Good day, ladies and gentlemen, and welcome to the Q1 2013 Stora Enso's earnings conference call. Today's conference is being recorded. At this time, we would like to turn the conference over to Ulla Paajanen-Sainio, Head of Investor Relations. Please go ahead.
Thank you, Martin. Good afternoon, everybody, on my behalf, and welcome to our Q1 2013 conference call and some of the new restructuring that we announced today. I will hand this now over to Jouko, our CEO. Please go , Jouko.
Thank you, Ulla. Thanks, everybody, for joining us today. A new day, a new quarter, and we want to do new things to keep the momentum going and move forward the company to the future that we all want to see. I start with slide three. First quarter performance. Yes, it was as expected, very much so in a structurally declining European paper market. Operational EBIT, EUR 118 million, and as we open this close, there is a land sale gain there of total EUR 10 million. Cash flow from operations, EUR 101 million. That's important. Not a number that I'm happy with, Karl will, in a minute, go through on what specific reasons are there. The fact that the EBITDA went down 9% is maybe the number that I'm least concerned about. Liquidity, quite happy at 1.7. Return on capital employed, 5.4%, even with the ongoing construction process, obviously not happy.
I think it's important also to then look at slide four, which gives you a bit of the dynamics. In EBIT margin, four quarters rolling, you can see that we have come down quite a bit, almost three margin points, in the recent quarters, which is not acceptable. We understand that. Interesting enough, the four-quarter rolling cash flow, we have been able to maintain at a decent level. If we would look at the six-year history, I think that has been the most stable number. As you all well know, given our transformation, that is the key number that we need to find ways to keep going. Slide five, which is the working capital. There was two specific reasons why the working capital went up, actually. Higher wood inventories, and you won't believe I say this, that's because of weather.
The serious point is the very long and cold winter that we all enjoyed, or most of us, actually has given us an extraordinary good harvesting season. We decided to use that opportunity and do quite a bit of harvesting while everything was still frozen. That was about EUR 50 million. The higher trade receivables essentially is that the sales in the last month of the quarter, March, were quite high, so the receivable collection flipped over also because of the Eastern location into April. The good news is, no, it is not overdue. The overdue are actually low level, even compared with end of December. That was the limiting factor on the cash flow. European paper demand, slide six. Nothing new, updated. Short of the hole in 2009, it is a straight line.
We have now, as we always do, looked quite a bit again on this development by freight. There are differences short-term. For example, coated mechanical shrank more based on published data in Q1 than, for example, newsprint and so forth. The overall simple rule of 4%-5% structural decline is still there, which I think says two things. One, the capacity reductions we announced in February, those plans are very much necessary, but also the new plan we announced today of EUR 200 million fixed cost, administration cost simplification out of the company, very much necessary. Keep this train going in the right direction. If you would move to slide seven, I will try to be clear, what does it say? We took our own recently announced permanent capacity cut plans, as well as other published permanent capacity reduction plans that the other industry players have announced.
We did a relatively simple math. We said, "Let's calculate the capacity utilization, assuming that the European demand early this year, plus the net export is played against the European capacity," meaning capacity located in Europe. The black bars by crate is essentially what the capacity utilization was in first quarter. The, I don't know whether they are green or gray bars, is when you take into account the announced permanent capacity reductions. Think about it this way. If we could reset the clock and all the newsprint capacity that has been announced in the recent months and couple of quarters would have been implemented January 1. That would have actually meant that the capacity utilization rates would have been 103%. Obviously, with the market development and the actual timing of these capacity reductions is not going to be 103%.
The point of the slide is, in newsprint and in SC, the already announced capacity reduction will have a significant impact on this demand-supply balance, which is obviously what we want and need and so forth. Less so in coated mechanical, where the utilization rate is low and there has not been any recent announcements. The only good thing I can say about that segment is relatively smaller for us. You see woodfree coated and office paper. No big news there, but a bit better utilization rates anyway. I will park that thought with you. If we move to slide eight. Some of you, if I do a 30-second history recap, I joined the company six years ago. We essentially took half of the corporate headquarters structures out, took a layer of the organization.
