What to do in an increasingly paperless society? Stora Enso adapts and innovates with 3 big announcements on being ‘fit for the future’

July 20, 2019 |

Lots of announcements coming in over the last few days from Stora Enso, from their EUR 10 million (about $11.2 million) investment in a pilot facility for producing bio-based carbon materials based on lignin to their Q2 financial reporting. And it doesn’t end there! They initiated a feasibility study for a possible cross laminated timber (CLT) unit in connection with its Ždírec mill in the Czech Republic and a new construction beam unit to be located at the Ybbs mill in Austria. They talked about the outlook for the rest of 2019, their latest decreased sales report, the challenges that lie ahead and their plans for navigating them.

In today’s Digest below, the details on the EUR 10 million pilot facility, the what and why of their wood products feasibility study, the focus on protecting profit and cash flow while their sales decline, how they are “fit for the future” by moving from paper to packaging and other biobased products, and more.

Lignin pilot plant

Let’s start first with the most exciting news – Stora Enso is investing EUR 10 million (about $11.2 million) to build a pilot facility for producing bio-based carbon materials based on lignin. Wood-based carbon can be utilized as a crucial component in batteries typically used in consumer electronics, the automotive industry and large-scale energy storage systems, according to Stora Enso’s press release.

Stora Enso’s CEO Karl-Henrik Sundström said on Friday’s investor call, according to Seeking Alpha’s earnings call transcript:

Last but not least…I would like just to make you aware of that this morning, we actually announced that we are going to do a investment for EUR10 million in Sunila. Sunila is the world’s biggest place to make a lignin production based on – fueling a lignin-based production of 50,000 tons. Now we are going to invest in a demo plant where you can actually – from the lignin, process it further and actually getting a graphite out, which is graphite, not the normal synthetic graphite based on fossil-based material but from lignin.”

This is a big move for Stora Enso and a signal that they are looking to the future of wood rather than the past. The pilot plant will be located at Stora Enso’s Sunila Mill in Finland. Stora Enso has been producing lignin industrially at its Sunila Mill in Finland since 2015. The mill’s annual production capacity is 50 000 tonnes making Stora Enso the largest kraft lignin producer in the world.

The construction of the pilot facility will begin before the end of 2019 and is estimated to be complete by early 2021. Decisions about commercialization will follow after evaluating the results of the pilot-scale production.

With the new investment, Stora Enso will pilot the processing of lignin into a carbon intermediate for electrode materials. This lignin will be converted into so called hard carbon anode materials for lithium-ion batteries with properties similar to graphite. Such batteries are used daily in mobile phones and similar portable devices, power tools, electric vehicles, in industrial applications, in stationary energy storage and grid units, and so on.

“This investment is another step on our transformation journey to explore new ways to replace fossil-based, scarce and high-cost materials with renewable alternatives. Using wood-based lignin for technical carbon material offers an exciting opportunity. With the pilot facility we will continue to build on our long-term work in extracting lignin from biomass to create more value from it. We will target the rapidly growing battery market in which companies are looking for high-quality, attractively priced and sustainable materials,” said Markus Mannström, Executive Vice President of Stora Enso’s Biomaterials division.

Put a lid on it

Other biobased products are on Stora Enso’s mind too. News came out in the last few days that Stora Enso and Valio are introducing reusable biocomposite lids this fall on crème fraiche and quark tubs. This cooperation is intended to trial how this new material works when combined with a traditional food package and to encourage Finns to reduce their food waste.

Biocomposite products in food packaging are one step Stora Enso is making towards their goal of replacing fossil materials with renewable solutions. DuraSense by Stora Enso bio composites, made of wood fibre, can be used to replace over half of fossil-based plastics and, depending on the product, reduce a product’s carbon footprint by up to 60% compared to conventional plastic.

