Stora Enso (OTC:SEOAY) (STERV.HE), a leading provider of renewable solutions in packaging, biomaterials, wooden construction, and paper, announced in its Third Quarter 2024 Results Presentation a continued profit improvement with a fourth consecutive quarter of adjusted EBIT growth.
The company's adjusted EBIT reached €175 million, marking a significant increase from €21 million year-on-year. Group sales rose by 6% to nearly €2.3 billion, supported by strong performances in several segments. Despite expecting a challenging fourth quarter due to market volatility and high wood costs, Stora Enso is on track for a robust financial performance, with a significant increase in full-year adjusted EBIT projected.
Key Takeaways
- Adjusted EBIT for Q3 2024 grew to €175 million, up from €21 million year-on-year.
- Group sales increased by 6% to nearly €2.3 billion.
- Strong segment performances in Packaging (NYSE:PKG) Materials, Biomaterials, and Forest.
- Plans to sell 12% of Swedish forest assets valued at €6.3 billion to strengthen the balance sheet.
- Anticipated challenges in Q4 due to market volatility and high wood costs.
- The company aims for €120 million in fixed cost savings by 2025.
Company Outlook
- A 50% increase in full-year adjusted EBIT expected compared to €342 million in 2023.
- No plans for further shutdowns of capacity at this time.
- Focus on operational efficiency and cost-saving measures to improve profitability.
Bearish Highlights
- Packaging Solutions segment faces challenges due to market weakness.
- High wood costs and volatile market demand, especially in Western Europe.
- Seasonal low demand and maintenance shutdowns in Q4 may lead to reduced volumes in Packaging Materials.
Bullish Highlights
- Strong performance in Packaging Materials, Biomaterials, and Forest segments.
- Retention of the Beihai packaging board site for its long-term value.
- New De Lier site in the Netherlands expected to impact margins positively in the future.
Misses
- Overall average price expected to decline due to a higher mix of lower-priced containerboard.
- Seasonal factors driving demand for plastic zone products and heating pellets, with a soft retail market potentially hindering demand peaks.
Q&A Highlights
- Beihai mill in China aims to increase output despite overcapacity in the folded boxboard market.
- A fraction of consumer board contracts up for repricing in Q1 2024, with significant portions renewed annually.
- Oulu 750 production line to proceed without delay, adding 1 million cubic meters of wood consumption annually.
- The strategic sale of 12% of forest assets in Sweden aimed at reducing debt and showcasing asset value.
Stora Enso's CEO, Hans Sohlström, reported that despite the current market challenges, the company has managed to sustain its growth trajectory. With the strategic sale of a portion of its forest assets and the retention of the valuable Beihai site, Stora Enso is positioning itself for long-term profitability and sustainability. The departure of CFO Seppo Parvi at the end of the month marks the end of a significant era for the company, but the focus remains on enhancing profitability and cash flow.
The earnings call also shed light on the profitability and capacity challenges in China and the Oulu mill, with emphasis on operational efficiencies and maintaining profitability amidst these challenges. The company's commitment to improving profitability and reducing net debt relative to EBITDA for the second consecutive quarter was reiterated, highlighting the importance of cost efficiency and value capture initiatives to enhance shareholder value.
