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Ladies and gentlemen!
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I hope you saw in this film that we in Stora Enso have started to rethink many things that we have been doing in a certain way for even hundreds of years. The example came from the Belgian Langerbrugge Mill. The raw material is recycled paper, and a significant part of the production is based on bioenergy.
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The final product is recyclable as well. Even the side product from the process, the ash, is used as raw material for the construction industry. I think this is a good example of how we should change. We have decided to call challenging new ideas and ways of operating with the word "Rethink."
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It means rethinking in many ways. It's about thinking in a new way, questioning old models, and renewing the ways of operating. When you arrived at the Annual General Meeting today, I hope you noticed that our image outwards has been reformed as well. The aim is to illustrate how we have been operating for quite a long time in this company. About a year ago, we decided to crystallize this new way of thinking within the word "Rethink."
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The change does not take place only within Stora Enso. I see, and we see, that the world around us is undergoing a tremendous, deep-going change. People all over the world are rethinking. They have to rethink.
Very often in the middle of disasters, they have to assess things from a new perspective. Many of our interest groups, for example, our shareholders, are rethinking matters. How to solve the problem of financial crisis in the world? How does the corporate social responsibility work in different companies? Such practical matters like as consumers in our local grocery store, we say that we don't want to have a plastic bag, we want to have a paper bag. All of this means rethinking the way in which we live our lives and treat our planet, which is our common home. For me personally, the important part of this message is that it is much more than just one word or the outward image.
It is a name for a change that has taken place, that has started for some time ago, and that will take place and go on for years. We will never say that now we are ready, we are so good that there is no room for improvement. I want and I hope that this is going to be our basic corporate philosophy. We not only want to challenge ourselves, but also you, our shareholders, others interested in our operations. A change like this has no value, at least for the shareholders, unless it has an impact in our business and its results. Already now we have several concrete examples of how our community of 26,000 people has managed to rethink traditional ways of doing things.
An example of this is that when I joined the company four years ago, I noticed that the tradition in this industry is to compare average costs. A lot was spoken about the width or the height or the length of a paper machine. To our minds, the only significant cost competitiveness is based on our costs towards the customer, and that's how we compare our performance internally. This is the basis for evaluating our investments and their return. Perhaps the most concrete example of this is if you remember the worst recession in 2008 and 2009 when our result was far from what it is now. We invested in three power plants. You saw one of those three in this film. It's a fantastic story, and it has been a very profitable investment even in terms of finances.
My second example has to do with the fact that a few years back, the keyword in this industry was specialization in your core competences. We wanted to run the machines in full capacity and keep the costs as low a level as possible. We questioned this. For example, in some of our businesses, we said that as the markets are changing and they are changing rapidly, it is important for us to be flexible to be able to manage our costs even when the markets go down or when there are major fluctuations. Instead of absolute specialization, we were looking for flexible production with optimal cost levels. We have outsourced, for example, mill maintenance and finance in order to increase flexibility. The outsourcing of the mill management operations is unique in this scale in our industry. I think it's unique in the whole of Europe.
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All right, about our performance. I've been the CEO for this company for four years and a few days. I'm humble, but I'm very proud too about what the people in Stora Enso have achieved. I want to say that our performance in 2010 was strong. It was good. It was achieved in difficult conditions. It was achieved through many painful programs.
That between 2007 and 2010, we managed to cut our fixed costs by about €0.5 million. It has been a core change for us. Here you can see the key figures. Our sales went up by 15%. Of course, we are comparing with the year 2009, which was an extremely difficult year. If you look at the EBITDA and EBIT, I dare say that not because of the market that we have achieved so well. Earnings per share also increased tremendously, and our net debt went down to €2.4 billion. This is strategically important because it gives us the opportunity to make choices and to make investments when opportunities arise.
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This may be slightly more interesting as a graph. Earnings, the return on capital employed, this is the average per quarter. Here you can see first a dramatic downturn that started practically speaking when I joined the company. There were a lot of problems. There was the threat of the Russian wood import duties. Then in 2008 within six weeks w e lost 15%- 20% of our market demand. All of this is history now.
