Jouko Karvinen Helsinki, Finland CEO, Stora Enso Oyj
Challenges for the Forest Products Industry of the North Stora Enso CEO Jouko Karvinen 14
Introduction Challenges for the forest products industry of the north Steps to address challenges
Stora Enso in Brief Stora Enso is a forest products company producing newsprint, magazine paper, fine paper, consumer board, industrial packaging and wood products 14.7 million tonnes* of paper and board 7.4 million m 3 of sawn and processed wood products Sales 2006 EUR 13 billion* Approximately 39 000 employees* in more than 40 countries Market capitalisation EUR 9.5 billion (31 Oct 2007) Shares listed on Helsinki, Stockholm and New York stock exchanges * Continuing operations
Selected general trends From To Unlimited resources Consumption focus in Europe and NA Lack of information, analytical tools, communication Capital constraints Constraints of wood fibre, energy, water at competitive cost Rapid expansion in emerging economies Ever more powerful IT, databanks, communication, analysis Abundance of money in the world seeking profitable investment targets
Introduction Challenges for the forest products industry of the north Steps to address challenges
Change Forces Affecting European Forest Industry - examples Product demand moderately Product prices Overcapacity Long-term assets vs. short term challenges Wood supply pressures Tight wood markets Bioenergy competition Other cost pressures e.g. energy Customer needs Sustainability How to turn these into a competitive platform?
Fastest demand growth in emerging markets Long-term Demand Growth (%/a) of Paper & Board by Region through 2020 6 India 5 4 3 2 Russia China Eastern Europe Middle East Latin America Africa Rest of Asia The market growth in Asia is two times bigger than in Europe and North-America combined! Average 2.1%/a Oceania 1 Western Europe 0 North America Japan 0 20 40 60 80 100 Share of consumption in 2004, % Source: Jaakko Pöyry
1100 1000 900 800 700 600 500 400 Paper price development in Germany 2000-2007 EUR/ton Jan 00 Feb 00 Mar 00 Apr 00 May Jun 00 00 July 00 Aug 00 Sept 00 Oct 00 Nov Dec 00 00 Jan 01 Feb 01 Mar 01 Apr 01 May 01 June 01 July 01 Aug 01 Sept 01 Oct 01 Nov 01 Dec 01 Jan 02 Feb 02 Mar 02 Apr 02 May 02 June 02 July 02 Aug 02 Sept 02 Oct 02 Nov 02 Dec 02 Jan Feb 03 03 Mar 03 Apr May 03 03 June 03 July Aug 03 03 Sept 03 Oct 03 Nov Dec 03 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04 June 04 July 04 Aug 04 Sept 04 Oct 04 Nov Dec 04 04 Jan 05 Feb 05 Mar 05 Apr 05 May 05 Jun 05 Jul 05 Aug 05 Sep 05 Oct 05 Nov 05 Dec 05 Jan 06 Feb Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Newsprint 45 g LWC Offset 60 g CWF Sheet 100 g SC Roto 56 g UWF - A4 Copy (B grade) Source: Pulp & Paper Week
Coated Magazine Paper (Example) Regional supply/demand balance - 2006 North America Consumption 6,001 Capacity 5,710 Capacity Consumptio n Latin America Consumption 505 Capacity 205 W. Europe Consumption 6,843 Capacity 10,600 E. Europe Consumption 767 Capacity 0 6843 Other Asia: Consumption: 1,110 Capacity 880 10600 Japan Consumption 2,125 Capacity 1,890 Sources: Cepiprint/PPPC Africa Consumption 70 Capacity 0 Oceania Consumption 355 Capacity in 80 1,000 tonnes
Stora Enso Wood Supply in Europe Wood sourcing in 2006, million m 3 sub Other countries 0.1 Sweden 7.1 11.4 Continental Europe 13.0 Finland 2.9 The Baltic Countries 7.1 Russia Total amount of wood (roundwood, chips and sawdust) delivered to own mills was 41.6 million m 3 (solid under bark) in 2006. The map describes the wood volumes which were sourced from each region.
