Stora Enso Interim Review January-September 2006

Stora Enso Interim Review January-September 2006Cash flow stronger and operating profit excluding non-recurring items maintained compared with second quarter.Stora Enso Oyj Stock Exchange Release 26 October 2006 at 10.00 GMT Sales in the third quarter were similar to the second quarter. Increases in operating profit in Packaging Boards and Wood Products, excluding non-recurring items, more than offset the decrease in Fine Paper. However, the results were negatively impacted by net non-recurring items of EUR -177.2 million primarily related to closure and divestment decisions, as already announced. Summary of Third Quarter Results (compared with Q2/2006)Sales were EUR 3 638.1 (EUR 3 616.3) million. Operating profit was EUR 195.2 (EUR 182.2) million excluding non-recurring items. Operating profit was EUR 18.0 (EUR 188.9) million including non-recurring items. Profit before tax was EUR 197.0 (EUR 53.2) million excluding non-recurring items; the difference is due mainly to unrealised fair valuation items (non-cash) in net financial items (positive EUR 50.1 million in the third quarter vs. negative EUR 71.9 million in the second quarter). Earnings per share were EUR 0.18 (EUR 0.05) excluding non-recurring items. Cash earnings per share were EUR 0.52 (EUR 0.39) excluding non-recurring items. Earnings per share including non-recurring items were EUR 0.07 (EUR 0.05). Cash flow after investing activities increased to EUR 473.8 (EUR 299.6) million.MarketsIn Europe market demand overall for the Group's products was slightly higher than a year ago and the previous quarter, driven by sustained economic growth and rising advertising and direct marketing expenditure. In Europe market demand for newsprint grew moderately and was slightly better than a year ago. Demand for uncoated magazine paper was considerably stronger than a year ago, whereas demand for coated magazine paper was slightly weaker. Market demand was better than in the previous quarter in all magazine paper grades for seasonal reasons. Publication paper prices were higher than a year ago and similar to the previous quarter, except for a slight decline from the previous quarter in coated magazine paper. Demand in the European coated fine paper market was stronger than in the previous quarter and weaker than a year ago. Demand for uncoated fine paper was slightly weaker than in the previous quarter, but stronger than a year ago. Prices increased slightly from the previous quarter in uncoated fine paper and were stable in coated fine paper. Market demand for packaging boards was good and better than in the previous quarter and a year ago. Prices remained stable. Market demand for wood products in Europe and most export markets was better than in the previous quarter and a year ago, allowing some price increases. In North America the weakening housing market caused prices to fall. In North America market demand for newsprint and magazine paper was weaker than a year ago, and newsprint demand was also weaker than in the previous quarter. However, the magazine paper market was seasonally stronger than in the previous quarter. Newsprint and uncoated magazine paper prices were higher than a year ago and the previous quarter. Coated magazine paper prices were lower than a year ago and the previous quarter. Market demand for coated fine paper was stronger than a year ago and the previous quarter; prices rose during the quarter. In Latin America demand for coated magazine paper was better than in the previous quarter and a year ago. Prices have been mostly stable. In Asia demand for coated fine paper was better than in the second quarter and a year ago, and prices were stable. Stora Enso Deliveries and InventoriesPaper and board deliveries totalled 3 686 000 tonnes, which is 108 000 tonnes more than the previous quarter's 3 578 000 tonnes. Production increased by 56 000 tonnes from the previous quarter's 3 576 000 tonnes to 3 632 000 tonnes. Inventories decreased by 54 000 tonnes. Deliveries of wood products totalled 1 593 000 m3, which was 153 000 m3 less than the previous quarter's 1 746 000 m3. Wood product inventories remained unchanged. Market-related production curtailments in the third quarter totalled 93 000 tonnes, mostly in coated magazine paper. Key FiguresEUR million20042005Q1-Q3/055)Q1-Q3/06Q3/05Q1/06Q2/06Q3/06Sales12 395.813 187.59 551.410 862.13 219.23 607.73 616.33 638.1EBITDA1)2)1 508.41 487.41 075.81 377.3388.6463.3451.2462.8Operating profit2)4) Foreign Exchange Gains and