Stora Enso Oyj

Thank you for joining us today. I'm Hans Solström, the President and CEO of Stora Enso. I'm here with our CFO, Seppo Parvi, to walk you through our performance and provide insights into our future outlook. We will also address any questions you might have towards the end. Let's begin by directing our attention to this striking image. This is an image from the interior of our new head office, soon to be a prominent landmark in the main harbour of Helsinki. We have just started to move in. This building not only represents our commitment to sustainable development, but also stands as a testament to the innovative use of wood in modern architecture. For every ton of wood utilized in constructions like this, we are able to sequester one ton of carbon while simultaneously avoiding the emissions of at least another ton of CO2 compared to traditional construction materials. Today's presentation is headlined Continued Profit Improvement with Strengthened Leverage Ratio. I will explain further what this means to Reinsa and how we have achieved these results as we move through the presentation. Now, let's shift our focus to the key highlights of the quarter. These highlights not only showcase our strategic progress, but also emphasizes our dedication to sustainable growth and financial stability. Firstly, I'm encouraged to report that our Q2 2024 adjusted EBIT more than quadrupled year on year with an enhanced EBIT margin, marking our third consecutive quarter of sequential adjusted EBIT growth. This performance aligns with our expectation and reinforces our upgraded full year 2024 adjusted EBIT guidance announced on the 15th of May to be significantly higher than last year's 342 million euros. Our value creation and profit improvement programs are progressively contributing to our earnings growth. Through targeted value creation efforts, we are reducing variable costs, optimizing sourcing and enhancing efficiencies across all divisions. Concurrently, our profit improvement program, initiated in February this year, is advancing successfully to deliver an additional €120 million in adjusted EBIT by lowering fixed costs with full impact from 2025. Our financial position has also strengthened, as indicated by an improved net debt to adjusted EBITDA ratio quarter on quarter. We have also managed to significantly reduce our operating working capital to an all-time low, which has enhanced our liquidity and financial flexibility. These achievements are testament to our commitment to operational excellence and financial prudence, highlighting our ability to deliver sustainable value and setting the stage for continuous success. Let's now take a look at our result and the contributing factors in more detail. Group sales decreased slightly by 3%, reaching 2.3 billion euro, mainly due to structural changes, including site divestments and closures throughout 2023. While on the other hand, sales from the continuing operations grew by 1%. We had higher deliveries across all divisions alongside increased prices in our biomaterials and forest division. Although prices in the packaging material division started to increase, they still remained below the level from a year ago. The adjusted EBIT rose significantly to 161 million euro from 37 million euro a year ago. with the margin improving to 7% from 1.6%. This positive result was primarily driven by higher volumes and a decrease in many variable cost categories. However, the raised fiber costs continued to create challenges and squeeze our margins. Additionally, fixed costs decreased mainly due to implemented cost saving actions. The restructuring efforts from the previous year alongside this year's value creation and profit improvement improving our profitability and competitiveness on a sustained basis. Our cash flow from operations reached 323 million euro bolstered by a reduction in our operating working capital by 576 million euro a year on year achieving an all-time low. This success is a result of our continuous efforts to enhance working capital efficiency and release capital, ensuring a robust financial position for the future. Let's dwell deeper into the development of the adjusted EBIT. As previously noted, the group adjusted EBIT rose significantly to €161 million from €37 million a year ago. A key contributor to this increase was higher volumes in our continuing operations, particularly in the packaging materials division, which improved profitability by 79 million euros. However, we also continued to face upward pressure on fiber costs, primarily wood, which negatively impacted our margins and decreased profitability by 64 million euros. On a positive note, apart from fiber costs, many other variable cost categories, such as chemicals, continue to decline, contributing an improvement of €56 million to adjusted EBIT. The value creation programs, which focus on sourcing, operational and commercial efficiencies, are progressing well across all divisions. Additionally, fixed cost saw a reduction of 53 million euro, primarily due to cost reduction actions. These programs employ an analytical and structured approach, significantly enhancing both our profits and cost competitiveness, and are integral to our ongoing financial health and competitive positioning in the market. Now, if we look at our divisions more in depth, let me begin with an overview of the Packaging Materials Division. Demand for consumer