Feb 03, 2005. /Lesprom Network/. Stora Enso today announced that Stora Enso's sales were Euro 3 241.9 million in the fourth quarter (Euro 3 033.1 million). Operating profit excluding non-recurring items was Euro 42.9 million (Euro 131.6 million) and profit before tax and minority items excluding non-recurring items was Euro 24.7 million (Euro 114.8 million).

Earnings per share excluding non-recurring items were Euro 0.03 (Euro 0.10). Cash earnings per share excluding non-recurring items were Euro 0.38 (Euro 0.45). Non-recurring items increased operating profit by Euro 179.9 million or Euro 0.15 per share.

Demand for Group products continued to improve during the fourth quarter and deliveries increased in all product grades, especially advertising-driven paper grades. In Europe product prices were generally stable, but the earlier announced fine paper price increases have not materialised. Previously announced price increases were largely implemented in the USA. The Group's profitability declined significantly, however, owing to the impact of seasonal shutdowns, the direct and indirect effects of the weak US dollar and higher input costs, including wood harvesting costs due to the wet autumn in Northern Europe.

European deliveries of publication paper increased substantially as demand in Western Europe recovered; fine paper demand followed the normal seasonal pattern and deliveries were similar to the previous quarter. Euro-denominated prices for most paper grades were stable, although revenue from the Group's European export volumes was depressed by the weaker US dollar. Packaging board deliveries increased slightly, with good demand for all products, and some price increases were implemented in consumer boards and coreboards during the period. Demand for wood products remained strong, but the redwood market was still oversupplied. Wood product prices were relatively stable, although deliveries from Europe suffered from the fall in the US dollar against the euro during the quarter. Wood costs rose in the Baltic area and Russia, and poor weather increased harvesting costs for the Group's Wood Supply Europe division.

In North America demand for magazine and fine paper remained strong and deliveries increased. The previously announced autumn price increase for fine paper grades was largely implemented in the fourth quarter. The corresponding increase for publication paper prices will be effected as contracts renew in the first quarter of 2005.

Market-related production curtailments totalled 73 000 tonnes in Europe and 7 000 tonnes in North America (in speciality paper), compared with the previous quarter's total of 61 000 tonnes, which was all in Europe.

Paper and board deliveries totalled 3 783 000 tonnes, which is 197 000 tonnes more than the previous quarter's 3 586 000 tonnes. Production totalled 3 655 000 tonnes (3 725 000 tonnes). Deliveries of wood products totaled 1 695 000 cubic metres, compared with the previous quarter's 1 595 000 cubic metres.

Fourth Quarter Results (compared with previous quarter)

Sales at Euro 3 241.9 million were 6.9% higher than the previous quarter's Euro 3 033.1 million as higher deliveries were partially offset by lower revenues due to depreciation of the US dollar. Sales improved in all product segments except Wood Products.

Operating profit excluding non-recurring items was Euro 42.9 (Euro 131.6) million, which is 1.3% of sales. Operating profit dropped in all segments except Merchants, and declined into a loss in Wood Products and Wood Supply Europe. Operating profit was Euro 222.8 (Euro 205.7) million.

Operating profit excluding non-recurring items decreased due to increased fixed costs mainly related to seasonal shutdowns (about Euro 40 million), the impact of higher wood costs (about Euro 15 million) and increased energy-related costs (about Euro 10 million). The weakened US dollar had a negative operating effect of about Euro 20 million, partly offset by a positive effect of released cash flow hedging contracts, especially for the US dollar and British pound, of Euro 5.0 (Euro 2.1) million.

Non-recurring items in the operating profit totalled Euro 179.9 million due to changes in the disability pension schemes under the Finnish Statutory Employment Pension Scheme ("TEL") as approved by the Finnish Ministry of Social Affairs and Health.

Profit before taxes and minority interests, excluding non-recurring items, amounted to Euro 24.7 (Euro 114.8) million.

