JUKKA HARMALA - STORA ENSO OYJ - (STRV)
CEO Interview - published 02/26/01

DOCUMENT # LAR007

JUKKA HARMALA has been the Chief Executive Officer of Stora Enso Oyj since 1992. Prior to that, he was President and Chief Operating Officer. From 1984 to 1988, Mr Harmala was Senior Vice President and Member of the Board of Management of Kansallis-Osake-Pankki. Mr Harmala graduated from The Helsinki School of Economics. He is married and has three children.

Sector: Consumer Products

TWST: Jukka, start us off, please, with a description of Stora Enso’s core business.

Mr. Harmala: We are a forest products company, measured by capacity, the biggest in Europe and number two in the world. Our domicile is in Helsinki, Finland. We have three main business areas which we have decided to concentrate on: publication papers, fine papers, and packaging boards; which are supported by timber and pulp.

TWST: Stora Enso comes out of a merger between two companies; can you pinpoint for me the main events since 1998 in the corporate history?

Mr. Harmala: The merger between the then Stora in Sweden and Enso in Finland was announced early summer 1998, and we started to operate as one legal entity from the beginning of 1999. This was the very first real cross-border merger in this industry, a major step forward in the consolidation of the industry. At the time the two companies had gone through a number of mergers and acquisitions domestically, and had internationally acquired businesses in their main market, Europe. Since the merger, we have been restructuring, and disposing of smaller but also some major areas that we did not believe to be important to the core businesses. One of the biggest achievements was the disposal of the energy assets, which was worth about EUR1.8 billion. In the beginning of 2000 we made a major acquisition in North America, whereby we acquired a highly focused paper company Consolidated Papers, domiciled in Wisconsin Rapids. Nevertheless, we have, according to our strategy, closed down some capacity in our non-core businesses.

TWST: If we take the divestment of the power assets and the acquisition of Consolidated Papers as expressing a view about the likely direction of the markets in which you operate, give me your analysis of the important trends that you anticipate over the next 18-24 months?

Mr. Harmala: We definitely believe that the consolidation of this industry will continue. The merger between Stora and Enso was a major step forward, and we would anticipate more consolidation to materialise. At the same time what is happening in this industry is globalisation. Our clients, especially the publishers, have become global; which has led us to globalise our business as well. We have three main areas: one is the home market, that is Europe; we are still by far a European company, but we have emphasised two geographical areas where we need to have a stronger foothold. One is North America; where we have already taken a major step and are currently assessing what more we can do. The other geographical area with strong growth is Southeast Asia.

TWST: What growth rates are you forecasting for the three main segments that you identified at the beginning of our conversation?

Mr. Harmala: We are in a growth business; we grew even during the recession at the beginning of the 1990s. The consumption of paper and paper-related products has been growing all the way through. It's certainly growth that is somewhat less in reasonably mature markets like in Europe and North America. But where you have higher growth figures, is in what I would call developing countries. So together with the well being of people, the consumption of paper will continue to grow and In Southeast Asia we anticipate the highest relative growth figures. However, I don’t want to express any exact figures as they vary by geographical area and product quite a lot.

TWST: Turning to your capital expenditure and client investment programmes, one of the items that has been in the press more recently has been the restructuring of your production capacity. Can you take me through the strategic thinking behind this development and explain what the main points are?

Mr. Harmala: We've been expressing our desire to continue to grow in the areas I've already mentioned. The emphasis on growth would be mainly based on mergers and acquisitions; the organic growth does not play a significant role. At the same time, a company of our size and type — we have more than 100 paper machines all over the world — has to keep an eye on the asset quality which has to be on the high side of the industry and therefore from time to time we have to renew the capacity. In other words, construct something new, modern, more efficient, more profitable, and at the same time close down the oldest capacity. This is exactly what was introduced a couple of weeks ago.

TWST: This is the Langerbrugge Project?

Mr. Harmala: Yes.

TWST: What targets are you setting for return on capital employed for the various projects that you're going to undertake over the next 18-24 months?

Mr. Harmala: At the time of the formation, Stora Enso decided on essential financial targets for the management. One was for the return on capital employed to be over 13% over the cycle. Most of the individual projects are defined to beat that figure as there are some investments where you don’t have any return whatsoever. Typically the environment-related capex is something that we simply have to do. The other element is the balance sheet, our debt equity should be below 0.8%. The third element is that the capital expenditure as a whole should not exceed the level of annual depreciation. We have financial cornerstones, and therefore whatever we do in the field of capital expenditure, whether it is the Euro or another currency that we commit we have to fulfil this criteria in the whole group.

TWST: Moving next to two other important aspects — sourcing the raw materials for your mills and the energy market — can you describe how you source your materials and energy? Are you an owner of forests? How are you changing the portfolio there?