If you look at the volume productivity in the existing assets, we've actually had a very good development throughout the six years in terms of getting more sales per person out, and also we have gain in fixed cost revenue ratios. That's the good news. The bad news, it's all history, and the world continues to change around us, and that's the essential reason or one of the two essential reasons why we are announcing the rethink of our structures. Before anything else, this will not have an impact on the segment reporting. You will have the same transparency on the different markets before. There's no issue there. We do need to resize or rightsize also the administration overhead structures on all levels, whether it's group management, divisional management or country to the new reality. Why? Well, because of the strategy.
We need to keep the cash coming in so we can continue and complete our strategic transformation. The other reason for the effort, which I think is actually very important, is that if you look at the portfolio of businesses, I'm sure you understand we've done quite a bit of that, is throughout the past six years, we've been able to get fairly simple. We have very little shared assets. The customer overlap between the business is very small. Essentially, it's resources like wood supply, logistics, IT, and then the famous group management that pull these businesses together. In this change where we combine building and living and printing and reading under Karl's leadership, the focus is twofold. One, if you look at the track record of renewable packaging, but also especially when we get Montes del Plata up and running, biomaterials, those businesses need to grow and grow profitably.
I don't want them to be slowed down by the reality on the other side, where we have lots of issues on the market and obviously issues also with the fixed cost ratios and so forth and so on. We expect EUR 200 million cost savings. We will not detail them today in terms of countries or functions or anything like that. I can assure you, I will not come out with the number without a pretty thorough understanding jointly with my board that we will get there. We will communicate then in a few months the details, so you get a bit of more accuracy there, and obviously then you also get an understanding of the one-time cost related to it. If we move on to slide nine.
Karl, after his relatively short time as the CFO of the company, will now take over almost 60% of the company revenue. Yes, part of the thinking is with his broad experience from other industries, there will be quite a bit of rethinking on how do we make that a success. We won't change the renewable packaging of biomaterials, so Mats Nylund and Juan Carlos Bueno will continue there. To be very specific, this is not a capacity cut program. This is to make the overhead cost of the company more fit to the reality and give our businesses, our mills and sales organizations, a better chance to make money on the market. We will look at shared services in terms of outsourcing where it makes sense. I won't list what we will and will not because I am not quite there yet. There's a twofold objective there.
One, if we can, through outsourcing, get economies of scale and cost benefits, good. The other factor is that in this world, I believe that we need to move more of our fixed cost to variable because that's how we can ride through some of the cycles also and so forth. Yes, I will not give you a list of non-core assets. Maybe the only definition I'd give you today is we need to get more clear on which businesses or assets do we continue to believe in on a longer-term strategic basis and invest in them, and are there some that will have a better home with somebody else? That's a question of not only the future of those assets, but it's also a question of focus because we need to get more focused.
We need to get more agile and fast. The effective date of the organization is July 1. I say that specifically because obviously we will now immediately launch a selection of our next Chief Financial Officer. That's why we take that time to do the detailed plans, which we will then disclose also in the coming weeks and months. Page 10, Guangxi. The news is there is no news. I was 2 weeks ago with the president of our nation, Finland, as a part of a business delegation in China to meet the new leadership. Had a personal chance to discuss our project with both the head of MOFCOM, Minister Gao, and the Vice Minister responsible for this area in NDRC, Vice Minister Chung. I can only report that obviously, yes, I promoted our project, as did others.
I must say I felt very good about the response in both ministries in terms of, yes, they believe our project is good. They also understand it's very big, specifically not just financially, but also in the implications on the society with the plantations and so forth and so on. I said to many media people, we're going to China for a very long time, and given the way the capital commitments have worked, which is that we haven't made them yet, I'm not in a hurry today. I think it's very important for the future and the success of the project that the Chinese administration on all levels feels comfortable to say, "Yes, we approve, and we encourage this project." Then when the implementation and the operation for tens and tens of years starts, that we have all the support on all levels, national and regional.