Net financial items were Euro -32.5 (Euro -27.0) million. Net interest expenses amounted to Euro -32.6 (Euro -31.8) million and net foreign exchange losses were Euro 2.8 (Euro 1.5) million. Other financial items totalled a positive Euro 2.9 (Euro 6.3) million, mainly related to unrealised changes in fair values of financial instruments.

The share of associated company results amounted to Euro 14.3 (Euro 10.2) million, including Euro 11.3 million for Bergvik Skog.

Net taxes totalled Euro -54.1 (Euro -56.6) million, and the minority interest in profits was Euro -0.4 (Euro -1.4) million and the net profit for the quarter was Euro 150.0 (Euro 130.9) million.

Earnings per share excluding non-recurring items were Euro 0.03 (Euro 0.10). Basic earnings per share were Euro 0.18 (Euro 0.16).

The return on capital employed excluding non-recurring items was 1.6% (4.9%). Capital employed was Euro 10 670.5 million on 31 December 2004, a net decrease of Euro 174.5 million, including a decrease of Euro 209.0 million related to currency effects.

Financing

Cash flow from ongoing operations was Euro 406.0 (Euro 448.1) million and cash flow after investing activities Euro 86.7 (Euro 127.1) million. Cash earnings per share excluding non-recurring items were Euro 0.38 (Euro 0.45).

At the end of the period, interest-bearing net liabilities were Euro 3 051.4 million, a decrease of Euro 291.2 million. Unutilised credit facilities and cash and cash-equivalent reserves totalled Euro 3.0 billion.

Shareholders' equity amounted to Euro 8.1 billion or Euro 9.81 (Euro 9.72) per share, compared with the market capitalisation on the Helsinki Stock Exchange on 31 December 2004 of Euro 9.5 billion.

The debt/equity ratio at 31 December 2004 was 0.38 (0.41). The currency effect on equity was Euro -40.0 million net of the hedging of equity translation risks. Share buy-backs decreased equity by Euro 23.3 million in the fourth quarter.

Capital Expenditure for the Fourth Quarter and Full Year 2004

Capital expenditure for the fourth quarter totalled Euro 214.3 million, giving a total for the year of Euro 979.6 million, which is about 90% of the depreciation charge. No new major capital expenditure projects were approved during the quarter.

The main ongoing projects during the year were rebuilding paper machine 6 at Maxau Mill (Euro 115.0 million), the new paper machine 12 at Kvarnsveden Mill (Euro 86.6 million), the Skoghall Energy 2005 project (Euro 54.7 million), rebuilding paper machine 3 and a new cut-size line at Veitsiluoto Mill (Euro 27.5 million) and folding boxboard asset improvements at Baienfurt Mill (Euro 28.1 million).

Events in Associated Companies

During the fourth quarter Stora Enso invested a further Euro 7.9 million in equity in Veracel, bringing the total amount invested in 2004 to Euro 80.4 million.

Fourth Quarter Events

In October Stora Enso announced the divestment of its majority shareholding in PT Finnantara Intiga, which owns the Finnantara plantation in West Kalimantan, Indonesia, to Global Forest Ltd., which is part of the Sinar Mas Group. The transaction resulted in a minor gain over the USD 26 (Euro 21) million book value of the plantation.

Also in October Stora Enso announced that the press section of newsprint machine 4 at Langerbrugge Mill in Belgium would be modified. Metso, the supplier responsible for the machine, is undertaking the modification during the first quarter of 2005. About 40 000 tonnes of production will be lost during the shutdown.

In December Stora Enso acquired 66% of the shares in the Polish packaging producer Intercell S.A. from private shareholders and the International Finance Corporation.

Also in December, Stora Enso launched a SEK 4.3 billion 5-year bond offer in Swedish krona (SEK benchmark) issued under its domestic MTN programme in order to prolong the maturity profile and take advantage of the prevailing market conditions. The deal pays a fixed coupon of 3.875% and had an issue/reoffer price of 99.599 to give a spread of 38 bps over the mid 5-year SEK swap rate.

Stora Enso North America (July – December 2004)
The USD figures are translated at the Euro/USD exchange rate of 1.3621.

