Hello, everyone and good afternoon.
Welcome to STORAN's Capital Markets Day twenty fifteen. And I'm Ula Payen Ensign, 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. So let's make this day a wonderful day and also be active and ask questions.
This is now the opportunity to ask questions from the management. And as usual in store and so safety first. Some instructions in case of emergency, which we of course hope that it's not going to happen. But in if there is a fire, we will hear alarm. And to the left hand side there, where you can see the Stolce Kapana ad is the way out.
And our CFO, Ezeppo Pari 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. So 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.
And last year according to Smitsers and Pira, this market was a size of US823 billion dollars And we at Stora Enso estimate that 32% of that is fiber paste packaging, 16% cottonwood and another 16% corrugated packaging. So this is something we can penetrate and we can grow with and take some market share even and that's our goal. This Capital Markets Day is a deep dive to packaging in addition to a presentation from our CEO about general business. But what we are going to concentrate here is how to create growth through customer focus and innovation. And that is really where we're trying to concentrate, because it's difficult to really demonstrate these in the regular road shows or one on one meetings.
And if we go through this program of today quickly, you have all that on the tables, I believe. So 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. Then we will have a coffee break. And after that, Head of Consumer Board Innovation and R and D, Marco 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. And then it is a question Q and A about the innovation to all of us taking part of the panel. Then after that comes a very interesting presentation, which I know is a great interest to everybody. And that is our Guangxi project by our Board Project Manager, Racha Jaindran. He's here with us today.
And then last but not least, our CFO, Stef Popari, will talk about our divisional targets that we've announced a couple of hours ago. And then it's a bit about working capital and how we think about that. But now want to invite our CEO, Karl Sundstrom. Please Karl.
Thank you, Ana. First of all, very welcome. So I will cover some of the big megatrends, how that affects Stora Enso. We are going into the second phase of our transformation. And then I will cover biomaterial, wood products and paper before having division heads going on a deep dive in the areas of packaging solution as well as Consumer Board.
So the next phase of profitable growth. But before going there, I think it's very important to understand that we are in a world that is changing. And one of the biggest challenges going forward is the quest for renewable material. A lot of resources on this earth are not renewable. And if you look on the major megatrends, 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. And that is a trend that will continue. And 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 it's 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. And it's important to keep in mind that everything that you can make out of fossil materials today, you can make out of a 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 or 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. And later on today, Zeppey Paragu 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 and I will cover briefly Biomaterials and Wood Products.
Four out of five divisions are geared for growth. And 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. Storianso 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 fifty and seventy years.
When we retired the PM1 in Beitsu Lotto in March, it was 60 years old. And as you can see, the composition of Stora Enso has changed a lot. In 02/2006, 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.
So in the 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% of the rest of the business. And that has changed dramatically. I would say today, the questions on the paper business is probably around 10% to 15%. But 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.
Enso has a unique position. Basically every country in the world are hit by product on 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. And 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 Raya 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 De Plata. We are converting Varektaos regulated this year. We have done the start up of Guangxi. We have done a Viridea technology acquisition. We have sold off a number of core assets and we have closed down quite a lot of paper capacity.
And if you look on the historical capital allocation, you see that we've been spending somewhere between 1,000,000,000 and £800 the last three years. All in all, we've 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 Sappo's presentation. The other part is that in the markets that we are addressing in the full division, our intention is to grow faster than the rate of the relevant markets. And that will be based on innovation, customer focus, but also sweating the assets 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% to 40% of the round wood in the production. The rest is used yes to burn to get energy. We have been investing in areas Ligno Boost or Vildea technology to start to get value out of the other parts of the round wood. We have today five pulp mills, two partly owned in Latin America and three in The Nordics. Two all the three in The Nordics are getting more and more specialized.
We are focusing on fluff in Skjordkar. In Sunnila, we have converted in part into Lingning production. And in Nocell, 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 we 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. Then based on new technologies that we have acquired like Virdia, Lingno Boost or MFS, create components of better cellulose, lignin, MFC or hemicellulose. With that, we are able to create new products and applications such as bio barriers, 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 Storenzo here, because and Jari and Jules will cover that later on. Because in many areas where you can use the bio barriers coming out of biomaterials is actually in liquid packaging, consumer boards or in corrugated packaging. And 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 Sikla. Going into the wood product, the only sustainable building material there is, 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. And right today, the housing starts are actually growing in all markets except Finland and France. And if you look upon the number of flats driven by the megatrends of urbanization, you will easily see that we are not less people today compared to turn of the century. We are actually more people.
So there is an underpinning demand on more constructions. In the Wood Products, we are trying to specialize ourselves, going away from the commodity called basic sawn timber 2x4. And 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. And that the CLT, LVL, specialized timber for window components etcetera like post and beams, euro beams etcetera. 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 margin in this business, the margins are not very high, but they are not very capital intensive. I'd like to cover paper. We have seen paper decline 2013 in the range of four percent to five percent 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 and they do that. So we have basically been able to generate the free cash flow out of the paper assets for the last couple of years on average of €50,000,000 plusminus. We will continue to work on the working capital being fanatic about the cost, making sure that we move around in the right segment because different segments deteriorate differently in paper. That's the reason why we converted one of the standard used machines in Sweden to an improved use to go more into the area of the retail, which has been one of the stable segments. And then trying to run the machines as high as we can on capacity.
But today when we see that 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 human rights assessment that we published the results in the February 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 story answer 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 guidelines that we have and the experience we have gained.
So as a final note, biomaterials are innovating themselves into new areas. Wood Products will start to grow with more building starts generated in Europe. We know how to manage the cash generation in the paper business. But 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 and As.
And don't steal all the thunder because it's going be a lot of other presentations. So if there are any particular questions yes, Antoine?
Yes. About the CapEx, could you give us a time frame as to say it needs to be a level of depreciation?
There's a microphone coming Antti.
All right. Thank you. Antti Koskwerdanske Bank. You talked about the CapEx coming to a level of depreciation or needing to be in that level. Could you give us a time frame?
Next year's CapEx will be lower than this year.
Okay.
So 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? And I'm thinking particularly of the Phase two of Guangxi.
Does that mean that's
a very ambitious asset transformation I would say. Is that now being put on hold? Or how should we understand this? So as we have 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. Then 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.
So I'm going to say how long is CapEx going to stay down? It sounds like it's not going to stay down very long.
So yes for the rest of you, how long it's going to stay down? And if you look on the commitments we have in any shape or form that is basically one of the few commitments we are having. And let's save those questions for Seth has a whole lot of information on it.
Oscar Lindstrom from Danske Bank. You mentioned again coming back to this theme of moving from asset transformation to innovation and technology and development driven transformation. Do you see sort of what proportions do you see that transformation being driven by your own development of new technologies? I mean you mentioned these technology centers. And to what extent do you feel that you will be looking at acquisitions to acquire that technology and acquiring new businesses to sort of develop your own business?
So 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. And I think if we want to drive this, we need to be in control ourselves. So 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 Schalbert, 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 sort of 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 De Plata, we saw an opportunity. When it takes to Guangxi, we have basically two liquid packaging board mills one in Imatra and one in Skogal. 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. So now I would like to introduce Jari Lachlanen. Jari is a person who has worked basically his own life in B2C. He has a very thorough experience in Nestle.
He's also the Head of Felix. So 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 the answer is very, very happy to have Yari on board. Yari, the floor is yours.
Thank you, Karl. As Karl said, my name is Yari Laffanen 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 thriving and thriving focusing on high impact outcomes and shifting towards renewable materials and sustainable solutions with the customer and consumer focus.
The main target for us is to have a premium market position in the high quality end use segments. And 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, we know what we want.
Consumers see packaging as a way of protecting food, but 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 and 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 EnsoQuote because of its mechanical features, because of the superior coating quality and forest certifications. But 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.