board remained solid and demand for container board improved throughout recovery, though recovery remained hampered by sluggish retail trade growth. Sales decreased marginally by 1% to 1.1 billion euro. The decline is mainly due to the impact of the production unit and line closures from the previous year, which adversely affected sales volumes. Despite this, the negative impact was largely offset by a steady recovery in volumes for both consumer and container board continued operations. Political strikes in Finland during the early part of the second quarter led to production curtailments and subsequently delayed shipments and the implementation of price increases during the quarter. Adjusted EBIT increased by €82 million to €60 million. This improvement in profitability was observed across all segments and was supported by structural changes, lower depreciation costs and higher operating rates. Although good costs continued to rise, placing pressure on our margins, we mitigated this impact through a reduction in other cost categories, including energy, chemicals and fixed costs. Continuing with the packaging solution division, where we continue to navigate through challenging market conditions. There were some indications of a gradual market recovery, yet the division's performance remains adversely impacted by industrial capacity. Additionally, poor weather conditions in the Benelux area negatively affected the key fresh product segments, leading to reduced deliveries. Consequently, sales decreased by 12% to €254 million, largely attributed to lower pricing levels. The lower selling prices seen in the first quarter of 2024 adversely influenced the second quarter sales. This was a result of previous declines in container board prices, which is the main input material for the division. Adjusted EBIT decreased by €60 million, resulting in a negative €1 million for the quarter. The division's profitability was heavily impacted by high margin pressure, resulting from a contractual lag in passing the sequential increased container board costs on to our customers. Moreover, increased depreciation costs associated with the startup of the Delir production plant in the Netherlands also contributed negatively to the results. These factors collectively highlight the significant challenge the division faces in maintaining profitability amidst the current market dynamics. Let's now focus on the biomaterials division, which saw positive developments in both sales and adjusted EBIT. Fault demand remained stable and we observed sequential increases in fault prices across all grades and markets. The global inventory stayed below the five-year average. In the first quarter, supply disruptions led to tightened pulp availability in Europe during the second quarter. As a result, sales in the division rose by 9% to 413 million euro. Although deliveries fell lower due to the closure of the Sunila pulp mill in Finland, higher sales prices contributed to the increase. Adjusted EBIT saw a substantial rise, increasing by €76 million to €63 million. This improvement was primarily driven by higher sales prices coupled with internal actions aimed at reducing costs and enhancing competitiveness. Shifting focus to the wood products division, we observed a continuation of low demand, although there were signs of seasonal improvement. Notably, we saw an increase in volumes, particularly for sawn wood. Despite the volume increases, sales in the division decreased by 5% to 414 million euro, primarily due to lower sales prices. The low level of building activity remained a significant factor suppressing demand for cross-laminated timber and laminated veneer lumber. Encouragingly, the division returned to a positive adjusted EBIT after six consecutive negative quarters. This was supported by several internal actions aimed at reducing fixed costs. Adjusted EBIT increased by €13 million to €7 million by reductions in both fixed and variable costs. This demonstrates a robust response to cost management and operational adjustments in the face of ongoing demand challenges. Now, take a look at the forest division, which continued its strong performance this quarter. Sales saw a significant increase of 11% to a total of 690 million euro. Demand continued to be strong in the Nordics, with both volumes and wood prices experiencing an upward trend. This resulted in price increasing both year on year and quarter on quarter. Adjusted EBIT rose by 23% to 76 million euros, and the adjusted EBIT margin improved to 11% from 10% the previous year. This record high result for a second quarter was primarily driven by increased wood prices, favorable harvesting conditions, and strong operational performance across the group's forest assets. So, let's take a look at the robust valuation of our forest assets in more detail. We are pleased to report a continuous stable forest valuation of 8.7 billion euros, which translates into 11.06 euros per share. This stability underscores the strength and enduring value and potential of our forest assets. The year-on-year increase of 660 million euro was primarily attributed to the positive changes in the fair value of our biological assets. Additionally, our quarter-and-quarter growth of 99 million euro was mainly influenced by favorable forex exchange rates, particularly with a stronger Swedish krona. I will now hand over to Seppo to go through details of some key financials.

