Good morning, everyone, and welcome to Stora Enso Capital Markets Day here in London. All of you here in this room and also our guests over the web. So this event is going to be webcasted. And when we go to the questions, please wait for mic before asking your question. This year, we are going to talk about accelerating our renewable future.
My colleagues will start to speak more about that, but I will also touch about our road to success in bioeconomy. How we see bioeconomy is that we are addressing it with attractive end use segments and when defining them, then we will start introducing new products services to those segments. When we do this, then we will be able to provide sustainable profitable growth and also have a generating generate superior return on capital employed. And we will talk about this through packaging divisions and our biomaterials. And also, our CEO and CFO give their presentations about the strategy financials.
But what I want to remind you of that outside in the hallway, we have our traditional demo stations. Please have a look at them during the lunch and coffee break and also during the drinks in the end of this event. What we are demonstrating there this year is our renewable packaging, which is basically the packaging materials that enables us to make the superior liquid boards through with MSC pulp. Then we have the intelligent packaging that will enable us to do plant protection and also the logistics surveillance. And then from Packaging Solutions, we will hear about e tails, about customer experience in retail.
And then we think it's Stora Enso that green is the new black, and we are talking about here carbon fibers. And the latest one is our biocomposites, which you have just outside in the hallway. But before we start today's agenda, we are going back to our important KPI, namely safety. Just to be mindful that if event of fire, you need to vacate this room, there's a one exit behind me and two in the back of this room. And I will now hand it over to our CEO, Kalle Sundstrom.
Please, Kalle.
Good morning, and very welcome. And I think it's very appropriate that we are being in this guild hall totally made of wood. Today, we're going to tell you about our strategy, how we are delivering the strategy, and I will not do that myself. With me today, I will have Annika Brezki, Head of Consumer Board I will have Giles, Head of Packaging Solutions Markus Manstrom, Head of Biomaterials and our CFO, Seppo Parvie, who will talk about the different parts of our strategy. We are here because we believe there is a great potential to create a lot of value in what we call the bioeconomy.
There are seven megatrends today that are affecting all citizens of this planet. And one of the most important is the global warming. It's about digitalization. It's about urbanization. It's about the growing population.
It's about eco awareness. Consumers today don't only think about what they buy, but under what circumstances that services or product has been produced. The challenge here is to make sure that we, as a company, will be in the leader seats when it comes to replace nonrenewable material in the future with renewable material. We are very fortunate to sit on a raw material that we have been working with for hundreds of years that is renewable, reusable and fossil free. And the vision that we are having is that everything that is today made out of fossil based materials tomorrow can be made from fiber, wood fiber.
I will briefly touch on our road to success. Our aim is to deliver and introducing new products and services faster than anybody of our competitors. Why? If we are faster, we create what is called a time monopoly. We spend more time with the customers.
It's about addressing the very attractive end user segments. That's why in many of the presentations today, you will see what we call the relative market share. The higher relative market share you have or can acquire in a segment, the higher your profitability will be. It will be about delivering a sustainable profitable growth, and that's about sustainability in all dimensions. That will generate a superior return on capital employed.
Now I will talk about the strategy on an overall level, and then you will see the strategy from each and every division. It remains the same. It's about customer insights. It's about innovation. It's about structured processes.
Why are structured processes important? In the digital world, the marginal cost is zero. So the more structured process you have, the easier and the faster you can digitalize. And obviously, last but not least, it's about motivated employees. This is what we're going to do in order to create profitable growth, sustainable profitable growth.
Now I will talk a bit about how we're going to do that. If you turn the coin around, you will see here, it's about continue to invest in attractive segments. And on an amount that we went out with yesterday, where we actually told you that the plan for next year is CHF $550,000,000 to CHF 600,000,000. And that is basically our depreciation adjusted for the depletion costs in our plantations. It's about using that in areas based on return on capital employed that we also changed a bit yesterday when we increased the hurdle rate for Wood Products to 20%.
So now we have three divisions with 20% hurdle rate, one division with fifteen percent and one division focusing on cash generation over sales, which is the paper division. That will and have proven so far has been delivering a strong balance sheet. We now have a balance sheet and a net debt to EBITDA below two. And we are also focusing with the profitable growth at the centerpiece of the presentation for us about getting dividends on a competitive level, which is 50% over in cycle. We have increased dividend two years in a row, first year with 10%, second year with 12%.
We are well positioned from growth. We have four divisions that are growing and are sitting in very interesting market. We have a fifth division, Paper, which I will cover today since we only have three business leaders here today, and I will also cover the Wood Products later on in my presentation. And that is the business managed for cash. The important part is where we have our strength within each of these divisions.
That's about the relative market share. We are number one in liquid in the world. We are number one in Europe for Foodservice Board, NCUK. We are number two in Europe when it comes to folding boxboard with a growing position in China, which Annika will cover later on. Packaging Solutions, we are the number six.
But if you open up the box within Packaging Solutions, which Gilles will do later on, you will see we have very attractive market segments. Biomaterials, Markus will present. We are the number one in Europe when it comes to fluff, and we have the widest portfolio. Wood Products, number one in Europe, fourth in the world. Strong position in classic sawn, which is the base for everything, but very strong positions in the growing building segments of mechanical wood and mechanical components.
And then we are the second biggest paper producer in Europe. So how have we performed? We have been growing the four growth divisions with over 4% over the couple of years, but the growth have accelerated in recent years. And when we delivered the third quarter result, we actually had the third consecutive quarter with growth on the top line because now we are growing faster than the decline in paper. We are taking the next step, and I know we have invested a lot historically.
Some years ago, we invested in an asset transformation between EUR 800,000,000 and EUR 1,000,000,000 per year. We are gradually taking that down. And yesterday, we announced that we are taking it down even another step to be more in line with what we presented to you in the CMD in 2015. The focus of the company going forward is a lot more about innovation and customer focus. And you will see evidence today in the presentations by my colleagues today where we are focusing.
It's everything from innovation centers. You will see in the demonstration outside where we have coming to partnership with start ups or within intelligent packaging based on semiconductors. We have launched a number of products recently, and I will also share with you where we are putting the focus of our innovation. We are focusing on our innovation in basically three areas. It is in biochemicals.
It's in areas where we can replace a foci based material, and it's in areas where you can get a new experience for the customers. If you remember, at CMD twenty fifteen, we've demonstrated intelligent packaging for the first time. I thought many of you were very skeptical. I can tell you, today, we have three commercial customers we are ramping up. And basically, the focus on the intelligent packaging area is in three areas: brand protection, supply chain, track and trace and giving the possibility for a new customer experience for consumer.
The other one that I would like to highlight is actually that we have already lightweighted boards in various kinds that we have been delivered since 2015 when we introduced the first MFC. So is this paying off? Yes, it is. Already today, 5% of our sales and is growing is coming from products that are totally new. And the good part with this is that they are having higher margins than the average of the existing products.
This is something that we've been working hard on, and we are driving even harder because the faster you renovate your product portfolio, the better your contact with your customer are as long as you develop together with your customers, which you will see evidence on later on today in today's presentation with your customer. Before going into a short presentation about the paper strategy, I would like just to highlight something regarding our successful startup of the Beihai Mill. This is a long story, seventeen years. We acquired leases in 02/2002. In 2014, in November, we started the piling.
Eighteen months later, we got the mill up and running on time, on budget. And now we're actually focusing on the next phase, which is getting EBITDA breakeven in the 2017, one quarter earlier than expected. Annika will cover some of the success factors. The other part I want to point out is that we also made a decision earlier this year that we will not build the chemical pulp mill in Beihai. We have a pulp mill there for CTMP, but the chemical pulp mill, we will not build.
And we are in the process in negotiations with the Chinese authorities regarding that. So paper, we are a clear number two when it comes to size of the paper business. We are convinced that paper will never disappear, but we're also convinced that it will continue to decline over the coming years. We are a supplier with a full portfolio covering all the grades necessary to be a serious player in this area. And we continue to deliver good cash flow.
We had a hiccup in the third quarter because of some problems in production, plus that we've been driving down the working capital to a very low level during the year ending in the second quarter. The last twelve months, as Seppo will show later on, we still generated 7% of cash flow over sales, which is the target. And we are seeing this as a temporary headwind. This is all about efficiency and cost reduction. And we have probably one of the best teams in paper there is in the industry, and I'm confident that they will do that.
So the strategy, if we go to Boston Matrix, which we have adjusted because this is not really growth business, is actually to grow market share in Book Paper, Uncoated Magazine and Improved News. This is a segment of the market very much linked to retail, which is fairly stable. There, we want to grow market share. In the area of office paper and coated fine, we have selected growth in certain areas where we have strength. When it comes to newsprint, it's maintained, where the decline is this strongly.
That's about 15% of sales. Coated magazine, paper and special paper, we are trying to leave as much as we can. This is new news. This is the same strategy we've had for the last four years, and we are delivering on. I will now switch into Wood Products.
There, the situation is slightly bigger. When I started to work in Storenz in 2012, my predecessor told me sawmilling is seven good months and seven bad years. I think Jari Somin and his team has proven this is one of the absolutely most profitable businesses that we have in Storenza when it comes to return on capital employed. And why is that? We are the number one in Europe.
We're number four in the world. We have a very big scale advantages in Classic so on, which is the basis. Strong positions in the growing building industry for wood and mechanical elements, and that's the reason why we have increased the return rate from them from the 18% to 20%. We are having a premium offering, but it's supported by very advanced digital tools. Services combined with this and a services concept, which is from one to many, driving scale in the service business and then supported by digital tool.
My favorite here is the CLT360. It's a very simple tool. But when you get the frames into a building site, they are very interesting to understand that you really have a complete delivery. So by just walking by the wooden elements, they click up on your phone on the drawing, and you can see you have a complete delivery. This is going to be a very important competitive advantage when you're building in city centers where you might have a very limited time to be able to deliver your goods.
And building in wood is on its rise. This is just a few example of project we have participated in. My favorite is Barangaroo International House. This is the first six store office building in Australia built in wood. 2,000 cubes of CLT from Storenso.
This all was put together with a crew, including the crane crew of 10 to 15 people, and they have the world record of 30 modules a day and no injuries built in record time. Looking forward, where are we growing, where are we maintaining and where are we going to reduce from a traditional Boston matrix? Growth is in CLT, biocomposites, which you can see outside, where we start real commercial deliveries in the 2018 industrial components and then in certain parts, what we call classic planed, which is a small value added product of big volumes using our strength in classic sawn. Selective growth is construction beams and LVL, where we are ramping up in Warkaus. Classic zone is to maintain because that's the basic.
That's where you run most of your business. And then as you probably understood, we are leaving the trading the wholesale business and trading, we're trying to reduce. And the November 1, we announced that we are leaving Pomerke to a better owner than ourselves. Given the strength of our balance sheet compared to historical performance in net debt to EBITDA, we now can talk of selective M and A because now we have a balance sheet that is possible to do that. But I would like to point out M and A will be very selective.
