Stora Enso Interim Review January-March 2011

STORA ENSO OYJ INTERIM REVIEW 20 April 2011 at 13.00 EET

• EUR 248 million quarterly operating profit excluding NRI and fair valuations, up by EUR 129 million (108)% year-on-year, EBITDA excluding NRI and fair valuations up by 59%.
• ROCE excluding NRI and fair valuations 11% (6)%.
• Improved year-on-year pricing and continued productivity improvement in all segments.
• Strong growth in market pulp.
• Increase in cost inflation estimate to approximately 4% for the full year 2011, actions to improve costs, productivity, product and customer mix continue to be even more important.
• Cost inflation and maintenance stoppages will limit Q2 2011 earnings improvement year-on-year.
• Investments announced in strategic high-return growth areas: Montes del Plata Pulp Mill, Uruguay and containerboard machine at Ostrołęka, Poland.
   

Summary of First Quarter Results

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 equity accounted investments.
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.


Markets
Compared with Q1/2010

Industry inventories were higher for magazine paper, fine paper and wood products, and significantly lower for newsprint.

Compared with Q4/2010

Industry inventories were higher for newsprint, magazine paper, fine paper and wood products.

Stora Enso Deliveries and Production

*Stora Enso’s net market pulp position will be about 1 million tonnes for 2011.

Q1/2011 Results (compared with Q1/2010)
 

Breakdown of Sales Change Q1/2010 to Q1/2011

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

Key Figures

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.
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 equity accounted investments.

Reconciliation of Operating Profit

Q1/2011 Results (compared with Q1/2010)                                       (continued)
Operating profit at EUR 248 million excluding non-recurring items and fair valuations was EUR 129 million higher than a year ago. This represents an operating margin of 9.1%.

Price increases in local currencies and a favourable product mix increased operating profit by EUR 257 million. Higher volumes increased operating profit by EUR 26 million. Paper and board production was curtailed by 7% (12%) and sawnwood production by 2% (6%) of capacity.

The costs of RCP, chemicals, corrugated raw materials, sawlogs, pulpwood and pulp were higher than a year ago, but productivity improvements and cost savings partly compensated for the cost increases. The net impact of the increase in variable costs and fixed costs in local currencies was a negative EUR 130 million. Market pulp had a positive net impact of EUR 9 million, mainly in Magazine Paper, as profit improvement through external pulp sales more than offset the higher cost of externally purchased pulp.

The favourable impact of exchange rates on sales was more than offset by the unfavourable impact of exchange rates on costs, especially due to the Swedish krona, the net impact being some EUR 13 million negative, after hedges.

Depreciation increased by EUR 10 million, partly due to the reversal of previous impairments in 2010.

The share of the operational results of equity accounted investments amounted to EUR 15 (EUR 14) million, with the largest contributions from Tornator and Bergvik Skog.

The Group recorded a net negative EUR 27 million of non-recurring items at operating profit level in the first quarter of 2011. The NRI relate materially to the planned closure of Kopparfors Sawmill. The other NRI relate to other restructuring actions and updates of existing provisions.

Net financial items were EUR -51 (EUR -6) million. Net interest expenses increased from EUR 17 million to EUR 23 million. Net foreign exchange losses amounted to EUR 12 (gain EUR 11) million and the net loss from other financial items totalled EUR 16 (EUR 0) million, mainly relating to the fair valuation of non-hedge accounted interest rate derivatives due to the increased market rates.

Group capital employed was EUR 8 768 million on 31 March 2011, a net increase of EUR 706 million due to the increased working capital, impairment reversal, strengthening of the Swedish krona and PVO valuation.

Q1/2011 Results (compared with Q4/2010)

Sales were slightly up by EUR 42 million on the previous quarter. Operating profit excluding non-recurring items and fair valuations was EUR 81 million higher than in the previous quarter at EUR 248 million. Higher sales prices in local currencies and a favourable product mix more than compensated for higher corrugated raw material, energy and RCP costs. The net impact of exchange rates was unfavourable.

Capital Structure

Financing Q1/2011 (compared with Q4/2010)
Cash flow from operations remained healthy at EUR 163 (EUR 265) million despite the increase in working capital. The increase was mainly due to higher business volumes but also to increase supply reliability. Cash flow after investing activities was EUR 106 (EUR 126) million as capital expenditure in the first quarter of 2011 was below the annual run rate. At the end of the period, interest-bearing net liabilities of the Group were unchanged at EUR 2 401 million.

