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ENGLISH

ENGLISH

Market

The forest products industry group Holmen has the capacity to produce 2.7 million tonnes of paper and paperboard per year. Europe accounts for some 90% of the turnover.

Holmen Paper produces printing paper for daily newspapers, magazines, directories and advertising matter at three Swedish mills and one Spanish mill. Iggesund Paperboard produces virgin fibre board for packaging and graphic purposes at one Swedish and one English mill. Holmen Timber produces sawn timber at one Swedish sawmill. Holmen Skog manages the Group’s one million hectares of forests and the annual volume harvested in company forests is some 2.5 million cubic metres. Holmen’s annual wood consumption is approximately 4.9 million cubic metres. Holmen Energi produces in a normal year some 1 100 GWh of electric power at wholly and partly owned hydro power stations in Sweden. Over and above this, around 550 GWh of electric power is generated at the mills. Holmen’s annual power consumption is approximately 5 100 GWh.

Strategy

Focus on printing paper and paperboard

By means of attractive products, active marketing and product development Holmen shall grow at a faster rate than the market.

Growth shall be organic and via selective acquisitions

Niche products and high productivity are the base for high and stable profitability

The procurement of raw materials is important. The ownership of forest and power assets and recovered paper collection companies gives knowledge and cost control

Financial targets

Profitability exceeding market cost of capital

Ordinary dividend 5–7% of equity

Strong financial position with a debt/equity ratio of 0.3–0.8

Extra dividend and share buy-back when capital structure and financing requirements of the business permit

MSEK 2006 2005 2004 2003 2002 2001

Income statement

Net turnover 18 592 16 319 15 653 15 816 16 081 16 655 Operating costs -14 954 -13 205 -12 570 -12 306 -12 205 -12 460 Depreciation -1 346 -1 167 -1 156 -1 166 -1 153 -1 126 Interest in associate

companies 11 20 25 -6 -10 -3

Items affecting comparability - - - - - -620

Operating profit 2 303 1 967 1 952 2 338 2 713 2 446

Net financial items -247 -233 -206 -212 -149 -152

Profit before tax 2 056 1 734 1 746 2 126 2 564 2 294

Tax -597 -478 -471 -675 -605 -108

Profit for the year 1 459 1 256 1 275 1 451 1 959 2 186 Operating profit

by business area

Holmen Paper 754 631 487 747 1 664 2 410

Iggesund Paperboard 752 626 809 1 001 818 455

Holmen Timber 80 13 5 18 -6 -79

Holmen Skog 643 537 586 516 450 455

Holmen Energi 197 301 178 193 -26 49

Group central costs -123 -141 -113 -137 -187 -224

Items affecting comparability - - - - - -620

Group 2 303 1 967 1 952 2 338 2 713 2 446

Balance sheet

Fixed assets 25 354 25 793 23 381 20 940 21 357 19 150

Current assets 6 138 5 709 5 149 4 743 4 922 5 366

Financial receivables 649 712 459 675 688 432

Total assets 32 141 32 214 28 989 26 358 26 967 24 948

Equity 16 636 16 007 15 635 15 366 15 185 14 072

Deferred tax liability 5 030 5 143 5 177 4 557 4 370 4 014 Financial liabilities 6 634 7 351 5 335 4 044 4 496 3 593 Operating liabilities 3 841 3 713 2 842 2 391 2 916 3 269 Total equity and liabilities 32 141 32 214 28 989 26 358 26 967 24 948 Cash flow

Current operations 2 358 2 471 2 331 2 443 3 498 3 786 Investment activities -947 -3 029 -1 195 -726 -1 810 -1 669 Cash flow