It's going to be basically in three categories. It's about strengthening our relative market share in areas where we see attractive. It's about strengthening existing synergies or getting new products and technologies supporting our strategy to grow in the bioeconomy. Another important part is dividend. So based on our sustainable profitable growth, we will generate dividends since the policy is to deliver 50% of net profit over a cycle in dividend, and we have, in recent years, increased dividend 1012%.
Before opening up for a short Q and A, I would just want to repeat the main messages. Introducing new products and services faster than anybody else to be able to drive time monopoly and advantage in the market, making sure we are addressing the attractive end user segment in order to build a strong relative market share. That will drive a sustainable profitable growth based on our capital allocation that Seppo will later talk about on based on our hurdle rates within the different divisions.
Thank you, Carlos. And we will now open the Q and A session. And please wait for Mike before you start asking. So Lars has here the first question.
Lars Kjellberg, Credit Suisse. I think what you just said about and reiterated, you've got to be in the forefront of innovation to drive your business. The key question there is, of course, there's always a risk when you enter into new businesses. And how do you weigh the pros and cons of being the innovator as opposed to the fast follower? And before you answer that, I also want to just think a bit about when you talk about growth, it's mostly top line driven growth.
Do you see that as a specific target? Or can you sort of shift focus towards more margin expansion and profit growth as opposed to top line? Why is top line so important?
So to answer that question first, the theme is sustainable, profitable growth because growth, we don't deliver you a bottom line is not worth that much. That's also the reason why we are focused on the relative market share because when you are growing in an area where you have a strong relative market share, you will generate superior profitability because you have scale in that subsegment. Second question, obviously, we don't want to be in the bleeding edge. We want to be in the leading edge. And how do you get there?
You need, as you will hear from my colleagues here later on, is all about focusing on customer insight and working with the customers. If you do an innovation matrix and you start up in the hardest corner, which is new product, new customer, failure rate in all businesses is about eighty percent. You need to have some of those, but most has to be new product with existing customers. And we have a huge opportunity, and I think we proved that. When we started with MFC, we started in biomaterials.
But the first one out is somebody having a customer contact, which is Consumer Board. That's how we play it within us. So a lot of the new materials might come out from Marcus area, but they might go in an end use that is close to some of our business. So when we choose to go for fennel replacement in biomaterials, we choose glue. Why?
We are probably one of the biggest users of glue. And in the LVL, we have part of the contract with the glue manufacturer is to use glue based on fennel. No, on lignin, not fennel. So that's how we try to do it, to minimize that. Obviously, that is a big risk.
I think next one was Alex out there, and then I think have Hari and Linus.
Thank you. Alexander Berglund from Merrill Lynch. I have a question on your divisional targets. So you raised wood products today. Q3, you had already surpassed 20%.
If you look at Packaging Solutions, also there in Q3, you were above 20%. How come you didn't increase that target as well? I mean when you put these targets first time, it's very ambitious and you've reached them in most cases. Does that mean that this is more the stable rate for Packaging Solutions? Or are there further potential to increase profitability there?
And then also secondly, on biomaterials, you almost reached the 15%, and we know that the pulp markets are currently very, very good. What do you need to do to get to that 15%? And is that possible to get without having this strong fundamentals in the pulp market that we have right now?
That was a lot of questions. So the first question is, if you look upon what where we were delivering a year ago on return on capital employed in Packaging Solutions, now we came to one quarter above 20. We need to make sure it's going to be stable because prices has been extremely well. So if we can maintain 20 for a number of quarters going forward, that will be a very good question. And if you look upon wood products, they have been above 20, but also been below 20 for a number of quarters.
And Seppo will give you the numbers for full year. So we don't only look on a quarter. When it comes to biomaterial, yes, the pulp market is strong. That's why we are close to this 15%. But I think to get above 15%, we need to work very hard on what Mark will present later on his strategy, which is threefolded.
And we need to get in to new products and services to be able to get that more stable because otherwise, we will be dependent on a volatile pulp market, which is very good, and we love it right now.
Okay. Thank you. And I think Linus is the next one and
Thank you very much. It's Linus Lasser with SEB. You've made it increasingly clear that you've come out of the heavy CapEx phase and you're moving into more of a return focused phase and you've provided new guidance for CapEx. And on in relation to that, could you just talk a little bit about your thinking around your portfolio with your five business areas? In the past, there has been a case of capital reallocation.
That to me isn't as self evident any longer with no major CapEx projects on the horizon. Could you just talk a bit about the synergies that you see or not see between the five business areas? We've seen across other industries several examples recently of splitting of companies. Is that something that would make any sort of sense for Stora Enso?
I think we are constantly evaluating these things. And this is a company that has a very long history. I think we are doing it time by time. So first one out was a conversion of Arkaus, where we allocate it, moved it away, that was on. Second one is what we do in Hilter, which is a split site between newsprint and Biocomposite.
You will probably, over time, see more because for us, it's a competitive advantage if we can reutilize the site because building a new site today, we're talking big money. To refurbish what you call a brown type investment in important area is a lot less because you have all the infrastructure, you have all the people in place, and you have everything around the power solution and everything. So that will probably increase over time. But splitting up the company, if I'll be very clear regarding if somebody would come to me with a great offer on paper, I would have been a seller, right? But we have to remember that the raw material, you don't get in pieces.
And that is one of our strengths, and that's also the highest barrier to enter for any competitors to compete with us, is the worldwide wood supply that we have in all the markets where we have virgin fiber.
I guess Hari is the next. Please go ahead.
You. Hari Daiten, Nordea. Just interested in hearing your thoughts on how to kind of combine the future. You being a sort of big company and then a lot of these activities that you are developing, they are often done by almost like start up companies and more sort of smaller and flexible organizations. And how do you sort of combine these two business models?
And does it also imply that you might be looking into acquisitions of sort of smaller companies developing or active in these new businesses?
I think it's going forward. You, as a big company, need to realize that innovation is never happening in isolation, right? So you need to be part of an infrastructure. You will have partners. You will have investments in start ups.
You will have to train your own staff, like we're doing right now, how it is to work in a small start up. And when we have this focus area like intelligent packaging or the biocomposites or the some of the new barriers or areas in biomaterials. Drive them like small companies where we put everything together, and we make sure that they are reported either to me or to a divisional manager to make sure that, that is not the first business you kill when you have a little bit of a challenge because you learn. So I think big organizations need to learn from small, but the small also needs to learn from the big ones. Nobody has the total answer, but it don't happen in isolation.
And if you look on one of the most innovative areas in the world, Silicon Valley, It's all about how you're working in infrastructure.
Okay. I think the next question is from Robin. Go ahead. When you get the mic.
Probe is Handeberta, Carnegie. Now you decided to not build a chemical pulp mill in China, right? Could you just sort of comment on the background for that decision as sort of now half a year later, fiber demand in China is very high. And I guess we all agree that longer term, there will be scarcity of virgin fiber in China. What's the sort of background?
Is it the fact that you don't want to be a pulp producer rather sort of a board producer there, longer in pulp than you are at the moment?
But if you look upon it, as we all know, pulp producing is probably the most capital intensive, right? And it's volatile. If we put that pulp into board, you get a higher profitability and a more stable margin, right? And for us, being slightly more than 2,100,000 tonnes long, I think it was a very easy decision to have it integrated within Storenso because the pulp you're using in Beihai is coming from Veracel. So suddenly, you have an internal integration and virtualization of an integration.
And the other thing is that when we calculated this, given the wood cost in China, we could never beat the Werra cell.
Thanks.
Okay. Mikael?
There is
one here who has been trying a long time with the microphone. Yes, miss?
No, no. He's the one who
got Okay. Was talking. Sorry about it.
So it's Mick Jelios here in the Mick
You've Jelios, Kepler been very clear that regarding the paper business that if someone comes and offers cash for it, then you would sell it. But my question is more now we have seen a declining paper market for more than ten years and you've been very successful in taking out costs and capacity, etcetera. So how much more cost cutting is there to be done? There's always more. We know that, but it must be coming harder and harder.
So I have not been on a ten year journey I've been on since 2012. And I tell you, it will continue. So I think it will continue. And given digitalization potentials and a lot of other, it's an enormous potential to continue to drive down the cost.
Do you see any sort of potential of speeding up that continuation of the process?
Did you say speeding up?
Speeding up a bit.
I think everybody is doing as fast as they can. And I think maybe if you're a little bit fast in digitalization probably using more virtualization, you can get there faster. That's why we are focusing so much on digitalization as you will see throughout today's presentation.
Thank you.
Thank you. Any more questions? Okay, good. And we have another opportunity during the breakout sessions, which will come at the end of the day. So thank you, Karl.
Thank you. And I
want to invite now up on the stage Annika Breski, who is Head of our Consumer Board Division. Annika, please. Thank you.
Ladies and gentlemen, it is a true privilege to be here today and be able to share with you some of the cornerstones of Consumer Board strategy moving forward and how we contribute to the Stora Enso journey for continuous profitable growth. And I will focus my presentation on showing you how we work with our customers, innovating and commercializing new products on the market. Also, how we address the most attractive segments in our area of operation and thus leading to profitable growth with which we have consistently proven track record of delivering. And we have a solid platform for profitable growth, and we are a strong partner for our customers. Our top line is €2,500,000,000 business globally.
And the last quarter, I've been very happy to see that we have had almost 7% top line profitable growth, mainly driven by our Beihai operations. We also came very close to reaching our long term ROOC target of approximately 20% by coming to 17.7%. And this is the result of very consistent work that we do together with our customers. We innovate the products of the future based on renewable materials from our certified forest implantations. And we have 11 new products delivered since 2014, six of them I will talk about today.
Over 40 joint customer projects and more than 22 cross functional digitalization projects ongoing. And of course, all this is supported by our competence centers, which we have in our innovation center and our two R and D centers. So where are we active? What are our focus segments? Well, as you know, liquid packaging board is our core segment with over 50% of our sales.
It is for fresh applications and aseptic applications. That means food with a long shelf lifetime. And to qualify into these segments, it takes many years. Between one and a half to two years, you have to have a qualification process. And this means that the barriers of entry in this segment are relatively high.
Another segment is, of course, food applications, where we have our brown qualities. I will talk a little bit more about that. Challenging white line chip applications where we see that there are higher demands on food safety. We also deliver food service board to cup stock and food industry. And in the high end luxury segments, we have solid bleached board, also folding box board for cosmetics, pharmaceuticals, wines and spirits, more or less everything that you can find in a tax free shop.
And all these segments are premium and it is capital intensive in order to go into this. Thus, there are pretty high barriers of entry. And one of the cornerstones why we are able to drive profitable growth is having strategic partnerships along the whole value chain. We work with retailers, with brand owners and our own customers, having deep consumer insight what is driving the package of the future. And the consumers of today are really empowered.
