Hello everyone, good afternoon. Welcome to Stora Enso Capital Markets Day 2016. I'm Ulla Paajanen, Senior Head of Investor Relations in the company. It's great to see so many of you here, and I also got the first remark that it's great that you are now arranging this Capital Markets Day, because it's more than three years ago since we met in the same setting. Let's make this day wonderful day and also be active and ask questions. This is now the opportunity to ask questions from the management. As usual in Stora Enso, safety first. Some instructions in case of emergency, which we of course hope that it's not going to happen. If there is a fire, we will hear alarm. To the left-hand side there, where you can see this Dolce & Gabbana ad, is the way out.
Our CFO, Seppo Parvi, will lead us out from here, and then we go through the courtyard and turn left and left again, and the assembly point is BBC Broadcasting House. Let's keep that in mind in case of emergency. World of packaging. We are talking about packaging today. These are companies that all use packaging. Last year, according to Smithers Pira, this market was a size of $823 billion. We at Stora Enso estimate that 32% of that is fiber-based packaging, 16% carton board, and another 16% corrugated packaging. This is something we can penetrate, and we can grow with and take some market share even. That's our goal. This Capital Markets Day is a deep dive to packaging, in addition to a presentation from our CEO about the general business.
What we are going to concentrate here is how to create growth through customer focus and innovation. That is really where we're trying to concentrate, because it's difficult to really demonstrate these in the regular roadshows or one-on-one meetings. If we go through this program of today quickly, you have all that on your tables, I believe. Basically, our CEO will first talk about our strategy. After that, we will have both of the Consumer Board and Packaging Solutions heads talking about customer centricity, innovation in the divisions. We will have a coffee break, and after that, Head of Consumer Board Innovation and R&D, Marko Hakovirta, will talk more about the interesting things that what we announced today through the press releases, which are on the tables as well.
After that, we form an innovation panel here at the podium where we will discuss what is this in practice for us. It is a question, Q&A, about the innovation to all of us taking part in the panel. After that comes a very interesting presentation, which I know is of great interest to everybody, and that is our Guangxi project by our both Project Manager, Rajah Jayendran. He's here with us today. Last but not least, our CFO, Seppo Parvi, will talk about our divisional targets that were announced a couple hours ago. A bit about working capital and how we think about that. Now I want to invite our CEO, Kalle Sundström. Please, Kalle.
Thank you, Ulla. First of all, a very welcome. I will cover some of the big mega trends, how that affects Stora Enso. We are going into the second phase of our transformation. Then I will cover biomaterials, wood products, and paper before having division heads going on a deep dive in the areas of Packaging Solutions as well as Consumer Board. The next phase of profitable growth. Before going there, I think it's very important to understand that we are in a world that is changing. One of the biggest challenges going forward is the quest for renewable material. A lot of the resources on this Earth are not renewable.
If you look on the major mega trends, which is a growing population, urbanization, these bigger cities are getting even bigger, digitalization, putting challenge on paper, a huge upside for corrugated packaging, income growth. We are going into a world where the middle class is growing in many of the emerging markets, which means that we are going to a better place. Eco-awareness. The consumer of today don't only care what they buy, but how it has been produced. That is a trend that will continue. Then, obviously, there is a lifestyle change. With two family members working in any family, the need for ready-made food is increasing. The service economy is coming across Europe, as has already been in the U.S., and it's growing fast in Asia and other emerging markets, which drives a totally different lifestyle behavior.
I think it's very important to remember that the forest is our roots as well as our future. It's important to keep in mind that everything that you can make out of fossil materials today, you can make out of wood in the future, be it new biochemical substances, be it construction material, be it liquid packaging or whatever. This is something that is very important for Stora Enso, and this is what we know. We are having five divisions, all every single one of them, and this is representing the performance last year, is probably among the better player in all the segments and businesses they are playing in. They have different challenges, and they have different potentials. Later on today, Seppo Parvi will go through these divisions about the financial targets that we are putting on them.
We will have a deep dive in the Consumer Board divisions as well as the Packaging Solutions. I will cover briefly biomaterials and wood products. Four out of 5 divisions are geared for growth. Unfortunately, the fifth division, Paper, is in a declining market that I will cover later on. I think even if it's a declining market, we are holding our positions very well because this we are managing for cash. Stora Enso has gone through quite a dramatic change in a few years, and that you have to have in context, given our asset base. The life of a board machine, pulp mill, or a paper machine has been 50 and 70 years. We retired the PM1 in Veitsiluoto in March last year. It was 60 years old. As you can see, the composition of Stora Enso has changed a lot.
In 2006, 30% was coming from the four divisions that are aiming for growth. They are today 63% of the sales and generating, in the first quarter of this year, 92% of the profit. When I took this position, I did statistics about the questions that I got from you guys. In the first second quarter of 2014, when we had a release of the Q2 results, 60% of the question from you guys was on paper, 20% on market pulp, and 20% on the rest of the business. That has changed dramatically. I would say today, the questions on the paper business is probably around 10%-15%. It's a huge step the company has taken in a very few years. We are now trying to accelerate the growth in four of the five division and keep the cash coming out of the fifth.
Stora Enso has a unique position. Basically, every country in the world are hit by a product from Stora Enso. Some of the products, basically the ones made out of fresh fiber, they travel globally. Some of the product don't travel so far, but even sometimes basic sewn goods are traveling all the way to Australia on very competitive prices. This is an asset that we are trying and going to utilize to a greater extent. In some markets where we don't have our own sales, we are using agents. Most of our production facilities are located in Europe, but we are getting more outside Europe. We have two partly owned pulp mills in Latin America, and we have a couple of establishing in Asia, and we are building big time in Guangxi, which Rajah will come to later on.
We have, during the last three to four years, put a lot of investments in new assets. We have invested in Montes del Plata. We are converting Varkaus, ready later this year. We have done the startup of Guangxi. We have done a Virdia technology acquisition. We have sold off a number of core assets. If you look on the historical capital allocation, you see that we've been spending somewhere between EUR 1 billion and EUR 800 the last three years. All in all, we basically managed to get very close to a very zero net cash flow. Going forward, we will change this strategy.
We will go from the asset transformation that we've had until today and focus on the next part of our growth strategy based on innovation and customer focus, which means that we will, over time, come down in CapEx. CapEx has to be in line with our depreciation, which is actually our corporate strategy, and we will come to that a bit later on in Seppo's presentation. The other part is that in the markets that we are addressing in the four division, our intention is to grow faster than the rate of the relevant markets. That will be based on innovation, customer focus, but also sweating the asset that we have to a higher degree. Now I'm going into the biomaterial. Biomaterial and biomass out of the forest is probably one of the few raw material that is not competing with food production.
Today, we basically only use 35%-40% of the round wood in the production. The rest is used, yes, to burn to get energy. We have been investing in areas LignoBoost or Virdia technology to start to get value out of the other part of the round wood. We have today five pulp mills, two pulp mills in Latin America and three in the Nordics. All the three in the Nordics are getting more and more specialized. We are focusing on fluff in Skutskär. In Sunila, we have converted a part into lignin production, and in Enocell we are focusing on dissolving pulp. Trying to differentiate through small innovations in new areas. At the same time, investing to become a better player by technology in the new areas that will grow. The Stora Enso biomaterial innovation path is to use biomass that is close to us.
Forest, either it's the Nordic forest or plantation-based, or waste that is close to us. Based on new technologies that we have acquired like Virdia, LignoBoost, or MFC, create components of better cellulose, lignin, MFC, or hemicellulose. With that, we are able to create new products and applications such as biobarriers, composite materials, which means that over time we will start to replace fossil-based materials in the packages. This is a game that will take some time, but this is the area we will go. This is how we will drive the future growth of the biomaterials division through innovation and customer focus in those areas or those specialties. We are also utilizing the strength of Stora Enso here. Jari and Gilles will cover that later on.
Many areas where you can use the biobarriers coming out of biomaterials is actually in liquid packaging, consumer board, or in corrugated packaging. That's the reason why we are setting up this innovation center in Helsinki, which is basically another step based on the one we're putting up in Stockholm, which is an application and a production development center in Sickla. Going into the wood products, the only sustainable building material there is actually wood. We are today the biggest supplier in the European market of building materials based out of wood. This has been an area pretty depressed, and right now you see that building starts are starting to grow in Europe in the coming years. Right today, the housing starts are actually growing in all markets except Finland and France.
If you look upon the number of flats driven by the mega-trend of urbanization, you will easily see that we are not less people today compared to turn of the century, we are actually more people. There is an underpinning demand of more constructions. In the wood products, we are trying to specialize ourselves, going away from the commodity called basic sawn timber two by four. We are doing that by integrating forward and taking a bigger responsibility, making us sure that we are getting closer to some of the industrial partners to get away from the volatility. That the CLT, LVL, specialized timber for window components, et cetera, like posts and beams, Euro beams, et cetera. Now, we've driven that from about 20% in 2007 to slightly with 30% as of today.
The aim now is to drive that up to 50%, make the business less volatile and on a higher margin. In this business, the margins are not very high, but they are not very capital intensive, like to cover paper. We have seen paper decline 2013 in the range of 4%-5%, 2014 in the range of 3%, and you have seen it going forward in Europe about the same rate. There is basically no growth in paper, and we are a European paper company, which means that we need to work of these assets to make sure they continue to generate cash. They do that. We have basically been able to generate a free cash flow out of the paper assets for the last couple of years, on average of EUR 250 million plus or minus.
We will continue to work on the working capital, being fanatic about the costs. Making sure that we move around in the right segments, because different segments deteriorate differently in paper. That's the reason why we converted one of the standard use machines in Sweden to an improved use, to go more into the area of the retail, which has been one of the stable segments. Then trying to run the machines as high as we can on capacity. Today, when we see they're going negative on cash generation, we close them down as we've done before. The team I have here is probably the most experienced team in the industry. I feel very confident with their capabilities of continuing generating cash. Global responsibility, sustainability, is today a competitive advantage that will increase going forward.
Stora Enso did a unique thing that was published in the beginning of this year. We did, across the company, a human rights assessment, that we published the results in the early of February this year. We will come back to all of you in the second quarter report with action plans. We have signed an agreement with ILO, generally for the whole of Stora Enso, and one especially how we can make sure we can combat child labor in Pakistan. We have implemented a supplier code of conduct that in nine months have almost reached 90% of our spend. We have adjusted our processes to make sure that we are adjusting to the reality of working in new markets, either it's a new penetration through sales, or it's establishing a unit, making sure that we are using the responsibility guidelines that we have and the experience we have gained.
As a final note, biomaterials are innovating themselves into new areas. Wood products will start to grow with more building starch generated in Europe. We know how to manage the cash generation in the paper business. The most important part here is we are going from an asset transformation into a customer-focused and innovation-led transformation, which will drive down our CapEx going forward. With that, I open up for some Q&As. Don't steal all the thunder, because it's going to be a lot of other presentations. If there are any particular questions. Yes, Antti?
Yeah. About the CapEx, could you give us a timeframe, as to say it needs to be in a level of depreciation?
There is a microphone coming, Antti.
All right.
There will be a mic for you.
Yeah.
Thank you.
Thank you. Antti Koskinen, Danske Bank. You talk about the CapEx coming to a level of depreciation or needing to be in that level. Could you give us a timeframe?
Next year's CapEx will be lower than this year.
Okay.
The journey starts now in the planning.
All right. Thank you very much.
Thank you. It's Linus Larsson with SEB. On that same topic, when you say that you're moving away from asset transformation into innovation and customer focus, where does that leave your expansion potentially in China? I'm thinking particularly of the phase 2 of Guangxi. That's a very ambitious asset transformation, I would say. Is that now being put on hold, or how should we understand this?
As I've said all the time, first of all, the big investment is actually developing the site as well as building the board machine. It's a smaller investment to build the pulp mill. The pulp mill will not be built until we have the machine up and running. We will take it to our board of directors to get an approval, which means that CapEx, the earliest, can be in the budget of 2017.
Thank you.
Sorry, Linus. I was going to say, how long is CapEx going to stay down? It sounds like it's not going to stay down very long.
Yeah, for the rest of you, how long it's going to stay down? If you look on the commitments we have, in any shape or form, that is basically one of the few commitments we're having. Let's save those questions for Seppo, has a whole lot of information on it.
Oskar Lindström from Danske Bank. You mentioned, again, coming back to this theme of moving from asset transformation to innovation and technology and development-driven transformation. What proportions do you see that transformation being driven by your own development of new technologies? You mentioned these technology centers. To what extent do you feel that you will be looking at acquisitions to acquire that technology and acquiring new businesses to develop your own business?
If we're talking about minor acquisitions like plug-in, that might happen. I don't have a balance sheet right now for anything big. I think if we want to drive this, we need to be in control ourselves. We need to build the knowledge ourselves. Because if you buy something you don't know anything about, it's usually not a success.
Thank you.
Lars Kjellberg, Credit Suisse. Asset transformation that you're putting through, you're putting an awful lot of effort into effectively top-line growth with arguably some market risk attached to it because you need the market to be there to sell the product. Why have you taken that route as opposed to buying a bigger footprint in packaging and investing in your assets to improve your profitability? Some of your peers have done exactly that route with a great degree of success.
Maybe I'm not really the right person to answer that question, to be very honest. I believe that when it comes to the Montes del Plata, we saw an opportunity. When it takes to Guangxi, we had basically two liquid packaging board mills, one in Imatra and one in Skoghall. We have historically debottlenecked them, but we are basically sold out. We needed to build another one, and then we wanted to go to the biggest market.
Thank you.
If there are no more questions.
We can also continue later.
Yes. You will have a chance at the end of the day because if you steal all the thunder now, it's boring for the other guys. Now, I would like to introduce Jari Latvanen. Jari is a person who's worked basically his whole life in B2C. He has a very thorough experience in Nestlé. He's also been head of Felix. This is somebody who's been working on the user side of packaging and knows how important it is. I'm very happy, and the rest of Stora Enso is very, very happy to have Jari on board. Jari, the floor is yours.