I'm heading back to China in 2 weeks to meet some of the new leadership in Guangxi, because I personally believe that I do need to continue to spend time and build relationships there and so forth. We've also done, not just waiting for something, but we've tried to use the time in the past 9 to 12 months to get more ready, mitigate issues, risk, and so forth. We've tested the wood supply in various areas of the plantations. We've done a lot of training for mechanical harvesting. We have continued to discuss the capital equipment. No commitments made, no selections made, just in case one of the suppliers would listen. Obviously, we believe that that all gives us 2 benefits.
One, it gives us a better chance of making the right choices, it also gives us speed when the time comes to hit the ground running, so to say. Very important, which we tend to underestimate sometimes, is I've had a chance to meet many of these great people, mostly Chinese, some experts, but lots of Chinese people, young, very well-educated, and very eager to do a great job for us. Waiting times are long, but I think it's actually not that bad. Page 11, the strategic projects. Ostrołęka, six weeks ahead start. As we kind of expected, a few technical issues in between through the quarter, but still today ahead of the original schedule, good there. Bulleh Shah, now we say it's going to be completed in Q2. No drama. Things just take a bit longer.
I've reviewed the project even today with my board, my final words were, it's still a very good project, and I believe in the strategy there. On Montes del Plata, we wanted to get a little more explicit. You all understand that the first day the chip goes to digester is interesting, but not the most important day. We wanted to report to you that we have started already, some time ago, to commission and test and verify some of the main equipment while we're finishing some of the more mechanical works and infrastructure works and so forth. Now we say start-up to start during Q3 2013. I will not give you a date, but I'll give you a priority.
I believe financially it's very important that we are complete before we start up the mill, because the first day of the mill with zero revenue and all costs isn't a good day. It is the day when we ramp it up and get full premium quality product out of it. The press release discusses it, Karl can talk to you about what does it really mean in terms of the second half of 2013, when do we expect the full blast of all that EBITDA coming back from Uruguay to us. Page 12. A different presentation, but same story. The delta between the two curves, what does it say? It's saying that we're rebuilding the company. That we're investing in things with zero revenue to some significant effect, and especially in renewable packaging, I think it's quite important to realize that the burden is there.
On biomaterials, before anybody asks, you could say, "Why did the delta between the two curves in Q1 go smaller?" That's the land sale, Karl can discuss that in more detail. The point I'm trying to make on this page is, yes, there is a price to be paid right now to rebuild the company, rethink the company, also in terms of transformation. I am convinced it's a good strategy, we need to just responsibly implement it. It all will be very different. I stop with that. Karl, Q1.
Okay. Thank you, Jouko. If we go to the next slide, called summary financials, I would like to highlight that we came in basic at the same level of sales as in Q1 2012. We came down about 0.9 percentage point in operational EBITDA and at 9% versus 9.9%. We came in with an operational EBIT of EUR 118 million or 21% down versus Q1. I would like to highlight that we are disclosing in these EUR 118 million on page eight in the release, that this is including the land sale that Jouko referred to of EUR 10 million, EUR 7 million out of Montes del Plata and EUR 3 million out of Thailand. We came in with a return on capital employed of 5.4%, and excluding the transformation element is 6.2 and a cash flow of EUR 101 million.
It's important here to say that we have slightly lower EBITDA, but more importantly, late sales in the month of March, plus taking advantage of the good harvesting season by increasing our inventories by EUR 50 million, explaining why the working capital has eaten up some of the cash generation. Net debt to EBITDA on a rolling 12 months, 2.7 versus 2.5 at Q4. If we go to the next slide, I will try to explain a little bit what have happened between the quarters. I think I would start with the Q1 2012 versus Q1 2013, because it more reflects the seasonality pattern of our business. It's important to understand that the price decline in printing and reading of around roughly more than 3% versus a year ago period cost EUR 41 million in EBIT loss.
