Mark Rushton, Editor, Pulp & Paper International Magazine, RISI
Feb. 25, 2013
PPI: Congratulations on the RISI European CEO Award for 2013, how does it feel to win?
I feel very honored and take it as distinction for the whole Mondi team. It is an accolade to the commitment and talent of everyone working at Mondi.
Looking at your CV, you joined Mondi in 1992 after stints in banking and the automotive industry. In a nutshell, how would you describe your experience of the paper industry in those 21 years since you joined? What are the most significant changes you have seen?
I started when the 1992-93 crisis caused by the devaluation of the Finnish Markka, the Swedish Krona and the Italian Lira happened and nearly put us out of business. On top, in those days we were strongly exposed to sack kraft paper, which was in structural decline in the 1990s. So I learned from the beginning that cost leadership and operational excellence are paramount. This lesson still guides me today.
We expanded into Central and Eastern Europe by acquiring Swiecie in Poland in 1997, Ruzomberok in Slovakia in 2000, Steti in the Czech Republic (as part of AssiDomän Kraft Paper) in 2000 and Syktyvkar in Russia in 2002. This made us the market leader in Central and Eastern Europe and gave us the opportunity to create a great cost base, if we could close the huge operational gap. And we did. Our strategic bet was that these countries would catch up, have higher demand growth for paper and packaging and give us lower costs to export to Western Europe. But most important these advantages would outweigh the lower costs from building wider and faster paper machines in Western Europe.
Mondi is clearly one of the leading companies in Europe on all sorts of fronts, with uncoated fine paper being one the leading activities. What is your feeling about the future of fine paper, both coated and uncoated as we witness somewhat of a downturn in demand in the more developed regions?
Two thirds of the Mondi group's business is now packaging much of which enjoys structural growth in mature markets and higher growth in developing markets.
We will have to live with a structural decline in fine papers because of digital media and electronic substitution like tablets. However, if we adapt capacities accordingly and supply first class products on low-cost machines, it will be a profitable industry for those with good assets. So Mondi is well positioned with very low cost assets and speciality niche products as evidenced by our ROCE of 16.7%.
What are the areas within the business that excite you the most?
All our businesses excite me. However, I see most potential for growth and development for our corrugated packaging business focused on Central and Eastern Europe and Turkey and our consumer packaging business.
And what is/are the most challenging area(s) presently?
Profitability of the Recycled Containerboard industry in Europe is currently very low with maybe 70% of mills making losses. And by losses I mean a negative net profit or a negative free cash flow - far too many business people in our industry think in terms of EBITDA, but a positive EBITDA is not enough to survive long-term. If you add to this existing overcapacity the new machines starting up in Poland and Turkey and shortly in France, the challenges for this grade are very evident and those holding on to high cost assets will lose a lot of money. Given our very low cost position we remain well positioned.
Looking at your production statistics from 2011, it seems that the areas of growth are the added value areas, for instance Industrial Bags and Consumer Packaging. Is this growth due to an increase in demand, or due to a strategy push to enter more lucrative areas?
In Industrial Bags, 2011 was a strong year. In the medium term, our strong presence in the growing Middle East markets compensates for some of the structural decline in Europe. Consumer Packaging enjoys structural growth, but let us remember one has to manage the product portfolio very well through innovation and customer focus to be a winner.
Last year and this year Mondi made quite a few acquisitions and divestments. (Nordenia, Duropack Ansbach and Bupack, the sale of Aylesford mill, the closure of several packaging plants) What will be Mondi's portfolio in Europe. Which businesses does the group plan to grow in the next 2-5 yrs? What will be the group's new structure?
We have very clear strategic criteria. In essence our strategic focus is on leading market positions, supported by a low-cost high quality asset base, customer led development and an ongoing drive for operational excellence.
On leading market positions, we firstly consider acquisitions in our core product areas and existing or adjacent geographical markets, particularly in high growth markets.
Secondly, we want a high-quality, low-cost asset base with sustainable cost advantages, especially with regard to paper or more commoditized packaging operations. Thirdly, in more differentiated markets it is about customer focused development. So with regards to acquisitions we would ask, if the target has innovation capabilities to develop new products in close cooperation with our customers.