Thank you, Kalle. As Kalle said, my name is Jari Latvanen, and I'm here to tell you how do we see the future of consumer board, and how do we intend to grow within a market that continues to be dominated by non-renewable materials. Consumer Board is a leading provider of boards for printing and packaging applications internationally. A board is suitable for packaging concepts and optimizing packaging for food, liquid packaging, pharmaceutical, and luxury packaging. We want to become the global benchmark, the best in class in terms of driving and focusing on high impact outcomes, and shifting towards renewable materials and sustainable solutions with a customer and consumer focus. The main target for us is to have a premium market position in the high-quality end use segments. Here you can see our broad, solid portfolio of boards. We also have well-recognized and appreciated portfolio of brands.
The modern consumer lives a hectic life. They have access to information online, and we, as consumers, know what we want. Consumers see packaging as a way of protecting food. They also consider packaging as excessive, expensive, and bad for the environment. We, in cooperation with our customers, need to work for and make packaging solutions that are suitable for consumers' lifestyles and values. Packaging is all about consumers. We can make a difference in consumers' lives. Our surveys show clearly that we, as consumers, are brand loyal. Packaging is the most important media at the most important time, the moment of purchase. Sophisticated cartons are important in building premium brands and driving differentiation.
A quote from our customers is, "We use Ensocoat because of its mechanical features, because of the superior coating quality and forest certifications." Packaging can be also used to attract new consumers to try new brands, meaning different shapes, different formats, different colors can be a way how you attract the consumer to try a new brand. We see a good continued growth in the paper packaging area. China and Asia remain the growth markets. In Europe, the growth is mainly coming from Eastern Europe. If we look more in detail, the board packaging segment, it's growing across the globe. If we look a bit more detail, for example, in China, we clearly see that there is a higher growth than the average growth in packaging. That applies to most of the regions. However, our market is not only focusing on the board markets.
We see the entire packaging segment as our opportunity to grow. Board will continue to take shares over other packaging materials. We strongly believe in a long-term sustainability of using board over plastic. Already today, many packaging solutions are replaced with board packaging. Luckily, when we again ask the consumers, they see paperboard as preferred packaging material. The consumers also consider paperboard as more environmental friendly. When we look at the premium segments, especially in the virgin fiber-based products, you can drive differentiation and you can drive and attract new consumers. Natural resources are fundamental to a quality of life. Board is one of the few renewable materials in the packaging. We believe packaging should be just right, not too much, not too little.
With the increased pressures we see in the board industry, not really in the market, but what has been communicated as additional capacities, there will be winners and losers. The only way you can remain competitive in this competitive landscape is to be relevant to your customers, whom you want to serve, with which products, and how. You need to have the best offer for those customers and their suppliers. Consumer Board has a focus strategy developed around customers and packaging demands for consumers. We all operating in this business, we need to have the basics right, what we call the license to operate. You need to have the right product, the right price, the right quality. We consider also sustainability as one of those key fundamentals for driving and being in this business.
We, as a premium supplier, we also need to have top quality and services supported by strong brands, innovation, and services. We, in order to give full value to our customers, need to stretch out further to see how do we, in partnership concepts, can, in terms of value chain corporation or range of services, add more value to our customers. The winner in this competitive landscape will be the one who is most adaptable to change. Let's look at into our strengths. Renewability makes a difference, focus on raw material selection is key. Sourcing a sustainable supply of materials will be a huge task for all businesses, decades to come. We are transforming our company to a company that meets new consumers in new markets. Already today, one-third of the liquid packaging board globally is coming from Stora Enso.
You can be only successful in a long term if you manage to add value to your customers. We have had high focus on customer value, it has been recognized through continuously measured in our customer surveys. For us, it is hugely important that we deliver what we promise, our customers have ranked us higher than our competition. Another example is our Tambrite brand, which has been recognized as the most valuable carton board brand among the European brand owners. As you know, we have been very much based here in Europe, now we are moving into Asia with our new China board machine. As Kalle said, this is not the first time we are entering to this market. We have had sales coverage in these markets long time already.
If we look more closely to the investment in China, we see a good continued growth, roughly 7% until 2020. This is a unique opportunity to expand our liquids board position globally. We will be more relevant to our customers in Asia and China. This will enable us also to grow together with our global customers in new territories. As a premium supplier, we need to make sure we have our products and mills are competitive. We are investing in all our mills, making sure that we have improved quality, we have increased competitiveness, and in some cases, additional capacities. For example, we are building in Fors mill, a new platform based on hardwood CTMP, which will enable us to launch a top-quality FBB, folding box grade, soon.
Additionally, now as we are moving with MFC to the industrial scale, that will clearly make us a forerunner in this business. We are also the first to install in the world a new technical solution that will enable us for a source grade reduction of 3% with our Tambrite brand, this investment we are doing in our Ingerois mill. We are investing in our PM5 in Imatra for improved quality and for improved effectiveness. We are investing, as Kalle said, to innovation is really important for us going forward. Marko will cover that in his presentation. When talking about innovation, it is also important to see how do we work with innovation with our customers. As a good example, straight from the reel is our cooperation with Herald.
This here is a packaging solution or system where customer can produce paperboard cans in all shapes in-house, and they do not need to use prefabricated boards. This concept offers the customers product flexibility, differentiation, and at the same time, it's cost efficient and environmental friendly. Herald is delivering the equipment, Stora Enso is delivering the board. If you look at our financial figures, we start with the sales. We see modest growth in sales numbers. We have modest in liquid packaging as we have been to capacity to the full level. When we look more deeper into, for example, general packaging, in this time period, we have been able to grow close to 13%. In food services, in the same period, we've been able to grow close to 30%. In EBITDA margin, we had higher transportation cost and higher fixed cost in 2012 versus 2011.
Ever since, we've been able to improve our EBITDA, reaching last year a 19.1%. Return on operating capital and this investment in China is increasing our operating capital heavily. I would like to still highlight that the Consumer Board's operating capital is already higher than the target of Stora Enso of 13%. In fixed cost, we have been able to keep our fixed cost through various cost savings throughout the years. If we look at the variable cost per ton, we have decreased through lower raw material prices and continuous improvements in our operations. On working capital, we have a high focus on this. We've been able to grow, and at the same time, we've been able to improve our working capital ratio. Consumer Board has been, in cooperation, been able to reduce our inventory turnover together with our customers.
To conclude, we have all the abilities in place to grow, and growth is key to our future success. We will grow by having focused customer-based strategy, and we will grow by high-performing operations. Last but not least, we continue to focus on innovations that are benefiting the modern and responsible consumer. With this, I would like to thank you and open for questions.
Thank you, Jari.
Lars, Credit Suisse. Two questions. First one, when you talked about very high growth in certain segments of your business, but no real revenue growth, what are the segments that have actually contracted, and why? The second component when you're looking at the China growth chart, you have effectively three years with no growth at all in China. What makes you confident that that will restart and have that very strong linear trend over the next five years?
First of all, our focus is in the liquid packaging and in food service areas. If you look at those grades, they are growing much faster than the average growth in those regions. It's linked to those mega trends, as Kalle was saying earlier. In order to get the ramp up with the board machine, we need to make sure we are qualified for the food production. The first two years is all about how do we get everything in the product qualification approved before we can get the final portfolio we're aiming for to be up and running. The first two years will be very much of getting the machine to go. When you work with food, you need to make sure there are no surprises. Everything works as it should be. This is done together with our key customers.
They need to approve the qualities. They need to approve that it goes through their machines. It will be what we call the ramp-up phase after the board machine is running. Meanwhile, we have to test in other grades. The portfolio and the strategy is based on our core grades, where we want to grow, where we want to see the benefits. Those are, for example, CKB, it's the liquid packaging and food service.
Right. The first question, again, you talked about high growth, but in your specific case, you haven't had any revenue growth for four years, more or less. What part of that business have actually contracted?
Liquid packaging, we've not been able to grow because the capacity is full.
Right.
Basically there we have a modest growth, slightly at 0.1%, like I said, in the carton board area where we're talking more about the products for luxury packaging, we have had close to 13% growth, and in food services, close to 30%.
Coming from low starting points.
Just one clarification. When you talked about a period of trials, I would have assumed that you have a certain pre-approval because you do the same stuff in Finland and Sweden. Does this actually require a new testing phase?
Yes
to the same customers in China?
Yes. Every time you change the crate, even in Europe between the board machines, it requires a testing phase because we need to make sure the board flies in their system smoothly. There is no surprises. Especially when you talk about liquid packaging, you cannot have leakages.
Understood. Thank you.
Mikael Jofs, Kepler Cheuvreux. You are adding capacity in this segment, we also know that one of your quoted competitors is doing the same in Sweden, actually two of them. The second one is doing something that's sort of related to liquid packaging board, but a little bit less. There's another one announcing in Finland. How big do you see the risk of a sort of oversupply situation in all of this, despite the fact that there are bright long-term prospects?
Well, first of all, we are adding capacity in Asia, not in Europe. For Europe, it is more capacity. It is to be seen which grades and how they want to play with their volumes. As I said in my presentation, it is all about to be relevant to your customers. How do we add value and which role we want to play? It is worth to remember that even if we talk about folding box boards, there are many different grades, and there are many different purposes how do you use the grade. At least in our case, as I said, we want to see the entire packaging segment as an opportunity to grow. We will show you later how do we see non-food sectors. If we look at cosmetics, if we look at hair care, if we look at toothpaste, what are the opportunities there?
This is very much linked to the brand owner strategy. How do they see renewability and sustainability as a key differentiator for that brand? There are several legislations coming. We do not know fully yet how that will impact if you are not able to use a renewable packaging, but this is something every brand owner needs to go through currently. What are my packaging materials? We clearly see that board is already today taking shares from other packaging materials like tin or cans, in glass and so on.
The other thing I think you should be aware of, it is at least EUR 100 per ton in transportation cost from Northern Europe to China, at least.
A follow-up question there on the material replacement. If you paint a blue sky scenario, let us say 10 years from now, how big part of board will be the total market compared to where we are today? This is not a forecast.
It's not a forecast
I want to highlight, Ulla said earlier it was 16% for similar boards. I think that the sky is the limit. There are lots of opportunities, but I need to highlight, this is not only Stora Enso. This requires that the brand owners and us and the converters, we together, it's kind of a triangle. How do we build the differentiation? I strongly believe coming from the B2C, there will be a huge transformation because we as consumers, we are shopping more on online, and Gilles will talk about it in his presentation. What I mean, how can we see and think out of the box what packaging can do? How packaging is communicating to the consumers, and how that is linked to the brand owner strategies. I think that's a huge opportunity.
Thank you.
Obviously, we are worried about a lot of new capacity coming online in certain segments. On the other hand, to make carton board on the highest quality is not something you do overnight. You have paper makers with experience, and you have it. Yes, we are worried. That means that we need to move faster, but we are not totally scared.
The company that's most adaptable change will win.
Hello, Fabio Lopez from Bank of America Merrill Lynch. For your packaging project in China, are you going to be shipping pulp from Montes del Plata? If that is the case, I've heard some concerns about Because you have to ship the pulp long distance, you have to dehydrate and then to ship it dry, and then rehydrate. Then you lose quality, you lose properties, and therefore, your packaging could come as a lower quality. Is that a fair concern?
I wouldn't be concerned about that. The reason for it is that Montes del Plata is actually ahead in the quality, KPIs today. Today, there's a lot of board being made in China, basically coming all out of eucalyptus pulp from Latin America. Why would we be different?
Because you're on higher-end liquid packaging.
Yes. That is pulp. We have not decided from where to take the pulp. It will be eucalypt pulp, and it's depending on the recipe, and the recipe is now being discussed with the customers that we are talking to.
Okay. Thank you.
Oskar Lindström from Danske Bank. It was a very impressive chart you showed there, or diagram, of a variable cost reduction in consumer board. Variable cost per ton, to be exact. What have been the main drivers of that reduction, is that something that you see that you can continue with going forward? This has been achieved during a period with not a lot of top-line growth.
Well, it is part of our innovation process as well. How can we get more out of it? It's again, a cooperation, how do we work with the customers? This will continue, absolutely. Like I said, what we're investing now in Ingerois is also trying to improve this and really to drive efficiencies and more cost per ton.
For my follow-up, how important has lower wood prices been for that variable cost reduction?
It's been part of it, yes. More important, in combination how you reduce the source. I think you will have an expert of source reduction coming up on stage later on this afternoon, Marko. Take that with him.
All right. Thank you.
If there are no more questions, we thank you, Jari.
Thank you.
I would like to invite Gilles van Nieuwenhuyzen, who has joined us, and he joined us in the middle of March. He has a very impressive CV. What you read in that CV is that he's probably also one of the better ones in the company from the outside understanding the chemical industry with his past in Danisco and DuPont. Please, Gilles, the floor is yours.
Thanks, Karl-Henrik. Good afternoon. I would like to take you through Packaging Solutions. My name is Gilles van Nieuwenhuyzen. I'm Dutch, and my first name is French, but you'll get my name right. I would first like to show you actually an innovation. The thing that we introduced a couple of months ago is a branding of containerboard. This is new to this industry. We want to move from being solely a commodity to being a differentiated supplier, which is on the one hand supplying high-quality products and also working on providing services to our customers. Which is about right weighting, selling the right product with high performance. Obviously with high performance, you need to sell less. We want to sell it on performance, not on per ton, but want to sell it per square meter.
Technical customer service or doing internet business with us, recycling. This is going to add value to our customers. It's highly appreciated. It's new to this industry. We sell our products to many different segments. Food is the largest segment with many sub-segments in it. Industrial, also large, again, many different segments in that. Household furniture, consumer electronics, you can see it. What is increasingly important is actually retail, because the retail power is increasing. What that means is that retail is increasingly specifying the packaging that they want around the products. Private label is incredibly important. The low end of retail, the price fighters are growing fast. That is going to be increasingly, in addition to the brand owners, an important type of customer for us. Now, Packaging Solutions is active with two different businesses.