We had some around a percentage point in renewable packaging costing EUR 15 million. All in all, that is EUR 56 million less EBIT due to pricing. That was compensating basically by lower variable costs, of which EUR 13 million is actually lower fiber cost coming in. If you do the same comparison versus Q4, the picture is slightly different. We have a EUR 12 million or 1.4% price decline in printing and reading. We have higher variable costs, which is both logistics and energy. We have lower fixed costs, basically because of lower maintenance of around EUR 27 million. We have less profit from the forest associates of about EUR 11 million. We have FX and other things costing about EUR 13 million, explaining the difference of EUR 40 million versus the Q4. If we take the next slide, which is the guidance.
What we are doing now is that we are saying that sales are expected to be slightly higher in Q2 versus Q1, and the operational EBIT in line or slightly higher than Q1 2013. We also provided, if you go to the next slide, some additional information regarding to our transformational projects, and that is Ostrołęka PM5. No material impact to group sales, this is basically a replacement and it's an internal sales. But EBITDA margin is approximately 20% during the second half of 2013. When it comes to Montes del Plata, sales impact 2013 is limited and slightly negative operational EBIT impact for the full year. Group sales in 2014 is basically the 650,000 tons, and that's the Stora Enso share. Full positive EBITDA impact in the latter part of 2014, provided that the current market conditions prevail.
With that, I would like to go to the last slide, which is the summary slide. The transformation that Jouko mentioned continues. The short-term focus is to create this platform that Jouko mentioned for the transformation, making sure we get the divisions ready with clear accountability, focusing on growth and cost competitiveness because we do have those dual challenges, and simplify the corporate structure and make sure we can deliver the EUR 200 million in planned cost saving. Montes del Plata has initiated the commissioning of the main equipment and expecting to begin the mill startup process during Q3 2013. Bulleh Shah, our joint venture in Pakistan to be completed in Q2 2013. Last but not least, the focus on cash flow and liquidity continues. With that, I hand over to Q&A.
Thank you. If you'd like to ask a question at this time, please press the star or asterisk key followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause for just a moment to allow everyone to. Our first question today comes from Mikael Jafs from Cheuvreux. Please go ahead.
Yes. Hello, everybody. I have a question. Although you said that you would not give a list on potential non-core assets, but I wonder if you could give us some color and flavor how we should think about this, given that should we think about it in terms of businesses or should we think about it as non-core assets being, let's say, providers of raw materials like, for instance, electricity that you perhaps no longer need as demand for your paper products are declining?
Okay. Yes, thank you for the question. This is Jouko. Like I said, I won't go too far because even if I don't give you a list, if I go too far on the question, then you make the list, and I think it's a bit early for that. Think about it this way. It can be several different things. We just announced a land sale on a small scale in Uruguay and Thailand. It could be resource bases we don't need. It could be assets, manufacturing assets, where we see that they have a better home somewhere else. You know our core strategy. The worry I have is all the big companies that you kind of need to put together the part of the chart, what's important.
What my worry is, if we don't get a little more decisive, a little more dedicated resources in looking at this is we will under-invest in some assets, and they will lose value. Therefore, I guess to summarize my very vague answer, I admit, is we will look at both manufacturing assets and some resource assets. The guiding star or principle is when and how do we get maximum value to our shareholders? Is it to keep and develop and invest in them, or is it that we find somebody else who can make more value out of them? If you forgive me, I'll stop there. I'm pretty sure you already wrote the list, but anyway.
Okay. No, thank you very much.
Our next question comes from Lars Kjellberg of Credit Suisse. Please go ahead.
Good afternoon, gentlemen. A couple of questions. On that note of reinvesting in growth assets versus maintenance CapEx, can you give us any sense what you think is an appropriate ongoing CapEx level from you outside, obviously, the large China project?
I think we've given a number earlier in the order of a couple of margin points. To use a simple number. Two margin points as the keep the asset in shape, and so forth.
