STERV Sees Loss in Paper and Writing Segment

In the second quarter, Finnish forest products company Stora Enso had a surprising loss in its Paper and Writing segment. Even though the secular headwinds for publishing paper in Europe are well known, Stora had previously been able to turn a consistent profit in the business in recent years.

Management says it is stepping up its cost-cutting efforts in response to the loss, but many wonder why such measures weren’t implemented earlier given the steady erosion of paper demand in Europe (year-over-year paper demand was down about 7%, down 10% on an annualized basis).

After a number of delays, Stora finally received the Chinese government approvals to build a plantation-based board and pulp mill in Guangxi. The problem is that in the time it took to secure the permits, Stora’s interest in the project may have cooled somewhat. The company’s original plan to build the EUR 1.6 billion integrated mill at once has now been split into two phases — the consumer board machine will be operational in early 2016 and the chemical pulp mill will come later.

As a result, any cost advantage that Stora might have had being vertically integrated won’t be realized for at least another few years. Stora also has a number of sizable debt maturities coming up between 2014 and 2016, which we think also influenced the decision to split the project into two phases. We were most impressed with the performance of Stora’s Building & Living segment, which produced EUR million 28 of operational EBIT this quarter — nearly matching the EUR 29 million figure generated for prior full-year.

The marked improvement in B&L was driven by strong demand (yearover- year deliveries were up 3.9%) and restructuring efforts started in late 2012. Svenska Cellulosa also noticed stronger demand for wood products in the second quarter, which could be a sign that a bottom has been reached in the European construction and home improvement markets. Stora’s consumer board and industrial packaging business again turned in steady results, which helped offset some of the weakness in the paper operations.

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