Business News

Stora Enso Interim Review January-March 2009

Thursday 23. April 2009 - Cash flow from operations EUR 264 million through strong working capital management; Marginally positive operating profit excluding NRI and fair valuations; EUR 250 million further annual fixed cost reduction planned; Summary of First Quarter Results ; Continuing Operations

Q1/09
Q4/08
Q1/08
Sales
EUR million
2 130.5
2 602.5
2 831.8
EBITDA excl. NRI and fair valuations
EUR million
134.3
163.3
299.2
Operating Profit excl. NRI and Fair Valuations
EUR million
3.0
28.4
140.1
Operating loss / profit (IFRS)
EUR million
-0.9
-784.2
125.0
Loss / profit before tax excl. NRI
EUR million
-82.1
-81.0
83.1
Loss / profit before tax
EUR million
-48.1
-845.6
83.1
Net loss / profit excl. NRI
EUR million
-60.2
-67.2
66.1
Net loss / profit
EUR million
-36.1
-654.6
66.1
EPS excl. NRI
EUR
-0.08
-0.08
0.08
EPS
EUR
-0.05
-0.82
0.08
CEPS excl. NRI
EUR
0.10
0.06
0.30
ROCE excl. NRI
%
-1.6
-0.8
4.9
ROCE excl. NRI and fair valuations
%
0.1
1.2
5.5
Fair valuations include synthetic options net of realised and open hedges, CO2
emission rights, and valuations of biological assets mainly related to
associated companies’ forest assets.
NRI = Non-recurring items.

Message from CEO Jouko Karvinen:
“The first quarter was as demanding as we had expected it to be at the beginning of the year. We continued with our principle of prioritising pricing and profit margin quality at the expense of volume. The decline in demand led to a large cut of almost one quarter in production compared with the first quarter of the previous year and a disappointing EUR 3 million operating profit excluding NRI and fair valuations in the first quarter of this year. The fact that we have reduced our fixed costs significantly in the past two years – by 4 to 5 margin points – is clearly crucial in this dramatic demand situation. Through continued strong management of working capital, our cash flow from operations was a healthy EUR 264 million. This cash flow, the best we have achieved in any first quarter since 2003, despite an operating environment more difficult than at any time since the early nineties, is proof of the benefits of taking action early and decisively.

“It is increasingly clear that the sharp volume declines we are experiencing in our markets are driven more by underlying declines in demand, than customer destocking. Our forecast for the second quarter is for more of the same – significant production curtailments and a strong focus on cash flow and margin quality, together with tight control of capital spending and expenses.

“We will continue to optimise the utilisation of our production assets on a Group-wide basis – by always running the lowest-cost asset in each grade and curtailing the higher-cost units and machines. This has been and remains crucial as demand has now declined more rapidly than ever before in history. Over the past two years, the cost inflation for our Finnish assets has been clearly worse in several respects – from fibre costs to energy – than for our other production locations, and therefore we will continue to focus a large part of our curtailments to Finland. In 2008 the Stora Enso Group was still clearly profitable, but was already making material operational losses in Finland, and this situation continued to deteriorate in the first quarter of 2009. With continued weakness in underlying demand, we will have to review permanent production closure alternatives as well, again starting from the highest total cost assets within the whole Group.

“Today we are also taking the next step to make Stora Enso a simpler, faster-reacting and more focused Group. Key objectives of this change are consolidating the organisation and building stronger and more powerful businesses that can operationally and strategically react quickly in a rapidly changing environment. We aim to simplify decision-making and move decisions closer to the businesses serving our customers. Consequently, we will scale down staff functions and country organisations, and unfortunately that will lead to up to 2 000 planned redundancies, mostly in administrative functions. Our goal is to reduce total fixed costs by EUR 250 million per year compared with the 2008 level. These changes will create flat and more consolidated organisations with a wide span of control, but no new organisational layers – and importantly, no loss of transparency in our financial reporting.

“Most of our actions in the past two years – including divestments of assets and difficult restructuring actions in our operational and administrative areas -were in our view absolutely necessary and have reduced our annual fixed costs by 4 to 5 margin points. With the blistering speed of change in our operating environment, this is not enough, however, so we commit ourselves today to a further 2 to 3 margin points improvement. Although the total impact of this will be fully realised only at the end of 2010, we expect the majority of the cost benefits to be achieved already by the end of this year. This is the next logical step on our journey – not a change in direction, but a clear acceleration in improving our structure, focus and costs. In the end, the difference between winners and losers in business is often the speed of their actions, more than anything else.”

Near-term Outlook
In Europe market demand is forecast to remain weak and clearly lower than a year ago for all the Group’s products, with no material improvement anticipated until the economic environment starts recovering. The supply and demand balance in the industry has improved, although the recent rapid deterioration in demand has disturbed the balance slightly. Advertising expenditure has fallen sharply and is predicted to remain weak, significantly reducing demand for graphic paper grades in the coming months. Newsprint demand is also affected by declines in circulations of paid and free newspapers. Markets for packaging and wood products are likely to remain weak, although some seasonal improvement in demand is anticipated in the second quarter for some consumer board grades, corrugated packaging and wood products. Production of wood products is expected to decrease in Europe, and this should gradually improve the supply and demand balance.

In Europe publication paper prices are forecast to stay the same as in the first quarter of 2009. Prices for coated fine paper sheets are expected to increase. Prices for coated fine paper reels, uncoated fine paper, some packaging products and wood products are likely to remain under pressure.

In China demand for uncoated magazine paper and coated fine paper is forecast to remain weak. Prices for uncoated magazine paper are expected to be exposed to price pressure in competing with coated magazine paper, but coated fine paper prices show signs that they have bottomed out.

In Latin America prices for coated magazine paper will remain under pressure due to increasing imports. Local demand is expected to stay fairly stable.

Stora Enso forecasts its cost deflation excluding internal actions to be 4% for the full year 2009, the main contributor being reduced fibre costs.