after capital expenditure 1 411 -558 1 136 1 717 1 688 2 117 Key ratios

Return, %

capital employed 10.0 9.0 9.5 12.3 15.5 17.7

equity 9.0 8.0 7.9 9.7 13.7 16.0

Debt/equity ratio 0.36 0.41 0.31 0.22 0.25 0.22

Earnings per share, SEK 17.2 14.8 15.1 17.5 23.6 26.4

Ordinary dividend, SEK 12 * 11 10 10 11 10

Extra dividend, SEK - - - 30 - -

Closing listed price, B, SEK 298 262.5 230 255.5 211.5 238.5

P/E ratio 17 18 15 14 9 9

EV/EBIT 14 15 12 10 8 9

* Proposal of the Board

Major shareholders % of shares % of votes

L E Lundbergföretagen 27.9 51.9

Kempe Foundations 6.8 16.7

Fidelity funds 3.4 1.0

Alecta 3.3 1.0

Handelsbanken incl pension fund 3.0 8.5

Swedbank Robur funds 3.0 0.9

Fourth AP fund 2.4 1.2

SEB funds 1.8 0.5

SHB/SPP funds 1.7 0.5

Second AP fund 1.2 0.4

Other* 45.5 17.4

Total 100.0 100.0

*of which non-Swedish shareholders 23.8 7.1

Holmen in 90 seconds

Holmen AB (publ) • P.O. Box 5407 • SE-114 84 STOCKHOLM • SWEDEN • Tel +46 8 666 21 00 • Fax +46 8 666 21 30 • E-mail info@holmen.com • www.holmen.com Registration number 556001-3301 • Registered office Stockholm

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Share price Total return

Share price and total return, Holmen B

650 600 550 500 450 400 350 300 250 200 150

Extra dividend SEK 60

Extra dividend SEK 30

01 02 03 04 05 06

Source: Reuters EcoWin SEK

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• The operating profit improved by 17% to MSEK 2 303.

• Demand for Holmen’s printing paper, paperboard and sawn timber was very good. Deliveries increased in all product areas, and newsprint and sawn timber prices were raised.

• The volumes from the new newsprint machine in Madrid exceeded the start-up plan by a wide margin.

• Sharply increased production in the paperboard business enabled higher deliveries.

• Swedish electricity prices reached record levels in September. Holmen’s hedges offset the effect of the high prices.

• Wood was in heavy demand at the industry. The focus shifted more and more towards wood, not least owing to the growing interest in sourcing biofuel from forests.

Contents

Key facts 2006 2005

Net turnover, MSEK 18 592 16 319

Operating result, MSEK 2 303 1 967

Profit for the year, MSEK 1 459 1 256

Earnings per share, SEK 17.2 14.8

Dividend per share, SEK 12 * 11

Return on capital employed, % 10.0 9.0

Return on equity, % 9.0 8.0

Debt/equity ratio 0.36 0.41

Capital expenditure, MSEK 1 079 3 170

Average number of employees 4 958 4 868

*Proposal of the Board

The year in brief

The year in brief 1 Comment by the CEO 2

Holmen in brief 4

Strategy 6

Holmen Paper 12

Iggesund Paperboard 14

Holmen Timber 16

Holmen Skog 17

Holmen Energi 18

Production 20

You meet

Holmen every day 22

The share 24

ANNUAL REPORT 26

Quarterly figures 63 Seven-year review 64 Corporate governance 66 Board of Directors 70 Senior management 72 Information

on AGM, reports etc 74

New logotypes 75

Addresses

Holmen in 90 seconds

2006 was a successful year for Sweden’s sawmilling industry in general and for Holmen Timber in particular.

Two reports for 2006

Holmen’s shareholder’s are the main audience for Holmen 2006, which is published in both English and Swedish.

Apart from Holmen 2006, the company publishes the report entitled Holmen and its World 2006. The main audiences for this report are the company’s employees and customers.

Holmen and its World 2006 will be published in Swedish and English in con- nection with the 2007 AGM. It is being published for the third consecutive year and describes from a sustainable perspec- tive the Group’s financial progress and its activities in the fields of social and environ- mental responsibility.

It will be published in Spanish in May.

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H O L M E N 2 0 0 6

2

Comment by the CEO

he markets for Holmen’s main products – newsprint and paper- board – grew strongly in 2006.

The Group achieved its growth target – to grow faster than the market – for printing paper by a wide margin, thanks to the volumes from the new paper machine in Madrid, and for its paperboard business as a result of markedly improved produc- tivity. Turnover increased by 14%, and the operating profit improved by 17% to MSEK 2 303. The improvement in the result was an effect of increases in the prices of newsprint and sawn timber, and higher volumes in more or less all our product areas.

Focus on Madrid

Holmen Paper’s printing paper activities were naturally characterised by the start- up of the new PM 62 paper machine in Madrid. This was a classic start-up with both successes and problems that we managed to overcome step by step.

Towards the end of the year we were encouraged by some really strong months with production well up to the machine’s planned capacity of 300 000 tonnes per year. The year’s volume exceeded the start-up plan by a wide margin. However, the running-in process was affected by high cost of energy and recovered paper, and the additional volumes were not enough to compensate for this. A good deal of effort is devoted to dealing with these cost factors. Luckily the timing turned out very well with a strong market that allowed new capacity to be intro- duced at just the time newsprint prices were raised. Demand for standard news- print rose by 3% in Europe, driven among other factors by free newspapers and unaddressed direct advertising.

