SEOJF - Stora Enso Oyj (SEOJF) Q1 2023 Earnings Call Transcript

2023-04-25 20:25:04 ET

Stora Enso Oyj (SEOJF)

Q1 2023 Results Conference Call

April 25, 2023 04:00 AM ET

Company Participants

Annica Bresky - President and Chief Executive Officer

Seppo Parvi - Chief Financial Officer

Conference Call Participants

Justin Jordan - Davy

Lars Kjellberg - Credit Suisse

Robin Santavirta - Carnegie Investment Bank

Joffrey Bellicha Meller - Bank of America

Charlie Muir-Sands - BNP Paribas Exane

Cole Hathorn - Jefferies

Presentation

Annica Bresky

Welcome everyone, and thank you for joining us today for our first quarter results presentation. In my presentation, we will cover the financial results and our strategic progress. We will also go through how we are managing the more challenging market conditions, short and long term and finish with an outlook.

Sustainability is, as you are aware, deeply embedded in our strategy and corporate culture. Our purpose to do good for people and the planet is more important and relevant now than ever before. 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 mitigate climate change. This is what drives both our underlying performance and our opportunities for innovation and growth. Please take a look at the image of the building on the right-hand side. This is how Stress new building of the headquarters in Helsinki will look like next summer when it's finished. And I'll come back a little bit to this building a few moments later on.

Looking at the key highlights for the quarter. We have acted on some major strategic initiatives. By discontinuing the paper division, we have reduced cyclicality, and we optimized the business portfolio with a focus on key growth areas. We've also completed the tactical acquisition of De jong packaging. It is doubling the size of our Packaging Solutions division and gives us the opportunity to integrate our long-term position in containerboard and advances our growth in renewable packaging by entering new markets in Western Europe. In Consumer Board, we are targeting growth in high-end renewable packaging by allocating capital to the Oulu site. And after that investment, it will be a mega site with the lowest cost curve in Europe. And lastly, the divestment process of our we High sight in China is progressing according to plan with good interest from potential buyers.

Now let's take a look at the key financials for the quarter. Group sales decreased by 3% to €2.7 billion, and we can see signs of weakening demand in most of our product segments, excluding liquid packaging. Higher sales prices in all divisions, except in wood products and also favorable foreign exchange rates had a positive impact on the top line year-on-year. On the downside, we had lower deliveries mainly due to market curtailments, a long-planned shutdown in Veracel and the logistical strike in Finland. We also had negative effects from structural changes, mainly related to the paper site disposals at Namal Sweden and [indiscernible] in Germany as well as the exit from the Russian operations.

As a consequence, the group operational EBIT decreased by 53% to €234 million and led to an operational EBIT margin of 8.6%. The operational return on capital employed, excluding ForEx, for the last 12 months was 16.5%, which is above the long-term target of more than 13%. If we now take a look at the operational EBIT variance, you can see here that the increasing price -- sales prices and product mix could not mitigate the continued year-on-year escalation in variable costs from fiber, chemicals, energy and logistics. The fiber costs increased due to higher pulp wood prices as the market is very tight, especially in Finland and Baltics. And fixed costs increased mainly due to maintenance cost, consumer bales and services.

Other variable costs increased in distribution of unit margin decreased because of lower sales prices in wood products. and from logistics strike for the group was approximately €26 million with majority of that impact happening in packaging materials due to lost volumes and production disturbances. On this next slide, you can see the quarterly impact on our operational EBIT due to maintenance activities, including both costs and lost volume. For Q1, the impact was €119 million, slightly higher than we estimated in conjunction to the Q4 report and up by SEK 12 million year-on-year due to operational issues that we had during the maintenance shutdown at the Veracel side in Biomaterials division.

In Q2, the impact is expected to increase year-on-year to €143 million due to maintenance shutdowns at 5 of our sites. Last year, we only had 3 maintenance shutdowns in the second quarter. The last years, we have accelerated our actions to fulfill our strategic road map and have successfully accomplished the significant transformation of our product portfolio towards our growth areas. You can see on the left that in 2006, 70% of sales were generated by the paper business. Today, we no longer have a paper division and 53% comes from strategic growth areas.