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Profit or the performance that we published today indicates that we are on the right track. We are still on our way. We still have to improve the results of the first quarter of this year. The EBIT rose to €248 million, which was strong, and the return on capital employed was strong, over 11%. It's not yet 13%, which is our target, but it's going in the right direction, and it strengthens our belief that we have been done for the right reasons for the benefit of the shareholders, but also for the benefit of the future of the company and for the future of the majority of our personnel. I'll go back to our debt to equity ratio. Here is a graph representing the years from 2005 to the present time. We are now in a figure of €0.39. The question is, how is it possible?
There are three core factors. The first of them, in the beginning, we divested some of our operations, for example, the North American operations and wholesalers. We got some cash from those divestments as well. The people in Stora Enso have been able to reduce the operating capital by €1 million, and I think this is a huge achievement that we should thank our personnel for. Why is the strong balance sheet important? As I said, it gives us freedom to operate, and of course it gives us a responsibility as well. When in the beginning of 2009, the tree plantations of the Spanish company ENCE in Uruguay were on sale, we were able to acquire those. On the basis of those plantations, we started a mill construction project this year. Without this opportunity, we would probably have spent seven or eight years more.
Saving in time has brought us a lot of added value. About the same time, we also published an investment in Poland for a corrugated board. These investments all serve to support the direction that we have decided to go for. We are investing in renewable packaging to replace plastic packaging, and also we're investing in plantation-based pulp. We also announced that in Austria, we're going to increase our capacity in cross-laminated timber. It's a manufactured construction element that we have good experiences of. We have acquired a small but very skilled company in Finland called Eridomic, that is very skilled in manufacturing special roof elements and large wall elements. Those Finns who live in a house of their own are used to living in a wooden house. In Finland, we still have yet to achieve wood construction also in blocks of glass. Why is this?
It is better for the planet, for the environment. It is extremely competitive as a whole compared to steel and concrete. Now that we have some new rules in the field of construction, it has also been shown that it is very safe. This is one growth opportunity for us. Elsewhere in the world, this is more common.
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I hope that we will see many more examples in Finland. I've mentioned our personnel several times, and this personnel has gone through a phase of four years which has been very tough and very challenging. I haven't promised them an easier future, but today we can see that we have reached a new stage. Without these fantastic loyal people, nothing would have happened. In this context, in front of you shareholders, I would like to thank everyone in Stora Enso all over the world for the persistent work and effort that they have shown. Also, I would like to thank the board of directors , that has given excellent support to both myself and the executive team, both in good and bad times.
Our approach, Rethink, has not only influenced our performance and our key indicators, I think it has meant a radical change in how we think about our global responsibility, our global corporate responsibility, how our operations impact the communities in which we are building our future. An example of this is that we have been questioning and rethinking our methods of operating in the tree plantations, and we have been developing new solutions. Now, I will show you a brief example of film of Laos.
During the Vietnam War, more than 2 million tons of bombs were dropped over Laos. A big part of those bombs were felled over the area where we are sitting right now and where we are working. There is a very strong correlation between the poorest districts in the country and the effect of the war. Through having bombs in the ground, you cannot do any kind of efficient agriculture. The only thing the farmers can do here, still with the risk for their life, is the traditional shifting cultivation. That does not give enough food for them. We started to elaborate a model that would both produce trees and food. We have a unique plantation model, which is based on wide spacing between the trees. Instead of doing shifting cultivation as they did before the project arrived, they now plant rice between the trees. We have the same number of trees per hectare as you would have with a normal and traditional plantation.
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Stora Enso plantation model is committed to 100% clearance of all the areas that they plant. We have two purposes for clearing the bombs. The first is to keep our workers safe, and the second is so that the villagers have a safe place to plant their rice. I believe the most important concrete action is the hiring of the farmers as labor, because that gives the farmers cash income, which they can buy rice or other commodities that they need. We are talking here about farmers that from their own rice production are rice maybe for two to three months per year.
