Comparatives
Markets and Deliveries
Financial Results (compared with the previous year)
Financing
Capital Expenditure and Asset Restructuring
Changes in Group Composition
Research and Development
Inspections by Competition Authorities
Personnel
Changes in the Board of Directors
Environmental Issues
Share Capital
Events after the Period
Outlook
Distribution of Dividend
Annual General Meeting
Comparatives
Comparative figures in tables are given for the previous two years for both Balance Sheet and Income Statement items; comparatives in text are given in brackets for the previous year unless otherwise stated. Comparable figures for foreign currency transactions are also given in brackets where appropriate, the foreign currency coming first if that was the operative amount of a transaction.
Markets and Deliveries
The global economic recovery improved demand, especially for advertising-driven paper grades and with deliveries increasing for publication and fine paper by 6–8%, though the increase for packaging board was somewhat lower. Demand for wood products was strong in whitewood but, due to European oversupply, no clear improvement existed in the redwood market.
Prices of all paper grades stabilised at their lowest level in this cycle though some increases were announced and also partially implemented; packaging board prices were stable during the year. The declining value of the US dollar negatively impacted margins. In North America demand for magazine and coated fine paper strengthened and price increases were implemented during the second half of the year.
Market related production curtailments totalled 357 000 tonnes in Europe and 7 000 tonnes in North America (in speciality paper). This compares with the previous year’s total of 782 000 tonnes, comprising 703 000 tonnes in Europe and 79 000 tonnes in North America.
Paper and board deliveries totalled 14 410 000 tonnes, which is 859 000 tonnes more than the previous year’s 13 551 000 tonnes. Production volumes at 14 520 000 tonnes were 835 000 tonnes more than in the previous year. Deliveries of wood products totalled 6 664 000 cubic metres, compared with the previous year’s 5 822 000 cubic metres.
Financial Results (compared with the previous year)
Sales increased by EUR 223.5 million to EUR 12 395.8 million, an increase of 1.8%. Higher production volumes were partially offset by the negative impact of declining prices, especially during the first half of the year.
Operating profit, excluding non-recurring items, decreased by EUR 189.4 million to EUR 336.4 million, being lower in all segments except Merchants and Wood Products. The main reasons for the decrease in profits were the decline in prices, partly offset by increased volumes, two major rebuilds in North America and the weak US dollar. In addition, the structural change following the sale of the Swedish forests to Bergvik Skog AB had a negative effect of EUR 80 million for 10 months, whilst released cash flow hedging contracts, especially for the US dollar and British pound, had a positive impact of EUR 16.4 (EUR 105.1) million.
Operating profit for the year totalled EUR 706.1 (EUR 471.4) million after taking into account four non-recurring items with a total positive effect of EUR 369.7 (EUR -54.1) million. These comprised the gain on restructuring ownership of the Swedish forestlands, the reversal of expenses already taken in respect of various US retiree healthcare programmes, the provision for the future reduction of maintenance personnel in the USA and the income relating to the change in the Finnish disability pension scheme.
The share of results in associated companies amounted to EUR 38.9 (EUR -23.0) million, of which Veracel accounted for EUR 3.3 million, Bergvik Skog EUR 24.2 million, Tornator EUR -1.7 million and Sunila EUR 5.3 million. Net interest costs for the year totalled EUR -141.3 million, which was 3.7% of interest-bearing net liabilities and EUR 44.8 million less than for the previous year, mainly due to lower interest rates and decreased average indebtedness. Foreign exchange losses in financial items were EUR 1.1 (gain of EUR 12.5) million. Other financial items totalled EUR 36.4 (EUR -64.1) million, mostly due to unrealised changes in fair values of financial instruments.
Profit before taxes and minority interests, excluding non-recurring items, amounted to EUR 269.3 (EUR 319.2) million. Net taxes totalled a positive EUR 108.8 (EUR -67.0) million, the gain resulting from the release of EUR 240.5 million in deferred tax liabilities on the fair valuation of biological assets relating to the restructuring of forestland ownership in Sweden and a change in deferred taxes of EUR 20.0 million due to changes in Finnish tax laws; the tax charge excluding these two non-recurring items was EUR 151.7 million, being a rate of 28.9% (31.7%). Minority interests were EUR -8.1 (EUR -5.8) million, leaving a net profit for the period of EUR 739.7 (EUR 137.9) million.
