PPI: Congratulations, how does it feel to win such a prestigious award?
Gary McGann: It is an honor for Smurfit Kappa to be recognized in this way. It, in many ways, reflects our belief that clearly communicating our strategy and delivering on it would, in time, be progressively recognised and rewarded by the market.
Before joining Smurfit Kappa in 1998, you were the CEO of Ireland’s national airline, Aer Lingus. What was your overall impression of the pulp, paper and packaging industry when first joining?
Obviously my focus was the paper-based packaging sector specifically and the view then was as it is now: that this is a growing, innovative and sustainable industry which can, and in many cases does, add real commercial value to our customers’ offerings and should deliver and sustain attractive, economic returns for all stakeholders.
And what is your impression of the industry now?
Our view is that we have started that journey and our industry has real value added prospects for the future, through technological progression, commercial innovation and a consistently strong customer orientation. Paper based products remain the most hygienic, user friendly, cost-efficient and sustainable transport, marketing and merchandising medium.
Do you think the pulp, paper and packaging industry could learn anything from the airline industry?
Both industries are capital intensive, invest hugely in technical advances and innovation, and have been victims of cyclicality. What is evident in both industries is that companies that focus on proactively anticipating and satisfying customer needs are successful. It is also a common feature of both industries that the ultimate differentiator is the quality, professionalism and commitment of the people within the business.
The analysts and portfolio managers specifically noted that you have not wavered from your overall strategy, and have been a steady skipper at the helm. Can you tell us more about your strategic approach at Smurfit Kappa, and what we can expect to see in the near and long term future, both from your paper and corrugated packaging sides?
In my opinion the real platform for our progress as a company is the strength in depth of our people in each of the regions, divisions and countries in which we operate. They truly make the difference. As a group, our relentless focus over the last decade has been on maximizing cash generation as a source of strategic flexibility. Our business model is a customer facing backward integrated one. We are very focused on delivering on our corporate goals by meeting and exceeding our customers’ needs to drive performance and in turn achieving desired outcomes which are ultimately measured by profitability, cash flow and return on investment.
The economic crisis, which began in 2008, made a cash focus even more imperative for us. Through operating excellence and consistent strong cash generation we paid down over €500 million in debt since the end of 2008, re-instated a progressive dividend policy, and have re-built a strong balance sheet. These achievements have increased our strategic and financial flexibility and allow us to actively consider accretive acquisitions. Underlying the financial strategy, we are a paper based packaging solutions provider strongly focused on our end customers. Our customers and our performance as a company also benefit from our balanced, integrated system of paper and packaging production. Our objective now is to continue to optimize that system in our current markets in Europe and the Americas and to expand our operations into other desirable growth markets
As I have previously said, what is perhaps most pleasing about the award is our belief that articulating a clear strategy and then delivering on it would, in time, be recognized and rewarded by the market. There were times over the years when our strategic approach was questioned. As a team, we have always listened to the market and our investors and then executed the strategy which we believe will create the maximum sustainable value for all our constituencies. Put simply, our strategy is about creating durable, long-term value for our customers and shareholders while offering excellent career opportunities for our people.
In terms of the future, we have clearly stated that delivering and exceeding our debt paydown objectives has substantially enhanced the range of available options to deliver and drive shareholder value. That can be in the form of accretive acquisitions - such as Smurfit Kappa Orange County – or in the form of increased returns to shareholders by other means. The key point is that we have substantially more strategic and financial options now than at any other point since our IPO (in 2007).
The analysts also noted that the Orange County Container Group acquisition Smurfit Kappa made in Mexico at the end of 2012 has been a resounding success, and is something of a showcase of how such acquisitions can be made. Any comments on that view?
The integration of Smurfit Kappa Orange County (SKOC) has been very successful so far thanks to the committed positive attitude of the management team and all our colleagues in SKOC. It is also due to the exchange of knowledge and expertise available in the larger group and the openness of people to transfer and receive best practice. People are the catalyst to progress in all such transactions and the contributions of both the existing SKG people and our new colleagues in SKOC has been an exemplar in this regard.
