Stora Enso Oyj (STERV) Earnings Call Transcript & Summary

Welcome to Stora Enso Q4 Report 2022. [Operator Instructions] Now I will hand the conference over to CEO, Annica Bresky and CFO, Seppo Parvi. Please go ahead.

Welcome to Stora Enso's Q4 2022 report presentation. Our purpose, do good for people in the planet is more important now than ever before. We need to look after our people, the communities in which we operate and the company. And by replacing fossil-based materials with our renewable products, we can leverage on this opportunity for long-term earnings growth and can, at the same time, positively contribute to mitigating climate change. Sustainability is deeply embedded in our strategy and corporate culture. This is what drives both our underlying performance and our opportunities for innovation and growth. I will now give you an overview of our fourth quarter and full year 2022 performance. So today, I'm most proud of that we have delivered the best full year financial performance in 22 years despite all market disruptions and challenges that we see around us. At the same time, we have been proactive and continue to deliver on our strategic road map. As we are all aware, the inflationary cost pressures escalated towards the end of the year and we could only partly mitigate them in Q4. If we look at our divisions, they give a mixed picture where Biomaterials was the star performer, while we saw continued market slowdown in both containerboard and sawn wood, a trend that really started in the middle of last year. We have also been busy with the reshaping of the business and positioning it for future growth to drive outperformance over the cycle, where our target is to grow more than 5%. Some examples of progress on recent key initiatives are that this month, we have completed the De Jong acquisition and have started the integration process. We also completed the majority of divestments and dissolved the paper division and started a process to divest the Consumer Board packaging site and forestry operations at our Beihai site in China. After a positive outcome of the feasibility study at our Oulu site, we are investing to build a cost-leading Consumer Board line for -- from a paper machine conversion. We continue also our collaborations and partnerships and have recently partnered with Polestar to contribute to their project to create a climate neutral car for 2030 with our Lignode product. And to create further shareholder value, the Board is proposing an all-time high dividend of EUR 0.60 per share. Let's take now a look at the financials and let's start with the full year of 2022. Sales increased by 15%, which was the highest annual sales since 2007. The positive impact from significantly higher sales prices and active mix management was partly offset by the adverse impact from structural changes, such as closing of 2 major paper sites and our exit from Russia. Operational EBIT grew by 24% to nearly EUR 1.9 billion. And as I just mentioned, the strongest since 2000 and with an all-time high EBIT margin of 16.2%. The operational return on capital employed, excluding Forest, 20.9%, which is well above our long-term target of more than 13%. Looking now at the fourth quarter. Sales increased by 5%. We had the highest sales prices in all divisions, except in wood products. And the top line was also supported by active mix management and a stronger U.S. dollar. The operational EBIT of EUR 355 million, however, decreased by nearly 17% with an EBIT margin of 12.4% and there are several reasons behind this drop. To name a few, we have the exit from our Russian operations, which reduced the result by EUR 20 million, while the escalated variable costs, especially in energy, chemicals and logistics had a negative impact of almost EUR 270 million. Lower volumes, which reduced operational EBIT by EUR 72 million. And then we had fixed cost increased by EUR 85 million, mainly due to the scheduled annual maintenance shutdowns. We had the 2 major sites of packaging materials being shut down this quarter. The operational return on capital employed, excluding Forest, was 13.2%, just above our target of more than 13%. And I will now show you a year-on-year comparison for the second half of last year on the following slide. As you can see in this slide, we show the third and fourth quarter combined in a year-on-year comparison for 2021. You can see that the development during the second half of last year showed a similar trend as in 2021. The maintenance costs in the second half of 2021 were EUR 314 million and just slightly higher at EUR 330 million in the second half last year. The main difference is that in 2022, the third quarter was exceptionally high, while the fourth quarter was exceptionally low in comparison to 2021 when both quarters were more stable quarter-on-quarter. In the second half of 2022, this had the effect of a lumpiness quarter-on-quarter as many variable costs such as energy and chemicals escalated, while at the same time, we have 4 of our largest packaging material sites in annual maintenance shutdowns, including 2 of our largest Consumer Board sites. In Q4 2022, the maintenance impact was EUR 30 million higher than in Q3 2022. And year-on-year, the maintenance impact was EUR 34 million higher in Q4 2022. The situation in the fourth quarter, therefore, impacted negatively with both higher costs and lower volumes. However, the impact on EBIT over the second half was relatively flat. Let's now move into some of the strategic parts that we've been working on. The acquisition of De Jong Packaging Group was announced in September last year. And I'm pleased that we have now completed this month this acquisition and can welcome them as part of Stora Enso. We have started the integration process. We have full focus on that and it is proceeding according to our plan. This acquisition will accelerate revenue growth and build market share in renewable packaging in Western European markets and key consumer and customer segments and double the sales from Packaging Solutions division. The De Jong Packaging Group, just to remind you, is based in Netherlands and is one of the largest