In the 2025 projections, we have excluded annualized paper line that is planned to be closed later this year. And have made sure that we continue with our investments in Oulu site to be able to take advantage of the growth that we have there. In 2030, our ambition is that 80% of sales would come from packaging, building solutions and biomaterials innovations. With this ambition, we can profitably grow with our existing and new customers in current markets and build market share in new markets and with new products and solutions.

In January, Stora Enso finalized the acquisition of the Dutch De jong Packaging Group, now a major part of the Packaging Solutions division. The integration process is proceeding according to plan, and we deliver annual synergies of about €30 million in EBITDA over the cycle. When the ongoing expansion projects in packaging converting are fully ramped up during this year, an additional EBITDA of €40 million is estimated to be delivered. A divestment of Beihai would include both the industrial side and forest operations and the released capital would support our already decided investments in Europe, improving our long-term profitable growth opportunities in existing sites such as Oulu site in Finland.

Existing and new customers in China and other Asian markets will continue to be served from Stora Enso's other global sites. And we are working very closely with our joint venture partners in China to manage the interest from potential buyers. We have no committed time line yet for the completion. On January 1, we discontinued the Paper division. The divestment of the new Melandaxal paper sites were completed during the first quarter and the divestment of the Hudecite was completed in April. And after evaluating available options, we decided to discontinue the divestment process of the annual paper site in April. The paper market continues to structurally decline. And due to the prevailing weak demand and the high input costs, we recently announced the plan of closing down on paper line producing uncoated mechanical rating [indiscernible]. The union negotiations have been initiated, and we will revert once that process is finalized.

I will now cover a few examples of developments we're working on in partnerships and cooperations with other companies to advance our innovations. For the development of lending-based products, we are collaborating with a Polish company called Page to meet market demand for bio-based and more sustainable plywood by using Stora Enso's bio-based high-purity lining can replace up to 40% of fossil-based glue in plywood. We're also collaborating with the Finnish company Valmet to advance the next generation of lignin process development and optimize the process machinery and asset design. The objective is to capture the growing demand for lignin-based products and increase their supply further by developing the quality and customer value of [Linden].

And lastly, we signed a joint development agreement with a Korean company coal on industries to develop industrial bio-based polyesters and their applications as well as renewable binder for raising formulations. This is a very early phase of the technology of using sugars extracted from wood. That is not there yet. But having the insight, we are now testing and developing future bio-based materials, which can replace fossil-based materials in this field. Applications area for this material covers packaging, car tire reinforcements, for instance, display films for electronic screens and panels. I would also now like to show you a couple of recent examples of how we are innovating to advance a renewable future in Wood Products division.

Looking at the image on the left, you can see how our new headquarters in Helsinki will look like when it's finished in summer 2022. This is a one of its kind construction, and there is no comparable wouldn't frame anywhere else in the world. The first mass timber elements have been installed and the building will be on our own headquarters, also hosted hotel and functions for the public. And this spectacular building will be a landmark for sustainable and climate smart construction built with our own Stora Enso's applications.

The timber structure stores around 5,900 tonnes of CO2 removed from the atmosphere while the trees were growing. The CO2 store is equivalent to driving 1,260 x around the world by car. The building on the right is a wooden landscaper in one of the wettest places on earth, which shows that wood construction is doable also in rains climates. Nangyang, Technological University in Singapore is one of the first timber land scribers in the world with an enormous 42,000 square meter footprint. The horizontal mega structure would be the second tallest building in the world is stacked vertically and is Stora Enso's largest delivery to a single building. Also here, the timber structure lose around 5,800 tonnes of CO2. And it will be safely locked in the structure for the duration of the building's total life cycle.

Now let's move over to the financials. All of the group long-term targets with the exception of the growth targets were achieved in the first quarter. Our sales decreased by 3%, even though the sales prices were higher. This was because of lower deliveries and impact from the structural changes, as I mentioned before. For the divisions, Biomaterials, Wood Products in the Forest division outperformed their ROC targets, while Packaging Materials and Packaging Solutions underperformed. Now I hand over to you, Seppo, to give us some more flavor on our financials.