MF Magazine, Holmen’s key strate- gic product in the printing paper sector, had a more challenging year. Magazine paper was in ample supply, which mod- erated demand and price trends in this product segment, and it lost market share. Despite this, we succeeded in boosting volumes with the upgraded products from the new PM 11 in Hallsta.

Strong year for paperboard

Iggesund Paperboard had a successful production year. Both mills - Iggesund and Workington – raised their output significantly. This is the effect of earlier

investments now having been trimmed and running under stable conditions.

The market for virgin fibre board in Europe grew by 4% in 2006, and this naturally provided a sound platform for our volume growth. Packaging board in particular grew strongly, while condi- tions for graphic and tobacco board were more moderate. Normally, the demand for paperboard changes in line with GDP growth, but this time it prob- ably benefited from the fact that plastic packaging material became more expen- sive owing to the rising price of oil.

The increases in folding box board prices that we announced for 2006 could not be implemented. After two increases in the price of white lined chipboard in 2006, and given the strong growth in virgin fibre board, it appeared reason- able to announce price rises for 2007 too, that should offset the substantial cost increases we have had to absorb.

Unfortunately, it looks as if it will be dif- ficult to make this price increase stick, which is highly unsatisfactory.

The name of our sawn timber busi- ness, Iggesund Timber, was changed to Holmen Timber at the beginning of 2007. This underlines the fact that the Iggesund name is now reserved for our paperboard business. Holmen Timber is a strategic part of Holmen and an impor- tant business in its own right. The mar- ket for sawn timber was very strong in 2006, with higher prices, growing demand, and lower supply all contribut- ing to the right prospects for earnings growth. Holmen Timber’s profit of MSEK 80 was MSEK 67 better than in 2005, which reflects the situation most aptly. Greatly improved productivity enabled us to take our due share of the strongly growing market.

Important raw materials

Wood, electricity and recovered paper are Holmen’s most important raw ma- terials. Keeping their costs under control is of vital importance for the result.

The wood market returned to normal in 2006 following the turmoil caused by the big storm at the beginning of 2005.

Prices were raised by some 5% at the end of June under the influence of firm demand for saw timber. Pulpwood prices were increased at the same time. Holmen, with its large share of company-owned

forests can feel a sense of security in a world where more and more parties are anxious to get their hands on forest resources. Bioenergy investments will demand more of the forest-owners’ capa- bility to deliver considerably more biofuel in order to prevent first-class raw materi- als from going up in smoke. Holmen’s forestry organisation is taking active measures to continue to supply our mills with raw material and at the same time take full advantage of the potential of biofuel.

The dry weather put the Swedish electricity market under great pressure for much of the year. In September elec- tricity prices reached record levels of more than € 70/MWh, which resulted in costs that could not be covered by pre- vailing product prices. Since Holmen has hedged the price of most of its electricity consumption, these soaring prices had only a limited effect. In practice, how- ever, we can in the short term hardly shut down production merely because of high costs. Most often our output has been sold at fixed prices and has to be delivered. A reminder from the 2006 electricity market, which saw significant- ly lower prices in the closing months, is that we will have to live with fluctuating prices as a result of the hydrological situ- ation and other factors.

Priority to efficiency

The constantly rising price of electricity means we will have to review our expo- sure to electricity costs. For example, we are putting electricity efficiency, high up on our list of demands when it comes to essential replacement investments. In Feb- ruary 2007 the Board made a decision on a new thermo-mechanical pulp line at Braviken where electricity consumption will be as much as 25% lower per tonne of pulp and heat recovery will increase by 30%. When it comes to decide on invest- ments in entirely new paper machines our assessment of how electricity prices will develop will play a key role in determin- ing whether to go ahead with an invest- ment.

As noted before, our mill in Madrid was affected by high raw material costs during the year, with the prices of electri- city and gas running at high levels. We are exploring the possibility of investing in a further gas-fired, combined thermal

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power and electricity installation as a means of reducing energy costs and we are also awaiting new government regula- tions in this area.

In order to coordinate Group energy issues more effectively Holmen Kraft will be given a more extensive mandate, and at the beginning of 2007 its name was changed to Holmen Energi.

