Good afternoon and welcome to Metsä Board's Capital Markets Day 2018 here in London. It's good to see so many of our investors and analysts here joining us today. My name is Katri Sundström. I'm responsible for Metsä Board's investor relations and also being your moderator here today. This event is also being recorded and webcasted, so everyone online, either today or later on, welcome to you too.
Safety, one of the key KPIs for Metsä Board as well. In your presentation material, you will have there right in the beginning the exit instructions of this building in case of emergency, so please study them carefully. Our theme for today is very much around profitability. I'm sure that we can also touch all the hot topics that we have been discussing with many of you during the past year.
Of course, by the end of the day, I hope that you have a better, deeper understanding of Metsä Board as an investment and how we will create the best possible shareholder value in the future. Our program for today, we will first take the two presentations by CEO Mika Joukio and Head of Sales and Marketing Sari Pajari, followed by a joint Q&A session. Please save all your questions to there. The same structure goes for the second part of the day.
Those of you here in London, you also have a possibility to continue to breakout sessions after the main presentations where we're going to go more thoroughly into Metsä Board, and you have a great opportunity to ask more questions in there. Those of you online via webcast, you also have a possibility to send questions to the management simply by typing the question in your screen. I'm delighted to tell that we also have our Chairman of the Board, Mr. Ilkka Hämälä, here today, sitting here in the front row.
As the CEO and president to Metsä Group, he's also representing our major shareholder, Metsäliitto Cooperative. I'm sure that Ilkka is more than happy to answer any questions you may have to him. We can do that either in these joint Q&A sessions or then during the coffee break. Before we start the day, I would still like to introduce three of our senior executives here with us today, not having presentations here in the main stage.
I will start from Marjo Halonen, Head of Communication. Then we have Susanna Tainio, Head of HR, and Mr. Ari Kiviranta, Head of Development. So without any furt her ado, let's start the day, and I welcome our CEO, Mika Joukio, here on stage.
Okay, everybody. Welcome to London. I'm so happy to see so many faces here today, and I wish you welcome on my behalf also. My presentation, or the theme of my presentation, is Profitability Guides Our Future Growth. And in the beginning, I point out that our focus clearly is on high-quality paperboards made from fresh fibers. That's our focus. We have had this focus for years.
We have had a very clear strategy, as Chairman already mentioned a bit earlier, and we have been able to grow more than 10% annually during the last five, six years. And that's a very excellent also then starting point for the future growth. But then when you think about the market, so market offers excellent opportunities for us to grow further and improve our profitability. So we are the market leader in our chosen products.
On the right-hand side, you can see that we have 35% of European folding boxboard capacity and 32% of white kraftliner capacity based on fresh fibers. So we have pole position here in Europe. Our strategic cornerstones are focus, growth, and profitability. So focus clearly on these fresh fiber-based paperboards, high-quality paperboards, and growth together with our customers who are brand owners, converters, merchants, and globally.
And then profitability, two elements, of course, excellent cost efficiency and healthy sales prices as a market leader. And Sari Pajari, as well as Harri Pihlajaniemi, will go through later these topics, Harri on the cost efficiency side and then Sari concerning the sales prices. As already mentioned, global trends are driving our growth, and Sari Pajari will go through more detail on those a bit later. And strategically, it's very important that we are self-sufficient in fibers.
As we know, the biggest shareholder of Metsä Board is Metsäliitto Cooperative, and Metsäliitto Cooperative is owned by 104,000 Finnish forest owners, and that means that we have high availability of northern wood. We have control of raw material from stump to our own production. Then when we have pulp in our own hands, either by having own production or then this ownership of Metsä Fibre, so roughly 25%, so we are able to tailor-make the pulps for our own needs.
That has been very important when we have developed our products, and that will be also important in the future when we continue to develop our products. As said, we are part of Metsä Group. Let's look back for a while. Back in 2005, Metsä Board made a decision to exit paper business. Those days, we had more than four million tons of different kinds of papers. We had uncoated fine paper, we had coated fine paper, we had LWC, we had SC papers. And then the decision was made to get rid of the papers.
It took 12 years to get rid of the papers, and finally, early July 2016, we produced our last paper reels in Husum, in Sweden. So since the beginning of 2017, Metsä Board has been a pure-play paperboard company. So our sales went down until 2016, even though we grew with our paperboards, but at the same time, paper sales declined. And then after 2016, when all the papers were sold, then since then, we have been able to grow based on our nice volume growth in paperboard. At the moment, we are at the level of EUR 2 billion in sales.
Then, operating result, quite nice development also there. So, 2016, we had this Husum investment shutdown, but since then, we have been able to improve our profitability quite nicely. And today, we have a total capacity of two million tons. Mr. Pihlajaniemi will go through a bit more detailed where the capacity is located. And then, when having a clear strategy, having improved results, so our enterprise value has also developed very nicely, as you can see here.
And together with this, we have been able to also nicely and positively develop our dividends. Our financial targets are here, no reason to change. So, target is to grow over the market growth in volume, then comparable return on capital employed, more than 12%. Last 12 months, already more than 14%, so nice result. Then net debt to comparable EBITDA in all circumstances, whether we have bigger investments or smaller investments, and so to be below 2.5, and now we are at the level of 1 at the end of September.
And dividend policy, we aim to distribute at least 50% of the result of the financial period in dividends. Okay, let's look at the market. So 36% of the whole packaging market is either board or paper. And that, so to say, slice of this cake is growing roughly 3% annually. But again, it's good to remember that the lion's share, the major part of this packaging material business is non-renewable materials.
And as we already saw in video, there are also some negative consequences of that, plastics in the oceans as an example, or then plastics in the landfill, and so on. And of course, this creates again excellent opportunities for us as a high-quality paperboard producer to develop our business profitably in the future. But it's not only the big picture. So the big picture, that renewable materials are replacing non-renewable materials.
