Aren't those pictures nice? This is what you can do in bioeconomy. Good morning, everyone. I'm Ulla Paajanen, Head of Investor Relations here at Stora Enso. Warm welcome to everybody here in the room. It's a great crowd. Also our guests there in the webcast. We are going to have seven presentations today telling us how to create value in the bioeconomy. We will be presenting all our divisions today. When you came into the room, I saw that many of you were really busy familiarizing yourselves with our demonstrations. In the feedback, we always get that they are very popular, and I can see why. The demonstrations this year, you can visit forests here in Helsinki through our virtual forest app. We also have world's biggest demonstration, Wood City, that is just outside, if you look out of the window, across the street.
We will familiarize more of that during the drinks reception tonight when we can see the whole building. This morning, we also launched ECO RFID tag. That was on the demonstrations. That's part of Packaging Solutions. Tomorrow, many of you will join us to a site visit to Heinola and Lahti. You can see what Packaging Solutions do on the sites. Before diving in today's agenda, I want to say a couple of words about safety. Safety is very important for Stora Enso. In case of emergency, you can see these two doors here that you need to take. Step outside. You can take either right or left. You find stairs that will take you to the ground floor. There are assembly stations in both ends of this hotel where we would like you to go in the very unexpected event of emergency.
Now we start the day to diving into bioeconomy. I want to invite the first speaker to the stage. He's our CEO, Karl-Henrik Sundström. Kalle, please.
Thank you, Ulla. It is a pleasure to have you here this morning. This is a bit complicated area to actually have a speech because I have a pillar. I will go with my head. I can't move too much. Anyway, very welcome here to Helsinki. I'm very pleased to actually be in Helsinki, especially having this Wood City on the side. I think you will see some of the potential in our product portfolio today. We are, Stora Enso, in a very good position right now because every company, every individual are facing a number of megatrends today. Either you like them or you don't like them. In the center of all this is obviously the global warming. Working with a raw material that is renewable, reusable, and fossil free gives us a unique opportunity.
We are going to capitalize on that unique possibility. The promise that we are making to you and to everybody else is all about that everything that is today made out of fossil-based material, tomorrow can be made out of a wood fiber. That is very important to remind because that gives us a unique possibility to become the renewables materials company. I think that is an aspiration that we are driving for. Going to the strategy, the strategy remains the same as it has been doing for the last couple of years. We are just fine-tuning it a little bit, but it is the same. I think that's a strength. We have been working on this strategy for the last couple of years. It's about customer insights, innovation, structured processes, obviously, as well as motivated employees.
The important part here is to spell out the importance of structured processes. It's either how we drive processes within the company, because in the digital economy, the marginal cost is zero. The more you can structure into common processes and digitalize, the better leverage you got. The other one is other type of processes, like how we allocate capital, which Seppo will talk about later on, which I think for you is very important, that we have a stringent long-term strategy for how to allocate capital between the sites. The other part of this coin is actually how we are delivering sustainable profitability. When we talk about sustainable profitable growth, it has to be sustainable in all dimensions. It's for the shareholders, it's for the suppliers, it's for the employees, it's for our various partners, it's for our customers, and society as a whole.
In our model, we are working with four cornerstones. Obviously, we do strategic investments, and we put our bets into areas where we think it's growth. That's one cornerstone, and we have done that successfully over the past years. The other one is to have a very rigid model where we allocate CapEx in accordance with our hurdle rates for the five divisions, and Seppo will come back to that later on. Obviously is to have a competitive dividend payout. We have, over a longer period, increased it by over 9% per year, and in the shorter period, 11%. Then obviously, it's important for us to have a very strong balance sheet. We have tightened the target. We used to have below three times net debt to EBITDA, and we are now at the level of a target level below two.
In the third quarter of 2018, we were down to 1.1 times. We are getting a stronger balance sheet. Things are working in our favor. We also have a very important and competitive and almost unique product portfolio. I will not go into this slide very much because this will be presented by Annica, Markus, Gilles, Kati, and Jari. You will get all the ins out of the strength of our unique product portfolio. One thing that we are very proud of is that we are spending basically twice as much as our nearest competitor in R&D and in innovation. This is an important part for us because this means that we will be perceived as an innovative partner with our customers, but also driving superior margins.
We have been working with this for a couple of years, we measure a new product being new in two perspective. It has to be new in the face of the customer, it cannot be older than three years. When we started to measure this in 2015, it was 1.5%. In 2016, it was 3.6%. In 2017, we reached 7%, right now we are somewhere around 9%. The target is to take this to 15%. That means that we will renew our product portfolio in average every 10 years. It gives us a time monopoly with the customers, which means that we are first, we have a longer time to discuss the new solution. Secondly, it also gives you better margin because all product you develop have a better margin than the old one.
I now would like to go into a little bit deeper three of the new platforms that we are developing and talk a little bit of the potential. They will also come up in the presentations in the respective division. Developing a platform in this industry takes, like any industry, about 10 to 15 years. We are focusing right now, among many things, on these three platforms. One is the lignin-based products that we have started to ship. In the first phase, we are basically using the lignin-based product to replace phenol in glue, and we have already been testing that in our LVL mill in Varkaus. The second part here is actually to produce carbon fiber. The third area we are focusing on, and that is a good demonstration outside, is actually hard carbon for energy storage, or in layman's words, batteries. The other area is biocomposites.
Biocomposites is a very efficient way of replacing up to 50% or 60% of fossil-based materials today to produce granules. These granules can be used in all the existing blow-molding equipment there is. In a very short period, you can actually replace up to 60% in the first generation of these granules, fossil-based materials. Here we are getting a great attention. Has a huge market potential and very attractive margins. We have probably the biggest equipment in the world in Hylte that was inaugurated this summer, and we are now ramping up. The third new platform is MFC. MFC, we've been working for years. In 2015, we introduced it as a source reduction in liquid board for certain markets.
Now, as you probably are aware of, in the third quarter announcement, we also announced that we are rebuilding one machine in Imatra to be able to produce the first generation of MFC film. Annica will come back to this. These three platforms are going to be very important in the next five to 10 years, we are working hard on it. We think we are in a very strong lead here. As you're well aware of today, many of the leading retailers and brand owners are actively seeking to replace plastic, they are supported by the legislation that will probably come out during next year about the ban of single-use plastic. We have a very good example of one of the biggest specialized retailers in the U.K. market, Iceland, for frozen food.
They have decided to go faster than the market and get a competitive advantage in the market by replacing plastic materials by 2023. They have chosen as a platform our Trayforma. This is a very strong message. This is happening, and you will see more and more brand owners during the presentation today announcing that they are going to replace plastic. An enormous opportunity for us. The other area that we are combining with innovation is digitalization. Digitalization offers unique possibilities to actually drive a number of areas. We are focusing our digitalization efforts in three areas. A new customer engagement that is either new business models, an integrated supply chain, and other things, which is very important, that actually makes it easier to do business with Stora Enso than your competitors.
The third area is more traditional. That is about how we get industrial digitalization of getting more efficiency out of your machines and your supply chain. The third area is all about getting an efficient back office. We've been working here in various streams. We have been working internally, we're building competence. We've been working with a lot of startups, and we are very proud actually to be named the most startup-friendly company in Finland. I think that's recognizing that we've been working with this for a couple of years. On the other area, when it comes to bots or RPA or robot process automation, we will have 33 processes in place by the end of the year, and Seppo will talk more about that. Another area that I would like to highlight to you is the importance of controlling your wood supply in the bioeconomy.
We are having a control either through ownerships or unique supplier agreements of about 30% of our wood supply. As you can see here, in Sweden it's up to 50%. In Finland it's lower. That has to do with the different structure of the forest ownership in Finland. In Brazil, it's either about 80% through our own plantation and the remaining coming from certified wood farmers. Similar situation in Uruguay and in China, we are long in wood, which means that we are selling in the open market as well as having discussions with the authorities to give back some of the land because we do not need all the land.
The other part is that on the other side of the slide, you can see that it is important to understand that plantation areas are scarce in the world, and there is a huge difference where you are on the wood prices with a fundamental reason for making investment or not making investment when you look at pulp. We have and we are under the discussion an internal feasibility study of the possibility of turning Oulu into a brown mill. This is an ongoing feasibility study, which offers us an opportunity once to see if it's economically feasible to divide or convert Oulu into a full brown mill, producing kraftliner as well as CUK. This is not ready yet. We will come back to you when we have information. As I would like to point out, the option is also to continue to produce papers.
What is important for you when we go through this presentation today, understand that we believe we can offer a growth excluding paper to 4%-6% annually. We will continue with a strong cash generation. We have CapEx of around EUR 3 billion, of which EUR 1 billion-EUR 1.2 billion is maintenance, and the rest is available for more of strategic investments. We will continue with the dividend policy of 50% of EPS over a cycle, and we have strengthened our financial targets of being below 2 times in net debt to EBITDA. Dividends, we have increased since 2007, slightly more than 9%, and in the shorter period from 2015, we have improved it by 11% per year. This is a focus that we aim to continue. With improved performance, as we believe is the possibility that we have in front of us, dividends will increase.
Another part is what is our M&A agenda. We are focusing basically on 3 areas on M&A. It is either to strengthen a relative market share in an area that we find is interesting for us, or strengthen already existing strategies, or to acquire new process or products to be able to deliver according to our strategy. If you take a couple of recent acquisitions, you can say Bergvik, restructuring of Bergvik is typically number 2, while Cellutech and Virdia is where we are getting new products and technologies to be able to grow. We have several profitable growth alternatives, you will come back to that later when Seppo talks about the capital allocation.
Looking upon the growth possibilities that we see, we have quite a lot of annual growth coming out of the various divisions, and this will be presented by my colleagues later on. To conclude this little presentation as an introduction, I would say that we have a unique raw material. We had a very strong product portfolio, which we can leverage of our innovation and digitalization agenda. With that, I hand over to you, Ulla.
Okay, thank you, Kalle, for a very informative and good presentation. Now we are ready for Q&A. Please.
Thank you. Nick Elios, Capital Share Group. You mentioned there your three sort of focus areas out of which lignin was one. Could you put some color and flavor on sort of what's the size in tons today and going forward for those three areas?
In the first phase now, we have a capacity of 50,000 tons. Obviously, when we get more traction, we will build it because we can extract lignin with the technology that we have in Sunila in a lot more mills.
The Hylte?
In the Hylte is 15,000 tons in the equipment we're having now. We have two old paper machine halls that we can fill with more machines because we have ample capacity of TMP.
Thank you.
Okay, Gustaf.
Hi, this is Gustaf Hansson from Pareto. A question on your CapEx guidance that you came out with yesterday. Just to remind us, when you released the feasibility study for Oulu, you said that you could do this under your earlier CapEx guidance, which was something like in line with depreciation. Just thinking, if you were to decide to build this, how should we think about
It's within the guidance.
Roughly how much is allocated for next year?
Since we haven't taken any decision, and the feasibility study is not ready yet, I cannot answer that.
Okay. Thank you.
Okay. Good. Thanks. I think Lars was next, and then Linus.
Lars Kjellberg, Credit Suisse. Just come back to the opportunities to replace fossil-based fuels. You mentioned market sizes here. Of course, your capacity today is relatively de minimis. What are those market sizes based upon, and when do you think that realize? It's not current market, I would assume.
It is current market, because the way we have calculated, for example, when it comes to biocomposites, is basically old granules, excluding the ones that are see-through, because we can't do see-through, because the fiber will be visible.
Okay. Just to understand, so who supplies this today?
It's basically the petrochemical industry.
Okay. Thank you.
Okay. Linus next, and then Antti.
