Good afternoon everyone and welcome to Stora Anso's Forest and Wood Products Investor Day. I'm Ula Payanen, Head of Investor Relations. We have this year a bit more focused Investor Day and we are talking about our latest acquisition, namely increasing our forest holdings here in Sweden. Our top management here will talk about the strategic rationale of this deal and why we did it. Then we will get the internal customer point of view.
Our Head of Wood Products Division, Jari Suomineen, will talk about how this integrated forest will help his business. After that, we get the perspective of the man from the forest, namely Jorma Lansitalo, will talk about the practical and tactical integration of the forest to the Nordic wood supply. And then CFO, Seppo Parvi, will explain to you how we are starting to report the new division from the beginning of next year. Before we start with today's presentations, couple of words about safety. If you hear the fire alarm, then please leave the room immediately and when you are in the foyer, you can turn either right or left and go outside of the building as soon as possible.
The assembly point is at the Brune Barristoriet, which is actually on the other side of the hotel. Now our CEO, Karl Sundstrom, will talk about Stora Enso's role in bioeconomy. Karl, please.
Thank you, Ola. And thank you all for coming here. It's a pleasure. And I will go through some of the rationales in the bioeconomy, touching lightly upon the Berivik restructuring. But I and then we end up with a Q and A session after that.
But don't ask all the questions because a lot of the questions you will have will be answered by Jari and Jorma and by Sepo. So you can take it light questions with me please. So a little bit what's happening and this is happening all over the world right now and that is that we are leaving the old fossil based economy and we're moving into a bioeconomy. And the bio economy will be based on circular economy, but also about renewable material. And being a company working with a raw material that is renewable, reusable and fossil free means actually that we are in a very good position.
And here is where Storanso wants to lead the new way into the bioeconomy. Just as a starting point, I would like to show you that we are a net contributor to a to a better climate. So we have a forest now, which generates some additional capture of about 3,000,000 tons of CO2. We are actually using 11 in the whole production in and outbound logistics. But the most important thing is that we are actually substituting 24,000,000 tonnes of foci based materials.
That is basically calculated in a very simple way for everything except wood products because in wood products, we know how much we capture. But when it comes to all other grades based on fiber, we actually only use the energy value. But being then long in this position and using the standing rate at the moment for green certificates at €25 per ton, this is a potential income going forward for our industry and for Storrenso, about €325,000,000 This is not how the world looks like right now, but this is where the world is going. Already today, with the existing packaging technologies, you can actually replace about 25% of the fossil based materials in the packaging industry. And we see an increasing demand today.
And one of the reasons for this increasing demand is the implementation of the single use plastic. This is the fastest legislation ever turned around in Europe and it will be in the national legislation in 2021. This will drive an increased use and give additional possibilities for us to actually almost double the sales in Food Service Board. This will only be possible also through innovation and that's why the innovation agenda has been so high in Storanso because it's an enormous potential. While being here, I would also like to make a little bit of a promotion.
You might wonder what this is. This is graphite, which is the main component in the modern batteries. But this is made from lignin at very competitive prices. That's the reason why we're investing €10,000,000 in a pilot plant in Sunnila to drive this even further. And for those who want to see it in real life, I have it here.
That's a prototype. Today, most of the graphite is either mined or being cooked out of the lowest quality of crude oil. And if we believe in electrifications, we need to make sure that the batteries of the future are actually green. Otherwise, we will not become into the bioeconomy. And this is an area where I think the forest industry in Storrenso has a huge potential going forward.
The other part I would like to touch upon is actually our investments in Oulu. And you probably have some questions about the CapEx, I already got that before the meeting. So what we basically are doing, we are accelerating the investment in Oulu. And the reason for that is that obviously, wood free coated is being more challenged than ever before and we need to get out of that as fast as possible. That's why we are having a higher CapEx.
But save those questions to Seppo and he will go through it. But this is a grade kraftliner, which is extremely interesting. It's over 30,000,000 tonnes per year and it's growing with a volume by year for around 700,000. So we, with our new 450,000 ton capacity, is less than one year of growth. It's a product that is global because this is the fundamental trade, especially when you're trading fruits and vegetables because it's a pure virgin product, which means that you can put a lot of food related things within it.
I know there is a competitor who is investing, which is about 250,000 tonnes, if I am right, but they are not the same timing. But all in all, that's the total investments of a year's growth in this market, which we believe in. And it wouldn't be a Capital Markets Day with all you guys here if I wouldn't talk about the pulp market. So basically, what I'm trying to say with this slide is basically pulp will continue to grow. All pulp end segments are growing with the exception of graphical paper.
The other part of it is, if you look on the average capacity coming per year until 2024, including the newly announced UPM mill, is actually less than we had in the 10 last year. That has been 1,600,000 tonnes. And today, going forward, it looks like it's going to be 1,000,000 tonne. Because even if you take a decision today, it's very hard to get it ramped up and running and constructed by before 2024. So as this as a backdrop, looking into our portfolio, we are sitting on a very good portfolio.
We have a very strong position in food packaging, in liquid, in consumer board. We are strengthening our position within the packaging solutions, especially with the new Oulu Mill. In biomaterials, we have a very wide and we are moving more and more into special pulps such as Skutka fully fluff and Enocell being fully dissolving pulp, which links very well to our cooperation with H and M and IKEA in the Treato Textile project. Wood products, I will not mention so much, but here we have a number one position in Europe when it comes to building materials based on wood. We have a fourth position in the world.
But in the high growth segment or cross laminated timber, we are by far the number one in the world. Paper is a declining market. It's probably one of my least problems as a CEO. They know what to do. And with the conversion of Oulu, we will take away around 20% of the paper capacity.
But it's also 20% of the most complex because you have a lot of sheeting in the wood free coated. So complexity for the remaining paper will be a lot easier. And then, as we talked about today, we are creating, as of the first of first next year, a forest division. This is fairly big because what we are doing is basically taking out all the forest related and the wood supply related items out of segment Other, which means that we'll increase our transparency. We are an extremely big supplier of and purchaser of wood and now with the restructuring of Bergvik, we are also a big forest owner.
This is a forest that is growing by 4% per year. This is a forest where we believe we can increase and are already starting it and Jorma will talk more about it, harvesting by 10% to 15%. We're talking about half a million cubes in additional that we're already ramping up. And then Jorma will also talk about the possibility of driving more yields in the standing stock by using more innovation. This makes us the second biggest private forest owners in the world with €3,600,000,000 of biological assets.
What is new for us now and Jorman will cover that in his presentation is we now are going from being purely a wood supply organization to more of a forest management. And that's where we believe that we have a 10% plus possibility of increasing the yield in our own forest, which is to a great extent what we are having in Bergvik. This will give us a stronger competitive position because our flexibility and agility will increase in a fully integrated wood supply, especially in Middle Sweden. The other thing that is important to remember and Seppo will talk about that later on, we are basically having in the Middle Of Sweden, which is all mills except Nymola and Hilte, 70% of the wood supply is coming from Bergvik and that's one of the reasons that we needed to get this back inside the company on top of being a very important asset for the future. Because if you believe in the bioeconomy, you need to make sure you have strong control of the forest.
So looking into the future, we believe that excluding paper, which is declining business, we have growth potentials in all divisions and consumer board is 2% to 4% going forward. Packaging Solutions is the highest growing by 7% to 8%. That's very much driven by the new Oulu investment. Biomaterials, 3% to 5%, partly because of repositioning ourselves in the pulp market going away from softwood pulp to more specialized pulp and other substitutes that you can get like lignin, etcetera. And then wood products, 6% to 8% growth and that is what Jare will cover.
So total, excluding paper, 6% to 8%, which I think is an interesting proposition for the future. So our formula that we've been playing for the last number of years will continue. So we have sustainable profitable growth growing faster than the rest of the market in the segment that we addresses strong cash generation, Sepo will come back to that CapEx of 3,400,000,000.0 or on average SEK $680,000,000, that is including the SEK 800,000,000 to $850,000,000 for this year, which we are temporary increasing to be able to do the Oulu transformation a lot faster than anticipated. Dividend, 50% of EPS and making sure that we are below net debt to EBITDA two times. We are temporary over it now with the reconstruction of the Bergvik.
So before I open up for Q and As, control of forest assets is a competitive advantage in the
bioeconomy. Okay. Thank you, Now questions for Karl. Oscar, please go ahead. Please wait for the mic and state your name and company.