And in Europe, the growth is mainly coming from Eastern Europe. If we look more in detail, the board packaging segment is growing across the globe. But 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 and that applies to most of the regions. However, our market is not only focusing on the board market. We see the entire packaging segment as an 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. And already today many packaging solutions are replaced with board packaging. And luckily, when we again ask the consumers, they see paperboard as preferred packaging material and the consumers also consider paperboard as more environmental friendly. And 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 focused strategy developed around customers and packaging demands for consumers. And 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 and 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.
But 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 cooperation or range of services add more value to our customers. The winner in this competitive landscape will be the one who's most adaptable to change. Well, let's look at into our strengths. Renewables makes a difference and focus on raw material selection is key. Sourcing a sustainable supply of materials will be a huge task for all businesses decades to come.
And we are transforming our company to a company that beats new consumers in new markets. And already today, onethree of the liquid packaging board globally is coming from Stora Enso. You can be only successful in the long term if you manage to add value to your customers. We have had high focus on customer value and it has been recognized through continuously measured in our customer surveys. For us, it's hugely important that we deliver what we promise.
And our customers have ranked us higher than our competition. Another example is our Tamprite brand, which has been recognized as the most valuable cartonboard brand among the European brand owners. As you know, we are we have been very much based here in Europe. And now we are moving into Asia with our new China board machine. And as Karl said, this is not the first time we enter into 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, but but 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 force mill a new platform based on hardwood CTMP, which will enable us to launch a top quality FPP folding box grade soon. And additionally, now as we're moving with MSC to the industrial scale that will clearly make us a forerunner in this business. We also prefer to install in the world a new technical solution that will enable us for a source reduction of 3% with our Tamprite brand and this investment we're doing in our Ingeros mill. And we are investing in our PM5 in Minatra for improved quality and for improved effectiveness.
We are investing as Karl said to innovation and innovation is really important for us going forward. Marco will cover that in his presentation. But when talking about innovation, it is also important to see how do we work with innovation with our customers. And as a good example straight from the real is our cooperation with Heralf. This here is a packaging solution or system where customer can produce paperboard cans in all shapes in house and they don't know to do not need to use prepapricated boards.
This concept offers the customers product flexibility, differentiation and at the same time, it's cost efficient and environmental friendly. Herauf 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 not we have been to capacity to the full level.
But when we look more deeper into for example general packaging in this time period, we have been able to grow close to 13%. And 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. But ever since, we've been able to improve our EBITDA reaching last year at 19.1%. Return on operating capital and this investment in China is increasing our operating capital heavily.
But 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 tonne, we have decreased through lower raw material prices and continuous improvements in our operations. And 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.
And Consumer Board has been in cooperation been able to reduce our inventory turnover together with our customers. So 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. And with this, I would like to thank you and open for questions.
Thank you, Gary.
Lars Kjellberg, 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 a very strong linear trend sort of over the next five years?
First of all, our focus is in the liquid packaging and in foodservice areas. And if you look at those crates, they are growing much faster than the average growth in those regions. And it's linked to those megatrends as Karl was saying earlier. So in order to get the ramp up with the board machine, we need to make sure we are qualified for the food production. So 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.
So the couple the first two years will be very much of getting the machine to go. And when you work with food, you need to make sure there are no surprises and 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.
So it will be what we call the ramp up phase after the board machine is running. And meanwhile, we have to test in other crates. So the portfolio and the strategy is based on our core crates where we want to grow, where we want to see the benefits. And those are for example CKB, it's the liquid packaging and foodservice.
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. So what part of that business have actually contracted?
Liquid packaging we've not been able to grow because the capacity is full. So basically there we have a modest growth slightly at 0.1%. But like I said in the cartonboard 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%.
I mean coming from low starting points. Just one
clarification. So 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 to the same customers in China? 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. And especially when you talk about liquid packaging, you cannot have leakages.
Understood. Thank you.
Mikael Joss, Kepler Cheuvreux. You are adding capacity in this segment. And then we also know that one of your quoted competitors is doing the same in Sweden actually two of them. And the second one is doing something that's of related to liquid packaging board, but a little bit less. And then 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 sort of long term prospects?
Well, first of all, we are adding capacity in Asia not in Europe. And for Europe, it is more capacity. It's to be seen which crates and how they want to play with their volumes. And as I said in my presentation, it's all about to be relevant to your customers. How do we add value and which role we want to play?
It's 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. And at least in our case, as I said, we want to see the entire packaging segment as an opportunity to grow. And 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? And 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 don't know fully yet how that will impact if you're not able to use a renewable packaging, but this is something every brand owner needs to go through currently. What are my packaging materials? And 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's at least €100 per tonne in transportation cost from Northern Europe to China at least.
A follow-up question there on the material replacement. So if you paint a blue sky scenario let's say ten years from now, how big part of board will be the total market compared to where we are today? I mean this is not the forecast, but it's just it's not the forecast.
It's not the forecast. And what Rallad Ula said earlier, it was 16% consumer with similar boards. I see 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. But 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.
But 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 I would say and you have papermakers with experience and you have it. So, yes, we are worried. That means that we need to move faster, but we are not totally scared.
Company that's most adaptable chains 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? And 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 and 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. And today there's a lot of board being made in China basically coming all out of eucalyptus pulp from Latin America. So why would we be different?
Because you're on higher end liquid packaging.
Yes. But that is pork. We have not decided from where to take the pulp. But it will be Yuca 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 Lindstrom from Danske Bank. It was a very impressive chart you showed there or diagram of a variable cost reduction in Consumer Board. What would your cost reduction variable cost per ton to be exact? What have been the main drivers of that reduction? And is that something that you see that you can continue with going forward?
I mean, this has been achieved during a period with not a lot of top line growth so
Well, is part of our innovation process as well. How can we get more out of it? And it's again a cooperation how do we work with the customers. So this is will continue absolutely. And like I said what we're investing now in Ingeros is also trying to improve this and really to drive efficiencies and add more cost back on.
And for my follow-up, I mean how important has lower wood prices been for that variable cost reduction?
It's been part of it, yes. But more important in combination how you reduce the source. And I think you will have an expert on source reduction coming up on stage later on this afternoon Marco. So take that with him. If there are no more questions, we thank you, Adi.
Thank you. And I would
like to
invite Gilles van denuiwenhoisen who has joined us and he joined us in the March. He has a very impressive CV. And 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 Danisqui and DuPont. So please Jari, the floor is yours.
Thanks, Karl.
So good afternoon. I would like to talk take you through Packaging Solutions. My name is Gilles van Niebenhausen. I'm Dutch and my first name is French, but you'll get my name right. And I would first like to show you an actually an innovation, because 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 a 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 products with high performance. For example, if it's at high performance, need to sell less. So we want to sell it on performance not on per tonne, but want to sell it per cubic meter per square meter. Technical customer service or doing Internet business with us recycling.
So 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. And 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. So 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 test liners today and flutings and I'll come back to extensions later. In containerboard, we use fiber either recycled fiber, which we do in Poland at our Austro Lanka mill or virgin fiber, which we do in Finland coming directly from wood.
Now the dynamics and fundamentals around these two businesses containerboard and corrugated packaging are very, very different. A corrugated packaging business is about supplying boxes and we include in that making a design. And our customers are here as I said, brand owners and retailers. The box doesn't travel far. It only travels roughly 200, 300 kilometers, which means it's a local business, you need to be very close to your customers.
And 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 eight to 900 kilometers. So it's more a regional type business. Now 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, and you need to have a very, very good energy efficiency, which means typically your own power plant. This business Packaging Solutions has got a strong financial track record. Over the last five years, we grew more than €100,000,000 from a base of just over €900 That's a CAGR of roughly 3% per annum, were over five percentage points.
The way we did that was the basis of two drivers. On the one hand, we took our cost, 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. Now you can see that we have been increasing our volumes both in corrugated, but especially on containerboard where we built the Poland the building in the Austro Lanka, 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. And 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, 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 and because it needs to survive the transport, which 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. So 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 Mark Hakrovita will talk about this more. But this is again a 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. Then there's right weighting. Right weighting is about selling not weight, but selling performance.