Do you mean that actually then includes the growth investments in those assets that you want to improve?
No, if you turn Sorry, Lars. Maybe I'm slow or confused, what I essentially can translate a couple of hundred million EUR a year. Not to play games with percentages. That is the supporting the existing asset base. It's not including if we would do on some of our core assets significant. I'll use an historical example. If we build a power plant in somewhere like we did the past years, let alone the strategic investment. That's outside the EUR 200 million.
Understood. In today's release, obviously the EUR 200 million, you are basically saying that's incremental EUR 170 because EUR 30 is from the building and living. Is that correct?
Yeah.
Yeah.
That's true.
You're talking, of course, the printed media have shrunk, and they will most likely continue to do so. You also mentioned that this is not a capacity program, which I appreciate is completely different structure to that. What does that do to your view on a further restructure on the asset side? This is obviously overhead cost, if you like, but.
Yeah.
Reflecting what you said about you've shut down some of these assets after the bad events have happened and relating to the newsprint chart, et cetera. Does this change your strategy in assets in terms of productive assets, what you do with them?
I hope I understand the question correctly, Lars. The Kvarnsveden and Husum, and two Husums actually in recent couple of quarters. That's how we take capacity out in terms of responding to the structured declining market. That's one story. This is more about, and actually solely about how do we adjust the overhead structure of the company that in totality serves a market that's not Well, 60% is right now serving shrinking markets because even the building and living base market is a bit shrinking because of the European economy. It's more right sizing, if I may use the English term. It's done with the thought that we've done it before. 2008, we took multiple margin points out of the fixed cost.
We have to do it again with the footnote, Lars, that we also understand that it has to become a ongoing event or ongoing process, because obviously when the market keeps shrinking, we need to make sure that we don't burn the remaining capacity or business with an ever-increasing overhead cost. Without giving you specific numbers, overall, the group has done pretty well, actually, on volume productivity of the existing assets, actually quite well in the past six years, and that's the good news, except it's history. On the printing and reading side, we need to accelerate that adjustment because that's the area that's shrinking on the market.
Sorry for the long answer, that's where the thought also comes that we need to think again about outsourcing and moving fixed cost to variable so that when the markets shrink, we can shrink the cost, and we don't end up with too many events every two years and so.
Makes sense.
Point is, readjust now.
Good. Final question from me. When you're looking at your second quarter guidance, unchanged to slightly up EBIT, I would assume that the very significant contribution from favorable wood harvesting in Q1 is not going to repeat it in Q2. Secondly, that we should exclude land sales from that guidance, or if you just wanted to clarify.
Yes. That's why we wanted to be very sure that we included that on the page eight, the land sale. That's not included, a repeat of land sales. The second one is that no, we don't expect to have the same contribution on the Finnish and the Swedish wood supply.
The winter is finally over, thank God.
Yeah. The winter is over.
Indeed. Very good. Thank you. That's all from me.
Thank you.
Our next question comes from Johan Sjöberg from Carnegie. Please go ahead.
Thank you very much. Just coming back to the EUR 200 million in terms of fixed costs. I understand it's overhead, but you have to get a feeling for how big is the overhead cost in your company?
When we talk about overhead, we talk about non-productive people-
In a way. I would like to say it's overhead on a corporate level, but also on the BA level and the subdivisions underneath that as well.
Yes. How big is that in terms of cost? Just to get a feeling for $200 million, how big portion of the overhead cost is that, as a factor?
Double-digit %.
Yes.
Intentionally big enough, so it won't be a cheese slicer, obviously.
We have to select what we do or what we don't. Yeah, that's one point. The second point is, it's not so huge that it would take forever to make happen. This is why we gave the guidance that it's got to be done in 12 months and so forth. Final comment, which you didn't ask, because I was quite involved in doing it round one in 2008 and 2009, I am convinced we can do it again. It's amazing what you can find in these big companies.
Okay. Also, when should we expect these, or the positive impact from the lower fixed cost to come through for you? In which quarter would you say?