But then if we take and have a look at our own products, so light paperboards, so we are able to get savings in production, so less energy, less water, less raw material, and so on. Then we are able to get savings and CO2 emission reductions in transport because the product is lighter. And then at the end of the life cycle, our products generate less waste because they are lighter. And these are not only beautiful words. So we have been able to reduce our fossil CO2 emissions per produced ton almost 50% in 10 years.
Ladies and gentlemen, 50% in 10 years. It's not, I mean, it's quite a lot. It's remarkable. Then there are other achievements in this sustainability area. We follow very carefully all these key figures which are listed here or shown here. We go through that in the management team regularly, and it's very important. We have also got recognitions, external recognitions for that work. That is also important. Sustainability is an integral part or integrative part of our daily work.
Whatever we do, there is also always this sustainability angle. Okay, future. Profitability guides our future growth. Before moving to future, just a few words on what we have been able to do during the last five, six years. We have been able to grow more than 10% annually during these years, and that's well and clearly higher above the market growth.
How we have been able to do that? Simply by investing. Of course, we need to sell that capacity. During this decade, we have invested both in Finland and in Sweden. In the beginning of this decade, so we had these so-called debottlenecking investments in Finland, Simpele, Äänekoski, and Kyrö mills. We increased capacity altogether by 150,000 tons. In 2015-2016, huge investments in Husum. We built a new folding boxboard production line, having capacity 400,000 tons.
We closed down two paper machines and converted the third one as a linerboard machine, having capacity of 270,000 tons today. Then the latest investment. Last year, we invested in Husum also the new extrusion coating line, having capacity of 100,000 tons. Based on these capacities and capacity increases, we have been able to grow. What next? Profitability drives our development.
And our top priorities are coming from our financial targets. Our intention and clear target is to keep Return on Capital Employed above 12%. And then we have a clear desire to deliver higher, improve our shareholder value also in the future. So these top priorities are very, very important. And then as far as the investments are concerned, we saw that the best returns can be achieved from medium-sized investments to increase capacity of the current production lines at our current mills.
We have several options for that. And that means that in medium term, the growth will be moderate, not double-digit as in the past in volume side. And we have very, very strong focus on profitability, as you can see then later in the other presentations. Clear focus to further improve profitability in Husum. Clear focus to increase our sales prices.
Clear focus to increase our sales mix, improve our sales mix. Clear focus and target to improve our production efficiencies at the mills, as Mr. Pihlajaniemi will show you and tell you later. So there are several areas where we can still improve and have impact on our profitability improvement. And our long-term financial targets, they remain intact, unchanged, no reason to change them. So profitability first.
Ladies and gentlemen, to summarize, so we are a pure-play paperboard company focusing on high-quality folding boxboard as well as linerboard. What is strategically important is that we have high availability of northern wood coming from the ownership structure, and then pulps are in our own hands. Whether it's quality or whether it's quantity, we are able to play the game by ourselves. Sustainability is an integrated part of our daily business, and that's important.
Finally, the key message in the medium term, we are aiming for moderate growth. We are still growing, we are investing, and we have a very, very strong focus on profitability. Ladies and gentlemen, that wa s my presentation. Now it's time to move to the interesting world of sales and marketing. Sari Pajari, please join me here.
Thank you, Mika. Good afternoon, everybody. I'm very proud to say that we are the market leader in fresh fiber paperboards. I would say that it's highly likely that each one of you has experienced our products even this morning. Maybe it has been a cereal box on your breakfast table. Maybe you have opened up a package of cosmetics, which has been packed in our beautiful paperboard.
Or maybe you have picked up a cup of coffee on the way here, which is in a paper cup produced or packed in our sturdy food service board. We are present globally, and today, I will explain how we have selected our sales strategy on a regional basis.
That's the first thing. Second thing is, as Mika mentioned, I will explain how we see that the market that we are in is growing and how the global trends are supporting that growth, and last but not least is that why we think that we are competitive within this field, what makes us and our products special. Let's take a look at first the regional approach. There are significant growth opportunities globally in all of the three regions. EMEA is our home market, and as you can see, it's noted here with bright green.
FBB and FBB-based products, they are a major part of the market. Altogether, EMEA is 15 million tons if you count in the high-quality coated white top liner boards also. Asia Pacific is the biggest market, clearly.
Some 25 million tons in focus. It also has the highest growth rate, and America is dominated by other fresh fiber grades like SBS and also recycled grades, and there you can see the share of food service board is quite large, and that's typical for the North American market especially, so market is significant, altogether 50 million tons, and the growth rate, as Mika mentioned, for the premium paperboards is approximately 3% per year. As I said, we have selected a regional approach because the markets are not alike.
Growth exists everywhere, but the competitive situation, the market situation, the customers are of course different in each one of the markets. Our split currently is that of our sales, 70% is to Europe or EMEA, Europe and Middle East Africa. A little bit less than 10% to Asia Pacific, and already 25% to Americas market. European market, that's the development is dominated by sustainability, safety requirements that of course support the use of fresh fiber. There we have a market share which is more than 30%. So home market.
And of course, our intention in Europe is to ride the wave, keep our market share, and increase our volume with the market. We are also very conscious and responsible about the price development in the EMEA market. Asia Pacific, as said, largest market, but it's dominated by Chinese producers. Growth of the demand is healthy, but it's a very, very price competitive region. We aim not, or our intention is not to sell sand to Sahara.
We are planning to stick with the brand owners, both the global ones and the regional ones that grow and benefit of our quality consistency and also ability to serve them in those markets, then last but not least is Americas. We have been in that market with our Kemi product, white top kraftliner, for decades already, and now in the couple of recent years, we have educated our customers about the benefits of folding boxboard. First is the recycled grades and the SBS.
And we have been rather successful, so we have moved from the position of a rather insignificant player on the cardboard side to the big league already, and I see that there have been three main key success factors that we've had there. First, of course, is the lightweighting. I mean, with the folding boxboard, our customers, the converters and the brand owners, they can get a yield benefit of 30% or even more. So that's pure cost savings for the customers.