Seppo Parvi

Thank you, and a nice start by looking at the cash flow that was impacted by working capital development and high CapEx. Going forward, we are putting now focus to improve cash flow. Cash flow after investing activities was €1 million, and working capital increased by €120 million, mainly because of the increased inventories that was somewhat offset by lower trade receivables and increased payables. Cash spent on capital expenditure was €253 million, which is mainly related to strategic investments like all conversion. We are openly focused to reduce our working capital turnaround, the trends that we have been facing now and also restrict capital allocation to improve cash.

In current business environment, cash flow is very important to focus and work on -- we are reviewing our strategic CapEx initiatives as well as other CapEx projects that we have in the pipeline. And we are now making a decision on a conversion of longer bit side somewhat later, so that will be postponed due to the cash flow-related issues and the business environment. We are also processing the investment in Linda when it comes to pacing and timing of that project.

Higher CapEx estimate is mainly due to growth investments in consumer work. This increasing from last year's €778 million, to a range of €1.2 billion to €1.3 billion. And in the strategic projects, we have included projects like Oulu conversion, [indiscernible] increase as usable plant. If you look at over time, you can see that maintenance and debt CapEx has been rather stable, remained stable, somewhat up now in '23, mainly because of the young transaction and acquisition. But strategic CapEx is more or less doubled compared to historical averages. It is obvious if there's something temporary that will come down over the time and the strategic projects are finalized.

Looking over a 10-year trends. Looking forward, roughly half of the CapEx is expected to go to strategic projects, somewhat less to maintenance and development and then typically around €80 million to biological CapEx. Then let's look at the divisional results and overview when it comes to the development, and I start by looking at the packaging materials. The high operating costs continued in the quarter, with weakening market demand outside liquid packaging part. Liquid package import market has been holding well and remains rather stable. Sales were down 1 percentage point year-on-year and price and volume decline was only partly offset by contribution from the whole recycled containerboard site that was part of the on acquisition and higher consumer portend paper prices. There was a clear trend when it comes to demand, we can demand of carton ports towards the end of the quarter.

Operational EBIT was down €167 million year-on-year as a reflection of higher operating costs, lower container port volumes and prices as well as impact from the logistics strikes in Finland. Like Annica mentioned €26 million in total for the group and a majority of statin packaging materials. These negatives will be partly offset by higher consumer [indiscernible] prices. Then looking at the price development in fact materials business. And in the containerboard side, we have seen this last summer downwards trend when it comes to selling prices, both kraftliner and testliner, and that has continued now also in first quarter of this year. When it comes to Consumer Board and especially folding boxboard prices, you can also see there that now beginning of this year, prices have started to go down.

Then moving to Packaging Solutions, where we could see strengthened results despite rising overall market demand also in this business. Sales were up 46% year-on-year, thanks to acquisition of De jong that more than offset the impact from the divestment of Russian operations in second quarter last year. Sales from the Northern and Central Eastern European businesses, that is the business that we had before the young acquisition. Those decreased slightly due to the soft market and lower sales prices. Operational EBIT was up €3 million 8 million acquisition of the young contributing positively as well as Northern Center, Eastern European markets performance was improved.

That mitigated the negative impact from soft market and the divestment of the Russian operations in the second quarter last year. Environment areas, all-time high first quarterly sales did not offset cost escalation as the pulp market turned softer during the quarter. Sales were up 10% year-on-year and dispose if you look at the sales all-time high first quarter. Sales were driven by stronger year-on-year prices, solid byproduct sales as well as favorable currency rates.

We could see increase in global market pulp inventories due to lower demand and weaker-than-expected Chinese market. And that was also reflected in the price development reset. Operational EBIT was down 22% at €91 million. Higher sales, as mentioned, did not offset higher wood costs, chemicals and fixed costs. Also want to note is that the Veracel site in Brazil hydro plant major annual maintenance shutdown, which had a significant impact on the result. The next graph on global pulp inventories development. As I mentioned already on the previous slide, we are seeing now increasing trends when it comes to pulp inventories and especially in the case of softwood pulp, we are the record high levels historically also hardwood pulp pulpwood inventories have been trending upwards during the beginning of the year. And this is, of course, then reflected on the global market pulp prices, where we see now the turn rate comes to price development, and we are seeing now clearly downward trend, both in hardwood and softwood pulp prices.

