Report on 1997 operations
REPORT ON 1997 OPERATIONS Net sales: SEK 44,464 million (45,161) Profit after financial items: SEK 2,382 million (2,349) Net profit after tax: SEK 1,582 million (1,560) Earnings per share: SEK 4.90 (4.85) Proposed dividend per share: SEK 3.75 (3.75) Significant events during the year -Decision and implementation of structural changes in existing plants in Langerbrugge, Belgium; Corbehem, France; Port Hawkesbury, Canada and Skoghall, Sweden -Board plant in Arnsberg, Germany, which produced recycled fiber-based board known as White Lined Chipboard (WLC) divested -Acquisition of Papirker Rt. in Budapest, Hungary. The company is one of the largest paper wholesalers in Hungary, with annual sales corresponding to slightly more than SEK 200 million. -Agreement between STORA and the Brazilian company Odebrecht SA to jointly construct a pulp plant in Bahia Province, Brazil. -At the beginning of 1998 a "Memorandum of Understanding" was signed under the terms of which STORA acquired the majority holding in the China-based fine papers mill, Suzhou Papyrus Paper Co., Ltd. It is estimated that final agreement will be reached during the first half of 1998. Net sales and earnings The 1997 fiscal year was distinguished by higher sales volumes and lower average prices. Internal efforts were characterized by the final phase of the comprehensive investment program and restructuring of production resources. The Group's net sales amounted to SEK 44,464 million, compared with SEK 45,161 million in 1996. Net sales in 1996 included SEK 1,721 million from the divested company, Stora Building Products. Profit after financial items totaled SEK 2,382 million (2,349). Adjusted for nonrecurring items, profit totaled SEK 2,644 million (2,386). Profit was adversely affected by lower prices in an amount of SEK 3,200 million. Profit was improved by increased delivery volumes, currency changes and lower costs in amounts of SEK 1,700 million, SEK 1,050 million and SEK 975 million, respectively. Profit was adversely affected by the extensive program of investments in Skoghall and Skutskär (Sweden) and Port Hawkesbury, Canada. The Group's financial net declined to an expense of SEK 832 million (expense: 510), due to increased net indebtedness resulting from the extensive program of investments. No interest was capitalized in connection with ongoing investment projects. Net profit, after tax and minority shares, amounted to SEK 1,582 million (1,560). Tax for the period was SEK 775 million (770), which corresponded to 33 percent (33) of profit before tax. Group earnings per share for 1997 were SEK 4.90 (4.85). The return on capital employed, after deductions for tax liabilities, was 7 percent, compared with 7 percent for full-year 1996. The return on shareholders' equity was 5 percent (5). The operating cash flow was negative in an amount of SEK 802 million (+2,643), of which currency translations accounted for a deficit of SEK 153 million (+788) and divestments/acquisitions for a deficit of SEK 365 million (+967). After deductions for net financial items, taxes and dividends, the Group's interest-bearing net indebtedness rose by SEK 3,144 million to SEK 15,557 million. Fourth quarter Group net sales for the fourth quarter totaled SEK 11,465 million (10,911), compared with SEK 10,976 million for the third quarter of 1997. Profit after net financial items amounted to SEK 629 million (427), which was better than the SEK 529 million reported for the third quarter. Profit was also affected by disruptions brought about by the ongoing program of investments during the fourth quarter. The board and packaging paper product area showed a loss during the fourth quarter as a result of production transfers and a claim. The related technical fault was corrected during the autumn. In addition, profit was also charged with estimated costs for the personnel reductions at Stora Skoghall and Stora Gruvön. Combined, these factors led to operating profit being charged with approximately SEK 120 million. In addition, profit for the quarter was otherwise affected adversely by nonrecurring items amounting to a net of SEK 112 million. This includes a capital gain of SEK 145 million on the sale of Stora Reinsurance SA, Luxembourg, and the estimated costs for the shutdown of PM1 in Langerbrugge and the sulphite pulp plant in Port Hawkesbury, totally SEK 210 million. Most of the costs for the shutdown are for personnel reductions. Earnings per share were SEK 1.30 (0.90), compared with SEK 1.15 (2.50), SEK 1.35 (0.80) and SEK 1.10 (0.65) for the preceding quarters, respectively, of 1997. Market and deliveries Markets in Europe improved steadily during 1997. A contributing factor was the strong USD exchange rate, which led to increased exports from Europe. During the fourth quarter the unrest in Asia made its mark in the form of reduced exports of pulp, paper and board to the region. The region accounts for some 5 percent of