Thank you, Hans. In 2024, our capex level is expected to remain at about 1 to 1.1 billion euros. The consumer body investment at the Oulu site in Finland is progressing on schedule and budget. This is our main project running currently. And production is expected to start in the first half of 2025, with full capacity estimated to be reached during 2027. Long term, we keep CAPEX at or below depreciation over the cycle. After the whole investment, the aim is now to quickly revert to the average CAPEX level of 600 to 800 million euros. Due to the current business environment and to protect our balance sheet and cash flow, we are continuing to be restrictive on any new major CAPEX initiatives. Moving to the next important topic, our cash flow. we have achieved a significant reduction in operating working capital. The profit improvement program initiated in the first quarter this year, with an adjusted EBIT target of 120 million euros, and the value creation program started, for example, on efficiency improvements and the reduction of variable costs, have both, as previously mentioned, continued to progress well. They have significantly contributed to an improved earnings trend through enhanced efficiencies and improved cash flow, which in turn has strengthened our leverage ratio. We have successfully managed to improve our net debt to adjusted EBITDA ratio to 3.5, down from 4.0 in the first quarter of this year. However, it remains above our targeted ratio of 2.0 and has increased compared to the 1.7 recorded in the second quarter of last year. This underlines the ongoing necessity for profitability improvements and actions to reduce working capital. This continues to be our top priority. In addition, We have, as mentioned earlier, achieved a significant reduction in operating working capital by 576 million euro year on year, reaching an all-time low level. This success is driven by ongoing efforts to enhance working capital efficiency and to release capital. Maintaining and improving this efficiency remains a focal point for us moving forward. Let's also take a look at our liquidity position next. We are committed to maintaining a strong liquidity position, which is crucial in today's volatile business environment for supporting our growth investment plans. Cardio Cash and Cash Equivalent stand at approximately 2.1 billion euros. Additionally, we have access to unused credit facilities totalling up to 1.9 billion euros. In further support of our financing strategy, in July, we secured a new €435 million bilateral loan from the European Investment Bank, EIP. This loan, which is currently totally undrawn, will partially fund the significant Oulu milk investment. Additionally, it is important to highlight that we have no financial governance and maintain an investment grade rating from both bids and moods. Let's now shift our focus to the development of our long-term financial targets. Despite the changing business environment impacting our ability to meet our long-term financial targets, we are seeing some segments starting to recover. As Hans mentioned, we are taking targeted actions to strengthen our business for immediate needs, while also planning strategically for sustained improvements and competitiveness in the future. We have improved our net debt to access the GDP ratio from 4.0 to 3.5, since the first goal was mentioned already. And except for the forest division, all divisions are below our return on capital targets currently. I will now pass back to you, Hans, for an overview of sustainability goals and market outlook.

Please. Thank you, Seppo. Our growth is underpinned by sustainability, which serves as both a strategic enabler and a competitive edge. We are committed to achieving our ambitious sustainability goals concerning climate change, circularity and biodiversity. In our climate change initiatives, we are enhancing energy efficiency, transitioning to renewable energy sources and increasing our use of non-fossil electricity. These efforts have led to a 46% reduction in production emissions since 2019. Building on this progress, we are targeting net zero carbon emissions by 2040. In circularity, we have reached 94% recyclability of our products and are aiming for 100% by 2030. We are also committed to a net positive impact on biodiversity in our forests by 2050. Our dedication to this principle has earned us the highest EcoVadis rating for the eighth year, affirming our commitment to environmental responsibility, labor and human rights, ethics and sustainable procurement. Now moving on to the sequential market demand outlook. Stora Enso anticipates a gradual market recovery in 2024, so let's examine the outlook from Q2 to Q3 for our products across our divisions. Starting with the consumer board, demand in Europe remains stable, with a slight uptick expected in China. For container board and corrugated packaging, we expect stable demand across Europe. Paper demand is also expected to remain stable, but at a low level. In terms of raw materials, demand for both softwood and hardwood pulp is expected to remain stable in Europe and China, alongside stable demand for pulp. A seasonal decline in sawn wood demand is expected during the summer holiday period. At the same time, the construction segment continues to experience weak demand for building solutions. In our forest division, we see a rise in industrial wood demand across all markets due to seasonality, leading to continued tight conditions in Finland, Sweden and the Baltics. Lastly, demand for pulpwood for energy usage maintains its stability. These continuous insights not only reflect the current market demand development, but also contribute to our strategic discussions on a longer term horizon. So in our next topic, building a more profitable and competitive company, I will cover how our