They have more information than ever on how to do their purchasing. And these are just five of the trends that we see affect the development of packaging. A lot of the products today, consumers wants to know where they come from, how they have been produced, is the can we track and trace them along the And this, of course, is driving intelligent packaging in such solutions to be able to determine the origin of the products that consumers are buying. Another driver is personalization.
50% of the consumers are prepared to pay more for products that are specifically targeted to them and feel unique. And this means that processes such as digital print are also growing and driving packaging development. I will focus now a little bit more on the increasing concern that many of us have about how packaging is affecting the future of our planet. And one third of food today that is produced is wasted along the supply chain. And of course, packages has a huge role to play here in order to make sure that we can reduce the CO2 emissions from that.
And food waste is the third highest CO2 emitter of The US and China, something that you probably didn't know. So this is an area where we can contribute a lot. And the industry is really taking very ambitious environmental targets that are not far in the future. They are publicly announced. They can be followed up, and it is close.
It's twenty twenty targets with targets of replacing, fossil based material with bio based packaging, track and trace of sustainably sourced materials, and also CO2 emissions. And here you can see some of the examples that our own customers and the brand owners are working with and of course affecting how we develop our products. And our partnerships, they lead to commercialization, which is really important. It is not something that is far in the future. 3% of our sales come from new products, a target which will increase when we introduce the Beihai business into the market.
And we are very proud here to have some of the products that you can touch and feel actually if you are out in our demonstrators. This is one example. The last from two months ago, the ECO line of a big dairy company in Sweden, where they have chosen together with us and the converter to develop a pack, which is lightweighting, I. E, less fibers used. It is bio barriers.
The cap here is bio based and contributing to 25% less CO2 emissions. So this you can find everywhere in the stores in in The Nordics. Another example is this one fiber cup where the plastic has been replaced by board. It is light coated, and it holds products like yogurt and so on. The aluminum foil has been replaced, and this reduces the emissions by of CO2 by 50%.
It's fully recyclable. So our strategy works. Now the packaging market as such is large and it is continued growing driven by economic growth. The biggest part of course is still within fossil based materials. It is an US850 billion dollars business.
And the fossil based part of it is where we see the opportunities to take market share. So for us, it's a great challenge to take on that area. And of course, if we look at our own segments, our growth is 2.6% in the virgin fiber based grades. The biggest growth happening, of course, in China and Southeast Asia, which is projected by 2020 to have almost the same size as North America and Europe. And our strategy is to maintain a strong position in Europe, to grow in China and Southeast Asia and to selectively grow on other markets.
And our portfolio covers all the virgin based grades. Now our strong position with our customers mean that with the top ones that we have, we have more than 50% of our sales and 60% of our EBITDA contributing from them. And as Kalle pointed out, we have the leading position in Europe for our focus segments. We are number two for FBB and globally for liquid packaging board. And our relative market shares are high.
And financially, this leads, of course, to profitable growth. As I said, quarter three, we had the growth of 7%. Over the years, we have been growing with the market between 23%. Our ROOC, excluding Beihai, is 40%. So this is a consistent delivery from Consumer Board.
So where do we see the future now? Well, our growth opportunities are to continue our focus growth within liquid packaging board, folding boxboard and the brown grades, CUK grades. And for Liquid Packaging Board, we will maintain a strong position in Europe and develop and grow in China and Southeast Asia. For FBB, which has the highest growth of approximately four percent, we will grow in selected premium marketplaces. And for the brown grades, where we see that we can take market share from white line chip, we will grow selectively globally.
And of course, the cornerstone to be able to do that is to consistently develop cost efficient mills to be good at operational excellence. And we have strong integrated mills in The Nordics. We have specialized mills, also two specialized mills in Sweden and Finland, and the current asset base can be further developed. Moving on to China now. I know you're all interested in Beihai, so I'll tell you a little bit about that.
The consumption in China is like the level that U. S. Had in the 1920s. The population in China is more than five times The U. S.
Population. So there is still a lot of potential to drive private consumption up. And also now we can see that the affluent and upper middle class has surpassed the amount of the total population, which is good, of course. There are over 60 cities of more than 1,000,000 people in China, and that is also driving more packaged goods being delivered there. And with Beihai, our focus is to capture the premium positions in three areas.
It's liquid packaging board, the brown gray CUK, which you see is growing, and also we have seen that we have good opportunities to get premium position with folding box board. And for the premium grades, we have had consistently high imports. And we want to be the local producer in China challenging the imports of the premium grades in the country. As you many of you know, there has been a heavy expansion on capacity in folding boxboard in China. But we in Beihai, as Kalle pointed out, have Veracel chemical pulp mill, which we control.
We have our own CTMP plant in China with our own plantations, which means that we have control of the fiber development and the pulp development. And that gives us the opportunity to adjust our recipes and make sure that we can reach a premium FPB position. The low grades of FPB, as you can see here, the local producers are exported mostly to Southeast Asia region. And now I know that many of you might not have been to Beihai, so I was thinking let's bring Beihai to you. As Keller showed you previously, this has been a process going on for many years now, and we are not finished with this.
It's going to be a continuous work moving forward. We can see that the successful the startup of Beihai has been very successful so far. It's having the highest operational rates in the division, and we are targeting EBITDA breakeven this quarter, one quarter before planned. We already have commercialized deliveries of liquid packaging board already after one point five years of operations. So we are well ahead of our qualification plan in that segment.
Our FPB quality is already on par on the higher medium grades of folding boxboard. And the coming year, we will focus on introducing new qualities in the premium segment. The board machine capacity is 450,000 tonnes. Already now, we are running at a 470,000 ton running rate. And our focus for the coming year is to stabilize on that level, deliver on the new qualities that we have and getting the premium market position, and after that ramping up to 530,000 tons because we see that there is excess capacity to do that without making major investments.
I think this is a really strong proof point of that the high mill is a state of the art operations. And just to give you one example of what I'm talking about in the folding boxboard segment, I want to show you a little bit one of the areas where we've been looking at, the health care segment, driven by an increasingly older population moving from traditional Chinese medicine to Western type of pharmaceuticals, where our position today is in the higher medium grade compared to local producers and where we see that there is a healthy growth of between 610% in the premium segment where we want to take a position together with imported grades. So where are the where is the future growth now from other areas outside of our core areas is within microfibrillated cellulose, bio based, barriers based of MFC and biocomposites. And if you don't know what MFC is, this is how it might look like, 97% water and 3% to 4% fiber. And you can have a look at it when you go out in the demonstrator and learn a little bit more about it.
So where can MFC be used? Well, it is as a strength enhancement in already existing products like our board. We already today deliver seven fifty million packs with MFC board, which means that the product is 3% lighter than competition, still maintaining strength. For new barrier solutions, which I will come back to. And right now, we have made investments in three of our Nordic mills and we are scaling up the production of MFC.
And for the coming years, it is the new barriers and film solutions that we're going to work with. And what can bio barriers be? Well, it is like in the food industry as greaseproof barriers, bio based and also in biocomposites where we collaborate with startups and accelerators to have biodegradable packaging, for instance, like here in the cosmetics industry. You can also have a look at that outside if you want. And of course, we do have a vision of a 100% renewable liquid packaging pack.
And today, these are high barrier constructions where you see that you have fossil based cap enclosure. There are several layers of PE for different types of qualities and properties. There is an aluminum foil in such a construction for long shelf life and oxygen barrier and also our board, of course. Now for the future, this is possible to have bio based capsid enclosures to replace the PE barriers with MSC based ones. We are targeting taking out one of the aluminum foil barrier, which makes the recycling processes much more difficult and replacing that with an MSC one.
It is also possible to have transparent MFC that could, for instance, work as a small window to see the product inside. Intelligent packaging to be able to sense the temperature or how the product has been through the supply chain. And of course, there are a lot of benefits of doing that, mostly reducing CO2 emissions and the pack can be much more competitive on the market. So to sum everything up with Consumer Board, we do have a solid platform for profitable growth. We are the global leaders in our targeted segments.
We have long term partnering with our customers and collaborating across the value chain. Our innovations are customer driven and commercialized. Our assets are strong and well positioned, and we can develop them further. And we have a state of the art mill in Beihai, where we will focus on capturing the future growth opportunities in China. And last but not least, innovations that based on renewable materials.
And I truly believe in our purpose that we have in Storenza to replace the fossil based materials with renewable ones, not only because it's good for the planet, but it is good business. And if we could just shift 1% from plastics to board, that would mean €6,000,000,000 more renewable business for us. And for me and my team in Consumer Board, this is really a challenge that we want to take. Thank you.
Thank you, Annika. And now we have floor open to questions to Annika. There is Mick Repel. Please go ahead.
You. Mick Repel, Handelsbanken. Two questions. First of all, on the Chinese liquid packaging market, how big is the market and what's your current market share there?
As I said, we are ramping up and commercializing. So for the coming year, we are targeting about 50,000 tonnes and having a market share long term of half the capacity of Beihai mill.
Okay. And then in terms of Beihai and the ROCE target you have there, if I do the calculations around that, I end up with quite a high EBIT margin for Beihai to get to ROCE of 13%, probably north of 30% or something, which is much higher than what you're currently generating in the Consumer Board division today or also before the Beihai construction work started. Could you elaborate a bit around that? How do you get to such a high much higher margins in Bayhide than what you are currently on an underlying basis doing in your Consumer Board division?
Yes. As I said, our focus now is to deliver on the targets that we have close, which is to deliver an EBITDA breakeven for Q4 and also to establish our market position in China as a premium supplier. And perhaps, Kalle, you want to?
So when it comes to that, we have said when we did investment over a longer period, when this is investment is actually at the state, we believe we will get a return on 13% on that investment. And that's going in that way. It will not happen tomorrow, but over time, we will get there, and we are convinced about it because it's going to come a lot of new products in there and the margins are attractive.
Thank you.
Robin, go ahead.
Robin, Santorata Carnegie. If I just continue from Michael's question about the return in Beihai. Now market growth is good. You now talk about 530,000 as a run rate capacity in a couple of years. Now looking further, what is the sort of long term plan in Beihai?
I assume you have some kind of plans for a new board machine there. It at least looked like that when I visited this site. When could an additional board machine be built? What kind of approvals would you need? Could you talk and what kind of investment would that be?
I assume much, much smaller than the current or the CHF1 billion almost investment so far. So could you talk about Beihai long term a bit?
Well, I think everyone that has been involved in such big capital intensive projects know that we need to take things step by step and proving our ability to generate profitable growth. And this is what we will focus on the coming years before we will start thinking about the next step in Beihai.
Maybe I should tell. We have a lot of people with gray hair within Storenso. Building this, ramping it up, we are not thinking about that. But once you start to plan for land, you always want to have a bigger land, possible expansions in the future. That's how we built all the mills, Imatra, Sunnila, Ulo.
You have to think long term on the space. But right now, we just want this up and getting to the targeted levels and develop the market. So we have no plans. But we have the land if we want to do something in the future, but we have no plans.
