Strategy

Our focus is on developing and maintaining leading positions in packaging and uncoated fine paper, particularly in high-growth markets. In 2012 we continued to make progress in achieving what we believe is the right product and geographic mix to ensure sustained profitability. The Group benefits from our exposure to faster growing emerging markets such as eastern Europe, Russia and South Africa, with 57% of revenue generated from operations in these geographical areas.

Mondi’s leading positions in emerging markets offer cost benefits and operational synergies with existing businesses, giving a clear strategic advantage over many of its competitors. The packaging business also enjoy uniquely strong market positions and attractive growth rates in both developed and emerging markets.

Mondi’s high-quality, low-cost asset base is a fundamental strategic strength and we therefore selectively invest in production capacity that brings us sustainable cost advantages. To ensure that our asset base remains well invested, we incurred capital expenditure to the value of €298 million in 2012, €35 million higher than the prior year. The capital expenditure to depreciation ratio was 86% including expenditure on a number of the Group’s strategic energy projects.

The approved energy related investments totalling approximately €140 million announced in early 2012 included a bark boiler at Syktyvkar in Russia, a steam turbine and recovery boiler economiser at Stambolijski, Bulgaria, a new recovery boiler at Frantschach, Austria and a new steam turbine at the Richards Bay mill in South Africa.

The benefits of these investments, mainly in the form of reduced energy costs, improved efficiencies and energy self-sufficiency, are expected to be realised from the end of 2013 as these projects reach completion. In addition, the decision has recently been taken to commence the €30 million pulp dryer project in Syktyvkar. The project was initially announced in early 2012 but put on hold pending clarification of various technical parameters, which have since been resolved.

As announced early in 2012 various additional energy related projects, amounting to approximately €250 million, were under consideration. In this regard, the Boards have since approved a further €128 million strategic energy investment at the 51% held Ružomberok mill. Further options remain under evaluation.

The Ružomberok investment, including a new recovery boiler at the mill, will increase pulp production, reduce the mill’s environmental footprint and improve the overall cost position. The project will also include improvements in chemical recovery and green energy and heat production during the pulp production process. Some of the project benefits also result from avoiding otherwise essential stay-in-business capital expenditure. The project is expected to be completed in the fourth quarter of 2014, delivering an after-tax internal rate of return in excess of 40%.

The Boards also approved a €70 million project in the Štěti kraft paper mill which will enable the mill to integrate the remaining open market pulp production on site by producing additional volumes of bleached kraft paper and will provide growth opportunities for the kraft business. The project is expected to be completed in the latter part of 2014 delivering an after-tax internal rate of return of around 20%.

Including the announced strategic projects, capital expenditure is expected to be approximately 125% of the Group’s depreciation charge on average between 2013-15.

The successful Nordenia acquisition complements and strengthens Mondi’s existing consumer packaging business with a complementary product portfolio which positions the Group well to develop a leading consumer packaging business, with an enlarged geographic footprint and strong competitive advantages.

Building on long standing relationships, know-how and the combined production base, working in close co-operation with its customers, Mondi is able to develop markets and value added technologically advanced products and enter high growth emerging markets in consumer packaging.

The Consumer Packaging business has a strong product pipeline in development. The new plant in China, supporting an existing global customer, is expected to commence operations towards the end of 2013, with full capacity being reached in 2015.

Mondi’s Green Range label was developed in response to customer demand for environmentally preferable purchasing and has since been extended to smart packaging products including sack and speciality kraft papers, containerboard, corrugated packaging, industrial bags, extrusion coated products and consumer packaging.

Our focus on performance is driven by continuous productivity improvement and cost reduction, delivered through business excellence programmes and rigorous asset management. We are very pleased that fixed cost increases have remained within inflation in all the countries we operate in. This achievement is particularly pertinent in South Africa where electricity and labour price increases remain well above inflation.

Double digit productivity gains were achieved at many of our key operations. The responsible and efficient procurement of our most critical raw materials, our increasing energy self-sufficiency and our operational efficiencies continue to provide much of the drive behind this core part of our strategy.