corrugated packaging producers in the Benelux countries with 17 sites across Benelux, Germany and the U.K. De Jong sales were approximately EUR 1 billion and approximately EUR 114 million EBITDA in 2022. Once ramped up, our corrugating capacity will increase by approximately 1,200 million cubic meters to more than 2,000 million cubic meters. And sales for the packaging materials division will nearly double, Packaging Solutions division will nearly double. We expect to achieve EUR 30 million of annual synergies over the business cycle built up over the coming 3 years and an additional annual EBITDA increase of more than EUR 40 million from 2025 from these ongoing projects. And the 2 projects that we are currently working on are expansion projects, 1 in De Lier, Holland and 1 in U.K. Furthermore, the acquired business has an excellent fit with the possible conversion of a paper machine line that we have in Langerbrugge to recycled containerboard line in Belgium, which is currently in a feasibility study mode. We have also for some time now communicated that the structurally declining paper business is not a key area for our long-term growth agenda for Stora Enso. So we have instead focused our financial and operational resources and also capital allocation on growing in renewable packaging, sustainable building solutions and Biomaterials innovations. In spring last year, we announced that 4 of our 5 paper sites were entering a divestment process and we have agreed divestments for a total enterprise value of EUR 378 million. We have completed the Nymölla site divestment, which was sold to Sylvamo and the Maxau site will be divested to Schwarz Group and the Hylte site to Sweden Timber. Both of those are expected to be completed during the first part of this year. The divestment process for Anjala site was discontinued and this remained -- retained in Stora Enso, continuing with its paper production and serving its current customers. The Langerbrugge site, as I mentioned on the previous slide, was not included in the divestment plan and the ongoing feasibility study of that site is expected to be finalized during the first half of this year. We have also started a new divestment initiative and let's take a closer look at that. As you are aware, we started a sales process at the end of last year to divest our Beihai site in China. This divestment would include both the industrial side and the forestry operations. And just as a reminder, Beihai has an annual capacity of mechanical pulp of 250,000 tonnes and 550,000 tonnes of Consumer Board. The forestry operations consists of 73,000 hectares of leased eucalyptus plantations. Stora's ownership of this site is approximately 80% and we have, at this point, not any committed time line for this divestment process. The reason for this decision is that we want to focus on long-term profitable growth where economies of scale can be achieved. We see that we have better options in other opportunities within the company. So we will be able to allocate capital and resources for growth in other existing sites, such as the Oulu site in Finland, for instance. China and other Asian markets are important to us, both on kind of our existing and also new customers in this market. We will continue to serve them from our other global sites and we still have 3 packaging sites in China in the Packaging Solutions division. I will now talk a little bit more about how we further can strengthen our growth strategy and also learning and reach new markets and -- through collaborations. And it is important to -- in order to innovate to have strong ecosystems with collaborations and partnering and joint development. And these are becoming more and more critical for companies not only to expand business, but also to share knowledge, speed to market and influence the development of different innovations. In Biomaterials innovation, we are actively developing our value chain ecosystem to build a path for green batteries. The latest one being the announcement of our partnership with Polestar, an electric performance car brand, where Stora Enso will contribute to their Polestar zero project, which is a climate neutral car for 2030 using our Lignode product. We are also progressing with the ongoing feasibility study for the first industrial scale production of Lignode at our Sunila site in Finland, where we have our current pilot facility. And we are, of course, constantly monitoring the development of battery technologies within wood-based materials. I've already mentioned our investment in a new Consumer Board line at our Oulu site and we are now moving ahead with the investment of around EUR 1 billion to build the most cost-competitive folding boxboard and Consumer Board machine in Europe. The targeted end user segments are food and beverage packaging for mainly Europe and North America. And this production is estimated to start in early 2025 with an expected annual sales of approximately EUR 800 million. In Building Solutions, we have launched our construction solutions, Sylva. Simply explained, it is a prefabricated and custom-made building kit delivered just in time to a building site. And these modules there help builders to enable faster construction, reduced cost, more efficient use of raw material and of course, less CO2 emissions than concrete and steel and other available applications on the market. And you can see here on the picture, an example of a prefabricated element being lifted and ready to go on a top of a building. Let's now take a short look at our financial targets. All long-term group level targets were exceeded in the fourth quarter and for the full year of 2022, including the dividend. In the quarter, it was only Biomaterials and the Forest division who outperformed their targets. Packaging Materials and Wood Products division had the biggest drop. For the full year, Biomaterials, Wood Products and Forest outperformed their targets while Packaging Solutions and paper underperformed and packaging materials was with a small improvement, not far from their long-term target. And now I hand over to you, Seppo, to give some more flavor on our financials.