Total unutilised committed credit facilities changed from EUR 1 400 million to EUR 700 million. In December 2010 Stora Enso signed a new EUR 700 million committed credit facility agreement with a syndicate of 16 banks effective in January 2011. The new facility matures in January 2014. Cash and cash equivalents net of overdrafts remained strong at EUR 1 108 million, which is EUR 5 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.

The debt/equity ratio at 31 March 2011 was 0.38 (0.39). The currency effect on owners’ equity was negative EUR 50 million net of the hedging of equity translation risks.


Cash Flow

Capital Expenditure for January–March 2011
Capital expenditure for the first quarter of 2011 totalled EUR 57 million, which is 42% of depreciation in the same period. Capital expenditure for the Group for the full year 2011 will be approximately EUR 550 million. Annual depreciation in 2011 will be about EUR 570 million. The equity injection into Montes del Plata, a joint venture in Uruguay, will be approximately EUR 120 million. Close to 80% of capital expenditure including equity injections is allocated for the strategic high-return growth areas in 2011.

The main projects during the first quarter of 2011 were power plants and energy-related projects at existing mills (EUR 20 million) and development of existing production (EUR 13 million).

Near-term Outlook
Demand is expected to be slightly stronger than a year ago for consumer board and stronger for industrial packaging, similar for newsprint and coated magazine paper in Europe, and slightly stronger than a year ago for uncoated magazine paper.

Demand for fine paper is forecast to be similar to a year ago. Demand for wood products is anticipated to be slightly stronger than a year ago.

Consumer board prices are predicted to be similar but industrial packaging prices slightly higher than in the previous quarter. Newsprint and coated magazine paper prices are expected to be stable and uncoated magazine paper prices slightly higher than in the previous quarter.

Fine paper and wood product prices are forecast to be slightly higher than in the previous quarter.

Increased cost inflation and maintenance stoppages will limit the year-on-year earnings improvement in the second quarter of 2011.

The Group has increased its forecast of cost inflation excluding internal actions from 3% to 4% for the full year 2011. Actions on costs, productivity, and product and customer mix continue to be even more important.

Segments Q1/11 compared with Q1/10

Consumer Board
Consumer Board manufactures all major types of consumer board, such as liquid packaging board, food service board, graphical board and cartonboard for packaging food, cigarettes, pharmaceuticals, cosmetics and luxury products.
 

* Excluding non-recurring items ** ROOC = 100% x Operating profit/Operating capital *** Excluding pulp
 

• Stora Enso launched Pharma DDSi remote access functionality that facilitates real-time adherence control in the healthcare sector.
• Stora Enso will invest EUR 12 million in an environmental and safety improvement project at Enocell Pulp Mill in Finland in 2011–2013.
• There will be an annual maintenance stoppage at Enocell Mill and a maintenance stoppage at Imatra Mills in Finland during the second quarter of 2011.
   

Consumer board sales were EUR 647 million, up 24% on the first quarter of 2010. Operating profit was EUR 96 million, up EUR 25 million on the first quarter of 2010. Supported by practically full capacity utilisation, productivity and efficiency were exceptionally good. Increased sales prices and volumes more than compensated for higher raw material and energy costs.

Markets

Industrial Packaging
Industrial Packaging manufactures corrugated packaging and containerboard, cores and coreboard, and also paper sacks, and sack and kraft paper.
 

* Excluding non-recurring items ** ROOC = 100% x Operating profit/Operating capital
 

• In January 2011 Stora Enso announced that EUR 285 million would be invested in a new containerboard machine at Ostrołęka in Poland.
• Power plant investment was completed at Ostrołęka in Poland.
• Regulatory approval process on Inpac International acquisition is ongoing and the acquisition is expected to be finalised in the second quarter of 2011.

Industrial packaging sales were EUR 243 million, up 9% on the first quarter of 2010. Operating profit was EUR 19 million, up EUR 12 million on the previous year as higher sales prices and volumes for containerboard and higher sales prices for corrugated packaging compensated for higher variable costs, especially for corrugated raw material. The laminating paper business was divested in summer 2010.