The recovered paper market in Europe was relatively stable during the year, but local competition in Spain resulted in higher imports, which caused our costs to rise. Several paper producers increased their recovered paper consumption dra- matically just before and after the start-up of Holmen’s new machine. Consumption has now stabilised at a new, higher level and this will have to be matched by more collecting and sorting. Holmen is expand- ing its sorting capacity at the mill to ena- ble it to increase the volume collected locally in and around Madrid. Playing an active role in collection and sorting effec- tively is of strategic importance when it comes to the sourcing of recovered paper.

Raised dividend proposed

Holmen achieved its profitability target.

The return of 10% on capital employed

and of 9% on equi- ty exceeded the cost of capital by a couple of percent- age points. Earn- ings per share rose from SEK 14.8 to SEK 17.2. In view of this the Board is proposing to raise the dividend from SEK 11 to SEK 12 per share. This cor- responds to just over 6% of equity, which is well with- in our target inter- val of 5-7%. The balance sheet is still strong, and the debt/equity ratio had fallen to 0.36 by the end of the year.

Further growth

Holmen’s strategy is to continue to expand in its two main areas: printing paper and virgin fibre board. We are well placed to continue the trimming at our mills on the basis of our existing struc- ture. At Holmen Paper the new paper machine will enable us to step up the output of other products in addition to standard newsprint. This is the case, for example, with coated paper from Madrid where the focus lies on local business in south-western Europe, and with MF Magazine from Hallsta.

Iggesund will be focusing on the extensive rebuilding of one of the board machines at Iggesunds Bruk. As quality leader in solid bleached board it is par- ticularly important to develop the prod- uct and retain our lead over our competi- tors. We will be investing in a new wire section in the third quarter of 2007, which will result in improved quality and enable us to increase production slightly. After the rebuilding we will relaunch Invercote, the brand name for our solid bleached board products with new, improved product characteristics.

We will strengthen our marketing organ- isation in Eastern Europe in order to respond more effectively to the growing demand there.

Prospects

for the remainder of 2007

In 2006 the Group’s products in the newsprint and magazine paper, paper- board and sawn timber segments enjoyed firm demand. Provided the growth con- tinues, there is every possibility that Holmen will also be able to further raise its deliveries in 2007. Capital expendi- ture is expected to increase in 2007.

Major rebuilding projects, mainly in Iggesund, are planned and will have a negative impact on both production and costs.

Negotiations are underway on increases in newsprint prices in Europe for 2007. The prices of sawn timber have been gradually raised over the past year and are now well up on the level of one year ago. However, the price of paper- board and certain grades of printing paper are broadly unchanged.

Costs have risen sharply over the past few years, mainly those relating to ener- gy. Electricity prices have for the most part been hedged by means of long-term agreements. During the past year the cost of fibre in the form of wood, recov- ered paper and pulp also rose.

The Swedish krona strengthened towards the end of 2006 which is nega- tive for Holmen’s export revenues. How- ever, the Group has currency hedges for 2007, primarily in Euro and Sterling.

Thank you for a good job

Holmen’s employees take considerable responsibility to ensure that the compa- ny develops in the right direction and 2006 was a year when many put in a great deal of effort to bring about change and a good result. I would like to take this opportunity to thank them for their contribution, which is much needed given today’s highly competitive situa- tion. I look forward to tackling new challenges in 2007.

Stockholm 16 February 2007

Magnus Hall

President and CEO Magnus Hall

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H O L M E N 2 0 0 6

4

Holmen in brief

Holmen is a public company whose Series “A” and Series “B” shares are listed on the Stockholm Stock Exchange’s Large Cap list.

The Group’s fi ve business areas each have full commercial responsi- bility for their operations. Holmen Paper and Iggesund Paperboard together account for some 80% of the Group’s net turnover.

Holmen Paper (printing paper), Iggesund Paperboard (paperboard) and Holmen Timber (sawn timber) are the business areas selling prod- ucts. Holmen Skog and Holmen Energi have responsibility for forest and energy assets respectively. They also have sales to other external companies.

Holmen can produce slightly more than 2.7 million tonnes of printing paper and paperboard per year. Holmen, with its annual pro- duction capacity of 2 170 000 tonnes, is Europe’s fi fth largest pro- ducer of printing paper. When it comes to virgin fi bre board, Holmen, with its annual capacity of 565 000 tonnes, is Europe’s third largest producer. The Group has the capacity to produce 270 000 m3 of sawn timber per year.