Can I just continue and I call it
this is a tough question,
but can you reach 13% with that one board
mill? We believe that.
Okay. And then in terms of the MFC products, what are the costs for MFC barrier board at the moment or in one year's time? So just so we understand sort of the difference between this new biodegradable board and say?
I think it's the MFC can be used in different applications. In the board, it's used as a strength enhancement and source reduction, which means that we reduce the amount of fibers in the board while maintaining the strength. This gives a cost advantage for our customers. So it is not an additional cost. It is actually more efficient resource use for us.
In the barrier side, when you use MFC, the target is of course to have cost competitive barriers that can compete with PE based ones, because otherwise you will not be able to commercialize. And that is what we are driving.
Okay, I think Hari had a question there.
Well, handily enough, just a continuation to that. On the I mean, sort of said that you had a sort of vision of replacing and making liquid packaging board 100% sort of recyclable and all But if you think about foodservice board and products where there is no aluminum, but we are just dealing with substitution of PE. I mean where are you in that? And have you looked into other materials than sort of MFC to look at venturing in that sort of a part of the market in foodservice board?
Yes, all these MFC barriers can be applied to different types of applications also in the foodservice market. And it depends very much what type of barrier you need and it is varying between different applications and that's why it's so important to have customer driven development project so that we develop the right type of barrier for the right type of application. So that is how we are driving the commercialization. Existing customer base adapting to their needs and making sure that we have cost efficient solutions that can compete with fossil based ones.
Sure. But in practice, basically, the price differential is still fairly high. So at the moment, it's not a big volume, I gather.
No. It is as I said, it is a developing part of our business and the target is to get there. So we are exploring different areas of applications. And as I said, some of them are commercialized already and some of them will take longer times to commercialize. There is a demand in the market.
It's our job to make it cost efficient.
Thank you.
Thank you. Okay. Thank you, Annika. We will now move on. And the next presenter is Hillen Van Nieuwenhoisen, and he's going to talk to us about Packaging Solutions.
So good morning still, good afternoon, I think. I'd like to take you through how Packaging Solutions is contributing to the success of Stora Enzo, and that's basically by delivering on profitable growth. So our we follow basically the same road to success, which is first of all looking at and introducing new interesting products and services and do that as fast as possible. Second one is to focus on the right markets where better returns are possible. This all will lead to profitable growth and finally to superior return on capital employed.
So what is roughly the profile of Packaging Solutions? Sales, a bit over CHF 1,000,000,000 and growing very rapidly. We're now closer to CHF 1,300,000,000.0 because, for example, in quarter three, we grew 23% year on year, which is well above the three percent for the industry. We have a lot of people supporting our customers in design and innovation centers. And we have three containerboard mills, two in Finland and one in Poland, from which we can sell virgin containerboard as well as recycled containerboard with good positions.
And we have a strong corrugated footprint focused on Northern And Eastern Europe, Eastern Europe where the high market growth is. And we are in China, mainly with consumer packaging. We have a very wide customer base because our markets are fragmented, more than 2,000 customers and many of them being leading brand owners, both local and global as well as leading global industrial companies. Of course, many innovations, and I'm going to take you through some of them later. Then we had strong growth and also strong performance.
Now to take you to our strategy, basically three core elements. The first one is to focus on the right strong attractive markets. And this industry is very big. Just the corrugated box industry, that industry has a global market size of roughly EUR160 billion. Containerboard is about EUR80 billion globally.
So these are actually the largest pieces of business in the paper and board industry. It's very important to focus on what is truly attractive. That's the first thing. The second one is to launch innovation, new innovations, products and services fast and really creating value for customers because you truly need to understand where the value is to create a superior return. And this industry will always remain cost competitive.
So it is very important to drive operational excellence in operations, in sourcing and supply chain. Now we have a vision of digitalizing as much as we can, both in the customer interface as well as our internal operations, smart factories as well as our supply chain and as well as our back offices because this will lead to superior customer satisfaction and this will lead to very strong operational excellence in everything that we do. So what is this doing in terms of our financial performance? Well, I can tell you the strategy is working because we showed in quarter three record sales, record profit and record return on capital employed. Record capital employed of 22.4%, which is clearly a leading industry return.
Now how is that possible? That's possible because we are driving growth. We managed to grow, KGR growth from beginning 2015, 18%. And we've managed to drive customer mix improvements as well as price increases, driving operational excellence all the time. We've turned around China, both in terms of operational improvements as well as strong growth.
And Warkaus, the start up which in the conversion was basically a drag on results last year, it is really delivering now strongly. Actually, Barkhouse is the conversion from fine paper mill to a kraftliner mill is actually delivering better than promised. In quarter three, we reached an over 15% EBITDA run rate. So that was what we promised to you as investors. And that this was a major step in our strategic transformation as a company, basically taking ailing paper assets, but in declining paper market and converting it to a growing kraftliner market.
It's 10,000,000 investment, one of our important strategic investments. Now there are several factors that are behind this strong performance. First of all, it's a completely integrated mill. It's an integrates with pulp mill with access to competitive fiber. Also, we have on the same side, we have wood products with the classic sawmill and an LVL mill, where we have strong synergies.
The pulp mill is now already exceeding its design capacity. And actually, the pulp mill had to convert from hardwood to softwood. So it's not a simple straightforward thing. The board machine is very close capacity. We have been increasing prices, but even more importantly, we have found the right and much best customer mix, the more interesting customers, all helped and aided by our global sales reach.
So how do I look at our containerboard markets, containerboard markets in general? Well, overall, the megatrends are driving growth in containerboard. But around virgin containerboard, there are particular things that I believe make that market much more attractive than recycled containerboard for the coming years. So what are these distinct features about virgin containerboard? Well, the price of old corrugated cases, we see as structurally being strong and actually slightly increasing, certainly not declining.
Apart from the short term China related import hiccups. OCC is becoming more scarce and the quality is going down. And that is because the recycled containerboard industry has been growing much faster than the addition of new virgin fiber. So it's being recirculated more. Moreover, there are very high barriers to entry in this area because a new pulp mill cost a huge amount of money, like a Varkaus, if we would have had to build it new, it would have been close to €1,000,000,000 investment.
And very few companies have the access to the virgin fiber. Also, there's a food safety issue with recycled containerboard, which is a huge advantage for virgin. So right now, in the European Union, there are actually discussions on tightening the legislation related to mineral oil migration. We think something will happen in terms of tightening legislation, again, driving demand for virgin fiber. On the recycled side, there is a lot of capacity being added.
The market is growing, about 500,000 tonne in Europe on a total market of about 30,000,000 tonnes, 5,000,000 tonne is about is growing per annum, but 2,000,000 tonnes of capacity is coming into the market end of this year, next year. So that is a huge amount. That's about several years of growth. So therefore, we decided not to invest in Austro Lanka expansion, not a good idea for the coming years. On the corrugated packaging market side, we have a footprint in Nordics and in Eastern Europe.
We have very strong relative market share positions where we're leading strong leading positions. And in Eastern Europe, the market growth is very, very high. We're talking about 5% per annum, 4.5%, 5% actually in Poland, for example. Also Russia growing very, very strongly. And in Russia, we're in the Central region, which is where most of the market is.
In China, we're all on the East Coast. This is mainly consumer packaging, selling basically to a lot of what we call rigid boxes to the high end of the packaging market. Also there, we have very good position with very strong leading international brand owners. So what have we been doing and what are we intending to do? So we have delivered a lot of things since 2015.
We have announced various new activities that are in the process of being executed and we have a clear roadmap for the future. So since 2015, we started up Warkash. We did the innovation center in Helsinki. We introduced new products there and we've also been divesting and closing less profitable, less interesting activities. Then several activities have been announced.
That's the Hengla Fluting Mill upgrade and capacity expansion. We are consolidating plants in Corrugated Finland, building a world class facility in Lati Mill. Then in Poland, expansions in corrugated boxes. In Sweden, investing in new capacity. And we just announced in the Q3 release a China capacity expansion because we're growing there so fast.
And we've been launching various innovations, I will come back on that, like the EcoFish box and e commerce. So our road map towards the future. You will not be surprised with after my comments on virgin containerboard, we have a clear focus on virgin containerboard going forward because we see it as the most attractive right now. Then a continued growth in what we see as interesting packaging markets and a clear focus on e commerce because that is a segment which is growing and developing very fast with only few relatively good solutions yet and a continued drive on digitalization because it will improve and strengthen our business. So we don't want to be just anybody in this industry.
We are differentiating. That's the only way to drive superior returns and growth. First of all, in containerboard, customer insights, because that's what matters, truly understanding the customer. That means that we can also sell our superior products, which we have. We have high performance products at value.
This industry is again about cost competitiveness, so a relentless execution and drive to get the maximum amount of our machines and a drive for innovation. I will come back to you later with some specific examples. In Corrugated Packaging, similarly strong focus on what is the customer driving, what are the customer insights. And design will always stay important in this business, but we want to take it a step further. It's not just about design.
It's about beyond design. And then this is something that I think is new in this industry. We are managing to sell, charge and let customers pay for services. I don't have a complete insight, of course, in our competitors, but I believe that we are pretty unique in what we're doing and started doing now. And innovation, this is again launching new products all the time.
So what do I mean by value selling? Well, I give you two examples. One example is about selling containerboard in Central America to a company making corrugated boxes. We went in there with our premium products, with our technical service. And first of all, we managed to redesign their boxes, lightweighting them by 18% and at the same time, increasing the output on the key corrugating machine by 75%.
Now you can imagine what that would do to the profitability of that particular customer and how loyal it is making them and what they are prepared to pay for our products. Now the other one is on what I would call beyond design. This is about truly exciting customers. This is an example where we came in with a retail ready packaging for chocolate. And this meant a tenfold increase in the sales of this brand owner.
Now these services, they are adding to our profitable growth. So design used to be in this industry for free. Well, to some extent, it will remain free. But if we really do for customers truly good designs and they want to put us in they want us to put in a lot of effort, we make sure that we understand that the customer is prepared to pay and they are prepared to pay. Same thing, we launched a service what we call total cost optimization.
We go into the customer, truly understand all the way how the packaging is being used, how it's going in and it's not only about redesigning the packaging, it's about giving advice on how they can optimize their total cost. And we charge for that and the customer is prepared to pay. Technical customer service, similar thing. We get paid for giving extensive customer service. So design will remain very important and we are leading in terms of the designs that we give.
I give you two examples. The left hand one is what we call the EcoFish box. You all know about how fish is being packaged today, expanded polystyrene, big white boxes. First of all, the transport to the fish supplier is already a problem because it's costing it's a huge amount of volume. And then what's happening then with the waste?
It's made from styrene, one of the most environmentally unfriendly So we came up with a solution, completely renewable, recyclable, corrugated boxes, watertight, leak tight, which can be erected, including an automation design at the customer. And this is reducing transportation cost. It It's is taking away this huge environmental problem. And this is happening right now. So this design got on world level two awards, both from packaging awards and a sustainability award.
