Business News
Stora Enso Interim Review January-June 2008
Thursday 24. July 2008 - Ever increasing cost inflation will require further cost and capacity cuts, as well as price increases
Summary of Second Quarter Results
Message from CEO Jouko Karvinen:
“The fastest cost inflation in the recent history of the industry, firstly in wood costs, but now also in fuel and electricity costs, has decreased our profits for the third consecutive quarter, now below half of the same period a year ago. Operating profit was significantly below our expectations especially in Wood Products, whereas the rapid cost increases and strong Euro have hurt most of the paper and board businesses as well. The restructuring measures we launched in late 2007 are being implemented as planned; however, in the present environment they are clearly not enough.
“Even with our strong overall energy balance, especially with biofuel-based energy, the 40% increase in oil and particularly gas prices in the past three months, in addition to the wood cost increases of the past two years, means we must take further actions. We have announced price increases in several paper and board grades to our customers. Escalating costs and potentially weakening demand will also require both temporary and permanent capacity reductions. These capacity adjustments are independent of the outcome of the Russian wood duty negotiations; they are needed because of unacceptable costs and the weak profitability in certain products and production lines. We will announce specific plans still during this current quarter. In parallel, we are preparing a second set of capacity reduction plans in case there is no concrete and cost-improving compromise on Russian duties soon.
“We sincerely appreciate the Finnish governments recent decision to significantly reduce the income tax on domestic wood raw material. The forest owners and the industry together need to turn this decision into increased availability of fibre in Finland at competitive costs, as it is an opportunity not only to reduce the damage of the Russian duties but also to provide forest owners with a viable long-term customer base for their wood. The time to act is now.
“Our forecast for overall annual unit cost inflation for 2008 is still estimated to be about 4%. If current trends on several cost factors do not change for the better, it is clear that this can rise further. We remain committed to compensating for 2.5% to 3% of unit cost inflation through our own actions.
“In the challenging environment we expect our operating profit excluding non-recurring items and fair valuations for the third quarter of 2008 to be somewhat weaker than the second quarter of 2008. The weakening earnings will naturally also have a negative impact on the Groups cash flow. We continue the policy of balancing financial prudence and cash preservation on the one hand, and investing selectively in attractive growth opportunities for the future on the other.
“In this reality it is clear that waiting for things to get better will do the Company nothing but great harm. This is especially true now that uncertainty about the market outlook has changed as we see the first clear signs of demand softness in certain grades. We will continue to take corrective actions as rapidly and efficiently as we can in the reality we see ahead.”
Near-term Market Outlook
Forecasts of advertising expenditure in Western Europe and North America during the rest of the year have been downgraded owing to growing macroeconomic concerns. Print advertising expenditure in those regions is forecast to stagnate, in contrast to positive growth in Central and Eastern Europe and Asia.
In Europe demand for newsprint is expected to be weaker than a year ago, but the market should remain firm with prices unchanged on the second quarter of 2008 as the supply and demand balance has improved.
Slightly stronger demand for magazine paper than a year ago is anticipated, but demand growth may slow down due to macroeconomic uncertainties. The supply and demand balance has improved in uncoated and coated magazine paper markets. Price increases have been announced and higher prices, including biannual contracts, are foreseen in the third quarter.
Demand for fine paper is expected to be weaker in Europe than a year ago, and also affected by the normal seasonal downturn during the summer holiday period. Due to severe cost inflation, price rises for both coated und uncoated fine paper are foreseen later in the year.
Demand for consumer board is forecast to be much the same as a year ago globally, but slightly weaker in Europe, and seasonally somewhat weaker than in the second quarter. Prices are expected to start improving towards the end of the year for cartonboard. The outlook for industrial packaging is affected by the deteriorating macroeconomic prognosis, and weaker demand in the third quarter than a year ago is foreseen. Prices for RCP-based containerboard are expected to continue to soften and for corrugated packaging prices are expected to be stable.
The market for wood products will remain weak. Demand in the third quarter is forecast to be considerably weaker than a year ago, and also slightly weaker than in the second quarter of 2008, aggravated by further weakening of the European housing market. Prices will remain under pressure.
In Latin America rising demand for coated magazine paper is expected to level out after the boom in demand in the first six months of the year. Prices are predicted to improve.
In China demand for uncoated magazine paper is forecast to improve after a seasonally weaker summer and prices may be higher than in the second quarter. However, the outlook for fine paper demand and prices is expected to weaken slightly.