Paper and paperboard

In the form of words and images printing paper carries messages and furthers communication. In the same way paperboard gives the con- tents of a package their profi le.

Holmen’s white printing paper is used mainly for daily newspapers, weekly and monthly magazines, supplements, and direct advertising.

Sporting and business newspapers, and catalogues for example, are printed on coloured paper.

Packaging for tobacco, perfume, medical products, chocolates and confectionery and food is produced from paperboard from Iggesund,

which is also used for printed matter.

Five out of seven in Sweden

Five of the seven production facili- ties are located in Sweden, as are ten of the 14 paper and board machines. The Group’s forest and hydro power assets are also located in Sweden, as is the sawmill. Pro- duction also takes place in Spain (printing paper) and England (paperboard).

Around 3 700 of the Group’s total of 5 000 employees work in Sweden.

European markets dominate

Great Britain, Germany, and Spain are Holmen’s largest individual mar- kets, along with Sweden. Publishers in these four countries are the larg- est buyers of printing paper from the Group, while most of the paper- board sales go to German, British and French packaging converters.

Great Britain and the Scandinavian countries are the main markets for sawn timber

In business

during four centuries

Holmen has its origin in an arms factory set up in Norrköping on an island in the Motala river in 1609,

from which Holmen evolved. Igge- sund’s history also goes back to the 17th century, when, in 1665, a paper mill in Östanå became the fi rst industrial facility in the district.

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Head offi ce Production sites Sheeting units Sales, distribution etc.

Holmen Paper Iggesund Paperboard Holmen Timber Holmen Skog Holmen Energi

Holmen is a forest products group manufacturing printing paper, paperboard and sawn timber. The Group also owns forest and power assets. The net turnover in 2006 amounted to some SEK 18.6 billion and the number of employees was about 5 000.

Rest of the world, 12 Rest of Europe, 17 France, 4 the Netherlands, 4 Italy, 5

Spain, 9

Europe, 88

* Of which forest and power 15

Sweden, 22*

Germany, 14 Great Britain, 13

Net turnover by market, %

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Holmen Paper

Products: White and coloured newsprint, directory paper, magazine paper and book paper Customers: Daily newspaper and magazine publishers, directory publishers and printers Mills: Hallsta, Braviken, Madrid and Wargön Production capacity/year: 2 170 000 tonnes Number of machines: 10

Net turnover, MSEK Operating profit, MSEK Operating capital, MSEK

2006 2005 2006 2005 2006 2005

10 140 8 442 754 631 11 541 11 452

■ Share of the Group (external share)

Iggesund Paperboard

Products: Solid bleached board and folding box board for packaging and graphical applications Customers: Converters of paperboard for pack- aging, printers and merchants

Mills: Iggesunds Bruk and Workington Production capacity/year: 565 000 tonnes Number of machines: 4

Holmen Timber

Products: Redwood sawn timber

Customers: Joinery and furniture industries, manufacturers of solid flooring, planing mills and builders’ merchants

Mill: Iggesund Sawmill

Production capacity/year: 270 000 cubic metres

Holmen Skog

Operations: Responsibility for supply of wood to the Group’s Swedish units and management of company forests, wood trading

Land holdings: 1 275 000 hectares, of which 1 037 000 hectares of productive forest land Timber volume: 116 million cubic metres

Holmen Energi

Operations: Responsibility for supply of energy to the Group’s Swedish units and management of the Group’s hydro power stations

Number of wholly or partly owned hydro power stations: 23

Production capacity/year (hydro power):

1 116 GWh

Net turnover, MSEK Operating profit, MSEK Operating capital, MSEK

2006 2005 2006 2005 2006 2005

5 240 4 860 752 626 3 935 3 965

■ Share of the Group (external share)

Net turnover, MSEK Operating profit, MSEK Operating capital, MSEK

2006 2005 2006 2005 2006 2005

465 460 80 13 208 230

■ Share of the Group (external share)

Net turnover, MSEK Operating profit, MSEK Operating capital, MSEK

2006 2005 2006 2005 2006 2005

4 042 3 858 643 537 9 001 8 919

■ Share of the Group (external share)

Net turnover, MSEK Operating profit, MSEK Operating capital, MSEK

2006 2005 2006 2005 2006 2005

1 691 1 480 197 301 2 965 2 958

■ Share of the Group (external share) 1 691 1 480

Share of the Group (external share)

197 301

Share of the Group (external share) Share of the Group (external share)

2 965 2 958

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H O L M E N 2 0 0 6

6

Main products

Holmen’s two main product areas are – Printing paper

for newspapers, magazines, directories and advertising print – Paperboard

for packaging and graphical applications

In these areas Holmen has a strong position on the market, which it intends to develop.