One business is containerboard, where you make very large paper rolls with thick paper from which you can make corrugated. The second business is corrugated packaging. In corrugated packaging, we make boxes. These are very different type businesses. In the corrugated boxes business, we sell to the brand owners and increasingly also now to retail. Containerboard, we have a complete portfolio, increasingly complete, with testliner today and fluting, and I come back to extensions later. In containerboard, we use fiber, either recycled fiber, which we do in Poland at our Ostrołęka mill. Or virgin fiber, which we do in Finland, coming directly from wood. The dynamics and fundamentals around these two businesses, Containerboard and Corrugated Packaging, are very different. A Corrugated Packaging business is about supplying boxes, and we include in that making a design.
Our customers are here, as I said, brand owners and retailers. The box doesn't travel far. It only travels roughly 200, 300 km, which means it's a local business. You need to be very close to your customers. The dynamics around this business is you need to make great designs with which your customers can reduce cost and/or sell more. A Containerboard business, however, these are big paper mills, big board mills. We sell here to converters externally and internally to our own converting operations. If it's kraftliner, so being based on virgin fiber, prices are relatively high based on the high performance. This travels globally, around the world. If it's a recycled base, the radius is lower prices. You can ship more or less 800 to 900 km. It's more a regional type business.
To be successful in that business, you need to have economy of scale, high volumes. You need to be technologically advanced, so you have paper machines that are really competitive. You need to have access to competitive fiber supply, either being recycled or virgin. You need to have a very good energy efficiency, which means typically your own power plant. This business, Packaging Solutions, has got a strong financial track record. The last five years, we grew at more than EUR 100 million from a base of just over EUR 900. That's a CAGR of roughly 3% per annum. We're over 5 percentage points. The way we did that was on the basis of two drivers. On the one hand, we took our cost improvements including restructuring, and we sold some less profitable businesses. On the other hand, that's about the other half of it, is growth.
You can see that we have been increasing our volumes, both in corrugated, but especially on Containerboard, where we built the building in Ostrołęka, Poland. The various trends in this industry which provide good opportunities for growth when you play it right. First of all, we believe that recycled fiber will become increasingly scarce because there is less and less paper being produced. As Karl mentioned earlier this afternoon, as you all know, paper is declining. That means less recycled fiber available, which means that it will get increasingly recycled, and the quality will decrease. That is a big advantage for us, having access to competitive virgin fiber supply. In retail power is increasing. That means that we need to partner with retail increasingly to do better business. The internet means that consumers are increasingly shopping online.
What that means is consumers buy less and less in a shop. When it gets bought, when they buy online, the product needs to be packaged properly because it needs to survive the transport. This means this is a great opportunity for corrugated, and corrugated is actually becoming increasingly a primary packaging because this is what the customer, the consumer, is getting at home. This is also about branding and having attractive packaging. The third thing is about intelligence in packaging. I will not dwell on this too much this afternoon because Marko Hakovirta will talk about this more. This is, again, very important type development for corrugated packaging because it's going to be very easy to integrate this, for example, in online type retail products. There's rightweighting. Rightweighting is about selling not weight but selling performance.
We have products in our portfolio which are much better than the average quality in the market. We want to get the value on that. We want to sell on square meters and downsize and reduce weight of the boxes and pass on that benefit to our customers. The last one, we've talked about it a lot, sustainability. It's quite clear that in several segments, we are competing against plastic packaging. That's the alternative. That's the big enemy. Consumers, and increasingly the young generation, they don't accept exhausting the world's resources. This is, again, a big advantage for our type of renewable packaging. For containerboard, as you all know, there is a very important development that we're doing right now. We have a big paper mill, Varkaus, in Finland, and because the business is declining, we will convert that paper mill.
We're in the process of converting that to a containerboard machine, which will be very competitive. We are converting a paper machine with a capacity of about 280,000 tons to a kraftliner machine being able to supply 390,000 tons. We project for that business an EBITDA margin over 15%. This is a very attractive story because we take away the problem for paper. We enter a growing market. We will have very competitive assets. We are already in these global markets with our fluting materials, which we supply from the Heinola mill in Finland. We are directly able to access a big customer base, so the majority we can easily cross-sell to these customers. We will have a very low capital amount to invest in relative terms.
I know that EUR 110 million is not nothing, but when you compare having to build a completely new kraftliner type capacity, including pulp, we're talking about EUR 2,400 per ton. We are going to spend on this about EUR 280 per ton. That is a huge advantage. We will have an integrated pulp mill with competitive wood supply and an infrastructure in place. Where does that take us? It takes us immediately in Europe from position 10 to position 6. More importantly, for our total containerboard business, it means that we will have 3 really excellent type assets and type businesses completing, having a complete portfolio, being in testliner coming from Ostrołęka, Poland, being in kraftliners coming from Varkaus, and being a fluting material, semi-chemical fluting from a Heinola mill. These are all large scales machines, this is about economy of scale.
Two of these machines will be really state-of-the-art, very modern, the Varkaus machine plus the Ostrołęka machine. We have access to our own recycled paper collection network in Poland for very competitive supply, and we have in Finland very competitive virgin wood sourcing. All these mills are completely integrated in terms of energy and pulp. We have also a good position in corrugated packaging in the boxes business, in those markets where we operate, which we have selected to operate in. We are in the Nordics. We are number 1. In Central Europe, which is around Poland, we are number 3 and very close actually to the number 1 and number 2. In Russia, in those areas where we operate, which is around Moscow and the larger area around that going east, industrial areas, we are number 4.
More importantly, I think, is also how are you positioned for growth here? We are not in Western Europe. Western Europe is a low-growth area, relatively a lot of capacity there. That's where we are not. We are in the Nordics. Nordics, relatively low growth. We are mainly in Eastern Europe, close to 4% market growth. We are in Russia. Oil prices will go up again over time. That's good. Market growth around 3%, around that level. Increasingly today, with the problems around the ruble, it's very competitive. More and more companies produce actually locally because imports are simply not competitive anymore. Then we are in China. In China, we are right now three converting plants, three box plants. The market growth there is on average maybe 4%, but we focus there on the high added-value market. That market segment is growing by roughly 7%.
In this boxes business, we provide value basically on two dimensions, thought leadership and innovation. Now, thought leadership, what we are doing there, we think about the industries of our customers. We try to understand what is driving them and how they can be successful, how they can grow their sales, how they can grow their margins. We share those insights with our customers. We produce these in what we call viewpoints. We get invited to exhibitions, major conferences, to talk about our insights. More importantly, when we go to the brand owners and to retail, we are not talking anymore to procurement. No, we go to their business functions, to marketing, to product development, and to share these insights and help our customers how they can be more successful with improved packaging. The other component is innovation.
Now in this business, we have today what we call design studios, eight in Europe and three in China. What we do there is that we co-develop with our customers. We co-develop improved packaging so that they can take out cost in the total chain and/or sell more. So we have now software in these design studios, which is a 3D virtual store. So we design a package, a box, and then we put that box into this virtual store. Then with this software, we get feedback on how well that box is selling. That's tremendous value for our retail customers and for our brand owners. So in that way, we truly help, and this is innovative. We also take out cost by having our high-quality materials and designing in the right way, reducing weight. Now, two examples. Left-hand side, the customer in Russia.
They were just supplying in the past, before we came in, eggs to retail, all these simple fiber compressed type packagings. We designed with them a completely new box. Very attractive, good printing. This box was selling 40% faster, so our customers sold 40% more. We reduced the size of the packaging so that on the shelf, there's actually more space available in the retail, and we reduced the weight of the box by 20%. The other example on the right-hand side is packaging for a furniture manufacturer. In this case, it was a kitchen drawer. Many loose components, a lot of plastic. We got in there, and we redesigned that to completely corrugated, completely renewable. With that, the customer can increase their truck loading, shipping from Eastern Europe to Western Europe by 60%, increased truck loading.
They can reduce the box weight by close to 40%. This is what we can do. I'm not saying that it can be done on every type of thing, but this is what we can do. These are impressive numbers. This is innovation. Concluding, Stora Enso Packaging Solutions is very well-positioned for growth. First of all, we understand our customers really well. Deep customer understanding. That's where it's starting. How can we create value? Secondly, we have a strong offering. We have a strong, complete portfolio now in containerboards, and we know what to do in terms of services and design in the boxes. We are very well-positioned, both now in containerboards to capture more growth and regionally to be in the right high-growth regions in Eastern Europe and China. We are innovative. We do new things. We move ahead.
We have a proven track record of solid financial improvement. Thank you.
Thank you, Gilles. Any questions? Diana. There's a mic.
Hello. The conversion that you are doing in the Varkaus mill sounds amazing. It sounds so great, such great returns. I am curious, how many more such projects you could do within your system? How many more paper mills could be converted with such high returns in your system?
We all the time look at potential opportunities, but it depends because it is a balance between paper and containerboard and if the assets are exactly right. That means you need to have the right trim width, et cetera. It is something that we are very aware of. If somebody can do it is probably us.
Theoretically, how much more capacity could you potentially convert?
There are a few mills that might be, but it is very few. I would like to point that out. Varkaus was one of a kind within our net mill structure. It is not that we are having, like, in Europe, 12 paper mills. I think Varkaus is the obvious one, then you can convert any machine. It is just a matter of money. Not as good as Varkaus.
If I may add also, in Varkaus, there was a power for the kraft and integrated.
Yes
integrated power as well. There are those results in the recent time in the papers.
It's Barry Dixon from Davy. Just to follow on from Diana's question. Are you concerned about the amount of capacity which is coming into the containerboard industry in Europe, both on your own mill and kraftliner, but also increasingly on recycled containerboard? Secondly, on the whole area of innovation, and there are a lot of your peers who claim that they're doing very similar things to yourselves in terms of product innovation around corrugated. I suppose the question that from a financial perspective is, who pays for that? I don't get the sense that your customer base, be it the Nestlé or Findus of the world, are actually willing to pay higher prices for these innovative products, because they just say, "We want to have the same packaging costs." Just your thoughts on that in terms of who pays for the innovation.
Thank you.
Second to first one, on capacity. Actually, on the one hand, I believe there is new capacity coming into the market. The market is growing. There is also capacity disappearing. When you look at recent announcements, there have been, in the last few years, several capacity closures on containerboard mills, all less in capacity, around about 100,000 tons. We are having asset sizes of about 400,000 tons. We are well-positioned where we are in Eastern Europe because that market is rapidly growing. It is actually pretty well in balance on capacity, supply, demand. That is the first one. On innovation-
Maybe I can also say-
regarding kraftliner. Kraftliner is today a market where it is basically not produced balancedly in Europe. 800,000 tons are imported. You are absolutely right. We need to think where we are going. This is a unique asset with a unique proposition.
The other-- On innovation. We are quite careful in terms of where do we actually want to supply these design services and work. We will do that only with customers where we feel, okay, we have an edge, and where indeed that value add is indeed being valued by our customers. We are very careful about segmentation, so in the first place. If somebody wants only cost, we will supply only cost and take out cost and have the lowest cost design. If we have customers, brand owners, and/or retail where we feel we have here the right context and we are going to redesign and create value in terms of selling more, when we get that feeling, and if we are that deep in a customer, they are going to value that, then we will put in the extra effort. We are careful about that.
We take the right, I think, balance between cost, not adding too much cost, but being selective where we do it because we want to create value and not destroy it.
On that, it's also how we address the customer. If you go only to purchasing, they will not. When you start to think about the product owner in a B2C, they do care. We are working up the value chain inside selected number of customers. Have you already seen evidence that it works? Yes. How much That is too little to talk about today. The journey has just started.
Mark Ferwen, Ebly. I was wondering, in context of consumer packaging, you talked about your global reach. Here you have fairly limited geographical presence. Would you consider Western Europe at any stage, or are you happy to be number six in Europe in containerboards?
Containerboard. What the containerboard is about is really about having very competitive assets and making sure that you are really having high returns on that. Size is less relevant. As long as you have a mill, a containerboard machine, which is very competitive, you can earn a lot of money. That is what it's more about. It's not about scale here. To have many machines. I'd rather have less in the right markets, whether they're being global or whether they're regional than having many of less competitive size. I'm very happy with what we are getting now, a complete portfolio with three machines, one being regional and two global.
Lars Kjellberg, Credit Suisse. I'm slightly confused actually about what your offering is because clearly from a corrugated platform, which is the end product where you're customer facing, arguably, there is a scale component here where there's global or regional purchasing, and what you just said was about containerboard. Do you have a different view on the corrugated business than you do on the containerboard side? The second question is about the containerboard assets or the Varkaus conversion specifically. As Kalle said, there's of course, there's an element of significant imports into Europe. That import has been there for decades. Effectively, what is your strategy to introduce those tons, and that those tons typically arrive in Southern Europe, and arguably, you're in Finland, which puts you at a relative disadvantage.
If you share your thoughts on that'd be interesting.
Okay. First one. On the geographic footprint and the areas where we want to compete in the boxes business, this is a regional business. Why to compete in Western Europe where there's oversupply and returns in corrugated boxes are very low? I feel that's not particularly attractive. In Eastern Europe, there is a gap there. The market is growing, and as long as you have the right footprint there, we are the first movers, one of the first movers there, and we make better returns. The same thing in China. I think the boxes business is about picking the right type markets in order to make good returns. The other point was-
Containerboard.
Yeah.
Varkaus.
On the Varkaus. We have already customers with our fluting materials. These customers, they need high-quality type material in order to make boxes, try a conversion from it, which required this high quality. For example, under humidity conditions. Kraftliners are preferred products. It is true that from the U.S., there are kraftliner imports. We understand our cost structure extremely well and our delivered cost because we supply already from our Heinola mill, the fluting mill, to those customers also in Southern Europe, in Africa, South America, and all around the globe. We see there the kraftliners coming in from the U.S. We know exactly what the delivery costs are, what the transport costs are, because Heinola and Varkaus are about 100, 200 km apart. We know exactly what it costs. We know exactly what the market prices are.