And we have products in our portfolio, which are much better than the average quality in the market. Now we want to get the value on that. So we want to sell on square meters and downsize and reduce weight of the boxes and pass on that benefit to our customers. And 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. Now consumers and increasingly the young generation, they don't accept exhausting to world's resources. So this is again a big advantage for our type of renewable packaging. For containerboard, as you all know, there's a very important development that we're doing right now.
We have a big paper mill Varkaus in Finland. And we will because the business is declining, we will convert that paper mill in the process of converting that to a containerboard machine, which will be very, very competitive. So we are converting a paper machine with a capacity of about 280,000 tonnes to a kraftliner machine being able to supply 390,000 tons. And we project for that business an EBITDA margin over 15%. Now this is a very attractive story, because we take away the problem for paper, we enter a growing market, we will have a very, very competitive assets.
We are already in these global markets with our fluting materials, which we supply from the Henlea mill in Finland. So we are directly able to access a big customer base, so the majority we can easily cross sell to these customers. And we will have a very, very low capital amount to invest in relative terms. I know that €110,000,000 is not nothing. But when you compare having to build a completely new kraftliner type capacity including pulp, we're talking about €2,400 per tonne.
We are going to spend on this about €280 per tonne. That is a huge advantage. And 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 number 10 to position number six.
But more importantly for our total containerboard business, it means that we will have three really excellent type assets and type businesses completing having a complete portfolio being in test liners coming from Ostrelenka, Poland being a kraft liners coming from Warkaus and being a fluting material, semi chemical fluting from a Hennla mill. These are all large scales machines and this is about economy of scale. Two of these machines will be really state of the art very modern, the Warkaus machine plus the Ostralenka machine. We have access to our own recycled paper collection network in Poland for a very competitive supply and we have in Finland very competitive virgin wood sourcing. And 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 one. In Central Europe, which is around Poland, we are number three and very, very close actually to the number one and number two. In Russia, in those areas where we operate, which is around Moscow and the large area around that going east, industrial areas, we're number four. 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're not. We're in The Nordics, Nordics relatively low growth. We're mainly in Eastern Europe close to 4% market growth.
We're in Russia. Oil prices will go up again over time. That's good. Market growth around 3% around that level. And 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. And then we're in China. In China, we are with 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're 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. And 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. 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 three d virtual store. So we design a package, a box and then we put that box into this virtual store. And then with a 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 on these simple fiber compressed type packagings.
We went in there and we designed with them a completely new box, very attractive, good printing. Now this box was selling 40% faster. So our customers start to 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%. And 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 and 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.
So concluding,
Stora Enzo 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 containerboard and we have really we know what to do in terms of services and design in the boxes. We are very well positioned both now in containerboard to capture more growth and regionally to be in the right high growth regions in Eastern Europe and China. And we are innovative. We do new things. We move ahead.
And we have a proven track record of solid financial improvement. Thank you.
Thank you, James. Any questions?
Hello. What the conversion that you're doing in the Varkaus Mill sounds amazing. It sounds so great, such great returns. I'm 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?
That is we all the time look at potential opportunities, but it depends because it's a balance between paper and containerboard and if the assets are exactly right. And that means you need to have the right trim width, etcetera. So it's something that we are very, very aware of. If somebody can do it, it's probably us.
Theoretically how much more capacity could you potentially convert?
There are a few mills that might be, but it's very few. And I would like to point that out. Varkas was one of a kind within our net mill structure. It's not that we're having like in Europe 12 paper mills. I think Varkas is the obvious one.
And then you can convert any machine. It's just a matter of money, not as good as Wirecast.
It's Barry Dixon from Davy. Just a follow on from Diana's question. And second, 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? And secondly, on the whole area of innovation and there are lot of your peers would claim that they are doing very similar things to yourselves in terms of product innovation around corrugated. I suppose the question that we from a financial perspective is who pays for that?
And I don't get the sense that your customer base be it the Nestle's or Finna's of the world are actually willing to pay higher prices for these innovative products because they just say we want the same we want to have the same packaging costs. So just your thoughts on that in terms of how who pays for the innovation? Thank you.
I'll take the first one on capacity. Actually on the one hand, I think there's new capacity coming into the market. The market is growing. There's also capacity disappearing. So when you look at recent announcements, I mean, there have been the last few years, I mean, there have been several capacity closures on containerboard mills or less in capacity than about 100,000 tonnes.
We are having asset sizes of about 400,000 tonnes. So and we are well positioned where we are in Eastern Europe because that market is rapidly growing. So it's actually pretty well in balance on capacity supply demand. So that's the first one. On innovation, maybe I can also say
regarding kraftliner, kraftliner is today a market where it's basically not produced balancedly in Europe. 800,000 tonnes are imported. So you're absolutely right. We need to think where we're going. But this is a unique asset with a unique proposition.
On innovation, we are quite careful in terms of where do we actually want to supply these design services and work only we will do that, only with customers where we feel okay we have an edge and where indeed that value added is indeed being valued by our customers. So we're very careful about segmentation. So in the first place, so if somebody wants only cost, we will supply only cost and take out cost and have the lowest cost design. But if we have customers, brand owners and or retail where we feel we have here the right context and we're going to redesign and create value in terms of selling more, when we get that feeling and we're that deep in the customer they're going to value that then we will put in the extra effort. So 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 is also how you address the customer. If you go to only to purchasing, they will not when you start to think about the product owner in a B2C, they do care. So we are working up the value chain inside selected number of customers. Yes.
And how
much? That is too little to talk about today. The journey has just started.
Mark Peron, Hebli.
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 containerboard?
Well containerboard so what 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. I mean, as you as long as you have a mill, a containerboard machine which is very, very competitive, you can earn a lot of money. And that is what it's more about. So it's not about scale here.
I mean to have many, many machines. I'd rather have less in the right markets whether they're being global or whether they're regional and having many, many of less competitive size. So I'm very happy with what we are getting now, a complete portfolio of three with three machines, one being regional and two global.
Lars Kjellberg, Credit Suisse. I'm slightly confused actually about what you're offering us because clearly from a corrugated platform, which is the end product where you're customer facing, arguably there's a scale component here where there's global or regional purchasing. And what you just said was about containerboard. So 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 Marqas conversion specifically.
As Carlos said, this of course is an element of significant imports into Europe. That import has been there for decades. So you are adding volume into a system that is already supplied. So effectively what is your strategy to introduce those tonnes? And that those tonnes typically arrive in Southern Europe and arguably you're in Finland which puts you at a relative disadvantage.
So if you share your thoughts on that that would interesting. Okay.
First one, on the geographic footprint in the areas where we want to compete in the Boxes business, this is a regional business. So 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. So in Eastern Europe, there's a gap there. I mean the market is growing.
And as long as you have the right footprint there, we can be we are the first movers, one of the first movers there and we make better returns. The same thing in China. So I think the Boxes business is about picking the right type markets in order to make good returns. Now on the sorry the other point was on
the warehouse.
We have already customers with our fluting materials. Now these customers they need high quality type material in order to make boxes prior conversion from it, which required this high quality, for example, under humidity conditions. So kraftliners are preferred products. It's true that from The U. S.
There kraftliner imports. We understand our cost structure extremely well and our delivered cost, because we supply already from our Hangela mill, the Fluting mill to those customers also in Southern Europe, in Africa, South America and all around the globe. And 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 Hainanola and Warkaus are about 100, 200 kilometers apart.
We know exactly what it costs. We know exactly what the market prices are. We know exactly what the wood is costing in Warkaus, what the energy costs are etcetera. Therefore, we know what our competitive position is against the Americans. And we know that we are at on the low end, the very low end of that cost curve.
Okay. So I was going to say just to follow-up on that. What you're telling us that your edge is going to be on price because you're cost competitive. Is that what you is that your offering?
And our offering is that the customers already know us and we will sell increase also on performance what I said. Because when we get in and they understand the value of our kraftliner, the quality of our kraftliner will be more. So we expect that over time our customers and converters will start to appreciate the value of our kraftliner and that's actually a differential also in premium. I have not taken into account, but the American kraftliners are worse in quality than what will be the quality of warehouse 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. And I'm curious if you could just talk about that for a minute. And how would you think about an acquisition of Klabin?
