Stora Enso Oyj

Hello, everyone, and welcome to Stora Enso's third quarter 2024 results presentation. Thank you for joining us today. I'm Hans Ulström, the president and CEO of Stora Enso, and I'm here with our CFO, Seppo Parvi. Today's presentation is titled Continued Growth and Earnings Improvement. We will guide you through our performance and share insights into our outlook for the fourth quarter. We will also address any questions you might have to extend. So now let's shift focus to the key highlights of the quarter. We achieved a continued profit improvement compared to the same period last year, primarily driven by price increases and ongoing cost-saving actions. And we are encouraged to report an increase in our adjusted EBIT for the fourth consecutive quarter. Notably, our packaging materials, biomaterials, and forest segments have performed we recognized the challenges faced by our packaging solution and good product segments and are focusing on navigating the weak markets in both segments. In October, our focus was clear to take decisive actions that would solidify our financial standing and retain the value of our assets. Although we achieved a reduction in our net debt to EBITDA ratio, we still remain above our target of 2.0%. We have therefore decided to sell approximately 12% of our forest assets in Sweden. In total, our Swedish forest assets cover 1.4 million hectares with a value of 6.3 billion euros. In addition to strengthening our balance sheet, it would also underscore and expose the economic value and resilience of our forest holding. Regarding the Bay High Packaging Board production site, after thorough review and negotiations, we decided to retain our Bay High site and forestry business, recognizing that the value in owning these assets is higher than the achievable selling price. We are confident that Stora Enso is the best position to continue operating the site going forward. And given the recent global cost escalation of wood and logistics, the relative cost competitiveness of the Bay High site has improved. This choice aligns with our long-term strategic goals, and our commitment to maintaining the global leadership in fiber-based packaging market is firm. We believe in the long-term value of this asset and its potential to support our core operations without requiring significant capital expenditure mid-term. The Bay High site will be developed through a continued focus on operational excellence, cost optimization, and product development. And by optimizing the product mix at Bay High, we are not just maintaining but enhancing our position, especially in the Asia-Pacific market. So let's move to our Q3 result and the contributing factors in more detail. Our value creation programs focused on sourcing, operational and commercial efficiencies are making progress across all divisions. Group sales increased by 6% or €134 million, reaching nearly €2.3 billion. This growth was driven by higher prices in all divisions except packaging solutions and increased deliveries, particularly in packaging materials. However, these gains were only partly offset by the negative impact of structural changes, such as the closure of the HOOP board unit in the Netherlands and the Sunila pulp production site in Finland. HOOP adjusted EBIT increased to 175 million euros up from 21 million euros last year, meaning our highest operational EBIT since the first quarter of 2023, and the adjusted EBIT margin rose to 8% from 1% last year. This improvement was driven by the higher top line that more than offset the higher fiber costs. Cash flow from operations amounted to 271 million euros, and cash flow after investing activities was 4 million euros, sustaining reduced operating working capital levels. Let's delve deeper into the key factors that influenced the adjusted EBIT. As mentioned earlier, the group suggested EBIT increased significantly to €175 million from €21 million last year. We can see on this chart that this growth from the higher sales prices and, as mentioned earlier, increased deliveries in packaging materials improved profitability by €99 million. However, fiber costs, mainly from wood, reduced margins and profitability by 80 million euros. Other variable cost categories improved, adding 60 million euros to adjusted EBIT. Fixed costs also came down by 13 million euros despite increased maintenance costs for biomaterials. And here we can see the impact from the value creation programs. Now, let's take a closer look at the division starting with packaging materials. The quarter showed strong performance with high operating rates and positive outcome from the profit improvement program. Sales rose by 11% or 112 million euros reaching 1.169 billion euros. The results were driven by higher volumes and significant increased container board prices. Furthermore, the consumer board prices increases were successfully applied to renewed contracts, which, important to note, represents only a small portion of the total volume. Demand remains stable, but ordering flow across all segments weakened in the third quarter due to challenges in market recovery caused by slow retail trade growth. Adjusted EBIT grew by €107 