strategic initiatives and capital allocation are aimed at enhancing our market positions and strengthening our competitiveness for sustainable growth in the coming years. Our actions to build a more profitable and competitive company is to deliver on our long-term strategy to position Stora Enso for current and future growth opportunities. We have already discussed elements of this today, but let's deep dive to see the full scope of how we are enhancing profitability and competitiveness through a mix of strategic initiatives and various restructuring and improvement actions. We are also enhancing our financial position by optimizing commercial and asset strategies, reducing working capital and divesting non-core businesses. At the beginning of last year, we discontinued our structurally declining paper division. and the plan to divest the Beihai site in China is proceeding. Although the process is lengthy, securing the right value for our assets is crucial. Ultimately, the value of the deal is prioritized over timing. This is nothing new, and we now focus on expanding our business in growing segments of renewable and recyclable packaging, where we already have leading market positions and good access to input material. In 2023, we also completed the acquisition of the Dutch corrugated packaging company, the Young Packaging Group, valued at around 1 billion euro. Additionally, our new corrugated packaging site in Western Europe is enhancing our position and is expected to be fully operational by 2026, increasing capacity by approximately 20%. Our ongoing investment of 1 billion euro in consumer packaging at our Oulu mill in Finland is progressing well. We anticipate production startup in the first half of 2025 with full capacity projected by 2027. Once fully ramped up, we expect annual sales from Oulu to reach approximately 800 million euros. To enhance our long-term competitiveness and profitability, we initiated a restructuring program in 2023. This includes redundancies and the closure of several production units with limited long-term viability. Through these actions, we achieved an annual adjusted EBIT improvement of 110 million euro, with full impact from the beginning of this year. Our value creation programs are driven by a structured analytical approach, targeting variable cost reductions through sourcing, operational and commercial efficiencies, such as pricing. We have now identified and are implementing about 1,900 improvement initiatives, spearheaded by around 500 project owners. These programs are advancing well across all divisions and significantly contribute to our operational and financial performance. Moreover, our profit improvement program aimed at reducing fixed costs and achieving a target of 120 million euro has been progressing successfully since its launch in February. We are now moving into the implementation phase of the finalizing the change negotiations with the Unips. Full impact is expected from the beginning of next year. Together these initiatives are contributing to our sustained profitability and competitive edge. In addition to these successful programs, we now operate with a decentralized model with P&L responsible divisions and business units within them. This means that we're also adapting to the completely new way of working. Let's now turn our attention to the recent appointments to our group leadership team. I'm delighted to welcome Niklas Rosenlev, CEPO's successor, and Stora Enso's new CFO. Niklas currently holds the position of Group CFO at the Swedish stock-listed industrial company SKF, a role he has occupied since 2019. Prior to this, from 2014 to 2019, he served as CFO at Busware and senior finance positions at Microsoft and Nokia before. Niklas holds a Master of Science degree in finance. His solid background in CFO and other senior positions in listed companies will be immensely valuable in Stora Enso's continued growth, transition, value creation and in reaching our financial targets. I'm also delighted to welcome Caroline Wagner as our new head of packaging solutions. She will replace Ab Smith, who will be retiring. Caroline is currently divisional CEO of the packaging division at the German Klingele Papier & Packaging Group, a position she has held since 2021. She has been with the company since 2019, occupying various managerial roles. Prior to that, she has held senior positions at other European corrugated packaging companies, including DS Smith and SEA. Caroline holds a degree of graduate engineer packaging technology. Her strong packaging industry insight will be important in developing and advancing our packaging solutions business. Both Niklas and Caroline will join Stora Enso latest in January 2025 and be members of Stora Enso's group leadership team. I will now end the presentation with the key takes from the quarter and how we are building a stronger future. To summarize, we are powering ahead to build a more profitable and competitive store for a stronger future. Our actions are focused on improving profits, competitiveness and cash flow. Our value creation programs have driven significant variable cost reductions, contributing to operational and financial performance across divisions. Additionally, our focused profit improvement efforts to reduce fixed costs have meaningfully enhanced our earnings and cash flow, reflecting our commitment to financial stability. And based on our performance analysis and market trends, we expect our full year 2024 adjusted EBIT to be significantly higher, meaning plus 50% and above than the €342 million in 2023. Looking ahead, we anticipate further progress and remain dedicated to investing in resources that deliver exceptional service to our customers and robust returns to our shareholders. Thank you for your attention, and now we are ready to take your questions.