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Before we go into a new area, we have two main surveys that ought to be done. One is the land use survey and the mapping exercise, which we do with the villagers and with District Officials. This exercise will give us total area of land in the village. It will give us spirit forest, agriculture land, and other types of land that should be respected and not used. Since the start, we have made sure that everything that we have done or planning to do has been transparent and well understood both by NGOs, government, and also UNDP.
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The government is often using the Stora Enso project as an example of how others should do similar projects. I definitely think that we are setting a benchmark here. This is not a charity project, but through this model, we all benefit. The farmers get more food, and we get trees that grow much better.
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Right.
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This is not a charity project. I'm saying that to you as shareholders. It's a pilot plantation. It's only 400 hectares. It's very small, but it's a place where we can learn to do these things better than anyone else even has tried to do them. It's important for us when we invest money in these projects because we're going there for decades. We need to be a welcome partner, and this is very closely associated to how the very poor community is going to see their lives change.
Otto Bruun, Tuomas Vallgren, and Niklas Toivakainen have requested that the AGM discuss the plantations of Stora Enso in Brazil and China and our activity and operations there. The board has received a letter, and I would like to say to begin with, because one of the questions deals with the extension of Veracel or the Brazil Pulp Mill. We have, of course, discussed that, and we are discussing it, but there are no decisions about expansion. Even when any decisions are made, as always, they will require a very thorough survey and several kinds of surveys of the economic impact, the ecological impact, and the social impact of the investment. These surveys, if we decide to go on that road, would then be completely public. There is nothing to hide in any kind of report like that.
It's very important to us and myself that local people participate in those surveys and making them in Bahia. We will not be able to make them from Helsinki. The same shareholders have also requested a report on how local people participate in those surveys and making them in Bahia. We will not be able to make them from Helsinki. The same shareholders have also requested a report on how the public criticism, which has been seen in Finnish media against Stora Enso's operations, and how that has changed our activity. H ow the dialogue is continued with the bodies who have expressed that criticism. Let me begin with what has not changed. I have been personally involved in this. I have had the opportunity to visit these areas.
At the outset, I have said and I keep saying that everybody is welcome to help us make things even better. We're keeping our eyes and ears open. We believe that we are doing good work, work that is good for in all areas that we are working in. It's not perfect. We're always open to dialogue. We're always open to learn new things, essentially and locally. In those places, we have also set up a new unit in our company. We call it the Global Responsibility. That unit will now challenge and revise and rethink the ways together with our partners, the ways in which the long-term responsible plantation business is run and how we develop the pulp operations. This was a living example of a method that I think nobody else has yet applied. We're very happy about it, myself included.
Once we have anything concrete to report to you, we will let you know. We're proud of these matters, and we want to tell about them through all channels. We want to talk about the change. At the same time, we must, and I say this myself, it's something I feel that we must discuss with all stakeholders better than ever how to improve our dialogue. Because there are many new channels available to us, including social media. We must be open and positive, and we want to be that. We must be open and positive in the dialogue. The same shareholders have also reported the land disputes in China and Brazil and the court cases. Start with China. China is completely different from Brazil. Southern China is very different from the Eastern Coast of China.
In order that you have some sort of an idea about it, where Stora Enso's plantations in Guangxi are, there live as many people as there are in the whole of Finland. In practice, that means that the contracts about the land management, the number, the thousands and thousands of contracts there are, and we have been reviewing them for more than a year, and we still continue the work. There are so many of those contracts. We are publicly committed to the fact that if there are errors or inconsiderate clauses in them, they will be revised. I will just ask you for a little bit of understanding, telling you that it won't be over in a minute. The Bahia state in Brazil, where there is a court case against our joint venture, Veracel, there are court cases.
At the outset, for the most part, those court cases are from the construction project. They are related to the subcontractors' agreements, and that's more than 10 years ago. Despite that fact, Veracel is continuously very active in attempting to get all this sorted out and behind them. Finally, there was a demand for independent surveys in China and Brazil. I ask for your understanding for the fact that when Stora Enso makes investments in projects of this kind, it is on a scale of billions for 30 years. This means basically that a company that understands its responsibility will carry out independent surveys of economic issues, of environmental issues, and of social issues. I'm taking my example from the environmental issues.
