Poor Earnings But Strong Cash Flow From Operations Following Aggressive Production Curtailments; Operating Profit Excluding NRI and Fair Valuations EUR 28.4 Million, Cash Flow From Operations EUR 236.7 Million for the Fourth Quarter
"The drop in customer demand in the last quarter of 2008 turned out to be as severe as we expected and warned in our third quarter 2008 results announcement. We also responded as planned by aggressively curtailing our production by 15% to 30% of capacity by segment. These robust actions had a large negative impact on operating profit, but at the same time reduced our working capital by some EUR 200 million, cut our capital expenditure by 25-30% below the original plan in the fourth quarter to a total of EUR 700 million for the year, and made sure we started 2009 with minimum inventory levels in all Business Areas as well as throughout our supply chain. These measures also helped us to agree with our customers meaningful price increases in several critical areas -- including Newsprint, Magazine Paper, Consumer Board and Coated Fine Paper -- that we so clearly needed as we started this new year.
"The operating environment for at least the early part of 2009 will be as challenging as at the end of 2008. We continue to focus on pricing quality and cash flow. We will only manufacture when customers buy our product, rather than building our inventory. We have also revised our capital expenditure budget for 2009 to EUR 500 million, and very importantly, it is intended to finance the majority of that by further reductions in our working capital. This dramatic reduction of capital spending for 2009 does not fundamentally change our strategy: you do not change strategy with every downturn -- but you do reschedule some of your projects in order to safeguard the company and its freedom to operate. That is exactly what we are doing. In the same spirit, Stora Enso has also proactively reduced the liquidity risk and reliance on short-term borrowings since mid 2007, when the first wave of the financial crisis hit the markets.
"We forecast our overall unit cost inflation for the full year 2009 to be close to zero. Some costs -- notably wood and natural gas -- will start to decrease significantly only in the second half of the year because of the nature of our purchasing contracts.
"To adjust capacity in response to lower demand, we have started negotiations concerning large-scale temporary lay-offs in Finland, and are also in negotiations and dialogues in Germany, Sweden and elsewhere to find opportunities for rapidly adjusting our capacity and costs. We will extend temporary curtailments for as long as necessary. We, the senior management of Stora Enso, will participate in the effort to control costs through limitations in our compensation.
"As disclosed in detail in a separate release today Stora Enso has during the audit process identified an incorrect accounting 2001-2006 between restricted and distributable equity, with no impact on total equity of the Group or parent company, but a need to reclassify EUR 1 512 million from distributable to restricted equity. This will lead to the fact that the boards proposal to pay a return of EUR 0.20 per share to our shareholders is subject to not only AGM approval but also a consent from Finnish National Board of Patents and Registration -- and will be delayed at least until July 2009. We will correct this accounting issue in a transparent way, and intend to pay a return, if reduced, to our shareholders also in 2009."
Near-term Outlook
In Europe market demand is forecast to remain weak and clearly less than a year ago for all the Group's products, at least throughout the first half of 2009, due to the current economic downturn. Advertising expenditure started to decline steeply in the fourth quarter of 2008 and is expected to remain weak, considerably reducing demand for paper.
Seasonal factors and destocking by customers following announced price increases are likely to reduce demand for newsprint in the first quarter of 2009. However, temporary and permanent reductions in production capacity have improved the supply and demand balance, especially in magazine paper and coated fine paper markets. A slight seasonal pickup in demand for some packaging products is anticipated towards the end of the first quarter. Very weak markets for wood products are foreseen as construction activity has rapidly slowed in all key markets.
In Europe some prices in local currencies are being raised in the first quarter above levels in the fourth quarter of 2008, particularly in newsprint, magazine paper, coated fine paper and consumer board; however, uncoated fine paper prices are likely to remain under pressure. Prices for wood products and most industrial packaging products are expected to be under continued pressure. Lower prices are predicted for newsprint in export markets outside Europe.
In China soft demand for uncoated magazine paper and fine paper is expected due to slowing economic growth and customer de-stocking. Persistent weakness in the coated magazine paper market is affecting the uncoated magazine paper market. Lower prices for magazine paper are anticipated, with fine paper prices remaining under pressure. The outlook for consumer board market is uncertain following last year's milk scandal in China.
In Latin America seasonal factors and high customer inventories are expected to restrain market demand for coated magazine paper, keeping prices flat.
The full-length version of the Stora Enso interim review is available on the Stora Enso website at www.storaenso.com/investors
Stora Enso's first quarter results 2009 will be published on 23 April 2009.
Stora Enso is a global paper, packaging and forest products company producing newsprint and book paper, magazine paper, fine paper, consumer board, industrial packaging and wood products. The Group has 32 000 employees and 85 production facilities in more than 35 countries worldwide, and is a publicly traded company listed in Helsinki and Stockholm. Our annual production capacity is 12.7 million tonnes of paper and board, 1.5 billion square metres of corrugated packaging and 6.9 million cubic metres of sawn wood products, including 3.2 million cubic metres of value-added products. Our sales in 2008 were EUR 11.0 billion.
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