Thank you, Annica. And let's look at the bridge between Q4 '21 and Q4 '22. And as you can see, we had higher prices during the quarter, but they were offset by increased variable costs, especially energy, logistics and chemicals. Also maintenance costs played the role here, as Annica already mentioned earlier, and maintenance costs were EUR 34 million higher year-on-year. And that is visible in fixed costs as well as in the volume development for the quarter. We have put in place a number of actions to mitigate when it comes to inflationary pressures, that is cost control, pricing actions, capacity management as well as working outsourcing and logistics. Then let's move to the divisions, and let's look at the Packaging Materials division first. In Consumer Board division, we have -- our Consumer Board business, we have implemented price increases to mitigate cost inflation. But container board market demand has remained weak. Sales were up 6% year-on-year, reaching EUR 1.127 billion, mainly driven by higher board prices. Operational EBIT was down EUR 102 million year-on-year at EUR 31 million level. There, we could see increased short-term operating costs due to annual maintenance shutdowns, as mentioned earlier, and we have maintenance shutdowns at our 4 large sites, which is good to keep in mind and look at the results evolve. On top of that, we had variable cost inflationary pressures during the quarter. And this variable cost and lower volumes had an effect on margins that were squeezed during the quarter. And operational return on capital was at 3.6% for the quarter. Then Packaging Solutions division. The sales and profitability were impacted by the exit from Russian operations as was visible in the previous quarters already. And we had some high inflationary pressures there as well. Sales were down 16% year-on-year at EUR 179 million level affected by like mentioned, Russian units' divestments. And we had higher sales prices in the corrugated packaging operations despite the softer market conditions. Operational EBIT was down EUR 30 million during the quarter, again, negatively impacted by exit from Russia and higher costs related to investments in growing the new businesses that we have today in Packaging Solutions division. That is something when it comes to segment reporting that we are trying to move the segment upward going forward in order to improve transparency in Packaging Solutions division business. And operating return on capital at negative 1.4%. Then Biomaterials division, where we had all-time high quarterly sales and profitability reached through record high pricing and effective good operational performance. Sales were up 32%, reaching all-time high for the quarter at EUR 649 million, driven by strong prices and deliveries and good performance in byproduct sales and operational performance. EBIT was up 49%, also at all-time high. It comes to the quarter EUR 249 million. That was a reflection of higher sales prices and positive foreign exchange impact fully offsetting higher growth that we've seen in the business and input prices. Operational return on capital at 35%, that is also clearly above the long-term target of 15% for the division. In Wood Products division, there was a rapid market decline in sawn wood, but continued stability in Building Solutions business. Sales were down 7% year-on-year at EUR 471 million. Construction market was impacted by market slowdown. We can see fewer building permits and projects that are started currently. And lower sales mainly were impacted also by lower prices in sawn woods and exit from the Russian operations earlier last year. And like said, good and positive thing is a stable demand in Building Solutions has continued despite the challenging market conditions. Operational EBIT was down EUR 103 million year-on-year at negative EUR 14 million and lower sales prices and increased cost for logistics, electricity and raw materials were affecting the profitability and margins in the business. And operating return on capital negative at 7.5% for the quarter. In Forest division, wood demand and prices remained on a high level and sales were up 11% year-on-year driven by increased wood demand and higher prices. Sales were at EUR 664 million level. Wood markets were tight, both in Finland and Sweden, but they were mitigated by flexible sourcing and our strong sourcing organization in Baltic countries, Finland and Sweden. Operational EBIT was up 30% year-on-year, reaching EUR 62 million, supported by good operational performance as well as positive impact on land sales in Sweden. Operating return on capital, 4.4%, above long-term target of 3.5% despite the higher fair value of the Nordic Forest assets. In Paper division, where we are significantly improved profitability due to business turnaround after the restructuring that we implemented the year before. Sales were up 9% year-on-year, reaching EUR 424 million. We had higher sales prices for the products and strong performance continue throughout the year. Volumes were impacted somewhat by scheduled maintenance shutdowns during the quarter. Operational EBIT was up EUR 59 million year-on-year, reaching EUR 49 million and we had good high sales prices that more than offset higher variable costs. Our cash flow after investments was negative by 0.7%, impacted by restructuring provision payouts and transaction costs related to the announced divestments. A restructuring relates to Kvarnsveden and faced lot of closures a year earlier. And also you have seen the release that we are now stopping reporting paper as a separate segment going forward as we are ready with the divestment process. Then top of that on the fair valuation of the forests. And like indicated earlier, we have now changed the market transaction-based fair valuation also in Tornator in Finland. Fair value of the forest were increased to EUR 8.3 billion from EUR 8.1 billion a quarter earlier and this is equivalent to EUR 10.52 per share. Change of the valuation method from discounted cash flow to market transaction-based method in Tornator in Finland resulted in a EUR 265 million positive impact quarter-on-quarter. There was also higher market transaction prices in Sweden, but that effect was offset by negative development at foreign exchange rate between Swedish krona and euro. And fair value for plantations decreased due to the higher discount rates used. Energy self-sufficiency is moving up with also the 3 coming closer to operational stage now. And we expect the total energy-wise we are 75% self-sufficient going forward and electricity is increasing from 68% to 79%. Then related to CapEx, quarter year that has now started. CapEx is up from slightly below EUR 800 million level to EUR 1.2 billion to EUR 1.3 billion range. And CapEx increases is driven by Consumer Board investment in all in Finland that also Annica was referring to earlier. We have started now to move forward with the investment. That was communicated, decided earlier this year. Dividend and dividend proposal. So we have now proposal from the Board to increase to all-time high dividend of EUR 0.60 per share. And this is bringing our dividend back to growth track that we have been showing since 2008 after 2 years of lower dividend due to COVID-19 pandemic that was affecting the economic globally. Then segment reporting changes that we have announced earlier today as well. So as of January 1 this year, we are, first of all, discontinuing paper division as a separate segment. Maxau and Hylte paper sites that are divested and where the deals are signed, will be part the segment other until completion of the divestments, and this is expected during the first half of this year. The Langerbrugge and Anjala sites that we are retaining in Stora Enso, they are reported now as part of Packaging Materials division. Then the new businesses that we have earlier reported and had as part of Packaging Solutions are moved to segment Other. This we are doing in order to improve transparency of Packaging Solutions division going forward, also now that De Jong is part of Packaging Solutions. And restated figures shall be issued for the new structure prior to first quarter report. Now back to you, Annica, and your guidance.