Raw materials

By owning – Forest assets – Power assets

– Recovered paper collection companies

– Sawmill

Holmen ensures effi cient and profi table procurement of key raw materials.

Strategy

Production

Holmen shall have high quality and low production costs within each product area by means of – Large-scale production – Rational processes – Active purchasing – High competence of the

personnel.

Growth

Holmen shall grow at a faster rate than the market by means of – Attractive products – Active marketing – Product development The growth shall be organic and via selective acquisitions.

Main products

Holmen’s strategy involves focusing on growth and development within printing paper and paperboard.

The overall object of the Group’s business is to offer customers attractive products of high quality as well as good service, and to do so using cost-effective means that will enable Holmen to remain a competitive supplier.

Holmen must satisfy the customers’

high demands for effi cient printing and converting of the products into suitable end products with customer appeal. It is important that the customers can use the products successfully in combination and competition with other media and advertising or other packaging materials.

Market. Holmen’s main market is Europe, which accounts for some 90%

of the Group’s sales.

Holmen Paper’s printing paper has a strong position among European daily newspaper publishers, who take some two-thirds of the sales. Telephone directo- ry publishers, retailers, printers and book publishers are complementary customer segments.

On the paperboard market, Iggesund Paperboard’s largest category of customer is converters who make packaging. Mer- chants and printers who purchase paper- board for graphic products are also impor- tant customers. Iggesund Paperboard holds a leading position in Europe for solid bleached board and is also an important

actor in the folding box board segment.

Holmen Paper has a market share in Europe of around 10% within standard newsprint, while the share of the improved newsprint, telephone directory paper (TDP) and book paper markets is some 25%. For virgin fi bre board Iggesund has a market share of some 20%.

In Sweden, printing paper is sold direct to customers. Elsewhere, it is sold by sales companies in most EU countries, Switzer- land, Australia, the USA and Japan.

Paperboard is sold from a central sales offi ce in the Netherlands, with sales per- sonnel and technicians in the European countries. There are also sales subsidiaries in Hong Kong, Singapore and the USA.

Main products

Business concept

Holmen shall grow at a faster rate

Production Raw materials

Financial targets

Profitability

Holmen’s profitability and return shall consistently exceed the market cost of capital.

Dividend

Ordinary dividend paid each year shall correspond to 5–7% of equity.

Capital structure

The financial position shall be strong with a debt/equity ratio of 0.3–0.8.

Extra dividend will be paid and shares bought back when the capi- tal structure and the financing requi- rements of the business permit.

Guidelines

Employees

Holmen’s competence long term shall be developed by

– Attracting – Keeping – Developing qualified employees.

Research

and development

Holmen’s R&D activities are to be directed towards supporting the needs of the business for – Product development – Efficient production

processes.

Sustainability

Holmen’s operations shall be characterised by a holistic approach that involves

– Protection of the environment – Lean use of raw materials and

energy

– Respect for ethical and social norms

– Furtherance of sustainable development.

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Products marketed on functionality.

The marketing of Holmen’s products mainly involves highlighting their functionality. The paper and paperboard shall be recognised for their good print- ability and runnability in the customers’

machines. Demands for higher print quality and faster printing and conver- ting are increasing. Converters demand characteristics that allow the paper- board to undergo processes such as fol- ding, foiling, laminating and embossing to achieve attracting packaging. When making comparisons with products from other producers, customers take quality and price into consideration. Service and especially the ability to deliver the right product at the right time are also of great importance.

Holmen also markets the products through a number of brand names.

Competitors. With its capacity of 2 170 000 tonnes per year, Holmen Paper is the fi fth largest producer in Europe of printing paper. UPM and Stora Enso with around 7.5 and 6 mil- lion tonnes respectively are the largest.

See diagram on page 13 for competitors in Europe within printing paper.

Iggesund ranks number three in Europe in virgin fi bre solid bleached board and folding box board, with its annual capacity of 565 000 tonnes.

The main competitors are Stora Enso and M-real. See diagram on page 15 for competitors in Europe within virgin fi bre board.