Second is that, like in the kraftliner side, we established our position as a local player by having common stock on the East Coast of the Americas and thus ability to serve the customers as locals. That's directly from the customer's mouth that in some cases, you serve us better than the mill next door. The third one, of course, is the sustainability. It's very deep in our story, like Mika explained. And the laws that we already have here in Europe, they are going directly to the Americas also, starting usually from California.
So we intend to grow also in the Americas using these competitive factors. We have to select, of course, our battles very carefully. I said that the global trends are supporting the growth in the paperboard. We have listed four key trends to support this development: urbanization and globalization, sustainability, safety, especially food safety, and e-commerce. On the globalization side, of course, more people, more consumption, more packaging, and more waste.
The only solution is, of course, circular economy, which means that you have to have products that are recyclable. Our products, the paperboard products, are ideal for that. On sustainability side, on Mika's presentations, of course, the seas are filled with plastic waste. Our position is that paperboard is a solution for that. We do a lot of development, as Harri and Ari in the breakout session will explain, to develop even more solutions to replace some of the non-recyclable products or fossil-based products. Food safety.
Here again, the controlled access to fresh Nordic fibers comes into the picture. So we know where the fiber comes from, we know where the pulp is produced, and we know from which raw material is our board, and we know that it's safe for food contact. Then last but not least, the e-commerce. I get a lot of questions that, how does this affect your products? There's many examples outside in the hall about our products. And take a particular look at one of the shipping boxes, which is brown outside and white top printed inside.
That's the direction where the market is going. Consumers want good experiences, and with our products, we can support the brand owners to deliver that. E-commerce, that's growing 20% per year, and 80% of the e-commerce packaging is already made of corrugated board. So 80% of the materials. And the requirements are clear. It needs to be sturdy, it needs to be handleable, and it needs to be strong, and that's what the fresh fibers give to the product. We are in the growing markets.
We see that the mega trends are supporting that growth. Why do we think that we are the ones that will succeed and remain as market leader? The role of the packaging is to protect the product inside and promote the brand or the brand owner. That comes by the stiffness of the paperboard, which you can see on the X axis, and the brightness and evenness of the surface that the brand message is printed on.
As you can see, our products position very well compared to the competing grades like SBS, solid bleached sulfate, and the recycled boards. We also position very well compared to our fellow folding boxboard producers. This statistic is based on the benchmarking that we do on a regular basis on different types of products. So we feel that we're doing very well on the quality side also. And what is then the reason why we are this good?
I could, of course, say that it's because of the magnificent production guys that we have in the organization. Harri will explain that later. That is, of course, true. But the Nordic fresh fibers and the pulp know-how, they are the essential part of the products. That's what the folding boxboard structure sort of is built on. The structure, having the BCTMP in the middle layer, having high quality, having consistent quality of the pulp, that's important.
That brings the lightweighting of the board, the yield advantage to the converters and brand owners. And that also brings the sustainability in the whole supply chain. The structure brings the stiffness and thus secure protection to the brand products that are inside the packages. And the high-quality chemical pulp on the top layer gives an excellent platform for the brand owners to print the brand message on. And consistent quality, very important to our converter customers, very important also to the brand owners.
So the package looks exactly the same regardless whether you're in Europe or North America. And in the core of all that are the Nordic fibers and know-how of the high-yield BCTMP pulp. And one additional benefit is, of course, that by this structure, by using the high-yield pulp, we leave more trees standing. Two examples, SBS, the common product, for example, in North America made out of chemical pulp 100%, consumes roughly five cubic meters of wood per ton of pulp.
On the other hand, our product, folding boxboard, made out of BCTMP, 70% out of BCTMP and 30% of chemical pulp, wood consumption is 3.4 cubic meters. Our product is also a sustainable choice. What are we focusing on? The CEO said it clearly that we are focusing on profitability. On the sales side, our top priority is to keep the prices healthy. There has been a very strong demand and, of course, a limited supply on the fresh fiber paperboards. That has led to increased market price levels in the past 12-18 months.
Our latest announcements have been EUR 80 per ton in Europe and $50 per short ton in the Americas for coated boards. For white top kraft liners, we have gone through several increases in the past 12 months. We believe that as a market leader, we have to also act responsibly on the pricing side. And increased prices, they carry profitability a long way. So as a summary, we operate in global markets, in the growing markets.
We have selected carefully the products, the segments, and the regions and the strategy that we go with to those regions. Our products are competitive. They are based on that high-quality Nordic fiber and pulp made out of that. And we have an offering that adds value to our customers, both converters, merchants, and brand owners. And at the moment, our top priority is to secure good prices. Thank you.
Thank you, Sari. And now I ask Mikko to come here on stage as well so we can open this up for discussions. Before we do that, I still want to remind that all our followers online, you also have the possibility to send questions through web. But please, let's start the questions.
Thank you very much. My name is Linus Larsson. I'm with SEB. You talk about moderate growth in the medium term as opposed to strong growth in the past few years, and you talk about medium-sized investments in existing platforms. Could you say something about what to expect in terms of I don't think you've given a CapEx guidance for 2019 as of yet.
Could you talk a bit about that compared to 2018, and could you maybe sum up these medium-sized investments that you are talking about? What do they amount to in total, and what's the pace of execution maybe? Thank you.
Okay. I think this one. So as far as next year investments are concerned, of course, budgeting and action planning is still ongoing. So nothing specified at this point concerning next year investment level. Concerning then this medium term or middle-sized investments, it's pretty much up to the mill. Of course, we have several different options at different mills. So it can be, in very general terms, tens of millions or maybe up to 100 million depending on the mill, but not like 500 million or 600 million at this point.
And how many such projects, how many mills are we talking about? And where and when will this appear?