Cost at Mill Gate Average wood costs up 15 to 25% Marginal wood costs up 45 to 65% 100 90 80 70 60 50 40 30 20 10 0 Example Finnish Short Fibre Pulp Wood 2007 2006 45% 0% 20% Relative 40% Purchase Volume 60% 80% 100% Relative Purchase Volume 20% 65%
Recovered paper prices in Germany 2006 2007 EUR / tonne 120 9/07 EUR108 +54% year-on-year 100 Used mainly for newsprint 80 9/06 EUR70 9/07 EUR93 +60% year-on-year 60 40 9/06 EUR58 20 Used mainly for packaging grades 0 2/06 4/06 6/06 8/06 10/06 12/06 Month / Year 2/07 4/07 6/07 8/07 Mixed paper (1.02) Deinking (news and pams) (1.11) Source: Euwid
Biofuels could capture a significant share of the global fuel market Billion liters As one of the largest forest based companies, Stora Enso is in a great position to build a strong presence in the biomass and bio-energy fields. Source: Tecnon; McKinsey
Introduction Challenges for the forest products industry of the north Steps to address challenges
Steps to address challenges Past 7 months: Simplify De-layering the organization From 4 divisions to 7 business areas Clarify the responsibility of individual businesses Increase transparency internally and externally Focus Sale of North American businesses Releases low returning capital Focuses the business Potential up-side retained Cut Invest Further capacity closures and divestment announced in Europe Will significantly reduce costs, particularly for wood Margins will improve at remaining mills Capital employed reduced Significant cuts in administrative personnel and costs Veracel pulp mill & plantations Pulp and paper mill project pre-feasibility study in Russia Consumer Board, New Business Innovations
What s next on agenda Changing industry fundamentals and dramatically higher wood costs require robust actions Stora Enso is determined to achieve its financial targets by all means The guiding objective is higher profits - through cost leadership and innovation, not size or market share Winning businesses will be grown aggressively Participate in industry restructuring
Conclusions From World largest paper & board company ROCE 2002-2006 below cost of capital To Regional clear leader ROCE = 13% over the cycle Production focus Cost issues Capacity driven Customer driven Cost leadership Innovations & differentiations
Speakers notes
Demand outlook mixed but overall healthy Overall, there is still healthy growth in the global paper & board consumption However, the demand outlook varies by: Product segment Geography In general, strong growth is foreseen in emerging markets across all product segments In mature markets the growth is generally slower and the outlook more mixed: Certain product segments stagnating or even declining, e.g. Newsprint in North America E.g. commercial printing and packaging end uses still expected to grow steadily also in mature markets
Near-term Market Outlook Europe Publication Paper Fine Paper Packaging Boards Wood Products Demand Development Positive economic outlook and advertising business expected to support demand. Outlook remains positive for both coated and uncoated. Seasonally normal demand expected. Slow demand; weak outlook as stock levels are high. Price Development Prices for newsprint are rather stable. Some pressure remains for non-contractual magazine paper; prices, however, are expected to stabilise in Q4. European price outlook remains positive. Prices are generally stable. Increases are being implemented in some business segments. Heavy price pressure, especially in lower grades.