Thank you very much. Linus Larsson with SEB. Just on coming back to capital allocation and the previous question about the CapEx guidance for next year, what's the unallocated portion of your guidance? Second to that, when you talk about M&A, and you gave those three types of potential targets, could you say how much of a focus that actually is today for Stora Enso to look for acquisitive growth?
When it comes to what is allocated and not allocated, I will answer it very simply because we are right in the budgeting process. I would say that EUR 200-EUR 250 is usually maintenance CapEx. The remaining we can use for more aggressive. You probably have some tail ends of Gruvön and some other stuff. A big amount is not allocated. When it comes to M&A, we've been looking in various forms. We are quite active in looking, but we haven't found anything that really fits us. We were very pleased to be able to do Cellutech, which is a new platform for growth. What that will do, if it works right, has a possibility to replace. In all packages, you usually have foam made of fossil-based, now you can make it out of cellulose.
That particular acquisition was within the tech criteria?
Yes.
Is that actually where you're looking the most?
Yes.
Thank you.
Okay, thanks. Now Antti Koskivuori.
Yes, thank you. Antti Koskivuori from Danske. Question about the wood sourcing. You show the number that 30% of the total sourcing coming from own forest lands.
Or controlled.
Or controlled, yes. Are you happy with that number, or should we expect that going forward, I think this will be even more of a topic going forward. Should we expect that number to increase going forward, and what's your thought on that?
Obviously, if you do the math, I don't have the balance sheet to go and be 100%, right? I think over time, we'll see that we will work in various forms to get even more control. That doesn't mean have to own it, because I have my limitation in my balance sheet. It could be other ways, long-term contracts and things like that. Making sure that you're having control and not being cornered in any position, because you need to think about having those sites working for another 100 years.
You're not excluding kind of using CapEx on that subject either?
No, but given the amounts that you need, don't ever think that I'm going to be 100% on the margin or controlling in a different way.
Yeah. Okay. Thank you.
Okay. Kevin, please.
Yeah. On the replacing of fossil-based materials, are you expecting that to be driven purely by a push from the environmental side? Are you also directly cost competitive across these different areas?
We have worked with this for a long time. We believe if we can't offer cost competitive, nobody will pay a premium. It has to be cost competitive. If you take the granules, for example, they are very cost competitive. They have one thing more. The pricing of wood, which is 50%, 60% in the forest, is very stable compared to the oil price, which means that you can offer more stability in the price as well. They have certain feature. Other thing is that you get higher yield in the molding equipment because it's wood fiber, so the heat is not so high, 10%-15%.
Okay. On your wood sourcing, one strategy, as you say, is own more, have more long-term strategic relationships. Have you also changed the way you think about your inventories, et cetera, given the disruptions we saw over the last 12 months?
What we have done is that during the very unusual Q1 and Q2, I would say that our wood sourcing strategy is actually being adjusted for that, because we don't think this is a one-time effect. We are building more flexibility into it.
Okay. Thank you.
Okay, thanks, Kevin. I think Robin is next.
Yes. Robin Santavirta with Carnegie. You're 2 million tons net long in chemical pulp at the moment, and I guess you possibly could increase that through another project with Veracel. What are your plans for the next 5 years or even longer to decrease that net long position or actually to increase it? Would Veracel actually have enough plantation for a Veracel 2 project?
I am comfortable in the long position that we are having today. I rather invest more money on the new platforms, which are many coming out on Biomaterials. I probably will be longer in pulp by decline in paper over time. That's happening. When we get to the Veracel 2, it's probably a discussion that we will have to do in the years 2021, 2022. It's a bit early.
Thanks.
Good, thank you. Do we have more questions for Kalle? Okay, good. Markku, please go ahead.
Markku Järvinen, Handelsbanken. You have this potential major investment in Oulu, EUR 700 million. What about the areas of lignin and biocomposites? Are those areas where we should expect potential major investments, or is that more incremental, smaller investments?
It is more of incremental, smaller investment. We built the first LignoBoost in Sunila, and now we know. We know we can put it into other mills. It's going to be a addition to an existing infrastructure. That's how you should look upon it. It's incremental.
Okay. Thank you.
Okay, thank you. There will be, of course, possibility for more questions during the breakout sessions that we will be hosting afternoon after the presentations. Thank you, Kalle.
Thank you.
Now, we will have Annica Bresky from our Consumer Board division telling about her solid platform for profitable growth in the bioeconomy. Annica, please.
Good morning, ladies and gentlemen. I'm so happy to have the opportunity to tell you a few words about Consumer Board division. We are well-positioned in the bioeconomy. Last year, we delivered a record high turnover of EUR 2.5 billion. We have been growing solidly this year on a 5.6% level, higher than our relative market, which is growing in 2.5%. One area that I'm particularly proud of is the fact that we are commercializing new products together with our customers and brand owners at a higher rate this year compared to last year. This year, we have 14% of our sales coming from new products, and this is a true testimony that our collaborations are really working. As Kalle said, the long-term target is 15%, but in Consumer Board division, we are more ambitious than that, I will come back on that further on in my presentation.
Our strategy remains unchanged. It is based on three pillars, to be the global leader in attractive end-use segments. This means that we want to have strong market positions, which we do have in many of our focus areas. We have 36% of the virgin carton board market in Europe, 10% globally. We also have number 1 positions in many of our core products, such as liquid packaging board, the brown CKB, and foodservice boards. The second pillar is about driving customer-based innovation based on renewable materials. This is at the core of our strategy. It means that through our innovation center, our two research centers, we drive more than 40 joint collaboration projects with our partners, with startup companies, with our customers and brand owners throughout the value chain to create the products and the packaging of the future.
Last but not least, to have competitive, strong assets, which are well-positioned to deliver on the global demands of our customers and brand owners. We have two integrated mills in Imatra and Skoghall, which are pulp integrated, two specialized mills in Fors and Ingerois, and of course, the state-of-the-art mill in Beihai. Here, the focus is to drive operational excellence, I will show you that we have, over the years, been able to constantly increase our deliveries. We drive lean manufacturing. Also a lot of our digitalization initiatives, we have over 30 of them, are linked to driving more efficient manufacturing processes. We are delivering sustainable, profitable growth. Here, of course, it's a comparability issue between the startup of Beihai and the years before.
As you have seen, the last years, we have been outgrowing the market. You're well aware, of course, that Q2 and Q3 have been challenging for a Consumer Board from a profitability point of view. Our margins have been pressured. The reason for that is twofold. One is the construct structure of this industry. We have stable products which are less cyclical, and 80% of our contracts are long year contracts, which means multiple year contract, one, two, three, perhaps even four year contracts, where the volumes are decided beforehand. Of course, this creates stability in the product portfolio of Stora Enso. It is an important parameter to keep in mind. Right now, we are negotiating many of the contracts that are expiring and are up for price negotiations.
When we do that, we will, of course, compensate for the cost escalation that we have seen in pulp and in other raw materials, the latest two quarters. The other reason has to do with our growth. This is a chart here of the deliveries and how we have constantly broken new record levels for each quarter since 2015 and adding more and more deliveries of board to the market with a growth of 6% per year. This means, of course, that also our exposure to purchased pulp has increased over the year. We have gone from 7% in the division to 15%. Of course, when the prices of the pulp have gone up the way that they have very rapidly, at the end of these two quarters, there is a timing effect from the contractual perspective when we can compensate for that.
We are taking actions in Consumer Board, both on price increases. We see the first price increases have already come through in Q3, and we expect more of them to come from Q1, since most of the contracts start from beginning of 2019. Then also internally, of course, we are doing efforts in our cost structure. I'm confident that in the year to come, we will regain the margins that we have had historically. Moving now to a more long-term perspective of our business. We are active in attractive end-use segments. Here you can see on the left graph, the total market size of all packaging materials, which means both renewable materials boards as such, but also plastics, glass, and other materials that are used in packaging. The market is enormous. It's a EUR 400 billion market. On one side, 50% is used for industrial packaging.
That area is mostly addressed through our sister division, Packaging Solutions. Our market is the other side, which is food and dairy, beverages, healthcare and cosmetics, and other types of consumer goods, accounting for half of this market size, EUR 200 billion. If you look further on the right, you see also how the distribution is between other types of material and board materials. The dark blue side part in the circle represents the amount of board, which ranges between 7%-15% of the total packaging materials. This means that there is a huge opportunity for us if we develop good innovation products to gain market share. You can also see that there is a healthy growth in the consumer segment, very much driven by the mega trends that Kalle described in the beginning of his presentation.
Between 2% up to 3% of growth, which is a good foundation to have moving forward for us. If we also move into our specific market of virgin boards, we see that the projection up to 2030 is continued growth also here. Of course, it's driven mostly by the Asian regions, China and Southeast Asia accounting for the major part, but also Europe and North America have quite a good growth. We see good opportunities for us moving forward since we are active on all these three areas. We as consumers drive a lot of the demands that set what type of parameters and what type of packaging is developed. There are three areas here that are important as consumers to be able to fulfill from a package perspective.
After a lot of challenges in food safety in Southeast Asia and in China, to be able to reassure the consumer, us, about food safety is really important, and the package needs to be able to perform in this area. We've also seen how the trend of plastics in the ocean has been driving the sustainability discussion around brand owners' new targets in replacing a lot of fossil-based materials with other types of materials or reducing plastics in the packages. This is, of course, one important area that we want to capitalize in Consumer Board. The other area is to enable us all to live a fast-paced life. We want food on the go, that it is easily packaged in small pack sizes, resealable, able to transport everywhere to keep the food fresh, and so on.
Functionality of package is truly important. The third area, of course, is that we as consumers today are as empowered as ever. We want information at our fingertips. We get information very quickly from our iPhones. How the package is able then to interact the brand value to the consumers, but also from a customer perspective, how the packs can be tracked and traced along the supply chain is another trend that is driving our innovation work. Here you will hear more about our intelligent packaging solutions from our sister division, where we're working commonly in developing these types of solutions that will help consumers and help our customers to track and trace packages in the supply chain. I told you before that our target is ambitious on new sales from new products and services. We have a target within the division to reach 25%.
That is quite a significant target. It cannot be done by only growing in existing product areas, but very much by developing these two platforms that are at the core of our innovations. One is the bio barriers and films. Kalle told you previously that we have just made the investment in Imatra Mill, converting one of the machines there to produce MFC-based films. It is right now ramping up. What we're able to do then is to replace PE films with bio-based ones. The other area is biocomposites. Here on this chart you can see from the easiest or the products that are closest to commercialization, you have them on the left. Then moving to more complex product structures on the right. You can also see our estimated commercialization timings. Starting from the top end, we have replacing PE films in cups.
For hot and cold cups, we will be able to commercialize during next year a solution that is bio-based. Being able to replace PE films with other solution. Then moving on to pouches for low, medium shelf life, for instance, bread packaging and so on. Then for lids for trays. Those are the three areas that we are closest at commercializing at this point. If we look at biocomposites to work on straws, caps, closures, and different packaging components within liquid packaging, like screw caps and rigid containers, those are the areas where we will soon have products on the market. If you really want to touch and feel, please take the chance to look at our demo stations, where we have an exhibition of all these products. As you can see, the market sizes are big.
It's a EUR 105 billion market for these applications. We see great potential here with the solutions that we have, especially in the light of the circular economy legislation that is being discussed in EU currently. Moving back now to our current portfolio, we have leading positions in all the attractive end-use segments, in premium segments. You can see here the brown is a strong position for us. Coming back to Kalle's discussion about the Oulu conversion, one of the machines that we are looking at and one of the opportunities that we have in Consumer Board is converting one of the machines in Oulu to a brown CUK machine, coated unbleached kraft machine. The pull from the market is very strong. These brown products for food packaging are viewed by consumers as natural and sustainable, and they convey that message to the consumers.