Okay. So we have eight mills, and all of them have different plans. As for example, Harri will show what has happened in Kaskinen mill lately. So it's too early to say which mill first, for example. When the decision is ready to be made, then we tell that, but it's too early to say.
Thank you.
Thank you. Mikael Jåfs with Kepler Cheuvreux. Two questions from my side. This actually goes into your partly owned pulp Metsä Fibre company. So could you sort of tell us a little bit if there are any potential growth ambitions in that part? That would be my first question. And then the second one would be for Sari on the contract structure. Could you tell us a little bit about how you sell your products? Are there long-term contracts in terms of volume and pricing, or are they on spot? Thank you.
If I take the first one, Metsä Board is a paperboard company. We are not a pulp company. We don't have any plans to increase our pulp capacity at the moment. Okay, BCTMP, because that is a raw material for our paperboard, folding boxboard. But on the chemical pulp side, we don't have any plans at the moment. Of course, Metsä Fibre has, but I mean, as a Metsä Board, we don't have. But Metsä Fibre is now going through different options, for example, concerning chemical mill.
But that is Metsä Fibre. Okay, we own close to 25% of Metsä Fibre. But still, as far as Metsä Board itself is concerned, our target is to increase the efficiency and capacity of our paperboard production, not pulp.
Okay, and then on the contract side, we sell very little on the spot market. Majority of the volumes are based on annual or multi-annual contracts on the volumes and the prices.
Yes, just a short follow-up. So you have some contracts that are sort of fixed multi-year also?
Yes.
Okay. How much?
Can't give you an exact number on the percentages, but usually, what we agree with customers, we agree about the supply, but the prices are usually only tied for a limited time.
Many thanks.
Markku Järvinen, Handelsbanken. I think last year you said that you expect market to grow 3%-4%. Now you say it's 3%. I guess it's a minor shift. But could you talk a little bit about why you now see a bit sort of softer growth?
I mean, the data shows or the market information shows that it's closer to three. It's more than three, but it's closer to three than four. So it's still between three and four, but closer to three. The latest info we have got.
Do you see any impact from the sort of trend of replacing plastics with carton board in your demand already, or is that something that you see in the future?
We have seen that already in the past, and we will see that in the future. There are customers who have moved from plastic packaging, for example, to paperboard packaging. For example, as an example, pasta industry. To have a general kind of answer. But we have seen the trend, and we will see the trend in the future also. No doubt.
Okay. And then the 3% and exceeding that with moderate investments, I suppose you have two million tons of capacity, so you'd need to increase that by sort of 60,000 per annum. How long can you do that with sort of these minor moderate investments?
Coming back to the earlier question, so it remains to be seen what is, where we invest first and what is then the volume increase that, of course, plays a very important role. And then do we invest in folding boxboard, or do we invest in linerboard? Of course, that's also a that affects on the final result.
Okay. And when should we expect the first investment decision?
I don't want to give any deadlines. Otherwise, then you will stick to that.
Thank you.
Thanks. Robin Santavirta, Carnegie. Two questions from me. First of all, in terms of the financial targets, obviously, your ROCE has improved quite significantly, and it's well above the 12% target. What is the reason now, especially when you say that the focus is on still improving profitability? Why wouldn't you then raise that 12% bar? And how should we see this sort of what you want to achieve every year, basically? Or is this some kind of long-term medium, this 12%?
So that's my first question. And then the second question, perhaps to Sari or one of Mika as well. What are you seeing in the market in terms of capacity increases in Europe regarding your key grades of folding boxboard and white kraft liners for 2019, 2020? Thanks. Yeah. Okay. So maybe you can say that first.
We are in the, let's say, specialty segment with our products, for example, for linerboard. So there has been significant investments on the brown linerboard, kraft liner, and testliner. But we are not really operating in that segment. Our product is, if you'd like to call it, a niche product. So I haven't seen an effect on that. On the folding boxboard side, there has been some capacity increases, which pretty much have been eaten up by the market demand already.
The first question,
it was in terms of the ROCE target of 12%.
These financial targets were launched last year in June in Capital Markets Day. They are relatively young, so to say. They are long-term targets. If in the last 12 months for the first time we are over 12%, I think it's a bit too short-sighted to change the target now. That also is valid for this net debt to EBITDA target.
We don't see any reason to change at the moment, even though we are at the moment higher than this 12%. Of course, the Chairman and Mika are always saying that, "Hey, hey, high, high, high, higher, higher, higher," but that's something else.
Thanks. And if I may, just one more to Sari, perhaps. I'll ask this before, but I'll do it again. In terms of the folding boxboard market, you have launched now price increase announcements for, I guess, 2019. How would you describe the market balance at the moment compared to last year when you actually received some higher prices? Is it roughly the same, or is it tighter, or is it sort of a bit looser?
We haven't seen any strong change in the market in the past 12-18 months. And demand seems to be very strong, and we are particularly experiencing that in North America.
All right. Thanks.
It's Harri Taittunen, Nordea. Well, one question for Sari, and then I can follow with another one. But how do you see the sort of the geographical balance? That was one sort of way how you kind of will address the profitability to improve the geographical mix. I mean, how far are you from the ideal or where you want to be in carton board in particular?
In particular, in carton board. We are not that far. In the past years, we have had volumes that have been sold to, let's say, lower-priced regions in EMEA. And we have been diminishing those volumes and growing the sales, particularly in Americas, and improved our market and customer mix.
Okay. And sort of one quickly, the sort of linerboard and maybe pulp, which is more of the fiber, Metsä Fibre side. But is there sort of likely to be any re-sort of positioning in the mix?
We don't speculate with the pulp prices or pulp regional sales.
Sure. Sure. The other question is now that we have the honor of having the Chairman also present, and it's about the Metsä Fibre dividend because there's quite a few years when dividend from Metsä Fibre was quite in line with the associates. And last year, it was fairly clearly below the sort of the net revenue from associates booked by Metsä Board.
