cham paper group – investor handbook...

SUMMARY l 1

CHAM PAPER GROUP – INVESTOR HANDBOOKJune 2009

DISClAIMER

The Investor’s Handbook is issued by the management of Cham Paper Group AG (CPG) for qualified and institutional investors. This Investors’ Handbook is being made available to persons who are evaluating the possibility to enter into a shareholder relationship with CPG. It will enable them to form their own opinions on the transaction, for which they ultimately hold full responsibility.

This document is for information purposes only and does not in Switzerland or in any other jurisdiction constitute or form part of, and should not be construed as an offer or invitation to subscribe or purchase any securities of CPG. It should, therefore, not form the basis of any investment decision for shares of CPG.

This document contains forward-looking statements. These statements are based on information currently available to the management of CPG as well as on management’s current assumptions and forecasts. Various known and unknown risks, uncertainties and other factors could lead to material differences between actual and future results, financial situation, development or performance and the estimates given in this document. CPG does not assume any liability for updating forward-looking statements or other information in this document.

This document does not purport to be all-encompassing or to contain all the information, which a prospective investor would require. Neither CPG nor any of its officers, directors, employees or agents may guarantee the accuracy or completeness of this confidential Handbook or any part thereof, and each therefore rejects liability concerning such information.

The distribution of this document may be restricted by law. Any persons reading this document should inform themselves of and observe any such restrictions.

Cham Paper Group AGFabrikstrasse CH-6330 ChamTel + 41 (0)41 785 33 33 www.cham-group.com

2 l DISCLAIMER

TABLE OF CONTENTS l 3

TABlE Of CONTENTS

1 SUMMARY 6 1.1 Cham Paper Group 6 1.2 The speciality paper market 6 1.3 Business model 6 1.4 Differentiating factors 7

2 KEY fINANCIAlS CHAM PAPER GROUP 8

3 SUMMARY Of CPG’S ‘STRATEGIC THEMES’ AND ‘EQUITY STORY’ 11 3.1 Focused speciality paper player 11 3.2 Providing value beyond paper 11 3.3 Speciality papers - a growing market 11 3.4 Catering to relatively stable industries 11 3.5 Swissness as a competitive advantage 11 3.6 Four-pillar strategy to generate value 12 3.7 Strong asset base 12 3.8 Sustained profitable growth 13

4 THE SPECIAlITY PAPER MARKET 14 4.1 Introduction 14 4.2 Market size and growth of the global paper market 15 4.3 Value chain of the speciality paper market 16 4.4 Market size and growth of the speciality paper market 16 4.5 Major market segments based on end-user applications 16 4.5.1 Technical papers 16 4.5.2 Self-adhesive base papers 17 4.5.3 Flexible packaging 19 4.5.4 Digital imaging papers 20 4.6 Non-cyclicality of the speciality paper market 21 4.6.1 Tobacco market 21 4.6.2 Food industry 22 4.7 Key demand drivers and trends 23 4.7.1 Increasing level of environmental awareness 23 4.7.2 Changing consumer needs 23 4.7.3 Volatile raw material prices 23 4.7.4 Consolidation of converters and end-users 25

4 l TABLE OF CONTENTS

5 COMPANY OVERVIEW AND MANAGEMENT 27 5.1 CPG in brief 27 5.2 Business model and strategy 27 5.3 Product offering 28 5.4 Strong foothold in Europe 29 5.5 Overview of CPG’s production plants 30 5.5.1 Overview of products manufactured at CPG’s mills 30 5.5.2 Overview of quality standards implemented at CPG’s mills 31 5.6 CPS’s value chain management 31 5.7 Supply chain management 31 5.8 Restructuring programme of CPG: Speed 31 5.9 Innovation at CPG 33 5.9.1 Curtain coating technology 34 5.9.2 Nanotechnology 34 5.9.3 Printed electronics 34 5.10 Group structure 35 5.11 Board of Directors and Management Team 35 5.11.1 Board of Directors 35 5.11.2 Management Team 36 5.12 Capital structure and major shareholders 37