Importantly, SKOC has been a commercial and a financial success and this has been recognized by the markets. From the time the deal was originally announced we have more than doubled our synergy estimates through the sharing and implementation of best practices, technology and intellectual capital transfers, integration with our existing Mexican business and some good fortune in the context of market pricing dynamics in the region.
Latin America is obviously an important region going forward, can you enhance as to what your strategy is there and what challenges and opportunities the region offers?
Latin America is an attractive region with higher intrinsic growth rates and good barriers to entry. It is a region in which we have been present since 1986 with a high quality and largely local management team running each country. We are well positioned in that region, and are the only Pan Regional player there. We continue to look at opportunities that arise in countries where we are not yet present such as, Peru, Central America and of course Brazil.
Doing business can be challenging in regions such as this which is what justifies the higher expected (and delivered) returns. Such considerations are always factored into our capital allocation decisions.
And what about the other growth regions, i.e. Russia, Eastern Europe, China, India and the ASEAN region, any plans for those?
We are already present in Russia and Eastern Europe. These are also markets with higher growth characteristics, are proximate to where we have a reservoir of talented people and are, therefore, attractive to Smurfit Kappa. Economic growth in these markets is forecasted to remain higher than in Western Europe and we are in these markets growing with our existing customers, recruiting new customers, and continually looking into acquisition opportunities.
As you would expect, we will evaluate other emerging/developing markets within the scope of our stated strategy, and in the context of business conditions and the availability of talented people.
You were recently appointed chairman of the Confederation of European Paper Industries (CEPI), and your opening remarks were: “The pulp and paper industry is a leading sector in the bio-economy with a large renewable energy and raw material base. 82% of our raw materials are sourced in Europe and we produce 23% of the world’s pulp and paper products. But our industry – made in Europe – suffers from a lack of a favorable business climate in Europe.” How are you going to tackle this issue in your role as chairman of the association?
Contributing to a pro-business political climate in Europe is one of CEPI’s goals. Neither I nor CEPI have waited for my chairmanship to address this topic.
I have been actively involved in other organizations that have the same objective, such as the European Roundtable of Industrialists. And of course I have been on the CEPI Board for a number of years. We now have a particularly good opportunity to address this topic in Europe due to the fact that there will be a new Commission and a new European Parliament later in 2014. We believe that competitiveness of our industry will be at the centre of our political programmes, in an even more focused and frank way than in the past. The current Commission had earlier engaged in approaches that were not favourable to industry, and it has been difficult for them to change course in a pragmatic and decisive way. The new Commission can do it from the start and we will be there to make the case to policy makers to set up the conditions for industry to thrive, remain and invest in Europe.
CEPI has the right tools to address that, and as Chairman, I will support the use of those tools and, as a consequence, we will hopefully create new opportunities. The CEPI Roadmap and the ensuing projects, in particular the outcomes from the “Two Teams” initiative, are the best route of entry to the new political set up. They are an example of how an industry can be progressive and lead the way in both imagination and innovation potential. They bring political attention to our industry and give us the legitimacy to ask for the right business conditions.
CEPI will be developing a manifesto targeted at the relevant Commissioners, outlining how we see a European industrial policy that will provide the right conditions for European companies. We will organise meetings with those Commissioners for Board delegations to present the manifesto. We will also engage, both as CEPI and as individual CEOs, with other sectors in promoting an industrial policy that really addresses the competitiveness of European industry in general. Last but not least, there is the “BASTA” campaign, to be launched on January 28 on the occasion of the Business Europe Day. It aims at raising the issue of poor, unnecessary, burdensome, overlapping legislation, and offering alternatives to the Commission. You will have to wait for January 28 to see it!
And what about Europe from a company perspective – market growth in Western Europe is expected to remain lower than in other regions,still we are aware of quite a few investment plans e.g. Roermond, Townsend Hook, and completed projects at Hoya and Wrexen.
