Unaudited

Operational key figures, items affecting comparability and other non-IFRS measures

The list of Stora Enso’s non-IFRS measures and the calculation of our key figures are presented at the end of the Report of the Board of Directors. See also the chapter Non-IFRS measures at the end of this report.

Financial results – Group

Sales at EUR 10 045 (9 802) million were 2.5% higher than a year earlier, mainly due to higher volumes in all divisions except Paper, favourable pulp prices in all grades and also favourable prices in Packaging Solutions and Wood Products divisions. The impact of the foreign exchange rate movements on sales was EUR 55 million negative. Sales excluding the paper business increased by 8.5%. The higher volumes are primarily driven by the ramp-ups at Beihai consumer board mill, Murów sawmill, Varkaus laminated veneer lumber (LVL) & Varkaus kraftliner mills, higher pulp production output and operational improvements in China Packaging. In addition, the share of new products and services increased significantly.

Stora Enso announced the divestment of its 35% holding in the equity accounted investment Bulleh Shah Packaging Ltd in Pakistan in July 2017 and the divestment was completed in September 2017. In October, Stora Enso divested 100% of its shares in the Finnish Puumerkki Oy and the Estonian Puumerkki AS, a specialised wholesaler of wooden building materials.

Operational EBIT reached a significant milestone at EUR 1 004 (884) million and increased 13.6%, mainly due to higher volumes, higher sales prices and better mix. Net foreign exchange rate movements and higher variable and fixed costs had a negative impact on operational EBIT. The increased costs were largely offset by good cost management through the Profit Improvement Programme.

Operational EBIT margin at 10.0% (9.0%) improved from the previous year. Higher volumes increased the operational EBIT by EUR 155 million and favourable sales prices and better mix by EUR 166 million. Higher variable costs in logistics, chemicals, energy and fibre decreased operational EBIT by EUR 83 million. The impact of higher fixed costs was EUR 67 million negative to operational EBIT, main reasons being the investments in innovation activities in Biomaterials division, higher maintenance costs and higher personnel costs due to the ramp ups of new sites and higher production volumes. The impact of exchange rates on sales and costs decreased operational EBIT by EUR 50 million after hedges. Depreciation was EUR 3 million higher.

The share of the operational results of equity accounted investments amounted to EUR 89 (80) million, with the main contributions from Bergvik Skog and Tornator.

The IFRS operating profit includes a negative net effect of fair valuations of EUR 7 (negative EUR 5) million from the accounting of share-based compensation, Total Return Swaps (TRS) and CO2 emission rights. In addition, the IFRS operating profit includes a negative net effect of EUR 6 (negative EUR 121) million from IAS 41 forest valuation from subsidiaries and joint operations and also a negative net effect of EUR 3 (positive EUR 59) million from Stora Enso’s share of net financial items, taxes and IAS 41 forest valuations of equity accounted investments.

Fixed asset impairments amounted to EUR 27 (92) million.

The Group recorded items affecting comparability (IAC) with a negative impact of EUR 84 (negative EUR 34) million on its IFRS operating profit and a positive impact of EUR 11 million (negative EUR 22) on income taxes.

The IAC relate to the closure of Kvarnsveden Mill paper machine 8 (a negative IAC of EUR 17 million), the devaluation of Green Certificates (a negative IAC of EUR 10 million), the divestment of the 35% holding in Bulleh Shah Packaging Ltd (a negative IAC of EUR 20 million), the divestment of Puumerkki Oy and Puumerkki AS (a negative IAC of EUR 9 million). In addition there was a negative IAC of EUR 24 million due to increases in environmental provisions at several sites impacting Segment Other, and Consumer Board and Paper divisions.

The IFRS operating profit was EUR 904 (783) million.