We know exactly what the wood is costing in Varkaus, what the energy costs are, et cetera. Therefore, we know what our competitive position is against the Americans. We know that we are on the very low end of that cost curve.
Okay. I was just going to say, just to follow up on that, what you are telling us that your edge is going to be on price because you are cost competitive. Is that your offering?
Our offering is that the customers already know us, and we will sell increase also on performance, what I said. When we get in and they understand the value of our kraftliner, the quality of our kraftliners, it will be more. We expect that over time, our customers or converters will start to appreciate the value of our kraftliner, and that's actually a differential also in premium. Have not taken into account, but the American kraftliners are worse in quality than what will be the quality of our Varkaus mill.
Okay. Thank you.
Karl, earlier in your comments, you mentioned that you, in theory, would have the capacity to do an acquisition like a Klabin. I'm curious if you could just talk about that for a minute, and how would you think about an acquisition of Klabin? How would it fit into the story that you're telling us today?
Klabin would be very hard for us to acquire, and the reason for it is that Klabin, BillerudKorsnäs, and Stora Enso are the three suppliers to one big converter in the liquid packaging board. We are already, in the European context, deemed to have a dominant market position. Okay? That will mean that we will have a dominant market position globally, so I don't think we will get any approvals for it. That one is not even on the agenda for us. If there wasn't those constraints, I would love to have it, but then you would control probably 55% of the liquid packaging board market. That's a dream scenario. That will not happen for regulatory reasons. Any last questions?
Any questions for this session? If not, I think that we go early to the coffee session or coffee break, and let's be back five to 3:00 P.M. Half an hour coffee break, and then we will continue with the innovation part. All right. Thank you.
Thank you.
Perfect. Thank you very much. Test. Test one, test two. Test. One, two, three, four, five. One, two, three. One, two, three, four, five. Are you still saying you're only getting one channel from this? Sorry, say that again. You're still only getting one channel as well? Yeah. You should be getting two. Actually, I mute the other one. Stop watching. Yeah. I don't need to. Just one is fine. Is that in order to get the levels down, is it? Huh? Sorry. Is that in order to get the level down?
Okay.
I just want to prevent any noise going in there because we don't need the other channel. Right. Okay. Just using a single channel. Yeah. Just a single channel. If we are doing a dual language one, we'll need two channels, but this one, I would rather just get rid of it altogether. Test.
Okay. How about?
Actually, lower it down another minus seven. You brought it down then? Yeah. Test. One, two, three, four. One, two, three, four. One, two, three. One, two, three, four. One, two, three, four. I think we're good to go with this. Can I reboot the Anycast? Sometimes. No, it's okay. I'm pretty sure it's just a reboot. It takes two seconds and then Fine. Is this the bit? Is this the machine? What's doing it? It's staying on. That's it, isn't it?
Yeah.
[Foreign language]
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No, that's right there.
What?
Oh, this one.
Yes.
It's not working.
It's not work. Marko, you just stay over there. Doesn't work.
Yeah.
May I have your attention? The clicker doesn't work. Now I would like to have the opportunity to introduce Marko, which is Head of Innovation and R&D within Consumer Board. Please join the stage, Marko. Marko is a person that joined us about a year ago. Marko has an experience both from the industry as well as from academia. With that, I would like to hand over to you, Marko. The floor is yours. Thank you very much.
Thank you, Kalle. Thank you for the kind introduction. Let me start by saying that it's a great pleasure to be here and talk about innovation in Consumer Board division. We have some very exciting things going on in our innovation pipeline, and sometimes it's kind of difficult to communicate because of sensitivities, NDAs with customers and partners. Today, we give you some of the latest highlights of our developments. Let's start the presentation actually by giving you a short video that tells a little bit about the story of what we are doing in our innovation R&D in the Consumer Board division.
We at Stora Enso create innovations for sustainable packaging alternatives for our customers and consumers to replace plastic packaging. We are the global benchmark and thought leader in renewable packaging innovation. Our progress will be measured in the superior value we bring to our customers and to our global community. We bring together the customers and industry to compile versatile expertise. The world needs a new approach to materials and sustainable packaging.
All right. Hopefully, you got a little bit excited after a little video demonstration. I will continue from Jari Latvanen's presentation by talking about Consumer Board's innovation R&D. I'll talk about the vision we have. I'll talk about our strategic key focus areas. I'll talk about our capabilities and our approach towards customer-centric innovation creation. Let's start by our vision. We really aspire to become a global benchmark and thought leader in renewable packaging innovations. Here, you can see our five focus areas in our development activities. I'm sure some of them are quite familiar to you. Let's start by walking through all of these briefly. Microfibrillated cellulose is an interesting topic in this industry. Many industry players are working on it, and there's a lot of academic research. Research institutes are heavily focusing on microfibrillated cellulose. I will not give you a lecture on MFC.
I will not give you a presentation on the applications even. I will use this opportunity to mention that actually, Stora Enso has the world's largest capacity in manufacturing MFC when it comes to the board-related MFC grades. We really are actually a global benchmark in this area already. Of course, barrier coatings are extremely important for us, important for our customers and of course for consumers. We continue in our R&D, investing into biobarriers, so creating even more sustainable barrier coating opportunities. You of course know that the prices of biopolymers are still quite high. The supply-demand equation has not been solved yet in the biopolymer side. Only about 1% of the total polymer market is biopolymers currently. This is, of course, a great opportunity to work with our R&D on this topical area. Intelligent packaging has tremendous new business development opportunities.
You can only imagine connecting fiber-based packaging to the Internet of Things. The applications range not just from logistical efficiencies point of view, but also from the point of view of brand enhancement and really consumer-related benefits. You heard from Jari's presentation that replacing plastics is very important for us. It truly is a strategic theme for us. We have a dedicated team of new business developers, incubation activities, looking at new concepts together with our customers to replace plastics. In this industry, design and R&D work hand in hand. Therefore, we of course, have selected design solutions to be one of the key focus areas in our development activities. A few words about our capabilities. We truly have world-class state-of-the-art capabilities. We have two research centers, one in Imatra, Finland, and one in Karlstad in Sweden.
We have world-class expertise in packaging material science, product purity, product safety issues, in industrial scaling up. MFC is a good example. It, of course, started from smaller activities and now is in industrial scale. Of course, we have expertise in new business development and incubation. In total, we have about 140 professionals in this innovation R&D function. Of course, we do not work alone in innovation. We actively work with our partners. We work with the best universities and research institutes in the Nordics, of course, their counterparts, the best universities and research institutes internationally, globally. Here's only a few examples of the partner networks we have. Recently, we have also started working more and more with the startup communities, SMEs, and larger corporations because we truly believe that an innovative company excels in working in open innovation networks globally.
To continue Jari's message, we are transitioning from a manufacturing-centric innovation company towards a customer-centric innovation company. This really means in our innovation activities that we look at the global mega trends that Kalle presented earlier. Also we look at what the real customers, our consumers, and end users of our products feel. We look at ergonomics, we look at user experience in the broader sense, look at the easiness to use, etc. All sorts of attributes that are related to packaging. I will not present any organizational charts on innovation organization, I'd like to go through some of the activities we have. We have R&D that is looking at product, materials, technology development, they are truly trying to answer the question: what is feasible technologically?
We have recently set up new business development activities, which includes partnerships, scouting, joint ventures, incubation, creating new solutions with the customers. This activity, of course, is looking at what is feasible or what is possible in the marketplace. And then of course, thirdly, we have design innovation activities. This activity is, of course, looking at what is desirable to the end user. All these three activities together is really our definition of new product innovation in the Consumer Board division. Now, a few announcements. You have heard that there are 3 announcements that came out today, and we are very happy to announce that we are building a packaging innovation center in Helsinki, in our Kanavaranta offices. It will be ready by the end of the year. And it will have a key role facilitating customer-centric innovation activities.
This is a place where we invite our customers, our stakeholders, our partners. It will be an experience center. It will be a showroom. It will show the future of packaging solutions. We will also have permanent staffing in the center, so our new business development team will be residing in these premises. Another announcement was that we have just signed a joint development agreement with a company called NXP Semiconductors. And you might know NXP from near-field communication technology. They are one of the global leaders in that. We all use everyday NFC technology, for example. It is in our passports. It is in our payment cards when you go to the public transportation system. It is in many applications, even the hotel key cards.
What we are now doing is, together with NXP, we are looking at truly intelligent packaging solutions. We are together now innovating how to really create value-added solutions to our customers from the intelligent packaging perspective. Sometimes it is easier to show things as a demonstrator than describe things when it gets too technical. Here is one example what we are looking at with NXP. We have embedded, integrated into a package, antenna structures and a microchip. And this concept enables, for example, a consumer, by using a smart device, to read if the package was ever opened after it was shipped. You could imagine applications, for example, in online retail. There are a lot of other applications, of course, what we are investigating, and this is a journey we are now starting together with NXP. The last announcement was about microfibrillated cellulose. Here is our development roadmap of MFC.
As you can see, we have moved forward with quite a good pace. And we are very happy to announce that now, 2015, we have entered a commercial stage of the development, so we actually make business out of MFC, and our product is related to source reduction. That has been our roadmap first target in the commercialization. We have, of course, continuation to the commercialization roadmap, and next steps are looking at barrier coatings, all the way to someday replacing aluminum foil as a barrier. Then also we are continuously looking at new solutions, new usage for MFC, since we have a capacity, and we have the ability to scale it up. Here is another demonstrator in my hand. You can see here, the box has a transparent window. It is not plastic. It actually is MFC, purely MFC. So it is a transparent paper in a sense.
This is not something that's going to be in the market tomorrow. This is a kind of example, as a thought leader, we need to show the direction where the packaging industry will be moving. MFC has a lot of other applications also we see potential in the future. I would like to conclude my presentation by summing it up by looking at the key drivers to our innovation activities. They truly are in source reduction, as you just heard about MFC case, in replacing fossil-based materials, going to barrier coatings, replacing plastic solutions, and of course, consumer convenience, which links then to the intelligent packaging solutions. Thank you very much.
Okay, thank you, Marko. We do it now so that we will start the innovation panel. Let me invite Kalle, Marko, Gilles, and Jari to join me here. It will be done so that we will discuss here a bit first, and then we will invite questions from the audience. There you will have a possibility to discuss with Marko and ask questions from him. In any way, thanks, Marko, for your presentation. It was very interesting and also very helpful to me in this work that I also learn more about this and my stakeholder group can access this info. Why don't you, Kalle, remind us, what are the megatrends that driving us and driving our innovation to a certain direction?
I think the six megatrends that I talked about before, which is globally increased population, urbanization, digitalization, the wealth spread, the growing middle class, the eco-awareness, and change of lifestyle, are the megatrends that drives us a lot in Stora Enso, because it's all about searching for renewable materials that do not compete with the production of food, which is the reason why we have a growing population that we need to feed.
Yeah. Good. Okay, maybe Jari next. Marko is working for you in the same division and doing these really pathfinding R&D and innovation type of issues. How do you see it? How can we make these products commercialized, how we can really bring added value to the customer and also show they the way that where to go with the renewable materials?
What I said earlier today is that we want to become more customer-centric, this innovation center is a place where we need to, together with the brand owners, to discuss the opportunities, how can you develop your brand or your packaging with us? We're moving to a phase where we're demonstrating concretely what you can do with the board, with the renewable materials, and not just being in the board area. This is really important, as Marko said earlier today. These are obviously very top-secret discussions we're going with the brand owners, so we cannot really open up those. This innovation center will be also a place where we meet continuously behind the closed doors.
It's also increasing our company's awareness, how we as Stora Enso can add value in the packaging area, and moving closer to consumer in terms of showing what you can do out of the board packaging.
If I understand it correctly, the NXP announcement is very much also, Kalle, to your area, and how you will be able to commercialize that in a corrugated packaging side.
I think that's a very important development because you think about online shopping. In online shopping, products will need to be packaged in a good way to arrive at the consumer undamaged. That will generally require corrugated packaging. You think about this near-field communication technology. A lot of these high-value items that today are being bought online, major concern of the customer is that they should really get the genuine article. For example, if you were to buy, say, a Lacoste polo shirt, maybe not even such high value, but can you trust that when it gets home, when you're delivered, that it's not a fake? To have a chip there that can tell you that indeed it was genuine Lacoste is of importance. Another area where actually online is not very important yet is the area of food retail. The penetration is very low.
It's only about 5% here in the U.K. Like Scandinavia, the rest of Europe, it's 2%, 1%. A major reason for that is that the consumer doesn't necessarily trust the quality, the freshness of what is arriving at home. If you order milk or yogurt or fresh groceries, can you trust that when it arrives home that it's still fresh? Under what sort of conditions has it been shipped? Was it at a high temperature? For how long? Is it still okay? With this sort of technology with a chip, you could read out with your smartphone that it's still okay to use. That could have a major impact on changing also that industry.
Yes. Speaking about the smartphones, I think that there's something maybe that Kalle and Marko you can share with us.
Yes, I heard that Ulla has been giving away a few of these boxes with some macarons. I was wondering if Kalle wants to have one of these boxes. Well
I am not sure because I am actually one of those terrible persons that you hate to have on an airplane.
nut allergies. Let's see. Now I recall you had some, was it cashew nut allergy? Yes.
That's right.
Let's see. Let's check it out with this intelligent box. Yeah. Better not eat, Kalle. I wouldn't eat this.
Thank you very much. You saved my day.
This is a very nice app you have there, and funny pictures as well. Thanks for that. What's new there? I mean, RFID has been around for a long period of time. Why haven't it really been used before?