6 PEER ANAlYSIS 38 6.1 Innovativeness 39 6.2 Operational efficiency 39

7 RISK ANAlYSIS 40

8 SCOT ANAlYSIS 42

TABlE Of fIGURES

Figure 1 Business model 6Figure 2 Evolution of CPG 7Figure 3 Key figures 8Figure 4 CPG balance sheet 10Figure 5 Four-pillar strategy to generate value 13Figure 6 EBIT generation process at CPG 13Figure 7 The speciality paper market 14Figure 8 Geographic distribution of the global paper market by value 15Figure 9 Leading players in the global paper market by value 15Figure 10 Value chain of the speciality paper market 16Figure 11 Expected growth in release liner 18Figure 12 Paper type used in flexible packaging by volume, 2007 20Figure 13 European tobacco market 21Figure 14 Change in US GDP vs. % change in US cigarette consumption 21Figure 15 Past and expected future growth of the global food products market 22Figure 16 Changing consumer needs 23Figure 17 Trend in NBSK pulp prices 24Figure 18 Trend in oil prices 24Figure 19 Trend in aluminium prices 25Figure 20 Comparison of electricity prices in Switzerland and Italy 25Figure 21 Share of top 10 industry players in key markets 26Figure 22 CPG’s approach to speciality paper business 27Figure 23 Regional sales volume 2008 29Figure 24 Share of non-standardized items in Cham profit centre 32Figure 25 CPG’s innovation process 33Figure 26 Group structure 35Figure 27 Sales volume of speciality paper of major European paper manufacturers 38Figure 28 Total revenue of major European paper manufacturers 38Figure 29 Trend in energy price 40

TABLE OF FIGURES l 5

6 l SUMMARY

1 SUMMARY

1.1 Cham Paper Group Cham Paper Group (CPG) is a Switzerland-based company with a strong foothold in the European speciality paper market.CPG develops and manufactures high quality speciality papers for various applications including self-adhesive labels, flexible packaging, digital imaging and various technical applications such as tobacco innerliners. CPG was a part of Industrieholding Cham AG and now is a completely independent company, after the spin-off of Hammer Retex, the former real estate division of Industrieholding Cham.

1.2 The speciality paper marketThe speciality paper market is a niche segment within the paper industry, accounting for 1.4% of the total market volume. The speciality paper market was estimated at 5.3 million tonnes per annum (MTPA) in 2007. It grew at a CAGR of 3.6% in the period 2001-2006. Speciality papers are not just commodity products but solutions that fit into the end-user’s value chain; speciality papers add value to end-user applications and require a high degree of technological advancement in the manufacturing process. The speciality paper market is of great interest to paper manufacturers as it offers higher margins, increased customer loyalty, higher growth and lower cyclicality than the commodity paper segment. The speciality paper market is fragmented with players including large diversified paper manufacturers for whom speciality papers are a mere sub-segment, and smaller niche players, who focus exclusively on speciality papers.

1.3 Business modelAs part of CPG’s strategic re-orientation, CPG focuses on the development of innovative high quality speciality grade papers and taps into new markets through close co-operation with its customers and end-users. This also enables CPG to directly influence the end-users buying decision in its favour and improve operating margins. The four pillars of the business model are the following:• Operational efficiency• Customer loyalty through Value Chain Management and close co-operation with customers and end-users• Supply Chain Management• Innovation leading to high margin products and services

End-User

Product Flow

VALUE CHAIN MANAGEMENT

Raw Material Flow

Material Expenses Revenue Flow

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Universities andTechnical Colleges

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Direct customers:Converters

Need for new products due tochanging market needs

figure 1 Business model

SUMMARY l 7

1.4 Differentiating factorsThe key differentiating factors of CPG are as follows:

• PureplayerfocusingonspecialitypapersCPG focuses on high quality speciality papers where value for customers is high. This results in higher margins and less cyclicality than commodity paper manufacturers.

• InnovationpowerhouseinthepaperindustryCPG’s in-house R&D team works closely with universities and technical schools in ground-breaking research to develop products based on new technologies. It derives approximately 25% of its revenue out of products less than 5 years old. CPG recently invested CHF 20 million in a curtain coater, the first of its kind in the industry, bolstering CPG’s standing as technology leader.

• StrongcustomerandmarketknowledgeCPG’s customer and market knowledge is amongst the highest in the speciality paper market. The Group pursues close co-operation and networking not only with converters but also end-users, ensuring early identification of market trends and customer needs.

• DifferentiationontheservicelevelCPG strives to differentiate itself on the service level by offering a broad spectrum of services and close co-operation with its customers. In an industry where service orientation is comparatively low, CPG consciously employs specialists from relevant sectors of the converting industries to ensure customer proximity.