STORA's total sales. As a result of increased consumption, domestic demand continued to rise in Germany. The trend of demand in the U.K. was strong throughout the year, while the U.S. economy remained buoyant, with good demand. Price increases have either been implemented or announced for most of STORA's paper and board products at the beginning of 1998. Prices for sawn timber declined during the fourth quarter of 1997. The order backlog for most of the Group's products varies from 4 to 8 weeks. STORA's deliveries of pulp, paper and board increased by 8 percent to 6,884,000 tonnes (6,374,000). Expressed in tonnes, finished goods inventories declined slightly from the level at year-end 1996. Translated into SEK, sales prices for the Group's paper and board products were about 8 percent lower than for the preceding year. Power Electricity consumption in Sweden rose by 0.5 TWh during the year to 142.6 TWh. The early winter months were mild, which explains why the increase occurred during the second half of the year, when growth was about 5 percent. Reservoir levels in the Scandinavian system declined during the autumn and correspond to about 10 TWh below the normal situation. The improvement in earnings was mainly due to increased hydro power production and to the effects of the refinancing of Kopparkraft. Forest Supplies in the wood market stabilized and the earlier surplus for certain products declined. There is currently a slight shortage of saw timber. STORA's wood deliveries to Swedish units rose by about 11 percent compared with the preceding year. Felling in the Group's own forests were somewhat higher than in 1996 and corresponded to a year's normal extraction. Pulpwood prices were lower than during the preceding year, while timber prices were higher. The increase in volumes and lower felling costs led to an improvement in earnings. Sawn timber The imbalance between supply and demand led to reduced price levels. For spruce, where the imbalance is greatest, the price level dropped by about 25 percent during the second half of the year, and for pine by 5 percent. Exports to Japan decreased significantly during the autumn. In Europe, consumption was good. STORA's deliveries increased during the fourth quarter 3 3 to 221,000 m (224,000), compared with 155,000 m (168,000) during the third 3 quarter. Accumulated, deliveries totaled 770,000 m (712,000). The favorable effect on earnings of higher average prices for finished goods was neutralized by the increased timber prices. The improvement in earnings in 1997 was primarily due to increased volumes and improved efficiency in the sawmills. A loss was reported for the final quarter, due to the declining sales prices. Pulp Norscan paper pulp inventory levels were about 1.7 million tonnes at year-end. European paper producer inventories are at a level considered normal. Pulp price levels declined slightly during December and were USD 580-590/tonne for long-fiber pulp and ECU 490/tonne for short-fiber pulp. In January 1998, price levels have further declined and are now USD 540-560/tonne and ECU 450- 470/tonne, respectively, depending on the market. Pulp operations continued to show an accumulated loss but the deficit was lower than in 1996. The improvement was due to lower wood costs and higher sales prices. Fourth- quarter earnings totaled SEK 149 million, compared with SEK 39 million during the third quarter. The sulphite pulp segment in Canada is the most severely affected market and the Group's unit there continued to show an accumulated loss, of SEK 199 million, of which SEK 23 million related to the final quarter. Printing papers Total deliveries of newsprint in Western Europe rose by 6 percent, and in the U.S. by slightly more than 4 percent. STORA's total deliveries rose by 5 percent. The increased shipments resulted in high capacity utilization in both Europe and North America. With the exception of the U.K., prices in Europe rose as of year-end 1997 by 3-7 percent, depending on market. In North America, prices increased steadily and levels are currently higher than in Europe. A further increase of USD 50/tonne has been announced in the U.S., as of April 1. Total deliveries of SC papers in Europe rose by 8 percent. STORA's total deliveries increased by 10 percent. The U.S. market continued to experience favorable demand during the final quarter. Demand for SC paper was favorable, due to the strained delivery situation with regard to LWC paper, among other factors. This led to increased capacity utilization. Price increases of 10-15 percent have been implemented in Europe since year-end 1997. Total deliveries of LWC paper to Western Europe rose by 25 percent. STORA's total deliveries increased by 20 percent. The volume increase led to increased order backlogs and high capacity utilization. Prices improved gradually during the year. Additional price rises of 5-10 percent were implemented as of January 1, 1998. The average price