I think what has happened is that like in many things in the electronic industry, the problem with the RFID when it was introduced was there was no infrastructure for reading it. With NFC being part of basically all smartphones as of today and the price has gone like this, the infrastructure is in your hands, most people, because probably the penetration of smartphones in Europe is probably somewhere around 50% growing, and inside it is an NFC chip. I think this box demonstrates a couple of nice things. First of all, it's a box. Inside is a printed antenna. Inside is an embedded chip. Inside is a small system, how you can make sure it's not tampered with. Then as icing on the cake, it's a plastic window here made of MFC.
This is just a demonstration, the cost of doing these things today is not very high. The chip is about EUR 0.20.
Right.
We have the technology to put it inside.
Think about all the apps we have. This is one additional one that you can have in your mobile phone, and it give you a lot of information. What I usually say in many of the investor meetings that this is a box now with the MFC window that you can throw it to the forest, and it works as a fertilizer because everything just dissolves, and it's a wood fiber. That is definitely the future we are looking for with this material. That's a nice story, and great that we are there with that. At this point, do we have any questions from the audience to either Marko or any of our panelists here? Please raise your right hand. Oskar.
Thank you. Oskar Lindström with Danske Bank. Very interesting new technologies and innovations here. To what extent do you see yourselves applying these to your existing products, or will there also be new products that you produce partly based on these innovations? Will Stora Enso, 5 years from now, be producing not packaging board, but other products from, for example, MFC?
What I said in terms of investing in innovation, it's really crucial that we do it in cooperation with our customers. We talk about the brand owners. A different brand owner has different value propositions. Obviously, we go through with our current customers what opportunities this could create for them. It's as important to move out of our current board packaging customers to move into these new areas like who are using today, for example, plastic. How could we together with them, obviously, depending on their brand proposition, how they want to develop it further, how they would transform from non-renewable packaging to renewable packaging? These technologies that we're demonstrating here, obviously, there are hundreds of different applications depending again from the customer. Again, I'm saying our journey is now starting where we invite, we have a place where we develop together.
We go customer by customer, there are some applications that can be commercialized much more rapidly.
The other thing is when you have a discussion about these things, you usually talk to other parties of your customer's organization. You're not always pushed down to the purchasing department where we try to go away from. The discussion is different.
I can, tomorrow, we, Marko and I, we are traveling a lot because we need to meet the top management of these brand owners and explain how the most important media can play a role for different brand owners. It's also for us a new journey to open doors, to go in and meet customers, and find those customers, and explain what board packaging can be capable of.
All right. Thank you.
Okay.
Thank you. Just as supposed to get a sense from you as to how much crossover there is in this whole drive towards innovation and product development between the Consumer Board and the corrugated division. In terms of, I suppose looking at it from the perspective of your customers, how much are they driving this consistency between secondary and primary packaging? Then from your own perspective, what are the synergies that you see, or is there much crossover between the level of innovation between the two divisions?
I can start saying there is actually a third division that is also a crossover where we have, and that especially when we meet retailers. We are now working more with joint teams towards retailers. Retailers, they buy paper, because that's the segment that is most stable when it comes to flyers, direct mail. They buy a white label kind of packaging, food packaging, and secondary packaging. Yes, we are addressing that issue.
This is really important. We are not just talking about divisions. When we take a customer in, we align internally, like Kalle says, when we talk to a retailer, there is Gilles, there is paper, and there is Consumer Board talking to the same team, how can we add value to them? We have great involved retail top management also to reconsider what and how we could work together.
The other area is that we're actually working very closely between the two of those divisions and the Biomaterials is at the forefront of getting the new materials, and that's like MFC, they started.
Gilles, do you want to add?
I think I would say that also that in terms of the innovation capabilities, it's quite important and we leverage what is there in terms of innovation capability. I think this is the critical mass here that we have. We have deep know-how, what is in terms of capabilities in that area, and that's available basically for everything and all people and all businesses within the packaging area.
Some more questions?
If I add to this, we also have the current converters we're working, and obviously, they are involved as well. We're not a converter. We need to make sure that the entire value chain is working for the same purpose.
At this point, I can also say that you have on your tables these boxes now with the macarons, and you have also received some information. There's a small information leaflet about what's in these because the intelligence is not put into these yet. Basically, also enjoy the macarons in a good time. We don't really take responsibility how long you can store them here. This is a fresh product made last night. It's very edible at the moment. Enjoy yourselves. Please, some more questions to these gentlemen. Okay, Micke.
Micke Nyhof, Capital R. This sounds very interesting. Of course, comes the question, how to measure it. Should we expect this to increase sales, pricing, margins? I know this is a very difficult question, since you're all sitting up there, some thoughts around it, perhaps.
Well, if I start, I said we want to have the premier market position in the high-end, in the high-quality segments. There, when we talk about the pyramid of products, obviously this is not directly for the low-value products, where the differentiation and the brand building drives the brand owner's agenda. We're not talking about huge costs like Kalle said, it's also the infrastructure, I think, that will enable us.
For me, this is a premium product. It's very few companies who can do it. It's how you laminate thing, how you get embedded it, how you get the anti-tampering. There is not that many companies that supplies near-field communication chips. Will there be competition? Yes. Will we be rewarded for having the first mover's advantage? Yes, I believe so. This is just to make sure that we stay ahead on this.
Also something very concrete in here that this is for MFC is part of our source allocation strategy in the R&D. Its fundamental aim is to reduce the use of wood and quantity-wise. It gets the same qualities to this package, or that you would get with the existing pulp. Of course, the new quality is what Jari is holding there to have this transparency. This is really getting to the really the big avenues of getting close to the plastic. You and I, we have been around some time, we remember from the earlier capital market days that it really is boiling down to the fact that you would get more out of the same amount of cubic meters of wood. That is also driver there, reducing the cost.
In addition, what Jari and Kalle was saying here of getting the new qualities in here. Okay, Lars and then Oskar.
Lars Kjellberg, Credit Suisse. When I'm looking at this is obviously quite interesting. On the containerboard side, you have a corrugated business. Would you consider again to reenter the converting side on cartons? You obviously had the Ora business in the past, right? Some of your competitors, well, namely in the U.S., they have an extension of the business, of course. The second point coming to Ulla changed in raw material supply and less wood, et cetera. Does that actually require any modification of existing board machines to use this new fiber technology?
Isn't this, Marko, something for you that you can take?
The board machine?
The board machine.
That one.
We are now, if I go a little bit ahead of Gilles, at this moment, we're in a strategy when it comes to the corrugated business, the box plans, that we think we are in the right markets. We don't see any growth in Europe. Since the box only travels 200 to 300 kilometers, we rather would like to expand in that corridor. Right, Gilles? That we're in.
Yes, I think that's true. That's giving us good growth. You're right in saying, the converting capability that we have is ideal to quickly incorporate these sort of near-field communication technologies. It's ideal we can do that. That's true.
I was actually more referencing to the consumer packaging part, not Gilles' business, i.e., the consumer packaging. If you were to go the next leg, so to speak, to actually make the carton, I suppose, just the raw material.
As a first step, currently, we want to work with our current converters. This is a triangle because so far, we've been very much depending, we sell to the converter sells to the brand owner. We're not trying to steal business away from converters. Rather, we want to work in a triangle where this is adding value with those resources we have in our innovation and R&D. I think we are quite unique for this business. There we need to join our forces. That's where we're also working very closely with the converters that we need to work together. We, as Consumer Board, as Stora Enso, want to have a bigger role also in the interfaces with brand owners. We're not really trying to steal business anywhere, but we want to have a more serious role in this entire value chain.
While Marko is talking about design, with my background, I didn't understand what FBB is. I understood packaging is a way of differentiating. Why we need the innovation center is really to involve all those three parties. This is what we can do together.
The answer to that modification question for current board machines, there's not much modifications needed, definitely so.
no significant-
No
reinvestments in it. Okay. Thank you.
Am I not correct that the MFC products are made in Imatra in the current board machines?
Yes. Correct.
Correct.
Yes. Where the MFC plant is or the pre-commercial plant is.
It is a scalable technology. As business advances, we are able to scale.
Okay, Oskar, please go ahead.
A specific question on MFC, and is that something that you could bring into the new Guangxi board mill and sort of have that when you talk about commercializing it? Would that be an opportunity to commercialize it on a grand scale? We are talking about barriers and so on.
It's not planned as a first step, but we know the technology and depending how we ramp up what is the interest in the market. This is not what we cannot copy to other mills, but we need to get the scale. Obviously, I believe strongly Asia will be much faster moving in these areas than Europe. Asians and Chinese will learn much quicker that this is a unique opportunity. I think here in Europe, we tend to be slower.
Isn't it also said that some of the culturally Chinese like some of the features in packaging products that the MFC can create, and we can create with that. That's why we think that that might be a good market for that.
What would some of those features be? I see the transparent window there.
Yes
are there others?
There are some that you can create with the new boards, that you can make them sort of more versatile and more attractive.
Marko said also, we are looking with MFC to get away.
Thanks. It's Linus Larsson with SEB. Just a continuation on the previous question about MFC. It sounds as if MFC at this stage is facilitating a long-going, light-weighting trend, you are also talking about some technological breakthroughs to come. If you were to put a timeline on what you said about aluminum replacement, what's your best guess at this stage? When could we actually see biodegradable liquid barriers in packaging?
It's always difficult to put timelines. Let's say what I mentioned about general barrier coatings against oxygen and grease, we see somewhere three years from now could be something. When you go to replacing aluminum, it all depends how fast and what kind of discoveries we make during our development work, but maybe five years from now and beyond. Those are always kind of difficult to estimate.
Good. Are there any more questions on this area? We probably all are ready to move on to Guangxi. Thank you for the panelists.
Thank you.
Thanks for your attention here. Can I have the slides on now? Rajah has been with the company for a year now. I will talk a little bit about the history of Guangxi project, so that we all get to the same sort of timeframe with this project. Guangxi project was started in 2002 when we started leasing land from the Chinese government and started establishing eucalyptus plantations in southern China close to the Vietnamese border. We have been doing this and ramping it up towards the last decade. In 2012, we were ready to announce a world-class consumer board and pulp mill. At that time, there was a government change taking place in China, which also delayed some of the MOFCOM approvals and NDRC approvals.
That delayed our project by 1 year and a couple of months, because we received those approvals in July 2013. That time we had to really consider, do we want to go ahead with the whole project at the same time? Because we were delayed, and we had the customer request or demand for having this board in China as soon as possible. We decided to split this project to 2 phases, phase 1 and phase 2. The phase 1 is the board machine, which makes consumer boards. Our aim is make liquid board in China with that, and that's something that why we are building it. At the same year, 2013, we also established 3 joint ventures to start really the operation building. 2014, state land use and construction permits were received. Also very importantly, International Finance Corporation invested 5% of equity to the project.
In addition to financing it with about EUR 300 million, EUR 400 million loans. We kicked off the building of, or the construction of the board machine in November 2014. Earlier this year, we relocated all our Beihai staff to the mill site. We have the office building ready there, and now they are located there at the mill site. We are now planning to start the production of the board mid-2016 or ramping up the mill at that time. After that ramp up, our board of directors will be deciding what to do with the phase 2. We will revisit this investment case, and there is no board of directors approval at this moment for phase 2. Let's move to Rajah. Rajah has been with Stora Enso for over a year, taking over the construction of the Guangxi mill site.
He has extensive experience of similar type of projects in Asia, working at the last job before joining Stora Enso was at Linde Group in Singapore. Welcome, Rajah.
Thank you, Ulla, for the kind introduction. Good afternoon to all of you. I'm excited to be here with you today. The reason is actually we're doing something quite exciting in South China. Let me just click this on. This is what Ulla was referring to. We are in the southwest of China, bordering on the ASEAN area in Guangxi Province. For those of you who follow news, this is actually a very strategic location now in China, because not only is it one of the provinces which still enjoys high GDP growth, but it is also at the core of China's new strategy of reestablishing the Maritime Silk Road. Beihai was actually the origin, and is also planned to be the origin again of China's economic flows and value flows into ASEAN. A good place to be.
Phase 1 and phase 2 of this project was mentioned. In phase 1, what you can see here, we're building the board mill proper and then the related infrastructure, power plant, woodyard partially, effluent plant, and water treatment plants. This is well underway now. A project that obviously took time to start, but is now actually progressing at a very rapid pace. It is also, one has to say, the largest Scandinavian investment in China, and in that regard, it is also very strategic to the Chinese government, and receives a lot of attention and support. If you look at the basic value flows that we have in the project, Ulla talked about forestry. Yes, we have about 85,000 hectares of land under lease. Those plantations are now maturing to the point that they can be harvested. This wood today obviously is going into the open market.
As we then get to the first phase of the project where we have a BCTMP mill and a board machine, part of that goes into pipe production, the rest continues to go to the open market. We produce obviously then in the niches that were mentioned, high-value board, liquid packaging and higher grades of general packaging or folding box board. In the second phase it is then planned, if approval has come through, that then most of the wood will be used captive to produce pipe. This will be well known to you. CapEx-wise, the project is coming in at around EUR 800 million. Quite a big spending happened last year already when ordering long lead items, obviously to facilitate the ambitious schedule of this project.
The majority, about 50% of the spend happens this year, then next year, the rest goes towards the completion and closing out of the project. Not only are we constructing a project here, but obviously we are also creating an employee base that will operate this project here. With construction having started November last year, and the target being that board mill to ramp up over a timeline of 18 months, starting mid-2016. Now is actually also the time where we have to recruit and establish the competencies in terms of human resources to be able to deliver this business venture. We are here leveraging the whole network that Stora Enso actually offers in terms of our global competencies and experience to train the people that we hire. We have Knowledge sharing initiatives and mentorship programs ongoing.
We have quite a few employees actually today in our Scandinavian mills receiving training. These are the typical middle management and technical management people who later on will have the key responsibilities in operating the plants. On the ground, we have a lot of technical training going on delivered by own people and by vendors to set the competencies where they need to be. Obviously we are in an area of China, which is, shall we say, not Shanghai or Beijing. Here it is very important actually to develop local talent, which will provide you long-term, the highly qualified resources that we need in that area of China. We are currently at about 140 employees, ramping up to above 200 end of this year. A lot of that recruitment actually locally is happening from vocational schools in the area, in the province.
