Stora Enso Fourth Quarter and Full Year Results 2013

STORA ENSO OYJ ANNUAL FINANCIAL STATEMENT RELEASE 5 February 2014 at 13.00 EET

Q4/2013 (compared with Q4/2012)

• Operational EBIT EUR 152 (EUR 158) million including EUR 19 million impact of lower depreciation due to impairment charges, a margin of 5.8% (5.8%).
• Negative NRI of approximately EUR 392 million, mainly due to fixed asset impairments (EUR 556 million) and Guangxi plantations fair valuation gain (EUR 179 million).
• Renewable Packaging profitability improved by lower variable costs and production from Ostrołęka Mill’s new containerboard machine, which reached its target 20% EBITDA margin by the end of the year.
• Strong cash flow from operations at EUR 470 (EUR 473) million, cash flow after investing activities EUR 310 (EUR 273) million.

Full year 2013 (compared with 2012)

• Operational EBIT EUR 578 (EUR 630) million, a margin of 5.5% (5.8%).
• EPS excluding NRI EUR 0.40 (EUR 0.33).

• Strong cash flow from operations at EUR 1 246 (EUR 1 254) million, cash flow after investing activities improved to EUR 756 (EUR 578) million.
• Net debt to operational EBITDA ratio improved to 2.3 (2.5), net debt decreased to EUR 2 434 million.

Transformation and divestment of non-core assets

• Montes del Plata Pulp Mill currently finalising construction works, mill commissioning and final permit process. Start-up expected to commence during the first months of 2014.
• Consumer board machine investment in Guangxi, China proceeding as planned. Machine expected to be operational in early 2016, as previously announced.
• As announced today, Stora Enso is divesting its 40% shareholding in the US processed kaolin clay producer Thiele Kaolin Company for USD 76 (EUR 56) million. A capital gain of EUR 37 million will be recorded in Q1/2014.

Restructuring

• EUR 200 million streamlining and structure simplification programme announced on 23 April 2013 proceeding as planned.
• Plan to permanently shut down a coated magazine paper machine at Veitsiluoto Mill in Finland announced in January 2014.

Outlook

• In Q1/2014 sales are expected to be similar to the EUR 2 604 million and operational EBIT similar or somewhat higher compared with the EUR 152 million in Q4/2013. Average prices are forecast to improve and fixed costs to decrease from Q4/2013. Renewable Packaging will be impacted by Guangxi project costs and lost production due to Skoghall Mill recovery boiler incident.

Key Figures*

* Data for the comparative periods have been restated following adoption of the revised 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 14.
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.

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 disclosed individually if they exceed one cent per share.


Stora Enso Deliveries and Production

* Stora Enso’s net market pulp position was 1.1 million tonnes for 2013.

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 and Group's share of tax and net financial items of EAI.


Q4/2013 Results (compared with Q4/2012)

Breakdown of Sales Change Q4/2012 to Q4/2013

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

Sales at EUR 2 604 million were EUR 123 million lower than a year ago as sales of paper products declined, partly due to the previously announced permanent shutdowns of paper machines at Kvarnsveden and Hylte mills in Sweden. Operational EBIT was EUR 152 (EUR 158) million, an operational EBIT margin of 5.8% (5.8%).

Clearly lower sales volumes, especially for newsprint due to permanent paper machine shutdowns, and slightly lower sales prices in local currencies for all paper products decreased operational EBIT by EUR 48 million. This was partly offset by slightly lower wood costs across divisions and lower pulp costs, which increased operational EBIT by EUR 23 million. Depreciation was EUR 22 million lower, mainly due to fixed asset impairments. Fixed costs remained stable. Paper and board production was curtailed by 11% (9%) and sawnwood production by 2% (5%) to manage supply.

The average number of employees in the fourth quarter of 2013 was 580 lower than a year earlier at 27 750. The number of employees decreased most in Sweden due to permanent shutdowns of paper machines and restructurings, whereas decreases in Finland were offset by the acquisition of ABB’s 49% shareholding in Efora Oy, which employs around 1 000 people. The average number of employees in China increased by 520 in the fourth quarter.

The Group recorded non-recurring items (NRI) with a negative net impact of approximately EUR 392 million on operating profit and a positive impact of approximately EUR 114 million on income tax in its fourth quarter 2013 results. The NRI are fixed asset impairments of EUR 556 million mainly in Printing and Reading, a fair valuation gain of EUR 179 million and related provision release of EUR 7 million on Group plantation assets in China, a production disruption cost of EUR 12 million in Renewable Packaging, EUR 12 million costs related to joint-venture establishment in China, the EUR 8 million settlement cost of a legal case with a supplier at the Group’s equity accounted investment Veracel and a gain of EUR 10 million relating to the Group’s share of the effect of the new tax rate on the equity accounted investment Tornator.