Full transcript - None (SEOJF) Q3 2024:
Hans Sohlström: Hello, everyone, and welcome to Stora Enso's Third Quarter 2024 Results Presentation. Thank you for joining us today. I'm Hans Sohlström. I'm 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 towards the end. 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 well contributing positively to our results. However, we recognize 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 financing and retain the value of our assets. Also, 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. In addition to strengthening our balance sheet, it would also underscore and exposed to economic value and resilience of our forest holding. Regarding the Beihai packaging board production site, after thoroughing review and negotiations, we decided to retain our Beihai 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 sites going forward. And given the recent global cost escalation of wood and logistics, the relative cost competitiveness of the Beihai 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 midterm. The Beihai site will be developed through a continued focus on operational excellence, cost optimization, and product development. And by optimizing the product mix at Beihai, we are not just maintaining but enhancing our position especially in the Asia Pacific market. So let's move to our Q3 results 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 Hope board unit in the Netherlands and the Sunila pulp production site in Finland. Group adjusted EBIT increased to €175 million, up from €21 million 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, and cash flow after investing activities was €4 million, sustaining reduced operating working capital levels. Let's dwell deeper into the key factors that influenced the adjusted EBIT. As mentioned earlier, the group's adjusted 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 good reduced margins and profitability by €80 million. Other variable cost categories improved adding €60 million to adjusted EBIT. Fixed costs also came down by €13 million 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 reaching €1.169 billion. The results were driven by higher volumes and significant increased containerboard 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 remained 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 continued 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 through though volumes 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 containerboard 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 weaker demand and planned annual maintenance shuts. 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 Wood Products division, we were impacted by continued low demand. Wood Products struggled with continued weak markets and low construction activity but so a Wood 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% or €9 million reaching €359 million. Adjusted EBIT improved by €19 million to a negative €2 million, thanks to higher volumes and prices reduced fixed costs and one-off insurance compensation of €10 million, 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 assortments in the Nordics. Sales saw a significant increase of 30% or €161 million to a total of €695 million. This was primarily driven by higher volumes and rising good prices both year-on-year and quarter-on-quarter. The third quarter adjusted EBIT reached a record high increasing by €22 million to €81 million. This reflects the strong operational performance of the group's Forest assets and Wood supply. The value of our total Forest assets remained stable at €18.8 billion equivalent to €11.11 per share. I will now hand over to Seppo to go through details of some key financials. Over to you Seppo.
Seppo Parvi: Thank you, Hans and let's start with the net debt to EBITDA ratio and operating working capital slide. Profit improvement program initiated during the first quarter this year set an adjusted EBIT improvement target of €120 million. Full impact is expected to be visible from the beginning of next year 2025. Those active 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 adjusted EBITDA ratio quarter-on-quarter to 3.1 now, although it remains above our target ratio of 2.0. Operating working capital improved compared to last year and stayed consistent with the previous quarter. To further strengthen our financial position, we are planning to sell -- and we are preparing to sell at approximately 12% of our forest assets in Sweden. This sale is anticipated to reduce both debt and further income enhanced the balance sheet. Then let's move to next slide, I look at the long-term financial targets. The current business environment is impacting our ability to meet or 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 also planning for continuous improvements and future competitiveness. As mentioned earlier, sequentially, we have improved our net debt to adjusted EBITDA ratio. However, we are still behind year-on-year. Except our 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 we'll make a decision by the end of this quarter. And now back to Hans for an overview on sustainability goals and market outlook.
Hans Sohlström: 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 wood 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 containerboard, however, the average price across the division will be lower. This is due to product mix with a higher portion of lower-priced containerboard 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 a weak order inflow from the third quarter makes our outlook for the fourth quarter are uncertain. Market demand in Packaging Solutions segment remains unpredictable and volatile influenced by weaker fluctuations and overcapacity. In Western Europe, we paid 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 containerboard prices and ramp-up of the new corrugated site in De Lier in the Netherlands. This site is -- will be the world's largest corrugated box site went up and 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, although demand for fluff pulp is projected to remain stable. Good price is expected to be higher in the Nordics, while are expected to be high in the Nordics continuing on a high level, while chemical prices are expected to stabilize. In wood 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 that 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 good. We expect the 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 driven 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 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 to strengthen our balance sheet. And after a thorough review and negotiations, we decided to retain our Beihai 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% [indiscernible] than the €342 million 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.
Seppo Parvi: Thanks Hans.
Operator: [Operator Instructions] Our first question comes from Ephrem Ravi at Citigroup. Please unmute your line and ask your question.