What would be how would it fit into the story that you're telling us today? So
Klabin will be very, very hard for us to acquire. And the reason for it is that Klabin, Villarreal Koshnes 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.
So that one is not even on the agenda for us. Now 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. But that will not happen for regulatory reasons.
Any last questions?
Any questions for this session? If not, so I think that we go too early to the coffee session or coffee break. And let's be back five to three, so half an hour coffee break. And then we will continue with the innovation part. All right.
Thank you.
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+1 2345. Sorry, say that again? You're still only getting one channel as well. Well, You should be getting actually I mute the other one. I don't need to.
Just one is fine. Sorry? Is that in order to get the level down? Well, I just want to prevent any noise going in there, because we don't need the other channel. Right.
Okay. So you're the channel? Yes, yes, just a single channel. If we are doing like a dual language one, we'll need two channels. But this one I'd rather just get rid of it altogether.
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other What's This machine.
Doesn't work. Because I need what?
Yes.
Marco, you just stay over there. Okay. May I have your attention? The clicker doesn't work. So now I would like to have the opportunity to introduce Marco, which is Head of Innovation and R and D within Consumer Board.
Please join the stage Marco. Marco is a person that joined us about a year ago. Marco has an experience both from the industry as well as from academia. And with that, I would like to hand over to you Marco. The floor is yours.
Thank you very much.
Thank you, Karl. Thank you for your kind introduction. Let me start by saying that it's a great pleasure to be here and talk about innovation for 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.
But 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
customers strong
and
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. So I will continue from Yari Ladvassen's presentation by talking about Consumer Board's innovation R and 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 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.
But I will use this opportunity to mention that actually STURA ANSEL has the world's largest capacity in manufacturing MFC when it comes to the board related MFC grades. So we really are actually a global benchmark in this area already. Then of course barrier coatings are extremely important for us, important for our customers and of course for consumers. We continue in our R and D investing into bio barriers, 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 biopolymers side. Only about 1% of the total polymer market is biopolymers currently. But this is, of course, a great opportunity to work with our R and 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, but point of view but also from the point of view of brand enhancement and really consumer related benefits. You heard from Yari's presentation that replacing plastics is very important for us. It truly is a strategic theme for us and 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 and D work hand in hand and 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, and one in Karstadt 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 and D function. Of course, we do not work alone in innovation. So, actively work with our partners. We work with the best universities and research institutes in The Nordics.
And 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 Yare's message, we are transitioning from a manufacturing centric innovation company towards a customer centric innovation company. And this really means in our innovation activities that we look at the global mega trends that Karl presented earlier.
And also, we look at what the real customers, our consumers and end users of our products feel. We look at ergonomics, we look at the user experience in the broader sense, look at the easiness to use, etcetera, all sorts of attributes that are related to packaging. I will not present any organizational charts on innovation organization, but I'd like to go through some of the activities we have. So we have R and D that is looking at product, materials, technology development and they are truly trying to answer the question what is feasible technologically. Then 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 and 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's three announcements that came out today and we are very happy to announce that we are building a packaging innovation center in Helsinki in our Carnavaranta offices.
It will be ready by the end of the year. And it will have a key role facilitating customer centric innovation activities. So 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 global one of the global leaders in that. We all use everyday NFC technology for example. It's in our passports. It's in our payment cards when you go to public transportation system. It's in many, many applications, even the hotel key cards.
So what we are now doing is together with NXP, we are looking at truly intelligent packaging solutions. So, we are together now innovating how to really create value added solutions to our customers from the intelligent packaging perspective. Sometimes it's easier to show things as a demonstrator than describe things when it gets too technical. So here's one example what we are looking at with NXP. We have embedded, integrated into a package, antenna structures and the microchip.
And this concept enables, for example, consumer to by using a smart device to read if the package was ever opened after it was shipped. So you could imagine applications, for example, in online retail. There's 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's 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, 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's another demonstrator in my hand. So you can see here the box has a transparent window. It's not plastic. It actually is MFC, purely MFC. So it's a transparent paper in a sense.
This is not something that's going to be in the market tomorrow. But this is kind of example as a thought leader we need to show the direction where the packaging industry will be moving. And MFC has a lot of other applications also we see potential in the future. So, 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, Marco. And we do it now so that we will start the innovation panel. And let me invite Karl, Marco, Giles and Jari to join me here. And it will be done so that we will discuss here a bit first and then we will invite questions from the audience.
So you will have a possibility to discuss with Marco and ask questions from him. But in anyway, so thanks Marco 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 call it remind us what are the megatrends that are driving us and driving our innovation to a certain direction?
I think the six mega trends 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 Storenso, 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 good population that we need to feed.
Okay. But then maybe, Jari next. Marco is working for you in the same division and doing these really path finding R and D and innovation type of issues. So 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?
So what I said earlier today is that we want to become more customer centric. And 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. So 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 Marco said earlier today that these are obviously very top secret discussions we're going with the brand owners. So we cannot really open up those.
So this innovation center will be also a place where we meet continuously behind the closed doors. But it's also increasing our company's awareness, how we as TURA 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.
And if I understand it correctly, the NXP announcement is very much also keyless to your area and how you will be able to commercialize that in a corrugated packaging side?
Yes. I think that's a very important development, because you think about online shopping. In online shopping boxes, products will need to be packaged in a good way to arrive at the consumer undamaged. So that will in generally will require corrugated packaging. When 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, does it really get the genuine article?
For example, if you were to buy say a low cost polo shirt, maybe not even such high value, but can you trust that when it gets home in your delivered that it's not a fake. So to have a chip there that can tell you that indeed it was genuine la cost is of importance. Now another area where actually online is not very important yet is the area of food retail. Penetration is very low. It's only about 5% here in The UK.
But like Scandinavia, the rest of Europe, it's 2%, 1%. And a major reason for that is that the consumer doesn't necessarily trust the quality, the freshness of what is arriving at home. So 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? Now with this sort of technology with a chip, you could read out with your smartphone that it's still okay to use. So that could have a major impact on changing also that industry.
Yes. Speaking about the smartphones, I think that there's something maybe that Karl and Marco you can share with us.
Yes. I heard that Ula has been giving away a few of these boxes with some macarons. So I was wondering if Karl wants to have one of these boxes as well.
I am not sure because I am actually one of those terrible persons that you hate to have on an airplane.
Not 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, Colin. I wouldn't eat this.
Thank you very much. You save my day.
Yeah. This is a very nice app you have there and funny pictures as well. So thanks for that. But 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's 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. And 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. And then as icing of the cake, it's a plastic window here made of MFC. This is just a demonstration, but the cost of doing these things today is not very high.
The chip is about €0.20 And we have the technology to put it inside.
Yeah. And what is also so that I mean, think about all the apps we have. This is one additional one that you can have in your mobile phone and it gives you a lot of information. And what I usually say in many of the investor meetings that this is a box now with the MSC 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. So that is definitely the future we are looking for with this material.
So that's a nice story and great that we are there with that. But at this point, do we have any questions from the audience to either Marco or any of our panelists here? Please raise your right hand. Oscar?
Thank you. Oscar Lundstrom with Danske Bank. Very interesting new technologies and innovations here. To what extent do you see yourselves applying these to your existing products? And or will there also be new products that you produce partly based on these innovations?
I mean will Storanzo five years from now be producing not packaging board, but other products from for example MFC?
Well, 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. And obviously, we go through with our current customers what opportunities this could create for them. But 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 nonrenewable packaging to renewable packaging. And these technologies that we're demonstrating here, obviously there are hundreds of different applications depending again from the customer. And 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 and then there are some applications that can be commercialized much more rapidly.
The other thing is when you have a discussion about these things, we usually talk to other parties of your customer's organization. You are not always pushed down to the purchasing department where we will try to go away from and the discussion is different.
And I can like tomorrow, we Marco 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. So 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.
Thank you. Just I suppose 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. I mean 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? And 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?
So I can start saying there's actually a third division that is also a crossover where we have and that especially when we meet retailers. So we are now working more with joint teams towards retailers, because 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. So yes, are addressing that issue.
