<<Seppo Parvi, Chief Financial Officer, Deputy to the CEO, Country Senior Executive, Finland>>

Transcription

1 Company Name: Stora Enso Oyj (SEO) Event: Jefferies 2015 Industrials Conference Date: August 12, 2015 <<Justin Jordan, Analyst, European Packaging, Jefferies & Co.>> Good morning, ladies and gentlemen. I m Justin Jordan from Jefferies. I m the European packaging analyst for Jefferies. I m delighted to introduce Stora Enso this morning with us Mr. Ulla, Head of Investor Relations and Seppo Parvi, Group CFO. And Seppo is going to tell us a little bit about Stora s very ambitious profitable growth plan. And then obviously we ll open it up the Q&A afterwards. So Seppo, over to you. Okay. Great, thank you and welcome -- good morning also on my behalf. So my name is Seppo Parvi, CFO of Stora and so I m here with Ulla Paajanen-Sainio who is Head of our investor relationship management. Please feel free to ask question during the presentation if you have [indiscernible] Q&A afterwards so then we have more discussion with any questions or topics in your mind. So short -- Stora Enso as a company because I think we might not be known to all of you that some facts. First of all we are leading global provider renewable solutions in packets in biomaterials wood and paper. We have 27,000 employees globally in more than 35 countries and sales about EUR 10.2 billion in 2014 and EBIT -- operation EBIT was EUR 810 million. And our shares are listed in Helsinki stock exchange and we have also ADR here in U.S. Now if you look at the trend and we are in the middle of the transformation process. We are transforming from traditional paper company to renewable materials company. I want to focus on the packaging side and the trends why we have chosen this, what they say about the business are here listed. First of all growing population is firstly in the Asian countries. We have been and we are investing quite heavily in Asia across market an opportunity to ourselves, income growth across obviously is increasing, consumption utilization of packaging and higher the income the higher the quality of packaging. It is of course good news for all type of company. Urbanization, that s one of the key drivers -- reasons why we are looking at China and Asian markets. More and more people are moving from country side to cities and they need packaging for processed food and that is an opportunity for us. Also they had challenges in food chain keeping products chilled, that is again an opportunity people need [indiscernible] packaged to long term shelf life products are not always in cool environment. Eco awareness that s one of the key drivers, there is a trend to replace -- plastic and glass products with this biomaterial based products, which is of course an opportunity for us having access to biomass and renewable biomaterials. So main product for enrollment of all products. Digitalization, that is of course sort of two side story, it s about unhurting our paper business. Paper has declined in 3% to 5% a year, but at the same time giving support to our packaging solutions business, where we are making boxes, online ordering that is a key driver for increased volumes there.