Thanks, Seppo. And let's take a look at the year ahead. If we look at market conditions and inflationary pressures, they are expected to be more challenging in 2023 than we experienced in 2022. And therefore, the variable cost inflation is also expected to remain high. So we expect the operational EBIT for the full year of 2023 to be lower than the record high full year of 2022 that ended up in EUR 1.891 billion. We have been and are continually taking actions to manage volatility. And as Seppo mentioned, we work diligently to protect our margins, working with pricing, managing our product mix, inventories as well, of course, as actions in sourcing and logistics. We have also reinforced our cost control across the company and will continue to take active actions also going forward until we recover our profitability. As we've mentioned before, we benefit from our high self-sufficiency relative to other companies. In wood, we are 30% self-sufficient and in energy, we are 72% self-sufficient, well-hedged for the coming years. And since I joined as the CEO of Stora Enso now some 3 years ago, we have taken extensive steps to also reshape the business that we have. The company is now financially, operationally and strategically in much better shape to handle market fluctuations. At the same time, we have the muscles to invest for growth in renewable packaging in sustainable building solutions and in Biomaterials innovations. Moving over now to the outlook. And if I go into a little bit more details around each division, for Q1, we see that in packaging materials, the overall demand for Consumer Board is expected to remain stable, while the overall containerboard demand is expected to remain weak and this has to do with the consumer consumption. Packaging Solutions demand for corrugated packaging is expected to weaken in Europe, while pulp demand is expected to be more or less on par with the previous year. In Wood Products, the demand for sawn wood is expected to be on par with the previous -- it is expected to be significantly weaker, especially in Europe with the overseas market remaining stable. And lastly, for the Forest division, the pulpwood demand is expected to remain stable, while demand for sawn logs is expected to decrease in the first quarter. So we are now coming close to the end of the presentation, but I will first just take a chance to summarize and then Seppo and I look forward to taking your questions. Our performance in -- our performance in 2022 demonstrates, of course, the strength of our leading market positions and our ability to be proactive and agile. Quarterly, all-time high results we have experienced in Biomaterials with continued slowdown in containerboard and sawn wood. We are investing in organic and acquisitive growth and entering partnerships all to drive outperformance over the cycle. And the Board proposes an all-time high dividend of EUR 0.6 per share. So all in all, I'm very happy that we are delivering the best full year financial performance in 2022 despite that the Q4 market challenges were more difficult comparable to previous quarters. With that, I would like to hand over to your questions, take your questions. Thank you very much.

[Operator Instructions] The next question comes from Lars Kjellberg from Credit Suisse.

I'll just start with inflationary pressures. It feels as if the marginal costs for your competitors are starting to come down, but you're talking about more challenging pressures in '23 over '22. So if you can sort of elaborate a bit what that is happening, is that due to hedges rolling over? Or is this really focused on the wood cost that we've seen rising sharply in the Nordics in particular, I guess, in Europe? Also on the pricing component, considering now we are in softer markets, where do you see opportunities to move prices? And then if I just move very quick to De Jong Packaging. Appreciate the strategic move. The growth ambition in that business though, I just wanted to ask how do we get to an annual growth rate around 20% to enable you to utilize that incremental volume in the market that maybe grows at 3%? How quickly do you believe you're going to be -- to fill that machine or those incremental capacities? And the final point, I guess, on Beihai. Of course, in the day, this is a high-profile project. China as a growth market. I appreciate you need potential capital release to invest in other projects. But what is really going in Beihai that wants you to get out of it and not pursue that growth that is within that country?