Ephrem Ravi: Thank you. I'll use my quota of two questions wisely I hope. Firstly, on Beihai packaging, you said kind of your proceeds were or potential proceeds were less than what you value them. Could you put some numbers around it in terms of you thought the value was and what the offers on the table was, so that we can get a sense as to how much the value uplift from that decision has been. And secondly on the sale of the Swedish forest assets, the market price of forest assets. I mean according to Ludvig & Co has been declining, et cetera, and so a quick question on that is that is it the appropriate time to sell these assets? And again, what's the timing of those assets? You've announced your intention but do you have a time frame by which you hope to close this transaction. Thank you.
Hans Sohlström: Thank you, Ephrem. So first on Beihai, no we don't disclose any numbers on this. But what I can say is that since 2022 the operating environment has changed, also China is the world's largest liquid packaging board market. And we really see that a liquid packaging board for Beihai is by far the best quality liquid packaging board in China and in Asia. And we clearly see that the retaining Beihai has an importance, has a great value. We are the best owner for this asset compared to the potential prices we could have got for the assets. So we are maximizing shareholder value through this decision.
Seppo Parvi: And I would add that like I said earlier, we are not in the financial situation that we would need to save it for any price. And like we said earlier that, if we don't get the price we want we are not going to move ahead and that's why we came to this conclusion.
Hans Sohlström: And regarding the forest assets, there is lots of inbound interest in forest assets. So based on the ongoing negotiations and indications from many participants, there is a lot of interest for this asset.
Ephrem Ravi: And do you have a timing for when you would hope to close?
Hans Sohlström: Well, we – also here we take the time needed to maximize value. So as in the case of Beihai, also here the value achieved is much more important than the let's say the timing.
Ephrem Ravi: Thank you.
Operator: Our next question comes from Pallav Mittal at Barclays (LON:BARC). Please unmute your line and ask your question.
Pallav Mittal: Hi, good morning. So a question on the packaging materials, specifically on the Consumer Board segment. So destocking is now largely over and you are highlighting weaker demand going into Q4, but you are also adding a lot of capacity, FBB capacity next year. So how should we think about pricing and margins when the environment is so challenging.
Hans Sohlström: Yes. Thank you, Pallav. Well, first of all I mean we have increased prices throughout the year in containerboard but also in Consumer Board and also other competitors in this segment have announced price increases, as you know from public sources. We – when we are referring to the outlook, some weakening of the board market we're referring to the fourth quarter. Our new 750,000-tonne annual capacity consumer board line comes on stream during the beginning of next year. And we still expect a gradual improvement of demand in – for our board grades. You know that our board demand is very much driven by consumer spending and consumer confidence. And with declining interest rates, declining inflation rates, we expect that that will also drive continued recovery of demand in consumer for board price.
Seppo Parvi: And also important to note is that the 50,000 tonnes is not going to be on market on day one. It takes some time to ramp-up the machine and all that. So but what really comes to phasing of the ramp-up we come back to that later, once we are at the ramp-up stage.
Hans Sohlström: Yes. The capacity corresponds to about two years of let's say trend growth for Consumer Board.
Pallav Mittal: Sure. Thank you. So the second question I have is on forest valuation. In June and July, we saw some reports saying that the transaction prices in 2024 are down mid-single digit 5%, 6% in Sweden. How should we think about that? I know that you reevaluate only twice a year but how should we think about transaction prices in Sweden?
Seppo Parvi: Like we said earlier first of all when it comes to valuation of our forest in the balance sheet. We use three-year moving average. And of course how that moves also depends on how the sort of earlier data has been moving compared to where the market is today. Another thing is that of course prices move a bit different in different parts of Sweden as well certain regionalization on the wood market and the forest market and then depending also where the deals have been that has an effect on the statistics.
Pallav Mittal: Thank you.
Operator: Our next question comes from Andrew James at UBS. Please unmute your line and ask your question.