And this is really important. We are not just talking about divisions. When we take a customer in, we need to. So we align internally like Carlos says, when we talk to a retailer, there is yield less, there is paper and there is consumer board talking to the same team, how can we add value to them. And 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 because biomaterials is at the forefront of getting the new materials and that's like MFC. They started.
Felix, do you want
to add? Yes. 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 the, what's in these because there's the intelligence is not put into this yet. So basically also enjoy the macaroni in a good time. So we don't really take responsibility how long you can store them here. So this is a fresh product made last night.
So it's very edible at the moment. So enjoy yourselves. Please some more questions to these gentlemen. Okay. Micker?
Micker Lioffs, Kepler Cheuvreux. This sounds very interesting and sort of but then of course comes the question how to measure it? How should we expect this to increase sales, pricing, margins? I know this is a very difficult question, but since you're all sitting up there some thoughts around it perhaps?
If I start I said we want to have the premier market position in the high end in the high quality segments, because there when we talk about the pyramid of products, obviously this is not directly for the low value products, but where the differentiation and the brand building drives the brand owner's agenda. We're not talking about huge costs like Ales said, but it's also the infrastructure I think that will enable us.
So for me this is a premium product. It's very few companies who can do it, because it's how you laminate thing, how you get embedded it, how you get down to tampering and there is not that many companies that supplies near field communication chips. So with the big competition, yes. Will we be rewarded for having the first mover's advantage? Yes, I believe so.
And this is just to make sure that we stay ahead of this.
But also something very concrete in here that this is for MFC is part of our source allocation strategy in the R and 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. And of course the new quality is what Yara is holding there to have this transparency. So this is really getting to the really the big avenues of getting to the close to the plastic.
But I mean you have you and I we have been around some time. So we remember from the earlier Capital Markets Day that this it really is boiling down to the fact that you would get more out of same amount of cubic meters of wood. So that is also a driver there reducing the cost. In addition what Yari and Kalle were saying here of getting the new qualities in here. Okay.
Lars and then Oscar.
Lars Kjellberg, Credit Suisse. When I'm looking at this, this is obviously quite interesting. On the containerboard side, have a corrugated business. Would you consider again to reenter the converting side on cartons? You obviously have the ore business in the past, right?
And some of your competitors, well, namely in The U. S, they have an extension of the business, of course. The second point coming to Olarsen and changed in raw material supply and less wood etcetera, etcetera. Does that actually require any modification of existing board machines to use this new fiber technology?
Isn't this Marco something for you that you can take?
The board machine.
The board machine, yes. So
if you so we are now if I go a little bit ahead of Giles, we have at this moment we're in a strategy when it comes to the corrugated business, box plants that we think we are in the right markets. We don't see any growth in Europe. And since the box only travels two to 300 kilometers, We rather would like to expand in that corridor, right, Shriv that we're in?
Yes. I think that's true. I mean that's giving us good growth. You're right in saying, I mean 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. The consumer packaging if you were to go the next leg so to speak to actually make the carton as opposed to just the raw material?
As a first step currently, we want to work with our current converters. And this is a triangle, because the convert so far we've been very much depending we sell to the converter, convert ourselves 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 innovation and R and D. I think we are quite unique for this business.
And 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. But we as Consumer Board, as Tura Enso want to have a bigger role also in the interfaces with brand owners. So we're not really trying to steal business anywhere, but we want to have a more serious role in this entire value chain. While Marco is talking about design, with my background, I didn't understand what FPP is.
I understood packaging is a way of differentiating. So why we need the innovation center is really to involve all those three parties. This is what we can do together.
Anders? The answer to that modification question for board current board machines there's not much modifications needed definitely.
So no significant reinvestments
in it. Okay. Thank you.
But am I not correct that we have been this is made the MFC products are made in Imatra and the current board machines?
Correct. Correct.
Yes. Where the MFC plant is or the pre commercial plant is.
And it is a scalable technology. As business advances, we are able to scale it.
Okay. Oscar, 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're 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 the whole what is the interest in the market. So this is not what we cannot copy to other mills, but we need to get the scale. And 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.
But isn't it also said that some of culturally Chinese like some of the features in packaging products that the MFC can create and we can create with that. So that's why we think that that might be a good market for that.
So what would some of those features be? I mean I see the transparent window there.
Yes. Are there it's there are some that you can create with the new boards that you can make them sort of more versatile and more attractive.
Marco said also we are looking with MSC to get away.
Thanks. It's Leene Slossow with SCB. 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, but you are also talking about some technological breakthroughs to come. If you were to put a time line on what you said about aluminium replacement, What's your best guess at this stage?
When could we actually see biodegradable liquid barriers in packaging?
It's always difficult to book time lines. But 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. But those are always kind of difficult to estimate.
Good. Are there any more questions on this area? Okay. Then we probably all are ready to move on to Guangxi. Thank you for the Thank you.
And thanks for your attention here. Can I have the slides on now? Okay. Yes. Raja 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. So Guangxi project was started in 2002 by 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. And then in 2012, we were ready to announce a world class consumer board and pulp mill. Then at that time, there was a government change taking place in China, which also delayed some of the MOFCOM approvals and NDRC approvals.
And that delayed our project by one year, one year and a couple of months, because we received those approvals in July 2013. That time we have 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. So we decided to split this project to two phases, Phase one and Phase two. And the Phase one is the board machine, which makes consumer boards and 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 three 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 $300,000,000 loans. And then we started kick we kicked off the building of or the construction of the board machine in November 2014. This year or 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-twenty sixteen or ramping up the mill at that time. And after that ramp up, our Board of Directors will be deciding what to do with the Phase two. We will revisit this investment case and there is no Board of Directors approval at this moment for the Phase two. Then let's move to Raja. So Raja has been with Stora Enso for over a year taking over the construction of the Guangxi mill site.
He has an extensive experience of similar type of projects in Asia and working as as the last job before joining Storanza was at Linde Group in Singapore. So welcome, Racha.
Thank you, Ola, for the kind introduction and good afternoon to all of you. I'm excited to be here with you today. And the reason is actually we're doing quite something quite exciting in South China. Let me just click this on. This is what Ula was referring to.
We are in the Southwest Of China bordering on the let's say 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 let's say, 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. And Beihai was actually the origin and is also planned to be the origin again of China's economic flows and value flows into ASEAN. So a good place to be. Phase one and Phase two of this project was mentioned.
So in Phase one what you can see here, we're building the board mill proper and then the related infrastructure power plant, wood yard partially effluent plant and water treatment plants. And this is well underway now, a project that obviously took a 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, Ula 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. And 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 pulp production. The rest continues to go to the open markets. We produce obviously then in the niches that were mentioned high value boards, liquid packaging and higher grades of general packaging of folding boxboard.
And in the second phase, it is then planned if approvals come through that then most of the wood will be used captive to produce pulp. This will be well known to you. CapEx wise, the project is coming in at around €800,000,000 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. And 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're also creating an employee base that will operate this project here. With construction having started November and the target being that Board made to ramp up over a time line of eighteen months starting mid-twenty sixteen. 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. And we are here leveraging the whole network that Stora Enzo actually offers in terms of our global competencies and experience to train the people that we hire. So 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. And 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. Then obviously we are in an area of China which is shall we say not Shanghai or Beijing. And 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're currently at about 140 employees ramping up to above 200 end of this year. And 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, is where the mill site maybe not yet fully operational today, but we have facilities there. And it's 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. So 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. So there's only a couple of items in the closing out that will be still necessary to be procured. So we are well on track actually to meet the mid-twenty sixteen start up schedule that all of you are aware of.
And we are doing this actually in a difficult environment. As I said, this is not Shanghai or Beijing, let alone Scandinavia. And it is challenging every day to keep this to our high standards of safety and responsibility. But I have to say my team is doing a good job there. And we're quite proud that early this week we achieved four million hours worked on-site without any recordable incident.
Now 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 or it's nearing completion now. On the right side you see the roof structure going up on top of it. And early next month this will be the last roof that is closed. Most of the roofs are already closed.