These students, as they come in, they receive intensive training at our mill site, where the mill site maybe not yet fully operational today, but we have facilities there. It is actually very interesting for these students to be able to receive training as the asset that they will later operate actually happens in front of their eyes. That is actually the best training ground. In terms of progress, as of end of last week, we were at about 30% completion overall of the project. Construction progress was at 25% completion. Procurement, nearly everything is procured obviously at this stage in the project, there is only a couple of items in the closing out that will be still necessary to be procured. We are well on track actually to meet the mid-2016 startup schedule that all of you are aware of.
We are doing this actually in a difficult environment. As I said, this is not Shanghai or Beijing, let alone Scandinavia. It is challenging every day to keep this to our high standards of safety and responsibility. I have to say my team is doing a good job there, and we are quite proud that early this week we achieved 4 million hours worked on site without any recordable incident. To give you a bit of a view of the progress, as they say, picture says more than 1,000 words. On the top left, you see the board machine plant, a very long, let's say, structure, which is from a structure also nearing completion now. On the right side, you see the roof structure going up on top of it. Early next month, this will be the last roof that is closed.
Most of the roofs are already closed. On the bottom left, you see the effluent treatment plant, and this is actually a core element of our, let's say, responsibility agenda in terms of this investment. Something that Chinese government stakeholders look at very favorably because we are installing actually world-class environmental facilities there to have as little impact on environment as possible. This is seen to some extent also as a showcase in China because the pulp and paper industry there has not always been a showcase, and the government is well aware of that. On the right side, you see the first plant that will actually start up, which is the power and steam generation plant. That is progressing very fast right now, and actually first equipment is already going in. A picture says more than 1,000 words.
We thought a video actually will show you even more. I'd like to start that now. That was the video to give you sort of a more vivid impression of what is happening there. I think everybody in the company is excited that this is progressing now, and I hope we could convey a bit of that excitement to you, too. We saw some pictures of the forestry part also in the video, and of course, this is not just a construction project here, but it is an integrated business comprising of forestry, which later on will feed the pulp production. What you can see here is that we are spread out over vast regions in South Guangxi Province. We have about one-third of social land here and two-thirds of state land. Many of you, of course, know the background also of that.
What I wanted to bring to your attention, though, here is that overall of the forest land in Guangxi, we only lease 0.5% of that, and of the fast-growing eucalyptus areas, that is actually also less than 5%. We are, however, let's say, thought leader and a transformative force there in this province because we are the only one that is large-scale FSC certified and actually practices this in a wholly responsible manner. That is also an important topic when it comes to the government looking at this project and Stora Enso to be a transformative force for this industry. You know that we've had issues around the land leases in forestry, especially in the social land contracting, where we are still working to close out problematic contracts.
It stems a bit from the complexities of reality in China that land ownership is often disputed, and the government obviously has not yet gone to the reform extent that it has in other areas. There are conflicting interests. What we do is, we actually conduct the contract negotiations in a very diligent manner with trying to include all stakeholders that are potentially impacted by it and adjusting rental payments and contracts to the extent that it comes to an sort of agreeable solution for all stakeholders involved. As of the end of the first quarter, we have achieved 61% correction rate of those problematic contracts. Also here, we are well on the way to actually achieve the target of getting this correction over by September next year, as we have always stated.
Another issue is that even with contracts in place, South China is a highly densely populated area, and there are always conflicts and disputes, lots of things happening like theft, illegal logging, and so on. We've actually put a team in place that does nothing else but really engaging all stakeholders and also the government and related law enforcement to actually mitigate this and allow us to operate in a smooth manner. We're quite successful in this, and that's why we are also very confident that when it comes to us for an operating partner, that this is something where we have built the experience and the capabilities to deliver on that. Coming back to where you hopefully will also one day be able to travel and have a look. This is where we're going to come out middle of next year, phase 1 of this investment project.
It's going to come in the budget that was announced. I think making this on a sort of 18-month schedule in South China, that is quite remarkable for our company to achieve that. We look forward to starting this plant up and then having a successful business in China.
Thank you, Rajah. Maybe you can join as well, Jari, if there are any questions on the mail, and I know you have. Antti wants to say a question here. Ask a question, sorry, bad English.
Yes. Thank you. Antti Koskela , Danske. Two questions, both of potential phase II. Firstly, on the CapEx side, your current understanding, how that compares to the EUR 800 million in phase I. Second question is, what are the main, not obstacles, but challenges that you have to work with before that decision is on the table in 2017?
To be very clear about the decision is that we will need to take this to the board and have a new evaluation, we will not take that until the board machine is up and running. That's when I answer before earliest CapEx 2017, but it might be later on as well. We believe that the pulp mill is going to be below EUR 800. The installation of a pulp mill in this infrastructure is a lesser challenge than build the board machine and the infrastructure to start with. You want to make some comments?
Yes, definitely. You're now looking at a major greenfield site where there was nothing. All the related infrastructure is part of this first phase. On a second phase, there will be necessity for some capacity expansion in that infrastructure, basically a lot of it is already in place. That should be well below the figure that was mentioned.
Thank you.
Hi. Anders Bank. When the board mill is fully up and running in China, what kind of profit contribution would you expect?
If you take phase 1, and correct me if I'm wrong now, we believe that's the plans right now, they will be around the targeted at least 13% return on capital employed.
Okay.
It was in table number 4. Table number 4.
If I could continue on that, I think you put today the target for consumer boards at 20% return on operating capital. Do you think this project will, I guess, phase 1 will not reach that, but after phase 2, do you think that's possible, or does it require a phase 3 or how do you see that?
We don't even have a phase III, if you look at the very strong financial performance on Consumer Board, because last year they were in 18%, including a non-yielding, the working capital and the CapEx we have in there. I think it will take some time before this, even if when we build the pulp mill, it's going to take some time before you get to the 20% because it's the composition of your assets. That will not hinder them in the planning period to reach the 20%.
I'm curious what your board will be considering most prominently to decide whether to go through with phase II or not. Can you give me a sense under what circumstances they might decide not to go through? What would be the environment or developments?
It's obviously a business case that has to be very giving the returns and the things we've talked with Seppo about before. Not doing it is a question that they have to decide on. It's also that we have an agreement with NDRC of doing it within a certain timeframe, which means that we have to renegotiate in that case. I don't know what they will say. We need to have a good business case.
What are going to be the biggest factors that they're going to be looking at?
The biggest factors is profitability.
The biggest variables that you don't know today?
The biggest variables that we don't know today is probably what will be the competitive advantage of a local wood supply.
Lars has one.
Lars has been waving for a while.
Yeah, number 2.
We take number 10.
Okay.
Thank you. Just coming back to what you said, at least 13%. Obviously, you made it quite clear you've had a heavy infrastructure part of this phase 1. We talked about how important it is with cost per ton, this is going to be like 1,800 EUR per ton, which is probably one of the most expensive board mills around. I'm just trying to put this into context of a startup phase where you're not going to be doing what you need to do, trial phase. It's a very competitive board market in China, where some competitors are making actually losses on existing capacity for the much smaller capacity base or capital base. How should we get comfortable with 13% plus on one of the most expensive board investments in China?
Isn't it really necessary to actually build phase two to get economics, given what you put in in phase one, so to speak?
First of all, I think when you compare FBB, folding box board, is everything and nothing, right? It's everything from 2% EBITDA margin up to the 20+, right? We know the end game for us is to be as big as possible in the liquid packaging. Obviously, we'll not reach the 13% during the ramp-up period, but once we ramped up, that's where we believe we will be around 13%. The thing is that. That's what I was trying to answer the question. I believe over a certain time, we need the pulp. I need to understand because I have no mandate, but it's part of the approval.
When we talk about the pulp mill, it's quickly coming through that you talked about 85,000 hectares of leased land and the quantity wood. I can't recall the number now, but I did the math very quickly. That would not be self-sufficient. Is that correct? You need to buy material from third-party sources to supply a 800,000 ton pulp mill. The second thing for the CTMP or the mechanical part of this, I guess that's softwood and where do you find that source, that wood?
For the CTMP, first of all, that is being actually done as part of phase one.
Yes.
That wood will be own eucalyptus wood. If you look at a phase 2, the 85,000 hectares today would not be fully self-sufficient, yes. We do have the option of expanding state land leases. That could be an option. The other one is just supplementing it from the market, so that you have your baseload own and that you then essentially take also your market fluctuations back to the market. That is part of a business case that
Yes
would need to be built for phase 2.
Just a final thing on the mitigating stuff that you need to do to get things right. Is that any meaningful cost associated with that upfront? Does it change the wood economics on a more sustainable long-term basis of this project?
Mitigating in which terms?
You talked about the various actions you're taking to rectify legalities of certain contracts and upfront payments and certain stuff. Is that a meaningful amount of money we're talking about, and is there a long-term slight increase in the cost of wood associated with the pulp mill?
No, it doesn't because this is a one-off now which will be completed next year. Long-term, no. This will be just normal operation.
Thank you.
Of course.
Janek. Can you get some?
Hello?
Yes.
Niklas Gillman here from Macquarie Bank. I just have a question referring to the wood we saw harvested there on the video. Is it from the Chinese forest? If so-
Yes
where is that wood going now?
Absolutely. This was taken just a couple of weeks back in North Beihai and in Qinzhou province of Guangxi. It's our wood actually and what you saw is that we're also investing heavily in mechanizing this industry because it gives you a cost advantage. Actually, it does. Of course it gives you a much, let's say, better safety performance. This wood today goes into the open market.
This wood being basically one of the very few plantation with FSC, so it has a value. There's a lot of big international companies who do coat hangers and other stuff in China. Number four.
Thank you. If the mill is up and running by mid 2016, at what point do you actually start to sell the board? What kind of supply contracts do you put in place given that the ramp-up is going to take 18 months or so? Just give us a sense about who's going to buy it and what the supply contracts might look like.
Basically, we had the first sales conference a couple of weeks ago in Beihai, so we have a sales force in place already. Now we're negotiating with our customers. When it comes to the liquid board customers, we are very closely planning how do we go forward with the ramping up, and we continuously meeting. We have a big meeting with one customer beginning of July. This is very close cooperation with the customers. At the same time, when we say what other grades that we want to see in China, we are looking and opening up high-level meetings now with the other local customers and building this relationship. Basically we are looking in China but also in the other Southeast Asia markets. Personally, I'm meeting many of the customers now discussing the expectations and how could we add and find a solution.
It varies very much. We have much longer contracts, then you can go also without contracts. It's only on spots. Obviously, we aim for long-term contracts with our strategic partners.
It is important. We are focusing on categories given our history and our capabilities of delivering the best quality. A typical one is CKB for the fast food industry. Right? It's about cup boards for the international brands. The international brands do not have lower quality ambitions in China than they have selling in Sweden or in the U.K. That's where we're aiming very much. When we do the start-up for the 18 months, we will train the staff, and that's going to be a lot what you call secondary or lower-level FBB. That's why we need to train the people and the paper makers. That's the normal. Takes about 18 months.
Also that is planned.
Yes.
I mean, the ramp-up plan considers exactly that, and that first also the lower grades are sold to other customers. Then as this kicks in and we have customer commitments also for certain qualities to kick in, it goes to those customers.
Can I have my mic on? If I may add there, in Consumer Board side, the contract structure is quite much longer than in the Packaging Solutions side. You tend to have 18 to 24-month contracts even, and even longer than that. Some of your customer relationships are over 60 years. The length of the business is much higher.
You have to understand that when we're talking about critical liquid packaging, this changing of board grades requires many testing with the new supplier. Even I said earlier, if we swap between the mills, it's not straightforward we can sell, that it goes through with the customer systems. It requires much effort from both sides, what needs to be planned, and that we have much longer contracts because it's costly also for the customers.
Are there any other FSC-certified suppliers of consumer board in China today?
Is the question if there are FSC-grown trees in China? You can import FSC pulp into China.
There is no other large-scale plantation operator with FSC certification today in China. There are smaller patches, but not of this scale, that will be sufficient to supply such an industry, but also some of the other big players that Kalle mentioned, which are more from the consumer goods or construction industry.
All right. Do you know that your operation would be FSC-certified?
It is today.
It is today already.
It is. It is not only FSC-certified, the Chinese government has, as they usually would have, their own certification system. We have both.
All right. Thanks.
Number two.
Linus.
Thank you. It's Linus Larsson with SEB. Just a clarification if I understood this right, we have talked about there are certain business risks, we also know that there are technological challenges when you start up new carton board machines. We've seen that on several occasions in the past. Do I understand it right that you're saying that you expect 13% ROCE or higher by the end of 2017?
No, that's not what I said. I said when it's ramped up and we are at the prime qualities, we will be at the level of 13%.
I thought someone said 18 months ramp-up. How long did the ramp-up be?
If you take mid-year, ramping it up 18 months, that's actually 2018.
Okay.
Where you start to get the run rate.
Run rate. You're saying that 2018, you expect at least 13% ROCE on the phase 1 project?
We're doing everything we can that Kalle is talking when we are in a pre-market.
Yes
the grade 1, that the time when we produce grade 2 would be as short as possible. That's why we're sending now a lot of our Chinese operators to learn how we operate the machines in Europe, in basically Finland and Sweden. At the same time, we're already in a close cooperation with our customers, because if we believe we produce a pre-market grade, it needs to be tested by our customers several times before it's qualified to be sent. These times when a customer goes through their qualifying process, it can be up to six months that they can check that all their own machines, this board fulfills the expectations. We're trying to do everything we can that this is already a firm plan as short as possible, but you never know how certain parts will move in and.
Target is to have it during 2018.
May I also ask, when do you expect the machine to be fully liquid packaging filled? Or if you could give any indication on.