Right hand side, believe it or not, but it's egg packaging. Typically, in supermarkets, in retail, the most boring packaging you can imagine is egg packaging. This is an egg packaging, and it got an award and actually increased the sales of the retailer by a factor two in this particular branded eggs. Then an example around customer insights. So what we did was that we equipped consumers receiving e commerce products at home, providing them with an app on their phone so that they could get feedback on how they were actually experiencing while the packaging was coming in.
Well, there's a lot of frustration I can tell you around receiving goods at home and you probably all know it yourself. And the next thing that we did was we went into actually into the fulfillment centers of the e tailers and tried to understand their problems in terms of quickly packing the products and getting them out of the door. And moreover, getting all the returned products back, which in some cases, like for fashion products, is about 50%, five-zero percent of what they send out. So that's a huge problem. So with these true customer insights, we have designed and launched now a completely new portfolio of e commerce products.
We've branded them. They're called e tails. In the demo stations, you can have a good touch and feel and good discussion around it. But here, I have just, say, one example. And this one example is, for example, for having books or for, garments.
And the interesting thing around it is that you can make it very flat because today a lot of this packaging is filled with all sorts of filling materials, which is expensive and difficult to recycle. But moreover, there are strips here, which allow you, first of all, easily to open it. And then secondly, if you don't like the product, you can use the same box and send it back and you can seal it. So solutions for this segment, and we have a whole range of these type of products. Now our innovation strategy is has basically two pillars.
One of the pillars is continuous innovation including these type of scalable packaging concepts I just showed like the e tails. And it's about value creating products and services that I've been telling you about. But importantly, there is another component which takes more time to develop. These are disruptive platforms. It takes some time, several more years to see the strong fruits of that.
We have several of these streams under disruptive platforms, but one I'd like to highlight to you and that's the intelligent packaging. And the intelligent packaging, we launched about two and a half years ago at the Capital Markets Day and we started them from scratch. We had nothing. We just announced in cooperation with NXP. Where we are today is that we actually are commercializing and we have developed a complete absolutely complete solution where we first of all can design the total solution, specify the chips, the labels, then program the chips, make sure that we have readers and writers in the whole supply chain, specify them and then have all the software to have those the data written to the chips and read from the chips.
And all this connect into the cloud. We launched yesterday a press release, issued a press release where we announced a cooperation with Microsoft. So we're utilizing their Microsoft Azure cloud platform, which is allowing us to collect data, to analyze the data and to give usual information back to brand owners, retailers, whoever is basically our customer. So this is making strong progress. We've done a lot of pilots with leading international companies, and we're now commercializing with some of them.
So strong progress, also cooperations with NXP continued and Impinjie were not the only ones. Big benefits in terms of supply chain management, then it's about tracking and tracing, making sure that there is no that the products are tamper proof, that there's no counterfeiting, which is a big issue for a lot of high value goods that are coming along long supply chains. So I come to basically a bit of a wrap up and a wrap up on what we're trying to do here. This is Packaging Solutions is about delivering on profitable growth. First of all, by focusing on the right customer segments where we see strong growth and customer and segments which have good profitability.
Secondly, it's about relentlessly driving innovation and very strong customer value creation to make sure that we do the right things for customers. And very strong execution on operational excellence driving the maximum out of our assets and our supply chain, all enforced and strengthened by strong digitalization effort. I see strong attractive growth in the packaging markets in which we are active, and we will continue to do so. Then we are well positioned in containerboard, especially in virgin containerboard. It's difficult to have access to virgin fiber.
We have a lot of assets in Storanzo Group. Then we have delivered on our Wargau strategic investment, doing better than promised already faster and better, and overall, a very strong financial performance. Just one small teaser for you. E commerce is a very fast growing area. Now just from a market study report, until 2021, e commerce could add 2% to the market in corrugated packaging.
That would mean about EUR 3,000,000,000 of new renewable business. Now this study, I believe, is conservative because it actually still assumes that a lot of the e commerce is going to be done via plastic packaging. That's our target to make sure that this will at least be doubled by converting plastics to renewable packaging. Thank you.
Thank you, Hildes. Okay. Questions to Hildes, please. All right, Justin.
You. Justin Jordan from Jefferies. Firstly, genuinely well done on Varcross. I think I was probably one of the most skeptical people in the world when you first announced those conversions. So getting to 15% margin is an incredible achievement.
It obviously begs the question, given your focus on virgin fiber and given the fact that Sorenza produces over 5,000,000 tons of graphene paper right now, are there further conversion candidates within the group to kraftliner or indeed other forms of containerboard?
I think the great thing about Storenza Group is that we have strong optionality in terms of the assets that we have. Of course, I mean, you should also realize Varkas conversion or conversion is not easy, but we have the strength that we have access to virgin fiber and we have paper assets. Not every paper machine is suitable to be converted because it must have the right width that's related to being more or less a multiple of corrugator widths. Then it needs to have a strong energy solution. Of course, you need to have the right pulp mill there because it typically also involves a change in terms of the wood and the pulp.
So there are several things that need to work at the same time. So just to bear that in mind. But of course, Storanza Group has strong optionality.
Just two quick follow ups. I guess, firstly, just on AustroLenca and your decision not to proceed with the testliner mill expansion. Can you just sort of refresh us as to what the, I guess, the main deciding factors ultimately were on that? And thirdly, just going back to, I guess, Slide 58 here. You talk about, obviously, OCC being a scarce resource longer term.
In the short term, of course, we all know what's going on with China there, whatever, potentially importing 10,000,000 less or so recycled fiber or recycled paper next year or something of that quantum depending on how it shakes out. What does that do in your view for OCC markets and OCC pricing in Europe in 2018?
Yes. First of all, on Australenga. So when we did when we announced that we were studying it, my personal hope was that it would shy off at competitors and not that they would think twice. While we're doing the study, a lot of capacity got announced and basically we decided, okay, we will not invest because it's not attractive. So that's the background on that one.
On OCC, I believe that structurally, be will remain prices will remain high. But short term, we've seen the dip because of the China import bans that happened more or less in quarter three. Early this year, demand was strong, so there were very strong imports into China and prices were skyrocketing, happened all very quickly. Then we had the import ban suddenly in July. And that, of course, then caused, especially on the West Coast Of The U.
S, strong drop in the OCC prices and it has affected Europe to some extent, but not much, only a little bit going backwards. Now two weeks ago, the China government announced a new regime basically, and that has immediately led to an increase again in the OCC prices. So they are going to allow again new imports, but the imports will need to be done by more than by the larger containerboard players. You must have at least 300,000 tons of capacity. Otherwise, you're not allowed to import.
The other important aspect about it is, of course, the China government is cracking down on waste. They don't want waste to be imported to the country. So it is specified now, 0.3% maximum contamination level in OCC. That's a very stringent requirement. It means that all the OCC that's going to be imported will need probably an extra screening and extra sorting step.
So it's going to make the OCC going to be imported into China relatively expensive, which means, again, that OCC levels, I mean, they will prices will remain high. I mean, the recycled containerboard is going to have relatively high prices because OCC will be expensive. So it's a volatile market. And of course, big changes in legislation can change things, but this is more or how I'm looking at it right now.
Hari there, and then I think Alex after that.
Yes. We think that no price has changed at all in the next three years, but I'm just thinking what do you see the potential for like increasing the pricemix and the sort of geographical mix? I know that you have been increasing the share of white products, for example, in Varco, and that is sort of raising the average price for the mix. But do you see a lot of sort of measures how you can improve assuming like for like prices don't change at all?
Well, on the white top, because you raised that point, we withdrew the white top because we were not happy about the quality. And we did some things on the paper machine to basically improve the quality. And we will announce at the right time that we're ready to introduce the white top. So just to give that background to you. Okay.
Any other measures that you can see how to sort
of course, continue always to drive performance to the maximum. So and the mill has been ramping up very, very quickly. So we I can never give any concrete outlook, as you know, but white top, we are looking at reintroducing.
Okay. Thanks.
Okay. I think Alex is next there.
Thank you. Hello. Yes. You talked a lot about value selling and how you continue to drive innovation. My feeling is this is something that a lot of companies talk about.
And you also said that you were able to charge a higher price for this. My key question is, is this sustainable longer term? Or is this just going to be the standard in the industry and that you're eventually just going to give away this to the end customer to competition?
Well, believe that value selling, of course, as always is related also it's also an incremental game, so it's a time game. So it's important all the time to keep innovating and to keep improving because competition, of course, is always trying to catch up. So that's why we need to, on the one hand, work on innovation and improving what we offer to customers and at the same time, to improve on our own on the cost side. I do believe that we have a performance that we really create value for customers when you of course, you can begin to compare ourselves to what others are doing and then you can benchmark yourself. And I do believe, therefore, it's justified we get a price premium.
Thank you.
Maybe I should add something to that. That's what I talked about the time monopoly. If you're first out with something, then you have something to talk with the customer that nobody else has. That's a time monopoly. That usually gives you a premium position, which means this will always continue and we always have to be better each day.
The day we lose the edge, we fall back and have to come back. That's why I love competition.
Okay. Thanks for the questions. And now there will be lunch. And please be back in this room five past two and also take your time to familiarize yourself with the demonstrations. The station heads will be there explaining you more about the products.
Okay. See you in about hours' time. Okay. Now we are all set for the last part of the presentations. I hope you all had a good cup of coffee and be alert for next presentations, which is going to be biomaterials and of course the topic is exciting pulp market.
So Markus Manstrom, Head of Biomaterials, please.
Thank you.
So good afternoon everybody. I hope you enjoyed lunch and you had a good chance to look at all the demonstrators and new pieces that we have in there in the showrooms. At least I saw that all these small wood plastic composites they gave quite a lot of traction I think. Anyway, now we're going to talk about biomaterials. I'm going to elaborate a little bit on our strategy going forward.
I'm going to talk about the pulp market as we see it today. And then we're going to talk about the new platforms for growth. But before that, how do we respond to our road to success in the bioeconomy? I would like to start from the right angle of the right part of this picture, generating superior return on capital employed. Chemical pulp is in our industry the most capital intensive piece that we have.
A new pulp mill today, we talk EUR 1,500,000,000.0, 2,000,000,000 in investment. So huge, huge investments. And of course, making the returns that goes far beyond one cycle of this industry. However, what we have is fairly unique in our hands because we have pulp mills, we have three pulp mills in The Nordics and we can all work with that and build them into what we call biorefineries. Now what's a biorefinery?
Well, a biorefinery is basically a pulp mill where we start to create more and more value out of what we today call side streams, what in the future are actually going to be mainstreams in the production of processing wood to new materials. So that way, I think we have a very good basis for, a, supporting growth with products that have a drive, that have a need on the market. And then when we introduce to the market, we are contributing of a sustainable society with less fossil based material. And I think this is very important to bear in mind when we also we had this one question about how are we going to make ROCE now when we have so favorable market conditions. When the market is turning, what's going to happen then?