Mr. Harmala: Indeed we are a rather large forest owner, particularly in the Nordic area where we have approximately 2.7 million hectares of forest land. In Sweden, where we have the majority of our own forestlands, our own procurement is about 35%, in Finland 7%-8% annually. In the Nordic hemisphere we buy the majority of the wood from forest owners, for example, private individuals, institutions, companies or parishes. The third source is imported wood, which mainly comes from the east — either Russia or the Baltic countries. All primary fibre has to fulfil strict environmental criteria as to harvesting and to ensure that the forests grow faster than which we harvest. A totally different raw material base is recycled fibre.

TWST: How will the proportions shift between virgin and recycled fibre in your sourcing over the next period? Do you anticipate a further shift towards recycled fibre? What's the outlook?

Mr. Harmala: The use of the Nordic forest is actually fairly high — I'm speaking mainly about operations in Europe — and we won’t invest in products which would mean a massive increase of the primary fibre. This means that the use of recycled fibre is going to increase. The Langerbrugge project for example, is based totally on recycling and here we will close down two primary fibre machines.

TWST: Energy costs: what are the prospects for your energy costs now that you’ve divested your energy assets? What's likely to happen; how will that impact your profitability?

Mr. Harmala: We came to the conclusion that one of the basic elements of our production — energy — was deemed not to be generated by the company-owned facilities. This has actually happened in tandem with the opening up and liberalisation of the European energy markets, which were highly controlled and very localised. This dramatic change in our policy is based on the view that there will be enough energy at a cost which, generally speaking, is lower than what it has been historically in the highly-controlled markets.

TWST: Within the financials, what are the best measures for an investor to look at when trying to understand Stora Enso?

Mr. Harmala: The investors should initially consider our overall policies, financial goals, and the targets set for the company — these are the very long-term ones. They do secure the disciplines of how the business is going to be conducted. On the other hand, the overall profitability of the group vis-à-vis our competitors, has been taking strong leaps forward, supported by the synergy benefits created from the merger.

TWST: Critical issues facing the company over the next 18-24 months: where do you see potential limitations on growth?

Mr. Harmala: Certainly as a company, we are highly dependent on the overall development of the various economies. The consumption of paper, our key issue, is highly related to GDP. We are currently very carefully analysing the various reports on what is really going to happen, in North America and in Europe. As of today based on all the forecasts, it looks as if the growth is slowing down but would be high enough to support the consumption of paper. But nobody seems to know yet. Week by week especially the American economy forecasters seem to change their views, but this is certainly the critical issue for us.

TWST: You’ve alluded to the competitive environment very briefly: can you classify for me your competitors and how you stand relative to them?

Mr. Harmala: Today we are a leading global company in this industry; we still have a lot of internal potential to improve our performance, and we are a company who doesn’t actually look around at what the others are doing but try to concentrate on our own strategy.

TWST: What is the next likely development for you in your acquisition policy? Are you going to increase your presence in the US still further? Where will the next acquisitions be?

Mr. Harmala: We study all the possibilities in those target businesses and target geographical areas. Our guiding principle in acquisitions is profitable growth, but we must be ready to streamline our production assets and product portfolio as well. Thus divestments cannot be ruled out.

TWST: The three-year vision for the company: how will its revenues be diversified geographically and in terms of product in three years’ time; will it look very different from the company it is today?

Mr. Harmala: I hope it will look somewhat different based on what I said about our growth targets. I would anticipate us having a stronger foothold in Asia, growth in North America, and certainly further expansion in Europe as well.

TWST: Recently you gave some press conferences updating investors and financial analysts on developments at the company. What were the questions the analysts were putting to you? Are there any assumptions that they're making about the sector and your company which you feel you'd like to refute?

Mr. Harmala: What seems to be a major concern, as a result of our strategic North American acquisition, is that the return is not immediate. The other question is a very natural one: how are the markets developing? And the third one is the restructuring of assets. I would like to re-emphasise the necessity of upgrading the assets from time to time, not to fall back from technical levels, or profitability as they go hand in hand. So to reiterate what I said earlier about our growth, the markets should expect modernisation of capacity, if it’s done in the correct way, as we are sure we are doing.

TWST: Thank you. (OK)

JUKKA HARMALA
 Chief Executive Officer
 Stora Enso International
 9 South Street
 Mayfair 
 LondonW1K 2XA
 +44 (0)20 8432 1500

Each Executive who is the featured subject of a TWST Interview is offered the opportunity to include an Investors Brief or other highlight material to be provided and sponsored by and for the company. This Interview with Jukka Harmala, Chief Executive Officer, Stora Enso International, is accompanied by an Investors Brief containing corporate information.

To ask a question of this or any other publicly traded company, visit QAWire.com


Copyright 2001 The Wall Street Transcript Corporation
All Rights Reserved

The Wall Street Transcript (TWST) interviews are published verbatim, and TWST does not in any way endorse or guarantee the accuracy of any information or opinions expressed herein and all opinions are subject to change without notice. Nothing herein constitutes a solicitation to buy or sell any securities. TWST interviews with CEOs may include include "forward-looking statements", which are based on factors that involve risks and uncertainties. Actual results may differ materially from those expressed or implied. TWST shall have no liability whatsoever for any trading losses arising out of use of this information. Copyright 2001 Wall Street Transcript Corporation. All Rights Reserved.