Growth

The markets for paper and paperboard are relatively mature, and growth on the market for Holmen’s products in Europe has been running at an average rate of a few per cent per year over the past dec- ade. Holmen’s goal is to grow faster than the market and remain a strong supplier with effi cient production. Most of the growth is organic and the result of product improvements and increasing production volumes in existing product areas. In recent years, Holmen has been growing in terms of volume by 4-5% a year in the main product areas. Little of the growth has been an effect of acquisi- tion. The most recent major acquisition was the mill in Madrid in 2000.

Production

Large-scale and effi cient production facilities and good employees result in high productivity and effi cient use of input goods and capital. For long-term investments to be successful, and to achieve economies of scale as well as development, it is necessary to have an effective interaction between marketing, product development and production increases. Basic volumes of certain prod- ucts are combined with selective ventures involving higher added value or

improved products for both existing and new customer groups.

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1 Rebuilding Board machine KM 2 Iggesunds Bruk 2 New paper machine

PM 53 Braviken 3 Rebuilding

Board machine BM 2 Workington 4 Acquisition Papelera

Peninsular (Madrid) 5 New paper machine

PM 11 Hallsta 6 Rebuilding

BM 2 Workington KM 1 Iggesunds Bruk 7 New paper machine

PM 62 Madrid

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H O L M E N 2 0 0 6

8

Raw materials

Alongside an effi cient production process, the cost of raw materials and transporta- tion is an important factor infl uencing competitiveness. Holmen has integrated backwards along the production chain by owning forests, recovered paper collec- tion companies and power stations.

Wood, energy and recovered paper are the main raw materials used by Holmen.

The sawmills play an important role on the wood market as they buy the best wood (saw timber) from forest-owners and sell large quantities of bi-products, mainly chips, to pulp and paper mills.

This has been one of the factors behind the investment in the Iggesund Sawmill.

Wood, a renewable raw material.

Wood is a renewable raw material. Pro- vided forests are well tended, they will last for ever. Wood – a renewable raw material – is the foundation of Holmen’s production of paper, paperboard and sawn timber. Wood is mainly procured on the Swedish market, where wood is also sold. Some wood is imported, primarily from Estonia.

Holmen owns one million hectares of productive forestland and the timber volume amounts to 116 million cubic

metres. The self-suffi ciency ratio for the Group’s Swedish units is around 60%.

Recovered paper becomes new products. Old newspapers, magazines and directories are collected for use as recovered paper to make new products.

Recovered paper is procured in Sweden, Norway, Spain, Portugal, France and Great Britain. In 2006 Holmen used some one million tonnes of recovered paper in its production of newsprint and TDP. The admixture of recovered paper amounts on average to around 50% in these products, while the remainder con- sists of virgin fi bre. The mill in Madrid uses solely recovered paper.

Company generated and purchased energy. Energy is obtained from the com- pany’s wholly and partly owned hydro power stations, back pressure turbines at the mills, by purchase of electricity and the recovery and purchase of thermal energy. Energy is also generated through the combustion of biofuel in the form of recovered liquors, bark and wood

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residues, or from oil and natural gas. The electricity generated at the Group’s wholly and partly owned hydro power stations and back pressure turbines at the mills corresponds to 30% of the electricity

consumed by the Swedish units. The mills in Madrid and Workington obtain energy from gas-fi red, combined thermal power and electricity installations completed with local electricity purchases.

Financial targets

Holmen’s profi tability target is to earn a sustainable return that is higher than the market cost of capital. This profi tability target is used to control the business. At Group level, a key ratio for profi tability – Value Added – is computed. This is based on the operating result less the

cost of capital and tax. This provides a simple and suffi ciently fair yardstick that is continuously followed up at Group, business area and production unit levels.

The Group’s profi tability over the past few years has exceeded the cost of capi- tal. Nonetheless there are units in the Group whose profi tability needs to be improved.

Holmen’s business is capital intensive and much of the development is the result of investing in additional capacity and improved production. Investments are also often combined with cost ration- alisation. To assess the profi tability of the investment a model is used to calcu- late the present value of the cash fl ows, i.e. estimated future cash fl ows are dis- counted by the weighted cost of capital.

The computation of the cost of capi- tal involves weighting the cost of bor- rowed capital and equity and multiply- ing the result by the capital invested in the business. The cost of equity is com- puted as interest plus a premium adjust- ed to the level of risk, with capital invest- ed in production operations being given a higher risk premium (5%) than capital invested in forest and power assets (2%).