It's not going to be fully liquid packaging board line. It will be like I had in my presentation. We're also looking food service. If you remember how I was highlighting some of the grades that are growing in China. We're talking about food service, we're talking about CKB, we're talking about liquid packaging board. There will be also cigarette board coming into this line. It's all about the mix. How do we plan and what is the right mix? That's where we are now with the customers, their expectations. We also need to follow the legislation of Chinese government in the food packaging. There are new re-
Requirements
requirements, thank you, coming in place now. How that will impact the portfolio or the mix we are able to produce.
What you're saying, CKB, cigarette boards, and those, they are high margin products.
You mean it's from a margin point of view, it doesn't make a huge difference what you're targeting is-
No. Not on these
the same type of profitability. Okay.
We are targeting the high end.
Yes.
We are not targeting the run-of-the-mill, where I think you mentioned that where there's a difficult competitive situation, definitely not.
It's important that we are moving with our global customers also to China board mill now. We're not only talking about the liquid packaging.
No. Thanks.
Actually the new legislation on food you mentioned is more of an opportunity than anything else.
Yes.
Just coming back to Lina's questions. Let's assume you can get a reasonably quick approval from the various testing phases. Do you have a committed commitment scenario? You get all this stuff done in six months as opposed to 18 months. Would you be able to sell that product? Do you have customer commitments to take the volume if you can produce that at specifics?
If we can fix the quality, we have not for 100% of the machine, but for more than 50%, we have commitments.
Okay, thanks.
If there are no more questions, Raja has to catch a plane. He has a mill to build. Raja, thank you.
Thank you
Thank you.
Thank you, everybody.
Thanks, Rajah.
Now Seppo will come with the financials and elaborate more about the divisional targets. Please, go ahead.
Thank you. I will cover not only the newly announced strategic targets, financial targets for the group and the divisions that we just made public earlier today, but I will also comment on some key figures. Look at the past and also commenting a bit our way forward. As well as a couple words on the capital expenditure, how we see it, which has been one of the questions raised already a couple times during the day. First of all, looking at the sales development top line, also discussion today has been very much around how to grow the top line. The challenge on group level we have had with the past years has been very much that our sales has been sort of around €10.5 billion plus minus, and mainly declining because of the paper business that has been structurally declining 3%-5% a year.
We expect that to continue also going forward. It's important to keep in mind, and that is what we have been talking about today in the packaging businesses, in Consumer Board and in the Packaging Solutions, that there's underlying growth in our figures, even though it is not visible yet in the consolidated figures. It's good to notice that if you look at the past years and take out structurally declining paper business, we have been growing 1%-2% a year. If you look at the Q1 this year compared to Q1 last year, and we exclude not only the paper business, but also divestments, Corenso we divested last year. Actually, the growth rate was already 3%.
I hope that today we have been able to demonstrate to you where we expect this accelerating growth to come from, and how we can start to demonstrate in future the growth figures at the consolidated level as well. Our operational EBIT has been growing strongly last year. We increased operational EBIT by 40% 2014 compared to 2013. Positive development also continues this year. There's 21% increase in Q1 year-on-year. This development has been very much thanks to cost improvements, profitability improvement projects that we have been running. The latest one was finalized last year around this time as I'm sure most of you remember. We have been improving our performance thanks to increased efficiencies at the mills, increased volumes, and also those transformational projects that we have done during the past years have been coming on stream and starting to generate profits.
Like Montes del Plata now generating cash flow and profits instead of negative effect last year. Ostrołęka, very good business case if you look at the development after ramping it up in 2013 and other investments. We believe that this will continue. Of course, it's nice to have some tailwind also once in a lifetime. Now we have some positives from the FX. We have some positives from the energy. That's also nice to enjoy. Because there have been a lot of headwinds in the past years. It's important for us, and that's what we keep in mind all the time when we're analyzing internally our figures to take out the positive tailwind that you have to ensure that we have positive underlying development in our figures. That's very much what we can demonstrate here.
We believe it will be the case also going forward. Net debt, something we are looking at very carefully. I come to capital expenditure figures, but we have been running now four or five years in a row quite high capital expenditure level compared to our depreciation. It will still continue for a couple of years, but will start to come gradually down. The good news is that our net debt level has remained quite stable, which is a proof point of the good cash flow generation capabilities that we have had. Paper business is a good cash flow generator. I show later some figures of other divisions. Also, Consumer Board has been significant contributor to cash flow and in general, we are working on working capital improvement.
That way, been able to take care of the balance sheet while we have been making these significant investments to transfer the company from European-based paper manufacturer to more global player when it comes to renewable materials and biomaterials. Coming to the financial targets, these are now on the group level. There are some old ones and some new ones. What we wanted to do, first of all, was to give a wider picture to you where we are aiming at, what we are driving. On top of the group targets, we also now published strategic targets for each division. To highlight a bit for you to understand, be more transparent, the different nature of the different divisions or businesses that we are in, as well as the different roles that different divisions have.
If you look at the group level targets first, we have now a growth target. We have return on capital employed. That's an old one, nothing new in that. We have fixed cost to sales, to highlight a bit how we see the fixed cost development, what we are aiming and targeting, how we think we are going to get there. Debt to equity, that's something old, nothing changed there. Net debt to operational EBITDA. We have been talking about it in investor meetings, but it has not been an official strategic target. Now we have put that also as one of the strategic targets. Also dividend policy, I will comment that. It's sort of strategic target as well, but it's not a KPI as such, but there's no change on that. I will comment that later. First about the growth.
We target to grow faster than the relevant markets. Here you see how it has been in the past. If you look at our deliveries, how we have been doing. We have been growing some 3%, and this is now excluding paper business. The growth businesses that we have been in. Up to 3%, now it has been around plus minus 0.5%. You have the high 3% coming when we were ramping up Ostrołęka. Also, we had good volume development at the same time in wood product businesses. Now I think going forward, we will start to see the effect from Montes del Plata. We have the machine conversion in Varkaus increasing the growth businesses' growth figures, as well as just discussed board machine project in China, Guangxi. That will continue to show and to enhance the growth opportunities.
Target to grow faster than the relevant markets. We have not put a figure there because it depends on many things what is the growth rates globally, but tied it to the relevant market. Look at the return on capital employed. That remains the same as in the past 13%. And here we have actually two lines just to demonstrate it's reachable, achievable, it's challenging. But it's good to notice that if you exclude those big transformation projects, mainly two of them, Guangxi board machine project and Montes del Plata. Montes del Plata is not excluded anymore here in the latest one from Q1, but we have been around 13% and we are at about 9% today, including everything. Clearly achievable going forward once we get ready with the projects.
We have fixed cost to sales, and there we target a level which is below 20%. We are at 24% something today, which is clearly above. There are two things to keep in mind here. First of all, we expect to grow. Looking at the setup we have today, we can grow without adding fixed costs. That will of course automatically mean that the ratio will go down. Even more important is that, and that is to notice that this doesn't mean that we would be announcing a new cost improvement or profitability improvement program. That is not what we plan. The key thing is that cost improvement must be a continuous thing. It's on the daily agenda in our company. It's something we work on continuously.
If we see needs to reduce costs in different places, we do it without having to go into big major programs. I know that markets typically appreciate big programs. It makes big headlines. It's good for the share price, but it's actually quite destructive for the organization. Takes a lot of focus away from doing the business. That's why we feel it's better to do it in daily work, have the internal targets, know what you're aiming at, and continuously review it. That's the way to do it in our case. We have debt to equity below 80, has been quite stable, and this is a target that we had also earlier for the group. Net debt to operational EBITDA below 3. We are at 2.6, 2.7 level now.
This has been something I've been talking quite openly about earlier, that we want to keep it below 3. Now we also have it officially as a strategic target on the group level. Dividend policy, no change there. It remains the same that we pay half of the net income over the cycle, and that remains the same. Divisional targets. This is something new. There we have two sets of targets for the divisions. For the growth businesses, it's return on capital. But for the paper business or paper division, it's free cash flow to sales. That highlights the nature of paper division that we have. It's there as a cash flow generator to help us to transfer the company, to help us to finance the investment program that we have. Also, you can put into perspective other way.
If you look at the cash flow generated from paper division last year, it's more or less equal to our dividend. It's also one way to look at it. Moving forward, if you look at Consumer Board, there we expect that and target to have return on capital above 20%. Actually today, we are not far away, even including in the figures the Guangxi project. Excluding that, we are clearly above. That's, I think one good point to remember. Also reflecting the discussion on return on capital employed expected for the Guangxi project as such and what does it mean for the Consumer Board division itself. Packaging Solutions. There we are around 14% today. If you look at the target level we have, we don't see any difference there why it couldn't be 20%, but that's what we are working on.
Gilles and the team is fully committed to that. I think you saw already the way of working they are developing the projects we have in place, That's how we believe that by creating the value to our customers, utilizing better the asset base we have today, we can reach 20% return on capital there as well. We have biomaterials. Target level is 15%. It is a reflection of the fact that even so that the pulp business that we are in, and which we believe strongly in, and we believe that Montes del Plata will be one of the best mills globally once it's fully ramped up. Of course, we have to remember that we had newly invested mill in Uruguay. It's quite heavy in the balance sheet. That has a reflection going forward, what kind of returns you can expect on that.
15%, I think if you look at the benchmarking, it's quite reasonable for this kind of business also going forward. It will start to go up now also including Montes del Plata, when it's now ramping up, but it's not having the full effect yet, as you can imagine. We have wood products. There, the target level is 18%. It has already reached 18%, has been slightly coming down recently, mainly because of some softnesses on Scandinavian market and some export markets. We think that 18% as such is a sustainable level and we are targeting at beyond that going forward. You also see there the good development we have had there since the beginning of 2013, when we did start the restructuring of the business, cutting cost structures in advance. That way we have been able to trim the business into pretty good shape.
We also believe that by, like you saw in Kalle's presentation, we are moving from sort of basic saw mill more into value-added products. That means that it's less volatile business also going forward. Of course, it's cyclical. It's relating to where construction business is going, but less so than in the past. Paper, free cash flow to sales, about 7%. We have been there. We believe it's doable. We just need to take care of the asset base. We need to make sure we manage the working capital properly, and it's a good cash flow generator. It has a good, important role in our business portfolio also going forward. About the CapEx levels and where we are. Here's a graph, some five, six years included, where we have been. Like I said, past or including this year, five years, we have been around EUR 800 million.
To put that into perspective, our depreciation is about EUR 530 this year. Like Kalle said earlier, we expect the total CapEx levels to start to come down towards the depreciation in the coming years. It's good to remember, and there's a small footnote there, that the CapEx figure here includes about EUR 100 million worth of forestry CapEx. That's something that is maybe a partly new and not so visible earlier, and that's because we have these plantations in Uruguay, Brazil, China, and the more we harvest, we of course need to do replanting. This forestry CapEx is replanting that is then activated to the cost. Of course, when we harvest, there is part of the total cost of goods sold. It's not depreciated as such, but it's then shown in the COGS. That's good to keep in mind when looking at the figures.
To put into perspective a bit about the CapEx figures going forward, you should remember that including the forestry CapEx sort of maintenance type of CapEx figures are sort of, say, EUR 300 million a year. If you think about some development projects, we have had some significant development projects also in the past. We will have also in future, but like Kalle said, we are now moving from asset transformation more to the customer end and innovation side, which means that I would assume that we will be able to bring down also sort of development project as such. If you think about the Guangxi phase 2, if and when that happens, typically, if you look at and compare that to Montes del Plata project or Guangxi first phase, the CapEx splits easily over a three-year period.
It doesn't mean that it's one bang, EUR 600 million, EUR 800 million, but you have to split it over some three-year period. Here you see in a way how the bigger projects, how they are shown in the CapEx figures. First of all, we have Ostrołęka there in light blue, 2011, 2012, and sort of tail in 2013. In a similar manner, Montes del Plata, actually starting from 2011, including 2012, 2013, and even some part in 2014. Typically these big projects, it is spread over three or four years with the CapEx plans because some payers are still paid after the ramping up or during that, depending on the payment schedules. That's good to remember. Of course, now we have the dark blue block there, which is the major capital expenditure included in the figures.
I hope that helps you to put a bit into perspective how we see the CapEx development. Of course, we continue to give annual guidance for the year, also in future. That's, I think, as much we can put into perspective to help you now. Look at the working capital. Mentioned already a couple of times. Worth to notice that we already released about EUR 540 million cash from the working capital. Working capital ratio to net sales is about 15% today, and we believe that there is still good potential to reduce more, probably another EUR 500 million. I think targeted level is 10 percentage points level, 10%-12%. It, of course, means that we need to continue to work more and more on the way of working processes.
Sales and operation planning type of things, looking at the full supply chain from the day we cut the tree to the day we get the money from the customer to reduce that lead time in the total chain. It's these kind of things that we are working on in all the divisions today in order to bring down working capital more. It's very important not only because of the investments to be funded, but anyway, it's lazy capital, so it's important to trim your capital base and get the money moving. There we are, I think, doing pretty good work, and we continue to do that also going forward. On the cash flow, a couple of points. Here to highlight, like I said already earlier, paper has been and will continue important cash flow generator.
Important to note this, for instance, especially Consumer Board over the past years. Here it's quarterly. It has been a good cash flow generator. It has good profitability. It has been developing positive. We believe that to continue also in future. Good to note this also, this is cash flow of the CapEx, that it has been only a couple quarters that Consumer Board, taking into account the large investment program, has been showing negative cash flow of the CapEx. Which I think was, again, a good proof point of how strong the business is and that we believe will continue also in the future. Sensitivities a bit to put things into perspective. I think you are familiar with the table on the left-hand side. A couple of points to be highlighted from that.
Quite often we get questions and people are concerned on our exposure to pulp market and very much on hardwood pulp market. It's good to notice here that actually the biggest single item is wood prices. You have to remember that we are integrated paper and pulp, sorry, paper and board producer. We have, of course, market pulp in our portfolio as well because we are surplus in certain grades. It's important to notice that actually softwood pulp and hardwood pulp price sensitivity, if there's a 10% change in the price, it's EUR 45 million each. That sometimes market and people are over-accelerating that they expect it's a huge exposure what happens to prices. Also good to remember, if you look at our pulp portfolio, we have not only softwood and hardwood pulp in our portfolio. It's diversified. We have also fluff and dissolving pulp.
