Stora Enso Oyj (STERV) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. We are very happy to announce that we are initiating a strategic review of our Swedish forest assets, including the potential partial demerger in order to create Europe's leading stock listed, publicly listed forest -- pure forest company. Next page, please. So this is a natural line in our development where we have been -- can I get the next page? Thank you. So this is a natural development of the focus on building a stronger, more valuable Stora Enso. We have taken lots of actions to improve our underlying profitability, our performance. We have 4 quarters in a row been able to improve our adjusted EBIT and our profitability. And that comes to a large extent through all the actions we are taking in order to improve our competitiveness and reduce costs. We have also, during the last 1.5 years, freed up about EUR 700 million from working capital, taking down working capital as a percentage of sales from above 14% to 7%. We continue this work. We continue focusing on driving profitability and competitiveness of our company. And as other steps, recent announcement, we have announced in connection with our Q1 report, a leaner and more customer-focused organization to support our strategic objectives. And also a couple of weeks ago, we announced that the sale of 175,000 hectares, so representing 12% of our Swedish forest lands valued at EUR 900 million in the deal. And as we are retaining 15% ownership in the company, the cash proceeds are going to be at closing EUR 790 million to strengthen our balance sheet and to enable also development and further enhancement of competitiveness in our company. So just as a reminder of the signed forest deal, this would mean that looking into 2024 figures that we are with the sale, losing some EUR 25 million of EBITDA. But out of this EUR 25 million, EUR 15 million is cash EBITDA. And we get, as said, a valuation of EUR 900 million and cash proceeds of EUR 790 million. When we announced our intentions to divest 12% of our Swedish forest lands, we clearly said in October of last year that there are 2 objectives here. There is the objective, of course, to get cash to strengthen our balance sheet, but there is another very important objective, and that is also to clearly confirm and crystallize the true value of our forest assets in Sweden because this 12% is very representative for our total forest ownership in Sweden. And all of this has been done. The deal has been signed with a long-term 15 plus 15-year wood supply agreement. So really ensuring wood supply to Stora Enso's industrial operations and with a significant valuation and cash proceeds. So it's important to remember this deal as a starting point in a way for what we are now announced yesterday evening. So we are now initiating a strategic review of the remaining Swedish forest assets, so the remaining 88% in Sweden, which corresponds to 1.2 million hectares and a fair value of EUR 5.8 billion. These assets possess distinguished operational, strategic and financial profiles. So in the Forest business, we see opportunities to create steady income and cash flow, and we see significant value creation opportunities, as also in the same way in the renewable materials company where we have the strongest offering, we have leading market positions, and we have very cost-competitive integrates and production operational activities. So the initiative here aims to further increase business focus, streamline operations even further and fully unlock the value of both the Forest assets and Stora Enso's core renewable materials business, very much focusing on renewable packaging business. We will explore various options, but we are clearly also highlighting here the potential separation and listing of our Swedish forest assets business through a partial demerger. And we believe this can be a value-creating and very interesting opportunity for strengthening of both companies in creating 2 Europe-leading companies in their fields, renewable materials with a focus on renewable packaging as well as at the same time, Europe's leading pure forest company with interesting value creation opportunities through new revenue streams related to, for instance, renewable energy, wind, solar, but also carbon capturing, carbon credits and carbon sequestration. There are new clearly visible value streams visible there. Next page, please. All in all, our Swedish forests, 1.2 million hectares remaining after the divestment of 12%. They are hugely attractive. They are in areas with high productivity. They are managed in a very sustainable, extremely good way, which is also ensuring high productivity. And they are located, as you can see here, in the south or mid-south part of Sweden, where also the forest growth is higher than, for instance, in the more northern part of Sweden. So we have high productivity here, high growth. And this, of course, enhances asset value. They are also optimally located in mid-Sweden with a huge demand for wood, for sawmilling and pulp mills. There is a lot of demand here in the proximity in this region with the annual demand exceeding clearly the harvesting capacity. So very well located and therefore, also very valuable forest assets. But now with these words, I hand over to our CFO, Niclas.