And now we, of course, know that the associates has sort of continued to increase quite steeply during this year. Just wondering how the dividend policy of Metsä Fibre will be formulated now that Äänekoski mill is up and running and sounds like the balance sheet of Metsä Fibre and sort of Metsä Group is also strong. Just sort of give a feel of the dividend policy for next year. Can you put it in?
Can I put this? Okay, thank you. So Metsä Fibre dividend policy is so that Metsä Fibre is sharing a 50% dividend from the net result. And last year, the total dividend paid out was EUR 140 million, and for Metsä Board, it was EUR 35 million.
This year's profitability in Metsä Fibre, the running rate after three quarters, and the guidance that we have given in the group for the fourth quarter says so that the net profitability will be quite close to double compared to the previous year. So like I said, previous year's dividend was based on this 50% payout from net profit. So it will be in the range of close to double number of that if we are going after the minimum.
Okay. Excellent. Thank you.
Yes, thank you. Antti Koskivuori, Danske Bank. Question on the U.S. folding boxboard market outlook, which you've been quite upbeat in the past on that market. Now, when it seems that you are kind of scaling down your capacity growth in the medium term, as you say, has there been any changes to that market outlook or the volume outlook that you see or the potential that you see for yourself in the U.S. folding boxboard market?
No, our long-term target is the same. So roughly 500,000 tons, which is coming from 300,000 tons folding boxboard and 200,000 tons linerboard. No reason to change that. And we are on the right track to achieve that in coming years.
All right. Thank you.
Okay. Maybe I can take here in between questions from the web. Maybe referring a little bit this Antti's question, but this is more to Sari. So what impacts do you see in increasing consolidation in the U.S. market, paperboard market, and do you see that could spread in Europe as well?
U.S. market is, on the carton board side, very consolidated. Two biggest players hold roughly 70%-75% of the converting capacity and the volume. And of course, I can't speculate on the targets of those companies in Europe. At the moment, we don't see any major consolidation. And in the U.S., we have focused on now the non-integrated converters also in the past years and will continue to do that.
Okay. And then another one, maybe this is for to Mika, that how big of a threat do you see that this EU's SUP, so Single Use Plastic Directive, is to Metsä Board and Metsä Board's PE products?
Yeah, of course. I think it's both minor threat, but more opportunity, and of course, it's still a bit early to say what is this regulation. I mean, finally, what is the final result, but for us, I think it's an opportunity, and we need to develop our products also then in order to be ready to replace these plastic materials, but it's more opportunity than a big threat.
Good. Okay. Do we have any more questions from audience here? If not, then we are a little bit ahead of our schedule. But anyways, we will continue in here. Just a second. 1:45 P.M. So 1:45 P.M., I ask you to be precise because we're going to continue the webcast then, but now it's time for a coffee break. Thank you. So, welcome back, everyone, and let's move on. Next, we will hear more about efficiency and excellence of Metsä Board's paperboard production. Our head of production, Harri Pihlajaniemi, will tell us more about this.
After Harri, we will have our CFO, Jussi Noponen, to tell you about Metsä Board's financials and also a much-requested update on Husum's profitability. Again, after the two gentlemen have had their presentations, we will have a joint Q&A. Please, Harri. Thank you, Katri. Good afternoon, everybody.
You have heard already today two presentations regarding paperboard being the future packaging material and also how Metsä Board is going to be competitive with that business. Now, I'm going to give you a little bit of background about Metsä Board's production. The mills, the assets, how do we operate our assets, how do we develop our assets, and also what operational excellence means for us in Metsä Board.
So, excellence in board making, many times mentioned already by Mika, it starts with availability and excellent raw material, the forest. Then you need to have the full control of the value chain. And then, combined with the capabilities and expertise, what comes to pulp making, special BCTMP pulp, plus then the board production. Our mills are located close to its main raw material, the forest. I want you to remember two things out of this slide.
First of all, the total paperboard capacity of the Metsä Board is 2 million tons. When talking about pulp, our net balance in pulp, including the share of the Metsä Fibre, is plus 550,000 tons. We have altogether eight production units, seven located in Finland and one in Sweden. Four out of these eight production units are integrated operations. Integrated operations, it means basically efficiency.
As an example, less transportation, better grip on the quality. Our Husum mill is a perfect example of integrated operations. Under the one roof, we have the wood handling, we have the big chemical pulp mill, we have two board machines, PM1 for the FBB, PM2 for the liner. We are able to do the barrier properties with our PE plant, and we even have our own deep sea harbor located in the mill area. Also, integrated operations means energy efficiency.
You have a pulp mill with the capabilities to produce more energy than it uses, and then, on the other hand, board production consumes steam and electricity. We have been able to improve our energy efficiency in Metsä Board by 10% starting from 2009. How did that happen? First of all, streamlined the product portfolio, as already mentioned by Mika earlier, so now focusing only on board and pulp, but then also have the balance what comes to operational excellence and investments.
Doing the continuous improvement, switching the operating model towards more energy-efficient solutions, and also doing the small energy efficiency investments. 80% of the raw material we use in our energy production is fossil-free. If thinking about the cost side, the electricity self-sufficiency for Metsä Board is today 60%.
But after Olkiluoto 3 startup, and also when we will utilize fully the energy benefit out of Metsä Fibre's bioproduct mill, it will be up to 80%. Our shareholding in PVO is 3.2%. And at the moment, we don't have any plans to change our position. So, operational excellence, what does it mean for us in Metsä Board, and how do we turn that as a real competitive advantage? First of all, starting with the facts. Starting from 2010, we have been able to improve our productivity by 25%.
How that happened? Of course, there has been these investments to increase the capacity, but then also we have improved the automation level in general in our mills and also educated our organization towards a more multi-skilled operating model. Increased the capabilities of the organization and of the people in different organization levels. Multi-skilled operation model means flexibility. It means efficiency.