Andrew Jones: Hi. Just on the forest sale again. Just curious what sort of buyer you're looking for a bit more detail on how you plan to do this sale. When you say a 12% stake are we talking about certain chunks of the forest or are we talking about 12% of the holding company. And given in the past we've had SDAs pushing idea towards these transaction values if you do it in the corporate space as you usually a corporate premium on those levels. So are you expecting to sell your stake at a premium to what we're looking at in the book? Or is -- I mean could -- can you just talk to your expectations maybe not around absolute price but how you think about that price relative to what we see in the book value? Thanks.
Seppo Parvi: If I start first of all at this stage we are not commenting on the deal structure. That's something we'll come back to later. It's we are now like I said in a process to divest 12% of the forest land in Sweden, but we don't go more into details now.
Hans Sohlström: Yes. Thank you, Andrew for the question. And I mean we don't comment on the expected sales price. But what you said about, let's say, the premiums for corporate deals I guess that is publicly available information that there is some kind of a premium when there is corporate deals. But as I said we don't take time so we don't comment on the expected price in relation to our book value.
Andrew Jones: Understood. And my second question is just on the Chinese asset. Can you give us an idea for the nine-month profitability of that mill? I mean is it -- I mean is it EBITDA breakeven? Is it positive? Is it negative? And obviously given the capacity build-out we're seeing in China on the Consumer Board side. I'm curious if you see that situation improving into next year? Because it seems like operating rates are very low and there's more capacity coming. Like how do you see that turning around in the future?
Seppo Parvi: Well as a comment on the Chinese market. But when it comes to profitability of single mills and units in our company we do not comment on those. We are -- on divisional level as we also report to the market.
Hans Sohlström: Yes. And as stated before we are -- we're happy to keep the asset and we feel that is absolutely the right decision. Beihai is producing the by far best liquid packaging board quality in the market. So we are really aiming at that highest end segment with the highest quality requirements. And I think that's how we can. And when it comes to market the Chinese market there is overcapacity in folded boxboard, but we aim to increase the amount of liquid packaging board in the mix at Beihai. So that's really the -- that's really the edge of our strategy in Beihai. And of course the latest stimulus airports in China can also seem to have some positive impact on the economic development and consumer confidence in China.
Andrew Jones: Yes. Understood. Thank you very much.
Operator: Our next question comes from Charlie Muir-Sands at BNP Paribas (OTC:BNPQY) Exane. Please unmute your line and ask your question.
Charlie Muir-Sands: Good morning. Thank you very much for taking my question and best wishes to you Seppo for the future. I've got some questions on the Packaging Materials segment. Can you just clarify you mentioned that a couple of or a fraction of your Consumer Board had already been able to reprice. But I guess it's the minority, because it's mainly a contract business. How much of the share of that business will come up for repricing in Q1 of next year? And on Oulu, I appreciate you're going to revert to us on the ramp up nearer the time, but do you anticipate that making an EBIT level positive profit contribution next year? Thank you.
Hans Sohlström: Yes. Thank you, Charlie. So when it comes to the Oulu 750 ramp-up we will come back to the guidance later during next year. And...
Seppo Parvi: Second question was about contracts with new loans in Packaging Materials and till pricing at of the contracts are renewed end of the year sort of Q4, Q1. When it comes to share of total volume that's something we don't comment. But typically those are as you know annual contracts and more limited volumes are in two or three-year contracts. So a significant part is going to be come through now during the coming months.
Charlie Muir-Sands: Very clear. And just a follow-up on your comment about the Board considering paying the second tranche of the dividend. Can you just share what are the key criteria, which you think they're likely to consider in this regard, because it strikes it is a little bit strange to be on the one hand selling long-term fixed assets? On the other hand selling -- sorry, paying out more cash to share orders when you're trying to strengthen the balance sheet.
Hans Sohlström: Yes. So, Charlie, the -- of course, there is a mandate, there is authorization from the AGM to the Board to make such a decision on a second dividend payout latest by the end of this year, there are no criteria disclosed around this. So that is a decision the Board will look into then later this year.