for printing papers in 1997 was 10-20 percent lower than in 1996. Earnings deteriorated in relation to the preceding year, due mainly to lower sales prices. The decline in earnings during the fourth quarter, compared with the preceding quarter, was due to higher energy costs during the winter half of the year. Technical office papers Total deliveries of carbonless paper to Western Europe declined during the fourth quarter and were down by 3 percent for the year as a whole. STORA's deliveries in Europe declined by 6 percent as a result of a strict pricing policy. Price increases were implemented at the end of 1996 and during early 1997. Subsequently, price levels have remained stable. The successive price increases resulted in an improvement in earnings. Total deliveries of thermal papers in Europe increased by 5 percent. STORA's deliveries in Europe declined by 17 percent, due to a fixed-price policy. Earnings improved as a result of the price increases implemented gradually during the latter half of 1996 and during 1997. Earnings for technical office papers were positive. Fine papers Compared with 1996, deliveries to European markets increased. Uncoated fine papers rose by 5 percent and coated fine papers by 11 percent. The volume trend is due to certain inventory build-ups at customers. STORA's total deliveries during the year increased by 12 percent. Volumes during the fourth quarter were in line with the preceding quarters. Order bookings remained favorable, with high capacity utilization as a result. Expressed in SEK, average prices were lower than during the preceding year. Prices in the fourth quarter were slightly higher than in the third quarter. In January 1998, prices in Central European markets were raised by 6-8 percent. The improvement in earnings during 1997 was attributable to higher volumes. Fourth-quarter earnings were up on the third quarter. Wholesale operations Inventory sales volumes increased as a result of the greater focus placed on this area and the contribution made by acquired units. Direct shipments declined, since to some extent these are now invoiced directly by the mills. Average price levels remained unchanged during the fourth quarter. Accumulated earnings were slightly better than in the preceding year, while fourth-quarter earnings were the best during the year. Board and packaging paper Delivery increases for board and packaging paper in Europe were 8 percent for packaging board, 6 percent for White Top Liner (WTL) and 5 percent for fluting. During the first half of the year, there were some inventory build- ups in the customer segment which contributed to the high increases. Compared with the preceding year, sales prices in SEK were about 6 percent lower on average for the entire product area. Following a weak trend at the beginning of the year, prices rose towards the end of the third quarter. As of January 1998, price increases of 5-8 percent were made in segments of the board range. The start-up and subsequent operations of the new board machine, KM8, have been carried out with a favorable level of work on hand. The test runs of new products and trimming-in of the new machine had an adverse effect on earnings for the year, as did a scrapping charge of SEK 50 million in connection with the start-up of the new bleaching plant during the second quarter. The costs related to the shutdown of board operations in Corbehem, France, were SEK 75 million more than the allocation made in 1996 because of labor legislation disputes which prolonged the scheduled shutdown period. The termination of board operations in Corbehem has now been completed. Operating profit within the board and packaging paper product area was negatively affected as a result of the production transfers and a claim related to the start-up and commissioning of KM8 during the third quarter. The technical fault was corrected during the autumn. In addition, profit was also charged with estimated costs for the personnel reductions at Stora Skoghall and Stora Gruvön. Combined, these factors led to earnings being charged with about SEK 120 million during the fourth quarter. The deterioration in earnings compared with 1996 was due to the start-up of KM8 and the phase-out of the board machine in Corbehem, as described earlier, and on lower sales prices. Financial operations Earnings were generated in interest-rate and currency markets, as well as in share-related instruments. A low level of earnings was reported for the fourth quarter, but earnings for the year as a whole continued to be favorable. Earnings do not include interest on shareholders' equity or internal margins. Financial position The Group's equity/assets ratio was 45.9 percent (48.0) and the debt/equity ratio was 0.52 times (0.42). Interest-bearing net indebtedness amounted to SEK 15,557 million (12,413), of which pension liabilities accounted for SEK 3,960 million (3,949). At the end of the period, the Group had granted but