Then the BCTMP, the real success factor of Metsä Board. We have two BCTMP plants, Joutseno and Kaskinen. Both mills are having the economy of scale because of the size of the units. Both mills are producing this special, unique, tailor-made pulp, fitting without no compromises to our FBB products.
We want to have accident-free operations and mills in Metsä Board. So then the question is, how to achieve this ambitious target? First of all, we don't accept any deviations what comes to safety processes or standards. So it means discipline in safety. But then, on the other hand, doing the continuous improvement all the time in the sector of safety.
As a practical example, if there will be a near miss in terms of safety or an accident or safety notification, we will utilize the root cause analysis to find out the real reasonings behind and also to be able to identify the right corrective actions to improve the safety in a sustainable way. In the picture, you can see also how the mill should look like after we have implemented 5S system in all of our mills. Basically, it means that 5S provides us order in our mills, and also it's a platform and environment for safe operations.
So, as Mika already told today, we have not decided to do any big capacity investments right now. But then, on the other hand, we are doing smaller ones which are bringing us nice financial deliverables and also which are aligned with our pulp making processes. As an example, we started up Kaskinen mill last October after the investment shutdown, where we installed a new baling line. We increased the capacity of the BCTMP production by 30,000 tons, lifting up the capacity of the mill up to 370,000 tons.
The total cost of the investment is 6 million EUR, and the estimated annual profit improvement is from 5-6 million EUR. Another example of investments. We will invest for a new sizer in Äänekoski mill, which will increase our capacity by 35,000 tons. After that, boost the sizing capacity of Metsä Board up to 330,000 tons. For us, it's important that we balance the sizing operations between the internal and external ones.
The roles are different. Internal operations give us always the cost efficiency since the operations are integrated to our board production operations. But we utilize the external sourcing to provide the shorter lead times to our customers and also to be able to even out the high sourcing demand peaks. Roughly 40% out of the total FBB in our case is sourcing. So, Metsä Board production in a nutshell. We have streamlined product portfolio with extremely efficient mill operations.
We have BCTMP concept, which is really a unique one. We are able to have these tailor-made properties for pulp, bringing those nice FBB properties. And then, last but not least, we have the continuous improvement culture and processes in place, basically meaning that we are able to deliver productivity improvements on an annual basis. Thank you. That was my presentation. Then I would like to invite our CFO, Jussi Noponen, on stage. So, Jussi, please.
Thank you, Harri. Ladies and gentlemen, also on my behalf, a warm welcome to our Capital Markets Day. As you have noted, the forest industry and paperboard industry is now operating in a very favorable market environment. In my presentation, I will be talking about how changes in market parameters could change our earnings profile as going forward. In his presentation, CEO Mika Joukio talked about the criteria for selecting new CapEx projects.
I will be continuing from that and talking about our financial capacity to do those things that Mika talked about. Then, finally, I will be giving an update on Husum's profit improvement. Husum folding boxboard machine started up in 2016, and that was the final step of transformation of Metsä Board from a paper maker into a pure play paperboard company. Then in the Capital Markets Day of 2017, we estimated that the profit of that mill can be improved by EUR 100 million from 2016 to 2019.
Today, I will give an update where we are on that path. Our profitability has steadily improved since the startup of Husum's folding boxboard machine in early 2016. The main contributors to profit improvement in that period have been increasing sales volumes and sales prices. Now we are happy to be able to guide our profit of the fourth quarter to further improve on the third quarter.
The contributors for the fourth quarter improvement are favorable effects after hedging, stable or increasing product prices, as well as seasonally lower net of energy costs and sale of emission allowances. I'm coming back to market pulp. This has been discussed in several presentations today already. As said by Harri just a moment ago, our current net long position in pulp is 550,000 tons per year.
The new information on this slide is that next year it is estimated to further grow to about 600,000 tons, and there are two factors behind that. One is Metsä Fibre's bioproduct mill running full for the entire year, and the second, the capacity addition at Kaskinen BCTMP mill, and then to the profit drivers in Metsä Board and the sensitivities, so as in almost any other business, changes in sales prices flow directly through to the result. Of course, exceptions are businesses where sale prices are contractually linked to costs.
In our case, they are not, so changes in sales prices have a full P&L impact. About the currencies, this fourth quarter positive guidance that we gave, it includes about EUR 5-7 million positive from currency movements after hedging. You might ask, are we now at the sweet spot in terms of currencies? The answer is no. For instance, comparing to the fourth quarter of last year, 2017, now this fourth quarter estimate that we gave, it is roughly -EUR 7-9 million negative year on year in terms of FX, then an important result sensitivity is pulp.
In this table, it has one of the smallest figures, the 10% change, but in the past 12 months, that's the area where we have seen the biggest movements in price. So pulp has been a significant contributor to our profit improvement lately. And it will be an important driver going forward as well, then about cost inflation outlook, and as you may have read from our financial reports, we have consistently talked about cost inflation now in the past 12 months.
The cost inflation has actually been faster now than at any point of time since the recovery from the subprime crisis in 2010. The cost inflation that we have seen now lately, it has not only been economy driven, but it has been largely weather driven. And that relates mainly to the wood that we import from the Baltic countries into our pulp mill of Husum in Sweden.
Now, going forward, assuming that the harvesting conditions this winter will be normal, that combined with the slowing down economic growth in Europe, that in our view leads to a very stable outlook on costs. Then about our capital allocation and balance sheet. So our cash flow is now strong after the heavy investment years of 2015 and 2016, but at the same time, it could be even stronger.
And one of the reasons why our full result improvement is not reflected on the cash flow statement is that Metsä Fibre is generating quite a big part of our pre-tax profit currently. The dividend from Metsä Fibre, we will only see in the first quarter of next year. Coming back to what Mika said about CapEx criteria, how that translates into capital allocation. Our message is that our capital allocation principles will remain in good balance. You should not expect any dramatic moves from what you have seen in the history.