“We were the first in the world to start using fully plant-based one-litre milk cartons in 2015. Last year, we converted all of our 250 million gable-top milk, yoghurt, cream, and sour milk packages to fully plant-based ones. These packages are a part of a larger concept where Valio is aiming towards carbon-neutral milk, i.e. resetting milk’s carbon footprint in 2035. We continue to think about new package innovation possibilities that we could try out and implement,” said Tanja Virtanen-Leppä, Head of Packaging Development at Valio.

Biocomposite products have similar properties to conventional plastic ones, and these durable and hygienic reusable lids are dishwasher proof, according to the Valio press release.

This ties right in with signals we’ve been getting from the last few months. As reported in The Digest in June, Stora Enso invested approximately EUR 350 million (about $390 million) to convert the Oulu paper mill into packaging production. The typical end uses for kraftliner are in packaging segments that require high strength, quality and purity, such as food, fruit and vegetables as well as heavy duty packaging. Production will target global export markets. Production on the converted machine is estimated to start by the end of 2020.

Wood products expansion

Stora Enso also announced on Friday that it has initiated feasibility studies for a possible cross laminated timber (CLT) unit in connection with its Ždírec mill in the Czech Republic and a new construction beam unit to be located at the Ybbs mill in Austria. Stora Enso also plans to consolidate production to increase focus on efficiency and to streamline the asset base. The transformation in Wood Products includes both selected growth in added-value businesses and consolidation of production to increase focus on efficient integrated production.

The proposed expansion in Ždírec would add a total annual capacity of approximately 120 000 m3of CLT. It would be Stora Enso’s fourth CLT unit, following the inauguration of the Gruvön CLT unit in Sweden earlier this year. The study is expected to be completed by the end of 2019.

In Ybbs, the planned expansion would add a total annual capacity of 60 000 m3of construction beams. The new beam product would be offered to Building Solutions’ customers and sold as a solution together with CLT and LVL. The feasibility study is expected to be completed by the end of the first quarter of 2020.

If the investments are approved following the feasibility studies, the capital expenditure is estimated to be approximately EUR 90 million. The transformation in Wood Products also includes the earlier announced plans to close the Kitee sawmill with a possible consolidation of spruce production to Varkaus, as well as the divestment of assets related to Thermowood production at Uimaharju sawmill in Finland. Stora Enso will consolidate the Thermowood production to Launkalne mill in Latvia.

“We see extensive potential for our engineered wooden materials in the market, and an opportunity for further growth in the multi-storey building segment. Our products substitute fossil-based materials and demand for our premium, renewable products, our proven massive wood components as well as our building concepts is constantly increasing. Consolidation would enhance cost efficiency, optimised raw material usage, efficient automatised production, synergies between mills and a strong market driven portfolio of products and services,” says Jari Suominen, Executive Vice President of Stora Enso’s Wood Products division.

Follow the Money

With the three big announcements also comes Stora Enso’s investor earnings call and the latest on their January through June 2019 report. Be sure to check out The Digest’s Multi-Slide Guide to Stora Enso below to see the slide deck that was just released on Friday.

The big news from the financial side on Friday was that sales decreased by 2.1% to EUR 2 608 (2 664) million. Operational EBIT margin was 11.0% (12.3%), above 10% for the eighth consecutive quarter. Operational EBIT was EUR 287 (327) million. Operating profit (IFRS) was EUR 142 (317) million. Strong cash flow from operations amounted to EUR 548 (357) million. The net debt to operational EBITDA ratio at 2.2 (1.3) increased temporarily slightly over the target level of 2.0, due to the restructuring of Bergvik Skog (impact 0.6) and the adoption of IFRS 16 Leases (impact 0.3).

Ok, so numbers are numbers, and numbers don’t lie, right? Before you get hung up on the lower sales, know that in the grand scheme of things, it’s actually not surprising given the decline in paper markets in Europe especially. The key here is that Stora Enso was prepared and has a good plan for the future. Just the fact that they are investing in biobased carbon options and looking at lignin and wood products way beyond paper shows that they knew this was coming. We’ve seen for years that paper is declining, thanks to online news outlets, e-books, online medical records, digital photography, cloud-based documents, and in general the move towards a more and more paperless society.