• Strongbrandawareness

CPG is a well-known industry leader and preferred supplier in their key segments. CPG has built a strong reputation based on the Group’s ability to innovate, on its special solutions and their wide network in the industry.

EvolutionofCPG

1657 1972 1987 1999 20071912 1978 1993 2006 2008

Establishment of paper mill in Cham, Switzerland

Etablishment of Papier fabrik Cham AG in Cham, Switzerland Papierfabrik Cham

AG acquries Cartiera di Locarno SA, Tenero to establish Cham-Tenero Paper Mills Inc (Cham-Tenero)

Cham-Tenero acquires Cartiera di Carmignamo SpA, Carmignaro, Italy

Restructuring program "Speed"implemented

Divestment of Hunsfos Fabrikker AS

Establishment of Industrieholding Cham AG (IC Cham)

Public listing ofIC Cham

Cham-Tenero acquires Hunsfos Fabrikker AS, Vennesla, Norway.The five mills are established as Cham Paper Group

figure 2 EvolutionofCPG

8 l KEY FINANCIALS CHAM PAPER GROUP

2 KEY fINANCIAlS CHAM PAPER GROUP

inCHFmillion,unlessindicatedotherwise 2008* 2007* 2006* 2005* 2004

Netrevenue 348.3 371.0 368.6 346.2 345.0

Change in % relative to preceding year –6.1 0.6 6.5 0.3 4.8

Operatingprofitbeforedepreciation(EBITDA) 35.3 37.2 62.8 39.0 53.2

Change in % relative to preceding year –5.0 –40.7 60.8 –26.6 8.7

As a % of net revenue 10.1 10.0 17.0 11.3 15.4

Operatingprofit(EBIT)beforenon-recurringitems** 11.4 13.0 11.6 16.1 32.8

Change in % relative to preceding year –12.1 11.9 –27.9 –51.0 11.4

As a % of net revenue (operating or EBIT margin) 3.3 3.5 3.1 4.6 9.5

Operatingprofit/loss(–)(EBIT) 11.4 13.0 16.6 16.1 32.8


As a % of net revenue (operating or EBIT margin) 3.3 3.5 4.5 4.6 9.5

Netincome/loss(–) 0.0 7.6 16.8 6.1 19.4


As a % of net revenue (net margin) 0.0 2.1 4.6 1.8 5.6

As a % of average shareholders’ equity (return on equity) 0.0 5.1 11.7 4.4 14.7

Netincome/loss(–)beforenon-recurringitems** 0.0 7.6 5.8 6.1 19.4

Change in % relative to preceding year –99.4 31.0 –4.7 –68.4 –9.8

As a % of net revenue (net margin) 0.0 2.1 1.6 1.8 5.6

As a % of average shareholders’ equity (return on equity) 0.0 5.1 4.0 4.4 14.7

Netcashflowfromoperatingactivities 9.9 21.3 23.2 30.1 35.5

Change in % relative to preceding year –53.5 –8.3 –22.8 –15.1 12.3

Freecashflow –9.4 –3.1 4.4 11.8 11.8

Change in % relative to preceding year –201.8 –170.9 –63.1 0.3 –23.7

Capital expenditures 14.1 25.4 34.0 17.8 22.4


Networkingcapital 37.3 77.2 29.2 1.9 –1.3

Change in % relative to preceding year –51.6 –164.5 1,423.7 249.5 102.0

Capital employed 281.7 281.1 272.2 258.7 269.3

EBIT as a % of capital employed (ROCE) 4.0 4.6 4.3 6.2 12.2

Shareholders’ equity 144.5 155.5 145.8 142.4 138.6

As a % of total assets (equity ratio) 42.8 42.4 40.6 43.2 41.2

Netinterest-bearingliabilities 126.6 115.6 109.8 98.0 109.8

Change in % relative to preceding year 9.6 5.2 12.0 –10.7 –6.9

Debt/equity ratio 0.9:1 0.7:1 0.8:1 0.7:1 0.8:1

Debt/EBITDA ratio (gearing ratio) 3.6:1 2.9:1 1.7:1 2.5:1 2.1:1

Numberofemployees(FTE) 673 713 757 779 852

Change in % relative to preceding year –5.6 –5.8 –2.8 –8.6 0.7

Net revenue per employee (in TCHF) 503 505 480 424 406

figure 3 Key figures *Figures include only continued business (without Hunsfos Fabrikker AS)**Non-recurring items from operations 2006: Restructuring expenses of CHF 6.5 million and gain on disposal of subsidiary net of CHF 11.5 million and tax effect related to recognized tax loss carried forward from the reorganisation of the Cham Paper Group of CHF 6.0 million.