You have already seen perhaps in the stores the brown milk cartons, for instance. It's one example of these applications. One of the most important preconditions for such an investment to be profitable is to have a pulp integration and to be able to control the quality of the fibers that you have in your products. If we do this conversion, we will reach high levels of market share in the brown in Europe, but also globally. How are the fundamentals then on the market for such an investment? On the left side, you can see the capacity expansions that have been done in Europe, and also the operating rate of the mills. Even though we have seen historically now for quite some years new capacity coming on stream, the market has been able to keep the high utilization rates.
If we look at North America, there have been quite a lot of capacity reductions, and here the operating rate is really increasing. For the brown boards, North America and Europe are the whole market for these products. Moving over to Beihai, I understand you're also interested in how we're doing there. China, as you know, is slowing down as an economy. Of course, depending on how the trade wars go, which no one really knows. If we look at from a board perspective, the market is still unbalanced. The capacity largely is higher than the capacity. No, sorry. The demand. There is a gap between capacity and demand, with an overcapacity in many of the board grades. However, that capacity is exported to the near Southeast Asian region. If we look at pricing, on the top side you have premium pricing for boards.
This is mostly imported boards that are not able to be produced in China due to quality reasons. The stability of the pricing of premium boards is much better compared to the commodity grades, which you see in the lower graph. There, the volatility is also higher. Our strategy in Beihai remains the same, to be able to have premium products produced locally in Beihai for the Chinese market. The focus areas for us is to continue to improve our profitability. The cornerstones of that is to continue the ramp-up of the qualification for liquid boards, to introduce new premium carton board grades, which we have in the pipeline now for Q1 and Q2 next year.
We have reached the design capacity of the mill, we are running stable on that level, which means that our focus now is to do recipe, product optimization, product mix optimization, and to continue with the qualifications. I estimate that we are halfway through the qualification period for Beihai. Another very crucial parameter for the success of Beihai is, of course, how efficient we are in our forestry operations. Here you can see one picture where we started, where the traditional operations was very manual. Today, it's highly mechanized, and Stora Enso is considered as a benchmark in forestry operations in China. There is no one there doing what we are doing. To conclude, we are delivering sustainable and profitable growth. Our target is to continue to grow faster than the market at a rate of 3%-4%.
We have strong assets, a strong innovation pipeline, and trends that are supporting our business and strategy. With that, I am confident that we will continue to deliver value in the bioeconomy. Thank you.
Thanks, Annica. Any questions for Annica? Linus, please. Then Lars. Noelle.
Thank you very much. It's Linus Larsson with SEB. You showed on the slide that out of your sales, liquid packaging board is 36%.
Yeah.
As I think you also highlighted, it's not the most cyclical part of your business portfolio. So you might, at this point of the cycle, find better profitability elsewhere. If you look into 2019, do you think that in your portfolio optimization short term, that you will see a lower % of liquid packaging board in your divisional sales? Maybe related to that, I also wonder about, you said you're halfway through your qualification process in Beihai. How much liquid packaging board do you expect to produce in 2019, and how far are you on that part of the optimization process in Beihai specifically?
If I start with the first question, I don't expect us to change the product mix in a big scale. Of course, when you look at your pricing strategy, you have to look at how long the contracts are and how you change them over the years. We need to remember that if we look at us in the perspective of Stora Enso, it is good to have some products that are less cyclical compared to some other that might have a higher volatility. Minor changes might occur, yes, but I don't see any major change in liquid. If I come to your second question, how far we are. It's difficult to answer. From an overall level, we are halfway through, which means some of the sizes of liquid packages, especially the smallest ones, those are the ones that we're working to qualify now.
Those are the most challenging ones, because they are difficult from a production point of view for Tetra Pak and for us, and it takes a lot of trials to do that. From the bigger sizes, there we are through with many of the products. I see that when I say that it is halfway through, I think that we will need to get to the premium level for both liquid and other products another two years to be on the premium side. Yes. I will not disclose how much the mix is. We don't do that for the mills.
Thank you.
Okay, Lars, then Annareetta, I think Gustaf, was there somebody there? Okay, Mikael then.
Okay. Lars Kjellberg, Credit Suisse. Just staying a bit with Beihai. You stressed when you talked about Oulu the importance of integrated fiber supply so you can control the fiber mix. Of course, you opted not to build a pulp mill. Is that something you'd like at that mill site? Also quite interested in your thoughts about introducing MFC, et cetera, as opposed to polyethylene. One of the issues for liquid packaging board is the recycling and the system set up to separate the various substrates.
Are you now introducing a new substrate? Is that an issue in recycling?
Also finally, on the biocomposites. I guess part of the issue with plastics is the low level of recycling, but these biocomposite varieties upon us, how would they fit into a recycling world or how do you dispose of them in a circular economy perspective?
Yeah. There were three questions now. If we go back to the first one, if you can repeat the first question.
Yeah. Okay. You stressed the importance in order of the integrated pulp supply.
Oh, yes. If I say that we would do a pulp mill in Beihai, that is not in our plans, and we are not considering that option. Beihai should be seen as an integrate in the total setup of Stora Enso, where we buy pulp from Veracel. We also see the product mix from a divisional perspective. We will run the products that are most profitable for the division between the different sites that we have in the optimal way. That is the work that we are doing now when the Beihai mill is in stable production and we can do that work with optimizing recipes and also within the different mills in the division. That's why I said we are halfway through, because if you just look at Beihai standalone, that is one ramp-up process.
The second part is, of course, optimizing the divisional footprint. On your question on recyclability of new substrates, this is not more complicated than all the stuffed substrates that we have in plastics. What we see if we have bio-based films is that we want to be able to recycle them in our assets. These are areas where we are investigating together with our partners throughout the industry, which sites can be developed to recycle not only liquid food service board, but also these new products. Since they are fiber-based, I think it fits very well in our business as such. On the third question regarding biocomposites, they can be taken back and reused to create new granules. They improve with more processing.
This is a setup that we're also looking at, these are new business models that we need to develop with our customers, how we can take back biocomposites and produce new products. From the strength that we have as a company is that we have so many sites where we have good experience in recycling of many materials, these are just new business models that we will develop.
Just one follow-up on MFC.
Sorry to interrupt. We will have a possibility to ask more questions over the breakout session. Quickly, three more questions. Annareetta, Mikael, Gustaf. Please only one because we're running out of time.
Annareetta Lumme-Timonen from Solidium. I'd like to go back, Annica, to your slide where you had all these different products, biobarriers and films and biocomposites, ask about the commercialization model in the future. Are you going to remain as a materials provider, which I assume is the case, to what extent will all these different new materials then require new equipment from your customers in order to really become commercialized and implemented, will that be what kind of a hinder for the growth?
Very good question. On the first part, we don't see that we can work only as a material provider. That's why we're collaborating with startup companies such as Sulapac is one example, where we go together, join forces, and use the materials with converters and make conversions. Another example is CartoCan, for instance, where we are collaborating with a machine and filling supplier to create new products. I think those are the business models of the future that we need to find revenue streams in collaboration with others. The other question is regarding the filling lines. I think that one of the strengths of these materials must be to be able to be used in existing filling lines, because if they are not, it's going to take quite some time before they can be commercialized. That is what we are targeting when we are doing our innovations.
Thank you.
Okay, Mike.
Mikael Röpel, UBS. You mentioned that you would like to capitalize on the trends that you're seeing in packaging, moving away from plastics and more paper-based packaging. You have the slide where you show the paper-based share of the total, which you mentioned was 7%-15%.
Yes.
What kind of a potential do you really see there? If you look five to 10 years out-
-what could that share be then?
That is, of course, very difficult to answer. I think it depends on how good we are at bringing the innovations to the market. I think what has changed compared to some years ago is that there is a strong pull now for sustainable products that are also recyclable, and that has not been the case before. Legislation is coming on stream that will support that. Of course, we, in our industry, have a long experience of actually recycling materials. That is, I think, one of the main areas where we will be able to compete
Just one quick one, maybe a bit shorter term, but you mentioned that you expect to fully recover the margins that you have more seen being compressed in the last couple of quarters. How long will this take?
We will start seeing effects from Q1 next year. Fully to compensate, that depends on the contract structure that we have. We will not see the full compensation during next year, but it will come gradually as the contracts expire. I think we need to remember here that the prices on pulp are all-time high. We expect them to stay for a while on this level. This is an area where, as the contracts are up for negotiation, we will push the price increases through.
Okay, good. We need to speed up a bit. Quickly, Gustaf.
Yeah, quick question.
Yeah.
Gustaf, can you just remind us how big the liquid board market is in China and how much is produced domestically, roughly?
The liquid board market is about 300,000 tons. 700,000 tons is the total premium market. It is growing very fast, but it is a small market today.
Perfect. Thanks.
Thank you. Okay, thank you, Annica.
Thank you.
Now, we will have Gilles speaking to us about his profitability ambitions. Please, Gilles.
Thank you, Ulla. I would like to talk to you about an exciting business, Packaging Solutions, which is well-positioned for further profitable growth. First of all, brief overview of the business, about EUR 1.3 billion in sales. Q3-on-Q3 growth about 4%. We have a network of design centers, of innovation center, three containerboard mills, four rigid box plants in China, 17 corrugated box plants around the world, mainly, say, Europe. We are active with a renewable and a recyclable raw material with positive growth trends. I'd like to highlight to you, we have a very diversified customer base, over 2,000 customers. In Q3, we reached a new record profitability level of 30%. Big growth driver behind for this business and this market is e-commerce.
You have to realize that corrugated packaging is the prime material of choice for corrugated packaging. This is external research showing that about 80% of the packaging material used is actually corrugated. That is a fantastic growth opportunity because the market projections are that it will be globally about 15% per annum growth, meaning that by 2021, the total corrugated packaging market will be worth around EUR 33 billion, in Europe, about EUR 6 billion. That means from now, about EUR 13 billion in market growth. That's a fantastic opportunity. We are very active in this field, and successful developing customers. We have, for example, a close collaboration with Zalando. Zalando is an online fashion retailer, you probably know them, active in Europe. More than 15 years ago, they simply didn't exist. Today, about EUR 5 billion in sales, 23 million active customers, supplying, providing about 2,000 brands.
We started business with them in March 2017. A few months later, we actually started to provide them so-called tear and reseal type boxes, which you see on the right-hand side. Because the big challenge for this type of retailer is that there is about a 50% return rate of the boxes. The customers, they basically want to try out many different type of things and then decide not to purchase, and it has to be returned. You need to have a good solution for that. This is type of solution that is catering for their needs. This is an example of how things are working, because next, they are so successful, they now start to be active in Nordics. Also from there, we are expanding now the business from Poland and into Germany, and also business in Nordics.
This can go very, very rapidly, and it's just one example of what we're doing in this field. Another very big growth driver is sustainability. It's already been discussed about, but clearly, plastic waste polluting oceans is in every consumer's mind. Just an example, left-hand side, BBC News. You can also see when you look at plastic waste on Google, that there is a skyrocketing over the last year of the number of searches for plastic waste on the internet. Absolute skyrocketing. Consumers are concerned. This is translating not only into European new type legislation, but companies are taking action. I just have three examples here, Tesco, Carrefour, Nestlé. They clearly have made their ambitions clear in terms of recyclability, in terms of compostability. You should realize that corrugated packaging is in the sweet spot.