Then moving to Wood Products. Nurses and profits were impacted by significantly being the solo market and to exit from Russian operations a year ago. Sales were down 21% year-on-year, and construction market was impacted by market slowdown with fewer billing permits and projects. Lower sales were impacted by low volumes and sales prices, especially for [indiscernible] and exit from Russian operations as mentioned. EBIT was €129 million compared to first quarter last year due to lower prices and volumes and together with increased costs, mainly for logistics and electricity -- moving to forest. The strong and stable financial results continued as expected, forest business should be more stable and less cyclical. Sales were up 10% year-on-year at €687 million, driven by higher wood prices year-on-year, especially that is visible and pulpwood, whereas the good demand was slower year-on-year. Operational EBIT up 16% year-on-year, driven by stable and strong operational performance in our own forests as well as in the good supply operations.

Then about the forest asset fair valuation that remained stable at €8.3 billion compared to year-end last year. That is about €300 million up compared to a year ago it was standing at €8 billion. That is equivalent to €10.49 per share. And just to remind that we are updating market-based forest property prices end of Q2 and Q4 report.

With that, handing over back to you, Annica.

Annica Bresky

Thank you, Seppo. A few words now about our changed market guidance and the demand outlook for quarter -- we can see materially lower earnings forecast for the full year results of 2023. And therefore, we have issued a new guidance for the full year, estimating that the operational EBIT being significantly lower than last year's result, which was 1.8 -- roughly €1.8 billion. That means being more than 50% lower compared to 2022. We expect uncertain market conditions and continued inflationary pressures to be more challenging during 2023 than in 2022 as the market outlook worsened during the latter part of Q1 this year.

Compared to last year and for the full year of in 2023, group margins are expected to be adversely impacted by higher costs, particularly in relation to energy, wood and chemicals. We continuously take decisive actions and measures, such as pricing when it's possible. We have reinforced cost control for our own fixed and variable costs. And operationally, we focus on decentralization and that continues throughout the organization, together with reduction of overhead costs and focus on cash flow and lowering CapEx, as Seppo described. Capacity adjustments are also in place to respond to fluctuations in demand, and we adapt our products mix and we manage our inventories according to the market development.

I will now cover the market demand outlook for Q2 compared to Q1 this year per division. So, for packaging materials, we can see signs of weakening throughout the product portfolio related to reduced consumer confidence. Consumer Board service packaging of premium applications within liquid and food, pharmaceuticals, cosmetics, et cetera. And overall, we expect demand in Q2 for Consumer Board to remain stable even if we see weakening signs for some consumer board grades such as folding box for the food service board. And as I mentioned previously, liquid packaging board is more stable and resilient. Container board serves end users such as e-commerce and a slow move in consumables such as electronics as well as industrial packaging. Here, demand is expected to remain weak. And in combination with the current supply-demand imbalance due to the many capacity increases in the later years, the market will be challenging for the full year.

For corrugated Packaging in Packaging Solutions, demand is improving from low levels, mainly due to seasonality effects as the agricultural season now is picking up going forward. At the end of the quarter, as mentioned also by Seppo, we saw the global pulp inventories increasing and a weaker demand for pulp in both Europe and China. Prices started to drop during the end of the quarter. And in combination with continued high pulp wood prices, we expect this to put pressure on the margins of Biomaterials division. The construction sector remains challenging with a lower number of issued building permits at new housing starts and also private home renovations. Normally, there is a positive seasonality impact from on wood between Q1 and Q2, but we expect that to be limited. And of course, this is expected to have an adverse impact on demand for the Wood Products division this year.

As mentioned also by Seppo, the Forest division is the most stable of our divisions. And for this quarter, the tight would market conditions in the Nordics are expected to continue. Therefore, we expect the demand for sawlogs to remain stable, while pulp wood demand is expected to decline due to the slowdown in the overall pulp market.

To summarize, we continue to adapt and take decisive actions to navigate the challenging market environment. Our financial performance in Q1 was weak and disappointing caused by external factors such as weakening demand in most of the segments and continued high-cost inflation. We have ongoing actions in place to manage market volatility being flexible and adapting to the conditions, taking sourcing measures combined with reinforced cost control and efforts to lower CapEx. We have taken several strategic initiatives to streamline the company for long-term resilience and growth. And we are optimizing the business portfolio to focus on the long-term value creation by growing in renewable packaging, sustainable building solutions and biomaterials innovations. And we are positioning ourselves for long-term growth and a lower environmental impact to serve all our business sectors and our customers. And with that, I think we are ready to open up for the questions-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Justin Jordan.