We talk about in the release about annualized savings by Q2 next year.
Okay. During the second half of this year, when will we start to see the impact on the income statement, would you say?
You would see some minor impacts Q3, Q4.
Okay.
Yeah.
It has to do with the co-determination negotiations and when it comes to people and some other things.
Okay. That's fine. Just a final question also. When it comes to tax rate, can you give an update there? What do you expect for 2013, 2014?
For statutory tax rate, we expect 24%-26%, and effective tax rate somewhere between 14% and 16%.
Okay, great. Thank you very much.
Thank you.
Our next question comes from Antti Koskivuori of Danske Bank. Please go ahead.
Thanks. Maybe still on the Q2 guidance, and printing and reading in particular. With the finalized price negotiation on mainly the newsprint side, they seem to be quite late this year. My question is, whether should we expect your average prices in Q2 lower than in Q1?
Okay. Jouko here. I try to answer you in hopefully clear terms. The way that worked is that there is, let me call it a winter negotiation for the specific publication grade pricing. That has been completed in the early part, well, I shouldn't say early part, during Q1. There is a specific color in those negotiations, which is that we have very intentionally limited to the possible extent the pricing agreements to six months agreements, meaning mid-year. That there is a discussion mid-year again, and therefore the whole capacity demand discussion is very relevant. By logic, you can say that pricing agreements of Q1 are essentially the pricing agreements of Q2.
All right. All right. Okay. Very good. Thanks.
Thank you.
Our next question comes from Kari Winter of SHB. Please go ahead.
Yes. Thank you, Kari Winter, SHB. My questions are related to the decision or potential combination of building and living and printing and reading. I guess I could start by asking that how have they slowed down the pulp and packaging in their current form, as you alluded to that you don't want anything to slow down the pulp and packaging units. How has the current structure worked against this ambition?
Well, first of all, I didn't quite say that it has slowed down. It's more saying that. Think about it this way, biomaterials, especially once we get one spot up and running, and very much the renewable packaging with the investments in Inpac, Bulleh Shah, and then the China project, with existing asset good returns, growth markets, and above current asset targets for the new investment returns. If we start there, where would you put the focus of those teams? Grow those businesses profitably, find new opportunities, whether it's small acquisitions or new customers or whatever. Yes, they need to be cost efficient, but the cost efficiency, productivity improvements, it's a different game and if you can grow.
On the other side of the aisle, if I may call it, which is vast majority of building and living still, the basic sawmilling business for the European market actually is down year-on-year in Q1, let alone the printing media paper market that we talked about. What I'd like to see now is with very strong division heads, that also the group management, which I guess at the end of the day is also me, is that I can rebalance and make sure that the, so to say, the Karl team now, they run their productivity improvements, their overhead fixed cost improvements, the necessary capacity adjustments pretty independently. I like to spend actually also a bit of more my time and the group management time on pushing the other side of the aisle on growth, new opportunities, innovation, marketing.
Be it the design studio concept in renewable packaging, be it some of the R&D programs we're doing and so forth. I do claim that from a market point of view, from a company return point of view, on one side, we need to put a bit of a gas pedal down, where on the other side Well, at least it's a different gas pedal. That would be my answer.
Then a follow-up on the overlap between building and living and printing and reading. How much shared overhead can there really be? Because the manufacturing side, there's not that much overlap, and the customers are very different.
Absolutely
I guess you can't have the sawmill operator running the paper machine and vice versa. How exactly and how much will you reduce that overhead? Because you are taking your very competent CFO and putting him in charge of this project. This must be very important, but I would like to get some numbers.
Yes, my very competent CFO, I agree, Kari, but also with a pretty strong business experience in Ericsson as a division head, building a different business. To answer your question, because this isn't only about the divisional management team and so forth. The numbers are so big, we're going to have to rethink all levels of administration, from middle level to division level to group level and so forth. Even though I will not give you an exact answer you asked for is, I think in the pre-work that we've done in terms of saying, how do we simplify on who does what? What can we stop? And so forth. I think the EUR 200 million, yes, it's a significant number, but I can assure you that Karl and I had that discussion before he took the job, that we will make it happen.