Okay. Thanks, Lars. And if I start with the inflation drivers before I hand over to Annica to cover your other questions. So we see pressures, especially on energy side, which also leads to pressures and the increase is on chemicals. So I think those are the 2 biggest drivers going forward. And obviously, energy price and energy market is very volatile, as you know, and that it had an effect, even though that we have pretty high self-sufficiency rate, but still we are exposed. And then wood market is a third element when it comes to inflation pressures. There we see that the log market is more sort of form, but especially pulp wood market, we see pressures from energy usage having the effect on the market. Then Annica, shall you take the pricing?

Yes. Well, if we look at kind of -- we don't comment on pricing in general, but where there is good and stable demand, we are able to have discussions with our customers to compensate for the inflationary pressures that we have and we do that. If we look, of course, that the market is weaker, then it's more difficult to push through price increases and then we need to work with products with balancing inventories and making sure that we run our capacities according to market demand. So this is the general kind of comment. And if we look at containerboard, for instance, there, we could see that the market was significantly weaker in quarter 4. We expect a weaker also quarter 1 on containerboard side. There are a lot of inventories out on the market. So there, the possibility to do adjustments on pricing is harder. Other areas like Consumer Board is more stable. So there, we have the constant discussions and we renegotiate our contracts as they expire with our customers. Generally, we have all contracts -- most contract discussions in Q3, Q4. But of course, we have some also for Q1 and going forward. In wood product, if we look at the market there, demand, as I mentioned, was very weak with significant price decreases in Q4. On European market, it was 30% on some -- 20% on sawn wood and overseas almost 30%. So of course, you understand that it is a quite challenging environment for wood products. And that's why we did not deliver a satisfactory result for that segment. And on paper, there has been quite a good pricing situation for quarter 4. We have been able to increase pricing. There is a balance in the market. But going forward, that situation also becomes more difficult if the macroeconomics impact and demand starts decreasing. Now looking at -- and lastly, of course, pulp prices, if I may comment on that, we see that mostly, as we all know, pulp is guided by how the Chinese market operates. We expect, of course, the opening of China as a country to contribute to increased consumption and then also continued good demand on pulp. We have seen some decreases of pulp prices during quarter 4. And if I look at kind of the demand going forward on pulp, we see continued strong demand for tissue and fluff, where we are main producers in Europe and then a stable demand for the other grades. Here also, of course, the U.S. dollar has a big impact on the results. And then if I say a few words about De Jong. As you know, they are a very successful company in the region that they are operating. It's also a very good synergetic assets to have in combination with our site in Ostroleka already. So we can also make choices about how we integrate our own containerboard production together with the De Jong new corrugating capacity. Then, of course, I think it's a good market situation to do investments and build the machines now when the cycle is a little bit slower and then we can start up once the cycle turns. So I expect the segments where we operate with De Jong, which is an agricultural sector, for instance, serving all the Netherlands or majority of the Netherlands agricultural sector. That's picking up. Seasonally, it's stronger in springtime and summertime compared to quarter 4, for instance. So I think this is the acquisition that is very synergetic to our existing assets. And as I mentioned, we have the opportunity also with a forward-looking Langerbrugge conversion to do more.

And it's 2 to 3 years process before the investments are ramped up.

Yes, of course.

So [indiscernible] for market to grow further.

Yes. And then if we look at Beihai, the investment as such has delivered on the capacities, on the kind of product mix on the machine. Yes, it is a growing market in China, but we also believe in economies of scale for the sites. We would see that in order to be able to build a much stronger position in China and reach economies of scale that we would need to invest more there. And when we have done our analysis, we have come to the conclusion that we have better options elsewhere. So this allows us to focus on better optionalities that we have inside of the rest of the company. That's why we have taken the decision to exit Beihai. And as I mentioned, we will continue to serve our customers from our other very cost-competitive and global sites that we have within the company and capture the growth in that sense.

And you had to make strategic choices. You have to remember that we are investing billions euros in all Europe. We have feasibility study going on Langerbrugge. And we need to also take care of the balance sheet and where we put the capital and where we can release capital for that growth.

Just final on that one, is for a pain level that you need to exceed to essentially go ahead with the Beihai. And I'm thinking about Anjala, you keep in that now because I saw there's no bidders for the asset at a reasonable price. Do we have a similar situation in Beihai?

I didn't catch your question.

Yes, I'm saying if there's a minimum price level, essentially at the Beihai for you to be willing to let go the asset similar to Anjala, which you also decided to keep because lack of demand at a reasonable price I would assume?