I think we have to like everybody has to make more out of less. And this also applies to the asset base that we have. Biomaterials today is a business of roughly €1,400,000,000 As I said already, we have very healthy market conditions for the moment, and we did extraordinary good result in the third quarter. We operate five pulp mills, two of which are joint ventures, Veracel and Montester Plata, and then three stand alone mills in Finland and Sweden, Enossel, Sunilab and Skujar. And now during the past years, already for some quite some while, we have reduced our exposure to paper and paper pulps, I.
E, printing and writing. So only 18% of the external supplies is going to that segment. And as we all know, it's a declining segment. In biomaterials, our strategy is built on three pillars. Why three?
Because we want to make a difference between the eucalyptus pulp and our Nordic mills, building on what I already said earlier. Eucalyptus pulp is the biggest commodity in our industry and that the drivers here are cost competitiveness, cost competitiveness and cost competitiveness. And that is linking very, very strongly to the cost of wood that you deliver to the mill. Whereas for the Nordic mills, we have a unique opportunity to differentiate, and we are well on that part on implementing our strategy. We are turning Scooch Har to more and more fluff pulp, which is a sort of a differentiation.
And then recently, we announced we're going to turn Ennocell to 100% dissolving pulp in 2020. And as the third pillar, we then have the platforms for growth, and I'm going to elaborate on the content platforms that we have in the division. But before that, let's jump into the pulp business a little bit. Pulp, chemical pulp is driven by the seven megatrends that are driving Stora Enso today. And up to 2021, we see healthy growth in the end use segments where we want to participate: textile and nonwovens, tissue, hygiene, cartonboard.
We also see growth in one of the paper segments, I. E. Specialty papers. There the growth is maybe a little bit smaller than the others, but still it's a good segment. So all in all, having a business which is growing on average 2.5% per year, I think that is a fairly solid position when the society trends, when the megatrends are supporting that business.
In Stora Enso, all in all, we are a fairly big producer of pulp. Our total production capacity today is 5,800,000 tonnes a year. Out of this, 37% goes to the market and the rest we then use internally. And we have a very traditional segmentation when it comes to the products that we produce, I. E, we produce hardwood, softwood, fluff, dissolving and a small portion of unbleached kraft pulp.
And going forward, what does this differentiation really mean for us? If we look at the yellow section here, today it's 21. In a couple of years, it's going to be 42. So that is the move away from standard softwood commodity into dissolving and fluff pulp. And still, one of we keep up one of the strong things that we have in the company, and that is offering a wide portfolio of all these grades going forward.
So going forward, what we're to do, we're going to maximize Juukka and then we're going to continue to differentiate. And in these segments where we want to differentiate, that is also really things that we can link to our R and D innovation agenda, building more and more interesting properties to the products that we push to the market. Then I think we'd come to the more interesting part and we look at what is the growth of pulp. In the upper box, you see the segments where we want to participate, the green ones. And now we look at the growth forecast until 2021 for tissue, for specialty papers, for packaging, for hygiene and textiles, ending up in the lower box where we turn those into the things that we produce, hardwood, softwood, fluff and dissolving.
So we foresee total growth of 8,400,000 tonnes in the coming years. So the business is going to total pulp market is going to grow from roughly 63,000,000 to 71,000,000. And how does this then match with supply demand balance? I think that is the most interesting question that all of us have on our terms today. Know and you have been writing a lot about disruptions in production, about delayed start ups of new mills.
And now we foresee a period where all of the disruptions and the new capacity would come on stream in the coming year in 2018. However, what we would like to highlight is that actually, if we look at this in the same time perspective, as I said earlier, up to 2021, we have no new mills in the pipeline. No producer, no player has announced that they would build a new pulp mill. Nobody has ordered a new pulp mill from one of the traditional suppliers, which means that new capacity is unlikely to be on stream before 2021 at its earliest because it takes more than two years to build a pulp mill. Of course, there are several big projects driven by the main players that are sort of in planning phase, maybe eventually becoming ready for approval.
So our point here is really that going forward, in the coming years, we're going to see a fairly healthy supply demand balance. All in all, we have a historical capacity increase of roughly 1,400,000 tonne net from 2006 until 2016. And with the announcement that we have today, the capacity increase is actually going to be a little bit smaller, even if we would get all the disruptions and the new capacity, which is already under startup on stream in 2018. Then another important angle is the cash cost thinking here. We divided now cash cost into three groups.
We have those who are best in class. We have those who we think are solid. And we have those who are not sustainable. The not sustainable part is substantial. We talk more than 10,000,000 tonnes.
Typically, small mills, environmentally not sustainable mills, typically mills in Asia. And why are they then not profitable? Primarily because of extremely high wood cost. In this solid part, where the difference in cash cost is then substantial if we compare to the not sustainable ones, we start to find also the Nordic mills, also our mills, our Nordic competitor mills. And then on the lowest area, the best in class are, of course, Brazilian and Uruguayan players, Chilean some of the Chilean players.
And here, we have our two joint ventures, which is very important to remember. Why is this so? As I said, wood cost is the prime driver. And the wood cost between the regions of the world are extremely big, moving from Brazil on hardwood of USD 33 per solid under overbark up to China's USD 80 per solid overbark. And then when you take that 3.5 times to make a ton of Yucca pulp, you understand how the big the difference is in cash cost.
And if you look at this from an overall cost point of view, 40% to 50% of the cash cost is wood. Another 40%, 50%, depending on how we split up the numbers, is then production and asset cost. And then we have a logistic cost. We don't end up in 120,000,000 though. But anyway, so what I said, it's a lot about wood cost and that is why we drive then our eucalyptus assets to be strong performers both operationally, but especially on forest based plantation.
This is where we have to be really, really good also going forward. And maybe this is also a little bit explaining one of the questions that was raised here in the early presentations, why don't you build a pulp mill in China? I don't think there's going to be so many pulp mills in China because wood is very expensive and going forward, it's almost impossible to get a permit for that in China. Then I'm going to continue to elaborate a little bit on this, what is happening, what is correlating and what is influencing the volatility of chemical pulp. We are all afraid of overinvesting and but if we look at this from a ten year horizon, it does not fully correlate.
This is one way of looking at this. We compare now investments that have started up, that's the green bars, and then the blue line, which will follow in the coming slides, that's average hardwood prices net CFEurope, I. E. Net prices then including rebates. And the rebates are statistic information that we get from, for example, Pern.
And there are years where we have huge capacity increases like 2014, but it doesn't really correlate in the pricing of the product. And historically, of course, supply and demand is key in this kind of business. But my point is, it's maybe not one to one. Another thing is to look at this with exchange rates. And here we have USD euro rates.
Traditionally, there has been much more evidence by different organizations analyzing our industry that find good correlations between FX movements and pulp prices. However, also this starts to be a little bit weaker during the past years. And again, what is influencing? I think that there is one market that has grown tremendously during the past five years and that is China. And that is making a difference to the market like we see today also when we all talk about the ban of importing recycled fiber in China.
When you get these disruptive elements into the system, it's making then really a difference. Then the one thing that I really believe is correlating and that's GDP. And if you would make analysis on this and really look at it from a statistical point of view, this is where we would find the best correlation. And this is very, very logical. If you think where I started to argue that chemical pulp is driven by the society megatrends.
The more wealth we develop in the society, the more pulp we're going to consume in products like hygiene, like tissue and so on. And of course, again, where is the biggest growth? The biggest growth is in Asia. Where is the biggest, highest wood cost? Well, it happens to be in the same place.
So flows are moving more and more to Asia. Then last, where we look at our business comparing it to some other global commodities like oil, like sugar, like iron ore, I think that the message here I want to bring to you is, well, a lot of these commodities actually have even more volatility. Our lines start to be quite flat compared to some of the lines that we see when we look at price development on other commodities. With this, I would now like to move and start to talk about the growth platforms. So we are working in biomaterials with four platforms.
And the four platforms are now a result of a development work that we have done with our organization internally recently, And we have continuously during the past years developed our R and D capabilities, our R and D agenda and now we are in a good way of executing on the selected initiatives. Why do I say selective initiatives? Even if we are a fairly big company, bioeconomy opportunities are huge. I think we have to be selective and put our bets on things where we really can win. If we do too many projects, if we focus on too many areas, we end up spending too little resources, money, capacity, people in the single initiatives because all these initiatives, they require a lot of effort.
Well, the first platform that we want to talk about is actually building on the existing business and going back to the differentiation of the Nordic mills. So going forward, when we have our assets in place for making more fluff, for making more dissolving, of course, what we want to do is to make an even better offering, make us even more attractive for the big customers that end up being big brand owners in fluff segments or in dissolving pulp segments, also selectively on specialty papers. So we will put much more effort going forward on doing R and D innovation also on existing products like chemical pulp that has traditionally been to far extent treated as a commodity. The other platform is then becoming a platform for also revenue growth really going into new business. We talk about developing new technologies for wood in textile fiber, nonwoven and specialty papers.
And here we have both regenerative cellulose and MFC. MFC was already discussed here quite a lot. What we want to do with MFC, we're going to use it as strength enhancer as they do in Consumer Board, but we're going to focus on segments, on end use segments where that are not competing with our packaging business, specialty papers, nonwovens and so forth. With regenerated fiber, our focus is really the textile industry. Cellulosic material in textile is going to grow.
This is a fact. This is driven by all the big IKEAs and Hennessen Maurits and others. They go out with clear statement and asking for more cellulosic material in textile. And what is reduced being reduced, it's reducing cotton usage and it's reducing then synthetic fiber. So in addition to making dissolving pulp, what we do is we put a fair amount of our R and D innovation work in looking and developing alternative processes for the viscose process.
Because the viscose process today is not the most environmental friendly process to turn renewable material like dissolving pulp into yarn and further to textile. So that is where we want to participate. I don't say that we would directly move downstream in the value chain, but we think it's important that we are moving and supporting the direction of the textile industry and we become a trusted partner for the brand owners. The third platform is then LingNin and there has been a lot of presentations, a lot of messages from our company on using LingNin as phenol replacement. The Lignin that we do in Zunila, it will end up as a phenol replacement.
It will show up as a growth segment in our offering. The phenol resin market is 2,800,000 tonnes annually, it's growing on roughly 4% annually. And as it was said by the presentation of our CEO, the first logical thing is to start to use it in our own offering, I. E. LVL, or similar mechanically wood processing products, because that is where it really fits in.
As a new product coming to a market with a new offering, it doesn't happen overnight. And we have now a dedicated team working extremely hard to develop recipes that not only work for the glue manufacturer, but actually works for the one who is using the glue, I. E, the mechanical wood processor like Stora Enso. With Ling Lin, you can do a lot more. And now this becomes really interesting.