Segment share of operational EBIT, IAC, fair valuations and non-operational items and operating profit/loss
Year Ended 31 December
Operational EBIT IAC, Fair Valuations and Non-Operational items Operating Profit/Loss
EUR million 2017 2016 2017 2016 2017 2016
Consumer Board 285 254 -32 -187 253 67
Packaging Solutions 170 64 -4 -22 166 42
Biomaterials 264 224 -10 -13 254 211
Wood Products 111 88 -9 - 102 88
Paper 128 211 -22 78 106 289
Other 46 43 -23 43 23 86
Total 1 004 884 -100 -101 904 783
Net financial items -162 -242
Profit before Tax 742 541
Income tax expense -128 -134
Net Profit 614 407
Operational EBIT comprises the operating profit excluding IAC and fair valuations of the segments and Stora Enso’s share of the
operating profit excluding IAC and fair valuations of its equity accounted investments (EAI).

IAC = Items affecting comparability. These are exceptional transactions that are not related to recurring business operations. The most common IAC are capital gains and losses relating to disposal of fixed assets, impairments or impairment reversals, disposal gains and losses relating to group companies, environmental provisions, provisions for planned restructurings, other provisions and penalties. Items affecting comparability are normally disclosed individually if they exceed one cent per share.

Fair valuations and non-operational items include equity incentive schemes and related hedges, CO2 emission rights, valuations of biological assets and the Group’s share of tax and net financial items of EAI.
Items affecting comparability, fair valuations and non-operational items
Year Ended 31 December
EUR million 2017 2016
Impairments and reversals of intangible asset and property, plant and equipment and biological assets -8 -133
Restructuring costs excluding fixed asset impairments -14 -19
Disposals -28 144
Other -34 -26
Items affecting comparability -84 -34
Fair valuations and non-operational items -16 -67
Total -100 -101
Segment share of operative assets, operative liabilities and operating capital
Year Ended 31 December
Operative Assets Operative Liabilities Operating Capital
EUR million 2017 2016 2017 2016 2017 2016
Consumer Board 2 477 2 486 537 513 1 940 1 973
Packaging Solutions 1 100 1 027 223 173 877 854
Biomaterials 2 578 2 880 253 195 2 325 2 685
Wood Products 789 766 238 235 551 531
Paper 1 561 1 629 811 653 750 976
Other and eliminations 2 339 2 267 389 636 1 950 1 631
Total 10 844 11 055 2 451 2 405 8 393 8 650
Key figures
2017 2016 2015
Sales, EUR million 10 045 9 802 10 040
Operational EBIT, EUR million 1 004 884 915
Operational EBIT margin 10.0% 9.0% 9.1%
Operating profit (IFRS), EUR million 904 783 1 059
Operating margin (IFRS) 9.0% 8.0% 10.5%
Return on equity (ROE) 10.3% 7.2% 14.6%
Operational ROCE 11.9% 10.2% 10.6%
Debt/equity ratio 0.38 0.47 0.60
EPS (basic), EUR 0.79 0.59 1.02
EPS excluding IAC, EUR 0.89 0.65 1.24
Dividend and distribution per share1, EUR 0.41 0.37 0.33
Payout ratio, excluding IAC 46.1% 56.9% 26.6%
Payout ratio (IFRS) 51.9% 62.7% 32.4%
Dividend and distribution yield, (R share) 3.1% 3.6% 3.9%
Price/earnings (R share), excluding IAC 14.9 15.7 6.8
Equity per share, EUR 7.62 7.36 6.83
Market capitalisation 31 Dec, EUR million 10 422 8 085 6 618
Closing price 31 Dec, A/R share, EUR 13.20/13.22 10.40/10.21 8.40/8.39
Average price, A/R share, EUR 11.93/11.54 8.50/7.88 8.87/8.70
Number of shares 31 Dec (thousands) 788 620 788 620 788 620
Trading volume A shares (thousands) 6 768 1 254 1 641
% of total number of A shares 3.8% 0.7% 0.9%
Trading volume R shares (thousands) 571 717 765 122 798 507
% of total number of R shares 93.4% 125.0% 130.5%
Average number of shares, basic (thousands) 788 620 788 620 788 620
Average number of shares, diluted (thousands) 790 024 789 888 789 809
1 See the Board of Directors' proposal for dividend distribution.