Charlie Muir-Sands: Thank you very much.
Operator: Our next question comes from Lars Kjellberg at Stifel. Please unmute your line and ask your question.
Lars Kjellberg: Thank you for taking my questions. Back a bit to the wood situation in connection with the start-up of Oulu. I mean, it's a very challenging market as you described it right now weakening demand, et cetera. And in the midst of that you're starting up a very significant new supply addition. Would you even consider to delay that start-up just to make right away for it, as things start to clear a bit on the demand front. The other topic is, of course, structurally high wood costs in the Nordic region in totality in Finland especially and you're adding another wood-consuming asset into the mix. And UPM at the Capital Markets Day commented structural wood cost issues require structural remedies. That seems to be the case. So what are you thinking about to offset the incremental wood conversion at all or how do we do that? Or is that not a consideration that you're taking or any other steps you may take to make way for the Oulu machine and wood consumption that's coming with it.
Hans Sohlström: Yes. Thank you, Lars. So, with the Oulu 750 consumer board line, so good consumption will increase about 1 million cubic meters per year in that region. And we are not considering any delay. We will start up when we are ready. We have a lot of capital tied up into the asset, and therefore, we need to start to get payback on that capital as soon as possible. It should also be noted that when we look at the recipes of this Oulu 750 new consumer board line, there is a significant amount also of Ucaluptus pulp, which will go into the due to furnish about 250,000 tonnes per year. So also in that respect, it is taken into account in the total in the recipe and the recipe optimization and total cost structure for this folded boxboard and the other products that will be produced on the line. And we are confident that this line is -- will be the most cost efficient or one of -- at least one of the clearly most cost-efficient consumer board lines globally with this modern technology size and with the furnish setup. And then when it comes to your question about the -- yes the wood market in Finland and the Nordics, the Baltic Rim area is tight. However, when you look at the wood pay capability, the more expensive, the higher added value products you produce and integrate the better is your wood paying capability, because the share of wood cost is lower the more expensive the product is. And consumer board like folded boxboard to be produced here in this Oulu 750 facility, actually has the best wood paying capability because the price point of these products is over the cycle almost twice as high as for instance market pulp or papers. So clearly the share of wood cost is smaller. And therefore, also when you produce in a cost-efficient way with economics of scale in integrates with integrated pulp as well as then also mechanical wood products to saw milling to support with chips and dust, you can basically have the best wood paying capability with Consumer Board. And that is exactly what we what we aim to do there in Oulu.
Seppo Parvi: And also, I would add that we have very strong good outsourcing organization in that part of Finland that will also support us when ramping up of the mill. And also notice that in general overall competitive already adding the 750,000 tonnes capacity there on top of the existing capacity will obviously improve the total competitiveness of the unit as well which will then be visible in the figures.
Hans Sohlstrom: Yeah. Let's remember we had a large printing paper facility there in Oulu which was in -- which was closed down in that region. And thus, we have very good established a wood sourcing organization and context to wood forest owners and sellers from that time.
Lars Kjellberg: Just one follow-up if I may. I mean, you are of course having substantial capacity in what now is an oversupplied market. And with the logic you just said about you can pay more for wood. It's a high-priced product going upstream so to speak on the pulp side that would be less relevant. So given the challenges in pulp will that be where you would consider anything to shut down you did shut down sooner now of course right? Are you thinking any other structural measures to ease that pressure again?
Hans Sohlstrom: No, we don't have any plans of any further shutdowns. As you said we just recently shut down the Sunila pulp mill.
Lars Kjellberg: Okay. Thanks.
Operator: Our next question comes from Cole Hathorn at Jefferies. Please unmute your line and ask your question.
