CEO’s review: Focusing on our strategic priorities to deliver value

A strong performance and record results

I am pleased to report a record financial performance, driven by our low-cost position, exposure to higher growth markets and ongoing focus on operational excellence. While growth in demand for the Group’s key products has remained generally subdued, supply-side constraint has been supportive of pricing.

Underlying operating profit of €699 million was up 22% on that achieved in 2012. Excluding the effects of acquisitions made in the prior year, underlying operating profit was still up 11%, driven by particularly strong performances from Packaging Paper and the South Africa Division.

Underlying operating profit [graph]

Return on capital employed (ROCE), a key performance metric for the Group, was 15.3%, a record for the Group despite the dilutive effect of the acquisitions made in 2012. ROCE over the past three years, averaging 14.6%, has been consistently above the Group’s through-the-cycle hurdle rate of 13%.

The focus over the last year has been on integrating and optimising the significant acquisitions made towards the end of 2012 and delivering the major capital projects initiated over the past three years. Excellent progress has been made in this regard, with synergy targets delivered, a number of the capital projects having been completed in the latter part of 2013, and the remaining projects on track for completion within budget and on schedule over the next two years.

The Packaging Paper business was the standout performer, benefiting from higher average pricing in all key grades and good volume growth. The downstream Fibre Packaging business was challenged by rising paper prices, but generally made good progress in recovering margins. The Uncoated Fine Paper business continued to deliver strong results despite the structural demand decline seen in mature western European markets, a testament to the business’ superior cost and market positioning. The South Africa Division made very good progress during the year and is now delivering well in excess of the Group’s 13% through-the-cycle hurdle rate.

The Group benefited from currency weakness in certain of the emerging markets in which it operates, most significantly in the South Africa Division from the rand’s devaluation relative to the euro and US dollar.

Our strong culture of continuous productivity improvement, our relentless focus on cost management and the benefits of restructuring activities completed during the year ensured that fixed cost increases were contained to well below inflationary levels.

Mondi remains strongly cash generative with net debt reducing to €1,621 million, compared to €1,872 million at 31 December 2012, notwithstanding the €405 million (2012: €294 million) invested in capital expenditure projects during the year. Cash generated from operating activities exceeded €1 billion for the first time.

Underlying earnings of 95 euro cents per share grew 37% compared to 2012, with higher finance charges offset by a lower effective tax rate and reduced non-controlling interest charges.

The Boards are recommending payment of a final dividend of 26.45 euro cents per share, bringing the total dividend for the year to 36 euro cents per share, an increase of 29% on 2012.

Delivering on our strategy

We are confident that our strategy is sound and that we have the ability to adapt and execute it successfully across the business cycle as we:

  • build on our leading market positions in our core packaging and uncoated fine paper markets;
  • continue to invest in our high-quality asset base, focusing on those assets which enjoy inherent cost advantages;
  • help our customers succeed by seeking to develop smarter, more cost effective processes and work with them to find inventive, innovative, advanced solutions; and
  • continue to improve productivity and find new ways to keep our costs down.

We continue to refine our product and geographic mix in line with our strategic focus. Our emphasis is on growing our packaging interests, which currently account for around 70% of the Group’s revenues, while at the same time continuing to invest appropriately to maintain and improve the competitiveness of our uncoated fine paper business. Within the broader packaging sphere, we see greater opportunities to develop those segments offering exposure to consumer related packaging. This includes both our Consumer Packaging business and the corrugated packaging value chain. We continue to develop our presence in emerging markets, which offer us inherent cost and growth benefits. In some areas, most notably Consumer Packaging, we also see opportunities to develop and leverage our competencies in mature markets. Overall, approximately 62% of the Group’s net operating assets and 51% of revenue by destination are currently in emerging markets.

Our consistent and focused long-term strategy has positioned the Group as a leading international packaging and paper Group with a strong platform for further growth. We will continue to pursue opportunities to increase our exposure to the higher growth packaging businesses, whilst maintaining discipline around acquisitions and expansionary capital expenditure. In supporting this strategy, we aim to:

  • maintain our strong and stable financial position and investment grade credit metrics;
  • invest in our high-quality, low-cost asset base and evaluate selective capital investment opportunities;
  • support the payment of dividends to shareholders, targeting a cover ratio of two to three times underlying earnings through the cycle; and
  • evaluate further growth opportunities, primarily in the faster growing packaging segments, that are value enhancing to our Group.

Risk is an inherent part of any business and identifying and managing the risks specific to our business is critical to our long-term success. We have a pro-active risk management system, designed to be flexible and dynamic in response to changing market and operating conditions. We maintain a deliberate investment strategy to mitigate regional and country specific risks to limits considered acceptable by our Boards. Our most significant risks, and our response to those risks, are set out under Risk management and our risk management processes under Corporate governance.

Working towards a sustainable future

Wherever economically and environmentally feasible, Mondi promotes resource efficiency by using innovative technologies and making continuous improvements to our manufacturing processes and forestry management activities. To succeed, we rely on our competitive strengths, our people, our well-developed business systems and our relationships with all our stakeholders. We do not want our business to profit at the expense of the environment or society.

We view sustainable development as integral to the success of our business. Our licence to trade, and all that this entails, underpins everything we do. We understand that we operate in a world of constrained resources, facing environmental and social challenges. These challenges affect our business, our stakeholders and the communities in which we operate, and our response influences our future sustainability. It is therefore crucial for us to identify and understand our material sustainability issues within this global context.

