Business review

Group operations review

The Group’s underlying operating profit decreased by 33% compared with 2008, reflecting the difficult trading conditions that persisted for much of the year. Pleasingly, the fourth quarter results came in significantly above expectations, supported by volume improvements across all main paper grades, price increases in most of the key packaging grades and a largely stable pricing environment in the European uncoated fine paper market.

The benefits of the early and decisive actions taken to restructure the cost base in light of market pressures were clearly evident. The Group’s cost reduction programme delivered savings of €251 million, significantly exceeding the €180 million target announced at the beginning of the year. In just over two years, Mondi has exited (either temporarily or permanently) around 930,000 tonnes of high-cost paper capacity and closed or sold 18 converting sites. Furthermore, the focus on cash flow optimisation was extremely successful, with working capital inflows for the year amounting to €248 million and capital expenditure outside the two major projects reduced to 63% of depreciation. All this contributed to a reduction in net debt for the year of €173 million despite funding around €300 million of capital expenditure on the two major expansion projects in Poland and Russia. Mondi enjoys a strong liquidity position and, as at the end of December, the Group had nearly €1 billion of undrawn committed debt facilities.

In addition to the benefits from the cost savings programme noted above, a number of the Group’s key input costs declined compared with the previous year, helping to offset the revenue pressures. There was, however, some evidence of rising input costs towards the end of the period. Wood, recovered fibre, pulp, chemicals and energy costs have all increased from the lows reached earlier in the year.

Currency movements had a mixed impact on the Group’s performance during the period. The weaker eastern European currencies, notably the Czech koruna and Polish zloty, benefited the results of our eastern European production base in the second half. Conversely, the significant strengthening of the South African rand from the middle of the second quarter eroded margins on export sales from the South Africa Division, placing substantial pressure on the profitability of this business as the year progressed.

Average return on capital employed, a key measure of Mondi’s performance, was 7.6%. While this is a disappointing outcome in relation to the Group’s target of 13% across the cycle, it nevertheless represents a resilient performance given the backdrop of an extremely difficult business environment. Importantly, the Group is confident that the actions taken over the past year place the business in a stronger competitive position than it was when it entered the downturn, allowing it to take full advantage of any improvement in the business cycle.

Net finance costs of €114 million were €45 million lower than those of 2008, mainly owing to higher levels of capitalised interest relating to major capital projects and lower exchange losses on foreign currency debt balances. The effective tax rate before special items of 32% was higher than that of the previous year, primarily due to an increase in non-recognised assessed losses as a consequence of the decline in profitability.

Underlying earnings per share were 18.7 euro cents per share, down by 45% compared with 2008.

The Group is proposing to pay a final dividend of 7.0 euro cents per share, giving a total dividend of 9.5 euro cents per share for the year.

Europe & International Division

€million	2009	2008	%
Segment revenue	4,099	5,159	(21)
– of which inter-segment revenue	110	155	(29)
EBITDA	515	623	(17)
Underlying operating profit	251	334	(25)
Uncoated Fine Paper	146	126	16
Corrugated	23	49	(53)
Bags & Specialities	82	159	(48)
Capital expenditure ¹
– Major projects ²	300	324	(7)
– Other	167	277	(40)
Net segment assets	3,588	3,659	(2)
Return on capital employed (%)	9.1	9.6	(5)

¹ Capital expenditure is cash payments and excludes business combinations.

² Polish and Russian expansion projects which commenced in the second half of 2007.

Underlying operating profit of €251 million was down by €83 million or 25% compared with the previous period, significantly affected by the decrease in demand for a number of the Group’s key products as a consequence of the general economic slowdown. Pricing was down across all major paper grades, while volumes were negatively affected by the approximately 173,000 tonnes of market-related downtime taken in the year. Encouragingly, market-related downtime taken in the second half of 2009 was minimal, reflecting a steady pick-up in order inflows over the course of the year. Prices in the downstream converting markets were more resilient, partially offsetting price declines in the paper grades.

There was some benefit from lower input costs, including wood, recovered paper, chemicals and other variable costs, while the Division delivered €205 million in cost savings. Furthermore, the restructuring actions the Group has taken in exiting higher cost capacity helped to offset the revenue pressures while also contributing to a more balanced market.