You just have to wait a few weeks now until we come out with the more specific splits on where and how many people and what one-time cost we have. That's by design because speed is obviously of the essence, Kari. Now that we announced the big number or the base number, as of tomorrow morning, if not tonight, we can launch with dedicated people then the work to find every euro out of the EUR 200 million very, very fast. It also leads to the point that I won't give you exact numbers by division and so forth. Final comment. Yes, you're right, and we've actually done that. We looked at customers channels, resource base, asset base. I'm actually proud that in the past six years, we've been able to dedicate our assets so that we don't have one million shared sites and so forth.
Which I think is good. Focus is always good. The point of the story is the dynamic is more Existing asset above cost of capital returns, big growth investments. How do we make sure those people focus on making them a success and grow the existing renewable packaging business? Whereas the other side is fighting a different war, if I may call it, the digital war. Maybe I say it this way, dedicated focused people, but also that the group management, meaning me also, can spend a little more time growing the good parts, the growth parts, the value-creating parts. That's the concept. It's not that we would have said that things are totally overlapping. That's one of the reasons why we keep the segment reporting also, Kari. I want full transparency and so forth.
The fact of the matter is, wood supply, IT, and logistics are kind of the physical common denominators in the company now. It's not customers or channels, to your point. Okay.
All right. Fair enough. Thank you.
Our next question comes from Linus Larsson from SEB. Please go ahead.
Yes, thank you very much. Good afternoon. My impression has been that these mature parts of Stora Enso have indeed supported the growth projects in renewable packaging and Biomaterials. Could you talk a bit about if there is a scenario and if so, when these two parts of the companies could be separated? At what stage could the growth that you are looking to have in packaging and in pulp be made without the support of what you have referred to as cash engines in the past?
Thank you, Linus. First of all, I need to admit that the cash engine was a bad choice of words. I did it, but it's not a very smart thing for the brilliantly good people in these two businesses. I've asked Carla to come up with the new name, which he hasn't yet. Mature was a nice word anyway. Right now, the first priority and the only priority is not to speculate about what if and so forth. It is to prove to all of you that starting from the second half of this year, slowly but anyway, by the second quarter 2014, we make the EUR 200 million happen like a Swiss clock. That's the priority. That is going to continue and secure the completion of our transformation. That's point one. Point two, let's pick Biomaterials.
When will they not need these, so to say, the cash engine divisions? Without going into the detailed numbers, while we need to get not started up, but up and running and returning a lot of the cash we've invested in it. That's critically important. If you go renewable packaging on the existing published projects, well, you know the China project is where it is, and so forth. Maybe final comment is, I have a few other ideas that we could maybe do, which I will not get into details. In that context, I keep telling Carla next to me that as much as I love him as a CFO, I love him more now as the division head because I need that cash engine to keep running and running and running for many years to go, because we can do some other exciting things there.
That's good. If I follow up on that, at what stage would you contemplate, if at all, combining your mature businesses with external parts in the industry? Could you find a way that you could do that and maybe reach some synergies while at the same time get the benefits of cash flow into these potentially additional few ideas of yours?
Even though I've only been six years in this industry, the one thing I have learned is I would never dare to say no, never to you. I do want to say that for the good of the company and our transformation, the primary focus is on the things that we can get done rapidly ourselves. Any other opportunity in any of the spaces, yeah, I'll be all ears, but that's not something that I want my team to focus on right now because it is, and I don't have to tell you. It is really, really critical we keep that cash engine going. If you look at printing and reading past few years, it's actually a bit amazing. We've been able to keep the cash flow from operations in printing and reading in the EUR 400, EUR 500 range every year when the market's shrunk 25%.
That's history, so that's Carla's task now to make sure that thing keeps ticking.
