Report on operations for the six months ended june 30, 1996

REPORT ON OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 Invoicing SEK 24,041 million (29,397) Income after net financial items SEK 1,610 million (4,068) Net income after tax SEK 1,060 million (2,685) Income per share SEK 3.30 (8.35) Sales and earnings The Group's invoiced sales for the first six months of 1996 amounted to SEK 24,041 million (SEK 29,397 million for year-ago period). The change is mainly attributable to delivery volumes declining by 12 percent. In addition, the strengthened SEK had an adverse effect on invoicing in an amount of SEK 1,700 million. Operating income totaled SEK 1,883 million (4,614). Income was affected by lower delivery volumes and prices totaling SEK 1,900 million, as well as by SEK 450 million due to the appreciation of the SEK. The remainder was primarily attributable to reduced revenues of a nonrecurring nature and to the revaluation of inventories. The Group's financial net improved to an expense of SEK 273 million (expense: 546). Due to the strengthening of the SEK, the financial net improved by SEK 60 million. In other respects, the financial net was positively affected by reduced borrowing and lower interest rates. Accordingly, income after net financial items amounted to SEK 1,610 million (4,068). The dividend on the shares in SAS Sverige amounted to SEK 81 million. Of this, SEK 71 million consisted of a nonrecurring dividend, which is reported separately in the income statement. The normal dividend, SEK 10 million, is shown in the financial net. Income during the preceding year included capital gains totaling SEK 272 million. Net income, after tax and minority shares, amounted to SEK 1,060 million (2,685). Tax for the period was SEK 539 million (1,346), corresponding to 33.5 percent (33.1) of income before tax. Group income per share for the first half of 1996 was SEK 3.30 (8.35). On a rolling full-year basis the corresponding figure was SEK 11.65 (11.90), compared with SEK 16.70 for full-year 1995. The return on capital employed, after deductions for tax liabilities, for the period July 1995 to June 1996 was 13 percent (16), compared with 22 percent for full-year 1995. The corresponding figures for the return on shareholders' equity were 13 percent (15) and 20 percent, respectively. The operating cash flow was positive and amounted to SEK 2,535 million (2,076), of which currency translation accounted for SEK 1,257 million (- 1,855). Following deductions for net financial items, taxes and dividends, interest-bearing net indebtedness rose by SEK 763 million (107). Market situation The market situation for pulp, paper and board during the first half of the year was characterized by customer inventory reductions and the weak economic trend in Europe. Demand in the United States was better, due to higher GDP growth. Despite this, deliveries in this market were also below the corresponding period in 1995 due to inventory run-downs among customers. The reductions in inventory, which particularly affected pulp, fine papers and board, started as early as autumn 1995 and continued through the second quarter of 1996. Towards the end of the period, order bookings began to increase again and it is judged that the inventory run-downs for these products have been completed. Order bookings and shipments for newsprint and uncoated magazine paper (SC) were favorable during most of the period. However, some inventory reduction had occurred, which resulted in decreased shipments towards the end of the period. Order bookings for coated magazine paper (LWC) were weak, although a more positive trend could be discerned towards the end of the period. STORA's deliveries of pulp, paper and board totaled 3,091,000 metric tons (3,509,000), corresponding to a 12-percent decrease compared with the first half of 1995. STORA estimates that consumption of paper and board has continued to rise and that the decrease in deliveries is due to inventory adjustments. The weak market also led to a drop in the prices of pulp, LWC papers, fine papers and board. Prices stabilized towards the end of the period. Price increases were implemented for pulp. Prices for newsprint and SC papers in Europe were stable. Newsprint prices in the United States declined during the period. In terms of volumes, sawn timber experienced better conditions, compared with the corresponding period of 1995, but prices remained low. STORA's deliveries 3 during the period totaled 320,000 m (297,000), up 8 percent. During the latter part of the period, the order situation for pulp, fine papers and board improved, while orders for newsprint and SC papers weakened slightly. For most product areas, the inventory adjustments in Europe are adjudged to have been completed. It is estimated that prices for most of STORA's products have reached bottom or have bottomed out. Power The normal-cold 1995/96 winter and a general increase in consumption resulted in electricity consumption increasing by 4.6 percent in Sweden. Despite normal precipitation during the period May-July, the dry winter placed a strain on the power situation and led to very low reservoir levels. A similar situation exists in Norway, which is wholly dependent on hydro power. As a result of the strained power situation, coal and oil-based power was utilized and additional purchases were made at high cost levels. Even if normal precipitation occurs during the remainder of the year, the strain on power resources will not be alleviated until 1997. Earnings deteriorated. Forest and timber The wood market is characterized by a surplus of pine and deciduous pulpwood, while spruce pulpwood and timber are generally in balance. Currently, the supply of wood from forest owners is low. Felling in the Group's own forests declined 9 percent, compared with 1995. Decreased prices for saw timber and wood, in combination with the lower level of felling, led to a deterioration in earnings. Sawn timber operations are affected by the weak activity in the building sector. Price levels dropped even lower during the second quarter, especially for pine. The price of spruce has been increased slightly for the third quarter. Inventories at STORA's sawmills declined 16 percent during the first half. The new Gruvön sawmill (Sweden) started up during the period. Sawn timber operations continued to show a loss. Pulp Substantial production cutbacks were implemented during the first half of the year within the Scandinavian and North American pulp industry. It was estimated that producer inventories in Scandinavia and North America totaled approximately 1.5 million metric tons at the end of June, which is judged to be a normal level. Demand for paper pulp has strengthened in recent months, due to the rebuilding of customer inventories and to an increased level of order bookings for fine papers. Currently, the price of short-fiber pulp is ECU 420 per