I hope you looked at the demo, but I have this part demo here with me. This is carbon fiber made out of zumila lignin, made on technology that primarily has been developed in our company. It has taken more than six years to reach properties, strength properties that make us attractive with potential end users. But we are in a very good pace here, because we are we now have strength properties that make us attractive. Six years is a long time, but if we look at how long it takes to develop new materials, new properties in new materials and then even entering with to the marketplace with them.
I think we're going to wait another five years because before this is adopted by the market. But what I want to say as a message here is we have shown that you can make carbon fiber out of Lingning. Then another interesting area, even more interesting is Lingning and energy storage. Going forward, we have now started fairly base science on looking at substitution of conventional hard carbon anode materials in energy storage. And this is, of course, extremely interesting because not only that we can make then carbon fiber, we can also take that same linen and start to work with companies like Tesla one day in the future.
But this is also on a fairly fundamental research stage. I will not show any revenue streams in the five year frame on this yet, but I'm pretty sure we will do it in the future. And both of these areas are really building on the thinking that we have to stay ahead of competition. We by far the first one who started to look at carbon fiber out of Lingning. And we believe we have at least four, five years time ahead of any competition in this field.
So very interesting. Then the fourth platform is our bio based chemicals, replacing fossil materials. And here we talk really about bioplastics. We have been very strong in packaging materials and we heard a very interesting story about how we push forward with developing our offering to be even more renewable, taking out the PE film or taking out the allo film. I brought this one because I hope I one day going to stand here and tell not only that we would show the brick, which is made of fiber, we're to make one which is see through and that's made of bioplastic.
And this is driven again by the huge packaging industry interest in bioplastics. This is an area where we are not alone, but we believe that wood is going to be one of the raw materials from where you can, through processing the sugars, end up in the future base chemicals for bioplastics. Then towards the end of the year, during next month, we're going to reach an important milestone. We're going to be able to produce silos in our demonstration plant in Raysland, And silos is then taken out again from hemicellulose, which is the other fraction of the wood that we talk about. So I'll now going through the three fractions of wood, lignin, hemicellulose and cellulose.
And they all, as single ones, offer us new opportunities. A little bit of history before we come to the end. Biomaterials is the youngest division in Stora Enso. It started in 2012. But interesting enough, you have major steps every year in the blue area where we talk about pulp and the green area where we talk about new businesses and platform development.
And of course, this ladder, it will continue and it will go forward. So to capture the core of our strategy, going forward, three pillars: one is to maximize value of Eucalyptus the second one is to differentiate our Nordic offering and the third one is then the platforms of growth. And this way, we will deliver sustainable profitable growth for STORA and SO. And as a teaser, my teaser is one shift of fossil based and other materials, well, the potential is EUR 20,000,000,000 renewable business. Thank you.
Okay. Thank you, Markus. And now we are going to get all the interesting poll questions. Okay. Lars can start.
So two questions. If you think about these really big areas of bioplastics, for example, are there enough trees to do this? I mean we can see a huge market potential, right? The second question comes as more near term, I suppose. Your dissolving wood pulp offering is comparatively small.
Why are you in that business? Why don't you try to do something different as opposed to be a small guy in a fast growing market with little or no growth potential effectively in that business?
If we start with the first question, of course, the wood raw material is limited. And the wood raw material as such cannot replace everything which is made out of oil in today's society. But I think on many areas, we gradually also move to a direction where there is a number of other replacement taking place. But if we then look at it from a company perspective, a return requirement perspective, a profitability perspective, what I said, a, we have pulp mills. Pulp mill can become a biorefinery.
Biorefinery is processing wood and we are damn good with it. And I read an article where Metza stated that they have calculated a twenty-eighty relationship between revenues in Anakorsky, 80% pulp, 20% size streams. If we develop this story right, if we do the right things on technology development, you can reach a point of fifty-fifty, meaning that we have really much more attractiveness in meeting the return requirements in a growing business. So of course, it would be nice to say that, yes, let's capture the whole world and replace everything. But I think one aspect here, we are in to make good business and making the right selections, I think we can do it.
On the other question, dissolving pulp, we are actually becoming at least a little bit bigger player when we are at 430,000 tonnes. Some of the players that we compete with are swing. Don't think that is going to be sustainable. I don't think when we go forward and especially participate in developing the whole value chain that global brand owners would allow that they have swinging machines who take get their wood from wherever. I think dissolving is a growing segment and we see more profitability opportunity in dissolving than in softwood.
Just one follow-up, if I may. You mentioned Air Nykoska as an example. Of course, they built a brand new pulp mill to get all these streams. You have like Scout Care, for example, a multiple pulp mill relatively old. Would it make sense to simply replace that with a new pulp mill to enable you to do what you want to do?
That would be an interesting thought one day in the future. But I think to be able to even justify such a thought, I think that we would need to have those revenue streams in our hands. And instead, what I would promote is that we become much closer to start to develop the revenue streams, for example, in Anacostia after we have turned it to 100% dissolving. And we already have a stream in Sunnila. So let's build forward on those, make the business and then see what is the next step.
Thank you. Okay. Justin
Jordan from Jefferies. Just a few follow-up questions. Just focusing on fluff pulp. Just can you give us some size of just the scale of the fluff pulp market globally at the moment? And I know, obviously, you're currently producing 250,000 tonnes within that and obviously plans to grow it.
But I'm just curious of just the scale of the market. And you talk about 3.6% growth in the market, but what's the size of the market?
Sorry?
I'm sorry, what's the size of the global fluff pulp market currently?
The global fluff pulp market now I think I need to ask help from one of my colleagues. No? I don't have that figure in my head.
Okay. And just philosophically, if we think about Stora currently producing 5,800,000 tonnes of pulp, of which 3,700,000 is used internally, obviously, as your, should we say, graphic paper business structurally declines, you will instinctively become more and more long pulp as a group and more and more available capacity in Europe essentially? And should we think philosophically, therefore, with the developments you're doing into fluff and dissolving, that being an increasingly important part of the group as you have more available pulp capacity given the graphic paper decline?
I think very important to remember that the single biggest pulp integrator that we have is Imatra. Imatra is 1,000,000 tonnes and there we produce board. In Oulu, we already go to the market with softwood. And then we have integrated production in Nymella, in Wetzelwatta and Oulu. So of course, one day in the future, you will be faced with the question that what are you going to do.
But today, we produce paper there. Then the rest, we have a quite big amount also today in Hainova and Warkhaus. So my point is a big share of the cap chip is actually in board already today.
Market is about 6,000,000 tonnes. Fluff.
Fluff. Fluff. Yes.
Yes. Fluff market size is 6,000,000 tonnes. Okay. I think that Mikael, did you have a question? Mikael
Ljobs, Kepler Cheuvreux. Lars talked a little bit about will there be trees enough, but if we look on your sort of there, 20,000,000,000 renewable business, so probably a lot of other companies are sort of also thinking in terms of this. But how do you see a risk of wood pricing sort of going up during in the midterm that sale? What are your thoughts around that?
I think the biggest threat for in the the biggest threat in The Nordics is actually subsidies in transportation fuels. And that could twist the market. But otherwise, if we look historically, of course, we have had fairly stable wood prices in The Nordics. And if we go into near term scenario in a foreseeable future of five years, I think that we are in a good position also in The Nordics because we take out less than we have annual growth. So it's not so that one could say that in five years we're going to start to use so much more trees that would affect heavily the market.
But if somebody would get severe incentives for transportation fuels, this can change with the picture. And I think this is something that we need to follow-up constantly.
Clarification. If the bioeconomy happens and it's going to be higher demand for wood, that will also increase the prices. There is only one product in reality that today where pulp prices increase are not reflected in the end price, and that is in the declining paper business. There is a lesser correlation. Otherwise, it's a very strong correlation.
Thank you for the are you through?
Do have
a Since I have the mic.
You're monopolizing the question.
I have to ask this. I will perhaps not get an answer. Pulp pricing, there's lots of discussion, a lot of debate. We are seeing a ramp up of three large scale mills. So I think consensus is seeing within not the two distance future sharp fall in the pulp price.
And your chart there with the GDP link, if you could talk a little bit about it and if you could tell us when pulp prices would peak that would be even better, but perhaps you will not do that.
Yes, I'm not asking much, are you?
No, that's an easy question. I think that if you looked at what the price analyst houses are saying, they foresee a decline during next year. I think what they also see now is the same that I said going forward. There is not new announced capacity in the pipeline. So and then what I was really elaborating in my slides is this has been a volatile business.
I think this will stay as a volatile business. And the important thing is to be able to make sure that you have assets that are cost competitive and you have products where you develop constantly your offering, so that you are not falling into the trap of high wood cost, bad product and high production cost because then it's not a good business. But given the volatility, I think that for a foreseeable future until 2021, where the pulp prices go up and down next year or 2019, I don't think we know. But we can say that, yes, they will. But over a longer period, healthy returns.
Thank you, Markus. I think we need to move on. And there's, of course, this breakout session where you can ask more questions. But before Seppo will start, please a kind reminder of the feedback form when you have filled that in, leave it on your tables and we will collect them. And now it's Seppo Parvi, our CFO, who will talk about the financials of the company.
Thank you, Ulla. And you have been now through a number of presentations, first going through the group strategy, the direction we are taking, then where we are heading in different divisions and what is the focus there. So I will now concentrate then more on delivering profitable growth and our focus on return on capital, how do we drive and ensure implementation of the strategy. And Karl went through the four cornerstones of the strategy that we are focusing on. And what I'm concentrating now is that how do we ensure, like I said, the delivery.
And the key focus then in the center is, of course, cash flow. That is the heartbeat of the company. And when it comes to moving forward, it's important that we put focus on our capital expenditure, how to create growth, growth investments and not only growing, but delivering profitable growth. That leads to continuously strong cash flow. And strong cash flow means that we can strengthen the balance sheet.
And when we have a strong balance sheet, we can follow our dividend policy and take care of our shareholders. Then we have been performing and improving the performance over the years now. And we are extremely happy and proud that we are also now demonstrating growth when it comes to top line of the company. Three quarters in a row, we have been now increasing the net sales. This growth has been visible already in our growth businesses for the past three, four years, and growth there is also accelerating now.
And it's not only that we are growing the top line, but we are growing in a profitable manner. So profitability is also increasing. And that is visible here if you look at the EBITDA as well as EBIT figures. Then looking at the divisions and where the action is. And I start with the port businesses, both Consumer Port and Packaging Solutions.
In both of those two divisions also, accelerating growth is very visible now when we are ramping up our strategic investments that we have made over the past three, four years. In Consumer Board, it's all about Beihai, that's what is driving the growth, as well as improving returns. When it comes to Packaging Solutions, it is Warkau's kraftliner business, the paper machine that we converted from fine paper to kraftliner, but also Australia still improving the performance even though that the investment took place three, four years ago already. And China Packaging also improving the performance. And especially proud we are about the performance in Packaging Solutions, where they have more than doubled the return on capital over the past year and are now above the targeted 20% level.