The North American economies continued to grow during the second half of 2004, fuelling advertising in print and improved demand for printing and writing papers. Selling prices and volumes were both higher than in the first six months.

Stora Enso's performance in North America was significantly better than in the previous six months. Operating loss before goodwill amortisation and non-recurring items was USD 10 (Euro 7) million in the second half of the year, compared with a USD 130 (Euro 95) million loss in the first half of 2004 and a USD 86 (Euro 63) million loss in the second half of 2003. Growth in revenue was partially offset by increasing costs, especially for fuel, fibre and chemicals. The strengthening of the Canadian dollar against the US dollar decreased the profits for Port Hawkesbury Mill in Canada by about USD 10 million. Capital expenditure in the six-month period totalled USD 84 (Euro 62) million, compared with USD 120 (Euro 88) million in the first half of 2004 and USD 108 (Euro 79) million in the second half of 2003.

Operating cash flow after investing activities was a positive USD 39 (Euro 29) million, compared with a negative USD 100 (Euro 73) million in the first half of the year and a negative USD 50 (Euro 37) million during the second half of 2003.

Of the USD 250 million total amount allocated to the Profit Enhancement Programme, USD 227 (Euro 167) million had been recorded by the end of 2004. The previously announced annual earnings improvement of USD 145 (Euro 106) million is on target to be achieved from mid 2005 onwards.

Since the programme was announced, the workforce has been reduced by 16% (1 000 employees), three uncompetitive paper machines have been permanently shut down and four paper machines have been modified to improve productivity and quality. By mid 2005 the workforce is expected to have been further reduced to some 5 000 employees, compared with 7 500 in 1999. As announced earlier, modifications to healthcare benefits were made to improve profitability.

The rebuild of paper machine 26 at Biron Mill, the division's largest lightweight-coated magazine paper machine, will be completed in early February 2005. The rebuild of lightweight-coated magazine paper machine 64 at Whiting Mill has been postponed until early 2006.

FINANCIAL RESULTS 2004 (COMPARED WITH PREVIOUS YEAR)

Sales increased by Euro 223.5 million to Euro 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 Euro 189.4 million to Euro 336.4 million. Profits were 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 (Euro 124 million). In addition the structural change of the sale of the Swedish forests to Bergvik Skog AB had a negative effect of Euro 80 million for the 10 months. The operating profit for the year totalled Euro 706.1 (Euro 471.4) million. Released cash flow hedging contracts, especially for the US dollar and British pound, had an impact of Euro 16.4 (Euro 105.1) million on operating profit.

There were four non-recurring items with a total positive effect of Euro 369.7 (Euro -54.1) million on operating profit, comprising 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 Euro 38.9 (Euro -23.0) million, of which Veracel accounted for Euro 3.3 million, Bergvik Skog Euro 24.2 million, Tornator Euro -1.7 million and Sunila Euro 5.3 million.

Net interest costs for the year totalled Euro -141.3 million, which is 3.7% of interest-bearing net liabilities and Euro 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 Euro 1.1 (gain of Euro 12.5) million. Other financial items totalled Euro 36.4 (Euro -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 Euro 269.3 (Euro 319.2) million.

Net taxes totalled a positive Euro 108.8 (Euro -67.0) million, the gain resulting from the release of Euro 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 Euro 20.0 million due to changes in Finnish tax laws. The tax charge excluding these two non-recurring items was Euro 151.7 million, a rate of 28.9% (31.7%).

Minority interests were Euro -8.1 (Euro -5.8) million, leaving a net profit for the period of Euro 739.7 (Euro 137.9) million.

Earnings per share excluding non-recurring items increased by Euro 0.01 and were Euro 0.25. Basic earnings per share were Euro 0.89 (Euro 0.16).

The return on capital employed was 3.0% (4.5%) before non-recurring items. Capital employed was Euro 10 670.5 million at the end of the period, a net decrease of Euro 942.6 million mainly due to the restructuring of forestland ownership in Sweden. The currency effect decreased the capital employed by Euro 170.3 million.