Pleasingly, the Division saw an upward trend in performance, with the second half of the year stronger than the first half on the back of a very strong fourth quarter. Price increases were achieved across all the main packaging paper grades as a result of firm demand while the UFP business delivered a particularly strong performance in the fourth quarter. This was supported by ongoing cost savings and optimisation measures as pricing and volumes remained firm despite concerns over the impact on the market of new capacity from Portucel.

Operations

In the Uncoated Fine Paper (UFP) business underlying operating profits were up by €20 million, or 16%, at €146 million. This represents a very strong result given the difficult economic environment and reflects the strength of the Group’s low-cost asset base and favourable market positioning. While order inflows for European producers as a whole were down by around 6% compared with the previous year, the Group was able to achieve volume increases owing to its greater exposure to the cut-size product segment and to emerging Europe, both market segments that have proved more resilient in the economic downturn. As a domestic producer in Russia, where management estimates that overall demand was down by similar levels to those seen in the rest of Europe, the business was able to maintain volumes at the expense of importers. As a consequence, results from the Russian operation were particularly strong, with stable volumes and marginally improved domestic selling prices supported by good cost control. Combined with lower pulp input costs at the non-integrated facilities and cost-reduction initiatives across the business, this more than offset the impact of lower European selling prices (office paper prices down 7% on average year-on-year).

In the Corrugated business, underlying operating profits declined €26 million, or 53%, to €23 million in a very challenging trading environment. Weak demand coupled with insufficient supply-side response put pressure on containerboard prices. Average recycled containerboard prices decreased by around 31% year-on-year. Similarly, average virgin containerboard prices were down by some 13%. However, the pick-up in demand witnessed in the second half of the year supported price increases which were implemented in the fourth quarter. By the end of the year, recycled containerboard prices had increased by some 29% from their lows in August 2009, while kraftliner prices improved by around 9% from their lows. The downstream corrugated operations saw some improvement in operating margins compared with the previous year, benefiting from the paper price declines.

In February 2010, agreement was reached to sell the 170,000-tonne-per-annum Frohnleiten recycled containerboard mill in Austria, subject to regulatory approval. Further, it was announced in January 2010 that negotiations were progressing concerning a potential transaction that would involve Smurfit Kappa Group (SKG) acquiring Mondi’s corrugated operations in the UK, with Mondi acquiring most of SKG’s European bag converting operations. There remains no certainty that this transaction will be completed.

To the extent these transactions are completed, it will bring to an end an 18-month programme of restructuring the Group’s western European corrugated packaging and recycled containerboard portfolio. This comes in response to ongoing overcapacity concerns in western Europe, and a desire to improve the quality of our assets by both moving down the cost curve in recycled containerboard, and refining our geographical footprint around our core central and eastern European and Turkish positions. This programme will have seen the Group exit four of its five western European recycled containerboard mills (Holcombe in the UK, Niedergösgen in Switzerland, Monza in Italy and Frohnleiten in Austria) with aggregate capacity of 540,000-tonnes-perannum. The remaining recycled containerboard mill in western Europe, the 210,000-tonne-perannum Raubling mill in Germany, coupled with the new 470,000-tonne-per-annum recycled containerboard machine in Poland and other smaller machines in our Polish and Czech mill complexes, gives the Group a very strong and highly cost competitive asset base in central and eastern Europe, mainly serving the Group’s integrated converting network in the region.

In the Bags & Specialities business, underlying operating profits for the year were down by €77 million, or 48%, to €82 million. The business was affected by sharply lower average sack kraft paper prices (down by around 20%) and weaker volumes, although speciality kraft paper prices and volumes held up well. Significant market-related downtime was taken in the first half of 2009 to balance inventories (some 86,000 tonnes or 18% of capacity), as demand was badly affected by the slowdown in the construction sector.

Pleasingly, demand recovered after a very weak first quarter to the extent that almost no market-related downtime was taken in the second half of 2009 and order inflows were sufficiently strong to support a sack kraft paper price increase of around 12%, announced in September 2009.

A €47 million investment in a new 45,000-tonne-per-annum machine glazed paper machine at the Štětí mill in the Czech Republic was successfully completed in August 2009 on time and within budget. Production from this machine is targeted at growing niche applications, including the release liner and flexible packaging markets as well as supplying customers previously served by the 20,000-tonne-per-annum Ružomberok kraft paper machine, which was closed in October 2009.