Oscar Lindstrom with Danske Bank here in Stockholm. A number of questions. I think the the the first one here you mentioned was paper was the least of your problems. What's your main problem or main concern? And please be
One of the biggest concerns when you're changing a company is to make the company move in a different speed. You know, we have worked a lot of trying to differentiate ourselves by being more innovative than our customers That is a challenge. How do you continuously make your organization the most innovative and the most nimble? That is always a challenge because you can never change an organization faster than they are willing to follow you.
And on a scale sort of from zero to 100% implementation, So where are
my ambition is 100 and I'm probably getting at 75 to 80.
Okay. Maybe just last question on the last or one of the last slides was showing your ambition of 6% to 8% growth. Excluding paper. Excluding paper. Yes.
That's something high speed of change. Will you need to significantly increase CapEx to sustain that type growth?
No. That is within the average of six eighty per year.
Wow. All right.
So you have to remember, new products and services when we started in 2015 was 1.5% of total sales. When we ended last year, it was actually 9%. This year, we will go down a little bit, but I believe we will be around 15% on new products and services in 2024. And trick is here to have a number of platforms such as the liquid platform, CUK platforms, where you can turn in to new products on a very short. But we also need additional platforms and that's what we are investing in, MFC, in the lignin portfolio, in the Yari will cover it when he talks about bio composites, you will get examples.
The formed fiber unit we're setting up in Hilt as well. It's a number of initiatives.
All right.
Thank you.
Thank you.
Okay. Thank you. Next one. Okay. Linus, please go ahead.
Thank you very much. It's Linus Larsson with SEB. Now that you've reconsolidated the Swedish forest land, I wonder how that will change your behavior in practice. And you did mention the volume potential and that will have a positive impact on the EBITDA figures that you presented yesterday.
Assume So
we be very clear. We presented with previous management because in 2018, we acquired it this year, right? So this is if you take what was produced in Dajvik under a different management. Obviously, one of the reasons why we bought it was to secure, but also that we saw additional potentials. So this is a starting point.
Right, right. Got you. And then on pricing, maybe the answer might be somewhat different. If you look at wood prices in the what has been the Bergvik area now, maybe the Sterenza area, wood prices are lower than area south of that area or even north of that area. Will that in any way change or will you continue to run your business in the market like you have been running it over the past, say, fifteen years?
The starting point is basically the same prices as we have had with Dyadic. We like that structure and it's not strange because we are such a big taker of forest in that area. And I think that's the way we do it. So it's market based, but it's based on the market where we are a big player.
Thank you. And then just finally, with this strengthened backward integration in mind, how does that affect your thinking in the downstream? Are we more, likely to see investments in nearby wood consuming operations? Does this play into the downstream strategy as well? I think
it's a historical reason. We should never have sold out Bergvik in the first place because that was part of our structure historically. Now we are taking Bergvik Vets back mostly and we because that is for the all the mills, I said, 70% of the wood supply. Into Nator, which is where we own 41%, that's about 10% of our wood supply in Finland and there's not a lot of these big pieces hanging around. And frankly I don't have at the moment the balance sheet to take more on.
But making sure that you have Jorn and I will talk about that because in the other markets we need to work with very long term relationship with the forest owners to be able to be nimble and to offer just a lot more than just a good price. Because today, most forest owners do not live in the forest areas of Finland and Sweden. They live in Stockholm and Helsinki. So it's a different service offering and Jorna will cover that.
Okay.
Sindre, I think here.
Sindre Serbe, Arctic Fund Management. Interesting to see your views on growth rates next during the next five years. But more specifically on what we can call the, let's say, emerging products like Lignin, MFC, food composite, something sugars and so forth. In absolute numbers, I mean looking five years ahead, we should actually start to see quite some top line effect from that. What would you deem the potential to be?
Jari will talk about €200,000,000 in biocomposites. I think we will have million to €80,000,000 of lignin replacement or fennel replacement. MFC, we have launched already in 2015 and we have launched in more and more products, but as a source reduction. The next level of MFC will go into areas such as being a barrier and generation first, we are actually starting to produce I think at the end of this year, which is basically Greece barrier in Imatra. When it comes to binders, that's probably coming out from in the next two years.
And then if you look upon formed fiber, we're talking about 100,000,000 to 150,000,000 in five years. So it's substantial.
So it means it could up much more than €500,000,000 So in five
that in the year 2024, yes. Could be 500,000,000
Yes. So that would be 5% growth alone. So yes.
Thank you.
I believe Marco was there, Marc Bjarvienen from Handelsbanken. And then was it Gustav and Robin? Yes.
Thank you. I just wanted to ask,
you saw this scenario with the single use plastics of, let's say, 50% growth, was it, for food service board? That's the potential. But you also show your current business in that area disappearing. How should we look at liquid packaging board in that universe?
So that is not in that. So liquid packaging board over time will replace barriers from being fossil based to non fossil based. That's part of what we are trying to achieve in MFC in the 2024 area. The second one is that recirculation of liquid packaging board is now being implemented outside The Nordics and going into more parts of Europe, which has been a problem.
So where do you see your current liquid packaging board business being in 02/1930?
In 02/1930, it's probably going to have a growth of 2% to 4% going forward. That's what I believe.
Thank you.
Okay. Marco, can you pass it behind you to Gustaf? Thank you.
Thank you. Gustaf Schwinn from PayPal. Two questions from my side. Firstly, on not bringing back Barrick into your own books. I mean other than just increasing potentially your harvesting levels, what do you think you can do with profitability here in the coming years?
So the profitability, to be very clear, is under previous management. And if you look because you can't see that, if you only look at Barylick, it's about the same as some of the Swedish competitors. But what you have to understand is on top of that, we are taking in all the wood supply from the Baltics, Russia, Finland and Sweden. So you cannot compare our forest division as it's been presented with the ones that you see in Sweden of our two competitors in Sweden, very different because they have one Bergvik. We have one of the biggest sourcing organization of wood in this area of the world.
So profitability will obviously be better.
Okay. Fair enough. Then secondly, I mean, you've answered potential growth in new business areas. I mean roughly, what kind of margins do you foresee in the next five years in this area?
So when it comes to new products and services, you only let new products and services out when they have a better margin, right? You will not release a new product that has lower margin. So I think margins will continue to tick up.
Yes, mean, seeing as these are pretty much byproducts, I mean, the theoretical margins should be very high, I guess. Yes.
But also in the early days when volumes are small, they're going to be fantastic good. But then after a while, will come in. But so form fiber is going to be high, biocomposite is going to be high, then competition takes we just need to be faster and that's what my first question was to be more nimble and faster than our competitors and that's the only way how you stay ahead of the curve. Thank you.
Okay, Gustaf, can you pass it to Robin behind you again? Thank you.
Thank you. Robin Santaverta, Carnegie. Now going back to sort of the previous question on the R and D that you are spending, I guess you're spending some EUR 150,000,000 a year on innovation, which is more than most of your competitors.
More than double than most of our competitors.
Exactly, exactly. What is the investment hurdle rate for that? Because obviously, it's interesting entities you're working with and the potential is there, But don't you feel that you risk investing sort of several years, 150,000,000 is much, five years of that is several €100,000,000. Do you fear that the return will not be there? It will come late.
Could you sort of be a bit specific on the hurdle rate that you expect? Obviously,
when we start the project, we are trying to figure out the margin of it and usually we have to go on the highest margins. So some of them we have to close down because we will fail, but I do believe that we would never have reached 8% new products and services in 2018 without that money. And if that's the case, which means that you're getting two things, you're getting new products with a higher margin than existing plus maybe the most important, you get time monopoly with your customer because copying what is later a Storansian invention means that you need to use price, right? And you can either fight in that and then you start with a lower margin to start with or you lead and have a higher margin. I rather do lead and have a higher margin.
But obviously, it is a way in a way also a substitution of CapEx. So in that sense, it's not a lot of money because for 150,000,000 you don't get a lot of a partner, right?
And then another, if I may, just sort of a bit of a tough question, I guess, for you. Cough. Yeah. It's nothing tough. During your time as a CEO, I guess, by far, the largest project you did was Beihai.
It was not decided by you, so it was decided by somebody else before your time as a CEO. Can you just sort of because it's been tough, the ramp up and I guess the profitability development has, at least for an outside, been a bit disappointing. What is the current state? Is there anything that sort of should have been done differently? And how should we expect sort of the outlook you have invested more than EUR 1,000,000,000 in Beihai still?
So the mill, including the PET coating is EUR $8.30 And then on top of that, have the land leases, right? I think sometimes you guys have a very short time horizon. I think the verdict of Beihai will be in ten years.