Corrugated packaging is fossil-free, it's renewable, it is recyclable, and it is compostable. These are very strong, good market growth fundamentals which will drive corrugated packaging, but with that, also the growth of containerboard as the raw material. When I look at containerboard, actually, I see a bit of a difference between recycled containerboard and virgin containerboard. In both market segments, the growth is good, about 2%-3% per annum. In recycled containerboard, I see in Europe a lot of capacity additions announced, firm, or planned. When you look on the virgin side, the picture is a bit different. The access to virgin fiber is scarce, you need an integrated pulp mill concept, and the investments there are very high and significant. The barriers to entry are much higher.
Here we see a much more balanced supply-demand capacity addition type picture. Coming to our performance. We did some divestments in 2014. We divested Corenso, and in 2014, small operation, offset operation in Hungary. I'd say the track record for the last three years is quite clear. What is behind that? Well, a couple of things. First of all, we had to make Varkaus start up this conversion a success, and we managed to do that. That, of course, that meant hard work. Secondly, we had some challenges in China, which we fixed. Thirdly, we've been driving the output of our machines, driving operational excellence hard, getting out of existing capacity much more volume. Lastly, and of course, also not importantly, admittedly, on the one hand, the market has been favorable in terms of pricing.
On top of that, we have been working hard on our customer and sales mix, and that has contributed very significantly to our average pricing and profitability. That all explains how we have reached now well over our target level of 20%. We're now in Q3 at 30% return on capital employed. We have a very simple and clear strategy. Three pillars. First of all, where I want to grow this business in what we see as attractive product segments. Secondly, to innovate and drive customer value. It's important that we do things for customers that value what we are doing and prepare to pay for that. Thirdly, it's important to drive operational excellence because this business will always be cost competitive. We need to drive operational excellence in our operations, supply chain, and sourcing. That all can be supported by digitalization.
I see our opportunities to work closer with customers, make it easier to do business. Secondly, we're working on innovation on new type of business models on the basis of digitalization that are completely new to this industry. Thirdly, to drive smart factories, smart supply chain, and smart back offices. We're on a roadmap. A roadmap of profitable growth. We delivered since 2015, basically Varkaus, we made it into a real success. We recently invested about EUR 30 million in Heinola Fluting Mill, which you're going to see tomorrow, and I'm very pleased with the results. We are quite successful with e-commerce, with our own portfolio and driving clear market penetration there. Then we've been consolidating plants. We've been restructuring and divesting some small, less interesting business just to clean up and make it better suited for profitable growth. Obviously, we've announced the Oulu mill conversion study.
On top of that, you may have noticed that in corrugated packaging, we keep on doing selective investments to grow the business. In China, in Poland, we just announced in Baltics, in Russia, in Sweden. Then we are obviously active with intelligent packaging. How do I see the growth for the future? I think it will be about continuous innovations. It will be about a clear growth focus in containerboard, and it will be about selective growth in packaging, corrugated packaging markets, and that all supported by digitalization initiatives. Then about Oulu. Why is that an interesting opportunity to convert? As said, we made a success of Varkaus, and we want to build on that success. We have introduced high-quality kraftliner, and this is a very big market, 31 million tons, in which we only have a small share.
The market is growing about 2%-3% per annum. There is room for growth. Actually, many customers we had to disappoint that we have too little available for them. We have a good understanding of the market. We also, not unimportantly, we learned how to do a conversion because this is technically quite complex. So we're in a very good position there. Then to our box markets. We are well-positioned. We have a wide range of segments that we cover with a very strong position, for example, already elucidated on that in e-commerce, but particularly in our markets. We're the number 1 in Nordics. We're the number 2 in Poland and Baltics. We're number 5, strong position in Russia, and we are strong in China in this premium segment where we operate.
Most of these markets have pretty good growth rates, clearly above average in corrugated packaging. Well-positioned. Then to innovation. I am very proud of our business having been named by Husqvarna, well-known brand owner, as their most innovative supplier. We're not only the most innovative supplier of our packaging materials. We have been named the most innovative supplier of all their suppliers, and they have hundreds of them. You wouldn't expect that maybe for a supplier of corrugated packaging. The consideration behind that, you can read on the sheet. One word I'd like to mention, too, is proactive. One example of what we did for them was that we designed an innovative type packaging for chainsaws. Chainsaws have an odd-shaped size. We designed a cone shape type packaging, and with that, a total concept on how to stack pallets.
Now with Husqvarna, they can stack 37% more on one pallet, saving therefore pallets, saving containers, saving transportation, and saving CO2. This is what can be done and what we can achieve as a company in this area. The next one is about a totally new concept in RFID tags. You know that we've been now a few years active in intelligent packaging. Today, we launched at the most important conference annually for RFID industry in London. We launched completely sustainable RFID tags, which we have branded ECO. These tags, so we have a chip and antenna on it. They do not contain any plastic. It is completely renewable, recyclable, fossil-free. That's new to this industry. The performance of that is equal to normal standard tags.
On top of that, we have reduced the layers from six plus release liner to three plus a release liner. It is actually very cost efficient to produce them. We're targeting here about a EUR 900 million market of passive UHF RFID tags, and that market is growing about 25% per annum. These tags are applied and used in, for example, apparel, footwear in retail. A great replacement type opportunity and an opportunity to grow with this rapidly growing market. Summarizing, Packaging Solutions. We are well-positioned for future profitable growth. Strong financial track record, very attractive growth opportunities, and we are taking innovation to the next level. Thank you. Do you have any questions?
Yes. Thank you, Gilles. You keep it. Any questions? Okay. Micke there in the beginning, Linus.
Thank you. Mikael Jåfs from Kepler Cheuvreux. Around e-commerce, I read that Amazon is starting something called Frustration-Free Packaging, or it's been ongoing for a while. Could you put that into context, sort of with your offering? It seems like you are offering something along those lines.
Yes. We provide a whole range, our own range. Companies like Amazon, they typically are designing partly themselves, partly rely on suppliers. What we do is we bring innovative concepts to these type of e-commerce companies, including Amazon, and then it depends a bit how we work together. These are generic concepts that we supply, and then, of course, it needs to be a bit tailored. It is a scalable type concept that we provide, and these companies like this.
Okay. Just a follow-up. You don't see any risk that their efforts would actually, for a period, lead to reduced demand for, let's say, brown boxes in certain types of packaging, et cetera?
The market growth is so high that there will be some optimization. Again, we can take part in that optimization because we are proactive, and the market growth is so high that it will negate, I think, the reduction through any optimization.
Many thanks.
Okay. Linus, and then was Robin.
Thanks. It's Linus Larsson with SEB. Another question on e-commerce. I wonder if you have a figure for how big a % of your containerboard that ends up in e-commerce, and if you would have a similar figure for, let's say, the European industry.
We do not know exactly where our containerboard ends up exactly. Roughly, when I look at the total market, I can give that answer. The size of the e-commerce market represents now something close to 10% of total corrugated packaging. I think that probably would give you a bit of an indication.
Would it be similar for Stora Enso?
That is a question that I am a bit reluctant to say how much we're doing there, but I can assure you we're pretty successful.
Thanks.
Thanks. Robin, please.
Thank you. Can I just ask you this? A lot of speculation about containerboard markets globally and also in Europe. What are you seeing short-term in terms of the market balance, in terms of containerboard prices in Europe?
Well, I am not here in a position to give any current trading updates. The overall growth trends, they are there, and I think they're much stronger going into the future than they were in the past, being e-commerce and sustainability. Of course, there can be economic cycles. I cannot predict them. I don't know if you can. The overall growth trends, they are there.
Can I, one more just on, you said the outlook is more balanced in terms of capacity additions for virgin fiber board. Isn't historically the correlation in pricing and demand quite high between recycled fiber and virgin fiber container boards? Would you expect that to continue, or is there sort of reason to expect that correlation to gradually disappear?
There is historically, indeed, in some of the indices that you see, there is some correlation. On the other hand, you can also see that the market is differentiating. When you look at different performances for different type of grades, you can see that some grades can command more unique type positions, less related to some base pricing compared to the past. I believe there's room for differentiation.
Thank you.
Okay, thanks. Then one question from Lars.
Just on the future growth and innovation, I was slightly surprised given the focus on value added. You talked about containerboard-focused growth. Can we try to just bring the two together? You talk about RFID tags, significant development and new product development, which is all downstream. Then you kind of go back to the upstream activity to focus on the growth there.
Focusing in containerboard, we're clearly focused. I've already given an indication that you know that we're looking at Oulu mill conversion. I see supply and demand balance more healthy in virgin containerboard than at least in the coming years in recycled containerboard in Europe. We will continue to grow in all these areas. It's obvious, I think, that in containerboard, we would make a very big step if we were to decide for a next conversion. That is what I meant. That's clear.
Thank you, Gilles.
Next will be Markus Mannström from Biomaterials, talking about his continued journey in Biomaterials.
Thank you, Ulla. Welcome, everybody, also on my behalf. Happy to be here. What we see here behind me is, to my knowledge, the first rechargeable battery that uses hard carbon lignin as anode material. This battery, it lit a small Christmas tree almost one year ago, and it has been recharged several times since that. More about that you can see at the demo stations. Today's presentation is going to be about chemical pulp. It's also going to be about our innovation agenda. Continuing to where we ended one year ago, I think we were one of the first to say that we foresee a stable, continuing good position when it comes to supply and demand in chemical pulp. This is because one year ago, we said the pipeline of new investment is empty. Today, we continue to say it's still fairly empty.
Some highlights over the past period, we reached record EBIT levels of 30.3% in Q3. We today run an innovation agenda with a total of 16 projects. We have also added one more feature into our approach on R&D-driven innovation, and that's our ambition to become the leading R&D innovator within the industry sector. Why this? I think it's so damn important when we talk new materials, new bio-based materials out of renewable sources, that we really know the technologies, and we know the fundamentals in what we are doing. By doing this in a really proper way, we also are in a key position to support our other divisions in their ambition to increase the share of renewable material, especially in our board divisions, when we look at processes on how we work with fiber-based going forward.
From a long-term trend perspective, we see a good trend also. Of course, you see a big change from 2014 when Montes del Plata was in a startup phase. Today, we are very proud to reach, on 12-month average, our target of 15% in return of operating capital. I think this is an achievement in a capital-intensive industry like ours, like chemical pulp, having Montes del Plata in our balance sheet. It's only four years old. Our strategy, we also continue to focus with the same three pillars I communicated one year ago. We talk about eucalyptus pulp, value creation of eucalyptus. This is the biggest commodity that we have in our industry, and we have to stay cost competitive. Our focus is to contribute, making Montes del Plata one of the most cost-competitive mills in the industry. When we look at the Nordic mills, we continue our differentiation journey.
We have this summer completed our investment, increasing the share of fluff pulp in Skutskär, and next year we will complete our investment in Enocell, converting the mill to dissolving pulp. As said on our innovation agenda, we have increased the number of projects, we have grown in terms of organization, and we have built a more integrated approach than ever in turning fiber-based material into new solutions and applications. To the pulp market. We see a total growth of 2.3% annually going forward. This is when we look at this from all the pulp grades on the market. Up in the right corner, you see a simple comparison, a simple bar showing how much the growth segments actually grow per annum in comparison to the decline of paper pulps, all this driven by the megatrends, the same megatrends that Kalle started with today in the morning.
We should see growth for textile, for carton board, for tissue, for hygiene, and specialty papers. These are the areas that we want to play in going forward. The market balance is going to continue. As I said, we have not seen that many announcements when it comes to new capacity. Taking into account the average 30-month period to build a new pulp mill, you understand that the capacity balance is going to be like now or gradually even improve. On hardwood and softwood, we today have a market balance of roughly 90%. If nothing happens, it could go up even to as high as 96%. I don't think this is going to happen, but this is the illustration of what is the meaning of having a lack and openness in the pipeline that we then illustrate there below.