Cole Hathorn: Good morning. Thanks for taking the question. It's a little bit of a follow-up on Lars and also related to the Beihai decision not to dispose. My understanding was that you would post that Beihai disposal, if you had done it being able to optimize your production mix and it would help you ramp up that consumer board mill a bit faster and place some volumes. I do agree that demand hopefully is a structural downturn rather -- sorry cyclical downturn rather than structural, but wood costs are higher. We do have overcapacity. Is it not better at this stage to reduce fixed costs close Packaging Materials capacity, be it containerboard or folding boxboard and improved operating rates on your entire mill system and improve your mix would you talk about being much higher margin enabling you to focus on those better products. Do you need to kind of revisit that strategy review that you did last year on your asset base because things have changed quite a bit? Thank you.
Hans Sohlstrom: Yes. Thank you. Thank you, Cole for the question. Well, yes, you are right. I mean when we started the divestiture process in 2022, there was an idea of doing that after the divestment of Beihai to do that kind of an optimization and to serve Chinese and Asian liquid packaging bought customers from Sweden and Finland. However, the operating environment has changed quite significantly since then. Wood costs have moved up significantly in the Nordics, which also improves the relative competitiveness of Beihai in the high-end liquid packaging board grades where as I said before Beihai is the clear leader and actually the only asset in China and Asia for producing this high liquid packaging board quality. So yes and of course as a function of that, we revisit our asset optimization and that is something that we are continuously looking into. I do agree with the comment that you need to look into how do you maximize the total profitability, the total EBITDA generation and EBIT generation of your available assets depending on what is the demand, what is the what is the sales outlook. So that is certainly something we continuously look into. And I don't want to exclude any potential scenarios for the future. But we don't have currently any plans to shut down any capacity.
Seppo Parvi: And also like we have said earlier, we are targeting not only European market but also Northern American market where we believe that we are in a good cost position quality position to get some volumes also and additional volumes.
Hans Sohlström: The folder boxboard from Oulu is providing 20% to 30% yield advantage actually compared to domestic US competing grades and much better quality properties, optical properties, strength properties, folding properties and so forth. So there is a significant part of the Oulu 750 sales, which is directed to the North American market.
Cole Hathorn: And then maybe just as a follow-up. We've seen Germany recycled containerboard prices move a little bit lower in October. But the cost dynamics are quite different to virgin containerboard and the entire industry is talking about value over volume. Do you have any thoughts on whether there could be a divergence between the virgin prices and the cycle prices? And while I can just to confirm on Oulu you've talked about low-cost machine, but am I right to think that it also improves the cost per tonne of the existing production at that site just because you absorbed greater fixed cost per tonne there?
Hans Sohlström: Yes, absolutely right you're Cole, starting up the second huge line there in Oulu will improve also the cost efficiency of the existing kraftliner machine there in Oulu absolutely exactly according to the logic you described. And when it comes to the decoupling of recycled fiber-based test liner and kraftliner, yeah, I mean the historically you can see that there is a variance between these. And it is true we have heard about some spot offers in the market for recycled containerboard, which are somewhat on a lower level than previously. However is that then temporarily, or is it more like that remains to be seen.
Operator: Our next question comes from Patrick Mann of Bank of America (NYSE:BAC). Please unmute your line and ask your question.
Patrick Mann: Thank you very much and thank you for the presentation. I just want to go back to the strategic decision to sell a portion of the forest. Can you just maybe talk us through the reasoning here? I mean, I think Lars touched on it when he said we've got high wood costs and now you're becoming less integrated into wood. I mean, how did you decide on 12%, and is the idea here as well as to reduce leverage to get people to appreciate that this is an asset, which can be monetized and potentially get it into your share price rating? Or is it really just about deleveraging? So, yeah, and then maybe how you selected the 12%. I mean, is this about areas where you feel that you'll be able to get wood supply contracts at a reasonable price, or at good volume? Or -- yeah, I think in general just talk us through the strategic planning around the sale and why that amount and why now?
