Annual Report 1998 Contents Significant events in 1998 1 Environmental management 43 Key figures 1 Human resources 46 Report on operations by Stora Enso in brief 2 the Board of Directors 48 Consolidated Corporate combination 3 income statement 53 Consolidated Chairman’s letter 4 balance sheet 54 Consolidated CEO’s letter 5 cash flow statement 56 Parent company Questions & answers 6 income statement 57 Parent company Financial review 8 balance sheet 58 Parent company Magazine paper 19 cash flow statement 59 Notes to the financial Newsprint 22 statements 60 Proposal for the distribution Fine paper 25 of dividend 83 Packaging boards 28 Auditors’ report 84 Merchants 31 Shares and shareholders 85 Specialty papers 32 Board of Directors 90 Timber products 33 Management group 92 Market pulp 36 Corporate governance 94 Forest 37 Glossary of technical terms 96 Energy 38 Capacity specification 1999 98 Purchasing and logistics 39 Organization and identity 99 Marketing and sales network 40 Addresses 100 Research and development 41 Information to shareholders 101 Significant events in 1998 Divestment of the production units for carbonless and thermal papers, Hillegossen and Flensburg in Germany, in December. Acquisition of Holzindustrie Schweighofer AG of Austria in December. Schweighofer’s operations are being combined with Stora Enso Timber. Schweighofer will strengthen the Group’s presence in the Euro- pean sawn timber market and in the United States and Japan. Acquisition of a minority holding of 19.9% in Advance Agro Pcl of Thailand at the end of November. Stora Enso will have exclusive rights for sales and marketing of this company’s pulp and paper world- wide, excluding Thailand. In June, a final agreement was signed to acquire 60% of Chinese Suzhou Papyrus Paper Co. Ltd. in Suzhou, with annual capacity of 120,000 tonnes of coated fine papers. The company’s production is mainly intended for the Chinese market. A new SC machine (PM 2) came on stream at Port Hawkesbury, Canada, in April. The machine has an annual capacity of 350,000 tonnes and produces paper for magazines, catalogs and supplements in the North American market. Key figures 1997 1998 1998 adjusted Target Return on capital employed (ROCE), %.................................................. 8.0 6.2 10.2 13.0 Debt/Equity ratio, multiple ............................................................................ 1.05 1.04 less than 1 Sales, EUR M .......................................................................................................... 9,998 10,490 Operating profit, EUR M.................................................................................. 916 719 1,190 % of sales ................................................................................................................ 9.2 6.9 11.3 Profit before tax and minority interests, EUR M.................................. 636 339 822 Net profit, EUR M................................................................................................ 409 191 Capital expenditure, EUR M .......................................................................... 1,134 896 % of sales ................................................................................................................ 11.3 8.5 Interest-bearing net liabilities, EUR M ...................................................... 6,090 5,783 Capital employed, EUR M............................................................................... 11,875 11,355 Earnings per share, EUR ................................................................................... 0.54 0.25 0.79 Equity per share, EUR........................................................................................ 7.26 6.97 Dividend per share, EUR.................................................................................. 0.33 0.35* Dividend per share, FIM .................................................................................. 1.99 2.10* Market capitalization, EUR M........................................................................ 5,801 Deliveries of paper and board, million tonnes..................................... 11.3 11.8 Deliveries of timber products, million m3 ............................................... 2.5 2.8 Average number of employees .................................................................... 40,301 40,679 * Proposed dividend Stora Enso in brief Stora Enso Oyj is one of the world’s leading forest industry companies, with shares listed on the Helsinki and Stockholm stock exchanges. The Group was formed through the merger of Finnish Enso and Swedish STORA at the end 1 of 1998. Stora Enso is domiciled in Finland. Stora Enso is an integrated forest products group that manufactures magazine paper, newsprint, fine paper and packaging boards. The Group holds leading global positions in these product areas. Stora Enso owns 2.1 million hectares of 2 productive forest land and conducts extensive sawmilling operations. Annual sales amount to approximately EUR 10 billion. The number of em- ployees in 1998 was approximately 40,000 in more than 40 countries. Europe is Stora Enso’s primary market. The Group’s global structure enables 3 Stora Enso to serve customers and develop operations worldwide. page 2 Corporate combination STORA ENSO WAS FORMED through the combination of July 31, 1998: the EU competition authorities the Finnish company Enso and the Swedish com- announced that they required more time to consider pany STORA. the merger and started the second-phase inves- Enso was established at Kotka in 1872 and its tigation. shares were first listed on the Helsinki Exchanges in 1916. The company has developed through several August 27, 1998: the starting date for the share- mergers and acquisitions into its present form and exchange offer to STORA shareholders. The accept- position as one of the major pulp and paper pro- ance period for the exchange offer was extended ducers in the world. twice due to the longer-than-expected approval STORA’s history dates back one thousand years to period required by the EU competition authorities. the time when copper mining started in Falun. In the 1860s, the company also started wood pro- November 25,1998: the EU competition authorities cessing operations. STORA’s shares were first listed approved the combination, subject to the following on the Stockholm Stock Exchange in 1901. Over the conditions: the sale of the Pure-Pak converting unit years, the company developed into one of the to Elopak, competitive market pricing on liquid world’s leading forest products groups. packaging board for a limited period and support for a duty-free quota on North American imports of ■ Combination process liquid packaging board to the EEA. June 2, 1998: the Boards of Directors of Enso and STORA approved the combination of the com- December 23, 1998: Enso Oyj’s share capital was panies. increased, its name was changed to Stora Enso Oyj, its Articles of Association were amended and the June 17, 1998: the Finnish Parliament passed a reso- new Board of Directors was recorded in the Trade lution to abolish the provision requiring the Finn- Register in Finland. ish State to hold a one-third interest in Enso. December 29, 1998: Stora Enso’s shares were listed June 18, 1998: an application was submitted to the on the Stockholm Stock Exchange and the new EU competition authorities for the approval of the Stora Enso shares on the Helsinki Exchanges. combination. January 14, 1999: Stora Enso initiated compulsory July 23, 1998: an Extraordinary General Meeting of redemption of the remaining STORA shares. Enso shareholders approved the combination on condition that certain terms, such as approval from January 19, 1999: STORA shares were delisted from the EU competition authorities, were fulfilled. the Stockholm, London and Frankfurt stock ex- changes. page 3 Chairman’s letter STORA ENSO IS CURRENTLY one of the In CEO Jukka Härmälä and world’s leading forest products com- Deputy CEO Björn Hägglund, Stora panies and its goal is to become a Enso has an exceptionally strong truly attractive investment alterna- and highly complementary manage- tive for the world’s investors. In a sec- ment pair. The merger has also made tor that has seldom met, and perhaps it possible to create a management has never fully understood the mar- organization of extremely high class ket’s capital requirements during in other areas of the new company. recent decades, this goal is, in effect, I would like to take this oppor- a challenge. tunity to thank the company’s In order to create shareholder management personnel on behalf of value in the future, new investments the Board for their exceptional con- must be viewed in a more realistic tributions during the time since the manner than previously, and greater merger proposals were first present- focus must be placed on the com- ed, and particularly during the en- pany’s capital flows. One of the more forced lull in the merger work while cherished yardsticks being applied increasingly by the waiting for the necessary approval from the European stock market today is EVA, or Economic Value Added, Commission in Brussels. Our warmest thanks are also which is a type of adjusted cash-flow measurement extended to all of the employees in the company, who tool. EVA, or a variant of this tool, has been shown to were naturally affected to a large extent by the publici- bear a very good correlation to the return on share- ty surrounding the merger and by their concern for the holder investment. possible effects