Yes. Now I heard your question, sorry. I believe there is quite a big difference between Anjala and Beihai in terms of how new the assets are and what prospects there are of good buyers. So they are not really comparable. But of course, we will make sure that we get the best value out of that divestment process with Beihai.

The next question comes from Joffrey Bellicha Meller from BofA Securities.

I have 3 -- actually, I'd like to ask these. The first one is looking at the latest performance of wood products, what are the measures you are taking to bring EBIT back to a positive level? And have you implemented any production curtailments in Q1 at this stage? The second one is on Beihai. Very clear message in your previous answers. The only question I have left over on this one is, what would be the estimated EBIT generation delta between the future Oulu sites and the current Beihai site, if you can guide us on that, please, that would be super helpful. And then the third question is on Lignode. Could you update us a bit further on the feasibility study and the current customer interest you have there? Obviously, we saw the Polestar partnership. Did you receive any firm orders from this partnership yet for the Sunila pilot plant, for example?

Thank you for your questions. On wood products, we could see the decline in the market starting already during Q3. So we have already been taking a lot of actions on that. As I said, the inventory management, taking down costs. We have had 4 low negotiations with the unions to also close down when the capacity is not needed to reduce cost levels. We've done this in several countries where we operate. And we continue, of course, to try to adapt to the changed reality of the inflationary pressures. So I believe that Q4 and Q1 are probably some of the bottom levels that we see in kind of construction industry. And so normally, many countries -- many companies choose to take down their inventories during the end of the year and that was something that we saw happened during Q4 in wood products. But all the actions that we mentioned in terms of cost reductions and so on are constantly taken.

And you have to remember that Q1 is always low when it comes to construction business and wood products. So that is obviously having effect as well.

But as we also mentioned, we could see that the 2 different businesses, building solutions, longer projects where they kind of have longer horizons. That pipeline stayed relatively stable comparably. And then the business that decreased very quickly was the traditional sawn wood business. And we have to remember that we had exceptional years, the latest years in this area with some tremendous results. So a normalization was in the cards sooner or later.

But this also, I think, shows the strength of the Building Solutions where we are investing and see the growth opportunities. It's less volatile business, as we have said all the time. It's relatively small share of the total, but that's a stabilizing factor going forward.

Yes. And that is why our strategy is to grow that part of the business with, for instance, these prefabricated modules in the Sylva concept. On the Beihai question, we don't comment between individual sites. Sorry, we cannot help you with that. If we look at Lignode then, we have several ongoing partnerships. Our focus -- and Polestar and Northvolt, as we've mentioned before, are the ones that we can make public. What we focus now is in parallel that we are doing our feasibility study using the knowledge that we get from these customer trials that we are doing because we're using the pilot material to deliver customer product to these and test them and make sure that we get the qualification right. This information goes into the feasibility study so we can make the design of the factory according to tailored needs of customers. And the focus is now up until we actually build the site or make the decision for the first site in Lignode, that we build up the customer offtake agreements. So we know that we have enough volumes to ramp up the new production site once decision is taken.

And then just a quick follow-up on Lignode. I was wondering if Polestar would eventually participate in a joint venture with U.S.? This was your initial plan for Lignode?

We have not discussed the joint venture at this point with them. Our main target, as I say, right now, is to make sure that we fill up the pipeline of volumes so that if and when we start up a new factory, we will be ready to start producing. So this is what we put our main focus right now. And we have parked the JV question for time being.

The next question comes from Cole Hathorn from Jefferies.

I'd just like some clarity on the Packaging Materials division. Could you give us an estimate of how much the maintenance impact was in that division, either quarter-on-quarter or the benefit that we should see into Q1? I'm just trying to get the run rate of what the underlying profitability of the Packaging Materials division should be? And I know you called out that there was more maintenance in Q4 than you originally kind of guided to. So just wondering how big that impact is?

So I can start with the general comments and then hand over to Seppo, but the planned maintenance was not different than we originally had planned. So the sites that were down were Skoghall, it was Imatra, Varkaus, Fors and Maxau. Now the 4 first sites, they are packaging material sites, Imatra and Skoghall, for those of you who know are the 2 big Consumer Board sites. So of course, having annual plant shutdowns with them in the same quarter had a big impact for the quarter. Actually, it's quite good to have your shutdowns in quarter 4, especially when energy prices are high. But of course, the effect for the division as a whole is big when these 2 sites have shut. If you remember also, we announced capacity investment in Skoghall, so the shutdown in Skoghall was longer than usual. What happened was that the start-up after these annual shutdowns was more cumbersome than we have thought. We had some issues in Maxau and we had also start-up issues in Skoghall, after the rebuild, which made the performance worse from a kind of cost perspective and also from volume perspective. That's why the initial EUR 125 million of cost for the quarter was, in fact, EUR 180 million. And as I showed you in the slide, if you look at Q3 and Q4 combined for last year and 2021, the total maintenance cost is the same. So it's an effect between quarters. And usually, we have Skoghall and Imatra in 2 different quarters. This year, it happened to be in the same.