Bag converting margins benefited during the year from lower paper prices although volumes were soft mainly due to poor demand from the building and chemical industries. Profitability in the Specialities business unit has improved compared with the previous year, driven by resilient demand in consumer markets, lower plastic resin and paper input costs and stable pricing.

Major projects

The new 470,000-tonne recycled containerboard machine and a new state-of-the-art box plant at Świecie in Poland (total budgeted cost of €350 million) saw the first saleable production in September 2009, and is currently producing well ahead of expectations. The Group anticipates that this machine will have the lowest operating costs of its type. Up to 50% of its offtake is secured by physical integration with the surrounding box plant network. Start-up of the machine was ahead of schedule and the project is expected to come in around €20 million below budget. Startup costs on the machine were capitalised to the end of September 2009. The project had a marginal effect on underlying operating profit in 2009.

The project to modernise Mondi’s mill in Syktyvkar is also making good progress and completion is anticipated in the second half of 2010. Severe weather conditions in December 2009/January 2010 did impact the project timetable. A small cost overrun of up to 4% (€20 million) is now anticipated, giving a total capital cost of up to €545 million. The key value drivers of this project are to improve efficiency, lower the Group’s cost base in Russia and increase energy production and revenue by selling surplus energy to the grid. In addition it will provide modest extra capacity (both pulp and paper) for the domestic market.

By the end of the period, €664 million had been spent on these two projects out of the total budgeted capital commitment of €875 million. The bulk of the remaining expenditure is expected to be incurred in 2010, with some occurring in 2011.

South Africa Division

€million	2009	2008	%
Segment revenue	478	587	(19)
– of which inter-segment revenue	210	285	(26)
EBITDA	76	152	(50)
Underlying operating profit	21	111	(71)
Uncoated Fine Paper ¹	16	75	(79)
Corrugated	16	36	(56)
Capital expenditure ²	26	44	(41)
Net segment assets	840	760	11
Return on capital employed (%)	4.6	15.9	(71)

¹ Includes pulp and forestry business.

² Capital expenditure is cash payments and excludes business combinations.

The South Africa Division recorded a decrease in underlying operating profits of €79 million, or 71%, to €32 million. In the uncoated woodfree operations profitability was negatively affected by lower pulp, woodchip and paper export prices together with lower woodchip and paper volumes. Significant US dollar market price increases in the second half of 2009 in both pulp and African paper sales (excluding South Africa) were largely offset by the strengthening rand. Market-related downtime in paper production of 62,000 tonnes was taken to balance inventories in the first half of 2009, related mainly to export business. This led to the decision to mothball a 120,000-tonne-per-annum UFP machine at Merebank which was completed early in the second half of 2009. A further 56,000 tonnes of market-related downtime was taken on the remaining machines in the second half of 2009. This in turn enabled increased sales of market pulp, where US dollar prices have been rising since the second quarter of 2009. Domestic uncoated fine paper cut-size prices continue to hold up, with demand in the first half of 2009 below the comparable period but recovering fully in the second half of 2009. The Division did not recognise fair value gains on forestry assets to the extent seen in 2008, as local wood prices remained relatively flat in 2009.

After a reasonable performance in the first half of 2009, the containerboard operation struggled in the second half as a result of the strengthening rand, the lower white-top kraftliner export prices (down by 6% compared with the first half of the year and by 13% compared with the second half of 2008) and reduced volumes due to the national strike and annual maintenance shut. However, the final quarter of 2009 saw an increase in European white-top kraftliner prices. Input costs offered some limited relief, however, and the Division delivered €30 million in cost savings.

Prior to the year end, agreement was reached to sell around 38,000 hectares of forestry assets in three separate transactions. Completion of these transactions remains subject to regulatory approval, which is anticipated in the first quarter of 2010.

Mondi Packaging South Africa (MPSA)

€million	2009	2008	%
Segment revenue	498	474	5
– of which inter-segment revenue	25	27	(7)
EBITDA	62	52	19
Underlying operating profit	36	28	29
Capital expenditure ¹	17	38	(55)
Net segment assets	335	301	11
Return on capital employed (%)	11.5	8.6	34

¹ Capital expenditure is cash payments and excludes business combinations.