Markets

Newsprint and Book Paper
Newsprint and Book Paper manufactures a wide range of standard and improved newsprint, and book and directory paper grades.
 

* Excluding non-recurring items ** ROOC = 100% x Operating profit/Operating capital
 

• Industry inventories were significantly lower than in the first quarter of 2010, but higher than in the previous quarter.
• Newsprint prices in euros increased to levels similar to 2009.

Newsprint and book paper sales were EUR 315 million, up 9% on the first quarter of 2010. Operating profit was EUR 26 million, up EUR 28 million on a year ago as higher sales prices more than compensated for higher variable costs. Volumes were slightly lower than a year earlier as the permanent shutdown of the newsprint machines at Varkaus Mill in Finland at the end of the third quarter of 2010 and the newsprint machine at Maxau Mill in Germany at the end of November 2010 reduced production volumes.

Markets

Magazine Paper
Magazine Paper manufactures uncoated magazine paper mainly for periodicals and advertising, and coated matt, silk and glossy magazine paper for specialist and general interest magazines, supplements, home shopping catalogues and magazine covers.
 

* Excluding non-recurring items ** ROOC = 100% x Operating profit/Operating capital *** Excluding pulp
 

• Industry inventories for magazine paper were higher than in the first quarter of 2010 and the previous quarter.
• The annual maintenance and upgrade preparation stoppage at Skutskär Pulp Mill in Sweden is scheduled during the second quarter of 2011.

Magazine Paper segment’s sales were EUR 482 million, up 11% on the first quarter of 2010. Operating profit was EUR 28 million, up EUR 24 million on a year ago as higher prices more than compensated for higher wood, RCP and other variable costs.

Markets

Fine Paper
Fine Paper manufactures high quality graphic and office paper for printers and publishers, merchants, envelope converters, office equipment manufacturers and office suppliers.
 

* Excluding non-recurring items ** ROOC = 100% x Operating profit/Operating capital *** Excluding pulp
 

• In the first quarter of 2011 Fine Paper launched Mediaset, Cosmoset and Lumiflex speciality papers from Uetersen Mill for labels and cans.
• Industry inventories for fine paper were higher than in the first quarter of 2010 and the previous quarter.
• The annual maintenance stoppages at Nymolla Mill in Sweden and Uetersen Mill in Germany will be during the second quarter of 2011.

Fine paper sales were EUR 563 million, up 19% on the first quarter of 2010. Operating profit was EUR 80 million, up EUR 38 million on the previous year as higher sales prices, the improved product mix due to restructuring and higher volumes more than offset higher pulp and chemical costs. Paper machine (PM) 8 at Imatra Mills was permanently shut down in early March 2010.

Markets

Wood Products
Wood Products manufactures wood-based products for construction and interior decoration, and solid biofuels for the energy sector. Its recyclable products are made from high quality renewable European pine or spruce.
 

* Excluding non-recurring items ** ROOC = 100% x Operating profit/Operating capital
 

• Bridport House in London is the first multi-storey building constructed from Stora Enso’s pre-manufactured construction elements.
• In January 2011 Stora Enso announced further expansion in Building Solutions through investment in a new EUR 23 million pre-manufactured construction elements unit at Ybbs Sawmill in Austria.
• In March 2011 Stora Enso announced the planned permanent closure of Kopparfors Sawmill and integrated pellet mill in Sweden by the end of 2011 due to several years of losses and no feasible options for improvement.
• Industry inventories were higher than in the first quarter of 2010 and the previous quarter.

Wood product sales were EUR 410 million, up 24% on the first quarter of 2010. Operating profit was EUR 12 million, up EUR 6 million on a year earlier. Higher sales prices were partly offset by increased wood costs.

Markets

Short-term Risks and Uncertainties
The main short-term risks and uncertainties are related to further increasing inflation in raw material costs and the limited ability to pass on cost increases in sales prices, and the threat of a white-collar strike in Finland. The political turmoil in North Africa and recent Japanese earthquake continue to cause uncertainties.

Energy sensitivity analysis for 2011: the direct effect on 2011 operating profit of a 10% increase in electricity, oil and other fossil fuel market prices would be about negative EUR 17 million annual impact, after the effect of hedges.

Wood sensitivity analysis for 2011: the direct effect on 2011 operating profit of a 10% increase in wood prices would be about negative EUR 236 million annual impact.