Net financial expenses at EUR 64 million were EUR 14 million higher than a year ago. The net interest expenses and the fair valuation of interest rate derivatives were similar to the previous year. The net foreign exchange impact in the fourth quarter of 2013 in respect of cash, interest-bearing assets and liabilities and related hedges was a gain of EUR 9 (a loss of EUR 1) million. During the quarter, prepayment of loans from Finnish pension institutions and bonds resulted in a charge of EUR 11 million. A one-time EUR 11 million gain from the settlement of the NewPage lease guarantee was recorded in the fourth quarter of 2012.

Breakdown of Capital Employed Change Q4/2012 to Q4/2013

The operational return on capital employed was 7.6% (7.3%). Excluding the ongoing strategic investments in Biomaterials and Renewable Packaging the operational return on capital employed would have been 9.1% (8.4%).

 

January–December 2013 Results (compared with January–December 2012)
 

Breakdown of Sales Change 2012 to 2013

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

Sales at EUR 10 544 million were EUR 271 million lower than in the previous year due to permanent machine shutdowns and deteriorating demand and prices in Printing and Reading. Operational EBIT was EUR 52 million lower at EUR 578 million. The operational EBIT margin was 5.5% (5.8%).

Significantly lower sales prices in local currencies for paper were partly offset by the improved product mix and sales prices in Building and Living. Lower sales volumes in Printing and Reading were partly offset by increased deliveries in Renewable Packaging due to Ostrołęka Mill’s new PM 5. Variable costs were clearly lower as wood and pulp costs decreased, and fixed costs were also lower than a year ago. Full year 2013 depreciation was EUR 19 million lower year-on-year due to fixed asset impairments.

Net financial expenses at EUR 223 million were EUR 3 million higher than a year earlier. Net interest expenses increased by EUR 30 million mainly as a result of higher average gross debt during the year, lower capitalised interest and lower interest income from loans to equity accounted investments. The net foreign exchange losses in respect of cash, interest-bearing assets and liabilities and related hedges were EUR 1 (EUR 12) million. The fair valuation of interest rate derivatives had a EUR 40 million positive impact compared with 2012 due to higher long-term interest rates. A gain of EUR 12 million from the sale of EUR 99 million of subordinated debt of the equity accounted investments Bergvik Skog and Tornator was recorded in 2013, whereas a EUR 34 million gain was recorded on the reversal of NewPage lease guarantee provisions and settlement in 2012.

Q4/2013 Results (compared with Q3/2013)

Sales increased by EUR 48 million to EUR 2 604 million. Operational EBIT was EUR 32 million lower than in the previous quarter at EUR 152 million. The fourth quarter results include the impact of EUR 19 million lower depreciation due to fixed asset impairments. Fixed costs were higher due to seasonality and increased maintenance activity, but variable costs were lower. Renewable Packaging volumes were lower than in the previous quarter, partly due to annual maintenance stoppages at Skoghall and Fors mills.

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 Q4/2013 (compared with Q3/2013)
Total unutilised committed credit facilities were unchanged at EUR 700 million, and cash and cash equivalents net of overdrafts remained strong at EUR 2 053 million, which is EUR 43 million less than for the previous quarter. In addition, Stora Enso has access to various long-term sources of funding up to EUR 800 million.
 

During the fourth quarter of 2013, loans from Finnish pension institutions with a nominal value of EUR 125 million were repaid early by Stora Enso. In addition, Stora Enso repurchased EUR 77 million of the 5.125% bond notes due in June 2014. Following the repurchase, the aggregate nominal amount of the outstanding notes is EUR 270 million.

In November 2013 Stora Enso signed a new EUR 700 million committed credit facility agreement with a syndicate of 14 banks to refinance its existing EUR 700 million facility. The new facility matures in January 2017 and will be used as a backup for general corporate purposes. The loan has no financial covenants.

The ratio of net debt to the last twelve months’ operational EBITDA was 2.3 (2.5).

The debt/equity ratio at 31 December 2013 was 0.47 (0.51). The decrease is primarily due to the EUR 291 million decrease in net debt due to solid cash flow generation in the fourth quarter of 2013.