Underlying operating profit increased by €8 million, or 29%, to €36 million. Despite a slowdown in the local economy and a stronger South African rand, the business was able to maintain average pricing levels during the year and benefited from a favourable product mix. Sales volumes, however, were lower, especially in corrugated packaging, owing to lower consumer demand both locally and internationally. Market-related downtime in paper production totalling 58,000 tonnes was taken in order to balance inventories. Specific cost savings initiatives assisted in lowering the cost base, although these gains were partially offset by higher input costs, mainly in energy.

Merchant & Newsprint

€million	2009	2008	%
Segment revenue	528	593	(11)
– of which intersegment revenue	1	1	0
EBITDA	28	24	17
Underlying operating profit	12	7	71
Capital expenditure ¹	7	10	(30)
Net segment assets	194	186	(1)
Return on capital employed (%)	6.0	3.3	82

¹ Capital expenditure is cash payments and excludes business combinations.

Aylesford Newsprint returned to profitability, benefiting from improved selling prices on its annual contract business, although rising input costs and the structurally weak European newsprint market remain a concern for the future. Europapier’s operating profit came in below that of the previous year, owing to lower sales volumes and prices, exacerbated by the weakening of some emerging European currencies in which it trades and higher bad debts, as several of its smaller customers were severely affected by the economic downturn. Mondi Shanduka Newsprint came under pressure from lower domestic demand and pricing pressures, recording operating profits slightly below the levels of last year.

Corporate & other

Net corporate costs before special items decreased by €2 million compared with 2008. This was mainly as a result of cost saving initiatives offset by certain non-recurring costs incurred in the second half of 2009.

Restructuring

Continuing our strategy of focusing on retaining a high-quality, low-cost asset base and in response to the economic downturn, we accelerated our restructuring plans. Significant actions were taken including:

• divestment of the four remaining corrugated converting operations in France for total proceeds of approximately €51 million, thereby completing the withdrawal from this market;
• restructuring of the Turkish corrugated business, the coatings business in Finland and the UK, and the consumer bags business in Austria;
• closure of a corrugated plant in the UK and four bag-converting plants across Europe;
• sale of the Italian recycled containerboard plant, Cartonstrong (100,000-tonne-per-annum capacity) and the related sheet feeder, and the 170,000-tonne-per-annum Frohnleiten recycled containerboard mill in Austria (subject to regulatory approval); and
• mothballing of the 110,000-tonne-per-annum Stambolijski kraft paper mill in Bulgaria and an UFP machine at Merebank, effectively removing 120,000 tonnes of uncoated fine paper capacity per annum.

These actions, together with those taken in 2008, have seen Mondi exit around 810,000 tonnes of higher-cost paper capacity in Europe (around 15% of the Group’s European paper production capacity) and around 9% (120,000 tonnes) of its South African paper production capacity in just over two years. Importantly, these measures, together with the various cost reduction initiatives in ongoing operations, have placed the Group in a stronger competitive position than it was when it entered the downturn, thereby positioning the Group to take advantage of any upturn in the business cycle.

Reconciliation of underlying profit to reported loss

€million	2009	2008
Underlying profit	124	202
Special items: (refer to note 5 of the financial statements)
Operating special item	(128)	(358)
Net profit/loss on disposals	3	(27)
Impairment of assets in sold operations	(8)	(2)
Related tax	6	4
Reported loss	(3)	(181)

Special items (refer to note 5 of the financial statements)

In aggregate, pre tax special items amounted to a charge of €133 million.

An operating special item charge of €128 million was recognised, principally comprising:

• asset impairment costs of €78 million;
• goodwill impairment costs of €12 million;
• closure and restructuring costs of €43 million;
• insurance profits of €8 million; and
• charges related to arrangements put in place for senior executives following the demerger from Anglo American plc in July 2007 of €3 million.

The asset impairments relate primarily to the write-down of an UFP machine at Merebank, the impairment of the recycled containerboard mills at Frohnleiten in Austria and Raubling in Germany and converting operations in the Corrugated and Bags & Specialities business units that have been restructured or closed. Costs related to the mothballing of the Stambolijski mill in Bulgaria and the closure or restructuring of the various converting operations represent the bulk of the €43 million closure and restructuring charge.