Consumer Board has been a solid performer also already over the years and clearly above the 20% strategic target level, if we exclude pay height that has been a burden because of the investment and ramp up phase. Then moving to other growth businesses, biomaterials and wood products. Biomaterials has had strong market conditions, favorable market, but also there it's not only the pulp prices that has been driving improved profitability, but it's also about improvement when it comes to efficiencies and increased volumes. And there now, last quarter, we were almost at 15% return on capital target. Wood Products, like Tulle also mentioned in his presentation, has been quite a solid performer over the last four or five years and has been continuously improving the business portfolio and returns.
It has also come to a new phase when it comes to return on capital, and that's why we have now increased the target there from 18% to 20%. Then our paper business that has been and we strongly believe that it will be also a steady solid cash flow generator also going forward, despite the fact that the top line has been coming down about 10% a year. But that has not been driven only by the decline in paper demand. It's also because we have been making some divestments and capacity closures. But that's important in order to keep the business in good form and shape and to ensure that we can continue the good solid cash flow generation there.
Then when it comes to our strategic targets and where we are heading. Back in 2015, many of you who saw the strategic targets when we announced them were a bit doubtful that can we ever reach it. And I admit, there were a lot of red spots. But already then we thought that they are realistic, reachable but challenging. They must be challenging.
Otherwise, companies don't develop. And today, when you look at the right hand side of the table, it's a lot of green and yellow spots. There are two red spots at the moment. One relates to fixed cost to net sales ratio, where we are above the 20% target. Obviously, we need to continue to focus on that.
It is in the focus. So we are working on the cost structures as well as on growing the top line. Paper, it is on red. It has been a solid performer when it comes to cash flow generation. And as I said, we believe it will be also so in future.
Now in Q3, we had some temporary headwinds because of some cost issues. And also Q2 end of the Q2, we had extremely low level of the working capital. So we are confident that during the coming quarters, they also will be back on track when it comes to cash flow generation. Then important asset base that we have is our forest assets, our global network and global footprint of assets. It's EUR 3,400,000,000.0 worth of assets in our balance sheet if you look at the fair value.
And that is a strategic advantage and strategic edge that we have in the competition. And we are the largest share largest owner of the forests, if you look at our peer group. And going forward, if you look at the opportunities, as Markus was presenting before me, on the Bayer economy, This is really where the competition is behind us, even our peer group, and not to talk about those outside our industry who are working on similar projects. So we have in our hands the Bayer materials. Then moving forward and talking a bit about the capital expenditure level, which is always interesting to you.
And there, our policy remains the same. So our capital expenditure will be an easy equal or below depreciation, operational decrease in value of bioelectrical assets over the cycle. No change on that. And we have been walking our talk also here. Like we have said back in 2015 in our Capital Markets Day, that we will gradually bring down capital expenditure levels from about EUR 1,000,000,000 at that time to be at par with the depreciation and depletion.
So guidance for this year is EUR 600,000,000 to EUR $650,000,000, for next year EUR $550,000,000 to 600,000,000, including this EUR 100,000,000 part that we are using in for the biological assets for the replanting at the plantations. Return on capital employed is one of the key drivers for the company, and that is true for the capital allocation. When it comes to scrutinizing the CapEx proposals or making the priorities, we put the focus on return on capital. And I'm also happy to say that as we well accepted throughout the company, not only for capital allocation, but also for business decisions as well as how to look at opportunities in the market, look at the business portfolio, products, customers to ensure profitable growth going forward. And that has led to strong cash flow that has been continuing.
And thanks to strong cash flow, we have been also making our balance sheet strong. Just three, four years ago, our net debt to operational EBITA was at three point zero. Now we have brought it down to 1.8, which also means that we have a strong, good balance sheet and good access to debt market. There are two proof points here on this slide on our good development and performance. And one of those is ratings, when it comes to great ratings, positive development there, and also the bond we issued late May earlier this year, ten year bond EUR300 million.
Also, the market has started to appreciate the transformation of STURA Enso. Share price has increased significantly since 2012 and it has continued to do so also after the Q3 report. That's where the cutoff point for this slide was. Then some more fresh news. Last night, yesterday evening, before the Capital Markets Day, we made an announcement on EBITDA recalculation.
And what we have now decided to do is that we are including equity accounted investments, EBITDA also in our operational EBITDA that has not been done early. It has been included in operational EBIT, and there is no change on that level. This is we have been looking at the market practice. And also this way, we are more comparable, better comparable with our peer group. This has an effect of about €100,000,000 when it comes to operational EBIT or about one percentage point on the EBITDA margin.
So to summarize today's presentation and the key focus when it comes to financials and driving our strategy. Like I said, it comes down to our cash flow generation capabilities, and we can get there by looking at where do we allocate the cash, where do we do the investments and where do we find the growth. And it has to be profitable growth, and that's where return on capital employed as a measure is an important for us. And all that leads to improved balance sheet. And with good balance sheet, with a strong balance sheet, we can then walk our talk and then take care of our shareholders as well in the form of increasing dividends, trusting that we also increase our net income while and when we are ramping up our investments.
Thank you.
Okay. Thank you, Zeppe. And now we can take some questions for Zeppe. Please. Okay, Mick?
Just a question on the CapEx. You mentioned that maintenance CapEx is EUR 200,000,000 to EUR $250,000,000, and then you had a strategic CapEx on top of that. The ones that you are budgeting now for 2018, is that kind of earmarked already? Or do you have a buffer in that
We have certain amounts already allocated. There was a slide here for sort of CapEx for 2018. So as you can see, there is still some unallocated money for the projects that might be in the pipeline. Some of it is already earmarked. Of course, this about 2% net sales maintenance CapEx is already included in the allocation that we have done because it's more it's not exactly 2% per division depending a bit on also on needs and where sort of asset age is.
Any more questions? Alex?
Thank you. You mentioned that you think, as a company, you need quite high targets to continue to drive performance. Just a question, how are people incentivized in the different divisions, especially like now that you're above your targets, for example, in Wood Products and Packaging Solutions, even if you're just looking at last quarter? But yes, that's my question.
Yes. Well, we have short term incentive programs, which are tied to cash flow generation and profit margins and certain individual targets then depending on the business that you are in. And of course, those financial targets are then relating, if it's a divisional head or divisional head management team or people in the divisions, to their own division and a certain proportion also to group result. Group management is obviously on the performance of the group. When it comes to longer term programs, that is then tied to value added, EVA, economic value added.
And there, of course and financial targets, strategies targets are the one thing. But of course, when we set the STRA, LTI targets, those are also based on the forecast where we believe that we are reachable target. But again, they must be challenging. That's clear.
Thank you.
Any more questions? Hari, okay, please go ahead.
Just a quick one on the, I mean, is there any difference on if you think about the sort of decisions on the capital allocation and sort of a decision on a new project? Is it sort of a is the condition for a go ahead the return on capital target? Or do you have a sort of higher target for a specific investment than the sort of divisional target?
Well, the starting point is the project or investments we are making must meet the return on capital employed target for the business they are in. Then of course, there can be a number of projects where they are meeting the target. Then of course, one point is that you look at the return on capital employed and where the best is, then you sort of set the priorities based on that. But then there are, of course, other traditional ways you look at the IRR, return on or payback period in years for the discounted cash flow, then you use different parameters to come to the final decision. But I would say that the top one is return on capital employed.
That's very much driven and that is the driver in the decision making.
Okay, Lars?
Lars Kjellberg, Credit Suisse. In terms of capital allocation, we're talking CapEx mainly, dividend to a degree. How is your thinking about your balance sheet? What do you think let's assume that you can't find significant projects. Where do you see more shareholder returns coming into the equation of capital allocation?
Do you want to take it, Karl?
You can take it. No,
I think if you look at the balance sheet tax, we have set at maximum is three point zero, we have 1.8. It obviously means that we have a strong balance sheet. And then when it comes to sort of distributing money to shareholders, that is, of course, up to the AGM and shareholders at the end of the day to decide if there are not enough investment opportunities to grow the company and cash flow generation remains good. Then I think it's up to the shareholders then based on the proposal by the Board that where they see it best, to keep the money in the company and see future opportunities or to take it out in the form of share buybacks or increased dividends. I think from management perspective, I think shareholders who need to drive it.
In terms of your comment earlier, you're accelerating growth, at the same time, you're decelerating CapEx. How do we think about that? How do we converge to two statements?
There are, of course, meaning that we have more optionality now when continuing to ramp up the businesses and also going accelerated growth of the top line. It also means that and you should not forget that even though that we are bringing down the capital expenditure from €1,000,000,000 level to 600,000,000 or $550,000,000 to 600,000,000 now in guidance for next year, it still includes $250,000,000 to 300,000,000 for the growth projects. So there's still potential to grow the company, which is important because we have stated as one strategy is targeted to grow faster than the relevant market. But having a strong balance sheet also, like Karl said, we have with the strong balance sheet, we have optionalities, means that we can also look at some areas where we can make positive acquisitions to accelerate the growth in some cases, if it makes sense.
One final question. Do you have any really sizable project investment project in your pipeline that you're thinking about?
Good question. We have other questions.
That's the one.
Okay. Thank you.
But I can answer that. We have a number of important things that we can invest. It's not lack of investments. And if you combine the possibility of investments with the hurdle rates, that makes a very good discussion internally. Very good.
Thank you.
Thank you.
Any more questions here? Okay. If not, thank you, Seppo. And then I would like to ask Kalle to come on stage once more and give us his closing remarks.
So first of all, I would like to thank you very much for coming here. I would also like to to share with you that we are very, very happy what we have done in the last couple of years. I think those targets, when we gave them to you in CMD in May 2015, I think many of you were very skeptical about our possibility to get close to them. I think we have proven and earned by being very focused on capital allocation, focused on where we invest, focused about delivering on our projects. And I also hope, as a closing remark to you, that you've seen the potential with renewable materials.
That is a challenge to us now to come back to you in a next CMD and the next CMD to share with you how we are taking that opportunity because I don't think there are many industries in the world who have the opportunity we have with having a raw material, renewable, reusable and fossil free, or which we are actually controlling a great deal of already today, which Seppo presented. So with that, I would like to thank you for coming here. We are happy to have you here. And now we're going to go to the breakup sessions, which Ulla will explain to you. So thank you very much for coming here.
Yes. There will be now the breakout sessions, and you all have your batches, which have a particular color. And so you are on that group, the color you're wearing. And opposite side of that gallery there, there are three rooms, which will serve as the breakout session rooms. You will the groups will remain in the same room for all three management teams to come in and answer your questions.
So you please stay in your rooms and we will circulate. And I really want to thank everybody for coming today and everyone on the web as well. It was great to have you all here and having these good questions and having a good discussion ongoing. And after the breakout sessions, we will have some drinks that I hope you will stay and we can continue the dialogue. Thank you.