On the bottom left then 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 and 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. And 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. And on the right side, you see the first plant that will actually start up, is the power and steam generation plant that is progressing very fast right now. And actually first equipment is already going in.
But a picture says more than 1,000 words. We thought a video actually will show you even more. And I'd like to start that now. So 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's 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. And we have about one third of social land here and two thirds of state land.
And 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%. Now 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. And that is also an important topic when it comes to the government looking at this project and Stora Enzo 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. So they are conflicting interests. So 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. So as of the end of the first quarter, we have achieved 61% correction rate of those problematic contracts.
And also here we are well on the way to actually achieve the target of getting this correction over by September 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, also things happening like theft, illegal logging and so on. So 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're 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. So 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 mid of next year. Phase one of this investment project is going to come in the budget that was announced. And I think making this on an sort of eighteen month schedule in South China that is quite remarkable for our company to achieve that. And we look forward to starting this plant up and then having a successful business in China.
Thank you, Raya. And maybe you can join as well, Jari, if there are any questions on the mill. And I know you have. So, Antti wants to say a question here or ask a question sorry, bad English.
Yes. Thank you. Antti Koskoweredanski. Two questions and both of potential Phase two. Firstly, on the CapEx side how that your current understanding how that compares to the 800,000,000 in Phase one?
And then 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?
So to be very clear about the decision is that we will need to take this to the Board and have a new evaluation and we will not take that until the Board machine is up and running. So that's when I answered before earliest CapEx 2017, but it might be later on as well. We believe that the pulp mill is going to be below 800,000,000 And 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. I mean, you're now looking at a major greenfield site where there was nothing. So all the related infrastructure is part of this first phase. On the second phase, there will be necessity for some capacity expansion in that infrastructure. But basically a lot of it is already in place.
So that should be well below the figure that was mentioned.
You.
Handelsbanken. When the board mill is fully up and running in China, what kind of profit contribution would you expect?
So if you take Phase one 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. What's in table number four? Table number four.
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 one will not reach that. But after Phase two, do you think that's possible? Or does it require Phase three?
Or how do you see that?
We don't even have a Phase three. But if you look at the very strong financial performance on Consumer Board, because last year they were in 2018 including a non yielding the working capital and the CapEx we have in there. So I think it will take some time before this even if we when we build the pulp mill, it's going to take some time before you get to the 20, because it's a composition of your assets. But 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 talked with Zepo about before. And not doing it is a question that they have to decide on, but it's also that we have an agreement with NDRC of doing it within a certain time frame, which means that we have to renegotiate in that case. But I don't know what they would say if but we need to have a good business case. The biggest factors is profitability. And biggest variables is that we don't know probably what will be the competitive advantage of a local wood supply.
Lars has been waiting for a while.
Yes. But number two and then
Then we take number 10.
Thank you. Just coming back to what you said at least 13%. Obviously, made it quite clear you've had a heavy infrastructure part of this Phase one. And we talked about how important this with cost per tonne and this is going to be like €1,800 per tonne, which is probably one of the most expensive board mills around. I'm just putting 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 with a 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? And isn't it really necessary to actually build Phase two to get economics given what you put in Phase one so to speak?
First of all, I think when you compare FPV following Boxboard is everything and nothing, right? It's everything from 2% EBITDA margin up to the 20% plus, right? So and we know the end game for us is to be as big as possible in the liquid packaging. And 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. But I need to understand because I have no mandate, but it's part of the approval.
And when we talk about the pulp mill and it's quickly coming through that you talked about 85,000 hectares of leased land and the quantity of wood. If I I can't recall the number now, but I did the math very quickly, that would not be self sufficient. Is that correct? So you need to buy material from third party sources to supply 800,000 ton pulp mill? And 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?
So for the CTMP first of all that is being actually done as part of Phase one. And that wood will be own eucalyptus wood. If you look at a Phase two, 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.
And 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. And that is part of a business case that would need to be built for Phase II.
And 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? And 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, doesn't because this is a one off now which will be completed next year. So long term, no. This will be just normal operational cost.
Thank
Can you get some?
Nicolas Gielman here from Macquarie Bank. I just have a question referring to the wood we saw harvested there on the video. Where is it from the Chinese forest? If so where is that wood going now?
Absolutely. This is I mean this was taken just a couple of weeks back in North Beihai and in Qinglian province of Guangxi. So 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. And of course, it gives you a much, let's say, better safety performance.
And this wood today goes into the local markets.
And 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-twenty sixteen, at what point do you actually start to sell the board? And what kind of supply contracts do you put in place given that the ramp up is going to take eighteen months or so? Maybe just give us a sense about who is going to buy it and what kind of supply contracts 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. So 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're continuously meeting.
We have a big meeting with one customer July. So 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. So basically, we are looking in China, but also in the other Southeast Asia markets. And personally I'm meeting many of the customers now discussing the expectations and how could we add and find a solution.
Six or five month contracts?
It varies very much. We have much longer contracts. And then there are you can go also without contracts. It's only on spots. But obviously, we aim for long term contracts with our strategic partners.
It's important. We are focusing on categories given our history and our capabilities of delivering the best quality. So typical one is CK being for the fast food industry, right? It's about cut boards for the international brands. And the international brands do not have lower quality ambitions in China than they have like selling in Sweden or in The U.
K. So that's where we're aiming very much. When we do the start up for the eighteen months, we will train the staff and that's going to be a lot of what you called secondary or lower level FPB. And that's why we need to train the people and the papermakers. And that's the normal.
It takes about eighteen months.
But also that is planned? I mean
the ramp up plan considers exactly that. And that is first also the lower grades are sold to other customers. And 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, I mean in consumable side, the contract structure is much long quite much longer than in the Packaging Solutions side. So they do tend to have like eighteen to twenty four months contract even and even longer than that. And some of your customer relationships are over sixty years. So it's a long so the length of the business is Yes.
Much
I understand that when we're talking about correct for liquid packaging, this changing of board grade 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. So 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 board of consumer board in China today?
Is the question if there are FSC grown trees in China because you can import FSC pulp into China?
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 Karl 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, but the Chinese government has as they usually would have their own certification system. So we have both.
Thanks.
Number two, Linus. Thank you. It's Linus
Larsson with SEB. Just a clarification if I understood this right because we have talked about certain business risks, but 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. So do I understand it right that you're saying that you expect 13% ROCE or higher by the 2017?
Was that
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.
So when then I thought someone said eighteen months ramp up. So when
how Yes. Long does But that
you take midyear ramping it up eighteen months that's actually 2018 where you start to get the run rate.
Right, right. But you're saying that 2018 you expect at least 13% ROCE on the Phase one project?
We're doing everything we can at the second. Karl is talking when we are in the pre market the first grade that the time when we produce second grade 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, 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 PRIMA grade, it needs to be tested by our customers several times before it's qualified to be sent. And these times when a customer goes through their qualifying process, it can be up to six months that they can check that all they own machines this Board fulfills the expectations.
And we're trying to do everything we can that this is already upfront plan as short as possible, but you never know how certain parts will move in.
Target is to have it during 2018.
And may I also ask when do you expect the machine to be fully liquid packaging filled? Or if you could give any indication on
Not going to be fully liquid order 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. Talking about liquid packaging board. There will be also cigarette board coming into this line. So it's all about the mix, how do we plan and what is the right mix. And that's where we are now with the customers, the expectations.
But we also need to follow the legislation of Chinese government in the food packaging. There are new requirements, thank you, coming in place now, how that will impact the portfolio or the mix we are able to provide.
What you're saying, CKB cigarette boards and those they are high margin products.
So 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 on these.
We are targeting the high end. We are not targeting the run of the mill where I think you mentioned that where there are where there's a difficult competitive situation definitely not.
And it's important that we are moving with our global customers also to China board mill now. So it's we're not only talking about the liquid
packaging. Thanks.
And actually the new legislation on food you mentioned is more of an opportunity than anything else?
Yes. Yes.
