COMMENTS BY the ceo

An extraordinary year with strong results

2015 proved to be an extraordinary year for AR Packaging in many respects and is the result of successful strategy implementation.

We have over the last years gradually improved our value proposition in core segments with a clear aim to work with customers with which we have a strategic alignment and can create a mutually beneficial relationship. This combined with relentless efforts to improve operational efficiency, reduce cost base and create a winning, performance-based culture has laid the foundation for strong improvement in profitability without capacity expansion and top-line growth.

In line with our long-term growth ambitions in core business segments, AR Packaging acquired MeadWestvaco Corporation’s European tobacco, confectionery and consumer goods packaging operations on 1 May, 2015, adding targeted volumes with strategic customers in core segments. The integration is progressing very well and the acquired plants are complementing the Group in an excellent manner.

Net sales amounted to 514 MEUR (404) and was to a great extent impacted by the acquisition, 106 MEUR, but also by organic growth with desired customers, despite negative macro-economic impact on Russian volumes in the beginning of the year. Our operating profit developed extremely well, reaching an EBITDA margin of 12.2% (10.5%) before non-recurring items. The Group also delivered a strong cash flow following the healthy improvement in operating profit.

In recent years we have been focusing our operations and establishing the fundament for profitable growth. This translated into divestments of some non-core businesses, consolidation of our geographical footprint, creation of a lean, decentralised organisation which centres around top performance in our value-adding processes. Investments in competence improvement in key areas such as innovation capacity and total value chain knowledge coupled with strong Key Account Management have strengthened our positions in selected areas and yielded an improvement of our business portfolio, increase of our value addition and operational performance while lowering the cost base.

This accomplishment together with the successful integration of the MWV acquisition creates a strong platform for realisation of our growth plan: Agenda 2020.

Looking back on the achievements of 2015, I would like to take this opportunity to express my gratitude for excellent collaboration with our customers and suppliers, and for the strong effort contributed by our devoted employees.

Positive development in all divisions

2015 also manifests the ambition of profit focus in that all three divisions are financially profitable and contributing good cash flow.

Sales of Branded Packaging reached 268 MEUR, a 63% increase compared with the preceding year. Sales in the Tobacco segment were boosted by the acquisition from MWV, which has strength- ened us at the largest tobacco customers. Sales of Confectionery declined slightly, partly due to the poor development in Russia because of the uncertain economic situation in the beginning of the year.

Sales of Barrier Packaging increased to 165 MEUR or 8% compared with the preceding year. In this division, Performance Packaging, as one of the key areas of our operations, had another strong year, which included a new long-term contract with one of our main customers, as well as the launch of new, innovative products. Further, an existing customer heavily increased their business with us during 2015. Flexibles continued to perform well and reinforced its market-leading position in Scandinavia. Flexibles launched new innovative products and secured substantial business from both existing and new customers.

Sales of Food Packaging amounted to 103 MEUR, a decrease of about 7% compared with 2014. Food Service has a solid position in the market with its unique product portfolio and had a decent level of sales during the year. Food & Consumer Goods is impacted by a challenging market situation with overcapacity and price pressure. We have taken measures to strengthen our position in this segment by offering innovative and complete packaging solutions as well as a high service level.

From a geographical point of view, the development of the Group’s sales was stable in Europe, while sales in the Nordic declined slightly. Despite the economic uncertainties in Russia, we saw a strong positive development in our sales during the second half of the year.

”The strategic acquisition of the European operations of MWV has been very successful for our Group. It has established AR Packaging as one of the leaders in the tobacco segment while enhancing the strategic position at key accounts in the confectionery and consumer goods segments”.

Successful strategic acquisition

The strategic acquisition of the European operations of MWV has been very successful for our Group. It has established AR Packaging as one of the leaders in the tobacco segment while enhancing the strategic position at key accounts in the confectionery and consumer goods segments. As a result of the acquisition, we are one of the largest suppliers in the European folding carton market. The acquired operations include three plants in Graz, Austria, Krakow, Poland, and Moscow, Russia. These production facilities complement our existing operations well and give us the possibility to better serve our customers in Central and Eastern Europe as well as in Russia. The acquisition was consolidated from 1 May and is an important milestone in realising our growth strategy in our core business segments.

The reaction of our customers has been very positive – they see a stronger supplier that can truly serve as a long-term partner in supporting the development of their businesses. Also, from an employee point of view, the integration has been smooth and has increased their motivation. Synergies started to materialize during the year. Regarding sales and marketing, the new AR Packaging can offer wide range of packaging solutions, extensive experience and a strong geographical footprint. From a cost point of view, we are optimising in all areas and so far, the results have exceeded our targets.

Important investments for expansion

During the year we made some important investments of approximately 3 MEUR in the plants acquired in Krakow, Poland and Graz, Austria. In Krakow, we expanded the plant, which included transfer of production equipment, and at the plant in Graz, the machinery equipment was upgraded. As another major effort, we decided to invest about 3.5 MEUR in a new printing line at Flextrus in Lund, Sweden, which will be installed in the beginning of 2016.

Agenda 2020 for future growth

The management of AR Packaging has devoted substantial work to developing a long-term plan for the Group – Agenda 2020. It is a strategic plan for the next five years and builds on our strategy for the past three years. Basically it focuses on three key success factors. Firstly, expansion in business segments where we have a competitive edge, for instance Performance Packaging. Secondly, some of our business segments that have reached a critical mass will aim for global expansion. Thirdly, we will continue optimising our internal processes, such as production, supply and procurement. All in all, with the integration of the acquired businesses from MWV, the Group has laid the foundation for further strengthening its market positions and becoming a global player in selected markets.

Outlook 2016

In 2016, we expect macro-economic conditions to be quite stable for our Group. However, there are several challenges. The competition is fierce, particularly in the food packaging market, with tough price negotiations with our customers. The new EU directive regarding the tobacco market will come into effect in the spring of 2016 and the consequences for our customers remain to be fully clarified. We stay attentive to swiftly support our customers in this transition and expect sales to the European tobacco market to be affected.

At the same time there are many opportunities. One is the positive development of our business in Russia, which we expect to continue next year.

Based on the strategic foundation we have laid in the past years, our objectives for 2016 include growing the company further, maintaining our good level of profitability, continuing our efforts to develop new, innovative products and completing the integration of the acquired MWV operations. With our skilled employees, good customer relations and strong financial position, we believe that 2016 will be another successful year.

Harald Schulz

CEO