Justin Jordan

[indiscernible] action to postpone the Langerbrugge potential version. Can you give us some outline of the options you have potentially with regard to disposing some of the lignode CapEx? And secondly, just can you outline your confidence in the ongoing interest in the Beihai disposal. I'm just curious whether this is a good time to be disposing of a consumer board asset given weak end market demand. And secondly, just a quick question for Seppo. Working capital increased by about $100 million quarter-on-quarter in Q1 relative to December last -- December 22 or about some $300 million year-over-year despite lower volumes and lower prices across most of the products. Can you help us understand what happened there and your ongoing efforts to reduce working capital as we go through 2023? Thank you.

Annica Bresky

Justin, unfortunately, I didn't hear the start of your first question. If you could repeat that.

Justin Jordan

Sure, Annica, apologies. Really what I was getting as I can fully appreciate the decision the Board has taken regarding Langerbrugge, can you help us understand what decisions might be possible in terms of rephasing or postponing some of the potential Lignode CapEx? And similarly, on the Beihai disposal, you've indicated clearly there's a considerable interest in the asset. Can you help us understand, given end market conditions for consumer board remains slightly weak, the Board's confidence in achieving a compelling disposal proceeds.

Annica Bresky

Thank you. So, when we look at project postponements, this is a natural part of, of course, being responsible in the current market environment. Then we are reviewing all projects that we have in our strategic pipeline. Referring to Langerbrugge, we have completed the feasibility study. We've gotten an environmental permit. And if and when the containerboard market is improving, and we're seeing cycle to turn, we are ready to push the button and continue. But so far, we have taken a pause in the project as such.

If we look at Lignode, it's one of the many projects that we have in our pipeline that we now will finish the feasibility study that we are conducting in Sollenau during this year, as we've said. And then depending on how the market looks like, we will take a decision of when to start such an investment.

On the behind disposal, as I said, the interest is strong, and we haven't committed a time line for such a divestment. And of course, we will take consideration to how the discussions are going before making a final decision on that disposal.

Seppo Parvi

And then Justin, on your question when it comes to working capital and like I mentioned in the presentation, especially inventories went down up. EBITDA went up during the first quarter. obviously, that is one key area that we need to address. That is something typical that happens when the cycle turns, and we need to put more focus on the sales and operations playing as well as inventory management. And obviously, also put focus when it comes to payables, payment terms from our suppliers. -- as well as when it comes to receivables and collections from our customers. Typically, the follow ratio to sales, and we see that, that should be below 11% rather closer to 10%. And I think there is potential €100 to €200 million at least to reduce.

Justin Jordan

Thank you, both.

Operator

Our next question comes from Lars Kjellberg from Credit Suisse.

Lars Kjellberg

Just first a quick follow-up on Justin's question. Can you help us think about CapEx in 2024. Should that be in the range million, €900 million if we assume that you only continue with Oluu? And then my question is essentially, a lot of these markets were weak in Q4 and heading into Q1 -- so what are the biggest changes you've seen in the progress of the first quarter that has shifted your view on the current year in terms of is it -- I mean consumer board is that an incremental new bus containerboard has been weak pretty much since Q3?

And the second point then would be on costs. Most of these cost items certainly would -- we've seen coming up for quite some time. I'm a bit curious about what you're talking about energy because most energy prices are materially down. Does that relate to hedges expiring in your business? And then if I may, just strike impact, if you can call that out, what that cost you in Q1. Thank you.

Seppo Parvi

Well, thanks, Lars. If I start with CapEx and energy, then hand over to Annica it comes to more market-related comments. So, this 24 CapEx, as you know, we don't give guidance for 24 yet. But as I said during the presentation as well what we said in the report, we are now reviewing CapEx pipeline when it comes to this year. Obviously, for this year, some CapEx is already committed that we need to see then what is uncommitted and what can be reduced for this year. And then we do the same for next year. And like already mentioned, we are post-morning postponing Langerbrugge as well as we are looking at the timing and phasing of lignode project. And we come back to 24% CapEx in due course.