2 The more people order online, the more packaging is needed, typically those boxes need to make two trips quite often. So it s shipped to cost -- and quite often cost no returns to the product. So it needs heavy a good packaging, so that is a positive thing. And new lifestyle, [indiscernible] fast food afford, where we are also are a major player. So basically this is one driver. Everything that is made fossil fuels today can be made out of the wood of tree tomorrow. And our sort of strategy as I said in the beginning to move from a traditional paper and board producer to a global renewable materials company. And the transformation is already moving and happening as we talk, I have couple of slides on that later. So today we have split the company into five divisions, we have consumer board, making liquid packaging board, cardboard, and that kind of high quality crates. Packaging solution is more traditional, packaging division making boxes and corrugated board materials. Biomaterials today it s dominantly our pulp business but why we don t [indiscernible] quite far because biomaterials we are also working and making commercial at the moment, products outside the traditional range that that our companies have had. So we are making products out of biomaterials or biomass like lignin that can be used in construction industry for cruise, it can be used also biomaterial, biomass from that we can expect refined sugars for the wood industries. So those are opportunities that we are working on, they are very interesting leads there I ll come later to those more in detail. And then we have wood products, which is more traditional saw milling, but they also we are moving more and more to building solutions type of business, which is less sensitive, depending on cycles, better margins. So [indiscernible] dealer so that kind of solutions instead of just two times for saw milling. And then paper which is structurally declining business has been declining 3% to 5% a year last almost 10 years, continues to build [indiscernible] future that s fact of life, the things that we need to manage the capacity of -- but it s a good cash flow generator has generated some EUR 250 million, cash flow since last year. And has been a stable cash flow generator and that has helped us to invest in the growth businesses, as we go out the consumer board packaging solutions biomass as a good product. And that way to keep our balance sheet in good order while we are growing those businesses. So that is an important role to play. Of course, challenge has been an ease that the top line has been coming down, couple of percent a year that s mainly a reflection of the declining paper business. But then, if you exclude the growth businesses is only on the right hand side, that has actually growing let s say a couple percentage points up to 9% last quarter year-on-year -- first half of this year, year-on-year 4%. So based on good underlying growth in the growth business season, we expect to start to see that on the group level sales because also going forward plan to peak transformation projects that we are -- plants and start to be ready. We are ready with the ramp up of new pulp in Montes del Plata, we start to ramp up a new [indiscernible] in China mid next year. So when those come on aboard and some of the small then we expect to start to see growth also of the top line. Operational EBIT last year 40% increase versus 2013 and 9% almost 10% increase during the first half year-on-year. So profit is going in the direction. Net debt actually quite stable, taking into account the heavy investment program behind which is a demonstration of good cash flow capabilities of the company. We made public some strategic targets in May in our Capital Markets Day in London and just to highlight couple of facts there. First of all, we

3 have a target to grow, excluding papers and we are actually growing faster in the market. Yearon-year in Q2 that was 4.8%, so meeting the target net debt to EBITDA and debt to equity within the target well, as I said [indiscernible] is pretty good shape. And more [indiscernible] fixed cost to save us, where the target is below 20%, we are 25.5% today. That of course comes to the growth going to top line, but of course we are going to keep the cost under our view and a continuous improvement that comes there to reduce the costs [indiscernible]. Return on capital employed at 9.4% we would be around 11% or so, if you take out the burden of the Guangxi, China project, which has not created any income yet. So not far away from 13% and once that is up and running, we are quite confident that we would not be in trouble to reach the target. And division of targets, those are something newly opened in the Capital Markets Day, we will follow those now frequently. Consumer Board target is to be at 20, if you exclude demands in projects in China we are already at 31 so that s pretty good, return on capital and good business and that s one obvious reason why we are investing more in that business. Packaging Solutions same target trends they are at 12% today. There is one key approach [indiscernible] at the massive conversing at Varkaus to kraftliner from uncoated fine, that will boost the profitability there and also some growth projects with existing assets and that s why we are [indiscernible]. Biomaterial is at 9%, target is to be at 15%, our pulp [indiscernible] is in the ramp up phase, so that why there is some burden on the balance sheet compared to income created from the gain, on the right track so we feel we would be able to get. And wood products sits at 18% and paper just to highlight what I said earlier, there the target is cash flow related because it is a cash flow generate --. And there [indiscernible] 7% cash flow of the investing activities so that s why, so it s not far away to the right direction. So transformation of the company, projects we had done, we just started to ramp up our pulp mill in Uruguay, 1.3 million tonnes. It s a joint venture with Arauco our share is 50%, it s trending up into starts up full speed. We reached our capacity in June this year, a year after the ramp up. So next step now is to optimize recipes and wood consumptions and logistics in that way to start improve the margins. Then couple other major projects, there is Sunila lignin project, that is what I mentioned earlier to use better biomass that we have in our hands, today about half of that is burnt. So instead of burning and getting energy, so it s not totally wasted, we re looking at how to get more value out of it. So lignin is one, and that highly refined sugars where we actually acquired a US based technology company in July was [indiscernible] technology biomass and there we are working on towards that development. That is may be two to five years away from being commercial. In the case of lignin Sunila mill will take more like half a year or so we are ready, so that is in the final stages. Barcelona mills in Europe with such diversity, it s part of the packaging business which is the core, but this was a bit outside the core of that business. It was a recycled fibre based and our strategy is to focus on virgin fibre based that s why we have the diversity in the mill. And we are getting some EUR 10 million cash consideration for the mill and it s close to in coming quarter. [indiscernible] we are running on the transformation, water cost conversion, there we are converting uncoated fine 280,000 tonnes to kraftliner, 390,000 tonnes that s a EUR 10 million