Long-term Demand Growth by Product Area through 2020 World paper demand is expected to grow by 2.1%/a in the long term. Tissue, coated woodfree papers and containerboards will be the fastest-growing product areas. 3.0 2.5 Demand growth, %/a Uncoated woodfree Coated woodfree Tissue Containerboards Average 2.1%/a Cartonboards 2.0 Coated mechanical 1.5 1.0 Newsprint Uncoated mechanical 0.5 0.0-0.5 Sack paper Other grades 0 20 40 60 80 100 Share of consumption in 2004, %
also the absolute volume growth regarding Growth of total paper and board consumption, 2007 2012 (Million tonnes) ~75% of volume growth 7.2 7.1 0.3 2.0 65.0 10.5 4.3 4.9 2.1 48.4 26.6 Total growth in 5 years China Rest of Asia excl. Japan Latin America Eastern Europe & CIS Middle East Total Western Europe North America Japan Rest of the World 28% 20% 15% 22% 16% 23% 8% 7% 1% 13% 14% Total Source: RISI
China s share of global Paper & Board capacity growth has reached ~50% Share of global capacity growth, % 100 80 Rest of World Japan Other Asia China 60 Europe 40 20 North America 0 Source: Jaakko Pöyry Consulting 1970s 1980s 1990s 2000s
Coated Magazine Paper (Example) Regional supply/demand balance - 2006 WORLD Consumption : 17 825 Capacity: 19 525 Ratio: 91% North America Consumption 6,001 Capacity 5,710 Capacity Consumptio n Latin America Consumption 505 Capacity 205 W. Europe Consumption 6,843 Capacity 10,600 E. Europe Consumption 767 Capacity 0 6843 Other Asia: Consumption: 1,110 Capacity 880 10600 Japan Consumption 2,125 Capacity 1,890 EUROPE (incl. Russia) Consumption : 7 610 Capacity: 10 600 Ratio: 72% Sources: Cepiprint/PPPC Africa Consumption 70 Capacity 0 Oceania Consumption 355 Capacity in 80 1,000 tonnes
Latin American pulp producers have a significant cost advantage BHKP, USD/Adt (indicative) 700 600 500 Delivered costs to Rotterdam 400 300 200 100 Brazilian pulp producers Manufacturing costs 0 0 5,000 10,000 15,000 20,000 25,000 - Cumulative capacity, 1 000 t/a - Source: Jaakko Pöyry
Supply trends Structural overcapacity in Europe short/medium term Restructuring, closures and consolidation in the mature markets in North America and Western Europe Significant cost differences between regions e.g. Southern hemisphere hardwood pulp manufacturing cost roughly half of the Nordic cost levels Major paper production capacity growth in China Major pulp production capacity growth in Southern Hemisphere, especially in Latin America Cost increases (e.g. energy) and new competing uses for wood raw material - bioenergy
New Growth Markets Main Drivers and Focus Areas Main drivers: Low-cost local resources (raw materials, labour) -> competitive fibre Fast economic growth, low GDP per capita -> demand growth Focus areas for Stora Enso: Fibre resources, low fibre costs, growing markets Latin America Russia China - 2 sawmills - 2 packaging board mills - 1 packaging board mill being constructed - 1 fine paper mill - 1 joint venture SC-paper mill being - 1 joint venture pulp mill constructed - 1 coated mechanical paper mill - Plantations - 1 sawmill - Plantations
Russian export duties Announced roundwood export duty increases: 1 July 2007: from EUR 4 to EUR 10 1 April 2008: 20%, or EUR 15 min. 1 January 2009: 80%, or EUR 50 min. Duties pertain to roundwood grades, with the exception of birch timber with diameter less than 15cm Aspen duties have been introduced at EUR 5 per cubic metre If a reasonable solution to the above is not found soon - further production rationalisation will result
Superior sustainability performance forest industry cornerstone Sustainability is built on environmental, economic and social pillars The industry is committed to sustainable forest management We as an industry have had challenges in promoting and getting credit for our good actions CO 2 issues ever more important forest industry can make this a competitive advantage
Forest Industry Carbon Cycle Wood products act as carbon sinks. In addition, their production process produces biofuels. 1) Trees absorb CO 2 (both fossil and nonfossil) from the atmosphere. 2) Trees store carbon. This carbon is transferred and stored also in wood products. 3) Use of biofuels and recycling of these products release non-fossil CO 2 which is again absorbed by the trees. Emissions from biofuels are considered to be carbonneutral because CO 2 is recycled through the atmosphere and stored by growing forests. 4) Use of fossil fuels introduces new carbon to the atmosphere in the form of fossil CO 2.