The Group’s weighted cost of capital for the current operations is computed on the basis of short-term market inter- est rates and was in 2006 around 8% for production operations and just over 5%

for forest and power, calculated on the result before tax. The cost of capital used for evaluating investment projects is based on long-term market interest rates and was in 2006 just over 11% for pro- duction operations.

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Dividend. Holmen shall pay an ordinary dividend each year that corresponds to 5–7% of equity. This represents a relati- vely stable and high annual dividend. The Board has proposed that the 2007 An- nual General Meeting resolves in favour of paying a dividend of SEK 12 per share, which corresponds to 6.1% of equity.

Over the past ten years the ordinary divi- dend has averaged 5–6% of equity. This means that almost half of the earnings per share have been paid out by way of ordinary dividend during this period.

Financial stability. Holmen shall have a strong fi nancial position that provides fi nancial stability and enables it to make correct, long-term business decisions re- latively independently of the state of the economy and external fi nancing possibili- ties. The target for the debt/equity ratio is 0.3–0.8, and the adjustment to this target is one aspect of the strategic planning.

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Holmen shall pay extra dividend or buy back shares when the capital structure and the fi nancing requirements of the business permit. In addition to ordinary dividends, Holmen has paid extra divi- dends for the fi nancial years 1998, 2000 and 2003. Shares have been bought back once, in 2000.

The 2006 Annual General Meeting mandated Holmen’s Board to buy back shares in the company. This mandate has not been exercised. There is no explicit goal for share buy-backs. Holmen has used them as a complement to dividends as a means of adjusting the capital structure when conditions are deemed favourable.

If Holmen achieves its profi tability target the funds that are generated inter- nally are estimated to be suffi cient to

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H O L M E N 2 0 0 6

10

fi nance the ordinary dividend and annual growth of 3–4%. Higher profi tability would over time permit the payment of extra dividends, share buy-backs, major investment projects or acquisitions.

Employees

Holmen’s personnel policy is oriented towards developing leadership, the organ- isation and the people who work in it.

A number of strategic goals have been established for Holmen’s human resources (HR) activities. They relate to factors such as the climate at work, lead- ership, performance reviews, sick leave, number of accidents, share of female managers, and the recruitment of gradu- ates. The overall measures relating to competence procurement, leadership and the organisation are followed up using ratios and Holmen Inblick, the employee survey.

Recruitment and managerial develop- ment to meet future needs were given priority in the HR activities in 2006.

During the 2009–2015 period the number of employees at the Swedish units who retire each year will be twice as many as during the 2000–2005 peri- od. In order to meet the recruitment requirements, Holmen has long paid great attention to activities, at both com- pany level and industry-wide level, to develop a relationship with schools at all levels from elementary through to upper secondary school and universities, with the object of creating contacts.

Measures to ensure a supply of good recruits in the future have in recent years

been directed towards high schools and universities. The proportion of graduates among new recruits is currently around 40%. Holmen’s aim is to raise this level.

Priority is given to the development of existing and future managers. Poten- tial managers are identifi ed and the tar- get is to fi ll at least 75% of managerial vacancies by internal appointment. Spe- cial attention is devoted to women with managerial potential. The proportion of women in qualifi ed positions, i.e. those that require a high level of competence and the exercise of independent responsi- bility, was 14% in 2006. This may be compared with 11% for 2002.

During the year sick leave at the

Swedish units fell to 4.8% (2005: 5.5%), thereby achieving the short-term goal.

Sick leave at the Swedish units shall be lower than 4.5% in 2008. The level at non-Swedish units was 3–5%.

The employee survey, Holmen Inblick, was carried out in 2006 in England and Spain. Inblick will be carried out in Swe- den, Holland and Estonia in spring 2007.

The questions are more or less the same as in the 2005 survey, although there are slightly fewer. The survey focuses on whether employees consider they have the conditions needed to do a good job, and on identifying management strengths and weaknesses. Holmen Inblick is a useful instrument for improving management.

Each manager has to take responsibility for this as a competent manager has con- siderable infl uence on the employees’

drive and their readiness to do a good job, which in turn has an effect on Holmen’s profi tability.

Research and development

Holmen’s research and development (R&D) activities are decentralised and directed towards supporting the needs of the business in terms of product develop- ment and effi cient processes. Responsi- bility for R&D rests on each business area. Joint research activities, which mainly involve Holmen Paper and Igge- sund Paperboard, relate to coating tech- niques and mechanical pulp.

Holmen Skog plays an active role in

References

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