unutilized credit lines corresponding to SEK 11.1 billion. Investments Investments in plant during the year totaled SEK 6,367 million (7,435), of which SEK 3,178 million (5,469) was in Sweden. Depreciation according to plan amounted to SEK 3,683 million (3,488). The investment in the new board machine, KM8, in Skoghall, Sweden, was concluded during the year and the machine was inaugurated on March 18. The PM2 magazine paper machine project in Stora Port Hawkesbury, Canada, is proceeding according to plan. To date, SEK 2,175 million (CAD 397 million) has been invested in this project. The investment sum was reduced by a total of SEK 439 million (CAD 80 million), which corresponds to an investment contribution from the Canadian authorities to stimulate investment in the region. This amount is being paid in the form of reduced future tax payments. The contribution has been discounted to present value and reported as a long-term operating receivable. Personnel The average number of employees in the Group during the year was 20,431 (22,716). Most of the decrease was attributable to the sale of Stora Building Products and the mill in Arnsberg (Germany). Other The decision has been taken to phase out sulphite pulp production at Stora Port Hawkesbury in connection with the start-up of the new paper machine for the production of uncoated magazine paper. The pulp line has a capacity of 180,000 tonnes per year. The cost of discontinuing this operation, an estimated SEK 86 million, was charged against profit for the year. Most of the sum relates to costs in connection with personnel reductions. The PM1 SC paper machine at Stora Langerbrugge (Belgium), with an annual capacity of 80,000 tonnes, was shut down. As a result of the closure, profit for the year was charged with SEK 125 million, of which SEK 100 million pertained to severance costs. The PM1 paper machine at Stora Corbehem in France, with an annual capacity of 60,000 tonnes of LWC paper, was shut down during the year. An allocation was made in the 1996 accounts to cover the shutdown. Board production operations in Corbehem have also been phased out. Annual capacity was 70,000 tonnes. The costs for the shutdown were SEK 75 million higher than the provision in 1996 due to labor legislation disputes which extended the shutdown period. The shutdown is now completed. During the year, CTMP fluff pulp production, annual capacity 55,000 tonnes, and MG kraft paper production, 15,000 tonnes, in Skoghall, Sweden were also terminated. Effective July 31, the board mill in Arnsberg, Germany, which produces recycled fiber-based board, so-called White Lined Chipboard (WLC), was sold to Cascades S.A. The mill has an annual capacity of 135,000 tonnes. The divestment resulted in a capital loss of SEK 150 million and in STORA's net indebtedness being reduced by SEK 320 million. Papírker Rt. in Budapest was acquired during the autumn. One of the largest paper wholesalers in Hungary, Papírker has annual revenues corresponding to slightly more than SEK 200 million. STORA's share (22 percent) in the U.K. paper wholesaler, Classic Papers, was sold during the year. On September 18, it was announced that an agreement had been signed between STORA and the Brazilian company, Odebrecht SA, to jointly build a pulp plant in the Brazilian state of Bahia. The new mill will have an annual production capacity of 750,000 tonnes. Wood raw material needs will be completely met by the facility's own plantations. STORA's share of the investment will be USD 300 million, corresponding to 50 percent of the share capital, of which USD 110 million was paid in 1997. The balance will be paid in the form of USD 45 million at the end of 1998 and the remainder during 1999 and 2000. At the beginning of 1998 a "Memorandum of Understanding" was signed under the terms of which STORA acquired the majority holding in the China-based fine papers mill, Suzhou Papyrus Paper Co., Ltd. It is estimated that final agreement will be reached during the first half of 1998. Suzhou is China's largest producer of coated fine papers, with an annual capacity of 120,000 tonnes. Dividend proposal The Board of Directors proposes that a dividend of SEK 3.75 (3.75) per share be paid for the 1997 fiscal year and that March 17 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 12, 1998 in Falun, Sweden. Falun, January 30, 1998 STORA KOPPARBERGS BERGSLAGS AB Lars-Åke Helgesson President and Chief Executive Officer This year-end report has not been subject to a final audit by the Company's auditors. It is estimated that the annual report will be published at the end of February 1998. The Annual General Meeting for fiscal year 1997 will be held on March 12, 1998. The interim report on the first quarter of 1998 will be published on April 23, 1998. The interim report on the second quarter of 1998 will be published on July 23, 1998. The interim report on the third quarter of 1998 will be published on October 23, 1998.