On the FX, quarter-on-quarter it's in the region of EUR 40 million more maintenance cost in Q4 and year-on-year, roughly EUR 30 million, 30. So that gives you some flavor. And then when it comes to Q1 this year, so actually no board mills are down for maintenance. Anila Mill, which is now part of the Packaging Solutions…

Packaging Materials.

Packaging Materials division is having maintenance stop, but that's not really affecting the board business.

And then Veracel Mill is in Biomaterials.

Yes. Yes, in Biomaterials, yes. But in Packaging Materials, no sort of original packaging material mills are down.

And then just following up on this, you've called out that you've been renegotiating some of your liquid packaging board contracts which should help with the kind of price cost spread. Anything that you can give on what this means for kind of incremental profitability on that liquid packaging board? Is this you're going to need further step-ups in pricing to kind of reset the profitability levels? Or how should we think about the margins? And then linked to the liquid packaging board, the Beihai Mill, you've, over the years, qualified that mill on liquid packaging. I imagine that when you dispose that, that mill will still be able to sell liquid packaging as per normal. There's no kind of tied to the Stora Enso. I mean it would go with the mill right when you dispose it. So whoever acquires it would get that benefit of having a qualified liquid packaging board mill?

Well, if I answer the first question on pricing, we constantly, of course, monitor how we work with pricing. And as I said, liquid and aseptic packaging is a stable part of Consumer Board where we have constant and ongoing discussions with customers and how we set up the contracts. I can't give you -- I know you want to know how we're doing it, but I can't go into more details and answer that, as you can probably understand. Regarding Beihai, yes, the site is qualified for producing liquid packaging. Of course, it's for a customer who they choose to collaborate with is a choice not only based on the product and quality, it's also based on innovation capabilities and other value-added services. So ultimately, it's a choice of the customers who they want to collaborate with. But yes, the site is qualified for liquid.

The next question comes from Robin Santavirta from Carnegie.

My first question is related to China and you alluded to the opening of that country after several years of quiet stringent C90 measures there. What are you seeing at the moment in China? And what do you hear from your customers about the outlook for this year in China?

Well, I think the expectation is at least that some of the consumption that has been stifled during the last 3 years of COVID closures would come back and that the market would grow. Then, of course, long term, the market of China is probably not going to grow as fast as historically. That is also has to do with other factors such as demographics and so on. And specifically then, if we look at kind of our products and the packaging is a good prospect in China with a growing population and urbanization. Then pulp used for different end users is still going to be -- the global demand for pulp is going to be driven by the Chinese growth. We don't have a lot of business in wood products. That's not one of the key end-use markets in Asia. There, we focus more in Japan, Australia, Southeast Asia, where we have more prestige type of wood and construction for us. And then if we look at kind of the other grades that we have in paper and so on, Asia is not -- or China is not a big market for us where we focus. So that is what we see.

I understand. My second question...

We would need to open up more on the kind of different grades, for instance, in packaging in China, close, shorter, more long term.

Yes. Perhaps what I was sort of -- what I aimed at to get sort of a feel for the general demand that when it comes to pulp and paperboards because those are the markets that you should probably know the best. Just sort of thinking whether you can see a pickup in sort of activity levels there or more positive customers or essentially not?

Yes. So I can just share then in packaging side. And one of the grades, of course, which is that we are delivering. Liquid is, as I said, it's a stable grade. So that is a little bit different. But if you look at folding boxboard, for instance, in Q4, the demand for folding boxboard was down 5% and we expect the demand in Q1 to pick up and be around 3% to 4%. So this is kind of one testimony that the packaging is kind of picking up in China. If we look at softwood and hardwood pulp in demand in Q4, we had about a 3% increase in demand for softwood and hardwood and we expect a demand between the same levels also for Q1 in pulp side, so.

All right. I understand. Now I know you don't like to comment about pricing, but I guess up or down is something that you can sort of share with us to get some kind of view where we're going in this sort of volatile market. Consumer Board prices up or down going into 2023?

Well, we don't comment on pricing like that.

Not more than we already said that we have been successfully implementing price increases when it comes to renewing the contracts that we have renewed now around the new year has typically done.

I understand. That is fair. And the final question I have, you said, Annica, a stronger position going into perhaps more challenging times. What do you mean with that is that sort of related to the divestment of the paper business? Or is it the cost base? Or could you just sort of explain so we understand how do you look at this sort of potential downturn ahead?