When it comes to energy, you are right that energy cost, especially recently have been going down. There were some negatives during Q1 because of [indiscernible] like you said, the hedges, et cetera, that have been in place. We see now that [indiscernible] and pressure especially on electricity is going down. And so that is easing. But then if you look at the cost, that is then more than eaten up by higher output cost especially. And pulpwood cost is also a reflection of high demand. And at least so far, the capability of energy industry.

Annica Bresky

Yes. And just an addition to the energy question, yes, it's going down, but it's still higher than last year. And so -- and in terms of CapEx for next year, Oluu CapEx is roughly evenly distributed between the 2 years. So therefore, we -- as you know, we are not giving a guidance for 2024, but we will revert on that. On the market, what shifted during, I would say, March was the increase of inventories in the biomaterials and pulp market, the global inventories went up. China opening, even though it's been kind of seeing a resumed kind of consumer spending, it was not as strong as we had seen before the pandemic. So, we could see then pulp prices in biomaterials going down and spot prices going down. We know that local Chinese pulp producers are taking standstills in China, which is indicating kind of that there is a weakening in the pulp business.

In Consumer Board, we have had, as you also mentioned, stability or more stability, liquid packaging and also packaging diverting to food is resilient. But we have seen other segments being impacted in also Consumer Board at the end of Q1, mostly in the folding boxboard and end uses that go to cosmetics or electronics or other applications where consumer spending is simply down. So having those 2 shifts at the end of quarter 1, we thought it was prudent to come out and give a guidance to the market that we see the weakening starting now in the pulp business.

Lars Kjellberg

And just a clarity on the consumer, you still call stable volumes in Q2 versus Q1. How does that stack up what you just said?

Annica Bresky

Well, if we look at that overall, the majority of the consumer board is stable, but it is a difference in the grades. You asked why we made a shift in our comment. And this is the shift that we see. So, between Q1, Q2, it’s stable, but we give guidance for the full year.

Operator

Our next question comes from Robin Santavirta from Carnegie Investment Bank.

Robin Santavirta

Yes, I have a few questions. The first one is related input costs. Now we talk about energy a bit. But if you look at overall your team costs and compare then the out for Q2 versus Q1, should we expect input cost to increase Q-on-Q and Q2? And what are sort of the drivers there.

Annica Bresky

Yes. Thanks for the question. If we see between Q2 and Q1, totally on the variable cost side, they will increase. But between the different categories, we see different movements, of course. Energy prices, as we have described, are expected to go down even if they are going to be elevated compared to last year, also easing in logistic costs and transport. But then we see continued elevated costs within wooden fiber and that side, which is, of course, one of the major categories we have. They have a share of 33% of our total variable cost kind of structure. So overall, we see an expectation of continued increased variable cost compared between the 2 quarters.

Robin Santavirta

Can I ask about pulpwood price. There seems still to increase quite clearly in both Finland and also apparently in Sweden still increasing. Could you explain what do you see so far the latter half of '23 and 2024. And could you explain the dynamics that we have at the moment. Historically, when pulp prices and import prices start to decline, pulpwood prices in Finland and Sweden have also started to decline almost immediately after that. But now that doesn't seem to happen. What is going on here? And what are your expectations for the rest of the year.

Annica Bresky

Yes, you're totally right. That has been the historical situation. And of course, there are always lagging effect. So, when the industry starts going down, you will, at some point, see an ease of pressure on the pulpwood. However, the Russian war on Ukraine has cut the pulp wood availability and the influx of wood by 10% to 15% to the Baltic and Nordic market as a whole, if we look at kind of the inflows of wood. And that since the war is expected to be long term, and we don't see a solution on that. It means that there is a structural tightness on the market that is going to continue to impact us. But you're right, as kind of the -- and then, of course, in the trail of that, during the winter time, we also saw more on pulpwood being used for energy generation, especially in the Baltics area. So, all in all, I believe we are going to see a decline in pulp wood, but I don't expect us to go down to the levels that were before the Russian war in Ukraine, if I would summarize.

Seppo Parvi

And I would add that also the fact that the speed is used nowadays for heating that has then increased consumption of pulp wood for energy purposes as another driver.