Very good. Thank you very much.
Thank you.
Our next question comes from Martin Melbye of ABG. Please go ahead.
Yes, a nitty-gritty question. The net financial items are EUR 56 million. How is that split on interest expense and FX loss?
The interest expense is EUR 50. We have the FX is EUR 5. We have other P&L effect of EUR 2.
Okay. The EUR 50, is that the run rate going forward, which you use?
Yes.
Okay, thank you.
Our next question comes from Kartik Swaminathan of BofA. Please go ahead.
Hi there, Kartik Swaminathan from Bank of America Merrill Lynch. Just had a couple of questions, if I may. Firstly, on China, I wanted to ask about the potential positive strategic benefits of pushing back the project, as intuitively, you'd be getting a little bit of alleviation from your CapEx pressure and maybe even helping to realign supply and demand, because we've seen in recent other trade publications that there is quite a lot of capacity coming on stream over the next few years, potentially overlapping with liquid packaging board. Secondly, I also wanted to ask for a bit of qualitative color on how the mills in the paper segment outside of Europe are fairing, i.e., the plants in emerging markets. I think I recall you have a few assets in China and Latin America. My final question is, how important do you believe the dividend is?
If we take a broad consensus view that the group will not necessarily be covering its payment, if you put in a full amount of CapEx for China over the next few years, how much flexibility is there on existing debt facilities to draw down on those and continue to pay it? Thanks.
Okay. I think Karl can maybe get to do it in question and so forth. First of all, logically, the fact that Montes del Plata plus Ostrołęka plus Oulu isn't exactly calendar-wise on top of each other, I don't mind, specifically because of the fact that, like I said, that the cost of preparing for China is in that queue, so it's not even really material for us, and everything we do now is obviously going to de-risk and lower the risk for China and so forth and so on. That is driven by the approval process. It's not driven by any kind of capacity, demand, supply considerations. We believe that the plan is based on a very sound market strategy. If you look at specifically liquid and food packaging in China, the market growth is in the one place on Earth.
It's very encouraging. You can use the number of 25% growth per year on number of Chinese families who start buying packaged food. You can use the more specific packaging material growth rates and so forth and so on. I don't think if you look at the market size in these segments, high quality consumer board, liquid, and food, the 450,000 ton machine that we're planning to build there is in the order of magnitude of, I don't know, one year of market growth. It's a different dynamic, I think, than most of the other places. But like I said, I think the fact that these big investments don't all come in the same 24-month window is actually not bad at all. We need to get Uruguay up and running and so forth, and that'll make life a little simpler for us.
Karl, you want to take the dividend question?
Yeah.
We have a dividend policy.
Yeah. I don't want to comment your estimate about our cash flow generation, but I would like to say that we have, and we will continue to generate cash flow. As Jouko said, we've been delivering out of the printing and reading assets EUR 400-500 operational cash flow per year. You heard Jouko saying that we had some sort of a maintenance CapEx level at around EUR 400. Sorry, about EUR 200. We are actually also taking actions to increase the profitability and the cash generation as announced today in the announcement of the cost savings. In all scenarios we are planning, we have not touched the dividend policy. I would like to say that touching the dividend policy is actually an owner question. The dividend policy is 50% of profit over a cycle.
Thank you.
There are no further questions, I would like to turn the call back over to Ulla Paajanen-Sainio, Head of Investor Relations. Please go ahead.
Okay. Thank you, Martin. All right. Thanks for this call on my behalf, and Jouko will say now the final words.
Well, I never say the final words. The only thing that doesn't change that we need to change, you've seen that for a few years now with us. I guess the one comment I do want to make is that I know we're giving you just a number, and that's intentional, but we will obviously, once we have the detailed plans in place, we will report to you more details, including the people impact and the one-time cost. I will also say that we will keep reporting very transparent then on our progress, so that you can see that we not only talk about it, but we do what we say. With that, thank you very much for your interest, and I'm sure we'll talk again soon.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.