Mondi Ltd. (MND), the South African packaging company that joined the U.K.’s benchmark FTSE 100 Index last month, is opening factories in China and Iraq as it follows clients into emerging markets to boost earnings.
Customers including Procter & Gamble Co. (PG:US) and Nestle SA (NESN) are tapping booming local demand for products such as diapers and microwaveable food and Mondi has to stay close to meet specific requirements in each market, Chief Executive Officer David Hathorn said in an interview in Johannesburg. Mondi this year inaugurated a plant in China’s Jiangsu province to supply stretchy films for P&G’s range of Pampers diapers, he said.
Asian demand for hygiene consumer products is helping Hathorn to transform the 46-year-old company into a packaging specialist and move away from the traditional printing and writing paper business that is suffering amid the rise of digital offerings. The strategy is paying off for Johannesburg-based Mondi as first-half earnings gained 35 percent and sales rose 18 percent to 3.3 billion euros.
“Growth will be in packaging and our bias will be towards consumer packaging,” Hathorn said. “If you go back over a 20 year history, Mondi used to be a printing and writing paper company, gradually we have evolved and moved into becoming a packaging company.”
Mondi, which operates in 30 countries with more than 25,700 employees and was spun off from Anglo American Plc (AAL) in 2007, said half of its sales now stem from higher-growth emerging markets, with packaging accounting for two-thirds.
The company this year also opened an cement bags plant in Sulaimaniyah, northern Iraq, to tap growing demand in the country, according to Mondi’s website.
The new China factory supplies P&G with the stretch materials in the frontal tape and waistband of diapers. The plant helps to cut costs and to meet the specific requirements of P&G, Hathorn said.
“In addition to taking advantage of lower production costs, it makes sense to convert the film reels to the finished product as close to the customer as possible rather than to import the end product,” he said.
Tracking clients as far as Jiangsu and producing food pouches with as many as seven layers of film to allow meat and dairy products to stay fresher for longer has helped make Mondi the top performer in South Africa’s benchmark stock index.
Dual listed in London and Johannesburg, the shares have surged 82 percent this year, valuing it at 80.8 billion rand ($8.2 billion). Today, it was up 0.1 percent as of 9:22 a.m. The stock joined the FTSE 100 index on Sept. 23. London-listed DS Smith rose 38 percent. Smurfit Kappa (SKG), traded on the Dublin exchange, gained 86 percent.
As the 2008 financial crisis led to plant closures in the industry, Mondi sold peripheral assets and focused on plants with the capacity to supply packaging of different sizes and colors to keep pace with changing consumer tastes. That’s added industrial and consumer clients on top of the corrugated packaging market.
Hathorn said while Mondi’s focus is currently on emerging markets, demand for packaging offerings is also rising in established markets.
“We are not fixated with emerging markets. In the consumer packaging space, the western market is also very good,” he said “So we make a lot of stuff in Poland for example and sell to Germany. Cost is an important part of our strategy.”
Mondi says it’s benefitting as consumer goods companies are seeking to reduce the weight of packaging, replace environmentally critical materials such as aluminium foil with multilayer paper materials and extend the shelf life of products through improved packaging.
Justin Jordan, an equity analyst at Jefferies LLC, says it makes sense for international consumer goods companies to source the packaging from paper companies with factories in different markets to make sure the quality is the same in each market.
“One of the key advantages companies like Mondi can offer brands is the ability to service them across multiple countries, across Europe,” he said. “The brand can be presented in a consistent manner in Russia and well as it can be in Germany, the packaging looks exactly the same across multiple countries. The individual colors of a brand logo are presented in a consistent manner.”
Demand for more sophisticated wrappings is spiralling and Mondi is targeting a third of its revenue from products that have been developed within the past five years to meet client requirements, Hathorn said.
“Consumer packaging is used to enhance a product on a shop shelf,” Jefferies’s Jordan said. The packaging “tends to be doing more than just protecting a product. It can also be giving marketing messages at the point of sale.”
After a year of integrating acquisitions, Mondi is also back in dealmaking mode, Hathorn said. The company has spent 1.6 billion euros on acquisitions since it sold shares on the Johannesburg exchange. After a year overseeing integration of companies like Nordernia International AG, the CEO is now looking at further deals.
“We have signaled that we are now looking at further growth options,” Hathorn said. “Clearly there are a number of acquisition opportunities out there.”
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