The return on capital employed was 3.0% (4.5%) before non-recurring items. Capital employed was EUR 10 670.5 million at the end of the period, a net decrease of EUR 942.6 million mainly due to the restructuring of forestland ownership in Sweden. Currency effects decreased capital employed by EUR 170.3 million.
Financing
Cash flow from operations totalled EUR 1 176.6 (EUR 1 808.3) million, with cash flow after investing activities amounting to EUR -16.8 (EUR 615.0) million. At the year end, interest-bearing net liabilities were EUR 3 051.4 million, down EUR 867.5 million on the year, with a debt/equity ratio of 0.38 (0.49). The currency effect on equity was EUR -10.1 million net of the hedging of equity translation risks and share buy-backs decreased equity by a further EUR 198.6 million.
Shareholders’ equity amounted to EUR 8.1 billion or EUR 9.81 (EUR 9.49) per share, compared with the market capitalisation on the Helsinki Stock Exchange on 31 December 2004 of EUR 9.5 billion.
Capital Expenditure and Asset Restructuring
Capital expenditure totalled EUR 975.1 million on fixed assets, which is EUR 273.1 million less than previous year and 83-% of the depreciation. A further EUR 4.5 million was spent on biological assets.
The main ongoing projects during the year were rebuilding paper machine 6 at Maxau Mill (EUR 111.4 million), the new paper machine 12 at Kvarnsveden Mill (EUR 86.6 million), the Skoghall Energy 2005 project (EUR 54.7 million), rebuilding paper machine 3 and a new cut-size line at Veitsiluoto Mill (EUR 27.5 million) and folding boxboard asset improvements at Baienfurt Mill (EUR 28.1 million).
Changes in Group Composition
In March Stora Enso finalised the restructuring of forestland ownership in Sweden and the divestment of forestland in Canada. The Group’s Swedish forests were transferred to Bergvik Skog AB with the majority of its shares sold to institutional investors, Stora Enso taking a 43.3% stake. Stora Enso also finalised the divestment of its 146 000 hectares of forestland in Ontario, Canada.
In September Stora Enso finalised the acquisition of the Dutch paper merchant Scaldia Papier B.V. from International Paper. The Group acquired Scaldia Papier to strengthen its presence in the rapidly changing European paper merchant market and to achieve synergies with its Papyrus merchant operations.
In October Stora Enso sold its majority shareholding in PT Finnantara Intiga, the owner of the Finnantara plantation in West Kalimantan, Indonesia, to Global Forest Ltd., which is part of the Sinar Mas Group. In December Stora Enso acquired 66% of the Polish packaging producer Intercell S.A. from private shareholders and the International Finance Corporation.
Research and Development
In 2004 Stora Enso spent EUR 82.2 (EUR 88.8) million on research and development, equivalent to 0.7% of sales.
Inspections by Competition Authorities
In May 2004 Stora Enso was the subject of inspections carried out by the European Commission and the Finnish Competition Authority at locations in Europe and received subpoenas issued by the US Department of Justice as part of preliminary anti-trust investigations into the paper industry in Europe and the USA. The investigations by the authorities in both Europe and the USA are at a fact-finding stage only and no formal allegations have been made against the Group or any of its employees. Coincident with these investigations, Stora Enso has been named in a number of class action lawsuits filed in the USA. No provision has been made.
Personnel
The average number of employees decreased by 485 persons during the year to 43 779, the largest drops being in Finland, the USA and Sweden and the largest increase in Russia. However, on 31 December 2004 there were 45 307 employees, 2 493 more than at the end of 2003, mainly due to the acquisition of Intercell at the end of the year and new forestry companies in Russia.
Changes in the Board of Directors
Lee A. Chaden was elected as a new member of the Board of Directors to replace George W. Mead, who retired.
Environmental Issues
Stora Enso’s environmental liabilities at 31 December totalled EUR 45.4 (EUR 47.2) million, mainly due to the removal of mercury and other contaminants from sites in Sweden and Finland. A verified report on environmental matters is published in the separate Sustainability volume of the Annual Report.
Share Capital
During the calendar year 2004 a total of 12 300 A shares and 18 461 600 R shares, with a combined nominal value of EUR 31.4 million, were repurchased by the Company, representing 2.2% of the shares and 0.8% of the voting rights. The average price paid for A shares was EUR 10.66 and for R shares EUR 10.77.