Financing

Cash flow from operations totalled Euro 1 176.6 (Euro 1 808.3) million, with cash flow after investing activities amounting to Euro -16.8 (Euro 615.0) million. Cash earnings per share excluding non-recurring items were Euro 1.67 (Euro 1.63).

At the end of the year, interest-bearing net liabilities were Euro 3 051.4 million, down Euro 867.5 million.

Research and Development

In 2004 Stora Enso spent Euro 82.2 (Euro 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.

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 retaining 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, which owns 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.

Personnel

The average number of employees decreased by 485 persons during the year to 43 779. The largest decreases were in Finland, the USA and Sweden and the largest increase in Russia. 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.

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 Euro 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 Euro 10.66 and for R shares Euro 10.77.

The Annual General Meeting (AGM) on 18 March 2004 decided to lower the Company's share capital by Euro 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 Euro 10.65 and 14 889 400 R shares at an average price of Euro 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 was 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, of which the Company held 12 300 A shares and 16 794 931 R shares with a nominal value of Euro 28.6 million. The holding represents 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 Euro 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 Euro 1.75 billion syndicated credit facility agreement with a group of 23 banks. The facility, which has a maturity of five years, is for general corporate purposes and replaces an existing Euro 2.5 billion syndicated facility.

On 3 February Stora Enso announced its plans to rebuild boiler 2 at Hylte Mill. The project will start immediately and is scheduled to be completed in February 2006. Capital expenditure on the project will amount to Euro 40 million.

Outlook

In Europe demand for advertising-driven paper grades is expected to remain healthy. Newsprint and magazine paper prices are 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 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 will take about three weeks and 10,000 tonnes of production will be lost.

Asian markets have stabilised and are expected to pick up in February, following the Chinese New Year.

Although demand outlook is generally positive, Group profits are expected to be influenced in the first quarter of 2005 by the US dollar and costs related to rebuilds in the publication paper mills at Langerbrugge (40 000 tonnes of production lost), Summa (15 000 tonnes of production lost), Corbehem (31 000 tonnes of production lost) and Biron (10 000 tonnes of production lost). 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-related and chemical costs.

The economic consequences of the recent storms in Northern Europe cannot yet be accurately estimated.

Despite the near-term challenges to Group profitability, the financial results for the full year 2005 are expected to show an improvement on 2004.

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.

Proposals to the Annual General Meeting

The Board of Directors will propose to the Annual General Meeting cancellation of the shares in treasury and a new repurchase programme.

Appointment of Nomination Committee

Shareholders representing more than 50 per cent of the votes in the Company have proposed that the Annual General Meeting appoint a Nomination Committee to prepare proposals concerning (a) the number of members of the Board of Directors, (b) the members of the Board of Directors, (c) the remuneration for the Chairman, Vice Chairman and members of the Board of Directors and (d) the remuneration for the Chairman and members of the committees of the Board of Directors. The Nomination Committee would consist of four members:

the Chairman of the Board of Directors
the Vice Chairman of the Board of Directors
two members appointed by the two largest shareholders (one each) according to the register of shareholders on 1 October 2005.
The Chairman of the Board of Directors would convene the Nomination Committee and before 31 January 2006 the Nomination Committee would present its proposals for the Annual General Meeting to be held in 2006.

Auditor

The above-mentioned shareholders have confirmed that they will propose to the AGM that Authorised Public Accountants PricewaterhouseCoopers Oy be elected to act as auditor of the Company until the end of the following AGM.

Distribution of Dividend

The Board of Directors will propose to the Annual General Meeting that a dividend of Euro 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 shareholders maintained by the Finnish Central Securities Depository, Swedish VPC and Deutsche Bank Trust Company Americas.

New Board members

Shareholders representing more than 50 per cent of the votes in Stora Enso Oyj have confirmed that they will propose to the Annual General Meeting that Gunnar Brock, Birgitta Kantola and Matti Vuoria be elected as new members of the Board of Directors. Krister Ahlström, Björn Hägglund, Barbara Kux and Paavo Pitkänen are not seeking reelection.