Pulp sensitivity analysis for 2011: the direct effect on 2011 operating profit of a 10% increase in yearly average pulp prices would be about positive EUR 55 million annual impact.

A decrease of energy, wood or pulp prices would have the opposite impact.

Foreign exchange rates sensitivity analysis for the next twelve months: the direct effect on operating profit of a 10% strengthening in the value of the US dollar, Swedish krona and British pound against the euro would be about positive EUR 108 million, negative EUR 110 million and positive EUR 58 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.

First Quarter Events
In January 2011 Stora Enso announced that Montes del Plata, its joint venture with Arauco, would invest USD 1.9 billion in building a state-of-the-art 1.3 million tonnes per year pulp mill at Punta Pereira in Uruguay. Each of the joint-venture shareholders has a 50% stake in the mill’s equity and will be entitled to half of its output. Stora Enso’s share of the equity investment is about EUR 280 million.

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 9 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 as an interim measure. 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.

Class Action Lawsuits in USA
In the context of magazine paper sales in the USA in 2002 and 2003, Stora Enso was 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. On 14 December 2010 a US federal court granted a motion for summary judgement that Stora Enso had filed seeking dismissal of the direct purchaser class action claims. The ruling, which the plaintiffs have appealed, means that the court has ruled in favour of Stora Enso and found the direct purchaser class action claims to be without legal foundation. Further, most of the indirect purchaser actions have been dismissed by a consent judgement, subject, however, to being reinstated if the plaintiffs’ appeal in the direct cases is successful. The ruling, if it stands on appeal, will also provide a strong legal basis for final dismissal of all remaining civil cases. No provisions have been made in Stora Enso’s accounts for these lawsuits.

Legal Proceeding 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 amounting altogether to EUR 283 million.

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

Changes in Group Management
Juan Carlos Bueno, 42, was appointed to head the Group’s operations in Latin America and as a member of the Group Executive Team as of 1 April 2011.

Share Capital
No conversions were recorded during the quarter.

On 31 March 2011 Stora Enso had 177 149 784 A shares and 612 388 715 R shares in issue of which the Company held no A shares and 918 512 R shares with a nominal value of EUR 1.6 million. The holding represents 0.12% of the Company’s share capital and 0.04% of the voting rights.


Events after the Period
On 4 April 2011 Stora Enso announced that it had signed a loan facility agreement with the International Finance Corporation (IFC) to extend the maturity of USD 128 million in syndicated loans under its existing facility with IFC.

On 18 April 2011 Stora Enso announced that due to a share lending transaction, where Norges Bank is the lender, the number of shares in the Company held by Norges Bank (The Central Bank of Norway) has decreased below 5% of the paid-up share capital and the number of shares in Stora Enso Oyj on 15 April 2011.

PVO, in which Stora Enso has a 15% shareholding, announced on 19 April 2011 that it had sold its shareholding in Fingrid. The transaction value is EUR 325 million and PVO is recording a capital gain of approximately EUR 200 million. The impact of the transaction is not expected to be material in Stora Enso’s accounts.

On 20 April 2011 Stora Enso announced that it will invest approximately EUR 90 million in Skoghall consumer board mill in Sweden.



This report is unaudited.

Helsinki, 20 April 2011
Stora Enso Oyj
Board of Directors

Financials

Basis of Preparation
Except as described below, 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 2010.

The following amendments to standards and interpretations were adopted from 1 January 2011 but had no impact on the Group financial statements:
 

• IAS 24 Related Party Disclosure – Revised definition of related parties
• IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments requires the extinguishment of a financial liability by the issue of equity instruments to be measured at fair value with the difference between the fair value of the instrument issued and the carrying value of the liability extinguished being recognised in profit or loss.
• Amendments to IFRS – Through the annual improvements process, the minor and non-urgent changes are collected into one ensemble and implemented at the beginning of the year. In addition, the IASB has published a few other small amendments which have also been implemented at the beginning of the year. These changes and amendments effective from 1 January 2011 relate to nine standards and interpretations. They did not have a significant effect on the Group financial statements.
   