Historical average capacity growth has been roughly 1.6 million tons a year, now to reach the upper picture, we should see a 1.3 million tons capacity increase, and we have only filled roughly one-fifth of that with the Arauco investment that will be in Chile, the MAPA project. When I said that the market is growing, where is it growing then? Well, China, of course. 75% of the total chemical pulp market, that growth is in China. Why so? Well, we have a lot of local trends there affecting, similar that the megatrends that affect us, but primarily urbanization, growing middle class, changing lifestyles, and also some disruptive elements that we have seen lately, like the import ban on recovered fiber.
If we assume that there will be a change per capita consumption on annual basis from 14 to 21 kilograms, we would see a change on 10 million tons annually going forward. These are real expectations of what we're going to think going to happen by 2030. China has a huge fiber deficit. As long as we see similar growth levels as we have seen during the past in China, even slightly weaker growth, this is still going to drive a huge growth in chemical pulp demand in that region, in that country. If I then move to Stora Enso, how do we position us on the market? As a pulp producer, we are still fairly big. We have a total capacity of 5.9 million tons in our company.
However, of that, 62% is integrated, supporting our board business, our paper business as integrated pulp, and we deliver some 38% of this totality to the market. If you look at this from how is the ratios, the biggest single product that we have is hardwood, after that, softwood, and then smaller shares in fluff and dissolving. Also a small share in unbleached kraft pulp. With the transformation and the change that we do and the differentiation in our Nordic mills, you also see how this is going to change, reducing our exposure in softwood, as we said in our strategy one year ago, and investing in more fluff, in more dissolving pulp to reach the levels that you see on the dotted lines in the bars behind you. Moving to why do we do this? Why do we think this is right to do?
This is a very traditional power to cost competitiveness chart, where we have the total volume on the x-axis and the cost on the y-axis. In commodities, hardwood and softwood, of course, we have our Latin American joint venture assets. They are best in class. We have a number of solid assets. There is a number of non-sustainable assets where we don't play. If we compare our position on the solid asset curve in hardwood, softwood, we look at the next curve, where we do look at the same thing from a dissolving cash cost point of view, we see that we actually reach a much better position when moving Enocell, for example, from softwood solid to almost becoming best in class in dissolving pulp.
We improve our competitiveness, and we can then build on our innovation agenda to make an even more interesting offering for our customers. This was a very quick introduction to how we look upon the chemical market. If I'm looking forward, and also being part of London Pulp Week exactly now, I think the general sentiment is that the fundamentals remain in place. No big changes in supply, demand. Growth is expected to continue. There is a growing need for chemical pulp. We cannot take into account for possible geopolitical or global changes in trade. From an industry perspective, we stand on very solid ground with our feet going forward. Moving to innovation, this is the key for sustainable growth. In addition to innovating on fiber, we do a lot of innovation on lignin, on hemicellulose, and cellulose, the three components of wood.
Kalle already started by introducing the platform role of lignin going forward. I will elaborate a little bit more on that also. We decided to make this table to try to put everything together for you in one slide on how we look upon the R&D innovation agenda from a commercial perspective for Biomaterials. We identify five different areas: improved pulp properties, regenerated cellulose, microfibrillated cellulose, lignin, and bio-based chemicals. The common denominator for all these five areas is the value proposition. When going forward, we either talk improved material efficiency, do more with less, that in combination with replacing fossil-based materials. I think the value proposition is strong. I also think and fully agree with the comment on one of the questions earlier, does this give a premium? No, we have to be cost competitive also.
We have to offer the same or even more at existing price levels. When we look at this from a time to market perspective, what we see today is all these five streams, they have a little bit different aspect when it comes to time to market. Improved pulp properties we do already today. Regenerated cellulose we're going to see in a couple of years. Microfibrillated cellulose is becoming more and more. I think in addition to the work that we do in our board divisions, especially in Consumer Board, we're also going to be able to sell microfibrillated cellulose already next year to players that use it either in specialty papers or in cosmetics or in coatings. It has, in all these applications, it has found its own benefit.
It's going to be an additive, but it's going to give at the end material efficiency and something which is fossil-free. We have lignin, where we actually started commercialization already a couple of years ago, this is the platform where I would say we have the strongest effort, also from a near-term financial perspective, I think this is really interesting. It's not only about batteries or phenol replacement. We have a number of other solutions in adhesives and glues. We work on applications to make formaldehyde-free binder, which would actually open up for a much more interesting business than the phenol replacement. In addition to the batteries, we also last year had a demo on our carbon fiber that we bring forward. Last but not least, we have the bio-based chemicals, there with all honesty, I say this is the biggest challenge.
This is the biggest technical challenge to come out with something that we can really 100% replace a fossil plastic product. At the end, I believe in technology-driven development. It's going to come out. The technology is already there, we just have to turn it more cost competitive. All in all, I think the future for our innovation agenda is good. If we look at this from a market size, whether it's tons or in EUR, the figures that we see here behind, the scale is so big that you understand that these become attractive opportunities. There was this question about, okay, how do we do this in practice? Do we have to build a new market? No, we don't build a new market. What we do is we come in with a substitute to existing market.
We come in with a better application, a more environmental friendly application. Last but not least, I would mention a few words about our approach to textile. Yesterday, maybe at least those in Finland read that the wife of our country president, she's going to wear a new dress made of Ioncell viscose type of pulp. The dissolving pulp is coming from Enocell mill. We look into this Ioncell technology, of course, but we also look into a number of other technologies where we in the future could select to participate in downstream value chains, turning dissolving pulp to yarn, further to textile. All in all, I think we are well-positioned. We deliver sustainable, profitable growth. We have several proof points of that.
We think the pulp market is going to stay strong and solid, we are going to build on our innovation journey to build more renewable material to the market. Thank you.
Okay. Thank you, Markus. Please limit your question to one. These are the questions that are between us and the lunch. Okay, Lars, then Linus.
Yeah, Lars Credit Suisse. You have a lot of innovative products. It feels a bit like you're throwing a very wide net to try to catch something. Well, I want you to comment on that. Number 2 then is just on the, similar to Gilles' comments about the big step change, of course, would be a containerboard mill versus other smaller relative additive products. How should we view this in the context of Kalle's comments on we don't want to build more pulp, that's where you get the step change, you have all these various smaller projects?
Yeah. I think the beauty with the smaller projects is actually, I said we have 16 projects. We have a very focused agenda. A part of the projects are actually technology-driven, really supporting the material development. Each of these, they have their own commercialization agenda. When we look at, we had the question of business models earlier. Do we have one business model? No, you cannot have one. What is the common denominator here is you go from laboratory to piloting to demonstration, you have to find the partners you want to play with at a very early stage because you cannot innovate in isolation. You have to work with companies that have a position in the supply, in the value chain, or want to get a new position in the value chain. It is commercial partners. For us, startup is type 1 of partners.
We are teaming up with brand owners that are really far in the value chain on other areas, example, textile. When we talk carbon fiber, we already talk with the car manufacturers. Of course, they would like to have our stuff, can we jump there now? No. The whole story is about going in steps. If we look at this from an innovation pipeline point of view, I think you need to have a number of initiatives. Not everybody will have a success, your goodness is really measured on how good you are at pushing the investments or the initiatives and when you have to change course. With the portfolio that we have now, I'm actually damn proud of it.
Okay, thanks. Linus is next.
Yes, thank you. Again, it's Linus Larsson with SEB. I think Biomaterials is at the core of Stora Enso as being the renewable materials company. You are extremely bullish when you talk about the outlook for chemical pulp and the next, say, five-year outlook and beyond, yet you are not investing in the same way as some of your peers. You do not have the most modern Nordic pulp mills in place if you compare with Metsä Fibre SCA. How should we think about that, and how is your discussion going? Don't you feel that you might be missing out on a great opportunity here? Don't you feel that you might be in for the need of a big round of upgrade in the Nordics? When will we see the next big pulp mill investment in Stora Enso in the Nordics?
I think the next big investment in a pulp mill in the Nordics for Stora Enso, we have to wait quite a while. What I would turn it around, and if I look at this from a differentiation point of view, I think it would be much more attractive to see that we would actually have a regeneration plant in Enocell where we make the dissolving pulp, and either us or together with somebody or even somebody else is taking the integrated synergy and setting up a plant where we turn dissolving pulp and cellulose into yarn. I think it's much more attractive as an investment opportunity.
Okay, thanks. I think the last question now comes from Micke.
Yes. Micke from UBS. Do you expect to see any changes in the wood chip supply to the Asia markets? If so, do you expect this to have any bearing on the chemical pulp demand?
Most of the Asian suppliers, they rely on imported chips. In China, some of the players, even having their own production, even having forest assets in China, they still take the wood in chips from elsewhere. I think that going forward, as we see the real focus of the chemical pulp business from an industry point of view, it has been very strong focus on Brazil lately. We see the Asians entering Brazil big scale in M&A, both on industrial operations, also in taking over forestry. I think that if we look at from their perspective, I think it's their understanding that they have a huge deficit on wood. They're going to have a huge deficit on chemical fiber. They're going to source it outside their own region.
Okay, thank you, Markus.
Thank you.
I will give some instructions about our lunch. Now we will have lunch and it's served downstairs. When you go outside, you turn left and take the stairs down. There is the restaurant where the lunch is served. Please be back at 1:30 when we will start. If you have time, please have a look at the demonstrations on the hallway. Thank you.
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We will start the afternoon session. Okay, good. Still some people coming in, I think that for the benefit of the people in the web, we should start. The next presenter is Jari Suominen, who is the divisional head at Wood Products, and he will tell us about how to accelerate profitable growth.
Thank you, Ulla. I have the famous position to be first after lunch, I have pretty interesting story to tell you, I believe I can keep you awake. Dear ladies and gentlemen, what do we see here? We see seedling, we see tiny tree. In Wood Products, we see much more. We see skyscraper in the making. With our new innovations, massive wood called CLT, cross-laminated timber, LVL, laminated veneer lumber, we can enter into new areas in construction which have been earlier dominated by steel and concrete. Completely new markets where wood has not been earlier. This tiny tree, what you see here, that might become a 14-floor highest wooden building in Finland. This is built in Joensuu, or is under construction at the moment.
This tree will grow back in 20 minutes in Finnish forest. This is showing we are speaking about renewable material. We are using some 2,000 cubes of CLT and LVL for this building. This tiny tree might become a 7-floor high office building in Sydney. This building is entrance for ultra-modern area called Barangaroo, where tens of thousand people are working and living there. By using wood in construction, you can reduce your carbon footprint even up to 75%. This tiny tree might become a head above the water. This was built front of London city some weeks ago for design week. Personally, I like this a lot because this is showing easily all advantages of building with massive wood. It's light. Weight is one-fifth when comparing to concrete. It's easy to assemble, it's fast to build in difficult locations.
Like you see, there is water around this head above the water, and it took only 40 hours to build this. Last but not least, there are amazing shapes, like you can see. All of those have been produced industrially. No hands has touched them. Those are produced in our Austrian factory based on the newest technology in cutting machinery. Kalle presented you several megatrends, and all of those are favoring the building with wood. It's resource efficient, it's fast, and it's carbon efficient as well. Dear ladies and gentlemen, I would now like to move towards our strategy, but I would like to start a bit with our track record because a lot has happened in Wood Products during past 5 to 6 years. We have here presenting 3 steps. In 2012, we started in financial difficulties. We started restructuring program, we saved EUR 50 million.
Now when I'm looking backwards, so we gained much more than just cost savings. We created new lean base, and we created continuous improvement culture for our division. In 2015, we were selected as a growth business, but growth just for selected value-added products. On top of that, we recognized that we need to develop our processes, and we started business development program to make our long value chain transparent. Like you saw, our value chain start from this tiny tree and is ending up to high-rise building somewhere around the world. This value chain, we want to digitalize. Now finally, 2017 onwards, we as a division, we have been growth business overall. I would like to remain in this topic and show you a bit our financial track record.