million to €73 million, driven by improved top line and lower fixed costs. And adjusted EBIT margin increased to 7%. Elevated fiber cost was offset by reductions in energy, chemicals, and other variable costs. Now, continuing with the packaging solutions division, where we continue to navigate through challenging market conditions. The division's performance remains burdened by substantial margin pressure due to market overcapacity. Consequently, sales declined by 2% to €262 million, primarily because of lower pricing levels, though volume saw a minor improvement. Adjusted EBIT fell by €21 million to a negative €6 million. The profitability of the division suffered significantly due to higher margin pressure stemming from difficulties in passing through the sequential increased container board costs. Additionally, the ramp-up of the new corrugated packaging site in the Netherlands burdened the result. These factors collectively underscore the considerable challenges the division encounters in sustaining profitability in the current market conditions. Let's take a look at the biomaterials division. In biomaterials, overall pulp demand weakened during the low season and due to new market capacity being ramped up. Global inventories rose above the five-year average. Sales increased by 10% or by €36 million to €380 million, primarily driven by higher sales prices, although sequentially pulp prices fell across all grades and markets. Deliveries decreased due to weakened demand and planned annual maintenance shots. Adjusted EBIT increased by €39 million to €43 million. Adjusted EBIT margin increased to 11% from 1% last year. Profitability improved thanks to higher sales prices, although this was partly offset by increased planned annual maintenance costs and higher fiber costs. Shifting focus to the good products division, we were impacted by continued low demand. Wood products struggled with continued weak markets and low construction activity, but saw slight increases in volumes and prices. Building activity remained low, keeping demand for cross-laminated timber and laminated veneer lumber down. Sales rose by 3% on 9 million euros, reaching 359 million euros. Adjusted EBIT improved by 19 million euros to a negative 2 million euros, thanks to higher volumes and prices, reduced fixed costs, and one-off insurance compensation of 10 million euros, which offset increased raw material costs. Ongoing cost-saving measures helped to improve the results. Now, let's have a look at the forest division that continued its strong performance also this quarter. The Forest Division experienced continued high demand for all wood assortment in the Nordics. Sales saw a significant increase of 30% or 161 million euros to a total of 695 million euros. This was primarily driven by higher volumes and rising wood prices both year on year and quarter on quarter. The third quarter adjusted EBIT reached a record high, increasing by 22 million euros to 81 million euros. This reflects the strong operational performance of the group's forest assets and wood supply. The value of our total forest assets remains stable at 8.8 billion euros, equivalent to 11 euros and 11 cents per share. I will now hand over to Seppo to go through details of some key financials. Over to you, Seppo.

Thank you, Hans. And let's start with the net debtor. EBIT day ratio and operating working capital slide. Profit Improvement Program initiative during the first quarter this year set an adjusted EBIT improvement target of 120 million euros. Full impact is expected to be visible from the beginning of next year, 2025. Also at this, our value creation actions aimed at reducing variable costs in the medium and long term have shown significant progress. These efforts have contributed to improved earnings, cash flow, and improving our leverage ratio. Notably, we have improved our net debt-to-exhaustive EBITDA ratio quarter-on-quarter to 3.1 now, although it remains above our target ratio of 2.0. Operative working capital improved compared to last year and stayed consistent with the previous quarter. To further strengthen our financial position, we are planning to and we are preparing to sell approximately 12% of our forest assets in Sweden. This sale is anticipated to reduce both depth and further enhance the balance sheet. Then let's move to the next slide and look at the long-term financial targets. The current business environment is impacting our ability to meet all long-term financial targets. However, encouragingly, we are seeing recovery in some financial targets. As Hans previously stated, we are executing measures to reinforce our business for current requirements, while also planning for continuous improvements and future competitiveness. As mentioned earlier, sequentially, we have improved our net debt to exhausted EBITDA ratio. However, we are still behind year on year. Except for forest division, all divisions are still below our return on capital targets. In regard to this year's dividend, our board is evaluating the possible second payout and will make a decision by the end of this board. And now back to you, Hans, for an overview on sustainability goals and market outlook.