Thank you, Hans. And if we take the next page, please. And good morning, good afternoon, everyone. So just to build on what Hans was just saying, why are we doing this? How did we come up with this idea of doing a strategic review? Well, I mean, the basics, of course, is self-evident. We are here to delight the customer. We are here to run a good business, a good performance and work with our stakeholders and create value. We have 2 distinct parts of the business. As you can see here, we've now pictured it as Stora Enso and then the Swedish forest asset. Both are really, really interesting. Both are really, really attractive businesses. So if we start with Stora Enso, the industrial part. So Stora Enso is a global leading renewable packaging company. Sustainability is at the very, very heart of what we do. It's all about renewable materials. We have leading positions with a differentiated customer-centric offering. We have one of the market's broadest offering in packaging, if not the broadest, globally. We have a very strong culture and drive when it comes to innovation and also sustainability, which then underpins the business. As Hans mentioned, we have leading asset base, cost-competitive integrated sites and also diversified material supply, including euca pulp. And of course, a proven track record. And on that note, this is something that we -- as you know, we take very, very seriously. We have a number of initiatives ongoing with already proven results to continue to strengthen the company and strengthen the performance. If we then look at the forest and just to add to what Hans was saying already, we are the leading Swedish forest owner. We have optimally located assets in Central Sweden, which are in close proximity to pulp and sawmills. There are strong tailwinds when it comes to renewable materials. And of course, the forest is a critical raw material or the raw material for this. And this will drive market growth, both short term and long term. We are a leader in biodiversity, and this is something which we have worked on. We have a long culture, long history and also really, really strong assets and capabilities in biodiversity management. The Swedish forest is also a source of consistent, strong cash flows and also growth in those cash flows. And then as Hans mentioned, beyond the kind of more bread and butter traditional businesses, we can also see emerging new businesses when it comes to renewable energy, carbon credits and beyond. So the rationale of the strategic review is really to look into these 2 distinct parts of the business and then conclude on whether it's better to have them as separate businesses or have them continue as is. And as Hans mentioned, of course, we have already made some thoughts and analysis, but this -- I want to reiterate here that this is a start of a strategic review. We have not concluded anything yet, but we do, of course, have a hypothesis here of what creates the best business value here. We then move to the next page, please. Just briefly on the next steps. So we will now initiate the strategic review, and we will provide an update to you by the end of this year. And just as a reminder, we also do have already earlier informed you about the Capital Markets Day on the 25th of November 2025. So with that, I think we can open up for questions.

[Operator Instructions] Our first question comes from Lars Kjellberg with Stifel.

Curious, of course, to really understand what are the strategic options what you presented today. It seems like you pretty much shut case, this is the way to do this. What are the alternatives? The other one that I was thinking about, which is quite important in the context of this is I would assume that a separated forest asset can carry quite a bit of leverage. What are your thoughts on how much leverage it can take on and on what base? Is that the cash EBITDA? Or is it the EBITDA inclusive of the assets revaluation? And what was the other one I had? No, that's it, I suppose.

Yes. Thank you very much, Lars. And well, we have clearly outlined an option here in the stock exchange release. And of course, our job is to maximize shareholder value. So that's the leading star for making decisions in this strategic review. But as said, there is an option very clearly outlined here. When it comes to leverage and balance sheet for the potential 2 companies, this is a strategic review. It's premature to take any stance on that. But you are absolutely right that our objective is to create 2 very strong entities in their fields, Europe-leading forest company with a stable and very predictable cash flow and also value creation upside by strategic focus and development on forest as a business. And then at the same time, of course, our objective is to strengthen the renewable material company and to see to it that we also have a very strong P&L, but also a strong balance sheet. So of course, the forest company will have a lot of equity value and stable cash flows and both EBITDA and EBIT generation. But I think that's all I can say at this stage.

Lars, maybe I -- Yes. Just to add to that, I mean, it's -- as you hear, it's premature. We are initiating a strategic review. So I don't want to get into details about debt allocation. But in any case, as you know, debt management, debt reduction, investment grade is what we do here, what we aim for, that's very important for us. And if we would conclude that we have 2 strong companies, the same holds true for both of them. So strong balance sheet, investment grade, stable leading businesses.

Quick follow-up, if I may. You mentioned, Hans, the tightness of the market in that particular area. So I would assume that you, in the strategic review, would ensure similar to what you did with the divestiture, meaning having a significant forward-looking supply agreement if you go ahead to split the company.

We would -- in any option, we would secure long-term wood supply. And right you are, I mean, the sequence of event is there. I mean the deal of selling 12% with a long-term 15 plus 15-year wood supply agreement and then having with that deal, in a way, crystallized and clearly confirmed the value of the forests we have in Sweden because this deal is very representative. It also gives a good kind of an input and guidance for what we are looking for -- also for the rest 88%. But of course, with the difference that we are speaking about a partial demerger, we are speaking about a stock-listed entity with our shareholders, current or, let's say, future shareholders at the time of the demerger.

