Strategy

Our focus has been on achieving the right product mix and geographical focus, and by doing this we have continued to increase the quality of our earnings. As conditions in the global economy continue to be challenging, we believe it is more important than ever that we continue to strengthen our leading positions,particularly in emerging markets.

By the end of 2009, 75% of our net operating assets were located in emerging markets, in line with our vision of focusing on low-cost, high growth regions and where we occupy the number one or two market positions in all our key packaging and UFP product segments. While our strategy clearly focuses on emerging markets, Mondi enjoys a uniquely strong market position in the bags & specialities segment in both eastern and western Europe, where specialities still enjoy very attractive growth rates. We will therefore continue to support our market position in bags & specialities with our existing western European assets.

In our European corrugated business, our remaining assets are in Austria and Germany which are integral to our Polish corrugated operations. In our UFP business, the remaining western European asset is the Neusiedler mill in Austria, which makes speciality products that achieve higher selling prices to compensate for the higher costs.

The Mondi Group’s vision of developing a modern, high-quality, low-cost asset base has been supported by management resolve and a rigorous approach to asset management. In just over two years we exited some 930,000 tonnes of high-cost paper operations amounting to around 14% of the Group’s global capacity.

Our actions in 2009 in particular will, we believe, prove to be prescient. Despite financial constraints, Mondi has continued to invest in large-scale, low-cost, high-quality assets to complete our long-term modernisation programme, with the ultimate aim of shifting the Group’s production base further down the cost curve.

The Group is coming towards the end of a significant, 10-year programme of modernising its asset base, with most large operations being overhauled. This underpins our long-term strategy, embarked on in the late 1990s and early 2000s, when the Group’s aggressive acquisition programme enabled it to acquire a substantial base in eastern Europe and Russia. Once secured, those assets required significant modernisation, with just over €2 billion being spent over 10 years on expansionary projects (see graph on the left). These assets today represent around 60% of our current capital employed.

Even if the economic recovery is slow and earnings do not improve sharply, the substantial investment made over the past years means that we are now entering into a period where shareholders should on average enjoy increased levels of free cash generation. While growth clearly remains an option, we will be disciplined as regards acquisitions and expansionary capex, and will allocate increasing free cash flow to debt reduction and by improving the cash returns to our shareholders.

Our relentless approach to cost saving is well established and received greater attention during this year of recession. Cost optimisation and the desire to be the lowest cost producer in our industry is entrenched within our culture at Mondi. Cost savings on the scale that we have achieved in the past year – in the order of 5% of operating cash costs – will be difficult to sustain.

We will consistently target levels of more than 2% a year, which is still significant. Cost savings of some €251 million were achieved by year end, 31% of which addressed fixed costs, which, excluding depreciation, increased only marginally relative to revenue, from 25% in 2008 to 26% in 2009. This is a commendable achievement given the revenue pressures experienced as a result of the difficult economic conditions.

Stringent management of working capital has also delivered significant cash benefits, with inflows of some €372 million in working capital over the past three years – €248 million in 2009.

Mondi announced in the fourth quarter of 2008 that capital expenditure outside of the two major projects would be curtailed, with new capital expenditure approvals limited in the short term to 40% of depreciation. The benefits of this decision in terms of cash flows have been clearly evident. While we continue to operate in terms of this policy, as trading conditions improve we expect to return to more normal levels of ongoing capital expenditure.