4 investment, it s quite good business, it reducing CapEx to a swinging paper market, adding CapEx to increase in kraftliner market in Europe. Europe is short of kraftliner about 900,000 tons of CapEx is 390, and it s a growing market. So it s a good business opportunity, we expect fast ramp up there. Actually we are taking the machine down, end of this month and doing a conversion for the rest of the years, start manufacturing of kraft towards the end of the year going into Q4. Then big project Guangxi board mill in China EUR 800 million investment, coming to final stage since we expect to ramp it up mid next year. Why China? It s a growing market, it s not only for Chinese market, it s for the Asian market. And that is a good opportunity for us to increase our sales, capture the growth in China, even though there are some hiccups in the Chinese economy, we don t expect that to be a threat to our project, because people still eat, they still -- this trend of people moving to cities, they need pre-packed food, China with the food chain that is what is supporting our business. And also if you look at the latest evaluation of the Chinese currency, it is supporting our business case again, because we are planning to export to neighboring countries from China. So the legal currencies, it s not bad news, it s actually good news going forward. Then [indiscernible] project, wood products but across Elements Dealing Solutions and at the end of biomaterials in Xylose demonstration and market development plan relates to this refined sugars project that we are running. So it s a development investment. Couple of pictures from our Guangxi Board machine projects just to show you it s coming up. Actually today all the walls and roofs are already covered this, might be couple of months to picture, so it s moving fast. Right, we have started the installation of the board machine parts already. This is important slide, and I think one takeaway from today, and the fact proving that transformation of [indiscernible] is happening and has happened already. Back in 2006, paper business for 70% of our portfolio. To-date, the 6%, I mean, two to three times and the big transformation projects that they were specifically done. Paper will be down to 30%, so the growth business is renewable materials business is that will be 70% of our portfolio. So there has been quite a shift in our portfolio and I would say that you should not look at as pulp or paper company or board company, you should look at us as a packaging renewable materials company. These are same [indiscernible] and mostly if you look at the sales profit coming from different businesses, only 94% of the profit is coming from the growth businesses unless from paper. But still I want to highlight paper business is a good cash flow generator. So it has helped us and helps us to keep balance sheet in order while we are investing or finalizing our growth program. But important message here also and a take away, that we are moving now from asset transformation. We have been investing 800 million plus a year for the last four or five years and now we are coming to end of that program when China will start next year. And we are moving asset transformation to innovation on customer focus sales transformation. What does it mean? It means that we will put more focus in huge RMP product development innovation work and we start to have the production manufacturing footprint now in place. It also means that capital expenditure will come down from 800 plus million levels closer to depreciation which is about EUR 530 million to EUR 550 million after next year, which of course improves the cash flow and balance sheet going forward.