Hans Sohlström: Yes. Thank you very much. So first of all, the 12% that is selected there is representative for our forest ownership in Sweden. So it is fully representative. And when it comes to the reasoning here, it's is two-fold. It is debt reduction as a key driver here. But it is also exposing the value of forest to really expose what is let's say, a true representative value of our forest holdings. And then, we are also looking into a long-term supply wood supply agreement with the new owner of the assets. So it's almost like eating a cake and keeping it at the same time, as we will continue getting good from this new entity. What I also can say is that, as Seppo earlier said, we don't disclose profitabilities of our mills. But what we can say is certainly that, divesting forest has a much smaller marginal impact on EBITDA compared to for instance divesting Beihai. So if you think about the net debt to EBITDA impact we get a clearly higher impact from forest deal.
Patrick Mann: I mean, just to push a little bit further on that strategically, if it's getting your cake and eating it too why stop at 12%? Why own any of the forest, right?
Hans Sohlström: Well these are our current plans and this is what we have disclosed and published.
Patrick Mann: Okay. Thank you very much.
Operator: Our next question comes from James Perry at Citi. Please unmute your line and ask your question.
James Perry: Good morning. Thanks for the presentation. Sorry to keep coming back to the forest sale. But are you able to share with us to where exactly in Sweden the forest you're selling is? Or is it holding scattered all over the country? And secondly, on Packaging Solutions as you said margins seem to have been pressured for some time here on the overcapacity even as paper packaging demand has returned a bit. I know, it's difficult to quantify but just how far removed are we from dynamics that would allow you to reach your 15% return target? And is there any prospect of reaching that level even in the next few years do you think?
Seppo Parvi: Maybe I'll take the first question first and before handing over to Hans the forest we own 9% Central growth Sweden. And then the awe are talking here is of course in that region where we have our ownership.
Hans Sohlström: Yes. And so it's basically Varmland -- that part of Sweden in the Central part where we have to make part of our forest ownership. So this 12% is representative for our total forest ownership in Sweden. And then this was the assignment I got. If you read the announcement news, when I took over as CEO in September of last year our Chairman of the Board said that, my job is to reach our financial targets. So that's what we are working on in a very systematic way and we are getting there. We are getting closer all the time. And that's what we are -- that's what we're working on.
Operator: Our next question comes from Charlie Muir-Sands at BNP Paribas Exane. Please unmute your line and ask your question.
Charlie Muir-Sands: Thanks. I just have one follow-up question. I just wondered how much of the EUR 120 million fixed cost saving program was already visible in Q3 or will be visible in totality in 2024. I appreciate it, could be fully visible in 2025 just on a double count for year-on-year benefit you're anticipating on receiving there? Thank you.
Seppo Parvi: Yeah. Without going too much into details, there's very small part is visible this year like I said, we started the program early this year the refinance union negotiations end of Q2, and then we are now in the implementation phase. So, like I said, it's fair to assume that Packaging Material part is coming for next year starting from the beginning of the year like I said earlier.
Charlie Muir-Sands: Okay. Thanks.
Operator: Our next question comes from Andrew Jones at UBS. Please unmute your line and ask your question.
Andrew Jones: Hi, guys. Just with regard to the accounting concerns that you've put some press releases out on. I'm just curious about the motivation behind there was delayed payments at the end of the quarter. Is that something that you regret given the sort of, I guess, hit to the company's reputation that came from that? Or do you think it was kind of a necessity because of pressure maybe from credit agencies and so forth if you haven't done that we may have seen some sort of credit agency-related downgrade. I guess was it a necessity? Or was it something that you regret given the reputational hit? Thanks.
Seppo Parvi: If you look at the totality and the volume in question here like we said this was in total on average €70 million in end of Q2 and in Q3. And like always working capital actions profit employment actions, et cetera, they come from a number of actions that this was one of those. If you look at this as a single action is relatively small not material in any significant way. So this would not be -- would not have been any triggering point when it comes to rating or similar things. Also important to notice that we have no financial covenants. As you know typical financial covenant could be as netted to debt-to-EBITDA ratio. And in that sense also no triggering points that one would need to be worried about.