If we are looking now since 2015, when we were recognized as a growth business, our turnover has increased more than 4%. Our EBIT has increased 75%, and we have reached our return on capital employed target clearly. Naturally now, 2018, the favorable business conditions have been also supporting that. I would like to move towards our strategy, and one question is that where are we unique, and how do we differentiate? One major area is our offering. If you are looking left side. What I like in this picture is that you get complete view of our strategy in one go. In left side are our products. We have unique position that we are one of the very few one who can offer all wooden components for high-rise building, but we are not stopping there.
What is making us truly unique is the fact that we can combine product to services, and this service is based on digitalized tools. If we take as example CLT, that is massive wood, that we develop further to building components like you see in middle section, and all those components are already included in so-called Building Information Modeling, which is this kind of 3D tool for architects and designers. This is what is making us unique, and this is what we want to develop in future. I would like to move same area but giving you update what we have been doing during this year in this area. First of all, upper left side, you can see robot. Where we want to develop is automatization.
Overall, sawmilling business is seen as undeveloped if you're looking technological-wise. We in Wood Products, we do not see that as a weakness, as opposite, we see that as a great opportunity. This is now area where we have started to work. This example is from brand mill in Austria. Middle section, middle picture, upper side is Gruvön. There we are starting, or we are at the moment starting operations of the biggest CLT line in the world, completely automatized, and we are even not stopping there. Right side, you can see rib panel, and we further develop part of our CLT to rib panels, and we started that production in Ybbs mill in Austria this year. In bottom side, you can see virtual reality. There is one station you can visit, you can see how that is working, and then we have biocomposites.
Those are coming back later on. I would like to continue and show you a bit activity for next year. We are planning to launch office concept 2019. In right side, you can see the 3D models we are already working with. Overall, if looking all our different building types, where we have had the most positive surprise has been offices. Only during couple of years, we have had more than 30 big office projects. Here you have just couple of examples. We have this Barangaroo from Australia. We have a green building, Enjoy from Paris, bottom. Middle is coming Supercell office here in Wood City, just 50 meters from here. You will see that area still today. We had groundbreaking ceremony last Monday.
Now I would like to show something very special where we are working at the moment, I think that is, from my perspective, one of the most beautiful buildings, wooden buildings I have ever seen. This is showing also that this giant Google, they want to select renewable products. They want to select wood for their construction. This is London head office for Google, which is under construction at the moment. This is massive building. This is including even 8,000 cubes of CLT. Like you can see, this is the direction today that wood will be visible, even trees are growing on the roof. We are the main supplier if we are looking the wooden parts there. I think this will be great landmark in London and even globally for wooden construction.
I would like to move a bit to present you that we are not just limiting us to these materials components, but also this digitalization and developing wooden value chain is focus for us. I will use a bit time here. Here you can see the life cycle of wooden building. We start from design and engineering, we continue with construction, comes operation, and finally the building will be demolished. If you're looking the left side, architects, designers, these 3D tools are available already. Our components are there, now we are working to build on top of that virtual reality tools. There we have selected as a partner for us, TRÄ Group , startup company for Finland, jointly we are developing these solutions. It will make it, for architect, extremely easy to design the house by using virtual reality glasses.
You can move the shapes, you can move the walls, all calculations are following. I just heard even that you can build acoustic there, that if you change something, you can hear how that is influencing on acoustic. Huge potential in that side. If we move from design phase to factory, this Building Information Modeling, 3D tools, those are sending directly information to our factory, we are using that information in our cutting machinery, we can create those beautiful shapes without any hands touching. When the components are ready, we will send those, supply chain will be playing vital role because we will deliver very different kind of components from many different mills, all of those need to be just in time in construction place.
That is the reason why we are going to use RFID tags to follow, that we know exactly where our products are. When products are coming to construction site, again, we can use virtual reality or augmented reality to follow where the component exactly need to be installed. Again, saving time there. In our factories, we will install sensors in our components. It's easy to install to wood, we can then finally follow the temperature, moisture of the house, that will be great benefit for maintenance companies or of course for people living there. Finally, when you are looking massive wood and we are looking recyclability, it's easy to take out and move to next location.
I think that most of our products in future will be recycled, that will be easy. I would like to move to biocomposite and present our newest product. Kalle presented that already at the beginning. I would like to go a bit more in details there. Where we are proud that now first time we have a truly cost-competitive material compared to general purpose plastic. We are still in position that we have, in this end product, we have 50% polymers or plastic, if I may say, we have 50% wood. We are working continuously to increase the share towards 100. We have started the production. We have the biggest compounder line there in the world, we are now further developing and establishing competence center for the very same location. We have market introduction ongoing. We established DuraSense by Stora Enso brand.
We have had first commercial deliveries to Orthex cutleries and H&M hangers. We are not producing, of course, hangers. We are producing granules, like Kalle mentioned at the beginning. We are working with H&M, and it's third party who is finally producing the hangers. We have exciting development ongoing with NorDan, who is our window customer. This is the picture down bottom right side, and this is a window round shape, which is normally difficult to produce. It has been produced from bio-composite based on 3D printing technology. I would like to summarize what does these all activities mean from monetary perspective and from potential perspective. We have categorized this in three different areas. We have building component solutions. It's EUR 300 million-EUR 400 million.
We have classic plain, which is commodity product, but based on our service models, integrated distribution concept, we can differentiate to competition, and we have even existing capacity available, so no major CapEx really required there. We have bio-composites. All of those are representing next five years huge potential, giving potential range of EUR 600 million-EUR 750 million, or annual growth of 6%-8%. Dear ladies and gentlemen, I hope you got positive impression regarding our ideas. Also you believe that when this tiny tree will become big, it will be something great. Thank you.
Thank you, Jari. Now we are ready for questions to Jari. I don't quite see you all as well as the others because you are in the shadow, so please keep your hands up for a certain period of time so I can pay attention to you. Okay, Lars?
Thank you. I just wanted to come back to your brief, the sort of platform of building components. You supply services, the design and engineering or the software, if you like. Can you in any shape or form parse out what sort of revenues you can put into the non-production part of that business?
Yes. Of course, very good question. Now we are in starting phase. Why we are developing this is of course to make wooden building overall total ecosystem and value chain more efficient. It will create us new demand. By creating that, it will make us attractive partner for any construction company or any partner in its value chain. Finally, we will end up that part of the services we will sell. At the moment, we are in starting phase. Like I mentioned, we have developed a lot. We can see the end results when we are ready. We see their significant potential. We need to remember there are these three different areas where we're getting advantage.
Okay, Kevin, next here.
On these potential figures you mentioned for the three different areas, do you have the capacity to reach that? Are you just waiting for the market to mature, or what kind of investments do you need to put in behind that to be able to deliver that kind of growth?
There are many actions needed. There are certain areas where limited CapEx is required. Certain areas, like this building component, some CapEx is needed. Of course it's a lot market creation as well. In our side, CapEx, if we are making one single project like new CLT line, CapEx is limited. We are speaking about roughly EUR 50 million. Those we are developing step by step, based on business development. We are not speaking about similar kind of figures what has been referred already today.
These EUR 700 million potential, EUR 750 potential, that's on a revenue level?
Yes.
Yeah.
Exactly. Yes.
Okay, thank you. We have still time for one more question. Okay, Harri.
Thanks. Harri Nordea. Just sort of thinking about the kind of connection to the wood supply, I mean, with all these developments, is it so that basically you will be able to kind of compare to the traditional sawmill, you will be able to use sort of smaller diameter wood going forward, and just thinking if it has an impact on the wood sortiments that you're getting from the forest, and whether it might have sort of implications on the pulpwood availability versus sawlog availability, or is it too far out?
I don't expect that we have huge influence on pulpwood availability in this case. Area where we are developing jointly with our wood procurement organization is to develop these newest technologies to select correct kind of wood. Earlier, sawmilling was based on saw that there came raw material in mill, and we made best out of that. Now we have turned the business model completely upside down. We understand what customers' needs, what are the products, and then we know what is best wood species, wood size for that kind of product, and then we are jointly with our wood procurement, based on latest technology, we are searching exactly the correct location where to find it. Business model has turned a lot, and this is the big change. Not possibly that are we using more big trees or smaller trees.
Okay. Thank you.
Thank you.
Thanks, Jari.
Yep.
Okay. Now we will go ahead with our program, and we will have Kati ter Horst speaking to us how to create value in paper. Kati, please.
Thank you, Ulla. Good afternoon, everyone. It's my pleasure to meet you all here today, and I will spend the next 15 minutes to talk about value creation in the exciting world of paper. I would like to start with a short summary of our business, and give just a couple comments here. Our sales in paper now total to about EUR 3 billion, and about 80% of our deliveries go to Europe as our home market. Our sales growth now in the third quarter this year was 7.2%, very much reflecting the higher paper prices and better mix. If we look at our customer base, we have a very balanced customer base, and we are basically delivering to all of the major end users of graphical papers, from newspapers to retail advertising, luxury magazines, books, and copy paper.
If you have some time, please look at also at the paper stand, and you will see some of the very well-known newspaper titles, as well as some of the magazine titles and many of the books that we actually produce the paper for in Anjala Mill, which is the biggest book paper producer in Europe. If we look at sustainability, 90%, or a bit more than 90%, of our paper brands carry one or more eco labels, and this is basically reflecting our leadership position in sustainability on paper market. Looking at the result now in the third quarter this year, our EBIT rose by 125% to EUR 65 million. If we look at cash flow to sales after investing activities, that stood at 8.3%, which is well above our 7% long-term target. How has our transformation then looked like in the past years?
I will talk about that through some numbers. Since 2013, the European paper demand has declined by 17%. In the same period, we have restructured our production capacity in paper by 33%. However, our deliveries have declined clearly less, as we have been moving our best paper orders to remaining paper machines, and in that way, also have been improving the operating rates. We have also put a lot of effort on safety by training and coaching our people to create a very robust safety culture. I'm very happy to tell you that our total recordable incident rate has declined by 82% since 2013. Finally, we have improved our customer satisfaction. Measured by the Net Promoter Score, we today have 20 percentage points better customer satisfaction than we did in 2013.
You could say that we have responded to the challenges that we have in the market by restructuring our business to better profitability. How does our journey look like in terms of sales, EBITDA, and cash flow? When you look at these charts, I think it's important to remember that today, we have about 2 million tons less production capacity than we did in 2014. Still, looking at EBITDA, we are, in the past 12 months, very close to the level of 2014 in absolute terms. If you look at the margin, clearly higher, reaching to 11.5%. One could, of course, think that this is very much the result of the paper price increases that we've been having, and of course they do contribute, but for instance, the newspaper prices were about the same or even a bit higher in 2014.
Remember the cost increases as well from pulp that also impact paper. On cash flow. Cash flow is the most important target for Paper Division. Market situations have been different on different years, but I would still say that we have continued to deliver cash flow to sales percent. It's very close to our long-term target of 7%. With these actions that we have taken ourselves, we have restructured our business to become a predominantly European asset base that is stronger than ever to serve the global markets. What you see here on the right side is our current asset base. Our Nordic mills being very close to the forest, and our mills in the continental Europe being close to consumers and close to the recycled paper streams. We have one joint venture in China serving the local market.
On the top corner on the left, you see how our restructuring in asset base has looked like in terms of the different product segments. The biggest change here is that we have become clearly a smaller player in coated mechanical grades, and this has been our strategic choice to exit the standard LWC business. You could ask, why have we done this? The reason is that we have very strong improved supercalendered paper assets, and they effectively actually compete exactly in the same end-use area as standard LWC. To summarize the restructuring part on assets, you can say that since 2013, we have either sold, closed, or converted 2.7 million tons of paper. If you want to see what that looks like in Europe for your reference, you can see that in Europe, that has been about 8 million tons.