ton, compared with ECU 380 earlier, while the price of long-fiber pulp is estimated to rise gradually from USD 520 per ton to reach the announced USD 580 at the end of the third quarter. The product area's earnings deteriorated. Printing papers The market for printing papers has been affected by the weak economic trend. In addition, measures have been introduced by customers to reduce consumption of this grade following the sharp price increases implemented during 1995. Total deliveries to the European market decreased by 5 percent for newsprint, 9 percent for SC papers and 24 percent for LWC papers. Coated fine papers and SC papers captured market share from LWC papers during the period. Prices for newsprint are currently the subject of negotiation. Prices for SC papers were reduced by about 5 percent as of mid-year. The level of LWC paper prices deteriorated and is currently 10-20 percent lower than the peak noted in autumn 1995. STORA has implemented considerable production cutbacks, most of which apply to LWC paper production. In the technical office papers segment, thermal papers continued to show market growth, while consumption of carbonless papers declined. Both products are currently subject to price pressure. The earnings of the printing papers product area were better than in 1995. Fine papers The level of order bookings for fine papers during the early months of the year was low, due to inventory reductions among customers. Order bookings since April have exceeded the level of the preceding year and the earlier pressure on prices has subsided. The improvement is due to customers rebuilding their inventories pending expected price hikes and the securing of shipments during the summer stoppage. Deliveries of coated fine papers in Europe declined by 6 percent compared with the preceding year. For uncoated fine papers, the corresponding figure was a decrease of 11 percent. STORA and other manufacturers implemented production cutbacks during the period. Price levels are currently lower than at the equivalent time in 1995. The earnings of this product area deteriorated as a result of lower price levels and lower volumes. Wholesale operations The Group's wholesale companies were affected by the tougher market scenario. Lower fine paper prices led to inventory write-downs, which led to earnings for wholesale operations being lower than for the preceding year. Board and packaging paper The market for board and packaging paper was affected during the early part of the year by inventory run-downs among packaging converters and end-users. The inventory reductions have now been completed and during recent months order bookings have improved for all grades of folding boxboard and packaging paper. The low level of order bookings earlier resulted in production restrictions. In May, production of unbleached sack paper in Skoghall (Sweden) was terminated. The machine has been dismantled and sold. Sales prices deteriorated and expressed in local currencies they are currently below the level of the preceding year. The improvement in the order situation means that earlier pressure on prices has been eliminated. Demand for liquid packaging board continues to be favorable. The product area's earnings declined as a result of lower prices and lower volumes. Building products Uncertainty regarding the economic trend coupled with the cold start to the year hampered building activity. In Sweden, building is at a very low level, both in terms of new building and extension work. Government subsidies for new building and repair and renovation work are beginning to generate an increase in the number of new housing units and renovation projects. New housing starts declined in Norway, while the building of institutional premises increased. In Denmark, the volume of housing starts increased during the year. Demand in Germany declined as a result of lower new building activity and lower economic growth. The markets in Finland and the U.K. are also weak. Due to the sharp downturn in the building market, Stora Building Products is currently implementing an extensive action program. The product area's earnings deteriorated. Financial operations Financial markets were characterized by less uncertainty than during the preceding year. Earnings were generated in the interest and currency markets, as well as in share-related instruments. Earnings were better than in the preceding year. Financial position The Group's equity/assets ratio at the end of the period was 48.9 (41.9) percent and the debt/equity ratio was 0.40 times (0.61). The corresponding figures at year-end 1995 were 47.6 percent and 0.37 times, respectively. Interest-bearing net indebtedness amounted to SEK 11,518 million (16,306), compared with SEK 10,755 million at year-end 1995. Of the SEK 1,735 million in tax paid, as shown in the change in net indebtedness, the major portion related to supplementary preliminary tax in Sweden for 1995. Interest-bearing net indebtedness includes pension liabilities of SEK 3,964 million (4,185) at the end of the period and SEK 4,055 million as at year-end 1995. To protect the shareholders' equity in the Group, STORA maintains loans corresponding to its assets in individual currencies. This eliminates the risk that changes in exchange rates will affect the value of the Group's net foreign assets. Capital expenditures Investments in plant during the period totaled SEK 3,389 million (2,055), of which SEK 2,704 million (1,359) was in Sweden. Depreciation according to plan amounted to SEK 1,827 million (1,857). The board machine project in Skoghall (Sweden) is progressing according to plan. Accumulated payments total SEK 2,108 million, of which SEK 1,141 million relates to 1996. The magazine paper machine project in Nova Scotia (Canada) is also proceeding according to plan. Site-preparation and construction work has commenced. Personnel The average number of employees in the Group as at June 30, 1996 was 24,600 (25,929). During 1995, the figure was 25,619. Structural changes STORA has entered into negotiations with Industri Kapital regarding the divestment of Stora Building Products. Final agreement is expected to be reached later this year. The preliminary purchase price for the shares is approximately SEK 865 million, which corresponds to STORA's book value. Following the completion of this transaction, it is estimated that STORA's net indebtedness will decrease by approximately SEK 950 million. During April agreement was reached whereby Mitsubishi acquires 20 percent of the shares in Stora Spezialpapiere GmbH (Flensburg, Germany), which produces thermal papers. Falun, August 7, 1996 STORA KOPPARBERGS BERGSLAGS AB Lars-Åke Helgesson President and Chief Executive Officer This interim report has not been subject to examination by the Company's auditors. The report on operations for the period January 1 to September 30, 1996 will be published on October 24, 1996.