Yes. First of all, I think, 3 years ago and so on, we had a much higher net debt position. So now even though we are doing these investments in growth, we have a very strong balance sheet. And I think a balance sheet and strong liquidity is some of the key positions to have if you enter a market that's more difficult. So we will continue to work with reducing our debt position and have a strong liquidity. So that is 1 parameter. Then of course, we did restructures and closed down the most unprofitable sites like Kvarnsveden and Veitsiluoto, they were also the sites that consumed a lot of electricity and energy. So they would have been in a quite difficult position and would, of course. So they would have been in a much, much more difficult position if we would have still had them. And of course, divesting the paper assets to other owners, we make sure that we find good homes for them with other players out there that will continue to run the business, but we also take away risk of quality and segment that has historically been very volatile, having quite difficult and poor performance in difficult times. If we look at kind of strengthening the position in our growth segments are Skoghall, Imatra, we have made continuous investments in our -- in Oulu now in our renewable packaging. So we make sure that the profitability and cost position of the sites that we have as leading cost positions and of course, in downturns and so on, you benefit from that. In Wood Products, we have also made sure to cut down costs where necessary, but also invest on sites with CLT factories that can kind of handle the volatility in Wood Products. And last but not least, cost position. If you remember, we did a cost -- or a profit protection program of EUR 400 and something million, EUR 420 million that we started 2019 with and we followed through on that the coming year and implemented on that. So our general cost structure is much more competitive and in shape. But this is, of course, something that we always adapt. When circumstances change, we need to make more decisions and look at what more possibilities we have. I believe...

The next question comes from Linus Larsson from SEB.

First question is on variable costs. And Annica, you said that they remain high. Should we understand that as Q1 variable costs going up compared to the fourth quarter? And if in that context, also could break down for us the variable -- the various variable costs, how wood is progressing, how energy is progressing, how chemicals costs are progressing, logistics, et cetera, Q1 on Q4, please?

Yes. Obviously, energy cost is one of the key drivers here, like I said earlier and key also for the full year inflation. And in short term, obviously, I think it's more around energy and chemicals. And on the wood side, it's a sort of mixed picture. Log prices are more stabilizing, but on the pulp side, the challenges are there because of the, of course, steady demand for pulp, but also increasing need and use of the energy wood as such. But I think for the full year outlook, the key thing is the pulp energy costs develop. And as you have seen, it's very volatile out there. And that's why it's very difficult to give very strict or sort of clear comment on the full year. But I think it's a very uncertain market in general.

But are you seeing higher variable costs as a whole for the first compared to the fourth quarter?

Yes.

Yes, for the first quarter.

Yes. Absolutely.

But visibility is of course more challenging. And -- yes. Well, as we all know also, as market cools down, also, of course, this will have an impact on other variable costs such as logistics or chemical costs and so on. But so far, we have not seen that coming through.

All right. That's very helpful. And with chemicals, I mean, that's been a cost driver now for a few quarters in the industry. Is that peaking up, is it starting to come down, or where are we in the chemicals cost cycle?

It depends a bit on what chemical it is. But in general, I would say that, that is very much linked also to energy prices as in many cases, they use natural gas as one of the input materials for the recipes and that is driving the chemical cost development as such. In some cases, it's easing, but in some cases, going up. So it is a bit mixed picture there.

And logistics?

Logistics are getting better now. The constraints are easing compared to how they were earlier, last year, have been at to the last couple of years. But -- so that looks somewhat easier. But obviously, fuel costs are effective for energy costs, how oil develops. So these surprises, they're actually going up currently as you -- on the market.

That's very helpful. And then just jumping back to the discussion on Beihai. Beihai has been a growth generator, not least for liquid packaging board, which is part of the product mix on that paperboard machine. How do you see your liquid packaging board market strategy going forward? Are you able to transfer some volumes within your system to mills that you intend to keep? Or should we expect very limited growth for you in liquid board on your existing or your remaining platform in the couple of years ahead?

Very good question. As you know, Oulu second step now is focusing on Consumer Board grades which are primarily within food and beverage and liquid. This, of course, is an investment that we are doing in combination with the other Consumer Board sites. So we will have the possibility to do products and transfer mixes between the sites of Imatra, Skoghall, Fors and Oulu and optimize the system. And all of these sites are leading cost-positioned sites with good availability of fiber and very good energy solutions, Fors and so on. So we see that we have the opportunity with the Oulu investment to optimize the Consumer Board sector and continue to drive growth.

Great. And then just finally on the integration of De Jong. What kind of contribution should we expect in the first quarter, if you could say something about De Jong's performance on the full year 2022 or even better the fourth quarter? And also how that will come into your P&L? What's the split between divisions?

Yes. Thanks. With De Jong, you have to remember, we just took it over early January. So we are at the early stages of integration and that is going well as planned and integration streams are there in place and in that sense, in full speed going ahead there. I think we are running out of time now. We are actually a bit of over time compared to schedule. So thank you for the good questions. And I know there might be more questions that are unanswered still, but don't hesitate to contact our IR and Anna-Lena to get some more help and answers. Thank you all.

Thank you.

This concludes the call. You may now disconnect your lines.