The goodwill impairment charge relates solely to the write-down of goodwill in Europapier, while the net insurance proceeds relate to a fire at one of MPSA’s plastics operations.

A non-operating special items charge of €5 million was recognised, which mainly comprises the net profit on the sale of four corrugated operations in France (€3 million profit), offset by the impairment of the held-for-sale assets of the Cartonstrong, operations in Italy amounting to €7 million (subsequently sold).

Finance costs

Net finance costs of €114 million were €45 million lower than those of the previous year, mainly as a result of higher levels of capitalised interest relating to major capital projects and lower exchange losses on foreign currency debt balances. Excluding the impact of capitalised interest, interest on net debt increased marginally from €148 million in 2008 to €151 million, even though overall debt levels declined during the year, owing to an increase in the effective gross cost of net debt from 9.1% in 2008 to 9.3% in 2009. This was principally because of the increase in the Group’s rouble debt resulting from capital expenditure in Russia at a time of exceptionally high interest rates during the height of the financial crisis. At year end, approximately 24% of the Group’s debt was drawn in euro, 23% in South African rand and 15% in Russian rouble.

Taxation

The effective tax rate before special items of 32% was higher than the rate of the previous year (29%), due primarily to an increase in unrecognised assessed losses as a consequence of the decline in profitability. There is only minor tax relief on special items.

Minority interests

Minority interests before special items for the year were €1 million lower than those of the previous year. Earnings were down at Świecie in Poland (66% owned), although this impact was largely offset by higher earnings in Tire Kutsan (the effectively 63.4% held Turkish corrugated business) and Mondi Packaging South Africa (70% owned).

Cash flow and borrowings

€million	2009	2008
EBITDA	645	814
Fair value non-cash movements	(26)	(46)
Cash flow from working capital	248	27
Cash generated from operations	867	795
Taxes paid from dividends from associates	(30)	(69)
Net cash generated from operating activities	(837)	726
Capital expenditure	(517)	(693)
Investment in forestry assets	(40)	(43)
Acquisitions of subsidiaries and associates	(2)	(49)
Disposals of businesses	57	17
Other investing activities including interest received	10	58
Net cash used in investing activities	(492)	(710)
Cash (used)/generated from financing activities	(364)	8
Net cash flow	(19)	24

EBITDA of €645 million for the year was 21%, or €169 million, lower than in 2008, reflecting the more difficult trading environment. Cash generated from operations of €867 million increased by €72 million, or 9%, compared with the previous year, mainly because of significantly higher inflows from working capital than were achieved in 2008, offset by the lower EBITDA. Cash inflow from working capital of €248 million was achieved despite an already strong performance in the 2007 and 2008 financial years (€124 million cumulative inflow).

Capital expenditure, including purchase of intangible assets, of €222 million (excluding spend on the two major strategic projects of around €300 million), was significantly lower than depreciation and amortisation of €351 million, reflecting the decision taken in the fourth quarter of 2008 to limit new capital expenditure approvals to below 40% of depreciation. The remaining expenditure on the two major projects is estimated at around €210 million, the bulk of which will be spent in 2010 with minimal flow through to 2011. There were no major business acquisitions during the year.

Balance sheet

€million	2009	2008
Trading capital employed	4,314	4,367
ROCE (per taxation) (%)	7.6%	9.5%
Shareholders funds	2,399	2,323
Return on shareholders funds (%)	4.0%	6.5%
Net debt	1,517	1,690
Gearing (Net debt/trading capital employed) (%)	35.1%	38.7%
Net debt to EBITDA (times)	2.4	2.1

Trading capital employed at year end was €4,314 million, €53 million lower than in 2008, mainly because of working capital inflows of €248 million, special item impairments of €98 million and disposals of €59 million, partially offset by capital expenditure including purchases of intangible assets of €522 million (€171 million in excess of depreciation) and foreign exchange movements of €195 million.

Treasury and borrowings

The Group’s treasury function operates within clearly defined Board-approved policies and limits, follows controlled reporting procedures and is subject to regular internal and external reviews. As part of management’s regular review of the suitability of treasury risk management policies, the Group’s currency hedging policy has been amended. Effective from the start of 2010, only material balance sheet exposures and highly probable forecast capital expenditures are hedged.