For sure. For sure.
So I say good because I think it's a very good place to be in and it's a very competitive it's actually one of the fastest ramp up liquid packaging in the history. Last time we ramped up, I think it took six years or seven years and we almost went broke on the store outside. So I think we have to be very humble of ramping up mills. I was in Uruguay about three weeks ago. It's an extremely good meal right now.
But I tell you, I had a lot of sleep last night when it was ramping up in 2014. We had the same issue but a lot smaller in Warkaus, started well, terrible second and third first and second quarter and then back on it. So we have to be a little bit long term. I tell you, in ten years, the verdict will come on Beihai. I'm positive.
Good. Thank you.
Okay. I think we still take one more question. I think, Johannes, you had one. And we have a big Q and A session, quarter past three starting. So we will continue then.
So Johannes, please go ahead.
Yes. Johannes here, Kepler Cheuvreux. Just one curious if you have thought about done internal analysis and so forth on climate changes and how that could affect your Swedish forest land and how you perceive risk for storms. You have the famous insects now going on in the South So of Sweden at least, if you can touch upon that, please,
would
So be obviously, for us and for most people, the biggest problem is climate change. We might actually benefit in the short run with higher rotation times, but in the longer run, we might have bugs coming up. They are not really in our areas yet, but the bug that is we see it in Southern Finland, we see it in Sweden. We have seen it in Central Europe for a while. So that's one.
We have more unpredictable weather, which is a problem, which is one of the areas where we are working constantly. And we saw that already in 2018 where we had basically a very warm winter in Southern Finland, which stopped harvesting and we had a challenge on that. In Sweden, where we have our forest, it was so much snow, we couldn't get it out. So this is something where we actually adjusted already in our way of wood supply for this year. We were going more for flexibility and in a way, Jorman will talk about that, it's about agility.
So that is but that's another one area is we need to invest more in innovation on new seedlings and we are one of the leaders here to make sure we can phase in new breeds of trees that are more resistant to this. So that's very important. Very good question.
Yes. But you mean, if I'm hearing you right, the issue right now with the beetle, with the spruce beetles, that's sort of under good control from your side So what it
we have been using a lot of technology to detect it early because not only the eyes, we are using drones to see them. And also when it happens, you actually cut down forest a lot faster, so wood prices come down. So that's a positive in the short run, but it's a negative in the long run, which means that you need now to have species that are more resistant, that you need to put money into the research in the nurseries and that's what we're doing.
Okay, thank you. And I think we will move on with the program. And now it will be Jaric Soaminen from Wood Products telling his strategy. Jaric, please.
Thank you, Dear ladies and gentlemen,
I would
like to start with some basic facts regarding Sturanza Wood Products. Like Karl mentioned, we are the biggest in Europe and we are number four globally. And in left side, you can see that we are running 20 operational units in 10 different countries. And what I would like to highlight is that these all units are close to best forest in Europe. Further on, we are developing wooden component wooden building component units and in CLT, cross laminated timber, we are the biggest globally.
Then moving to customers, so we have a unique position. Our people are serving our customers in each continent except Latin America and Antarctis. We have close to 3,000 happy customers and those customers are served with wood, which has full traceability. Last time, in Capital Market Days, I was explaining you how we have been delivering our promises, especially when looking to financial targets. Further on, I explained you our progress in our transformation, our huge transformation from traditional classic sawn producer to provider of innovative wood waste solution.
This strategy is still valid, but in order to grow and in order to accelerate the growth, we have identified three success factors we need to focus and we need to develop in order to make it happen. Those three areas are: Sustainability, we need to take the advantage of our sustainable position. Secondly, we need to be disruptive, we need to dare to challenge the status quo in construction industry. And thirdly, we need to be agile. Our transformation is continuing, world is changing and we need to adjust to that continuously.
This leads me to our main business driver and that's called construction. 80% of our business is coming directly or indirectly from construction. And this is industry which need to change. And we in Stora Enso, we do not want to be just part of the change, we want to lead the change. This industry is highly resource intensive.
Construction materials are causing 11% of global carbon dioxide emissions, 11%. It's one of the weakest developed industries and if you are looking technology is also weakly developed. Then comes the question how are we going to do this. And I will start with our innovations. In right side in this picture you can see CLT building element.
We have similar kind of solutions from LVL construction beam and these are components which will change the industry. These are faster to build. These are light, so you need even five times less trucks into European capitals if you build high rise building from wood. Construction places will be quiet, safe, there is overall nicer atmosphere. And what is also highly important is the fact that our product is natural, so it's healthy.
And this is the reason why many, many schools, kindergartens are now built from wood in not just in Nordics, but overall in Europe. Dear ladies and gentlemen, I would like to proudly present you a video which is about our newest building concept for offices and all these proof points I was showing here you will see from the video. So please show the video. So I hope you liked it. This is now this you were the first audience seeing it and this will officially launch in a couple of weeks for architects and engineers in London.
I will still stay with couple of examples and this is building from Wexer, Sweden and we are getting always the question that for your growth will you have enough raw material? And our answer is that yes, we do. Our raw material is renewable and our products are reusable. And what is the beauty is that this total building block will grow back in Swedish forest in seventeen minutes. And when comparing to competing materials, we can save up to 75% in carbon emissions, carbon footprint.
And this is the example which is showing that how our sustainable positioning is highly important for us, all the proof points are very important for us as well as our position in circular economy. I will still continue in one example. This is building block in Germany in Hanover. There are 140 apartments and one kindergarten this was built by German logistic company. And one of their main decision factor was ecology.
Storage impact of this building is equaling of driving 40,000,000 kilometers by truck, so 40,000,000 kilometers. So this kind of decision factors will be there, what we are seeing continuously more and more. But we don't want to stay just as efficient component provider or ecological material provider. We want to reach more and we want to lead the change and we want to reset the total wooden construction value chain. And this is what I would like to move now on.
Left side, you can see the existing value chain, existing ecosystem. It's highly sub optimized, it's value disruptive and in a matter of fact it's a complete mess at the moment. And this is what we want to change. We want to develop end to end process, starting from architects and engineers, we will develop with our partners which are also including start up companies, so we developing new platform which will be based on digitalized solutions. And these digitalized solutions are fitting perfectly to our highly prefabricated products.
So then the question is that what does this digitalization mean and I will move that to that next. Here you can see this is highly simplified, but here you can see the wooden construction value chain. We start from design and engineering, we continue in construction and finally comes to operation and demolition of the building. And when looking the digitalization developments, we are developing three d modeling tools called building information modeling. Our products are included there and this is increasing that phase, engineering and design phase efficiency hugely.
And these models are connected to our factories and then when we are sending the products from the factories, we are using RFID and sensor technology, so we can follow the delivery and even not just location, but also what is the condition of delivery from moisture temperature perspective and so on. Then when products are entering into construction place, we have applications available and those are already in use in our partner carpenters and they can see based on those applications what is exact location for each component. Then we are moving to operation phase, sensor technology is fitting very well to wooden components and with those data, we can help facility owners, maintenance companies with information what is the temperature, moisture, carbon dioxide situation in the building. And last but not least, finally, when we are end of lifetime, so we have considered already from the beginning in design phase how as easy as possible to de install our components and reuse them. So this is roughly very simplified way how we are going to digitalize that.
And the middle, you can see our mill, big picture of our mill, there is also second digitalized value chain that is from our mill to forest. But I will not go there into details. Jorma will come back to that and those who will join us tomorrow, we will get deep dive on that when we go to forest and see what we are going to do with our beautiful material in our mills. This leads me to last area, agility. This is area which is highly important for us.
World is changing, we need to change according to that and speed, like Kalle was also referring, speed is one of the main factors. But one way to reach the speed is to be proactive, see the future trend early enough. Further, we want to automatize our operations and improve the efficiency. But this automatization, we are getting feedback that our industry is weakly developed if you are looking technology perspective. And my answer is that yes, we are weakly developed.
But we don't see that as a threat, we see that as an opportunity as it's so easy to copy from other industries. Then new capabilities, we need to develop continuously. We are moving in our transformation and we need to attract new competencies, we need to adjust our processes. So this is the agility we have been developing. Then moving a bit to track record and when looking the sales development, we have been growing during the past year some 3% to 4%.