Dividend growth is supported by strong performance. Our policy is to pay a minimum of 50% of the result. Deleveraging will continue to levels below one times already at the end of this year. As said, CapEx allocation is profitability driven. We have a debt portfolio that supports the said capital allocation principles well. On one hand, we have enough repayments for the next two years to allocate the cash flow to debt repayments.
On the other hand, we are financially in such a strong position that when we decide on new CapEx projects, we are in the right position to finance those projects as well with incremental debt if needed. The backbone of our financing is the bond maturing in 2027. So there is still nearly nine years of that bond remaining. So we have a very strong backbone financing in place. About the credit ratings, one of the two has been in investment grade already since early this year.
The other one is one notch below investment grade with positive outlook. Staying in investment grade is not a guiding principle when we plan the development of the company. But at the same time, simply by following our own financial policy that we have set, for instance, leverage ceiling of 2.5 times, we feel that we can stay in the investment grade territory going forward. How that strong balance sheet and the low leverage of one times translates into financing capacity.
So the headroom to our ceiling of 2.5 times is 1.5 times, which with the last 12 months EBITDA, it translates to about EUR 500 million. This slide is not to say that we are going to raise EUR 500 million of debt. It is to say that when the time to decide on the projects that Mika was talking about comes, we have the capacity to do so. And then finally, an update on Husum's profit improvement.
Back in 2017, in our Capital Markets Day, we presented an estimate that the improvement in year 2019 compared to the loss-making startup year of 2016 is EUR 100 million positive. What we have achieved this year already in our estimates we will achieve this year is a EUR 90 million improvement, 2018 versus 2016. Today, I'm very happy to be able to increase the improvement estimate for next year to about EUR 110-120 million. Why? Husum mill is also enjoying this favorable market.
The mill is gaining from high pulp prices as well as the weak Swedish krona. On the other hand, it is getting a lot of headwind from higher wood costs and a weaker dollar compared to 2016. Year on year, from this year to next year, the improvement is about EUR 20-30 million. We also see further gradual improvement potential beyond 2019. Ladies and gentlemen, I have three key takeaways for you. First of all, we have a solid track record in improving our profitability.
Secondly, Metsä Board has a strong cash flow. Thirdly, thanks to the good market conditions, we are now able to upgrade the profit improvement potential of Husum to over EUR 100 million. Thank you.
Okay, thank you, Jussi. Now I ask Harri to come here on stage too for a Q&A. We can open it up again for discussions. Markku here begins.
Markku Järvinen, Handelsbanken. Just wanted to ask about the EUR 20 million-EUR 30 million improvement potential at Husum next year through paperboard pricing. What does that assume in terms of your announced price increases?
That sort of profit improvement can be achieved, first of all, by rolling the current prices that we have through to a full year. We have been able to increase the average selling price during this year. So the price level now is significantly higher than it was early this year. That's one part of the thing.
And then customer mix optimization going forward. So the improvement does not assume any market price increases. You have to remember that Husum mainly sells to Americas. And there we have not announced a new price increase. Now we are more following the local market prices.
Thank you.
Robin Santavirta with Carnegie. Can I just, so that I understand this correctly, the increased estimates to 110, 120, is that now including? Is that from the higher paperboard prices? Or is it sort of EUR 110-120 million plus a potential of EUR 20-30 million from potential paperboard prices? The upgraded estimate of EUR 110-120 million includes this EUR 20-30 million from higher paperboard prices.
I see. I see. Then in terms of capital allocation and your balance sheet, assuming that your profitability would remain at this level or perhaps even improve from Husum or FX, etc., your balance sheet will strengthen quite significantly if you will not invest in anything significant in the midterm. Are you comfortable with net debt to EBITDA going down to zero or even below? Or could you consider some measures in order to, for example, higher dividends or acquisitions of shares? How do you see sort of the balance sheet potential strength in the midterm?
As I mentioned, the profitability improvement that we have seen this year, simply by following our dividend policy, most likely will lead to a higher dividend next year. So that's one part of the capital allocation game. Taking into account that and the CapEx projects, potential CapEx projects that Mika was talking about, it is unlikely that the balance sheet would strengthen as fast as you described in your question.
Good. Thank you.
Mikael Jåfs with Kepler Chevreux. You showed us there a very nice slide with your potential debt capacity. In that light, could you sort of talk a little bit about how you prioritize between M&A-driven growth and organic growth? I don't know if this is for Mika or for Jussi.
Well, as it was fairly clearly stated in Mika's presentation, so perhaps I can answer on the back of that information. Debottlenecking type of investments in our existing production lines, that is the most likely way forward in our CapEx plans.
Okay. Thank you.
Yes, Harri Taittunen, Nordea. In sort of some months from now, if Metsä Group decides to go ahead with the Kemi pulp mill according to the bigger scale option, do you foresee that the financing structure would be similar sort of structure as you had for the Äänekoski share where your equity contribution was pretty limited?
The Kemi pulp mill project, it is in a pre-feasibility phase and no comments regarding the financing structure have been made.
Exactly. Okay. Okay. A bit too early for that. Maybe can you open a bit on the because there was discussion in the conference call on the emission rights trading and how that works.
Could you maybe just give a bit of kind of the mechanics, how much you get those rights and what's the sort of potential delta from year to another year, how much you sell the emission rights? I mean, what are the other factors than the price for rights that could be driving the earnings in the coming years?
Well, first of all, the background of this topic is that, first of all, we have invested in bio-based energy production. And secondly, we have improved our energy efficiency at the mills. So for those reasons, we have a small annual surplus of emission rights. And in this year's sale of emission rights, in the volume, there was nothing extraordinary. But the price now simply is higher than in the previous year.
And for that reason, as it's anyway multiple millions EUR in the fourth quarter result to help the markets understand the quarter-on-quarter comparisons, we wanted to highlight this fact.
And in terms of rights that you obtain yearly, is there sort of any kind of potential change there that, in a way, I understand that your net balance is positive because of the gains you have done in the efficiency side, but?