Robin Santavirta

All right. And the final question I have is that if we look at -- you had a fantastic 2022, obviously, in '21 was good. But now you have quite steep declines in earnings and my view, based on also your comment is that apparently, the next few quarters will not be, by any means easier from a profitability standpoint. What can you do on fixed costs? It sounds like this is the place you need to sort of realize not only CapEx, but also the cost structures. Anything that you are looking at, at the moment or doing? How should we think about this?

Annica Bresky

Yes, you're totally right. And as I mentioned, the fixed costs are, of course, in a high focus. We focus on everything we can impact ourselves and fixed cost is part of that. It's but also of continuous improvement way of working. And if you remember, 3 years ago, we implemented a €410 million profit protection program. We are working internally with similar actions and all the divisions have plans, and we follow that up in a very structured way.

However, they cannot mitigate fixed cost, can by far not mitigate the pressures that we see on variable costs. So how we are working is, of course, we are making sure that we can defend and protect the pricing situation by taking curtailments where we can. We have -- or where we need. We have negotiated flow agreements, so we are able to adapt the production according to market demand. If we look at the variable cost side, our sourcing and logistics organization is, of course, negotiating the contracts and kind of making sure that we put the right pressure there as the logistics, for instance, market is easing up after the pandemic. We have opportunities there to reduce costs, and those will become visible going forward. So yes, we work with everything that we can impact.

Robin Santavirta

All right. Good.

Operator

Our next question comes from Joffrey Bellicha Meller from Bank of America.

Joffrey Bellicha Meller

So, hope you can hear me well. I have 2 questions from my side. The first one is I'm trying to gauge where is underlying demand compared to destocking across your businesses. So, if you could help us with any view you have there, that would be super helpful. And then the second one is around CapEx. You made an interesting comment earlier on the call saying that -- or was split evenly between 2023 and 2024. So, I'm trying to understand in your strategic CapEx, what is the roughly €300 million to €400 million left over? And what are they targeting? And more importantly, if CapEx optimization is going to target those €300 million to €400 million as well.

Annica Bresky

Well, in the strategic, I can start with that. We also have the rebuild of Skoghall for new capacity in liquid, the investment in energy efficiency in Enocell and so on. So that and [indiscernible] energy efficiency. So, all in all, the strategic CapEx is kind of in accordance to what we have communicated. And then if we look at -- and it will improve the cost competitive situation of our pulp mills, which I believe is the right thing to do, both now and for the future. And then if we look at destocking, if I start then in Consumer Board, we saw destocking in folding boxboard taking place, and we have reached and also seasonality, of course. So, we see that for the demand going forward in Q2, there is destocking going on. If we look at containerboard, the inventory levels there are still quite high, and the demand is weak. We know that there is a lot of curtailments taking place in Europe, but the inventories are still on elevated levels. And I should add for consumer board, the inventories are stable. So, we don't see any increase in inventories in consumer.

On the paper mills that -- and the paper business as such, there are no -- this is going to customer orders directly and inventories are limited. If we look at corrugated packaging, this is tailored according to customer needs. So, no significant inventories there. On the pump side, here, as Seppo also mentioned and showed in the graph, we can see the first increase now in global inventories. And for instance, if we look at softwood and hardwood, they are above the 5-year average 11 days above the average in softwood and 4 days above the 5-year average.

So, all in all, this is, as I've mentioned before, he will -- we follow the global pulp inventories because it's the first indication of the market starting to turn. And we also know that there are major projects coming on stream in the coming 2 years. So, it will be a challenging situation, I believe, if the market continues to be weak. If we look at the good products, even though it has been weak, the inventories in Santimber are still at a relatively high level. So there also, we expect, as I said, that this is going to be -- it's going to be some time before we start seeing the decline in those inventories. Even if there are now improvements here and there on several cattle markets depending on market activity.

Joffrey Bellicha Meller

Thank you very much for your reply, Annica.

Operator

Our next question comes from Charlie Muir-Sands from BNP Paribas Exane.