Hans Sohlström: Yes I want to emphasize what Seppo said here. It's the €70 million represents about 6% of our annual operating cash flow. And in fact the impact was neutral in Q3, because -- it was done in Q2. So it had a certain positive cash flow impact there, but as it had been. And it's a transfer of cash flow between the quarters. As you know and because it was done in Q3 another time, it means that the impact was neutral, because it had been done in Q2. And now we have clearly said that now it is stopped. We don't do it anymore. So on the full year there is a neutral impact out of this, I do want to underline that payment statistics is public information in Sweden. So anyone can go in and check the payment accuracy of payments delays of payments in Sweden from Bullock's market. And if you go in there and you make research you will notice that in fact Stora Enso is not a poor payer. In fact, we are quite a good payer when it comes to payment accuracy. That's the public information available in Sweden. But of course, as we have stated also now within size thinking about the headlines of this and the potential impact on our brand and reputation we took cash flow optimization one step too far. That's clear.
Andrew Jones: Okay. That's clear. Thank you.
Operator: Our last question comes from Cole Hathorn at Jefferies. Please unmute your line and ask your question.
Cole Hathorn: Thanks for taking the follow-up. And I'd just like to have questions on the market trends. In Packaging Solutions, I was just surprised to call out a bit of seasonal weakness there. Normally we have kind of the kind of the Black Friday and the Christmas boost. And I'm just wondering is this more your on packaging specific items where they're kind of more skewed to food that's impacting that? Just anything you can call out on the dynamics there on the Packaging Solution box volumes? And then in Wood Products you talked about improvement in sawn wood, and again, normally we just have a bit of a softer winter period. So I'm just wondering if there's something I'm missing on the sawn wood side. Thank you.
Hans Sohlström: Yes. Thank you, Cole. Well, yes, you are right regarding Packaging Solutions. So, it's mainly -- we are -- the result is burdened by the ramp-up of the De Lier site in De Jong. It's a €200 million investment in total that we have been ramping up now throughout this year and the ramp-up is continuing. And as said, that site with the old factory and the new factory, that site when ramped up will be the world's largest, the world's most efficient corrugated box plot, the world's most efficient and largest. But this former De Jong or the De Lier site be U.S. and Europe as we call it is serving to a large extent the vegetable business; flower, vegetables, food segment. And there basically the season is there seasonal weakness right now combined then with the ramp-up ongoing. Regarding sawn woods, I mean there has been some price increases taking place and there has been some improved demand here in Q3 but still let's say the construction market continues to suffer as we know I mean there is no major uptick in construction market in building permits and so forth. So, that still remains to be seen when we can see the construction market really coming back and moving up. It could be -- it could also be happening very quickly then when construction restarts again because there is of course now a lot of pent-up demand around new buildings and construction.
Seppo Parvi: And when it comes to Black Week and Christmas and our reference in the outlook. But we mean obviously there is sort of a big, but because of the soft retail market and consumer behavior, we don't expect similar approve of peak in the demand as they would have been in the normal year if you can say that that's what we -- what was the purpose of the message there.
Cole Hathorn: Thank you.
Operator: There are no further questions. I shall now pass back to Hans Sohlström and Seppo Parvi for closing remarks.
Hans Sohlström: Thank you very much. Thank you all for joining in and thank you for your good questions and your interest. You can clearly see we are totally determined to improve the profitability of this company. Q3 was the fourth consecutive quarter-on-quarter improvement here and we are also committed to reduce the debt burden. Q3 was the second consecutive quarter of reduced net debt to EBITDA. We're continuing to focus on those items we can affect, so cost efficiency competitiveness and we are doing great progress in our value capture programs value capture work throughout the whole organization. So, we are fully determined to deliver shareholder value. Thank you very much and have a good day.
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