Our next question comes from Pallav Mittal with Barclays.

So a couple of questions. Firstly, if you could just clarify what you mean by partial demerger here. Is it that you're not spinning off 100% and you look to sell 60%, 70%, whatever and then sell the rest for cash? Because -- the reason I'm asking this is because it is slightly confusing in the statement because in -- you also go and mentioned that it will be split into a new company that would be wholly owned by -- all Stora and the shareholders. So that is why it is coming to this confusion. So exactly what I'm trying to understand is what will the SpinCo look like? And how much of that will be distributed 100% or less? So that's the first question. And then secondly, if you do the spin, are there any operational or cost dis-synergies that we should be looking at plus any tax liabilities with the Forest spin-off either for Stora Enso or for shareholders?

Okay. Pallav, if I take the first one. So again, just a reminder, we are initiating a strategic review. So we are looking at options, and we are highlighting one of the options here. But if we then -- to your question, one of the options is a partial demerger. And here, exactly as you say, there's, of course, different structures, but maybe the one which has been primarily in mind here is a tax-free spin, meaning that Stora Enso is split into a forest -- Swedish forest Stora Enso and the rest of Stora Enso and the forest asset is then given to our current shareholders or at the time of the spin shareholders. And that would mean 100% distribution, nothing remains with the Stora Enso Group. So 100% spin is what we are -- have as an option if we would conclude on a demerger and that an option there is to do it in a tax-free way for the tax-free.

Yes. And following up here on your -- the second part of your question. So basically, practically no dis-synergies. That's the way how we would manage this. And as Niclas said, in a tax -- without tax implications to our shareholders.

If I can just quickly follow up on the previous question from Lars around debt allocation. Clearly, you're not commenting on that. But is there any covenant issue with any of your bonds based on the one option that you are highlighting in the release?

No. No covenants. And again, I want to reiterate that whatever we conclude investment grade is what we are -- essentially, yes, what we are and what we will be also.

Our next question comes from Linus Larsson with SEB.

Many, many things to ask. Maybe I'll start with the potential buyback clause. So first of all, could you maybe share with us what the buyback clause looks like with the entity that has been agreed to be sold, which you're expecting to sell in the third quarter? And with whom with that buyback clause end up? Would it end up with the new potential SpinCo or the industrial entity? And also on that theme, how are you thinking around a potential buyback clause for the bigger forest entity? If you could just share a little bit on that would be super interesting.

Yes, Linus, thank you for your question. Well, first of all, in the 12% deal with the buyback clause, it's really -- it's there in order to ensure that we can continue the wood supply agreement another 15 years. So it's more a mechanism in order to really ensure that 15 plus 15, so in total, 30 years of wood supply agreement, that's why the buyback clause is there for Stora Enso, so one sided. And it would be theoretically the industrial, the renewable materials company who has that also in the case of this demerger and creation of a new stock-listed entity. And then when it comes to, let's say, a partial demerger and creation of a publicly-listed forest, the pure forest company, of course, there cannot be any buyback or similar arrangements in that case.

Our next question will come from Charlie Muir-Sands with BNP Paribas Exane.

The first thing is just related to the way you currently report. I think your Forest segment reported EUR 364 million of EBITDA last year. I just wondered how much of that would be attributable to the Swedish forest assets? Obviously, for 12%, it only seemed to be EUR 25 million. So some clarity against the actual contribution of the rest of that segment would be very helpful. And also whether you could clarify on the free cash flow basis, how much that will be either pretax or post tax? And then secondly, just going back to the 12% that you did sell and just trying to understand the rationale now for a spin or partial spin as opposed to selling more for cash proceeds. I wondered if you could just talk about the level of interest you got beyond the successful winning consortium that paid 1x book because I think you previously had indicated that, that was the minimum level you would be willing to sell at. So I just wondered whether there was sort of a depth of interest or whether you kind of exhausted what was like an interesting avenue to crystallize forest valuation through actual cash sales. And therefore, how much of this consideration of a spin is sort of plan B having exhausted plan A?