To put things into perspective. I think our biomaterials team has been working very much on this to improve the mix and to lower the volatility of the earnings. That's also one reason why we have been moving to fluff and dissolving pulp from softwood, for instance. On the right-hand side, we wanted to open a bit more on the effects exposed of the different divisions. You remember in Q1 this year, we had EUR 64 million positive effect from FX in our operating EBIT. We mentioned earlier that biomaterials was about EUR 40 million, which is clearly the most significant contributor here. If you look at other divisions, paper is about EUR 10 million positive in Q1, Consumer Board a bit below 10, and then Packaging Solutions, Wood Products, less so. This gives you some idea on that.
The main exposures we have in USD, SEK, and GBP. Those are the same as earlier. Depending bit on the volumes and how the flows are shifting, the magnitudes might be changing a bit, but nothing radical happening there. Another area relating to sales, we quite often have been getting a question around non-European sales of different divisions and what kind of effects the changes, especially euro-dollar rate, has on our businesses. Here, first of all, I want to highlight that paper business has actually the lowest ratio, 25%. Like Kalle also mentioned earlier, paper business is, and we see it very much European business. We sell some volumes overseas, but 75% it's European business. Exposure to currency is quite limited. Also, you saw it on the previous page, only about EUR 10 million in Q1 this year.
Highest exposure we have actually is in wood products as well as in biomaterials. Biomaterials obviously has, like you saw in the figures on previous page, it's coming through the price and logic of the pulp. It starts from the USD, even if we're not be selling outside Europe. They have the strongest exposure because of that. Then we have Consumer Board and Packaging Solutions there between. That gives you some idea on the exposures that we have. On the loan portfolio, currency mix there. First of all, if you look at the gross debt, about EUR 4.1 billion, roughly half of that is in EUR. About EUR 1.4 billion coming in USD. That is mainly loans relating to Montes del Plata and our project in Guangxi in China. Those are funded in USD.
Then we have some in SEK and other currencies. If you look at the loan portfolio and the maturities, for this year, we had close to EUR 1 billion maturing debt. Also good to notice, we actually, like we announced, we made a prepayment of 2016 bond just about a week ago. The thing when it comes to loan portfolio management for us today and at the moment is that we want to reduce the excess liquidity that we have. We have about EUR 1.3 billion liquidity. Looking at analyzing our sort of cash flows, CapEx needs, also of course keeping in mind rating agencies who look at your liquidity, we believe that we can manage with clearly below EUR 1.3 billion, say around EUR 800 million or so. That is the level we are targeting.
That's why if you look at the debt programs this year, we are concentrating using the cash to repay the debt. We might do some small or big operations to sort of reshape the portfolio, take the advantage of the lower interest rates, but nothing significant in plans. It's more to how to manage the liquidity and bring it down. There's been a good reason for the excess liquidity that we have. It's because of the big projects. We have wanted to make sure that we have the money funds available to make the investments and pay the investment when the time comes, no matter in what condition the financial markets are. There's been a lot of turbulence through the past three, four, even five years of the financial market. It is sort of an insurance that we are wanting to put in place.
We start to be ready with the project so we can start to reduce the liquidity. Of course, there is a sort of opportunity loss having too much liquidity at the moment because you don't get too much return on your cash. That's of course another reason to bring it down. There has been clearly a reason historically why we have been running such a high liquidity level. To summarize, we have now targets that support the next step in our transformation. Where do we want to go? How do we follow it? We have financial targets in place. They are challenging, but they are achievable. Cash flow will be and continue to be high on our agenda. We will work on reducing the CapEx levels, capital expenditure, like I said earlier, and we continue to focus on operating working capital.
That makes a difference. Cost managing. It's a continuous daily work to be done, and it's high on our agenda as well when working in offices and plants. With that, thank you and.
Thank you. Now you may ask Seppo or me any kind of question or any other that in the team who has presented except Rajah, who has to catch a plan. If you have any questions on the presentation or any other, please shoot them. Linus. Linus at table number 2.
Thank you. It's Linus Larsson with SEB. When we met at least some of us three years ago at Langerbrugge at a similar event, the vocab included very much terminology like the cash engines and the growth engines, and that was a strategy which has made a lot of sense given the very heavy CapEx phase that you've gone through. The message today seems to be that that phase is nearing an end. My question is that setup or strategy as valid still, or would it from a management point of view make sense actually to split up the company?
I understand it's an ownership question at the end of the day, from your perspective, what is actually keeping the group together given that we are now going into a phase which is not as asset and CapEx-focused as you have been for the past couple of years?
Linus, good question. The thing we are aiming at, we have to make very sure we are going into the next phase. It doesn't mean that CapEx goes from one year like this, now we are going to grow based on innovation and customer focus. I have been very vocal that I'm a seller of paper since I took over this position, if there is somebody who's buying it. Right? When it comes to the ownership question, I am not really the person to answer that. That's actually my owners, where they want to have it. You are right. The dependency of paper assets to generate cash to finance that asset transformation is actually trailing off. That is correct.
Thank you.
Lars there. Lars.
Yeah.
There you go.
Cash is still of course important, right?
Yes.
Given the importance of how much paper is actually generating, put that into context, if business continues to decline at the pace it's been doing, call it anywhere between 3% and 5%, wouldn't it at some stage also for you to make sense to restructure the business, albeit I fully appreciate what you're saying, it's disruptive to do big things. At some stage, you've got to come to a situation where you need to be more efficient on the best machines. One of your competitors, of course, are doing this more on a recurring basis because it's a bigger part of their portfolio. Wouldn't it actually make sense? Wouldn't that be a way to actually sustain cash flow in a declining business? Thus, you really need to work on the cost line, which requires a bit of upfront investment.
How do you view this in terms of medium-term, long-term?
I believe, I think everybody who's worked in the paper industry knows that it seems to be a never-ending story of how much cost you can take out of a paper machine. I agree with you. There's still a lot to take out to continue the cash generation. We are doing that, and you will see different ways in the coming couple of years how we manage a paper machine. There are other players that might be becoming weaker. I am a strong believer that paper will never disappear. It will be there, but at what level, I don't know. I think we are actually doing the absolutely maximum in the paper business because our machines are running at the high operating rate. The day when they start on a high operating rate and they are coming down to cash flow, we close them.
You know the carousel that everybody else does. The best thing for me would that somebody bought mine for a value that is fair.
Sorry, just to take on your comment. Don't get me wrong. We continuously look at the cost structures, we improve it. What I meant was that we are not planning to come out and say that, "Hey, we are going to run EUR 300 million profit improvement program-
No
within the next 12 months." That's what I'm saying. Especially, you are right, absolutely right. In the paper business with declining volumes, it's even more important that they're thinking ahead and looking at the cost structures and where they can reduce the cost, cut the costs, or improve their business operating model so that we can be mean and lean. That's the only way to survive and continue to generate the cash flow for us to invest elsewhere.
That kind of brings back a question. This business, you've been incredibly good, and some of your competitors the same, to take out cost. The business that are less pressured, what is the potential in that business? Can you repeat what you've done in paper, in Consumer Board, Packaging Solutions?
This question I like. We are now trying to make sure a lot of the operating practices that we have started in the paper business, we are trying to transform and learn into the other board mills. We are actively engaging competence management because since we are aimed to grow in the other areas, we need to move competence from one area to another. This is not easy always in paper because usually it's in a fixed location, but we are trying to do that actively. Also compare total efficiency of a machine versus a paper and a board. The board is slightly more complicated, but there's a lot of learnings, and we are now trying to make sure that happens. That was not the thing we focused on before.
Just one final question, if I may, on the targets of Biomaterials . Considering in a historical perspective, pulp prices are high, you have a meaningful FX tailwind, and yet you're way below the targets you set for yourself. What's it going to take to move up sustainably to the level of return on operating capital that you target?
That's a good question, what you have to remember is that MDP is still ramping up. It has not reached the full volume, and it has not reached the full margin potential yet because we are still working on recipe optimization, what is the right mix of wood and chemicals, what kind of wood, et cetera. It will take time to get there. Typically, as you know, pulp mills in the Southern American atmosphere, they are creating sort of 40% plus EBITDA margins. Also it's a fresh investment, so of course it's heavy on balance sheet. You have to keep that in mind, what is the starting point. You're right. I think the ramp-up has been successful. I think the project itself, there were delays and cost overruns when it comes to capital expenditures.
When it comes to ramping it up, that's been done quite successfully. Also it was proven by the fact that when we had the maintenance shutdown, the planned one just about a month or two ago, there was no major surprises. Actually, that was happening below the budget and within the time frame. Okay, ramp-up took a couple of days more than expected, but that's acceptable for the new crew because they're still on the learning curve. We are well on track, and we are confident that we will get there. It's more if you look at the level 15% return on capital, you have to remember it's very capital intensive, and you have the plantation and those around it, which is sort of lowering the return on capital.
15% is still above the group level target, 13, and it's reasonable for that type of business to keep that in mind.
Another way of looking at it. In the first quarter, if you take it isolated, as we reported, Biomaterials had 11% return on operating capital. You were having rolling numbers, which means that it's back end heavy by having a number of quarter with a full capital and nothing. In the single quarter, it was 11. We know there is potential. One of the potential is coming back to the usual way we find the efficiencies. We are running Montes del Plata a lot on old wood. That we have been bringing up for the startup, and we were late. There was a lot of old wood there. That means that the efficiency, because of the density of the fiber, you can do a lot more.
For me, I agree, challenging, we need to put these targets because otherwise it's going to be, you know. You see there are two divisions that are extremely attractive and I feel very comfortable are reaching. This is a tough target, and I think the other tough target is to continue to generate about 7% cash returns on the paper.
Thank you.
Thank you. You've been quite clear about the CapEx declining from 2016 onwards. You talk about tailwinds in earnings, which combine to or adding the growth projects that you have. It's a bit difficult for me to be really pessimistic about your EBITDA growth in coming years. Which brings to us to a scenario where, I guess your free cash flow should improve quite a lot. Little bit thinking around that, how do you view, going a bit ahead of me, I guess, but spending that free cash flow, will there be debt levels coming down or dividends going up or combination, or how do you think about that?
It's a very leading question. What I think the important thing in this kind of industry, if I get the background, is that you need to continue to drive out and sweat the assets. We have built a lot of existing capacity in a very short period because that was the strategy that we wanted to transform the company. I think it is not sustainable to continue on this level of investments, and we need to make sure we make choices in connection with the customers and going to segmentation based on innovation or whatever to drive. What the board is going to do and the owners hopefully, which is our ambition also to increase the cash generation going forward, is actually a question for the shareholders.
Also, I think we are very clear on dividend policy.
Yes.
Half of the net income over the cycle.
Yeah.
You can do the math.
Yeah
Without any speculation.
Also your debt level, debt EBITDA, you are now in two and a half around?
2.6.
2.6, and target is below three.
Okay. There is no real need for taking that level down, I guess.
Not from that perspective, no.
Yeah. All right. Thank you.
Yes. Another one from table three.
Hi. Could I just ask on your Uruguayan plant, am I right in thinking it is 50% owned?
Yes.
Just going back to this question here, as we look forward and your net debt levels fall and your cash flow hopefully increases, would you ever look to increase your ownership of that plant, or would your capital employed issue restrain you from doing that?
If I would do an investment going forward, I am not sure I am going to put another pulp mill.
Increase your ownership.
No, because that's increasing in pulp. No.
You have to remember, like I said earlier, you should look at as integrated pulp and board producer.
Yes.
To increase our shareholding, if you look at today, that would increase our market pulp position. It's not a strategic move for us. We're more to invest rather in businesses that Gilles and Jari.
Yes
introduce us today.
There we are getting higher returns. The other thing is that in certain jurisdictions, it's not in Uruguay, but in others, foreigners cannot own land. If you're thinking about Brazil, we are not allowed to have 100% ownership or buy land today. There's new legislation coming. Any other questions? Yes.
Yes. A question around your dividend policy, the 50% of net profit over a business cycle. It's been the same for quite some time. It's nice and clear policy. In view of you taking the next step, should we expect sort of some new metrics also here, more linked to, let's say, shorter term cash flow generation and things like that? I know that you're not proposing that, but a general discussion.
I think that is a question that the AGM and my board are going to have. I'm trying to change the business model, if that is the implication that we generate more cash, that's a decision they have to take.
Thank you.
Any more questions?
Before handing over to Ulla, I just want to make sure I have one very strong message to send to you. We are leaving the phase of the asset transformation. We're going into the next phase based on profitable growth led by innovation and customer focus. We are going to take down our CapEx more towards the depreciation rate over a number of years, and that's what we're here for. We have four very competitive businesses with growth potential, especially the packaging businesses that you seem to hear. Both of them are probably delivering best-in-class returns with potentials. We have a pulp business with potentials and especially potential in biochemicals. We have a wood business that will start to grow with the building activities increasing mainly in Europe. That is what we have talked about here today.
We have a mill in China that will be ramping up from the middle of next year. We look forward to meeting you again. Thank you very much for coming here. Ulla, the last word is yours.
Okay. Thank you, Kalle. Before we close, just a reminder, you have this questionnaire on your table. If you kindly can fill this in and leave it on the table, we will collect it then. Also some practicalities still. The drinks will be served in the garden, on the courtyard to the left-hand side here. I think the weather is nice, and we're going to have it there. The dinner is going to be either there or then in the foyer as usually. Let's play by ear and see where that is. I just want to thank you all for coming. It was great to see you here and to have good questions and discussions, and now we can continue it over the dinner.
Thanks for coming, and hopefully it's not three more years when we next time meet in the same event, but little bit sooner. Thank you.