Condensed Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Cash Flows

Property, Plant and Equipment, Intangible Assets and Goodwill

Borrowings

Condensed Consolidated Statement of Financial Position

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
Commitments and Contingencies

Purchase Agreement Commitments

Fair Values of Derivative Financial Instruments

Nominal Values of Derivative Financial Instruments

Sales by Segment

Operating Profit/Loss by Segment excluding NRI and Fair Valuations

* 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 equity accounted investments.

Equity Accounted Investments in the Income Statement

NRI by Segment

Operating Profit/Loss by Segment

Key Exchange Rates for the Euro

Transaction Risk and Hedges in Main Currencies as at 31 March 2011

Changes in Exchange Rates on Operating Profit

The sensitivity is based on estimated net operating cash flow in next 12 months. 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.

 

Stora Enso Shares

Calculation of Key Figures

Return on capital employed,                                    

ROCE (%)                                                                100 x         Operating profit

                                                                                                     Capital employed ^{1) 2)}

Return on operating capital,                                100 x         Operating profit  

ROOC (%)                                                                                  Operating capital ^{1) 2)}

Return on equity,                                                   100 x         Profit before tax and non-controlling items – taxes

ROE (%)                                                                                     Total equity ²⁾

Equity ratio (%)                                                      100 x         Total equity

                                                                                                    Total assets

Interest-bearing net liabilities                                                 Interest-bearing liabilities – interest-bearing assets

Debt/equity ratio                                                                      Interest-bearing net liabilities

                                                                                                     Equity
 

                                                                                                                                                Fixed asset

CEPS                                                                                           Net profit/loss for the period ³⁾ – depreciation and impairment

                                                                                                     Average number of shares

EPS                                                                                              Net profit/loss for the period ³⁾

                                                                                                     Average number of shares

¹⁾ Capital employed = Operating capital – Net tax liabilities
²⁾ Average for the financial period
³⁾ Attributable to owners of the Parent


For further information, please contact:
Jouko Karvinen, CEO, tel. +358 2046 21410
Markus Rauramo, CFO, tel. +358 2046 21121
Ulla Paajanen-Sainio, Head of Investor Relations, tel. +358 2046 21242
Lauri Peltola, Head of Communications and Global Responsibility, tel. +358 2046 21380

Stora Enso’s second quarter 2011 results will be published on 21 July 2011 at 13.00 EET.


PRESS CONFERENCE IN HELSINKI
 

The conference will be held in Finnish. Questions can be addressed to Jouko Karvinen and Markus Rauramo after the presentation.

ANALYST CONFERENCE CALL
CEO Jouko Karvinen and CFO Markus Rauramo will be hosting a combined conference call and webcast today at 14.30 Finnish time (13.30 CET, 12.30 UK time, 07.30 US Eastern time).

If you wish to participate, please dial:

The live webcast may be accessed at www.storaenso.com/investors

Stora Enso is the global rethinker of the packaging, paper and wood products industry. We always rethink the old and expand to the new to offer our customers innovative solutions based on renewable materials. Stora Enso employs some 26 000 people worldwide, and our sales in 2010 amounted to EUR 10.3 billion. Stora Enso shares are listed on NASDAQ OMX Helsinki (STEAV, STERV) and Stockholm (STE A, STE R). In addition, the shares are traded in the USA as ADRs (SEOAY) in the International OTCQX over-the-counter market.

It should be noted that certain statements herein which are not historical facts, including, without limitation those regarding expectations for market growth and developments; expectations for growth and profitability; and statements preceded by “believes”, “expects”, “anticipates”, “foresees”, or similar expressions, are forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. Since these statements are based on current plans, estimates and projections, they involve risks and uncertainties, which may cause actual results to materially differ from those expressed in such forward-looking statements. Such factors include, but are not limited to: (1) operating factors such as continued success of manufacturing activities and the achievement of efficiencies therein, continued success of product development, acceptance of new products or services by the Group’s targeted customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by the Group’s patents and other intellectual property rights, the availability of capital on acceptable terms; (2) industry conditions, such as strength of product demand, intensity of competition, prevailing and future global market prices for the Group’s products and the pricing pressures thereto, price fluctuations in raw materials, financial condition of the customers and the competitors of the Group, the potential introduction of competing products and technologies by competitors; and (3) general economic conditions, such as rates of economic growth in the Group’s principal geographic markets or fluctuations in exchange and interest rates.



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STORA ENSO OYJ