If we take into account the fact that we stopped trading in our business and we would take that into account, so we are speaking about some 4% to 5% growth. And in March, we have close to doubled our EBIT percent and we have reached our return on capital targets. So when you are looking this picture, one main focus areas is that how not just to grow, but how to accelerate the growth. And this is where we are working and I would like now to show you how we are going to do it. The area where I focused today was Building Components and Solutions, there we see potential up to EUR 400,000,000 in five next years.
Then we have our traditional classic sawn business. There we will have also some growth, but that is mostly based on new service models. And then, where already Kalle also referred Biocomposite, there we see there we will grow some up to EUR 200,000,000 in next five years. This is the product where we have new innovations and first time we can cost competitive, what I would like to highlight cost competitive, we can replace fossil materials with renewable material, wood in plastic different kind of plastic applications. And last but not least, we will focus to develop and increase the share of new products in our sales and portfolio.
Last year it was 4%, this year it will be somewhere between 67% and then our target is fifteen percent twenty twenty four. When we count this all together, we come to growth of up to 8%. Dear ladies and gentlemen, I will now move towards conclusions of my presentation. How we believe is the winner in this industry will be the one who dares to be sustainable and take the advantage of sustainable position and the one who dares to be disruptive challenge the status quo in construction industry and the one who dares to be agile, continuously adjust in the changing environment. And I hope you got good understanding how we are going to do it.
First of all, with our new innovation solutions, we can enter into markets earlier dominated by concrete and steel. Then we want to develop end to end transparent value chain in wooden construction industry together with our partners with developing the platform and finally that based on digitalization. And agility, we will develop based on our new capabilities we are continuously adjusting.
Thank you.
You, Jari. Any questions for him? Okay. I think Antti was there first and then Amaretta, believe.
Antti Kosperum, Danske. About the disruption in in the construction industry, you mentioned that building out of wood is is faster. It's cost competitive, and it's definitely more sustainable. What is the, you know, kind of main things that is keeping the the the construction industry from changing to from concrete to to wooden products at the moment? What's holding them back?
First of all, I would say that nothing is holding. So in many markets, we are already starting the high increase and our growth rates are high if you look in these products. When we are entering into new markets, there we have a challenge what I showed that it is not enough that we will play the new game. We need to have the total ecosystem with us. So it takes always some years to develop each new market, but when it's developed then the growth is high.
So my answer is that new market development takes some time, but when we are there, nothing is holding up. And there we have good examples already. So you need any regulatory actions to to promote wooden product building out of wood? Basically, if you mean that, regulators, regulations should help us to get wood up. We do not need that.
In certain cases, what we wish is that we get the same same chances as other materials. Like
there is
a lot of questions, is wood fire safe? And these products are from massive wood and those are fire safe. So from this perspective, there are in certain areas, regulators are coming a bit behind, but those are getting into correct direction. So are confident we will get there.
Good. Thank you. I think Annarete, please.
Hello, Annarete, Lumetimum Solilium. You just described your growth targets getting from building components and solutions, euros 300 to €400,000,000 more per year.
Can you give us some kind
of an idea how many kind of these kind of bigger office buildings it means?
I mean, do you have
some feel are we talking about tens or hundreds or how much?
So far, we have had 15,000 projects. So people are thinking that we are new in this business. So these products we have been sold already for 15,000 projects. And those are for private homes until high rise buildings. And if you are taking this kind of big very big project, we are talking about 5,000 to 10,000 cubes there and one and so we are talking about €5 €6 €7,000,000 per each.
So it is, of course, many of them, but the portfolio is the key that we have the residential building, we have schools kindergartens and then we have single forms as well. So it is many projects, but we are operating European wide at the moment.
Sure, I understand. So but I repeat, so we should think that a big office building wood delivery is somewhat below I mean EUR 10,000,000 would be really a big office building delivery from your
Yes, yes.
Okay. Thank you.
Okay, good. I think Hari there, Hari Daiton and Nordea.
Thanks Hari Daiton and Nordea. Just going back to the returns that you showed and all this sounds like you should have a sustainable chance to kind of increase the value sort of creation in the division. But I mean how much if you think that we started off the economic cycle in 2015 and that was when you had sort of the division sort of booked about 16% returns and then the peak returns were at almost 30%. And now the last twelve months, we are coming down to sort of 24%. But assuming that we get to the sort of a slower economy and this sort of a 2015 type of economic environment, construction slowing down and all that.
How much is sort of realistic to assume that you can stick or how much kind of this sort of margin and return improvement you can hold on to with these new concepts?
Yes. Thank you for your question. It's a very good question. Traditionally, wood products or if I say sawmilling has been seen highly volatile and that is highly volatile and it's very transparent and very dynamic business. But what we are developing is that we are increasing our share in these highly developed building components and we are not just remaining there, we are adding their service and solution and digitalized concepts.
So we are step by step, we have made already now, we have made huge steps out of that area. And also in this classic zone area, based on our global reach and based on our European wide operation, we have good possibilities to optimize that. And this has been one big development area for us that how we can manage the total portfolio. We are calling that sales and operation planning and there we have made a lot of good steps as well. But not just that, but connecting to service models there.
This will decrease the volatility. Of course, volatility is there, but we are and this is the reason why we have been keeping the good profitabilities. Of course, volatility will impact, but our target is significantly to reduce it.
Thank you. Fair enough. Maybe just a very quick question on the slide that you showed on the digitalized value chain and this sort of example of the new way of working. Have you kind of concrete a lot of concrete examples of that or is it sort of still in the making or is it sort of something that you have done many times already or whereabouts in the world?
We don't have any concrete examples. We have just wooden examples, but I understood your question. So basically, we are developing platform and this platform includes different pieces. And like I mentioned, we are not developing that alone. We have a large partner network.
We have very high level, well operating companies and we have start up companies where we are working together and this we are developing. And there are many areas like I mentioned this, the applications where Carpenter can see how products will be moved in construction site. Those are working. Our like I mentioned, our products are already in building information modellings. So all pieces are proceeding and those are at least in pilot phase or already in commercial use and this platform starts to be in place.
Of course, it needs to be continuously developed then.
Thank you.
Marco, did you still have okay. A last question from Marco.
Yes. Marco Aruna, Handelsbanken. As you said, construction is cyclical. Sawmilling, I guess, one could say, has been at least highly cyclical. 2018 was, I suppose, the peak, and now we're seeing a bit softer markets.
You set out this target of 6% to 8% growth per annum. If we look to 2024, should we sort of expect you to make up the difference towards the end of the period if it's a bit slower in the beginning? And second of all, I'd like to hear how are you impacted now by the sort of pine beetle issues and the flood of wood to the market in Central Europe? Thanks.
Yes. So basically, our growth target is over the cycle. Of course, like I mentioned, our volatility has reduced based on our own work, but it's still there. But what we believe is the fact that these like with our new solutions and innovation, we are entering completely into new markets we have not been early at all. And wood will increase the market share, especially in urban environment.
So we believe that that will support our growth going forward. And also, as we have global reach, so we have a possibility to optimize our markets and we have happy customers due to our new service models, so this will allow us to be first one among our industry. And we are the leading in our industry already today. So this is how we believe that the growth will continue. And you asked also the your second question about Central
European wood The
pine beetle issue and wood Yes.
This has influenced in Central Europe, so there has been a lot of wood in market. And it is like Karl mentioned, longer term it's a threat. On the other hand, where we need to invest and where we in Central Europe as in Nordic, we are investing is to continuously develop the forest management. And this will lower the risk, but risk is there. But this is coming similar way.
This is not just Central Europe. Everywhere, these certain threats coming from global warming. But what I would like to highlight that there are tools to limit the impact if we manage our forest very well, like we are managing our Parivik or our forest what we have been acquired.
Good. Okay, thank you. Thank you, Jari. And now we will hear from Jorma Lansitalo about forestry. Jorma is a very experienced forester and he will talk a bit about his background because you are new to the markets.
Thank you.
Okay. Thank you, Ula. Ladies and gentlemen, yes, I've been more than thirty years in forestry and wood supply business in this company and in the different operations and different countries. So it's needless to say that it's really a great pleasure to be here today and to explain that how our new great forest assets in Sweden and new forest division can contribute to Stora business. We can say in Stora Enso that it all starts from the forests.
So all our products are made of wood, wood raw material, and the forests are not only like a source of the raw material, today they are also deeply integrated to our value chain from forest to the mill and up to the customers. Tomorrow, will see that how close link there is between wood procurement and, for instance, wood products industry. We are the second biggest forest owner in the world with our €3,600,000,000 asset in the biological assets. So it's, of course, quite natural that we are establishing forest division to increase visibility and transparency to our operations. And I am going to lead you through a little bit to the issue that what is the forest division all about.