Losses-3.7-11.14.0 Other Financial Items, of which22.5-78.448.0 Capital gains, listed shares-3.8--2.1 Unrealised fair valuation of option hedges (TRS)29.5-61.236.0 Unrealised fair valuation of other financial items-1.9-10.715.7 Other items-1.3-6.5-1.6 Net Financial Items Total-25.0-149.2-8.4Stora Enso utilises Total Return Swaps (TRS) to partially hedge the exposure to changes in the share price of synthetic options granted under the option programmes for Management, which are settled with cash payments. While these TRS instruments allow the Group to partially stabilise the future cash flows related to the settlement of outstanding synthetic options, they expose the Group to certain market risks. The TRS instruments do not qualify for hedge accounting; therefore periodic changes to their fair value are recorded in the income statement. Net financial items were EUR -8.4 (EUR -149.2) million, the difference being mainly due to the fair valuation of the hedges for the employee option programmes (Total Return Swaps, "TRS"). Net interest was EUR -60.4 (EUR -59.7) million and net foreign exchange gains on borrowings, currency derivatives and bank accounts were EUR 4.0 (EUR -11.1) million. Other financial items rose to EUR 48.0 million from EUR -78.4 million due to EUR 51.7 (EUR -71.9) million of unrealised changes in fair values of financial instruments, including TRS. This unrealised fair value change is a non-cash item. Profit before tax amounted to EUR 197.0 (EUR 53.2) million excluding non-recurring items. Net taxes totalled a positive EUR 37.3 (EUR -19.0) million due to a tax-free gain from the Celbi Mill divestment, leaving a net profit for the quarter of EUR 57.1 (EUR 40.9) million. The cumulative tax rate for the first nine months was 26.7% excluding non-recurring items. The profit attributable to minority shareholders was EUR 1.3 (EUR 2.3) million, leaving a profit of EUR 58.4 million attributable to Company shareholders. Earnings per share were EUR 0.18 (EUR 0.05) excluding non-recurring items. Earnings per share including non-recurring items were EUR 0.07 (EUR 0.05). Cash earnings per share were EUR 0.52 (EUR 0.39) excluding non-recurring items. The return on capital employed was 6.7% (6.1%) excluding non-recurring items. Capital employed was EUR 11 360.1 million on 30 September 2006, a net decrease of EUR 426.4 million. Operative working capital was EUR 238.9 million less than for the previous quarter as inventories decreased and short-term interest-free liabilities increased. Capital Structure EUR million31 Dec 0530 Sep 0530 Jun 0630 Sep 06Fixed assets11 616.8 On 30 September 2006 Stora Enso had 178 104 067 A shares and 611 434 432 R shares in issue, of which the Company held no A shares and 954 829 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. Profit 2007 and Asset Performance Review (APR) ProgrammesStora Enso's Profit 2007 profit improvement programme is proceeding ahead of schedule. The target of an improvement of EUR 300 million in annual pre-tax profit from mid 2007 onwards is expected to be clearly exceeded. More details will be given with the full year 2006 results on 7 February 2007. The APR programme, as it was announced in October 2005, is now completed, except for the planned closures of Reisholz and Berghuizer mills. Near-term OutlookIn Europe economic recovery is expected to support newsprint and uncoated magazine paper markets in the seasonally strong fourth quarter by boosting advertising expenditure; newsprint and uncoated magazine paper prices are forecast to remain unchanged until the year end. However, the coated magazine paper business is expected to remain competitive, with market-related production curtailments continuing in the fourth quarter of 2006. The prospects for fine paper demand in the fourth quarter are healthy with stable prices in coated fine paper, and it is anticipated that price increases in uncoated fine paper will be finalised during the fourth quarter. The market for packaging boards is expected to be seasonally weaker than in the third quarter with stable prices. The outlook for wood products for the rest of the year is favourable in Europe. In North America demand for newsprint is predicted to decline further. In coated magazine paper seasonal demand should improve the market in the latter part of the year. Demand for uncoated magazine paper remains stable. The coated fine paper market should stay healthy with stable prices. No material changes in publication paper and coated fine paper prices are anticipated in the fourth quarter.