The Annual General Meeting (AGM) on 18 March 2004 decided to lower the Company’s share capital by EUR 47.3 million through the cancellation of 8 100 A shares and 27 800 000 R shares; these shares had been repurchased under the authorisation of the AGM in 2003. The AGM on 18 March 2004 further authorised the Board of Directors to repurchase and dispose of not more than 9 000 000 A shares and not more than 32 700 000 R shares in the Company. Repurchases started on 31 March 2004 and by 31 December 2004 the Company had repurchased 12 300 A shares at an average price of EUR 10.65 and 14 889 400 R shares at an average price of EUR 10.78; this represents 0.1% of the current authorisation for A shares and 45.5% for R shares.
By 31 December 2004 the Company had allocated 34 897 of the repurchased R shares under the terms of the Stora Enso North America Option Plan, leaving the Company holding 12 300 A shares and 16 794 931 R shares. During the year a total of 2 154 457 A shares were converted into R shares, the latest conversion being recorded in the Finnish Trade Register on 15 December 2004.
At the year end Stora Enso had 179 048 523 A shares and 658 194 876 R shares in issue. In addition, the Company held 12 300 A shares and 16 794 931 R shares with a nominal value of EUR 28.6 million., this representing 2.0% of the Company’s share capital and 0.7% of the voting rights.
Events after the Period
On 18 January Stora Enso announced its plans to acquire a leading French paper merchant, Papeteries de France (PdF), from International Paper. PdF, which has annual net sales of about EUR 160 million from a sales volume of some 160 000 tonnes of paper, would become part of the Stora Enso Merchants division, Papyrus.
On 25 January Stora Enso signed a new five year EUR 1.75 billion syndicated credit facility agreement with a group of 23 banks. The facility is for general corporate purposes and replaces an existing EUR 2.5 billion syndicated facility.
On 3 February Stora Enso announced its plans to rebuild the boiler 2 at Hylte Mill. The project will start immediately and is scheduled to be completed in February 2006 at a cost of EUR 40 million.
Outlook
In Europe demand for advertising-driven paper grades is expected to remain healthy with newsprint and magazine paper prices expected to rise as a result of the ongoing negotiations. Demand for fine paper is expected to be good, with coated fine paper prices stable, but uncoated fine paper prices are under pressure partly due to increased competition and the weak US dollar. Demand for packaging board should remain stable and some price increases are being implemented in consumer boards and coreboards. Demand for construction and joinery wood products is relatively stable globally, but the business suffers from overcapacity and weak currencies in the main export markets.
In North America print advertising expenditure remains robust. However, strong paper demand and improved selling prices are attracting additional imports mainly from Asia, especially in fine paper sheets. Stora Enso’s previously announced autumn price increase for magazine paper grades will be implemented for contract customers in the first quarter of 2005. Market conditions are expected to remain favourable and operating rates high. The Profit Enhancement Programme will continue to improve performance, although the financial results for the first half of 2005 will be affected by downtime due to rebuilding paper machine 26 at Biron Mill, the shutdown taking about three weeks with 10 000 tonnes of production lost.
Asian markets have stabilised and are expected to pick up in February, following the Chinese New Year.
Although the demand outlook is generally positive, Group profits are expected to be depressed in the first quarter of 2005 by the weak US dollar and costs related to rebuilds in the publication paper mills at Langerbrugge (40 000 tonnes of production lost), Summa (15 000 tonnes), Corbehem (31 000 tonnes) and Biron (10 000 tonnes); the shutdowns will take from three to six weeks at each mill. Furthermore, the Group’s financial performance will continue to be adversely affected by rising energy and chemical costs.
The economic consequences of the recent storms in Northern Europe cannot yet be accurately estimated. Notwithstanding the near-term challenges to the Group’s profitability, it is expected that the financial result for the full year 2005 will exceed that of 2004.
Distribution of Dividend
The Board of Directors will propose to the Annual General Meeting that a dividend of EUR 0.45 per share be paid for the financial year ending 31 December 2004. If the proposal is approved, the dividend payment will be issued on 8 April 2005 to shareholders entered on the dividend record date of 29 March 2005 in the register of share-holders maintained by the Finnish Central Securities Depository, Swedish VPC and Deutsche Bank Trust Company Americas.
Annual General Meeting
The Annual General Meeting will be held at 16.00 (Finnish time) on Tuesday 22 March 2005 at the Finlandia Hall, Mannerheimintie 13 e, Helsinki, Finland.
These Consolidated Financial Statements have been approved for issue by the Board of Directors on 2 February 2005.