We can put this into the three categories and or three focus areas, and I will walk you through all the all these three. The first of all, it is, of course, wood supply. So we are supplying wood to our industry in our operating area so that would create a competitive advantage to our mills and divisions. Secondly, EU Forest division will serve as a platform for global innovation and development and R and D. So we can utilize our economy of scale and to have more focused and coherent development work.
And thirdly, of course, it is our forest asset that how we can maximize the value, how the forest assets are what the forest assets are creating to the company. But going first to part of wood supply. So basically, we can say that wood supply has two key processes. The other one is the wood sourcing, how we are getting access to the wood and the other one is the supply chain, how we are managing the whole wood supply from the forest to the mills. I will today focus more to the sourcing side because tomorrow we will see more of the supply chain in the forest.
Starting about our own forests. So we are controlling globally some 30% of our raw material needs. Highest, of course, in the plantations, but now after Swedish acquisition, so we are up to 50% of our total wood demand in Sweden. And actually, if we are looking at our Central Sweden assets, we are covering 70% of the supply, like Karl said in his presentation. So this gives us the strength against any possible turbulence in the wood market or any volatility in the wood market.
So we are very well secured with our own forest assets. Then in the other picture, you see what does the new forest division cover. So we are covering all the key market areas around the Finland, Sweden, Russia and the Baltic countries. Out of our scope are the plantations, which are directly connected to Consumer Board and Biomaterial divisions and Central European procurement, which is directly connected to wood products. In all these market areas, we we can are say that we are deeply integrated from forest to the mill.
And there is no other company in this business that has such a coverage in this area. And that is, of course, one of our competitive advantages. We can say that we know the wood business in this area much better than anyone else and we have tools to maneuver in the different market areas so that it balances our supply in a good way. On the top of the like a geographical spread, we are also operating with all different wood sources. You see that our own forest and our long term agreements, they are a big and important source.
We are also doing very much business, both purchasing and sales with other companies, business to business partners. And why is that? That is to optimize the sourcing to our own mills. So we are when we have a good geographical spread, we can optimize the transport distances with the wood swaps, we can optimize the wood assortment structure by selling something that we are not needing and buying something back. Another important finding in this one is that we are still very, very dependent and we are sourcing a lot from the private forest owners.
And that is a business of its own, I can say. So 50% of our wood is coming directly from the private forest owners. And they are, like Karl said, they are normal people, ordinary people who are not so dependent on the forestry income and there is a lot of those. So roughly a million people in Finland and Sweden are forest owners. So we have been developing very advanced CRM techniques, very advanced kind of sales force management systems to categorize segment focus in our service offering to different forest owner segments.
And we have developed a lot of services simply in a way to make the forest ownership very easy to forest owners and to create also loyalty that they feel that it is easy and trustful to work with two rails. This is a very key of our wood procurement. So putting this wood supply part as a nutshell so that so we are the number one wood supply organization around the Baltic Sea because of our geographical spread, because of the integrated supply chain from forest to the mills and because of our strong forest assets and good and close contact to the forest owners. The next important area is the innovations and development. And this is actually quite interesting with the New Forest division is that we are now acting as one wood supply.
And that means that we can focus our development work, our innovation work much more coherent way and like it is said that and we can use our benefit of scale. We are big. So we can invest to those projects that we think that are really important. And like you know that in the digital world, the marginal cost is zero, so then we can implement throughout our organization. And that gives us strength.
There is a lot of things going on here. I just give you some examples or areas rather than what we are working for. One big thing is that with all remote sensing techniques, including laser scanning and other techniques, start to know forests digitally in a very, very detailed way. We can say that we already today can produce like a digital twin of growing forest from three by three. There is a picture in the left.
And that helps us, of course, much better to steer our operations, to have a dialogue with Yari and his business that what kind of solar he really needs and to steer our operations to those locations. The same way we can use these digital images of the forest to describe to the forest owner that how does his or her forest really look like. There is no need to go to walk to the forest, but actually with this device you see in the mobile phone there, you can fly over the forest, look how it looks like, you can simulate how our operations are impacting the forest, how does it look like after twenty years after harvesting. And this is, of course, naturally helping a lot our communication with the forest owners. Tomorrow, we will look closer to optimize supply chain and especially what we can do to maximize the value of the trees to our industry.
The third area is our own forests. And like already described in Karl's presentation, there is many ways how we are creating value with our own forest. So first of all, forest is a very nice asset in the sense that if you are we can increase the yield. We are now in the 4% pretty much for the growing stock. But with the right actions, with a good management of the forest, we can further increase the yield and, in a way, increase also the value of the asset over time, like from any other technical assets, so that this asset is increasing in the value.
Our main income is coming, of course, from the wood sales. So we are using majority of annual growth in the harvesting. I will come back to this a little bit after that and that is the main source of income to us. Very important to us as the forests are part of our integrated wood supply operation is that we can use also our own forest to balance the wood supply. If there is like a disturbances in the wood market or any unpredicted changes, we can be very flexible with our operations in our own forests.
And the last, maybe a bit less significant, is that we can use our forest area to many other purposes and create some additional value there. We are, for instance, developing wind power parks, which we are then selling or leasing to actual power production companies and we can still continue to grow forest in those areas. So and or using the land for the construction, planning and so forth. When talking about own forest, so sustainability comes first. And to us the sustainability actually covers everything what we are doing and we looked it as three aspects of sustainability: economical sustainability, social and environmental sustainability.
And there is a continuous dialogue between these aspects and we have already long time I would dare to say that we are probably the company who is the most active participating and even initiating this dialogue. We have seen it very constructive way to match these different aspects together. In many cases, what is good for the forest can be good for the sustainability and for instance we discussed earlier about the climate change and how to manage the forest in a good way. So we believe that the healthy, well growing forests are good also for protecting the climate change and they can sustain the best way also the damages. Also this we will look a little bit closer tomorrow in the field what are the biodiversity actions in concrete way when doing the operations in forest.
About the yield, like mentioned earlier, Berivik has been historically about 3,500,000 cubic meter in the harvesting annually. We have taken over now this asset in the first of starting from June 1 this year. We have, of course, started the analysis of the forest assets and the possibilities there and we are confident that we are able to ramp up the harvesting level in the very sustainable way without risking the future growth or risking the forest capital there to the level of 4,000,000 cubic meter. We also are confident that this is not all. We will continue from here onwards.
We will invest more to R and D and technology development to further boost forest products. How to do that in practice then? Here is a couple of key things we in the small team discussed about the tree breeding and tree breeding technology. So there is a lot of experience and a lot of historical work done with the tree breeding in The Nordics. It is slow work but it brings results.
So we already know that well selected seed, which are produced to the seedlings with our we have three forest nurseries to produce seedlings with. Those seedlings can grow up to 25 better than just this kind of like forest seedlings. So there is a big opportunity there. Another thing, a little bit related to the digitalization or much related to digitalization is actually this, we call it precision forestry. So what it means that when we have a good understanding what is our forest with our remote sensing technologies, we can be much more accurate with our forest management activities.
We can do right things on the right time and that is proven to be a very effective way basically without any additional cost to increase the forest products. Another thing that we have already started is quite extensive R and D in the field of biodiversity and sustainability. We are doing all this in the cooperation with the different kind of institutes, universities and so forth. In the field of biodiversity, we have the same kind of efficiency target. We want to do biodiversity actions that really have a meaning, not just in order that we can tell that we are doing this and this, but to do something that there is a measurable impact out of those.
I'm coming to the end now, and I hope that you could take the three main things what I had in mind. Firstly, our wood supply organization is number one in this area. We are deep integrated from stump to the mill and we have a good flexibility over the sources, different sources of wood suppliers, but also with the geographically. This will give us flexibility and, of course, supported by strong own forest standing forests, but also close relations with the forest owners. Secondly, we believe that innovation, including digitalization, will bring us to the position that we can be recognized as a leader in this industry in some years' time.
Because of that, we can use global platform, invest more and implement the results widely worldwide. And then last but not least, we really believe on the further potential of our forest assets. We are now ramping up our staff and our skills to bring that further, but we know that there is further potential there. Thank you.
Thank you, Jorma. Any questions for Jorma? Okay, Oskar and then Mick Derpen.
Yes. In the old Baervik West, which you acquired, a number of minority shareholders have also taken out forest land, which they now own themselves. So are you going to be sourcing wood as before from these minority shareholders who have now become independent forest land owners?