So 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 kind scenario, you get all this stuff done in six months as opposed to eighteen months? Would you be able to sell that product? Do you have customer commitments to take the volume if you can produce at specifics?
So 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, Raya has to catch a plane. He has a mill to build. So Raya, you. We have to stay here and
thank you. You. Okay.
And now Seppo will come with the financials and elaborate more about the divisional targets. So please go ahead.
Thank you, Ola. So 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 of words on the capital expenditure, how we see which has been one of the questions raised already a couple of times during the day. First of all, looking at the sales development top line and also discussion today has been very much aligned 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 €10,500,000,000 plusminus and mainly declining because of the paper business that has been structurally declining 3% to 5% a year and we expect that to continue also going forward. But 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 is underlying growth in our figures, even though it is not visible yet in the consolidated figures.
And it's good to notice that if you look at the past years and take out structural decline in Paper business, we have been growing 1% to 2% a year. And if you look at Q1 this year compared to Q1 last year and we exclude not only the paper business, but also divestments Korenstadt we divested last year, actually the growth rate was already 3%. And 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 forty percent 2014 compared to 2013.
Positive development also continues this year, there's 21% increase in Q1 year on year. And 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 had done during the past years have been coming on stream and starting to generate profits, like Montes De Plata now generating cash flow and profits instead of negative effect last year. Ostroleka, very good business case if we look at the development after ramping it up in 2013 and other investments.
And we believe that this will continue. And 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. So that's also nice to enjoy, because there have been a lot of headwinds into the past years.
But it's important for us and that's what we keep in mind all the time and 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. And that's very much what we can demonstrate here. And we believe it will be the case also going forward. Net debt, something we are looking at very carefully. I come to our 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 saw later some figures of other divisions. So the Consumer Board has been significant contributor to cash flow and internally I'm working on working capital improvement.
And that they've 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. Then coming to the financial targets and 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. And on top of the group targets, we also now published strategic targets for each division.
Again 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. But if you look at the group level targets first, so we have now a growth target. We have return on capital employed, that's an old one, so nothing new in that. We have fixed cost to sales, 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.
And then 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. And also dividend policy, will comment that is sort of strategic target as well. But it's not a KPI as such, but there's no change on that, but 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. So we have been growing some 3%, at least now excluding paper business, so the growth businesses that we have been in, up to 3%. Now it has been around plusminus 0.5%. You have the high 3% coming when we were ramping up Ostroleka, also we had good volume development at the same time in Wood Products businesses. And now I think going forward we will start to see the effect from Montes De Plata.
We had the machine conversion in Barracauce increasing the growth businesses growth figures as well as just discussed board machine project in China Guangxi. So that will continue to show and to enhance the growth opportunities. So target to grow faster than the relevant markets. So we have not put a figure there, because it depends on many things what is the growth rates globally, but tied into the relevant market. Then 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, maybe two of them Guangxi, board machine project and Montes Plata. Montes De Plata is not excluded anywhere here in the latest one from Q1, but we have been around 13% and we are at about 9% today including everything. So clearly achievable going forward once we get ready with the projects. Then 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. But there are two things to keep in mind here. First of all, we expect to grow. And we looking at the setup we have today, we can grow without adding fixed costs.
So that will of course automatically mean that the ratio will go down. But 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. And 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. It's actually quite destructive for the organization. It takes a lot of focus away from doing the business.
So that's why we feel it's better to do it in daily work, have the internal targets know what you are aiming at and continues to review it. So that's the way to do it in our case. Then we had debt to equity below €80,000,000 has been quite stable and this is a target that we had also earlier for the group. And net debt to operational EBITDA below 3%, we are at 2.6%, 2.7% level now. And 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 strategic target on the group level. Then dividend policy, no change there. So it remains the same that we pay half of the net income over the cycle and that remains the same. Then divisional targets, this is something new. And there we have two sets of targets for the divisions.
For the growth businesses, it's return on capital. But for the Paper business, our Paper division, it's free cash flow to sales. That highlights the nature of Paper division that we have. It's still 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. And then moving forward, if you look the Consumer Board, there we expect that and target to have return on capital above 20%. And actually today we are not far away even including in the figures the Guangxi project. Excluding that we are clearly above.
And 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. Then Packaging Solutions, there we are around 14% today. But 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. And 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 and that's how we believe 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. Then we have biomaterials, target range 15%. It is a reflection of the fact that even though that the pulp business that we are in and which we believe strongly in and we believe that Montes De Plata will be one of the best mills globally once it's fully ramped up. But of course, we have to remember that we had newly invested mill in Uruguay. It's quite heavy in the balance sheet.
So that has a reflection going forward what kind of returns you can expect on that. But 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 De Partem and it's now ramping up. So it's not having the full effect yet as you can imagine. Then 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 our Scandinavian market and some export markets. But 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 peak of 2013 where we did start the restructuring of the business cutting cost structures in advance and that we have been able to trim the business into pretty good shape. And we also believe that by like you saw in Karl's presentation, we are moving from sort of basic sawmill more into value added products.
That means it's less volatile business also going forward. Of course, it's course cyclical, it's related to where construction business is going, but less so than in the past. And 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. Then 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 including this year five years, have been around $800,000,000 And to put that into perspective, our depreciation is about $530,000,000 year. And like Karl said earlier, we expect the total CapEx levels to start to come down towards the depreciation in the coming years. But it's good to remember and there's a small footnote there that the CapEx figure here includes about €100,000,000 for the forestry CapEx. That's something that is maybe a partially 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.
So this forestry CapEx is replanting that is then activated to the cost. So 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 sold into COGS. So that's good to keep in mind when looking at the figures. Now 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 €300,000,000 a year.
And then 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 Karl 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. And then if you think about the Guangxi Phase two, if and when that happens, typically if you look at and compare that to MDP project or Guangxi first phase, the CapEx splits easily up over three year period. So it doesn't mean that it's 1 bang €600 €800,000,000 but you have to split it over some three year period.
And here you see in a way how the bigger projects how they are shown in the CapEx figures. First of all, we have Ostrovekar there in light blue, eleven, twelve and sort of tailing twenty thirteen. In a similar manner, MDP Montes de Plata actually starting from 2011 including twelve, thirteen and even some part in 14. So typically there's big projects. It is spread over three or four years if got the CapEx plans, because some tails are still paid after the ramping up or during that depending on the payment schedules.
So that's good to remember. And then of course now we have the dark group Guangxi there, which is the major capital expenditure included in the figures. So I hope that helps you to put into a bit into perspective how we see the CapEx development. Of course, we continue to give annual guidance for the year also in future, but that's I think as much we can sort of put into perspective to help you now. Then look at the working capital.
I mentioned already a couple of times. Worth to notice that we already released about €540,000,000 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 €500,000,000 So I think targeted level is sort of 10 percentage points level 10%, 12%. But 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.
And it's these kind things that we are working on in all the divisions today in order to bring down working capital more. And 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. And there we are I think doing pretty good work and we continue to do that also going forward. Then on the cash flow, a couple of points.
Here to highlight like I said already earlier, paper has been a very continually important cash flow generator. But important to note this point especially consumer board over the past years, so here it's quarterly, has been a good cash flow generator. It has good profitability. It has been developing positive. We believe that to continue also in future.
And good to note is also this is cash flow after CapEx that it has been only couple quarters that Consumer Board taking into account the large investment program has been showing negative cash flow after CapEx. I think that's again a good proof point of how strong the business is and that we believe will continue also in the future. Then sensitivities a bit to put this into perspective. I think you are familiar with the table on the left hand side, 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 port producer. We have of course market pulp in our portfolio as well, because we have surplus in certain grades. But 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 €45,000,000 each. And sometimes market and people are over accelerating that, that it pays 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 fluff and dissolving pulp. So to put things into perspective, and I think our biomaterials team has been working very much on this to improve the mix and to lower the volatility of the earnings. And that's also one reason why we have been moving to fluff and dissolving pulp from softwood for instance. Then on the right hand side, we wanted to open a bit more on the FX exports of the different divisions.
