3 - Stora Enso

average cost of capital (WACC) at the
end of 2005 was 8.7 %.
Stora Enso achieved a ROCE of 3.1%
(excluding non-recurring items) in 2005,
which is signifi cantly below target and
therefore unacceptable. The poor ROCE
fi gure was impacted in particular by an
extended labour dispute that affected
the entire Finnish forest products sector
and by increased variable costs. The
Group has launched two profi t improvement
initiatives to address the low profitability:
Profi t 2007 and the Asset Performance
Review (APR).
Growth
Stora Enso continues to aim for profi table
growth, through both organic
growth and selective mergers and acquisitions
in core businesses, mainly in new
growth markets.
Acquisitions will only be made if
they meet Stora Enso’s fi nancial targets
and make a positive contribution to
Earnings per Share (EPS) and Cash Earnings
per Share (CEPS) after one year,
excluding synergies. Over the shortterm,
returns from acquisitions must
exceed the Group’s pre-tax WACC of
8.7%, and support the ROCE target of
13% over the long term.
Cash fl ow
Enhancing cash fl ow from operations is
a high priority at a time of low profi tability.
To improve the effi ciency of the
management of its working capital,
Stora Enso has set an internal benchmark
that cash fl ow should exceed
average capital expenditure and dividends,
as calculated on a three-year
rolling basis.
Stora Enso’s cash fl ow from operations
in 2005 totalled EUR 1 057.0 million,
which was not in line with the
Group’s three-year rolling target. The
main factors resulting to this were weak
profi tability and increased working capital,
especially inventories.
Stability of the Company
Financial
Debt-to-equity ratio is a good indicator
of balance sheet strength and fi nancial
fl exibility. Stora Enso’s target is 0.8 or
less. In 2005, the Group recorded a debtto-equity
ratio of 0.66.
The ratio was impacted in 2005 by
share buy-backs worth EUR 344.7 million
and two acquisitions in the merchant
business: Papeteries de France and
the Schneidersöhne Group in Germany.
Volatility
Stora Enso aims to reduce the volatility
of its business by making its portfolio
less cyclical and by diversifying its operations
geographically.
Shareholder return
Stora Enso’s dividend policy is based
on long-term stability. The current target
is to distribute half of the Group’s net
profi t over the cycle to shareholders as
dividend.
A new share buy-back programme
was approved by the Annual General
Meeting held on 22 March 2005 that
allows the Company to buy back up to
10 % of its shares outstanding under new
Finnish legislation. By the end of 2005,
the Company had purchased 37.3% of
the authorisation for R shares.
Further structural development
The launch of the APR was an important
fi rst step in improving the Group’s under-
Reaching key
financial targets Target 2001 2002 2003 2004 2005
ROCE, % * 13 10.6 7.2 4.5 3.0 3.1
Debt/Equity ratio ≤ 0.8 0.58 **0.37 0.49 0.38 0.66
Dividend/share, EUR 0.45 0.45 0.45 0.45 ***0.45
Payout ratio, % * 50 48 82 180 180 161
* Excluding non-recurring items **Adjusted with the initial valuation of IAS 41 Agriculture
*** Board of Directors’ proposal to the AGM
Stora Enso’s business drivers
Sales in 2005
EUR 13.2 billion
Publication Paper 33 %
Packaging Boards 23 %
Fine Paper 18 %
Wood Products 11 %
Merchants 9 %
Other 6 %
lying profi tability. This work will continue
with further assessment of the Group’s
strategy and the alignment of the product
and production asset portfolio.
Continued focus on South America,
China, and Russia
Stora Enso’s new growth markets strategy
continues to be focused on South America,
China, and Russia. The strategy is
based on captive low-cost fi bre, targeting
growing market segments, and balancing
the portfolio.
Securing local fi bre supply is central
to achieving profi table expansion on
China’s rapidly growing paper and board
markets. Stora Enso will concentrate on
those business segments where it has
competitive advantage in terms of its
capabilities and proven track record.
South America continues to be an
attractive region for developing a captive
low-cost fi bre supply base, and Stora
Enso will act to further expand its lowcost
fi bre assets there.
Securing fi bre supply from Russia to
Nordic and Baltic mills remains vital for
the Group. Further expansion of low
capital-intensity production, such as
corrugated board and sawmilling, will be
investigated. •
Core business drivers
Advertising 53 %
Business 16 %
Non-durable goods 12 %
Construction 12 %
Other 7 %
STORA ENSO COMPANY 2005• 9