Partly yes and partly no. There is three bigger minority shareholders that with whom we have already made the long term supply agreements. I will then show how is the rest. But with these three big ones and our own forest, we are very well covered So
it's not a situation that you now need to go out and find new suppliers to replace the ones that you've lost and No.
No. And, of course, I mean, we are all the time well supplied also from the private forest segment. But basically, with the existing own forest and the new suppliers, we are covering the same volume that what we had earlier from Berivik West.
Another question on sort of the transition from Berivik Skog to your new forest holding is, I mean, you or Stora Enzo was, as I understood it, managing the forest land for Berwick School previously, in particular Berwick School West areas. Now that some of that forest land has been taken out of Baivik Skog West, does that mean that your forest management organization is oversized and that you need to reduce it? Or how are you coping with that transition?
Yes. So during the transition, PariWeek had something like thirty, forty persons. Very few of those were transferred to us. And we are now in the middle of reorganizing our staff. We will get some synergies because there is some overlapping functions.
And then in the field, you are quite right that in some areas we need to restructure our operations because we are not anymore doing the silvicultural work. But most clearly, majority of the external forest owners are also relying on our services when it comes to silviculture and harvesting.
And maybe this is a question for you, Ola. Does that mean we should expect some nonrecurring items or extra costs here as this is being restructured?
I mean, we are not we haven't been announcing anything major in advance, and they come on a timely manner.
You will see that in Sepo's presentation of what we are doing in the profit protection in segment other because segment other will be different now. But in the presentation of Zeppe, you will see that. So that's a good question for Zeppe. Thank you.
Okay. I think it was Mick Derpansen next.
You. Mikael Roeppel, UBS. You mentioned the potential to increase the harvesting and also increase the yield. Would you be able to quantify in terms of earnings impact what the potential would be from all of the measures that you're doing? I do realize that you are kind of, as you mentioned, ramping up and it's in the middle of the process, but any numbers you can give?
No, not really in the sense that exactly like I said that we are in the very early phase, but kind of analyzing the different activities separately. So I have promised to my boss that there should be 10% plus further potential, but the time is not defined.
Okay. We'll
take that next
week. Yes.
And then just another question on level of integration or self sufficiency. It's currently at 30% now with the Berwick acquisition in Stora Enso. If you could decide, do you see an optimal level of self sufficiency for a company like Stora Enso? Is this good or would you like to see a higher level or
The issue here is that this 30% is not at all equally spread in the different geographies. And I mean that Sweden now with 50% and Mid Sweden with 70%, that is extremely good. That's fantastic. In Finland, have 10%, 15% coverage and that is clearly low. But I think Karl mentioned that there is not in a way big opportunities hanging around there and that is another reason that we believe that we can get very much of these benefits if we are able to create good service models to the private forest owners in a way increasing their loyalty, possibly increasing little bit long term supply agreements even with the private forest owners and that way kind of stabilize more our business.
Okay. Thank you.
Okay. I think Robin and then Sindre here in the beginning. And then I think we need to park the rest of the questions to the Q and A session.
Thank you. So Robin, Sandroveta, Carnegie. Now going outside of Scandinavia to your forest that you lease in China, what will you do with those in future? Are they core for you? Is that operation profitable or loss making for you?
And how much of the wood the CNTP pulp you produce for Beihai is from wood raw material from these forests?
So you're my supporting them with expertise how you run plantations because that is also part of that. But when it comes to the we are clearly long in wood in China and that was because of the intention earlier on to have a pulp mill which we decided not to do. So we are in the process of handing some of that back and keeping the best land. And that's what we've been doing.
Yes. Against chemical pulp mill?
Yes. We have the CTMP and we need to plant
That's from own forest.
Well, it's leased forest.
And then just on the Veracel and Monte De Plata, what's the self sufficiency in terms of wood raw material there? And why is the value of
the
hectare in those places where forest really should be valuable and grow fast so low? So
70% to 80% we have in the plantations in Latin America. You need a little bit and we implemented that in especially in Veracel, we have three farmers and then we have the similar situation. The values of those we are digging in because it hasn't been land sold in Bahia in a very, very long time. But I can tell you it's a high value.
It's not booked
high. What? It's not booked high. No. One you should never mix and maybe I take this thunder now.
You have a balance sheet value and we value everything in the balance sheet because the value of Storians is not the equity value, right? It's the market value. So it's depending if it's a book value, if it is what somebody is willing to pay for it, which is a total different. Sometimes we miss these things. They are different values.
And when it comes to biological assets, you basically are valuing the trees and have basically no value on the land because you have the plantation and the forest for the wood supply, right? So think it's almost what is the purpose. Are you trading forest? Then it's one. Or you're having it for wood supply?
It's a different value. So I think we need to be a little bit clear the purpose. So if somebody was really interested in buying additional forest in Bahia and you can probably see a bit of the value in Uruguay because there is land being acquired recently that's semi public and they are expensive.
I agree. Thanks.
Okay, thanks. I think Sindre here in the front and then we will have the rest in the Q and A session.
Hi, Syndra from Arctic. The cards have in some way been dealt for new now. So should we expect in Bagrig that you will, let's say, swap some forest plots with other owners in some instances maybe sell off some nonproductive plots if you get a very good price for that. And in cases, you could add some plots. Would you should we expect this increased activity going forward now that you control it?
Yes, the answer is yes. So that we our kind of strategic ambition is to maintain in this level in the Forest Ownership. But exactly like you said that there is a continuous trading that if some plots are not so well fitting to our portfolio, we might sell something out and then purchase something back. Another thing is also that there has been in the history possibilities to swap some set aside lands with the state to the productive lands. Yes.
Good. Okay. Thank you, Jorman.
Thank you.
And we will now have a coffee break for about twenty minutes, and please be back in the Room 223. But if you want to have a closer look of this battery, it's here in front, and I think we have our researcher here that can tell you more about that. So Stefan is by the battery, you can discuss that. Okay. We will start now, and CFO, Seppo Parvi, will talk about the reporting of the new Forest division.
Seppo?
Thank you, Ola, and ladies and gentlemen. So I will give a bit financial flavor to the new Reformed Forest division. I will also talk a bit about the profit protection program that we started earlier this year, a bit about trimming working capital and then also about capital allocation going forward. I will start with the cornerstones of driving competitive and sustainable business. And theme today has been about the integrated forest assets and integrated wood supply, that's where it all starts and that's pretty much key to everything we do.
But we also continue our continuous improvement projects and work. Good explanations or good examples there are our profit protection program and working capital reduction work that we are doing. And all that together with amongst other things we are doing out is then, of course, leading to increased shareholder value. Then about the forest assets and big picture, like Karl and Jormo already mentioned, we are globally second largest private forest owner. EUR3.6 billion worth of biological assets in the balance sheet, EUR0.5 billion on top of that when it comes to forest land, so EUR4.1 billion.
And the latest important transaction there has been this acquisition of EUR1.4 million hectares of Swedish forest land. Then a bit about the rationale behind the deal, why did we do the transaction. And it's very much about the optionality around the forest management and forests and wood supply in Sweden. It is enhancing integrated wood supply, like has been mentioned already several times during the day and I think Jorma gave you a good picture on what does it mean in practice. This is about supply security.
You should remember what has been mentioned already today, 70% of the wood needs of our mills in Middle Sweden, half of our needs in total, if you look at Sweden as one total entity. It's also about flexibility. It means that depending on the market situation, we are able to harvest more or harvest less. And that way flex and use flexibility when it comes to internal use of wood or external purchases and that they balance a bit our own exposure to the market. It's also about the synergies, cost improvements and more efficiencies at the end of the day.
And also we strongly believe that the figures that we have shown yesterday and I have also here about the illustrative figures for 2018 and first half of the year, that is based on as was. And we strongly believe that we can take it further and improve the returns on the forest assets that we have taken over now with the actions that we are implementing. We also managed to get the original forests here with very attractive price and valuation. For the original hectares, we paid EUR2400 a hectare. Average price is about EUR200 a hectare if you look at the total ownership of this 1,400,000 hectares here.
If you put that into perspective, it's about half of what Pillarut Korsnas got when they divested their share of Parivik Skog Forests after the restructuring. It's about onethree, if you look at the statistics in Sweden, when it comes to deals done in the whole country. So very attractive valuation for the deal. Then when it comes to asset itself, it's very attractive asset, it's appreciating asset and you can get very beneficial financing for this kind of assets. When we did the deal, we also launched our first Green Bond.