Net debt at year end of €1,517 million was €173 million down compared with the previous year. This was achieved despite significant capital spend of around €300 million on the two key capital projects in Poland and Russia, through a strong focus on cash flow optimisation across the Group, including the release of working capital and the reduction of capital expenditure outside of the two major projects. Gearing as at 31 December 2009 was 35.1%, and the net debt to trailing 12 months EBITDA ratio was 2.4.

Group liquidity is provided through a range of committed debt facilities amounting to €2.5 billion, which are in excess of the Group’s short-term needs. The principal debt facility is the €1.55 billion, five-year, syndicated revolving credit facility which matures in June 2012. In total, €735 million of this facility was drawn at year end, leaving €815 million undrawn, committed and available to the Group. The other key facilities include a €170 million export credit agency loan in Russia with an amortising repayment until 2020 and a €115 million European Investment Bank (EIB) facility in Poland with an amortising repayment until 2017. Total undrawn committed debt facilities at year end amounted to €990 million.

The average maturity of the committed debt facilities is 2.2 years (compared with 3.4 years in 2008). Drawn facilities maturing over the next 12 months amount to €219 million. To the extent they are not renewed, they can be financed out of existing undrawn committed facilities. The Group’s major refinancing event occurs in June 2012, when the €1.55 billion, five-year, syndicated revolving credit facility becomes due. It is intended that this facility will be refinanced well ahead of this date, utilising a combination of bank and other debt markets.

Reclassification of Mondi plc shares

After a constructive dialogue with the South African Reserve Bank and Treasury, we announced in July 2009 that the Minister of Finance had decided to reclassify the secondary listing of Mondi plc ordinary shares on the JSE Limited as domestic assets in the hands of South African investors. It is pleasing to note the subsequent significant narrowing of the price differential that had existed between the Mondi plc and Mondi Limited ordinary shares.

Risk management and internal control

The DLC executive committee, mandated by the Boards, has established a Group-wide system of internal control to manage Group risks. This system, which complies with corporate governance codes in South Africa and the UK, supports the Boards in discharging their responsibility for ensuring that the wide range of risks associated with Mondi’s diverse international operations is effectively managed.

Internal control

The Boards are responsible for establishing and maintaining an effective system of internal controls. This system of internal control, embedded in all key operations, provides reasonable rather than absolute assurance that the Group’s business objectives will be achieved within risk tolerance levels defined by the Boards. Regular management reporting provides a balanced assessment of key risks and controls and is an important component of the Boards’ assurance. In addition, certain Board committees focus on specific risks such as safety, and provide relevant assurance to the Boards.

The finance heads of the business units provide six-monthly confirmation that financial and accounting control frameworks have operated satisfactorily. The Boards also receive assurance from the DLC audit committee, which derives its information in part from regular internal and external audit reports of the Group’s risk and internal controls. The Group’s internal audit function is responsible for providing independent assurance to the DLC executive committee and Boards on the effectiveness of the Group’s risk management process.

Key elements of the Group’s system of internal control are:

• a clearly-defined organisation structure with established responsibilities;
• a simple and focused business strategy, restricting potential risk exposure;
• Group financial, business conduct, operating and administrative policies and procedures which incorporate statements of required behaviour;
• a continuous review of operating performance;
• a comprehensive reporting system, including monthly results, annual budgets and periodic forecasts, monitored by the Boards;
• approval by the Boards of all major investments, with proposals being subject to rigorous strategic and commercial examination;
• a centrally co-ordinated internal audit programme, using internal and external resources to support the Boards in ensuring a sound control environment;
• completion by business unit management of a six-monthly internal control assessment, confirming compliance with Group policies and procedures, detailing controls in operation and listing any weaknesses;
• assurance activities covering the key business risks summarised and reported annually to the Boards, the DLC audit committee or, where appropriate, the DLC sustainable development committee; and
• annual risk-profiling by local businesses and the Group to identify, monitor and manage significant risks, with the results discussed at business reviews and internal control, audit and risk meetings.