Cash Flow

Q4/2013 cash flow
Fourth quarter 2013 cash flow from operations remained solid at EUR 470 million. Inventories and receivables decreased by EUR 70 million and EUR 75 million, respectively. Payables increased by EUR 60 million. Payments from the previously announced restructuring provisions were EUR 20 million.

Capital Expenditure for January–December 2013
Additions to fixed and biological assets in 2013 totalled EUR 425 million, which is 75% of depreciation in the same period. Investments in fixed assets and biological assets had a cash outflow impact of EUR 424 million in 2013.

The EUR 36 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 66 million in 2013.

The main projects ongoing during 2013 were Montes del Plata Pulp Mill and the Ostrołęka containerboard machine.
 

Capital Expenditure, Equity Injections and Depreciation Forecast 2014*

* Capital expenditure includes approximately EUR 300 million for the project in Guangxi, China and approximately EUR 150 million for Montes del Plata Pulp Mill in Uruguay. As of 2014 Stora Enso will consolidate Veracel and Montes del Plata line-by-line in accordance with IFRS 11. For further details, please see Basis for Preparation on page 14.

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. This programme does not include capacity reductions.

About 70% of the cost reduction actions specific to this programme were completed by the end of the fourth quarter of 2013. Most of the non-recurring one-time costs totalling EUR 88 million related to the programme were already announced by the end of the third quarter of 2013. Due to the programme, about 1 300 employees exited by the end of the year.

Near-term Outlook
In the first quarter of 2014 sales are expected to be similar to the EUR 2 604 million and operational EBIT similar or somewhat higher compared with the EUR 152 million in the fourth quarter of 2013. Average prices are forecast to improve and fixed costs to decrease compared with the fourth quarter of 2013. Renewable Packaging will be affected by Guangxi project costs and lost production due to the Skoghall Mill recovery boiler incident.

Segments Q4/13 compared with Q4/12

Printing and Reading
Printing and Reading, part of the Printing and Living Division, 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
 

• Lower sales volumes due to declining demand and related capacity reductions, and slightly lower sales prices in local currencies decreased operational EBIT. This was partly offset by lower variable costs resulting from operational improvements and lower fixed costs.
• Depreciation was EUR 19 million lower mainly due to fixed asset impairments recorded in the fourth quarter of 2013.
• As announced in January 2014, the permanent shutdown of a coated mechanical paper machine at Veitsiluoto Mill in Finland is planned.
   

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 Biorefinery.
 

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

• Lower variable costs, mainly for wood, were more than offset by Biorefinery Business Unit costs, and higher costs for Montes del Plata Pulp Mill. Fixed costs were similar to a year ago.
• Montes del Plata Pulp Mill is currently finalising the construction works, mill commissioning and the final permit process. The start-up process is expected to commence during the first months of 2014.

Markets

Building and Living
Building and Living, part of the Printing and Living Division, 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
 

• Slightly lower sales prices in overseas markets were more than offset by lower log prices in the Nordic countries, clearly higher by-product income in Central Europe, lower fixed costs and higher volumes in all businesses.
   

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
 

• Containerboard sales volumes were higher due to Ostrołęka Mill’s new PM 5 and stronger consumer board deliveries at the end of the year. Increased production despite annual maintenance stoppages at Skoghall and Fors mills improved operational EBIT. Variable costs were lower. Average sales prices in local currencies remained stable.
• The consumer board machine project in Guangxi, China is proceeding as planned. Approvals from MOFCOM (Ministry of Commerce of People’s Republic of China) were received in November. The machine is forecast to be operational in the beginning of 2016, as previously announced.

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.
 

• Fixed costs increased due to acquisition of ABB’s 49% shareholding in Efora Oy.
• Operational EBIT was EUR 51 million higher than a year earlier mainly due to inventory adjustment in Nordic wood sourcing operations in 2012 and lower expenditure in Group Functions and Group Services.
• Stora Enso divests its 40% shareholding in the US based processed kaolin clay producer Thiele Kaolin Company for USD 76 (EUR 56) million. A capital gain of EUR 37 million will be recorded in Q1/2014.
   

Short-term Risks and Uncertainties
The main short-term risks and uncertainties relate to the economic situation in Europe, and the persistent 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 13 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 190 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 95 million, negative EUR 78 million and positive EUR 53 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.

Fourth Quarter Events
In October Stora Enso announced the appointments to its Nomination Board.

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.

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%, which decision has been challenged by Veracel. In spite of this, the supplier and Veracel entered into a settlement agreement in December 2013, agreeing that the supplier should make certain tax payments of which Veracel paid to the supplier, and expensed, BRL 45 million (EUR 16 million), of which Stora Enso’s share amounts to BRL 22.5 million (EUR 8 million). The settlement is subject to formal acceptance of the payment by the Brazilian authorities and the final decision of the Chamber of Commerce Arbitration Court.