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, focusing on climate change, circularity, and biodiversity. In terms of climate change, we are enhancing energy efficiency, transitioning to renewable energy sources, and increasing our use of non-fossil electricity. These efforts have led to a 49% 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. Stora Enso remains fully committed to the long-term target to achieve a net positive impact on biodiversity in its own forests and plantations by 2050 through active biodiversity management. And after the environmental incident in Finland in August, Stora Enso has and continues to introduce robust measures to prevent similar events from happening ever again. Now, moving on to the sequential market and business outlook for the fourth quarter. I will now cover the market and business outlook for the rest of this year. Stora Enso anticipates that the gradual market recovery will slow down from the third to the fourth quarter, which is expected to adversely impact our fourth quarter's profits. Additionally, we face ongoing market volatility, including high inflation and potential labor strikes and continued high good costs, which may affect demand and pricing through year end. With that as a background, I will now comment on the outlook per division, starting with our largest division, packaging materials. The fourth quarter is typically a low season in the division. Here we expect to face challenges with reduced volumes due to weaker demand and our annual maintenance shutdowns. We will see the impact of price increases in consumer board and container board. However, the average price across the division will be lower. This is due to product mix. with a higher portion of lower-priced container board compared to the higher-priced consumer board products, as we are having shutdowns in our big consumer board mills. High wood costs continue to be a primary concern, and the weak ordering flow from the third quarter makes our outlook for the fourth quarter uncertain. Market demand in packaging solution segments remains unpredictable and volatile, influenced by weekly fluctuations, and over capacity in western europe we anticipate a sequential decline in volumes due to seasonal effects with no significant uplift expected from peak periods margin growth is constrained by ongoing expenses related to increased container board prices and ramp up of the new corrugated site in delhi in the netherlands This site will be the world's largest corrugated box site when up and running. In biomaterials, demand will vary across regions and segments, but on average, it is expected to remain unchanged in the division quarter on quarter. In China, we anticipate a rise in demand due to lower inventories, favorable seasonal demand, and lower prices. In Europe, demand for certain paper products is expected to weaken slightly. Older demand for fluff pulp is projected to remain stable. Good prices expected to be higher in the Nordics while or expected to be high in the Nordics continuing on a high level while chemical prices are expected to stabilize. In good products we expect an increase in demand for plastic zone products and heating pellets driven by seasonal factors. Demand for our building solutions is also expected to drive higher volumes. While raw material costs are expected to remain in line with the third quarter this year, elevated wood costs are anticipated to continue with a year-on-year increase. And finally, our forest division, we expect the wood market to remain constrained in the Baltic Rim due to shortage driven by increased demand for industrial wood. We expect a continuation of our robust and sustainable financial performance into the fourth quarter. We also anticipate that general cost inflation, particularly affecting logistics and harvesting costs, will impact the fourth quarter. With this outlook, I will move to the key takes and how we are building a stronger future. To recap, our third quarter of 2024 has shown solid performance and decision-making to ensure financial stability and growth. Our actions are focused on improving profits, competitiveness and cash flow. Our value creation programs have delivered significant variable cost reductions, contributing to operational and financial performance across divisions. And this year's profit improvement program is on track to deliver on its target of 120 million euros in fixed cost savings by 2025. We have decided to sell approximately 12% of our 1.4 million hectares of Swedish forest assets, which are valued at 6.3 billion euros, to strengthen our balance sheet. And after a thorough review and negotiations, we decided to retain our Bay High site and forestry business, recognizing that the value of these assets in our own use exceeds the achievable selling price. Furthermore, we are well on track to deliver on our guidance and expect our full year 2024 adjusted EBIT to be significantly higher, meaning plus 50% and above than the 342 million euros in 2023. But before we conclude, I want to recognize our CFO, Seppo Parvi, who will be departing now by the end of this month to pursue new opportunities. Seppo has made significant contributions to Stora Enso over the past 10 years, and we are truly grateful for his dedication and impact. We wish you, Seppo, all the best for your future endeavors. Thank you, Seppo, for your commitment and for your valuable service. Thank you for your attention, and now we are ready to take your questions. And pass on.