Business News

Stora Enso Interim Review January-September 2008

Monday 27. October 2008 - Favourable exchange rates, reduced overhead costs and pricing improvements compensated for deteriorating market conditions since the second quarter 2008

Summary of Third Quarter Results

Continuing Operations:

Q3/07
Q2/08
Q3/08
Sales
EUR million
2 876.7
2 871.8
2 722.7
Operating Profit excl. NRI and Fair Valuations
EUR million
199.2
94.4
125.5
Operating profit (IFRS)
EUR million
-305.3
71.3
-138.7
Profit before tax excl. NRI
EUR million
220.2
31.7
117.8
Profit before tax
EUR million
-329.2
30.4
-161.7
Net profit excl. NRI
EUR million
168.2
29.9
116.5
Net profit
EUR million
-274.5
28.6
-119.1
EPS excl. NRI
EUR
0.21
0.04
0.14
EPS
EUR
-0.36
0.04
-0.16
CEPS excl. NRI
EUR
0.46
0.26
0.37
ROCE excl. NRI
%
9.6
2.8
5.4
ROCE excl. NRI and fair valuations
%
7.8
3.6
4.9


Message from CEO Jouko Karvinen:
“The storm we have faced for the past 18 months has changed. Strengthening of the US dollar and, even more important for us, weakening of the Swedish krona have already clearly helped. We can also see a downward trend in fuel-based energy costs, which will start supporting us in early 2009 following the tremendous increases of recent quarters. However, we now also face accelerating softening in market demand in most grades. This reality makes the actions we have taken in the past year and a half, from cost and capacity cuts, focus on pricing quality, increasing Finnish wood sourcing and strengthening our balance sheet through divestments, critically important. Our third quarter results, although still poor, were somewhat better than expected owing in part to our own early actions. The fact that we have since mid 2007 successfully improved our liquidity and reduced our reliance on short-term borrowings with a significantly extended debt maturity profile also supports us now when we enter the next phase of the storm.

“Our focus on pricing quality has worked well in all magazine paper grades, coated fine paper, consumer board and some of the industrial packaging grades. We have achieved meaningful – and necessary – price increases in local currencies compared to the prior year period. We will continue to defend our margins by adjusting volumes across our product mix towards more profitable grades and safeguard our earnings capability even if that means production curtailments. In some segments, such as newsprint and magazine paper, we have informed our customers that we intend to increase prices in early 2009, despite the softening macroeconomic outlook.

“Another key priority is to improve our weak operating cash flow. We reduced our capital investments in the third quarter by some more than 20% compared to a year earlier. We are now reviewing our entire capital investment programme for the next one to two years, with the aim of reducing the overall level while ensuring that we progress in strategically critical projects. For these projects, we will focus on safeguarding the quality and progress of the investments, but we will consider rescheduling them if needed. We also have the aim of reducing working capital and will curtail production to realistic delivery volumes already in the fourth quarter to ensure that we start 2009 with inventory levels appropriate for the challenging year to come. These production curtailments will have a clearly unfavourable impact on our fourth quarter earnings. We are convinced this is the right preparation for the reality we face in 2009. As before, we believe it is right to plan for the worst, and then adjust our plans upwards if and when the opportunity comes.”

Near-term Outlook
In Europe market demand is forecast to be weaker in the fourth quarter than a year earlier for newsprint, magazine paper and fine paper. Despite weakening demand, markets for most paper products, especially newsprint, are expected to remain balanced due to substantial reductions in production capacity.

Consumer board and industrial packaging markets are forecast to be weaker than a year earlier. Demand for consumer board is currently negatively impacted by food safety problems in China, and industrial packaging will be affected by weaker demand in consumer goods markets and construction industries. The outlook for wood products remains poor, further undermined by low consumer confidence, and demand is likely to be weaker in the fourth quarter than a year earlier.

Prices in Europe are expected to remain stable during the fourth quarter for newsprint, magazine paper and uncoated fine paper. Some improvement in coated fine paper and consumer board prices is anticipated as already announced price increases are gradually implemented. Prices for industrial packaging products are forecast to decrease slightly. Persistent oversupply of wood products is likely to keep prices under pressure in many markets. Stora Enso intends to increase prices for newsprint, magazine paper and coated fine paper in Europe in early 2009.

In China demand and prices are vulnerable to weakness in coated magazine paper market, which is also having an affect on the uncoated magazine paper market. The outlook for fine paper demand in China remains stable, but prices are exposed to some pressure due to elevated mill inventories.

In Latin America demand for magazine paper is forecast to stabilise, but prices for non-contractual business are predicted to improve further. In other overseas markets some improvement during the quarter is anticipated in magazine paper prices, whereas newsprint prices are expected to remain unchanged after significant increases in the third quarter.