So what does Stora Enso’s CEO Karl-Henrik Sundström have to say about all this? They got it covered, they are adapting, and they are being super smart in navigating the challenges that they can’t control like the markets and decline in paper demand.

“We continued our transformation with two major steps during the quarter. Firstly, we finalised restructuring of our Swedish forest holdings by dividing Bergvik Skog with its shareholders. Currently we have a direct holding of 1.4 million hectares of forest in Sweden. This transaction increased our forestland holding by over 250 000 hectares and gives us better access to competitive raw material supply for the future. The direct ownership of forestlands improves our opportunities to further develop sustainable forest management, thus strengthening our competitiveness and self-sufficiency. This is important for us, as we strongly believe in the bioeconomy and the future business opportunities it offers to us. The average value per hectare in our balance sheet is 2 000 euros in Sweden. In the restructuring of Bergvik Skog AB, we decided to increase our part of the Swedish forest holdings, while one of the other major owners recently decided to sell with the price of 3 700 euros per hectare. Further, using the price statistics from LRF Konsult for smaller lots, the price per hectare has been 5 700 euros.

The second major step in the transformation was our announcement of converting Oulu paper mill to kraftliner packaging board production. This is another action that shows our determination to grow in the packaging sector and reduce our exposure in the declining paper business. We have quite recently completed a similar project successfully when we converted one paper machine at Varkaus Mill to kraftliner. We have a proven track record in machine conversions.

We reached double-digit operational EBIT margin for the eighth consecutive quarter, despite the further geopolitical uncertainty that impacted Stora Enso’s trading conditions. This materialised in a sales decline, and we have decided to intensify our profit protection measures. We increased the profit protection programme’s target from EUR 120 million to EUR 200 million. I am impressed by the actions we have taken throughout the organisation. The programme is proceeding ahead of plan, and EUR 60 million of the cost savings have already been achieved.

Our cash flow from operations was strong at EUR 548 million and we will continue on this path. We have intensified working capital management, addressing inventories is important in this economic environment. The focus on profit protection and cash generation is an opportunity to make us more fit for the future.

Bottom Line

So with an increasingly paperless society, where does a wood and paper based business do? It adapts, it changes, it refocuses, it innovates, and with that, it not only survives but succeeds. That’s Stora Enso’s plan in being “fit for the future.”

Sundström shared these thoughts on his outlook for the rest of 2019 during the Friday earnings call:

“And we have a new outlook for 2019, and that’s a reflection of the unknown and the very mixed picture we’re getting. We believe that there are a further deterioration in the trading conditions and a likelihood today higher than before or a hard Brexit. And we also see an accelerating demand decline for European paper.

Costs, as you’re aware of, has been rising in the whole of 2019 and that is something that we stand with. And therefore, we are only focusing on a guidance for the second quarter, and we are focusing on making sure the things we can address which is cost. And that’s the reason why we are increasing the profit protection program.

The guidance for the third quarter of 2019 is that an operational EBIT is expected to be in the range of EUR 200 million to EUR 280 million. During the quarter, there will be annual maintenance shutdown at the Beihai Imatra, Heinola, Ostroleka, Enocell and Veitsiluoto mills. The total maintenance impact is estimated to be on the same level as in the third quarter 2018 and EUR 30 million more than in the second quarter of 2019.

Before going into the Q&A session, I just want to make sure that the focus in the second quarter has been actually to prepare us to be fit for the future, protecting the profit and the cash flow. We had eight consecutive quarters of double-digit operational EBIT margin. And in this quarter that we have published today, the reason is that we actually accelerated the implementation of the profit protection.

Strong cash flow, up over 50%. However, further deteriorating in the trading conditions, which means that we are accelerating the – an increase in the profit protection program. And we believe that well over half of the EUR 200 million will be in the P&L of 2019. We’ve had EUR 60 million so far.”

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