High share of bioenergy in the forest industry to start with Paper industry is the world s largest producer and user of bioenergy Biomass fuels are a by-product of the pulp and paper industry A long value chain of wood and fibre products is resource, energy and carbon efficient The forest products industry derives a greater fraction of its energy requirements from biomass than any other industry. 50% in OECD countries
Biodiesel JV with Neste Oil Examples from Stora Enso Full scale pilot plant to be built at Varkaus Mill, aim is to develop a new gas purification technology Major investment in R&D with the long-term goal of building a commercial, full-scale production plant Stora Enso s role Neste Oil s role Joint technology development Supplying wood biomass Utilisation of generated heat Joint technology development Refining of the product Marketing of endproduct
Wood costs - Q3 2007 Euro / m 3 sub Nordic Baltic Germany Europea n Russia Southern China Brazil Long fibre for chemical pulp 41 55 55 65 43 46 32 48 47 53 25 31 Short fibre for chemical pulp 60 68 60 70 43 46 25 52 25 45 17 25 Sources: Jaakko Pöyry, Paperloop, Stora Enso Notes These are indicative costs of wood delivered to mill or railway / port terminal European figures based on market prices, China and Brazil figures represent a range of market and cost-based prices of plantation-grown wood in certain regions 1 Euro = 1.42 USD
Reporting Units Reporting Unit Executive Responsible Responsibility Fine Paper Business Area Consumer Board Business Area, Merchants Business Area Industrial Packaging Business Area Magazine Paper Business Area Newsprint Business Area Wood Products Business Area Aulis Ansaharju Mats Nordlander Veli-Jussi Potka Hannu Alalauri Juha Vanhainen Elisabet Salander Björklund Fine Paper, Country Manager Finland Consumer Board, Merchants and Market Services Industrial Packaging Magazine Paper Newsprint Wood Products, Wood Supply and Pulp Supply
SENA Estimated Financial Impact on Stora Enso Group Annual sales reduction EUR 1 950 million ( * ) EBITDA reduction EUR 189 million ( * ) Capital employed reduction EUR 1 750 million Debt / Equity Ratio From 0.64 to 0.42 ( ** ) * Based on 2006 results for the divested businesses, with an average exchange rate of EUR/USD 1.2563 ** Including impact of reversing the impairment from EUR 1300 million to EUR 500 million in the third quarter of 2007
Planned closures and divestments Planned Closures Mill Summa Mill Products Newsprint, uncoated magazine and book paper Annual capacity, tonnes 415 000 Anjala Mill PM1 Book paper 120 000 Time of planned closure During Q1 2008 After conversion of Anjala PM2 to book paper Kemijärvi Mill Long-fibre (softwood) pulp 250 000 During Q2 2008 Norrsundet Mill Long-fibre (softwood) pulp 300 000 At the latest by the end of Q2 2009 In addition, immediately after Q1 2008, Anjala Mill PM2, which produces 155 000 tonnes of coated magazine paper will cease production of magazine paper and be converted to produce book paper. Planned Divestments Mill Kotka Mill Kotka Sawmill Products Laminating papers, special coated magazine paper Sawn goods Annual capacity 348 000 tonnes Time of planned divestment As soon as practicable 250 000 m3 If satisfactory offer received
Present operations in Latin America Veracel Pulp Mill in Brazil (JV with Aracruz) Annual production capacity of 900 000 tonnes 77 000 ha of eucalyptus plantations Exploring possibility of Veracel 2 Land purchase programmes in Brazil and Uruguay Brazil Rio Grande do Sul (46 000 ha) Uruguay Rio Negro (45 000 ha) Stora Enso Arapoti Acquired from IP in September 2006 Coated Mechanical (LWC) mill with annual production capacity of 205 000 tonnes Sawmill with annual capacity of 150 000m 3 50 000 ha of timberland (30 000 ha of productive plantations) 100% of Sawmill, 80% of timberland and 20% of LWC machine sold to Arauco for USD 208 million (EUR 147 million) in October 2007 Veracel Aracruz Sao Paulo Stora Enso Arapoti Rio Grande do Sul Rio Negro Stora Enso Arapoti Land purchasing Division office Sales office
Expanding operations in Russia pulp and paper mill project prefeasibility study Aim to produce paper for the Russian market from Russian wood Pre-feasibility study for a pulp and paper mill in Nizhny Novgorod now ongoing; full feasibility study may follow If the results of the feasibility studies are favourable, final investment is subject to Stora Enso BoD s decision Issues to consider include: Infrastructure for logistics Forest rights Taxation
New Technologies and Materials for New Solutions Examples from Stora Enso Media Solutions 100% cartonboard packages for cd s & dvd s Contract packaging services to blank media brand owners Digital Solutions Value chain re-engineering Integrated digital printing & packaging systems Coming soon: Pharmaceutical Solutions Intelligent Solutions