5 Last couple of slides on where that the consumer board market is growing, the big markets are of course North America, Europe where the growth is a bit plus or minus 1% have slide on that later. But the big market is in China already and that is growing fast. And here you see growth rates in different regions North America growth to zero [indiscernible] growing anymore. Europe about two-thirds, but Europe is split, like Western Europe is a bit like U.S and North America, but Eastern Europe is growing 3% to 5% and that s the one growth driver for us. And when we actually get the board machine up and running in China that will release about 100,000 tons capacity in Europe but we can sell to increase in Eastern European model. So it s a good for us to get more capacity released here once the China gets up and running. China now is growing 4% but if you look at the key grades that we are like liquid packaging board and food service board that s growing almost like 8% or box board of course a white area and we are up there in higher grader of box board products, that s also 27%. So that s why, why we see that s a very interesting in the daily market going forward. Got a couple of version of packaging solution business, we are not sort of global player, we are some competitors who are sort of global, but have a global footprint. In our case we are more in Eastern Europe and Scandinavia and we have very strong position in that market and making good margins. And also good position in China in certain parts of China which is growing 47% a year making packaging business And this is an opportunity, today if you look at the total packaging market is huge, but only relatively smaller share today is covered by renewable materials, still dominant with plastic and glass. So that is an opportunity with environment friendly approach that we can offer and basically more important for customers and consumers. So that is one driver for our growth going forward, replacement of plastic and glass, that we covered. Just to highlight the role of the paper business, because we quite often get asked, why you keep the paper business. Like I said it s an important cash flow generator, what we have told of course if someone wants to buy it and would seen cash on paper, we of course will look at it. But we need to put it in the perspective that these EUR 50 million cash at year. We need to get enough up front in order to that we used to pay interesting and so far we have found it more interesting to keep it and reinvest the money in the growth businesses. [Indiscernible] just may be couple of slide we ll revisit those later. So we are moving on paper and board product over materials growth company. And like I said the transformation has happened is happening. We re at the right track [indiscernible] cash flow wise, profitability wise and there is good underlying growth for the 5% in our sales because if you look a bit deep and that we ll start to come to on the top-line going forward. So thank you. So then we move over to discussion product. <<Justin Jordan, Analyst, European Packaging, Jefferies & Co.>> I guess can I start with Stora the global leader in liquid packaging forward and I guess I d love to understand a little bit more about your major project in China and just the huge opportunity that gives the Group over the next few years within both consumer board and obviously liquid packaging board?

6 Yes. So one reason why we decided to invest in China was like I mentioned earlier that s where we see the growth in future and at the moment. We could have make the investment also in Europe or Latin America, but of course when you spot and find growth markets with focused they have local presence. So we re in China not because of the low cost based we are there to be present on the growth market to capture the growth. There are no other international players have in local manufacturing. So that is the opportunity. And it s driven by the fact that people moving to cities, population is still growing, not necessarily in China anymore, but in the neighboring countries and they need pre-packed processed food and that s the opportunity we are capturing. But we will also produce not only liquid package board, but food service like cardboard, also high quality foaming box products like [indiscernible]. And these products high printing quality is important for instance and other pre products that is very sensitive typically for orders and smells and that kind of things. So that s the driver. <<Justin Jordan, Analyst, European Packaging, Jefferies & Co.>> And globally within the packaging board who are your sort of key customers, who your sort of -- I guess key competitors it s a very niche market and obviously just a very high growth market. Yes, if you look at the competitive environment, there are say, three global players, and we are the major and the key player globally on this business. And one reason why we did not force us in, was in Latin America, there s a one major player in Brazil so why to start to fight here when there are growth opportunities in countries like China and Asia. Then if you look at the typical customers those are system providers, who provide package assistantce for dairies and juice producers, and then we have the packaging solutions and not only for fresh products but for also MPM packaging for longer shelf life like -- milk and juices. And that is the key for instance thinking about the cool chain, the challenge is the cool chain. So we have packaging solutions for products to be kept in room temperature. <Q Justin Jordan>: So essentially liquid packaging board is growing and market everywhere, but also it s taking share from plastic and glass and other forms of your [indiscernible]. Yes, correct. In many cases still today, plastics are used for milk or juice or water. And what we see is that there is a trend because of the environment drivers to replace those package even for water and this kind of basic products with environment friendly solutions like carton board.