Risk management

The Board’s risk management policy encompasses all significant financial, operational and compliance-related risks which could undermine the Group’s ability to achieve its business objectives. Mondi’s dynamic risk management system has the commitment of the Group’s senior management and is designed so that different businesses can tailor their processes to the specific circumstances. Clear accountability for risk management is a key performance criterion for the Group’s line managers, who are provided with appropriate support through Group policies and procedures. The requisite risk and control capability is assured through Board challenge and appropriate management selection and skills development. Continuous monitoring of risk and control processes across all key risk areas provides the basis for regular reports to management, the DLC executive committee and the Boards.

Principal risks and uncertainties

It is in the nature of Mondi’s business that the Group is exposed to risks and uncertainties which may have an impact on future performance and financial results, as well as on its ability to meet certain social and environmental objectives. The Group believes that it has effective systems and controls in place to manage the key risks identified below.

Mondi operates in a highly competitive environment

The markets for paper and packaging products are highly competitive.

Similarly, prices of Mondi’s key paper grades have experienced substantial fluctuations in the past. However, Mondi is flexible and responsive to changing market and operating conditions and the Group’s geographical and product diversification provides some measure of protection. Uncertain trading conditions in the future may have an impact on the carrying value of goodwill and tangible assets and may result in further restructuring activities.

Input costs are subject to significant fluctuations

Materials, energy and consumables used by Mondi include significant amounts of wood, pulp, recovered paper, packaging papers and chemicals. Increases in the costs of any of these raw materials, or any difficulties in procuring wood in certain countries, could have an adverse effect on Mondi’s business, operational performance or financial condition. However, the Group’s focus on operational performance, relatively high level of integration and access to its own fibre in Russia and South Africa, serve to mitigate these risks. It is also anticipated that the recent settlement of land claims in South Africa will provide a framework for settling future forestry land claims with Mondi.

Significant capital investments including acquisitions carry project risk

Mondi is in the process of completing a significant capital investment to expand and upgrade existing facilities in Russia. This project carries risks and Mondi has put in place dedicated teams to ensure delivery of the project on time and within budget. Severe weather conditions in December 2009/January 2010 had an impact on the project timetable. Together with a stronger-thanforecast Russian rouble, this is expected to result in a small cost overrun of around 4%.

Accountability and audit

The Boards are required to present a balanced and understandable assessment of the Group’s financial position and prospects, which are provided in the joint chairmen’s statement and chief executive's review and in this business review. The responsibilities of the directors and external auditors are set out in the Financial statements (45KB).

Whistle-blowing programme

The Group has a whistle-blowing programme called ‘Speakout’. The programme, monitored by the DLC audit committee, enables employees, customers, suppliers, managers or other stakeholders, on a confidential basis, to raise concerns about conduct which is considered to be contrary to Mondi’s values. It makes communication channels available to any person in the world who has information about unethical practice in the Group’s operations. During 2009 reports were received via the global programme facility covering a number of areas. Reports were kept strictly confidential and referred to appropriate line managers for resolution.

Going concern

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in this business review. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the financial statements (309KB). In addition, notes 37 and 38 (63KB) to the financial statements include the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.

The current economic conditions have had an impact on short-term demand growth for Mondi’s products, as well as placing pressure on both customers and suppliers who may face liquidity issues, and could have an adverse impact on the Group's business. Furthermore, the lack of credit availability could affect the Group's ability to execute its strategy effectively. However, Mondi's geographical spread, product diversity and large customer base mitigate these risks. The proactive initiatives by management in rationalising the business through cost-cutting, asset closures and divestitures have consolidated the Group’s leading cost position in its chosen markets. Strong working capital management has resulted in a significant net cash inflow from working capital over the period, while capital expenditure programmes have been reduced.

The Group meets its funding requirements principally from its €1.55 billion, five-year, syndicated revolving credit facility maturing in June 2012, together with a €115 million facility in Poland, a €170 million facility in Russia and a number of facilities in South Africa totalling €340 million. The availability of these facilities is dependent on the Group meeting certain financing covenants, most significantly an EBITDA to net debt ratio of 3.5. At year end this ratio was 2.4. Mondi had nearly €1.0 billion of undrawn committed debt facilities as at 31 December 2009 with an average maturity of 2.2 years, which should provide sufficient liquidity for Mondi in the medium term.

The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current facilities and the related covenants.

As a consequence, the directors believe that the Group is well placed to manage its business risks successfully.

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.