Net financial expenses at EUR 162 million were EUR 80 million lower than a year ago. The reduction was mainly due to the net foreign exchange result gain of EUR 34 (loss EUR 43) million coming from the revaluation of foreign currency cash, interest-bearing assets and liabilities and related hedges. The net interest expenses decreased by EUR 2 million, due to significantly reduced debt levels, partly offset by lower capitalised interest and lower interest income from loan receivables. Other net financial expenses were EUR 1 million lower.

The net tax charge totalled EUR 128 (134) million, equivalent to an effective tax rate of 17% (25%), as described in more detail in Note 9, Income taxes, of the Consolidated Financial Statements.

The loss attributable to non-controlling interests was EUR 11 (56) million, leaving a profit of EUR 625 (463) million attributable to Company shareholders.

Earnings per share excluding items affecting comparability were EUR 0.89 (0.65) and including items affecting comparability EUR 0.79 (0.59). Operational return on capital employed was 11.9% (10.2%).

The Group capital employed was EUR 8 308 million on 31 December 2017, a decrease of EUR 286 million on a year earlier.

Breakdown of Capital Employed Change
Capital Employed
31 Dec 2016, EUR million 8 594
Capital expenditure less depreciation 126
Impairments and reversal of impairments -21
Fair valuation of biological assets -6
Costs related to growth of biological assets -66
Available-for-sale: operative (mainly PVO) 66
Equity accounted investments 52
Net liabilities in defined benefit plans 56
Operative working capital and other interest-free items, net -69
Net tax liabilities -34
Translation difference -394
Other changes 4
31 Dec 2017, EUR million 8 308

Financing

Cash flow from operations was EUR 1 492 (1 633) million and cash flow after investing activities was EUR 825 (834) million. Working capital decreased by EUR 37 (283) million, trade payables increased having a positive impact of EUR 170 million and short-term receivables increased having a negative impact of EUR 128 million into working capital. Payments related to restructuring actions and environmental provisions were EUR 35 million.

Operative Cash Flow
EUR million 2017 2016
Operational EBITDA1 1 587 1 463
IAC on operational EBITDA -76 -61
Other adjustments -56 -52
Change in working capital 37 283
Cash Flow from Operations 1 492 1 633
Cash spent on fixed and biological assets -658 -798
Acquisitions of equity accounted investments -9 -1
Cash Flow after Investing Activities 825 834
1 Restated due to a change in Group’s operational EBITDA definition to include the operational EBITDA of its equity accounted investments (EAI). See chapter Change in the operational EBITDA calculation at the end of the Report of the Board of Directors.

At the end of the period, net interest-bearing liabilities of the Group were EUR 2 253 (2 726) million. Cash and cash equivalents net of bank overdrafts amounted to EUR 603 (949) million.

During the fourth quarter, Stora Enso signed a new sustainability linked EUR 600 million revolving credit facility agreement with a syndicate of 13 banks to refinance its existing EUR 700 million facility. Part of the pricing for the facility agreement is based on Stora Enso’s Science Based Targets to combat global warming by reducing greenhouse gases, including CO2. The new facility matures in January 2023 and will be used as a backup for short-term facilities. The facility has no financial covenants. In addition, Stora Enso has access to various long-term sources of funding up to EUR 950 (1 000) million.

The debt/equity ratio at 31 December 2017 was 0.38 (0.47). The currency effect on equity was negative EUR 256 (positive EUR 115) million net of the hedging of equity translation risks mainly due to weakening of the US dollar, Brazilian real, Swedish crown, Chinese renminbi and Russian ruble.

The fair valuation of cash flow hedges and available-for-sale investments recorded in other comprehensive income increased equity by EUR 69 (increase EUR 148) million mainly due to increased electricity prices resulting to higher fair value of Group’s shareholding in Pohjolan Voima.

At the end of the year, the ratings for Stora Enso’s rated bonds were as follows:

Ratings as at 31 Dec 2017
Rating agency Long/short-term rating Valid from
Standard & Poor’s BB+ (stable) / B 21 August 2017
Moody’s Ba2 (positive) / NP 4 August 2016

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