7 <Q Justin Jordan>: And just changing geographies, look, I know you ve come from Latin America to be here. So I guess can you give us an update on -- just the ramp up it s going to be major contributor to improving return and capital employed in future years? Yes, yes, sure. We started to go around about the year of going June, like I said earlier today. And we reach one important milestone in June this year after one year of the start when we reach phenomenal capacity. So we are now at 1.3 million ton annualizes product rate. Next step now is to start to work on the recipe mix. Of course, we ve been working and need to work on the ageing structure of the plantations. We are about 80% self-sufficient. That is of course important when you have a pulp mill in Latin America. So we are working on the product mix [indiscernible] we use and trying to reduce of course the utilization of the chemicals. In the beginning, we had of course challenges with the fiber structure and those and now we are optimizing the recipes, consumption, optimize the logistics systems, meaning that we can use water ways to bring that wood to the mill to grow finding the mix there, because it s quite cheaper to use to bring the wood in. And also of course the crew there has been on the learning curve, the operators but they are learning fast and we have been of course and also our [indiscernible] has been bringing the safety to have on the training, hands on training and that s in already. So I think in good full speed I mean we are fully confident that we are getting there and meeting our targets. <Q Justin Jordan>: So it s impressive, obviously you got to full speed within 12 months, but just the optimization process that what s the further 12 to 18 months? Yes is probably it s of course difficult to say what kind of things you ll face, but I ll say towards end of this year beginning of next. <Q Justin Jordan>: Okay. So another six to 12 months to get fully optimized. Yeah? <Q Justin Jordan>: Okay. And could we just quickly talk on Varkaus because obviously because I guess many people are saying may not be familiar the Europe is next short kraftliner. And so you got a really unique opportunity to supply market that short that s going anyway. <A Seppo Parvi>: Yes, exactly. And Europe is currently about 900,000 tons of kraftliner and that is an opportunity we are capturing with our machine, that s we are the 90,000 tons. Big part of that kraftliner is imported from U.S. today and also some from Asia. And it s also got to keep

8 in mind that those kraftliner market the demand in Europe is increasing 3% to 5% a year which means in five years time another 900,000 tons will we needed. So that s why we see that s a great market opportunity. And if you look at the latest dollar-euro foreign exchange rate it s actually making our business case even better, compared to what it was when we made the investment. So we are at the moment ready to start to the conversion, we run down to paper manufacturing end of August, [indiscernible] change of the machine with the end of Q3, Q4 and towards the end of the year we should be ready to starting to ramp up. So it could start to have really affecting us because already -- obviously picking up next year. <Q Justin Jordan>: Okay. And then what it will ramp up through calendar 2016? Yes typically ramp up takes six to 12 months but this of course is proven technology, so in that sense it s correct. <Q Justin Jordan>: And I have to say it s a bold statement to say that everything that made from fossil fuels today could be made from countries tomorrow that s -- it s a very bold statement. Now obviously brings us into what you re doing in, I guess converting -- those to brings refine sugar and lignin and that is very unique as far as I m aware within not just Europe but globally. Can you just share some of the innovations and then the R&D work you re doing on that. So that s exciting step for the future. Absolutely that is the great opportunity that we have, some of our competitors are looking at five year deals we have done that but we didn t find that commercial interesting. So we believe more opportunities in food side and then on the construction side. And one of the strengths of our company is that we have good access to biomaterials, biomass and half of that is burnt today. We get [indiscernible] and now the question is, how get more out of this, second half that that is now used for pulp today. And we have been looking at the refine sugars, but it s a interesting market replacing sweeteners artificial sweeteners which are today used in or cooking or food making. They are low in calories but not necessarily good for your body system. When they are sweeteners made up of biomass, that is a product from nature, and actually we don t think about it, but even today pulp is used in many product, you can find pulp in toothpaste, you can find pulp in ice cream, such couple of products that to be mentioned. So it s already that s something we eat, we are not such aware of it and actually it s very printed product for our body system that [indiscernible]. And so that s something we are working on and that is why we acquired this US based Virdia technology company was to develop the technology to extract the fine sugars from the biomass and we are taking that forward. So we believe that there will be three to five years still needed to develop the product and to make it commercial. And then we already look at the next steps, of course we are working also