Let's continue to look at what have the markets looked like. My main message with this slide is that it's not about the demand decline, it's about market balance in this business. If you look at the left side, the blue bars are representing the practical capacity in Europe for graphical paper grades. The green bar is combining the European demand with exports. Exports today represent about 3 million tons. European markets came in balance towards the end of 2017, because of the restructuring actions that industry had taken, but also supported by strong export markets, especially in China. Market balance means healthy paper prices. That you can see on the right side. Fine paper prices started increasing already 2017, clearly, supported by the high pulp prices.
Publication paper prices have moved this year. From here, I would like to continue to talk about some other areas that we do in paper to create value for the future. The three areas I would like to touch upon today are commercial excellence, focused innovation, as well as smart operations, and I would like to spend a little time on each of them. If we start with commercial excellence, the statement I want to make to start with is say that we are really there out of the markets. We are playing to win on these global paper markets. We may be predominantly European producer, but we play on global markets.
What we do is that we are utilizing our business intelligence arm as well as our global market presence to understand and to predict where these markets are moving. How we run sales is that we optimize the sales between our production assets and the markets, and we steer pricing centrally. To give you a good example on how this works, I could refer to the situation in the fall last year. We could see that Chinese newsprint producers were really short on fiber, and that was coming from these import restrictions on recycled paper. We are also operating China with our mills, so we could see what happened locally. This was boosting paper prices up in China, and we decided actually then to allocate a clearly bigger part of our newsprint production to profitable Chinese orders.
Of course, we did this also to support the price negotiations in Europe. The end result today is that one of our biggest newsprint customers is actually Chinese. You may also know that the transportation costs to China are quite competitive. I would like to move to talk a bit about the focused innovations in paper. Our innovations are not so much geared on growth, as you can imagine, but they are more on these three areas. The first one is operational excellence, second one is new and improved paper products, and third one is then related to non-paper-related new businesses. Operational excellence, in short, is about keeping our paper assets competitive, but also continuously working on improving our processes and the ways of working.
I will shortly come back a bit to this through some green energy investments that we have been doing lately. Then on new paper products. Stora Enso has actually always been a forerunner in the industry to develop new paper grades together with our customers. We are also the company that launched and developed the SC grade to start with. MultiCopy Zero here is an example of a bit different kind of development. It's basically fulfilling the customer need for carbon neutral copy paper. The third one, as Jari already has talked to you about the biocomposites, but why I bring it up here is that where did this investment idea actually start with?
It started with a question at our Hylte newsprint mill that now that we have closed two of our four newsprint lines, what can we do actually with the excess thermomechanical pulp? The answer was to mix TMP with plastic granules to make biocomposites for many, many end uses. This is how we can use our assets also for something else. Coming back on green energy. First example comes from Belgium, from our Langerbrugge mill, where we have since 2016, been delivering green energy in form of heat to Volvo Cars in Ghent. This has meant for us some cost savings, and for Volvo Cars, it has meant that they have been able to reduce their CO2 emissions by 40%, and that equals to about 5,000 households heating in the area.
Last summer, we announced an investment in Germany, EUR 25 million investment in green energy production at our Maxau mill. This investment will clearly boost the cost competitiveness of this mill for the future, and as well, it's reducing our CO2 emissions by 50,000 tons a year. Quite a big change. The latest announcement has been our cooperation with Gasum at our Nymölla mill in Sweden. There Gasum will be producing liquefied biogas based on our wastewater effluent. To describe what kind of production volume we're talking about, at least in the beginning, it would be equal to the fuel needs about 200 long-haul trucks on annual basis. Next, I would like to move to talk about smart operations. We have a system called Paper Production System, very innovative name.
This Paper Production System is our common way to run our nine paper mills. 19 lines, nine paper mills. It's based on the lean manufacturing principles, and there our target is continuously to improve the productivity and to reduce waste. To give you an example of one machine in this area is our Anjala mill, quite an old asset already, but just continuously working on this productivity, they have actually improved profitability purely based on productivity, by EUR 8 million in the last three years. We are, of course, developing the competencies for the future, continuously thinking what kind of competencies do we need, what do we need to change, and digitalization plays a big role in here. We have several projects going on looking at predictive maintenance, predictive operations, then, of course, remote process control is one. Where can we add robotics more?
We are checking where could we use drones to do certain simple checks or checks in very dangerous places. Coming back to assets. Continuously reviewing our assets, pulp lines, paper mills, and our energy setups to see where to invest. Of course, our paper assets also offer the opportunity for other Stora Enso businesses to invest in. I think Varkaus is a good example of this, as referred by my colleague, Gilles, already. To conclude a bit, how are we then going forward to create value? I would like to build it on the next three pillars. We will continue in paper business to work on improved efficiency, and we will continue to reshape our cost base.
Secondly, I dare to say that we have the best commercial global team out there, their task is to make sure that we maximize our sales result and we create the value for customers also in the future. Thirdly, we will have selective investments in our assets and in our paper grades, as well as in the business models. I would want to conclude by saying that I think we are well-positioned in paper at Stora Enso to continue to deliver a solid profitability and cash flow. Thank you for listening.
Thank you, Kati. Now we will take questions for Kati. Okay, Robin, Markku, Micke. Let's start with these three and see how we do with the time.
Robin Santavirta, Carnegie. Can I ask you about the profitability of your exports to Asia or China in specific? Is that competitive, the profitability, if you compare to the European business with these prices that we have in the market at the moment? The second question, your capital expenditures in this segment, what are we talking about on an annual basis this year and 2019?
Answering your first questions, whether our exports to China are profitable, they are, compared to Europe, they are as well. Chinese pricing is very short-term, about quarterly pricing, so it's also very easy to allocate, take back, and move with the market. It's not that we are selling all paper grades to China. We sell the ones where we can make good profits. It's not an, let's say, swing market for us. As long as the conditions are as they are, we are committed to sell to China. The second question on capital expenditure. It of course varies a bit every year depending what happens, but it has been, next to the maintenance, clearly below EUR 100 million in paper on annual basis, I think that's about how we will continue, a bit less maybe even.
Good. Okay, I guess Markku is next.
I wanted to ask about the Oulu potential conversion and what does that mean to your business in coated wood-free? Will you exit that business or what will happen?
Well, if Oulu would be converted, then we would exit wood-free coated business because that's the only place where we still produce wood-free coated.
Okay. let's say the potential that your assets offer to other businesses, how do you review that potential, or is it left to the other businesses, and where do you see most further potential?
We review that together. We look at paper that what are the kind of segments that we see carrying with the best profitability going forward, what are the opportunities we have in the assets to develop them, then we discuss them with our divisions. If there's something in there, then we will together see if there's a need for a deeper study to go forward and look at the opportunities. I think it's good to always have several alternatives at your hands.
Thank you.
I think it's Mikael Jåfs here in the front next.
Thank you. Mikael Jåfs, Kepler Cheuvreux. You showed us the slide there with the continuous demand decline that has been ongoing for m any years. No one can give a prediction, but how are you thinking around this demand decline? Will it continue at the same pace, faster or slower going forward?
If you look at the past, we talk mainly about Europe now, it's been somewhere between all paper grades between 3%-5%. If you look at this year, the seasonally adjusted demand decline in Europe has been 4.2% for the first seven months of the year than compared to last year. We have to remember that there are big differences. Newsprint continues to go down the most, about 8% currently. If we look at improved newsprint grades, mainly used in retail advertising, that's actually +1.5% for this year, and they are basically made on the same machines. Improved newsprint is compensating for newsprint as well. Even though newsprint now declines, it declines mostly in the newspaper end use. Newsprint is also used in retail advertising. Basically, when paper prices go up, you cannot downgrade further than newsprint.
There's no lower grade. I think it somehow also will support that. To your question, do I expect paper demand to decline? Yes, probably about the same rate. That's how we plan our business, that the decline will continue.
Thank you.
Okay, one more question. I think it was Lars then. Next.
Yeah, just on the same topic. I guess it seems to be a bit of an acceleration in demand decline this year versus the prior year. Literally every week there is a printer going bankrupt somewhere. How do you see that price elasticity to demand? How do you think about that as you go into next year's price negotiations?
You can imagine that with our discussions with customers, the question comes often that, "Aren't you kind of killing the demand by increasing the prices?" Like I said, paper prices are not historically high now. They have been coming down also for many years. That has not prevented the decline. It can, of course, be now when prices go up, that there will be some more digital versions, there will be a bit less paper used because people have to live with their budgets. For instance, retailers then, when something else happens, they also come back to the original budget. I don't think it will have a big impact in the demand decline as such. It may have an impact for couple of quarters or something like that. In that sense, that demand decline is not impacting our way of looking at price discussions.
Since Kati cannot join us for the breakout sessions, maybe we allow one more for her, and I think Harri was there with a question.
Okay.
Did you have something still, Linus? Okay.
Okay, good. Thank you.
Okay, thanks a lot, Kati. Now we will have our CFO, Seppo Parvi, concluding this presentation slot here, and he's going to talk how to drive performance in the bioeconomy. Seppo, please.
Okay. Thank you, Ulla. Ladies and gentlemen, I will share with you how in finance we are helping, first of all, Stora Enso to implement the strategy and how we are driving performance from the operations and the bioeconomy that we have been talking a lot about today. We have actually three building blocks when it comes to driving performance. First of all, we are working on automation and digitalization in order to reduce the costs and improve efficiencies. RPA is one of the key things here that Kalle was referring to already earlier today. We are, of course, screening the capital expenditure proposals and ideas that we are getting to make sure that they are meeting the strategic targets and criteria that we have set in our strategy. We have to ensure profitable growth with robust asset management.
To continue with automation and how we are driving out the costs in the system. Of course, already for a long time, we have been working on continuous profit improvement and other traditional ways to reduce the costs. Also to improve the top line and improving the efficiencies. Improving the efficiencies has been one of the key topics and themes this year to get more out of the existing assets. That will of course also grow the top line and help to reduce the fixed cost to sales ratio that we are targeting to come down to 20%. That is not of course enough. We need to do something all different and also think out of the box. That is where we see a lot of opportunities with the RPAs and automation and robotics.
We have been piloting those already for about a couple of years, and now we are coming to a phase when we are moving to production phase. This year, we are targeting to have about 33 robots up and running. About half of those are in finance, but we are also looking at opportunities when it comes to HR, sourcing, treasury, et cetera, and other functions. We are already capturing some opportunities there. A good example is that we are currently insourcing from India from a third-party service provider, our financial delivery services, where they have been taking care of basic accounting and invoice handling. We are setting up an operation in Tallinn with 80 people. There has been about 300 people in India doing the same. With the help of robotics automation, we can save actually EUR 3 million a year.
I think that is just the beginning, but a good business case and example what can be achieved and done. The next step to going forward is to move more and more into end-to-end process streamlining and robotization and automation. I will share with you shortly an example on a robot. This is a real example, how it's running, how it's working. This specific robot is about sales invoice PDF printing for VAT declarations. It is processing about 1,000 invoices a month in Finland and Sweden. It is saving about 56 hours of manual man working. It is again a good example on how it is done. Let's see on the robot example now. It is based of course on algorithm and flowcharts on how the work is actually done. It will be moving between different systems.