Charlie Muir-Sands

Apologies for the last time, hopefully, you can hear me. I just had a couple of follow-up questions, please. Firstly, on capital expenditure. Could you just quantify what are the total expansion CapEx commitments that you have that go beyond 2023? Just so we have an understanding of what's the minimal spend likely in 2024, if none of the new projects that are not already up and running, go ahead, please? And secondly, on De jong. Obviously, good to hear that the synergies are still envisaged to be as per your original guidance, but I wondered if you could talk about the operational performance of the De jong at the moment, whether that has continued as you had anticipated? And then finally, just on Beihai, can you just disclose what is the current annual profit contributions, just so we kind of understand what may be the potential scale of the disposal proceeds.

Annica Bresky

So, I can start. The De jong business is, as we said, showing a visible contribution to our Packaging Solutions business. De jong, if you remember, one of the big areas of kind of end users that they are focusing is on agricultural kind of products, which are more resilient, if you look at it from a long term. And seasonally, not a lot of vegetables are grown in the greenhouses during the first quarter and also the high energy costs that we had this winter delayed the start of the agricultural season. So seasonally, the end uses of agriculture with De jong will pick up -- the spring was also a little bit cold delaying the start. So, in that sense, yes, they are. But for the division, as I said also, we have the disposal of the -- exiting the Russian units in Packaging Solutions, which were very profitable. So, De jong had to pick up that slack compared to last year. And then if we look at Beihai, unfortunately, we do not comment on individual mills performance. But once we get further ahead in the divestment process that we can communicate, we will, of course, disclose kind of the particulars of the site.

Seppo Parvi

Then on terms of the capital expenditure commitments going forward and beyond '23. I think the main project there is Botanic already mentioned, this or conversion roughly €1 billion CapEx, which is evenly split over the year period. And then we have the maintenance and development CapEx, which typically has been €300 million, €400 million. So that is more or less given the sort of the range. But obviously, then there are smaller and bigger carryovers typically from 1 year to another. And then on top of that, we are in the pipeline. So that gives you sort of the ballpark where we are.

Operator

Our next question comes from Cole Hathorn from Jefferies.

Cole Hathorn

This is over 3 years.

Annica Bresky

Sorry, we didn't catch your question.

Cole Hathorn

Just following up on the impact into Q1. Is there anything you can comment on, is there any callout for EBIT impact for the destocking and downtime at the mills, Finland strike that you can quantify or a rough range that you can give? Because I imagine that due to the port strike, there were probably downtime that was less efficient than if you planned it and give a notice to the unions and you're able to get some cost savings. So firstly, just trying to understand if there's any item you can quantify for Q1.

Secondly, is following up on pulpwood. The commentary that it's going to be elevated but will ease, but not go back to the prior levels. Will there be a divergence between what we're seeing in wood costs in the Nordic region versus potentially somewhere in Central Eastern Europe. And I know you've got sawmills in Central and Eastern Europe. So just trying to understand if you think maybe Central Eastern European wood costs might ease before the Nordics? And then finally, just following up on capacity closures. How are you thinking about your wider portfolio? Is there anything that you could do from a temporary basis to manage capacity.

Annica Bresky

I can start with the last question and then work myself through. For capacity, we are flexible. And of course, if we see that depending on where prices are going and we see that we have a product mix improvement, so we move products to more profitable sites and take capacity closures at sites we estimate are not kind of performing as well. And this is a part of the continuous arsenal that we have, and we utilize it, as I said, when we need it. Regarding to wood flows in Central Europe, the markets kind of in Central Europe and Nordics are not really connected in terms of moving wood from one region to the other as such. But you are right that in the Central European part, the influx of wood from Russia is not as evident as it was in the Nordics where there was quite a significant kind of capacity of wood that was used in particularly Finland.

Regarding the strikes, yes, as I said, they did have an impact on how efficiently we could run our sites on some of the sites. We had to reduce kind of the speed of production and our internal stocks got filled up. And of course, even though the strike is over, it takes some time before it kind of eases up in the value chain. But I would not compare to kind of the global demand weakening that we see and the inventories kind of out on our markets, that's not an effect that will stay for long in that sense. And as said, the impact was €26 million for the quarter, and that involved both volumes and increased costs that we had due to that.

So, I think we have reached kind of the end of our time now. I thank you once again for all your questions, and I look forward to meeting you again at our next quarterly report in Q2. Have a great day, and thank you.

For further details see:

Stora Enso Oyj (SEOJF) Q1 2023 Earnings Call Transcript