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| Summary Day I |
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The 39th PRIMA Conference, PRIMA 2008, took place in Norway´s capital city, Oslo, from 18th - 20th May. Hosted by Norske Skog and Nordea, this year´s conference was aimed in particular at getting to grips with the tough challenges that are currently facing the paper industry, and was entitled "Hurricane Warning: Fibre Climate and Media Change".
As is traditional at this event that is renowned for its deliberate focus on networking opportunities, as well as its conference programmes, the attendees got together on the evening before the Conference itself. From headquarters at the Grand Hotel Oslo, a one-minute walk across the park took delegates to the Welcome Dinner on Sunday evening at Café Christiania, where old friendships were renewed and new ones begun, with the help of an excellent menu and a great atmosphere.
The Conference proper was opened by PRIMA Chairman and CEPIPRINT Director General, Emanuele Bona, who highlighted PRIMA´s belief that paper-related industries can achieve success even in today´s challenging times, by harnessing the power or marketing. He said companies today are challenged to change more profoundly and quickly than ever and to be willing to experiment and take chances, which was a very appropriate message to lead into the first presentations.
The first of these was the Keynote Speech for PRIMA 2008, entitled "Changes, Challenges and the Future", and was delivered by Kim Wahl, Norske Skog´s Chairman of the Board. Wahl began by highlighting some of the major changes in the world´s newsprint business, i.e. stagnant or declining demand in mature markets, counterbalanced by growth in emerging economies, such as China, India, Eastern Europe and South America. Other changes that he noted are influencing the business included competition for virgin and recovered fibre and energy, as well as environmental pressures such as sustainable production. He then moved on to look at the challenges faced by the industry today, highlighting dramatic cost increases in recent years, with more and possibly even larger increases lying ahead in the short to medium term. Added to this, Wahl continued, is the overcapacity of newsprint, with producers reluctant to minimise capacity, despite unimpressive demand. All of this has seen profit margins erode in the past few years, with paper companies seeing their share prices underperforming the market, and consequently, financial flexibility being a challenge. Looking to the future, he then presented two possible Scenarios: In his "Too Little, Too Late" Scenario, restructuring would be modest and reactive, and profits and cash flow would get worse than they already are. Alternatively, his "Restructuring and Consolidation" Scenario would see bolder action, to achieve economies of scale and a better industry structure with supply being balanced in line with demand in mature markets, and the creation of an industry able to respond to the changes in the global newsprint market. Wahl was clear about what he thought was required - he insisted the industry is in dire need of restructuring, warning that papermakers can´t just sit tight and wait for better times.
After Wahl came an extremely thought-provoking and challenging presentation from Michael Braungart, Professor of Process Engineering at the Lüneburg University in Germany and the founder of the Environmental Protection Encouragement Agency. Among a wide range of issues, he took a highly-detailed look at paper, the ingredients in its production, the resulting pollutants and also the gases emitted from the final paper products themselves. He praised the ingenuity of the industry in making its products very efficiently, but argued that the industry is actually making the wrong products. He believes that the gasses emitted by newspapers and magazines clearly demonstrate that such products are unsuitable for indoor use, and that the industry really should make more effort not to reduce its environmental impact, but instead to use raw materials and production processes that actually protect or benefit the environment. Professor Braungart´s presentation presented the industry with a wide range of challenges, and some delegates afterwards wondered whether we had just seen the birth of the next big environmental challenge for papermaking: gas emissions from finished paper products.
These first presentations set the scene for the main morning session of the Conference, which was entitled "The New Industrial Revolution?" and was chaired by Robert Latham, Sustainability Director for PaperlinX Europe. Before the session proper, Latham had some observations of his own regarding the environmental demands on the whole supply chain, from raw materials sourcing, to mills, merchants and printers. Customers´ environmental demands and corporate values are having a big effect on the business, he observed, arguing that this was a positive development.