Yeah, the quantities of emission right allocations to the industry, they are decreasing year after year.
Yeah. Yeah. Yeah. Okay. Fine. Just a small detail that when you talked about the pulp balance, did that also include some sort of assumption of increase in paperboard production to not only the BCTMP and?
Yes. It assumes basically full run at our paperboard mills. Okay. Okay. Thank you.
Thank you.
Hi, Jussi.
Thank you for a good presentation and giving us insights on the company. My question is regarding the FX hedging strategy that you have right now. FX plays a big part in how the numbers move. So what is the current hedging policy and do you see any changes going forward? Our hedging strategy is basically mechanistic rolling forward of hedges. The normal level is six months forward. So we hedge roughly half a year's of forecasted FX flows ahead. We don't speculate with FX, so we don't foresee any big movements in that. Thank you. Hi. Thank you, Gustav Sandström from Pareto Securities. On the sheeting investment, you talked about at Äänekoski. Can you give some clarification on the timeline of that? And will CapEx for that most likely be next year?
Also for the mechanical pulp additions you're making now, is that CapEx taken for this year or 2019? Yeah. First of all, the Kaskinen case, so basically the majority of EUR 6 million will be capitalized this year. Something for the small amount for the next year. And then for the sheeting, also majority for the next year. And then something for the 2020. So the sheeting capacity will most likely be up and running quite early next year then? No, basically it will start up. We will start up the operations or let's say commissioning during August and ramping up the production. So basically estimated at the end of the year that we have ramped up the machine fully. So that is the target. All right. Thank you. Okay.
If we don't have any questions from here, I can take here at least in between a few questions. First one goes more to Harri. You will increase the own capacity in sheeting. Why do you still use external parties for sheeting after this? Yeah. As I mentioned during the presentation, so we always try to keep the balance between the operations internal and external. And we don't have sheeting operations, for example, in Europe, I mean, closer to the big customers. So for that purpose and short delivery times, we used external sheeting operations. And then also we are not having the capacity for the whole sheeting demand since it's a volatile business. So we also need external ones to even up the high demand peaks. Okay. Thank you. And then question regarding the PVO and the electricity that you are buying from there.
How much are the annual savings? Because obviously you buy that at cost price. And will that change somehow when the new Olkiluoto will start? Of course, that is heavily dependent on the electricity prices. But we estimate that within existing electricity prices, the cost difference is roughly EUR 10 million on annual basis. Okay. And then I assume this one goes to Jussi and about the Husum's profitability. Where does the gradual improvement potential after 2019 come from? It will continue to be related to sales prices and optimization of the sales mix. Okay. Thank you. Do we have any more questions here in London? If not, then I thank gentlemen here. And now we are in a stage where I ask CEO Mika Joukio to come back here and wrap up the day. Okay, ladies and gentlemen, thank you very much for active participation.
Good questions, good comments altogether. I think if I start from the beginning, so packaging market in a big picture, as we heard today, global megatrends explained by Sari, they are supporting this packaging market, so it's growing and that is the fact, but at the same time, then this growth creates challenges coming from non-renewable sources. We have seen pictures of plastics in the oceans, etc., but we have a solution that is good news, and good solution is high-quality paperboards from Metsä Board, so we are ready to take the challenge and the opportunity and grow then, improve our, increase our volumes, then in addition to this big picture, of course, then we have the other aspect, and that is that our light paperboards, they are very positive as far as the fossil CO2 emissions are concerned.
In our production, we need less water, less energy, less raw materials, then on the way to the customer, less transportation emissions because the products are lighter, and then at the end of the life cycle, then less waste is generated because the products are lighter, so we have excellent position in that, and then what is important also is the access to northern wood, so based on our biggest shareholder, Metsäliitto, so we have good availability, high availability concerning the wood, and then when the pulps are in our own hands or Metsä Fibre's hands, so then we are able to develop our products and our pulps, fibers based on our own needs, so Metsä Board has grown, as we see, double-digit growth during the last five, six years, and we have been able to improve our profitability after we got rid of the papers.
Nice development since 2016. In our chosen product group, Folding Boxboard as well as the linerboard, we have a leading position, a pole position here in Europe. 35% of European capacity in Folding Boxboard is ours. 32% of white kraftliner capacity in Europe is ours. We have very strong and good position. At the same time, when we have been able to grow, we also have been able to improve our profitability as we can see. We have seen so since 2016. Our intention is not to change the strategy. Strategy has been defined already years ago. Of course, we fine-tune that every year as all companies, but no reason to make any big changes. Our intention is to continue to operate based on the current strategy.
As far as the financial targets are concerned, the long-term financial targets are concerned, no reason to change them either at this point. We just launched them in June 2017, and we stick to those also now. And then the most important takeaway I would say from this Capital Markets Day is that our intention is to continue to grow, but not necessarily double-digit growth as we have been able to do, but a bit more moderate. And that growth will be based on medium-sized investments at our current mills. So no high CapEx investment at this point, but medium-sized investments at our current mills. And very, very strong focus will be put, and we will have own profitability. Whether it's in production, operating efficiencies, then the whole supply chain savings there.
And then as Sari Pajari went through, the price level as such, I mean, the market price, we need to be responsible because we are the biggest player in Europe. Our intention is to continue to increase prices. But not only that, also then to change the price or sales mix, business mix, as we have been able to do during this year also. And then finally, the Husum potential, we have been able to improve remarkably from 2016 to 2018 and further to 2019. Of course, this nice development in pulp prices has helped us a lot, no doubt. But also our own actions, higher pulp production, lower fixed costs, and then higher Folding Boxboard volumes and prices, they all have supported this development. And as Mr. Noponen mentioned and went through, we have also potential to improve profitability in Husum after 2019.
So, ladies and gentlemen, that was my summary and wrap-up. And now, of course, I think we have some time for further comments or questions. Am I right? Well, let's end the Capital Markets Day and the official part and the webcast here. Thank you for your attention.