You remember in Q1 this year, we had €64,000,000 positive FX from FX in our operating EBIT. We mentioned earlier that biomaterials was about €40,000,000 which is clearly the most significant contributor here. But if you look at other divisions, so paper is about 10,000,000 positive in Q1, Consumer Board a bit below €10,000,000 and then Packaging Solutions and Wood Products less so. So this gives you some idea on that. And the main exposures we have in Dallas, Swedish krona and British part.
Those are the same as earlier, depending bit on the volumes and how the flows are shifting the 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 how what kind of FX the changes especially euro dollar rate has on our businesses. And here first of all, I want to highlight that paper business has actually the lowest ratio 25%. And like Karl also mentioned there the paper businesses and we see it pretty much European business. We sell some volumes overseas, but 75% is European business.
So exposure to currency is quite limited. Also you saw it on the previous page only about €10,000,000 in Q1 this year. Then highest exposure we have actually is in Wood Products as well as in biomaterials. And biomaterials obviously has as like you saw in the figures on previous page, it's coming through the price logic of the pulp. It starts from the dollar even if we're not selling outside Europe.
So they had the strongest exposure because of that. And then we have consumer board and packaging solutions there between. So that gives you some idea on the exposures that we have. Then on the loan portfolio currency mix there. First of all, if you look at gross debt about 4,100,000,000 roughly half of that is in euros and about €1,400,000,000 coming in U.
S. Dollar that is mainly loans relating to Montes De Plata and our project Guangxi in China. Those are funded in dollars And then we have some in Swedish krona and other currencies. Now if you look at the loan portfolio and the maturities, we for this year we had close to €1,000,000,000 maturing debt. And also good to notice, we actually like announced we made a prepayment of 2016 bond just about a couple about a week ago.
And 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 €1,300,000,000 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 1,300,000,000.0 say around €800,000,000 or so. And that is the level we are targeting.
And 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 smaller, bigger operations to sort of reshape the portfolio, take advantage of the lower interest rates, but nothing significant in plans. So it's more to how to manage the liquidity and bring it down. And there's been a good reason for the excess liquidity that we have. It's because of the big projects.
And we have been 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 in through the past three, four, even five years on the financial markets. It is sort of an insurance that we are wanting to put in place. Now we start to be ready with projects, so we can start to reduce the liquidity. And 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.
But that's of course another reason to bring it down. But there has been clearly a reason historically why we have been running such a high liquidity level. So to summarize, so we have now targets that support the next step in our transformation. Where do we want to go? How do we follow it?
So we have financial targets in place. They are challenging, but they are achievable. And 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.
And cost management, it's a continuous daily work to be done and it's high on our agent as well when working in offices and plants. So with that, thank you. And Thank you.
And now you may ask Zepo or me any kind of question or any other that the team has presented except Raya who has to catch a plan. So if you have any questions on the presentation or any other please shoot them. Linus? At table number two.
Thank you. It's Linus Larsson with SEB. And when we met at least some of us three years ago at Langenburg 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. Now the message today seems to be that that phase is nearing an end. So my question is, 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. But 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?
Foligno, it's a good question. The thing we are aiming at and now we have to make very sure, we are going into next phase. It doesn't mean that CapEx goes for one year like this. But 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?
And 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. But 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.
Here. Lars. Cash
is still of course important right? And 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 35%, wouldn't 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. But at some stage, you've got to come to a situation where you need to be more efficient on the best machines. And one of your competitors, of course, are doing this more on a recurring basis because it's bigger part of their portfolio.
But wouldn't it actually make sense wouldn't that well, rephrase. Wouldn't that be a way to actually sustain cash flow in a declining business? Does 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 and 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 is still a lot to take out to continue the cash generation. And we are doing that. And you will see different ways in the coming couple of years how we manage a paper machine.
And 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. But I think we are actually doing the absolutely maximum in the paper business, because our machines are running at a high operating rate.
And the day when they start on a low on a high operating rate and they are coming down to cash flow we close them. And then we you know the carousel that everybody else do. So the best thing for me would that somebody bought mine for a value that is fair.
So just to take on your comment. Don't get me wrong. We continuously look at the cost structures and we improve it. What I meant was that we are not planning to come out and say that, hey, we are going to run €300,000,000 profit improvement program during the next twelve months. That's what I'm saying.
And especially you're 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, because that's the only way to survive and continue to generate the cash flow for us to invest elsewhere.
And that kind of brings back your 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 in paper and Consumer Boards Packaging Solutions?
So if I then 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. And 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. So and also compare total efficiency of a machine versus a paper and 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 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. But 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 etcetera. So it will take time to get there. And but typically as you know pulp mills in the Southern American atmosphere they are getting sort of 40% plus EBITDA margins.
And also it's a fresh investment, so of course it's heavy on balance sheet. And so you have to keep that in mind what is the starting point. But you're right. And I think the ramp up has been successful. You think the project itself there was delays and cost overruns when it comes to capital expenditure.
But when it comes to ramping it up that's been done quite successfully. And also it was proven by the fact that when we had the maintenance shutdown, the plant one just about a month or two ago, there was no major surprise. It's actually that was happening below the part and within the timeframe. And okay, ramp up took a couple of days more than expected, but that's acceptable for the new group because they're still not learning. So 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. But then you have to remember it's very capital intensive and you have to plantation those around it, which is sort of lowering the return on capital. But 15% is still above the group level target 13% and it's reasonable for that kind of business to keep that in mind.
Another way of looking it, in the first quarter if you take it isolated as we reported, biomaterials had 11% return on operating capital. We're having rolling numbers, which means that it's back end heavy by having a number of quarters with a full capital and nothing. So in the single quarter, was 11%. And then we know there is potential, because one of the potential is coming back to the usual where you find efficiencies, because we are running Mantas del Plata a lot on old wood that we have been bringing up for the start up and we were late. So there was a lot of old wood there.
And then that means that efficiency because of the density of the fiber you can do a lot of more. So for me, I agree it's challenging, but we need to put these targets because otherwise it's going to be nuts. And you see there are two divisions that are extremely attractive and I feel very comfortable of 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've been quite clear about the CapEx declining from 2016 onwards. And you talk about tailwinds in earnings, which combined to or adding the programs that 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 your, 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, 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. But 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 for segmentation based on innovation or whatever to drive.
What the Board is going to do and the owners with hopefully, which is our ambition also to increase the cash generation going forward is actually a question for the shareholders.
But also I think we are very clear on dividend policy. Yes. Half of the net income over the cycle. So you can do the math without any speculation.
And also your debt level net debt to EBITDA you are now in 2.5 around?
2.6.
2.6 and target is below three. So there is no real need for taking that level down, I guess.
But from that perspective,
no. Yes.
All right. Thank you.
Yes. Another one from table three.
Hi. Could I just ask on Uruguayan plant, am I right in thinking it's 50% owned? Yes. And so 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'm not sure I'm to put another pulp mill. Increase your ownership? No. But because that's increasing in pulp, no.
But remember, like I said earlier, you should look at it as integrated paper and board producer. And to increase our shareholding, if you look at today that would increase our market pulp position. It's not a it's a strategic move for us. We more to invest rather in businesses that Chile's and Yari introduced us today.
Because there we are getting high returns. And the other thing is that in certain year restrictions, it's not in Uruguay, but in others, foreigner cannot own land. So 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. But 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 we have not 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. And if that is the implication that we generate more cash that's a decision they have to take. So before handing over to Ola, 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 and we're going into the next phase based on profitable growth led by innovation and customer focus.
And 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 and 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 up ramping up from the middle of next year. And we look forward to meeting you again. Thank you very much for coming here. So Ula last word is yours.
Okay. Thank you, Kale. And 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 and we will collect it then. And also some practicality still, the drinks will be served in the garden on the courtyard to the left hand side here.
And because I think the weather is nice and we're going to have it there. And then the dinner is going to be either there or then in the foyer as usually, but let's play by year and see where that is. And I just want to thank you all for coming. It was great to see you here and have good questions and discussions. And now we can continue it over the dinner.
So thanks for coming and hopefully it's not three more years when we next time meet in the same event, but a little bit sooner. Thank you.