KEY FINANCIALS CHAM PAPER GROUP l 9

Cham Paper Group Key financials 2004–2008

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10 l KEY FINANCIALS CHAM PAPER GROUP

Balance sheet of Cham Paper Group*

31.12.2008in TCHf

31.12.2007in TCHf

Cash and cash equivalents 2,350 8,618

Accounts receivable - Trade, services 69,557 73,340

Inventories 69,464 77,171

Other current assets 8,027 11,264

Current assets 149,398 170,393

Tangible and intangible fixed assets 178,922 184,402

Financial assets 101 1,346

Other long-term assets 8,421 10,738

Non-currentassets 187,444 196,486

Non-currentassetsheldforsale 975 0

Assets 337,817 366,879

Short-term bank loans 60,733 25,386

Accounts payable - Trade, services 31,270 57,306

Other short-term liabilities 20,056 43,114

Short-termliabilities 112,059 24,729

Long-term bank loans 68,349 98,884

Subordinated loans 0 0

Other long-term liabilities 12,959 19,265

Long-termliabilities 81,308 118,149

Liabilities 193,367 211,378

Share capital 10,000 10,000

Reserves (incl. profit / loss) 134,450 145,501

Shareholders’ equity 144,450 155,501

Liabilitiesandshareholders’equity 337,817 366,879

Additional information

Total bank loans credit facilities 195,354 217,553

Liquidity reserve 68,622 101,901

Interest bearing liabilities 129,102 124,310

Net interest bearing liabilities 126,629 115,561

Net working capital I 37,339 77,164

Net working capital II (non-cash) 95,720 93,941

Net working capital III (rec. + inv.-pay.) 107,751 107,397

Net operating assets 277,840 286,842

Equity ratio 42.8% 42.4%

Gearing ratio (Net int.bearing liabilities/equity) 87.7% 74.3%

figure 4 CPGbalancesheet *CPG will get a cash inflow of CHF 62 million due to the spin off of Hammer Retex in spring/summer 2009.

SUMMARY OF CPG’S ‘STRATEGIC THEMES’ AND THE ‘EQUITY STORY’ l 11

3 SUMMARY Of CPG’S ‘STRATEGIC THEMES’ AND THE ‘EQUITY STORY’

3.1 focused speciality paper player Cham Paper Group (CPG) is a specialist in paper surface technology solutions and is a leading supplier of speciality papers to industries mainly in Europe. The Group focuses on providing high value products with unique functionalities to its customers. As part of its strategic re-orientation, CPG has divested its loss making operations in the uncoated-speciality paper market in late 2008. The Group is today well positioned to grow faster than the market, to increase margins and profits over the next years as well as to manage the cycles of the industry.

3.2 ProvidingvaluebeyondpaperWhile the paper industry as such is largely considered a commodity business, success in the speciality paper market depends on a company’s ability to constantly innovate in order to create a better value proposition to customers. CPG is well-known for technological competence, innovation, custom-made solutions and close proximity to its customers. CPG provides high value added products with unique functionalities that fit into its customer’s value chain. With close customer co-operation through value chain management, value adding supply chain management and technological competence, CPG has positioned itself as a reliable partner providing high value, tailor-made solutions to its customer. CPG’s knowledge and competence in specific coating technologies enable it to offer value beyond paper.

Value added services

Low

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Speciality and premiumpapers market: USD 22 billion

Global Paper Market: USD 310billion (Including speciality paper)

CPG2008

CPG2012

3.3 Specialitypapers–agrowingmarketThe speciality paper market is a niche segment within the highly fragmented paper market. The overall global paper market was estimated at USD 310 billion in 2007. The speciality paper market is estimated at approximately USD 22 billion with a single-digit market growth rate (+4% in 2008, CAGR 2001–2006 3.6%). CPG focuses on the high end of this market using technology to add functionality and value to base paper. CPG is one of the leaders in Europe in high margin products.