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 (EUR 6 million) to cover the cost of settling those claims, which cost has been recorded in the third quarter 2013 accounts. The only remaining cases of any substance, filed on behalf of indirect purchasers of publication paper in the California (CA) and Connecticut (CT) state courts, are about to be settled as well – without any admission of liability by SENA or SEO – via payments of USD 0.1 million (EUR 0.1 million) plus proportionate cost (CA) and USD 0.1 million (EUR 0.1 million) (CT). These settlements have to be approved by the responsible courts. In previous periods the cases were disclosed as a contingent liability.

Legal Proceedings in Finland
In 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. In 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 initiated similar legal proceedings. The total amount claimed from all the defendants amounts to approximately EUR 45 million and the secondary claims solely against Stora Enso to approximately EUR 10 million. Stora Enso denies that Metsähallitus and other plaintiffs suffered any damages whatsoever and will forcefully defend itself. No provisions have been made in Stora Enso’s accounts for these lawsuits.

Kemijärvi Pulp Mill in Finland was permanently closed down in 2008. In December 2011 the Vaasa Administrative Court gave its decision concerning the environmental permit for the closure of the mill. The judgement included an obligation to remove the majority of the sludge from the bottom of the water treatment lagoon. Following an appeal by Stora Enso, the Supreme Administrative Court in August 2013 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 remove the majority of the sludge, and returned the case to the Regional State Administrative Agency with an order to Stora Enso to deliver a new action plan by the end of 2014 for removal of the majority of the sludge from the basin at the Kemijärvi site. The Agency was also ordered to consider and evaluate the costs to Stora Enso against the environmental benefits achievable if the Agency ordered Stora Enso to remove the sludge. No provisions have been made in Stora Enso’s accounts for this case.

Changes in Organisational Structure and Group Management
On 23 April 2013 Stora Enso announced that it planned to change from four Business Areas to three Divisions by integrating the Building and Living Business Area with the Printing and Reading Business Area in a new Printing and Living Division. The segment reporting has remained as before.

On 31 May 2013 Stora Enso announced that from 1 July 2013 onwards the Stora Enso Group Leadership Team would comprise the following persons and roles:

Jouko Karvinen, Chief Executive Officer
Juan Bueno, Head of Biomaterials Division
Lars Häggström, Head of Global People and Organisation
Per Lyrvall, Head of Global Ethics and Compliance, General Counsel, Country Senior Executive, Sweden
Mats Nordlander, Head of Renewable Packaging Division
Lauri Peltola, Head of Global Identity, Country Senior Executive, Finland
Karl-Henrik Sundström, Head of Printing and Living Division
Jyrki Tammivuori, acting Chief Financial Officer (until 31 January 2014)
Juha Vanhainen, Executive Vice President, EUR 200 million Streamlining and Structure Simplification Programme, Wood Supply Operations in Finland and Sweden, Energy, Logistics and Business Information Services

Personnel
On 31 December 2013 there were 27 985 employees in the Group, 218 less than at the end of 2012. The average number of employees in 2013 was 28 231, which was 546 lower than the average number in 2012. The number of employees decreased most in Sweden due to permanent shutdowns of paper machines and restructurings, whereas decreases in Finland were offset by the acquisition of ABB’s 49% shareholding in Efora Oy, which employs around 1 000 people. Excluding the effects of the acquisition of Efora Oy, the number of employees in Europe decreased by approximately 1 650 during 2013.

Share Capital
During the quarter the conversions of a total of 50 168 A shares into R shares were recorded in the Finnish trade register on15 October and 16 December 2013.

On 31 December 2013 Stora Enso had 177 096 204 A shares and 611 523 783 R shares in issue of which the Company held no A shares or R shares.

Events after the Period
The conversion of 25 000 A shares into R shares was recorded in the Finnish trade register on 15 January 2014.

Seppo Parvi started as new Chief Financial Officer on 1 February 2014. According to Stora Enso’s Corporate Governance, the CFO also acts as deputy to the CEO as defined by the Finnish Companies Act. On 5 February 2014 Stora Enso’s Board of Directors appointed Seppo Parvi as deputy to the CEO.

Annual General Meeting
The Annual General Meeting (AGM) will be held at 16.00 (Finnish time) on Wednesday 23 April 2014 at Marina Congress Center, Katajanokanlaituri 6, Helsinki, Finland.