The first presenter in this session was Leif Brodén, President and CEO of Södra, who looked at fibre supply questions in his presentation "Fibre: Convenient or Inconvenient Truth?" Brodén absolutely caught the audience´s imagination with his claim that the chase for biofuel is actually counterproductive, as many other forest uses (such as building wooden houses or producing packaging paper) are more CO2 efficient than producing biofuel. He argued that it would be more beneficial (as well as 99% less expensive) to focus on capturing CO2 emissions rather than just reducing them, with a focus on reducing deforestation and increasing afforestation in the world´s available industrial/productive forests. It is possible to capture all CO2 emissions, he insisted, using Sweden as an example, as the country captures twice as much CO2 as it emits. In this way, he suggested that the forest industry can "give the world a gift of 30 years to solve the carbon dioxide problem."
Brodén´s informative contribution was followed by a presentation on "Energy and Carbon - the User´s View", by Bill Sneyd of The CarbonNeutral Company, which advises businesses on managing their carbon footprint. He began by citing evidence that climate change is a real and serious threat and that there is little doubt that human activities are the main cause. However, he argued that there is still time to avoid the worst effects, as long as action is taken immediately and strongly. With strong energy consumption growth in emerging markets, a business-as-usual approach will make it absolutely impossible to stabilise the climate, and major reductions in carbon emissions are necessary, Sneyd explained. Businesses will be directly affected, as they will soon find it essential to supply their customers with product-level carbon emissions data. He also pointed out that a number of paper-related companies are already actively involved in the process, either having achieved carbon neutrality at the company or product level or at least being actively involved in moving in that direction.
The final paper in this session was delivered by Olav Mugaas, Executive Vice President, Media Norway, for Schibsted, which is changing from a Norwegian publisher of newspapers and books to a European media group. Mugaas pointed out that on-line activities now contribute more than half of Schibsted´s operating profit, adding that Harvard Business School is even writing a case study on the company because it is such an example of on-line success. He explained that Schibsted is prepared to accept that its paper-based media may lose business to its on-line activities, which show high growth and profit margins, while its own competing newspaper activities see big declines in advertising. Circulation of printed newspapers is also falling, and is now little more than half of what it was just a decade or so ago. However, with margins growing at its on-line businesses, the annual operating profits of the company as a whole have been improving since 2001, and it is planning significant further expansions of its on-line activities. The print-only channel faces a bleak future, he warned, although free newspapers do still have brighter prospects, and there are encouraging signs for a combined print-plus-online offering for such titles.
Lunch was followed by a session entitled "Return To Profitability", which was chaired by Olli-Petteri Lehtinen, Executive Vice President of Nordea. The session was led off by Gunn Wærsted, also an Executive Vice President at Nordea, with his presentation on "Challenges facing the Pulp & Paper Industry and measures applied to fix them". He began by identifying 4 challenges to the European/North American industry in particular, i.e. the gradual transfer of the industry´s gravitational centre to Asia/Latin America, increased costs, the negative effect of New Media on paper demand, as well as the strength of the Euro and Canadian dollar affecting competitiveness in the affected countries. As a result, profitability is weak in North America and Western Europe, and the measures that he quoted to combat this included cost reductions/efficiency improvement, asset restructuring, and possibly also restructuring individual companies or even the industry. The restructuring measure should not only lower costs but also consolidate product offerings enough to make it possible to keep output in line with demand, to keep prices up. He gave the example of the newsprint sector in the USA, where capacity closures have counterbalanced declining demand and made it possible to raise newsprint prices by 50% - Wærsted argued that this proves that supply discipline works as a strategy. Europe has held back from such fundamental restructuring so far, for a range of reasons, but Nordea believes these measures will also take place in Europe and that they will be successful. However, he warned that "unfortunately," there is a clear risk that Europe will not restructure to prevent a downturn, but only in reaction to one.
Then it was the turn of three paper and board companies to examine the question of returning to profitability. The first of these was Norske Skog, whose President and CEO, Christian Rynning-Tønnesen, focused on Cost and Capacity. Cost-reduction measures include cuts in overheads and administration costs, downsizing corporate functions and running company-internal improvement programmes, all of which have brought some benefits, but are not enough to solve the problem, he said. The big killer of profit margins, he argued, is overcapacity, and Norske Skog is closing 450,000 tonnes of newsprint capacity at three mills this year alone, but he also pointed out that delaying a closure until an operation turns cash negative is waiting too long. Like Wærsted, Rynning-Tønnesen quoted the successful example of the North American newsprint industry, which has cut capacity to match declining demand, and made it possible to raise prices in the USA.