It was the biggest Greenpond in the history of the Swedish market at the time when we launched it and made the transaction. And the terms and conditions were very good and favorable. On top of that, we did also two bilateral arrangements for funding, with Green Bond framework was used there, also with very attractive terms and conditions. So that was also important step for us in the treasury that we have been preparing for Green Bond for a long time and looking for the good opportunity to tap the market. And this was excellent, excellent example of where Greenpond can be used and it's working.
Then we also promised when we announced first time and originally about the deal that we will increase transparency about the forestry and forest reporting. Also at the same time, when we are increasing transparency for the Forest assets, Forest division, it also means that there is more transparency for segment Other. As you know earlier, wood supply and forest assets in Noden were all reported in segment Other, which has become a bit of black hole for many of you, very difficult to estimate, foresee what is happening there. I think going forward, that will be also more straightforward and easier for you to follow and understand what to expect in the coming quarter or coming years and also to understand the movements. Another thing before I go into the figures is to remember what Karl mentioned that if you look at our Forest division, it is not exactly one to one, if you look at our Swedish competitors as an example.
For them, it's more like Parevix, Kug, stand alone type of thing, while we are including with Interforest division also our wood sourcing and wood supply organizations, not only in Sweden, but also in Finland, Baltic countries and Russia. So it's a bit different type of setup because of us having wide operations compared to some of our competitors. Now while becoming more transparent and starting to report separately forestry and forest division figures, we have been also working on and trying to build the reporting and change the reporting principles so that it's easier for you to follow and understand the value creation of the forest assets. Because it's not only about the harvesting, it's about how the return of the forest asset is built and where it's coming from. And that's why we have changed a couple of things on the reporting.
First of all, when it comes to fair value changes, we are splitting that now to operational and non operational part. Operational part, which will be included in EBITDA going forward, includes inflation related changes and harvesting differences versus harvesting plan. Those will be included in EBITDA going forward. We also changed the reporting of the silviculture cost planting basically and some other costs, that instead of including those in the costs, we will in future include those below EBITDA in the same manner as we have been already doing for the plantation related civil culture costs. So in that way, we are harmonizing to reporting for the different forest assets that we have in our portfolio.
And then if you look at the figures that we published yesterday, which gives you some idea and picture about the reporting. First of all, change in the reporting principles is increasing EBITDA by EUR 50,000,000 compared to the figures that we have reported earlier. And we think that with this change, like I said, it better demonstrates the value creation from the Forest. Total sales of the Forest division twenty eighteen was about EUR 2,300,000,000.0, EUR $750,000,000 of that was external sales and operational EBITA about EUR €130,000,000 By the way, the changes we are doing to reporting principles does not change IFRS related operating profit, so that remains as is. But it's having no difference on the operational EBITA and operational EBITA.
Operational EBITA is going up EUR30 million compared to the past. And we will come up with restated figures during the first quarter next year before we report Q1 figures with the new structure when it comes to reporting and including Forest division figures there. And like I said, the reporting change is valid from January. Then moving a bit to profit protection program that we launched in February, million originally, increased that to EUR200 million in July. It's moving forward as planned with good speed, actually better than I personally dared to expect.
So organization has done excellent work defining opportunities to protect our margins and profitability. Roughly half of the improvement is coming from variable side and roughly half from fixed cost. And you can also see from the graph here that roughly you could say that all divisions and functions are contributing their fair share to the total. Obviously, we continue to work also on additional actions, so we are very confident that we can reach EUR200 million as promised or even go beyond that as we push the program forward. Then another area that we are working on, which is extremely important if you think about uncertainties in front of us and if you look at the global economy, and that is cash flow.
And we started after Q1 to work on working capital, to trim our working capital. We have named it TRIM, turnaround idle money, the project. And we started end of Q1. With the Q2, you also our reports, so we already reduced some EUR120 million from working capital. And the work continues.
The working capital was creeping up somewhat during the past couple of years when the sales was going up, we were ramping up the investments. So now it's a good time to bring it back to the levers we have seen earlier. And that means and we are confident also going forward we will have healthy cash flow. Healthy cash flow is important not only because of challenging business environment, but also if you look at the capital expenditure. We also announced yesterday that we are increasing our capital expenditure estimate for next year from about EUR600 million that we have been having over the past couple of years to EUR800 million to EUR850 million.
And the increase is because we want to capture the growth opportunities and to do the conversion of Oulu from paper to kraftliner as soon as possible and also at the same time be sure that we can capture the growth opportunities in the other businesses that we are in, so that we don't limit our hands too much. But this will be a temporary increase. So after a couple of years, we are coming back to the levels we have indicated earlier as sort of level to be expected that we need to keep the growth rates that we have and develop the company. So coming back to about level of depreciation, which is around EUR600 million as seen earlier. And to fund the temporary increase in the CapEx, that's coming from cash flow.
That's why working capital reduction is one of the key actions we have taken implementing to fund it as well as from non core asset disposals. Over the past five years, we have released already about EUR600 million from non core asset disposals and we continue to work. There are still some more cleaning that we can do in our business portfolio and use those proceeds also to fund the temporary increase of the capital expenditure. Then when it comes to capital expenditure and capital allocation, we continue, as said earlier, to base it on capital returns. This is now estimate for 2019.
It's if you look at the Port divisions, Packaging Solutions and Consumer Port and Biomaterials, more or less on the same level with each other, obviously, next couple of years, Packaging Solutions will be somewhat higher than the other divisions because of the conversion of the Oulu mill. And this is the key. Think the organization, since we announced the division based return on capital targets has very well understood the meaning of return on capital. It's driving very well capital expenditure proposals and the way we develop the company. So with these actions, dare to say that we are fit for the future.
We are having very good integrated forest asset, wood supply in place. We are trimming working capital. We are working on profit protection program and adding value to you, our shareholders. And that means that being fit for future means that we are ready for the challenges in front of us and also ready to capture the opportunities that there are in front of us in bioeconomy and elsewhere. Thank you.
Okay. Thank you, Seppo. And now questions for Seppo. Johannes?
Hello, it's Johannes Grasilis, Kepler Cheuvreux. Just curious about the extra land you could acquire in conjunction with the restructuring of Baroweek. It seems to be a very, very good price. Was there any sort of special circumstances behind that?
Well, I think it was based on the total valuation of Bariwik Skog and it was a big deal. And as part of that, some of the previous shareholders and our partners wanted to exit and rather get cash instead of keeping the land and forest in their portfolio. We, of course, used opportunity because we see opportunities and benefit of having forest in our portfolio. So I think we were opportunistic. And it was, like I said, very attractive pricing.
Okay. I think Alex next. And after that, Mick.
Thank you. Alexander Berglund, Bank of America. First of all, on speeding up kind of the ULU conversion, should we still expect kind of the Coda Wood Free to stop in September 2020? Or has that also moved so it just happens quicker? And then yes, you can just start with that question.
Yes. No, I mean we are keeping the plan that we will run coated wood free in all about the year, so September, and then do the conversion works. Project has started well, so we have placed orders to equipment suppliers and are then preparing so that the conversion can take then place during the fourth quarter basically. So it will take two to three months like in the case of Warkaus. So by end of next year, we should be able to start to ramp up the production.
It should go pretty fast like you remember in the Warkaus case. And of course, we are a bit more experienced than that now.
Thank you. And my second question was just on the accounting and on the silviculture cost. I guess, I mean, you mentioned that you want to do it the same as in the plantation, but I just fundamentally want to understand the reason why is this not in the EBITDA? I mean this is something you have to do continuously as a cost. So why is it not capturing the EBITDA?
Well, it is reported below EBITDA because by nature, you could look at it and
you should look at it like an investment that you depreciate. And that's how we treat in the plantation based forests. But of course, we are taking a bit of practical approach here that we are moving to annual costs to the same line as we are doing with the depletion with the Nordic asset. Remember, asset growth times are eighty years seventy to eighty years. So to capitalize that and depreciate would be quite an administrative nightmare.
So we are taking a bit shortcut there because over time, they are more or less the same.
Okay. Thanks. That's very clear.
Okay. Then, Micker, please.
Micker Leppen, UBS. Firstly, on the transformation. You talked previously about speeding up the transformation of the company. Now you are speeding up the Oulu conversion and investments there. Beyond that, I guess you have I mean, you've been looking at Tesla in Poland.
You have the other PM in Oulu now being idled, not being converted. And then there might be something else as well. Where do you see kind of the next investment going? What seems to be the most attractive right now from the options
that
you Maybe, Karl, you want to comment on that.