Thank you very much, Charlie. Well, first of all, I mean, the whole idea with this 12% forest sale, as we said in October of last year, is really to crystallize the value. And therefore, a good proxy when you -- if you try to estimate the EBITDA for the 1.2 million -- remaining 1.2 million hectares, you can use the -- as we said, the EUR 25 million EBITDA for the 12%, if you take last year's figures. But please remember that out of that EUR 25 million, EUR 15 million is cash EBITDA and the rest is basically value appreciation. So that gives a good kind of a proxy for what we are speaking here about when estimating for the rest. And of course, we'll -- if there is the final decision and when there is, we'll come back with more precise figures there. And then I'll let you answer the free cash flow question, Niclas. When it comes to the 12% sale, there was a lot of interest. And that also, in a way, encouraged us when it comes to maximizing value for our shareholders and for the interest of both the company -- the companies and for our shareholders to take this next step when it comes to the strategic review of creating Europe's leading pure forest company. So if you answer the cash flow part?

I mean not much to add on the cash flow. I mean we are again -- we are kicking off a strategic review, so it's far premature to kind of discuss cash flow of the entities. But as Hans said, I mean, the 12% sale is kind of a proxy that's out there.

Great. And so just to clarify, the residual of that forest segment's profitability, that's related to kind of internal markup on externally sourced Forest business and the profits from other elements. I mean I know that Tornator is equity accounted. So there's not much other fully consolidated forest. So just where the extra profit comes from in that segment then?

Yes. Again, we are initiating a strategic review. We can go through the current reporting in more detail. But at this stage, we just have to wait a bit and see what we conclude on the strategic review. And of course, at that stage, we'll open up and depending on what we conclude.

Our next question comes from Cole Hathorn with Jefferies.

I'd just like a bit of color on the discussions you've had with your key shareholders because they have a significant portion of the voting rights. Should we interpret this strategic review as the key shareholders are supportive of you exploring all avenues, including private sales to further insurance consortiums? Or is there any avenue that you are getting more pushed down just to understand what is actually on the table, insurance consortium, stale, spin? What are the options that you're exploring? And then secondly on how this will work because you've got 2 avenues for your business, you've got realizing value through what is effectively financial engineering on this forest spin to get value for shareholders, but also the operational turnaround of your industrial assets. How do you ensure that management time is also allocated to the underlying turnaround of your traditional packaging businesses?

Yes. Thank you very much, Cole. Well, first of all, naturally, our 2 anchor owners are deeply engaged here and also very supportive for this strategic review exactly as we have outlined in the stock exchange release where we clearly outlined one avenue forward. There was also from the Wallenberg family investment company, FAM, who is the anchor owner in Stora Enso, a separate press release following our press release where they outlined their support for this strategic review, and they also stated that if the strategic review would end up in 2 leading companies, a leading European pure forest company and a leading renewable materials and packaging company, they would remain as -- would want to remain as anchor and strategic owners in both companies. Of course, the Finnish state through Solidium, the other anchor owner in Stora Enso is also engaged here. And of course, they have also expressed to us their support of this strategic review. And yes, right, you are, Cole, let's remember that the most important thing for Stora Enso is the underlying performance, our financial performance, our profitability, serving our customers better than ever before, operating our mills and plants more efficiently than before with higher productivity. That is our key focus. And we have done great progress there, as you have seen in our quarterly reports, and we will continue on that path and focusing on that so -- but at the same time, also, of course, looking into our structures. It's very much partly engaging at least to a large extent, different people and teams, but we are committed to creating shareholder value. That's our absolute key target. And for that, we need underlying performance, profitability, cash flow, strengthening our balance sheet, working capital efficiency, but we also need to look into our structures as we have announced here.

Hans, then maybe if you allow me a follow-up. I know it's early days, but when you put out a public announcement often triggers more interest. So if a consortium of maybe some insurers come and approach you to take the full amount private, what would you do with ultimately the cash flow? If you had a similar structure as the 12% stake, does Stora Enso has the flexibility to either return the cash as special dividends or investigate buybacks for the shares? Is that an option that's on the table, if you're approached for that deal?

I think it's speculation, and every proposal that our company would get would be handled by our Board of Directors, but I think it's speculation. We have now published a stock exchange release with a very clearly outlined option and avenue for the future.

There are no further questions. I shall now hand back to CEO, Hans Sohlström; and CFO, Niclas Rosenlew, for closing remarks.

Well, thank you very much for participating here on a short notice. As you can see, the actions we are taking and also the strategic review is really showing our deep commitment to maximize shareholder value. That's the most important target for us in the management, for me personally, also for our Board of Directors, and that's what we are doing. We are seeing to it that we are maximizing shareholder value for the benefit of all our owners. Thank you very much for joining in here, also happy mid-summer for those who are celebrating mid-summer and looking forward to speak to you then in our next webcast. Thanks a lot. Take care. Bye-bye.