The agenda of the AGM and proposals on the agenda of the AGM, as well as the AGM notice, will be available on Stora Enso Oyj’s website at www.storaenso.com/agm. Stora Enso’s annual accounts, the Report of the Board of Directors and the auditor’s report for 2013 will be published on Stora Enso Oyj’s website www.storaenso.com/investors during the week commencing on Monday 17 February 2014. The proposals for decisions and the other above-mentioned documents will also be available at the AGM. Copies of these documents and of this notice will be sent to shareholders upon request. The minutes of the AGM will be available on Stora Enso Oyj’s website www.storaenso.com/agm from 7 May 2014.

The Board of Directors’ Proposal for the Payment of Dividend
The Board of Directors proposes to the AGM that a dividend of EUR 0.30 per share be distributed for the year 2013.

The dividend would be paid to shareholders who on the record date of the dividend payment, 28 April 2014, are recorded in the shareholders’ register maintained by Euroclear Finland Oy or in the separate register of shareholders maintained by Euroclear Sweden AB for Euroclear Sweden registered shares. Dividends payable for Euroclear Sweden registered shares will be forwarded by Euroclear Sweden AB and paid in Swedish krona. Dividends payable to ADR holders will be forwarded by Deutsche Bank Trust Company Americas and paid in US dollars.

The Board of Directors proposes to the AGM that the dividend be paid on 15 May 2014.
 

This report has been prepared in Finnish, English and Swedish. In case of variations in the content between the versions, the English version shall govern. This report is unaudited.

Helsinki, 5 February 2014
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 (revised) 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 and the Condensed Consolidated Statement of Financial Position 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 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.

Stora Enso will apply the new IFRS 10 Consolidated Financial Statements, 11 Joint Arrangements and 12 Disclosure of Interests in Other Entities as of 1 January 2014. The change will affect Montes del Plata and Veracel, which will then be treated as joint operations and thus consolidated with the line-by-line method.

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, Goodwill, Biological Assets and Other Intangible 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

Commitments and Contingencies

Capital commitments
The Group’s direct capital expenditure contracts, excluding acquisitions, amounted to EUR 69 million (compared with EUR 72 million at 31 December 2012). The Group’s share of capital expenditure contracts in equity accounted investments, excluding acquisitions, amounted to EUR 73 million (compared with EUR 213 million at 31 December 2012) of which Stora Enso has guaranteed EUR 44 million (compared with EUR 189 million at 31 December 2012).

Sales by Segment

Operational EBIT by Segment

* Fair valuations and non-operational items include equity incentive schemes, synthetic options net of realised and open hedges, CO2 emission rights, valuations of biological assets and Group’s share of tax and net financial items of EAI.


NRI by Segment

Fair Valuations and Non-operational Items* by Segment

* Fair valuations and non-operational items include equity incentive schemes, synthetic options net of realised and open hedges, CO2 emission rights, valuations of biological assets and Group’s share of tax and net financial items of EAI.

Operating Profit/Loss by Segment

Key Exchange Rates for the Euro

Transaction Risk and Hedges in Main Currencies as at 31 December 2013

Changes in Exchange Rates on Operational EBIT

The sensitivity is based on estimated next 12 months net operating cash flow. The calculation does not take into account currency hedges, and assumes no changes occur other than a single currency exchange rate movement. Weakening would have the opposite impact.
 

Fair Values of Financial Instruments
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

• Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;

• Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly;

• Level 3: techniques which use inputs which have a significant effect on the recorded fair values that are not based on observable market data.

The valuation techniques are described in more detail in the Financial Statements.


Carrying Amounts of Financial Assets and Liabilities by Measurement and Fair Value Categories: 31 December 2013

Reconciliation of Level 3 Fair Value Measurement of Financial Assets: 31 December 2013

Unlisted shares
The unlisted shares consist mainly of PVO shares for which the valuation method is described in more detail in the Annual Report. The valuation is most sensitive to changes in electricity prices and discount rates. The discount rate of 5.01% used in the valuation model is determined using the weighted average cost of capital method. A +/- 5% change in the electricity price used in the DCF would change the valuation by +/- EUR 37 million and a +/- 1% change in the discount rate would change the valuation by -/+ EUR 46 million.

Unlisted Interest-bearing Securities
During the third quarter of 2013, a EUR 99 million loan note issued by Papyrus Holding AB, classified in the Statement of Financial Position as an unlisted interest-bearing security, 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 Statement of Financial Position as a non-current loan receivable.
 

Stora Enso Shares