted in summer 1996, prices during the first quarter of 1997 rose by about 20 percent for pine and 25 percent for spruce. Start-up and fine tuning of the new sawmill line at Gruvön (Sweden) resulted in additional costs. Pulp Demand was affected by decreased paper and board production in Europe and North America. The market was also affected by inventory levels which remained high. Despite substantial production curtailments within the Norscan region, inventory levels were unsatisfactory at the end of the year. The increased demand for fine papers improved the market for short-fiber pulp. At year-end, the price level for long-fiber pulp remained at USD 560 per tonne, while the price of short-fiber pulp was about ECU 420 per tonne. Printing papers The market for printing papers was affected by inventory adjustments, switches between different paper grades and savings measures implemented by printers and newspaper publishers. Total deliveries of newsprint declined by about 5 percent in Western Europe. Exports from Canada to Europe increased by approximately 25 percent, due to the lower price levels prevailing in the U.S. In combination, these factors led to the introduction of production curtailments among European producers. Price levels remained stable during the first half of the year but declined by 3-5 percent since July, depending on the market. Larger price adjustments were made in the U.K. market. The extensive supplies of printing paper available in Europe led to further price reductions of about 15 percent, as of year-end 1996. Total shipments of SC paper in Europe declined by 4 percent. The U.S. market was characterized by weak demand. Prices during the second half of the year declined by around 8 percent. The weak market conditions were most noticeable for LWC paper. SC paper and coated fine papers captured market share from LWC. Following a weak start, deliveries increased during the latter part of the year. Total deliveries to Western Europe declined by about 11 percent. The lower level of deliveries resulted in production curtailments. During the year, prices were reduced by 25-30 percent. In January 1997, price hikes of 5-7 percent were announced. For carbonless paper, total deliveries to Western Europe increased by 8 percent. The severe competition led to sharp price reductions. During the latter part of the year, prices were raised. Further increases have been announced for February 1997. For thermal papers, total deliveries in Europe rose 18 percent. The prices of certain grades were reduced by 34 percent during the first eight months of the year. Towards the end of the year prices were raised. An additional increase has been announced for February 1997. Production costs for all printing paper grades are higher during the winter half of the year due to seasonal adjustments in electricity prices. In Langerbrugge, the rebuilding of PM3 led to extra costs in connection with the restart in November. Fine papers Total deliveries of uncoated fine papers increased by 2 percent, while for coated fine papers the increase was 10 percent. Sales of fine papers during the first quarter were low, due to inventory reductions among customers. Market conditions improved during the second quarter. Order bookings were higher than the actual consumption increase, due to certain inventory build-ups at wholesalers and printers. During the final quarter, demand returned to normal, but the market remained strong for both uncoated and coated grades. Price increases were implemented during the autumn in all European markets. An additional increase was implemented at year-end in Germany. Fine paper prices are affected by the trend of paper pulp prices. Wholesale operations The Group's wholesale companies were affected by the changed market scenario for fine papers. During the year, wholesale operations strengthened their presence in Eastern Europe through the establishment of operations in Estonia and Latvia and the acquisition of a paper merchant, PN Papier, based in Poznan, Poland. The deterioration in fine paper prices during the year led to inventory write- downs, which contributed to earnings for wholesale operations being lower than for 1995. Board and packaging paper The market for board and packaging paper was affected by inventory run-downs among packaging converters and end-users during the first half of the year and then improved. The strongest order bookings were noted for liner and fluting. The market for kraft paper improved gradually. The order situation for sack paper was weaker. Production of unbleached sack paper in Skoghall was terminated during May. The machine has been dismantled and sold. Liquid packaging board continued to show stable development, both in terms of volumes and prices. On average, the price of packaging board was 12 percent lower than in the preceding year, with considerable variations between grades. The greatest price declines were shown by the recycled fiber grades. Prices stabilized during the final quarter. The substantial changes being made in Skoghall in connection with the KM8 project, including rebuilding work and test running new products on the KM7, had an adverse effect on earnings, a situation that will continue until after the commissioning of the new machine. Production curtailments at Gruvön during the early part of the year and an ex- tended investment and maintenance stoppage during the autumn had an adverse effect on packaging paper volumes. Financial Operations Financial markets were characterized by increased uncertainty with regard to the American economy. This affected business opportunities within the Group's Financial Operations. Earnings were generated in the interest rate and cur- rency markets, as well as in share-related instruments. Earnings do not include interest on shareholders' equity or internal margins. Financial position The Group's equity/assets ratio at the end of the year was 48.0 (47.6) percent and the debt/equity ratio was 0.42 times (0.37). Interest-bearing net indebtedness amounted to SEK 12,413 million (10,755). Of the SEK 2,613 million in tax paid, as shown in the change in net indebtedness, the major portion related to supplementary preliminary tax in Sweden for 1995. Interest-bearing net indebtedness included pension liabilities of SEK 3,949 million (4,055). At year-end 1996, the Group had granted but unutilized credit lines amounting to SEK 9.5 billion. To protect the shareholders' equity in the Group, STORA had loans/forward contracts corresponding to 50 percent of its assets in individual currencies at year-end. Capital expenditures Investments in plant during the period totaled SEK 7,435 million (5,455), of which SEK 5,469 million (3,852) was in Sweden. Depreciation according to plan amounted to SEK 3,488 million (3,648). The board machine project in Skoghall (Sweden) is progressing according to plan. Accumulated payments total SEK 3,059 million, of which SEK 2,007 million related to 1996. The magazine paper machine project in Nova Scotia (Canada) is also proceeding according to plan. To date, SEK 611 million has been invested in this project. Personnel The average number of employees in the Group during 1996 was 22,716 (25,619). The change is attributable to the sale of companies. Other The sale of Stora Building Products to Industri Kapital was concluded on Sep- tember 30. The divestment was effective retroactively as of July 1, 1996 and resulted in STORA's net indebtedness being reduced by SEK 905 million, and in a capital loss on the sale of SEK 30 million, which was charged against third- quarter earnings. Effective December 31, 1996, a refinancing of Kopparkraft has been imple- mented, which means that the former partnership-financing agreement has been dissolved in accordance with the terms of the option agreement and the partners replaced by new ones. The new financiers, a consortium with considerably fewer participants than originally, is led by Nordbanken. In addition, STORA contributes approximately SEK 2 billion of the financing. Under the terms of the new agreement, the price for the repurchase of the power assets is fixed at the current value, SEK 8.3 billion (corresponding to SEK 2.30 per kWh). All of the underlying agreements remain unchanged, but in a more simplified form. The option dates for repurchasing the assets remain un- changed and relate to the years 1998, 2003 and 2007. At present interest-rate levels and based on the current distribution between fixed and variable interest rates, the agreement means that operating income improves by approximately SEK 150 million as of the beginning of 1997. In December, as part of its program to streamline the Group's operations, STORA sold its entire holding in SAS Sverige AB. The sales amount was SEK 231 million and the capital gain was SEK 189 million. Dividend proposal The Board of Directors proposes that a dividend of SEK 3.75 (3.75) per share be paid for the 1996 fiscal year and that March 25 be adopted as the record date. The proposed dividend corresponds to a total of SEK 1,206 million. Annual General Meeting STORA's Annual General Meeting will be held on Thursday, March 20, 1997 in Falun, Sweden. Falun, January 29, 1997 STORA KOPPARBERGS BERGSLAGS AB Lars-Åke Helgesson President and Chief Executive Officer

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