Next up to the speaker´s rostrum was Jyrki Ovaska, President or Magazine Papers at UPM, with his presentation entitled "How to get from Rags to Riches?". He began by illustrating the fundamental changes to the business environment, which represent challenges for the paper industry. These include, he said, structural overcapacity in Europe, mature traditional markets, the downward trend in paper prices in real terms, rapidly increasing input costs, and new competition based on short fibre. Added to this, he pointed out that Europe is the only region that is dependent on exports, and that it has now become a real challenge to export profitably from the region, not least because of the strengthening Euro. All of these factors have added up to poor industry profitability, he noted. UPMs strategy for dealing with these challenges is three-fold: Improving profitability in Europe, advancing in new growth markets and developing new business opportunities. The companys profitability programme includes capacity management and stronger self-sufficiency in fibre and energy. These is also a readiness for industry restructuring, although Ovaska did point out that consolidation needs to add value for shareholders, and must take account of restructuring costs, as well as the usual price/tonne valuation of a possible merger/acquisition target. As for advancing in growth markets, the company is investing in self-adhesive label materials, Uruguay (short-fibre pulp) and China, and there is also a letter of intent to invest in Russia. New business opportunities, meanwhile, include a new wood-plastic composite product, RFID tags and inlays in Finland, the USA and China, developing business concepts and technical solutions in biofuels and a potential new business idea involving agro residues, such as straw and reed.
The final speaker in this session, Mayr-Melnhof board member, Franz Rappold, took a rather different approach, focusing not on returning to profit, but remaining there, with his presentation "Keeping Profitability - Key Focus Pays Twice!" With operating profits around 10% in the last two years, Rappold explained that Mayr-Melnhof has a long-term focus on profit, based on a number of factors, claiming that success does not simply happen, but must be planned. The success factors include being a low-cost producer with a clever product portfolio, which in this case means a reduced number of grades with permanent availability, as well as a top level of service, with locations near to the company´s customers, offering economical and ecological products. The mention of economical should not be misunderstood, however, because although Mayr-Melnhof operates a market-orientated pricing model, it is based on cost transparency and discipline the company charges extra for extra service, and its order-booking software will simply not accept orders at prices that are too low for the model. Finally, Rappold warned that companies should be realistic when appraising and budgeting their businesses, urging his listeners never to over-estimate either their own company´s abilities or the market itself.
The next session featured the same speakers, participating in the PRIMA 2008 Executive Panel, together with Nordea Senior Analyst, Stig Andersen, in a discussion moderated by Mads Asprem, the Managing Director of Green Resources and former head of Merrill Lynch´s global forest products and paper research team. With healthy and enthusiastic participation of Conference delegates, a very wide range of subjects was discussed, including (among many others) whether prices have to fall at all, investment subsidies, how companies can differentiate themselves, and should a company not just wait for its competitors to close capacity instead of doing it itself? The answers and opinions expressed were well-considered and thought-provoking, according to attendee feedback.
The Conference proper was then followed by the PRIMA General Assembly, which approved the budget, bid a grateful and warm farewell to departing Council Members Catherine Myren of Norske Skog and Ludwig Bichler of Mondi, as well as welcoming in new Council Members, Andrea Frattapasini of Burgo and Olle Axell of Norske Skog. A highlight of the Assembly was undoubtedly the unveiling of the location and lead sponsor for next year´s Conference: PRIMA 2009, the 40th anniversary of the Conference, will be held in Turin, Italy, and will be hosted by Burgo!
With this good news, the Conference attendees then prepared for the PRIMA Cocktail and Dinner, which was held this year at the truly spectacular Holmenkollen Hotel and sponsored by Norske Skog and Nordea. On the heights above Oslo, the Hotel´s Saga Hall offered PRIMA attendees breathtaking views out over the fjord, and for those lucky enough to be in the right place at the right time, there was even the beautiful sight of the full moon rising up from below the horizon to shine over the fjord just after the main course was finished. Those people with cameras had a busy time! The evening was a delightful combination of effective business networking and satisfying personal pleasure.
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Kim Wahl, Norske Skog´s chair of the board, opened the conference
Prof. Michael Braungart
Bill Sneyd and Olav Mugaas
Panel discussion
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