It goes to SAP, it will then go to our Phoenix system to collect data and manage the data. This is actually the real speed. It's not speeding up. It is done automatically based on the algorithms. Here is the Phoenix system. There it will extract data to Excel and process the Excel sheets. PDF printing. Now in Excel. Then at the end of the process, it is sending an email to an accountant, and then what the accountant is doing, some sanity checking to make sure that everything went okay and there are no hiccups. Then it's sent to tax office. It's very simple, good example on what can be done and achieved. As I said, our target is to have actually 33 of these kind of robots in production use already this year. Going forward and what we have been delivering.
Over the past five years, we have good underlying growth visible in the businesses excluding paper. Also past three years, actually, the whole Stora Enso group top line has been growing about 3%. We are not only growing, but our profitability has been going up even faster. If you look at the EBIT development, we have been growing over 13% a year over the past five years. This is also visible in the strategic targets that we announced four years ago at the Capital Markets day. Many of you were present at the Capital Markets then, the day when we showed the new targets, and many of you were skeptical that can we ever reach those. No wonder, because many of those were on red and yellow at the time.
Now you can see that if you look at the Q3 this year, we are delivering. We are on green on most of them. There are a couple red spots left, but we are confident that we can reach the targets there also. Targets must be and are challenging, but also we need to deliver on those. As I explained about the fixed cost to sales ratio, working there with automization and traditional ways to improve the cost structures and knock out costs from the system. Annica already explained what they are doing in the Consumer Board business to close the gap. Coming more back to bioeconomy and key drivers there. One of the key things there is, as you have heard earlier today also, is access to wood. That is the critical advantage you need in bioeconomy.
There we are in a strong position. We are the biggest forest owner globally. Value of the forests are about EUR 3.3 billion in our balance sheet. It's not only that you own the forest, you must have productive forest as well. As an example here, we have figures and statistics on our ownership in Bergvik Skog. This also explains the background and thinking we have when thinking about the restructuring of the ownership in Bergvik Skog. We believe that this way we can release more value from our forest assets, for instance, in Sweden. If you look at the productivity of the forest, cubic meters per hectare, as well as IFRS value per hectare compared to one of our major competitors there as an example.
If you look at the potential based on the external data from third parties and then do the math and see the potential there is to be captured. With the restructuring of the owners in Bergvik Skog, we truly believe that this is something we can deliver going forward. This also leads to capital expenditure management, and already back in 2015, when our capital expenditure was close to EUR 1 billion, we are saying that we are coming to the end of the asset transformation and that we are planning to bring down capital expenditure from EUR 1 billion to the same level with the depreciation of the company, as well as EUR 100 million roughly for the biological assets. We are actually there now. We are also giving now guidance for next year, and we are planning to keep and stay on the same path.
Our guidance is EUR 550 million-EUR 600 million also for next year when it comes to capital expenditure. This of course means that we need to keep an eye on the projects. You have seen today that we have a lot of projects, a lot of opportunities. That's of course, very positive. But in order to manage that, we must have very systematic approach when screening the proposal, filtering them. We are using very robust systematic way to value the proposals, to look at what makes sense and what doesn't. We have investment working group that I'm heading, where we go through the proposal, screen them, compare them, and run through those in our cash flow modeling, taking a longer term view, 20-30 years, to ensure proper prioritization between the divisions and inside the divisions when it comes to major capital expenditure projects.
Also as part of the process, we ensure that the projects we pick and choose are meeting the long-term strategic targets, mainly, as said, relating to return on capital. That's the key driver. Moving to a bit different topic, sustainability, which is of course the core of our strategy. We truly believe that business in long term can be profitable only if it is sustainable also. There are 17 sustainable development goals defined by UN that we follow. We have picked three of those as the focus in our strategy and also in financing and funding. Those are responsible consumption and production, climate action, and life on land. These are also reflected if you think about the ambitious reduction targets for CO2 that we have set.
I talk about the science-based targets that we, as the first forest company, announced and communicated, and those are externally approved science-based targets. Our target is to reduce 31%, and last quarter we were at 24%, we are in a good way to deliver here also. These are also reflected in our financing and treasury activities, which is of course natural if you walk your talk. Last year, when we put in place revolving credit facility, we have there a green aspect linking to these science-based targets. In the pricing grid of the revolving credit facility, there is a component that when and if we reach the targets, there will be a reduction at the cost of the facility. We are also, before summer this year, set in place a green bond framework.
We are ready to launch green bond as soon and when we see it necessary. One opportunity could be when we are finalizing this Bergvik Skog ownership restructuring. We are confident that could be one opportunity to use green bonds. When it comes to sustainable finance strategy, it's not enough that we are sustainable. We also expect that our partners, when it comes to funding and working, that is, for instance, banks and capital market partners, are also having a sustainable agenda and follow the same path. We also believe that you need to be transparent when it comes to sustainability. That's why we are supporting and working on financial disclosures as well as integrated reporting. That is the key.
If you look at our internal report for already past 5 years, we have a separate segment for sustainability issues and topics, and that way opening what we are doing, and you can follow that we are delivering on our promises and targets. Just as one example. To summarize how we are moving and delivering performance, it's digitalization, automatization to knock out the cost from the system. It is ensuring that investment projects that we are approving are meeting the targets, and that is linking to sustainable, profitable growth through robust asset management. Thank you.
Thanks, Seppo. Now we are ready for Seppo's questions. I think now, Harri, please go ahead.
Yes, thank you, Seppo. Harri Tähtinen, Nordea. You mentioned about the kind of strict sort of policy on the sort of when deciding upon investments. Could you also relate it to acquisitions? Is there some sort of a strict policy, or how would you look at acquisitions in this context?
I think it's very simple. We have set return on capital employed targets. Whatever we do must be creating additional value through that. It's a very simple way to measure it. I think we are very positive over the years now that we have had these targets, also internally clearly communicated. It's also going through in the organization. People clearly understand that those are the drivers when it comes to bringing us proposal capital and expenditure acquisitions. It's very straightforward and simple in that sense.
Yeah, makes sense. Is there some sort of timeframe that you are attaching to this sort of, say, there is an investment which might be creating EBIT loss in the first year, and then sort of what would be kind of typical time when you measure whether the investment has met with the sort of criteria?
Yeah, absolutely. In many cases, when you start up a major project, it's part of the calculation that you are going to make losses first couple of years in some cases. Sometimes it goes fast, it depends case by case. We take that into account, and in some cases, we allow two to three years before it starts to deliver. Or even longer if there is a bigger, let's say, amount invested in infrastructure as well. You need to take into account and remember the long-term value and long-term uses of the assets. We are in capital-intensive business, and the investments are up and running for 50-100 years, not just five years. That's something to be taken into account, absolutely.
Sure. Okay. Thank you.
Okay. Yes, Mikko
Thanks. Mikko Ervasti, SEB. Regarding the financial targets traffic lights, now they're mostly on green. Why didn't you want to go back to yellow and red again today by lifting them?
Of course, when we set the targets four years ago, we were on red and yellow with most of them, and we already then said that they are ambitious, and now we are delivering. Of course, it's something to be considered, but you have to remember, it's just very recently that we have been starting to meet and exceed the targets. We need to take that into account and take a longer-term view on this. I just want to remind that we have changed some of the targets. A year ago, we increased the target for Wood Products from 18%-20%. When it comes to our debt ratios, we also did some changes this summer. It is a living document, and we do a bit see where we are, reflect how we see the future also going forward.
Okay, Markku.
Thank you. You show quite a big value gap between the market value of the Bergvik asset and the IFRS value. Why do you think that is? What do you think is the potential for you to close that value gap? Which you think is the value that a shareholder should care about?
Yeah. It's a good question, and I was expecting to get that when showing that table. Of course, you have to remember, first of all, that the external data is often gathered on smaller size deals compared to fair valuation as we are doing for the whole asset base that we have in Bergvik Skog, as an example, or elsewhere. Quite often, if you look at the actual land prices, they have been higher than based on the valuation alone. When it comes then to how to creating more value out of the assets, I think for in the case of Bergvik Skog, what we believe is that we can revisit the harvesting plans, be more efficient in harvesting. Also focus more and improve the forest management to get more growth out of the forest.
Doing it that way and also separating that more clearly in our figures and explain to you what we are doing, how we are creating the value from the forest base. I think you can also better understand and capture the opportunity there.
Okay, then we have Lars here in the front.
Just coming back to Bergvik. Changing the structure of the ownership from being an equity investment to consolidated, how will that shape or change the way you operate that asset? Just the point you just mentioned, how to change your harvesting schedules, et cetera, will that really change anything or it's just going to be fully on your balance sheet, or how do you see that?
Well, of course, the asset will be fully in the balance sheet. What is changing is that as we have the direct ownership, it is fully in our controller hands how we are running the forestry operations there when it comes to, as I mentioned, a good example is harvesting opportunities. We think that we can increase the harvesting and that way get more cash flow and improve the self-sufficiency rates as well. In longer term, of course, it is not that you should not overharvest, we can also work more on how we can increase the growth of the forest in the areas where we are harvesting or where the Bergvik Skog lands is. I think we can come more into details once we are ready with the deal.
Like Kalle said, we are working on the details, and we come out as soon as we are ready.
Just a question on, you focus on return on capital employed, of course. I think you said when you announced the deal, that will be reduced by about 100 basis points. How should investors think about that versus a very high return on operating capital investment in, for example, in paperboard, where you have 20% plus?
Yes. That is, of course, the initial effect. I think it was half a percentage point. Anyway, it has a negative effect when it comes in. As I said, we believe that by running it more efficiently, we can close the gap that is coming initially. Also, I think the key and important thing here is, like I had also in one of my slides, that this is a strategic asset giving us a competitive advantage in bioeconomy. We have been all the time a true believer in the value of the forest and importance of forest ownership. I remember back, was it four years ago when we increased our ownership in Bergvik Skog. Many people said, "Are you crazy?
Why you need to own forest that you can source it?" I think already past year has shown that was our experience, that it was easier to manage the challenging harvesting conditions when it was your own land compared to harvesting done by subcontractors or ourselves on someone else land. There are operational benefits as well in owning the forest, as well as the value creation that we can create for the shareholders by owning it truly directly and managing it better and better. We believe that after the initial negative effect, it will be value creative. We wouldn't be doing it otherwise.
Okay, I think we need to conclude now, and there are more opportunities during the breakout sessions for further questions. Thank you, Seppo.
Thank you.
Before we conclude today, and we will say goodbye to our webcast audience, I want to give you some instructions for practicalities going forward here. We will after Kalle's concluding remarks here have a break for coffee, and we will start with the breakout sessions at three o'clock. Now look at the color of your badge. Because we are divided according to that to different groups. The group gray will come back to this room for day session, and the two other rooms are just opposite in the corridor, and there will be a color coding, which color is in which room. After coffee break at three o'clock, please come to these breakout session rooms, and the management will circulate from one room to another. Immediately after the breakout sessions, we will head to the top floor of this hotel for drinks.
The elevators all right, Dennis, hold your horses. The elevator is actually in the other end of the hotel, and you go to the top floor. Then it's not only going to be drinks, I must say, it's going to be about Wood City. Jari will continue with a great presentation about how it goes about and what are the future outlook. Since it's going to be a dark November night, we have lighted the building for all of us to see it in a more detailed manner. Good. I think this is hopefully clear to everyone now. Please, Kalle.
Thank you, Ulla. As a concluding remarks, I'm very happy to see that so many of you came to visit us here in Helsinki, and I feel very excited about having all five divisions presenting, showing their potential in the value creation based on a raw material that is renewable, reusable, and fossil free. I think we have demonstrated today that if we do these things right going forward, there is an enormous potential for Stora Enso. It's also based very much on our innovation and digitalization agenda, which means that we are changing as a company. The journey that we started a couple of years ago, we have had some traction so far, but we need to continue. This is a long-term journey. Thank you very much for coming.