I think there are a number of important and what we are trying to do is to have more idea than we have money because that focus us to choose and there are many alternatives. But we need also to think about complexity, time to market as well as the situation. Right now, we are speeding up partly because we want to get to the market. The other thing is that wood free coated is a bit ugly right now, so get that out faster. And then we need to focus on cash flow to get back to make sure that we are net debt to EBITDA below 2%.
And we believe with the money we have available going forward, there are a number of interesting. But I will not tell you what. And maybe I'm not the one to tell you.
And I think Jari showed you some good examples when it comes to wood products, looking at the wooden buildings opportunities, biocomposites and other things. And on top of, like you mentioned, second machine in Oulu, no decisions made, but obviously, we need to look at that what do we do with the machine there. We are not planning to scrap it as a first thing. That's something to be looked at later.
And then just a final question on you mentioned in terms of the short term challenges in the market, it's a tough environment out there. Could you talk a little bit about what is happening in the market right now in terms of demand trends and pricing and costs? What are you seeing now in terms of the trading across the different business areas?
Yes. I think it's fair to say that, like we have also said during the quarterly reporting and interim reports, that there has been some softening of the market. It's very much driven by U. S.-China trade relationships. We see in the supply chain that people are getting more and more cautious and running down their inventories, which is having an effect in the volumes that we are supplying or our customers are supplying.
Difficult to say and put the finger on it exactly how much the end demand has come down. But clearly, supply chain has been emptied. And that's one reason for the pulp market, why it has been coming down. Interesting question is then, of course, that what is needed and when things happen in geopolitics that would balance the situation. But you can all look at the tweet there and see the flow there and then try to make your best guess.
And that's I think I'm very happy that we started our profit protection program early this year. I think we are a step ahead of many other companies when it comes to protecting our margins. And also we are clearly taking a view that we rather protect our margins and prices than go for volumes. It is very difficult to increase prices if you go into that game. You.
Any more questions here? Okay, Gustaf? And then I think it was Cole, wasn't it?
Gustaf Schoen, Pareto. Just to understand your new CapEx guidance a bit better. So I mean correct me if I'm wrong, but if I remember correctly, when you've been talking about the Oulu transformation before, it has sounded like you had room in your, well, sort of CapEx levels in line with depreciation to well, to finance it with that. And I mean, when you announced the final decision to do this conversion in May, the plan was already back then to ramp this machine up by the end of next year. So I mean, what's the difference here really?
Well, obviously, I've been looking at the speed of transformation during the feasibility study. And already remember, when we announced the conversion in Oulu, confirmed that we increased CapEx for this year by 70,000,000 for obviously the same reasons. At that time, we did not comment guidance for the coming year because we don't do it. We typically guide only the year and then we have this kind of capital markets, the investor, then we give more guidance for the coming year. But and of course, it's how you set the priorities.
We could squeeze it into 600, but that means that there would be a lot less other development projects. And like I said, we see a lot of opportunities. Like you saw in Yari's presentation earlier today, if we would squeeze this all in, it means that then a lot of other things would need to stay in queue. And that would be a pity because that would stop our opportunities to capture the growth and opportunities in bioeconomy. We need to keep the momentum.
And I think we wanted to note this, like I have said several times, it's a temporary increase for a couple of years. Next year will be the highest, then it starts to come down already. And in a couple of years, it should be back to €600,000,000 And we are funding it through improved working capital and by noncore asset disposals. So we are cautious making sure that we don't destroy our balance sheet. We want to be strong.
And I did say in my presentation, the average for the next five years is €680,000,000 including Oulu.
Then secondly, what kind of money do you have to spend on the second machine in order to keep it sort of in good shape for a potential future conversion?
It's not a lot. Of course, it takes some expenditure during the year to run it around every once in while to ensure it remains in a running order, but we are not talking about big money. A couple of million It will not kill our result.
It's a couple of million euros to heat it in the wintertime and rotate the critical portion.
Okay. I think it's Cole.
Cole Hotham from Jefferies. You've talked today about your forest operations and the benefits you're going to get there. I'm just interested to know why when you thought about it like your Swedish peers, you didn't think about revaluing the forest on your balance sheet.
Sorry, can you repeat?
Some of your Swedish peers have thought about how to best reflect the value of the forest on the balance sheet. I was just wondering why when you thought about today's Capital Markets Day, you didn't think about potentially addressing that.
Well, I think we had that we just acquired the asset. We have done fair valuation when we took it over with the parameters we use. And I think important point there is I don't know what they are planning to do, but of course, if you look at the total portfolio and assets, I think like Karl said earlier, you need to separate biomass and land, forest land. And those are two different things. And typically, when it comes to fair valuation, you talk about the biological assets and land is at historical value.
Now when you make deals and you buy and sell land or forest land, then it's land and biological assets on it that is having an effect there. I think the challenge with the forest assets is that there are not often frequently large deals that you can use as a benchmark. There has been now, of course, our transaction and then what Biller Gorsnes did. But typically, discount transaction doesn't happen every year. And that is making then it's difficult how you benchmark.
And then you need to rely on the cash flow modeling. And but of course, I think the statistics show that we have done a good deal. There's a lot of value in the forest that we have in our hands. But we also have to remember, we are running forestry to run industrial operation compared to finance investors who then are looking for the alternative investment opportunities that might be negative return on German government bonds. So that's driving the valuation in many cases.
Thank you.
Robin?
Thank you. In the future, short term or mid term, do you think that these forest valuation levels that we have in Sweden and in Scandinavia, it's smart for you to increase the net holding of forest assets? Or is it better risk reward returns in terms of industrial operations for you?
It's, of course, always a balancing act. And we have said earlier that, yes, we are interested to increase forest holdings if they are optimally located to our mills. It's not running an industrial operation and wood supply, it's about logistics. So I think if there are attractive land areas in the proximity of our mills, it could be interesting, but not to start to acquire something thousands of kilometers away because then that's adding very fast to the costs.
So basically, you look at transactions that we've seen in Sweden, they're very much driven by where the forest assets are located compared to the industrial operation of the buying company, for example.
For us, yes. I cannot talk on behalf of our competitors or other investors.
That makes sense. Thanks.
Okay. Thank you. Thanks, Hepop.
Thank you.
And now I will give the stage for our CEO, Kalle Soldstrom, for the concluding remarks of today and before the Q and A session that will still come.
Sit down. This is a short speak, about half an hour. I won't ask you. No, no. So first of all, thank you for coming here.
The purpose of this was to explain the logic about the Bergvik transaction and the values we see in creating in an integrated forest management to our industrial operations. It was also a way of demonstrating how we look at the future of our growth opportunities, especially on the wood products, which I think has been treated historically in our industry as sawmilling and is actually one of the most sophisticated businesses we have with the highest level of digitalization within our company. And also just to tell you that Wood Products has been the most stable have had the most the highest and most stable profitability since 2013. When I joined this company in 2012, my previous boss said this with sawmilling, that's not good. It's seven good months and seven bad years.
And I think today was a demonstration that this is actually the future, has a very nice capital structure. It's capital light compared to everything else we do, which means that you can accelerate and you can build a very competitive platform with industrialization and a light touch with the digital tool. I also think you have gone through some of the rationales around our TRIM program and profit protection program. And I will tell you, the profit protection program, we started that right after the U. S.
Election. So we had a simulation of what might come out if Mr. Donald Trump started to deliver on his promises. In 2018, we gave all divisions a target to prepare for a tough period because when geopolitical and business start to divert, then you know something is happening. So by mid year twenty eighteen, all divisions have trained what to do in case there was a change in the market.
We have developed early indicators and then we decided in conjunction with Q4 to launch it. I got a bit scared because all other companies basically in Q1 this year said there's no change in the macro environment and the order books. And I think Q2 and what you have seen lately is actually demonstrating that we are going into a more downhill street. So I'm very, very happy for the organization. And this is almost the same amount of cost reduction as we did in the ReShape in 2012 to 2014, but without any streaming in the organization and it is about productivity.
I am also probably this is my last Capital Markets Day for Storanso. So I thank you for coming here and I tell you this is a great company. Thank you.
Okay. Thank you. And thank you, Kalle, for all these years with us. It has been great pleasure working with you. And this has always been an exercise, this Capital Markets Day.
Yes, now we will say goodbye to our audience in the web and we will continue still here in this room for forty five minutes before some of us will continue to Karstadt and have a look at the forest tomorrow morning and also our cross laminated timber plant at Grubern. So those