We have identified our most material sustainability issues as:

  • securing access to sustainable fibre in the short, medium and long term to meet the needs of the business and our customers;
  • understanding and minimising our contribution to climate change and taking advantage of the potential opportunities presented by forestry in the mitigation of climate change;
  • maintaining our licence to trade by making a real and lasting contribution to the communities in which we operate;
  • operating in a world of constrained resources and recognising concerns regarding biodiversity, water and ecosystem services;
  • safeguarding the wellbeing of our employees and contractors and securing key talent and skills; and
  • increasing the eco-efficiency of our products.

We need to secure the future of our business and the communities in which we operate. In exploring opportunities for new markets and innovative products, we can help our customers address their sustainability challenges by partnering with them across the value chain.

In 2010, we developed a set of 37 commitments to guide our sustainable development efforts over the subsequent five years. In the section Understanding our material sustainable development issues, we set out these areas of commitment in the context of our most material issues and how we have progressed in delivering on some of these key commitments.

The one area that is of great concern to me is safety. In 2013, four contractors lost their lives whilst working at our operations and a number were seriously injured. It is unacceptable that people have been so tragically affected by our operations and I am deeply saddened. It is imperative that we address the risks that caused these low-probability, high-impact incidents and continue to find ways to improve our safety performance.

Investing in our world-class assets

Capital expenditure of €405 million was €111 million higher than the prior year as expenditure on a number of our previously announced energy and debottlenecking investments ramped up. Our capital expenditure to depreciation ratio was 113%.

Our major strategic investments initiated over the past two years and completed during 2013 include the rebuild of the bark boiler at our Syktyvkar uncoated fine paper and containerboard mill in Russia, a new recovery boiler at our Frantschach kraft paper mill in Austria, a recovery boiler economiser and turbine at our Stambolijski kraft paper mill in Bulgaria and a new steam turbine at our Richards Bay pulp and containerboard mill in South Africa. With the exception of the bark boiler completed in the first half of 2013, these projects were completed in the second half of the year, with the benefits of reduced energy costs, improved efficiencies and improved electricity self-sufficiency expected to be realised from 2014 onwards. In total, approximately €140 million has been invested in these, and other smaller energy related projects.

Early in 2013, the construction of a 155,000 tonne bleached kraft paper machine at the Štěti kraft paper mill in the Czech Republic was approved. This will enable the mill to integrate its remaining open market pulp production on site, providing further growth opportunities for this business. The €70 million project is expected to be completed in the first half of 2014.

Good progress is being made on the €30 million investment in a 100,000 tonne pulp dryer in our Syktyvkar mill and the project is on schedule for completion in the second half of 2014.

In the first half of the year, a €128 million project to replace the recovery boiler at the Ružomberok uncoated fine paper mill in Slovakia commenced. Completion is scheduled towards the end of 2014. The project will reduce the mill’s environmental footprint and improve its overall cost position. Some of the benefits from this project also result from avoiding otherwise essential stay-in-business capital expenditure.

In the second half of the year, the Boards approved a €166 million investment at the Mondi Świecie containerboard mill in Poland, bringing forward the planned replacement of the recovery boiler and the mill’s coal fired boilers. The investment will result in a reduction of ongoing maintenance costs, an improvement in overall energy efficiency and a reduction in CO2e emissions. The project is expected to be completed early in 2016.

We are very pleased that all these investments are proceeding according to schedule and within budget.

As a consequence of the major capital projects approved during 2013, coupled with some delay in the expected spend on previously approved projects, our capital expenditure is expected to increase to around €500 million per annum, on average, over the next two years.

Our exceptional people

Mondi is a fast-paced business and our success is reliant on our dynamic people who are able to find solutions even when the pressure is on. It is therefore critical for us to employ talented individuals and foster an inspiring working environment to motivate our teams at all levels of the organisation. We encourage an open and honest culture and expect our values to be reflected in the way we interact with each other and our stakeholders.

Measuring our progress in this regard is very important so towards the end of 2013 we conducted our second Group-wide employee survey. Based on the outcomes of our original survey conducted in 2011, we identified a number of priorities to further strengthen our employee engagement and interaction. Results from our 2013 survey show that overall we are making progress in this regard. We believe that this ongoing interaction and feedback is crucial to our success and our response to the outcomes of this survey will have a significant impact on our long-term sustainable success. In 2013 we also invested 854,000 hours in training and development to enable our employees and contractors to fulfil their potential while working safely.

During the course of the year, the executive committee and I visited a number of our sites and it is extremely motivating to meet the people that drive our business performance. It is also inspiring to see that so many of Mondi’s people share our belief in this business and our eagerness to operate in a sustainable way.

On behalf of the Group executive committee, I extend my sincere thanks to all our employees and look forward to continuing our journey together in 2014.

Looking ahead

The trading environment in the Group’s main markets remains mixed. The increase in the price of recycled containerboard in the second half of 2013 on solid demand growth is encouraging, and should lend support to our other key containerboard grades. However, price pressure in most virgin paper grades in the second half of 2013 means that we start the new year with lower pricing than the average for 2013. The near-term outlook for pricing is largely dependent on the strength of the European macroeconomic recovery. In this regard it is encouraging to see a recent pick-up in orders in some of our main product segments and discussions underway with customers on price increases in certain virgin packaging grades.

Recent exchange rate volatility in several of the emerging markets in which we operate does create its challenges. However, the Group’s positioning as a net exporter from most of these markets typically allows us to benefit from the devaluation of these currencies relative to the euro.

We are confident that our ongoing capital investment programme will contribute meaningfully to our performance going forward, while our proven ability to generate strong cash flows through the cycle provides valuable optionality. As such, we remain confident in the Group’s ability to continue delivering industry-leading performance.

David Hathorn
Chief executive officer