An overriding fourth element is our focus on performance. So we ask ourselves if we can leverage our operational capabilities to improve the performance at a target company or if the target has capabilities which we can leverage across our existing business.
Although Mondi will always be open to growth opportunities that support our strategy, we are committed to continued discipline around acquisitions. Our short term focus is on successfully integrating the businesses we have recently acquired and harnessing their full potential.
The divestiture of Aylesford shows we are also committed to take action and exit non-core or underperforming businesses.
We notice that there is a Nordenia project in China as part of the acquisition Mondi made last year which is due for startup next year. Do you see this as a first of many footprints in the country or just dipping a toe in the water for the moment?
China offers significant growth opportunities, but it is a very difficult market and many companies fail to make money there. Following the Nordenia acquisition, Mondi's existing consumer packaging business has been strengthened with a complementary product portfolio which enables us to develop a leading consumer packaging business, built on deep, long-term customer relationships. Nordenia enjoys a strong competitive advantage through its proprietary technology, global presence and a proven track record of innovation and growth which we will leverage in China.
Our expansion into China is based on a blue chip customer base, our long standing customer relationships, innovative products which cannot be copied and long term contracts. We want to expand, but only if a number of strategic criteria are met which ensure sustainable profitability.
Mondi's strategy is to focus on the Eastern European market. Are there plans to expand in Russia? What business areas would Mondi focus on there?
We have gathered a lot of experience in Russia. We are market leader in UCWF and WTKL and we locally supply consumer packaging. Our first priority is to grow these businesses organically, but we remain open to acquisitions, if both the quality of the asset as well as the price are right.
What is Mondi's strategy on the European bleached sack kraft market after the Billerud/Korsnäs merger. Some market participants are expecting Mondi to react and try to thwart Billerud/Korsnäs, while some others think it will maybe reposition itself on new markets?
We have decided to forward integrate our open market pulp production at Steti in the Czech Republic and increase kraft paper production capacity by around 150,000 tonnes per annum because we use internally much more than 100,000 tonnes of bleached kraft paper and because we want to avoid the cyclicality of market pulp. This decision has been worked out over a number of years and was not influenced by the BillerudKorsnäs merger.
The new EU Timber Regulation comes into force very shortly (March 3). What has been done by Mondi to ensure that its products coming from Russia (UWF paper, White-top kraftliner) and from Africa (pulp, kraftliner) comply with the new regulation. What challenges did Mondi face with regard to the new Due Dilligence mechanism?
Credible Forest and/or Chain of Custody certification assures responsible forestry and forms a critical part of our Due Diligence System - ensuring legality and minimum standards of social, environmental and economic practices. In South Africa and Russia all owned and leased forests (2.4 million ha) are FSC certified. FSC wood supplies from these and other forests exceed 70% of our FSC Chain of Custody certifications and the balance meets the FSC Controlled Wood Standard. Products from Russia and South Africa should comfortably meet the new EU Regulations.
FSC and PEFC are strengthening elements of their systems to meet specific requirements of the EU Regulation and Mondi is working on improvements to origin and traceability of wood, fiber and biomass. We are confident that with this combination our global supplies of wood, fiber and biomass will comply with the new Regulation.
Uncertainty regarding the implementation of the new Regulation remains a challenge, especially for global certification systems. Encouraging small forest owners and small contractors/operators especially in Central Europe to adopt a credible Due Diligence System remains a challenge to the sector.
What is your feeling on "the state of Europe"? Are the economic woes of certain countries having any affect on Mondi Europe & International's performance? What is your feeling about Europe in the future?
In my personal view, the perception on Europe is too pessimistic. Southern Europe is and will be in recession for some time, but Mondi has only a small exposure to these markets. Central, Eastern and Northern Europe are strong economies with a deep consumer market and Central & Eastern Europe, which are Mondi's core markets, enjoy medium term good growth prospects.
So whilst Mondi is not immune to economic woes, we have adapted to achieve strong returns in a low growth business environment.
And finally, anything that particularly keeps you awake at night in regard to the pulp and paper industry?
Unfortunately, rationalization will need to continue in order to ensure a stable market. Those who do not read the writing on the wall and adjust capacities, but hold on to high cost assets will destroy value and impair their capacity to invest for their future.
A successful business is a sustainable business. So long as Mondi stays on this path, I will continue to get a good night's sleep.
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