In many of our European mills we still see on-going improvement opportunities by investing in projects with relatively short pay-back periods. Lowering our cost base is definitely more profitable than expanding by building new paper machines that the market doesn’t need. The current project in Townsend Hook, where we are replacing the existing capacity with a modern, efficient, lightweight paper machine that we took out of the Italian market, is a good example of that.
Innovation seems to be a big thing at the Smurfit Kappa Group, can you tell us a little bit about what the group is doing on both the paper and corrugated sectors within the company?
Our own innovation efforts are focused in two directions. One is to find proactive, innovative, commercially attractive ideas to enhance the efficiency and marketability of our customers’ products. The second is to enhance our production processes through innovative technical improvements. Sustainability plays an important role in all innovation activity. In this area we co-operate with research institutes and we participate in EU and national projects.
We are also fully supportive of the ideas launched in CEPI’s Roadmap 2050. We were quite active in the Two team Project and we believe that a number of the concepts are worth developing further. In general, the paper and packaging industry has a unique opportunity to ‘re-invent’ itself over the next 10 to15 years. In that time the industry will need to develop the necessary new concepts delivering practical solutions that should lead to the realization of the targets that the CEPI Roadmap 2050 mentions. In my view, this industry has a future full of opportunities.
How do you see these industry opportunities translate into your own business strategy?
Smurfit Kappa’s strength, mind-set and fundamental “DNA” helps us to constantly strive to open up opportunities for our customers and deliver on their present and future packaging needs. We can leverage insights that we gather from all over the globe for the benefit of our local customers, and we are uniquely set up to deliver that.
We have been at the forefront of innovation within the industry for many years. We intend to increasingly innovate across the total spectrum of our offering for the benefit of our customers. This will be achieved by further tapping the creative expertise of our people and by constantly renewing our world class innovation tools and infrastructure.
As a Director for the UCD Michael Smurfit Business School – how do you feel the packaging industry is doing regarding developing and nurturing the future Gary McGann’s of the industry? Could more be done?
In certain countries there are industry specific school/university educations available for people that want to pursue a career in our industry. One of the challenges we face (as many industries do) is to attract the right people for our businesses. From the outside, on many occasions students do not think of the many and varied career opportunities that exist within our industry. That is partly caused by the high profile of certain other segments mostly in the services industries. However I also believe that it is partly due to the failure on our part to properly promote the attractiveness of our industry to future generations. This is something we are beginning to address. As an industry we need to clearly demonstrate what an interesting industry we are and the opportunities that exist to develop an exciting career and excel in this industry.
As always, success breeds success and the potential to attract and retain the best talent will also be positively influenced by the industry’s ability to deliver attractive economic returns for all its constituencies.
What, if anything, keeps you awake at night in regard to the pulp and paper industry?
Our industry continues to be an important source of growth, development, opportunity and employment within the European economic landscape. We need to ensure its long term viability and that of European manufacturing business as a whole. Politicians across Europe have taken measures that have increased the costs of doing business in Europe and are progressively making it more difficult for European businesses to compete internationally. This not only needs to stop, but, in fact needs to be reversed (e.g. energy costs in Europe are far too high compared to the US). We also need to make further progress on how we can make our industry a real ‘green’ industry that is producing not only renewable products but has production processes that are even more sustainable than they are today. The question is how can the paper industry really become a sustainability champion and an example to other industries. That opportunity definitely exists and we have already made progress in that regard.
I am an optimist. This is a growing industry with a bright future and I fundamentally believe in the unique attributes of our product!
And finally, how or can you sustain the level of share price performance (delivered in 2013) in 2014?
Our consistent stated position on this subject is, that as a management team we need to deliver the level of performance to which we have committed, which is expected of us, and to ensure the Smurfit Kappa investment case is widely known. We will continue to do that. The market determines the share price. What we can say is that the business landscape for SKG for 2014 is positive and we have greater strategic and financial flexibility than we have had for some time.