Some media have spoken about the detriment to water balance in plantations, but when we invest billions of money, we absolutely want to make sure that the soil will be viable for decades. I think it's important to note that our surveys are not secret or confidential. They are public. There is no mystery here. We are happy and proud of these projects, and anyone is welcome to read all the reports and surveys on them. As to Veracel, that's a joint venture company with Fibria in Brazil, the decision was taken before my time. I'm not trying to steal any of the honor for it. I feel that it was a fantastic strategy adopted by my predecessor and the board. It is the best Pulp Mill in the world if you speak of cost efficiency. It's being criticized interestingly from Finland.
That is why I would like to show you another point of view on Veracel, a point of view which unfortunately has not been shown in the media. It's only one viewpoint, but do take a look at it and then think about it yourself and make up your mind yourselves.
This area was untouched for several centuries until logging activity almost destroyed all the rainforest. By the end of the '80s, only 6% of the regional rainforest coverage remained. 97% of the properties that Veracel bought were used for cattle raising. Most of this area was already degraded when Veracel bought it and established a Pulp Mill.
It was very difficult to imagine a business here, and we decided to do it with this model, the mosaic landscape concept. That is, you have a eucalyptus plantation together with the rainforest. With this decision, we brought back more rainforest and increased the biodiversity.
We used 50% of the area to plant and 50% protected areas. Veracel decided to plant on the plateaus because then you can have mechanized harvesting and leave the valleys to recovery of the natural vegetation. Eventually, the Atlantic rainforest.
Veracel's Station is a private reserve. Our main goal is to preserve the biodiversity. We must provide research, environmental education, and charming nature activities. We have a relationship with the local communities through the courses and the workshops that occur here in our visitor center.
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We now have a social approach. The community began to have this relationship with the rainforest, began to give value to the biodiversity, and began to bring business with the biodiversity.
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Veracel is part of a Brazilian effort to establish, all over the original rainforest area, corridors that would connect the remains of the rainforest.
We plant each year 400 hectares. It's more social and environmental reason. We develop here with some cooperatives, and we train the people to know how to manage the native seeds.
In the regeneration of the rainforest, Veracel needs seedlings of the various types of plants.
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We choose which areas must be protected in order to connect fragments. If we have separated the fragments, it's not good enough.
We need them to be connected to each other. Why? Because the genetic variability, the animals, and the plants must have a diversity.
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When you make a connection between those fragments, the species can make a migration process from one fragment to another. We use the protected area of Veracel to make this connection. It is not a philanthropy. It is good for the business, it is good for the environment, and it is good for the local community.
Once again, this is not the absolute truth. It is just one viewpoint, our viewpoint, not that of us in Helsinki, but that of the local people, those who know how things are and who know the community in Bahia, Brazil. In Bahia, things are being improved continuously. Other opinions are important. Criticism is important. It is actually welcome. The aim of that criticism is to try and improve things and to bring positive solutions, to challenge, to rethink, to reform.
We also want to involve you, our shareholders, on this journey, this rethinking journey. It is a journey of learning. We keep learning things every day, and it is a never-ending journey, actually. No matter whether we are thinking of NGOs or local government and dialogue with those, on environmental issues, social responsibility, or whether we are speaking of how we are going to leave this planet, what it is going to be like when we leave it to our children or grandchildren, so that it will not be choking in plastic. These are important things, and Stora Enso can do an awful lot with these things. It is not only just about Stora Enso and its shareholders. We think it is about all consumers and the future of the next generations and the future of planet Earth. Once again, I would like to thank you.
I hope that this brief review has given you some new perspectives. I hope you have seen, noticed that we also published a recent report. It was written like a magazine. There are many stories in it f rom Laos, Veracel, Belgium. There are sad stories as well. From Varkaus The sad projects in Varkaus. It is all been written there quite openly. We have allowed people to say what they felt, and we have then tried. It is an explanation of why difficult things have to be done also. This is the spirit that we want to base our progress on with all our stakeholders, including our shareholders.
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