Strategy

Our focus continues to be on achieving the right product mix and geographical focus and thereby increasing the quality of our earnings. In order to increase our exposure to the faster growing emerging markets and reduce the risk associated with the declining western European markets, we have completed a number of restructuring programmes. As a result Mondi is well positioned with good exposure to high-growth emerging markets such as eastern Europe, Russia and South Africa, with 73% of the Group's net operating assests and 55% of revenue by destination based in these geographical areas.

As part of Mondi’s ongoing focus on leading market positions, the restructuring of the European Corrugated business was concluded during the first half of the year with the sale of the UK box plants and the recycled containerboard mill in Austria. The business can now focus on its core central and south eastern European markets, with leading market positions in the high-growth markets of Poland and Turkey. The containerboard mills in Poland, Germany and Turkey provide the Group with a competitive paper asset base serving the Group’s integrated converting network in these regions.

Our leading position in high-growth emerging markets was further enhanced by the successful completion of the last of our two major capital projects, with the modernisation of the Syktyvkar mill in Russia, bringing an additional 50,000 tonnes of office paper and 63,000 tonnes of containerboard into this high-growth market. The construction of the new 470,000 tonne lightweight recycled containerboard paper machine at Swiecie in Poland was completed in 2009.

Mondi has continued to develop its high-quality, low-cost asset base and the €545 million modernisation project at the Syktyvkar mill in Russia not only boosts our leading market position in this key region but the mill is now a well-invested highly cost-effective asset. The project incorporated the construction of a new wood yard, the rebuild of the softwood and hardwood pulp production lines and the white liquor plant, a new lime kiln and recovery boiler, a new turbo-generator and evaporation plant and the rebuild of the office paper and containerboard machines. This investment enables Mondi to increase product quality and output for UFP and containerboard. Most importantly the mill is now fully self-sufficient in pulp, which is where the major cost advantage lies.

The European Corrugated business benefited from the new recycled containerboard machine at Swiecie, which has continued to operate well; restructuring and cost reduction initiatives; and improved product prices and volumes. The new machine produced 410,580 tonnes of paper in 2010 and should make good progress towards its capacity output of 470,000 tonnes during 2011.

To further refine our asset base in the Bags & Coatings business, two Bags plants are being closed in Spain and Italy and two closures in France are still under consultation. A restructuring provision has been recognised as a special item in this regard.

Encouragingly, very good progress continues to be made in Coatings with a number of the investments made in recent years now operating well. The Coatings business now enjoys good, and in many cases leading, market shares in its key markets and delivered a ROCE in the region of 14% during 2010.

The sale of the Europapier paper merchant business to the Heinzel Group, announced in early May 2010, was approved by the relevant competition authorities and concluded early in November. In August, agreement was reached with Hadera Paper Limited to sell down the Group’s 50.1% interest in Mondi Hadera Paper Limited for a consideration of €10 million, with the Group retaining a 25% minority interest and this transaction was concluded on 31 December 2010. These disposals are in line with Mondi’s stated objective of exiting non-core businesses.

Cost optimisation is entrenched in Mondi’s culture and management’s relentless approach to cost savings did not lose momentum in 2010. Our focus on cash flow optimisation resulted in working capital remaining tightly under control within the desired range of 10-12% of turnover. Capital expenditure for the year amounted to €394 million, or 64% of depreciation.

Following the decision to limit capital expenditure approvals outside of the two large projects to 40% of depreciation during the recession experienced in 2008 and 2009, as indicated at the end of 2009, we will now return to more normal levels of ongoing capital expenditure estimated at around 60-80% of depreciation.

2010 was an extremely successful year from an operational perspective, with significant improvements in production efficiencies across the business and full-year production records being set in a number of key operations including Swiecie, Syktyvkar, Steti, Ruzomberok, Frantschach and Richards Bay.