9 on things like processing, how far we should go into the value chain, how to range the distribution that kind of things at the same time when we are working on [indiscernible] <Q Justin Jordan>: Okay. We are in the U.S, so I guess it s only fair we should talk about the ADR program. So can you just give us some insights on what you ve done on that program? <A Ulla Paajanen-Sainio>: Yes, we have an ADR program which is sponsored level one, and it s available for everybody on top of the shares, it s a switch between R and ADR we have also do leasing of [indiscernible] shares and listed in Helsinki and Stockholm. But for U.S. ADR is available in US dollars and I mean if you want to use that vehicle so feel free to do that. And currently they are sponsoring the bank is Deutsche bank. <Q Justin Jordan>: And given as X rates its getting more appealing by today its when we <A Ulla Paajanen-Sainio>: Yes, I need to say the liquid FFO share with itself. <Q Justin Jordan>: And just one final thing from me just before open it up what do you think the market just doesn t get about Stora? Because there is a lot going on and in terms of transformation here and. <A Ulla Paajanen-Sainio>: Well I think that -- also bringing we are very far with the transformation and if you look at the profitability all the packaging and especially consumable and then if we didn t have the Guangxi investment our return on capital employed would be almost 31%. <Q Justin Jordan>: Yes. <A Ulla Paajanen-Sainio>: So it s a wonderful business and that s where we are going and that s why we are very strong and there is something we can also to be markets in customers. And that s why we want to go more and more. But at the same time usually cash from the paper where the cash generation is still very good. <Q Justin Jordan>: Okay, I m sorry we re late in doing this but are there any questions from the floor anyone, we haven t covered really want to get into more detail. <Q Justin Jordan>: You mentioned that one of your advantages is having good access to biomass can you just expand on that and what that means? <A Seppo Parvi>: Yes, yes. First of all, we own eucalyptus plantations in Uruguay, in Brazil where we have a joint venture there ourselves reducing all, also in China Guangxi where we build the port and we have close to 100,000 acres of eucalyptus plantations and elsewhere that we are harvesting already and saving to local market. Also in Scandinavia our home-based basic that we are need to hold an own forest assets both in Finland and in Sweden. So in total only about how hectares

10 <A Ulla Paajanen-Sainio>: Yes, basically, our [indiscernible] has 2.5 million hectares of land and we own 49% of that company in Finland we have 600,000 hectares of forest land and we own 41% of that. <A Seppo Parvi>: So we have forest assets and also we have major product of pulp. Our total pulp capacity is 6.5 million tons. So on top of what we own, we are also buying from external sources wood, and what we called biomass that we process. But then you should keep in mind that we are not a pulp company they integrated based on forest company, so out of 6.5 million, 1.9 million is external market pulp. And that s why we said we have good access and we have lot of biomass in our hands that we can then better use to improve our profitability, improve the global environment in total -- <A Ulla Paajanen-Sainio>: And he told us not only these holdings we have but the capabilities and knowledge we have in the company. Say, we have a very good wood supply organization with a lot of expertise how expect this plantation either in Asia or in the South America and we have done this for years. And also through trial and error because these plantations you really need to know the species and develop the right species to the right cost. So it comes not only by balance sheet and holding of these forest lands, but also what we can do with the biomass. And like I simply said in the presentation that this is a wonderful raw material, it s not competing with the food. And even those we are eating at the moment without knowing it, but eating in the sense it s not based on that like a palm oil or corn or so forth. <A Seppo Parvi>: Yes, that s a good point Ulla just made and just taking on that, of course this one opportunity we are working is -- areas. Today if you look at the cup board, if you go to McDonalds or Starbucks get a cup of coffee or coke, typically inside of the cup has BE coating and that s plastic based. And what we are also working and developing is fire coating materials were also that kind plastic coat could be replaced with renewable materials from biomass again having environment friendly cup available that you can basically throw away and not to destroy the nature. <A Ulla Paajanen-Sainio>: And that s actually what we already doing. We have those cups available. And one more aspect you said if you think about that bottle, that most of you have in front of you, with full of water. And we can already do this cap out of biomass. Say, that s the next thing to do these transparent bottles so that we could also off package for water <Q Justin Jordan>: Unfortunately we can go on for hours. <A Seppo Parvi>: Okay. <Q Justin Jordan>: And our time out. So I just want to say <A Ulla Paajanen-Sainio>: Thank you <<Justin Jordan, Analyst, European Packaging, Jefferies & Co.>> Thank you very much for your time.

11 Thank you very much.