3.4 CateringtorelativelystableindustriesCPG manufactures a range of speciality papers for self-adhesive labels, flexible packaging, cigarette innerliners and digital imaging. CPG’s speciality papers are especially used in the food and tobacco industry and are associated with a number of world leading brands in food, sweets, wines, beers, soft packs and inner liners for cigarettes packaging as well as the world famous “Panini” pictures. As both the food and tobacco industry are non-cyclical in nature, the speciality paper market segment is characterized by low cyclicality.

3.5 SwissnessasacompetitiveadvantageHaving a manufacturing in Switzerland enables CPG to promote the “Swissness” of its solutions, and thus strengthening its standing as a high quality speciality paper manufacturer. In addition, CPG profits from Switzerland’s high educational standards given the high quality and specialist personnel skills required. Relatively high salaries on the other hand are not a disadvantage as personnel expenses typically only account for approximately 15% of the total production costs in a paper mill allowing CPG to produce at competitive costs.

12 l SUMMARY OF CPG’S ‘STRATEGIC THEMES’ AND THE ‘EQUITY STORY’

3.6 Four-pillarstrategytogeneratevalueThe four pillars of the value generation for CPG’s shareholders are the following:• Operational efficiency• Customer loyalty through Value Chain Management and close co-operation with customers and end-users• Supply Chain Management• Innovation leading to high margin products and services

Operational efficiencyCPG is implementing systematic product management and sales force optimization. Its goal is to increase its revenue per employee, currently at CHF 518’000 and already high by industry standards. Furthermore, CPG has a sound understanding of the underlying forces in its market and is able to manage operations effectively. Ongoing cost cutting programmes and environmental issues include initiatives to reduce energy consumption, water usage and to reduce water purification sludge. Strict operations management ensures a positive EBIT in every year. Though the target margin can vary depending on the market situation, CPG expects its EBIT to be positive and within a range of 5–12%.

Customer loyalty through Value Chain ManagementCPG aims at creating a win-win situation through close co-operation not only with its customers but also with suppliers and end-users, allowing early identification of market trends, customer needs and technological shifts. In order to optimize its Value Chain Management, CPG has implemented individual Service Level Agreements (SLA) with major customers, ensuring jointly agreed lead times, customer-specific rolling sales plans and cost reductions through elimination of unnecessary logistics steps, like buffer stocks at various stages along the supply chain. Furthermore, in order to optimize its customers and end-user’s value chain, CPG jointly develops its products, together with them. This ensures a process fit along the entire value chain, resulting in high customer satisfaction and loyalty.

ServiceexpansionfollowingitscustomersCPG serves numerous globally operating customers and through them various internationally leading end-users such as Philip Morris, Nestle, 3M, Hewlett-Packard, Avery Denison and many others. The goal is to continuously expand turnover with these key accounts and further strengthen the relationship. This is achieved by accompanying these clients and/or end-users geographically into untapped market or new market segments in order to guarantee a consistent product quality worldwide. Often, clients in the tobacco or food industries prefer to stay with a leading supplier such as CPG when they open-up new markets, because the range of products, reliability and synchronized logistics processes are of crucial importance to them.

InnovationleadingtohighmarginproductsandservicesCPG is known for its high degree of innovation. CPG’s internal R&D team closely co-operates with universities and technical schools in ground-breaking research. The purpose is to develop new surfaces with specific functionalities that meet customer needs, help customers innovate and add value to their services. Such active technical ingredient management leads to both enhanced product benefits and optimized production costs and margins. Accordingly, CPG’s R&D expenditure as compared to revenue is among the highest in the industry. In 2008, CPG invested CHF 20 million in a new curtain coater which will enable the use of the latest coating compounds such as polymer dispersions and nano-particles. Going forward, CPG will focus on innovation in nanotechnology and in smart papers such as printed electronics.

3.7 StrongassetbaseThe strategic decision to focus exclusively on coated speciality papers and spin-off the real estate business is expected to act as a catalyst for CPG’s value. In addition, CPG has a strong tangible asset base including land and building, machinery and production equipment. Moreover, the tangible asset base of CHF 173.9 m in 2008 is further enhancing CPG’s value.

SUMMARY OF CPG’S ‘STRATEGIC THEMES’ AND THE ‘EQUITY STORY’ l 13

figure 5 Four-pillarstrategytogeneratevalue

3.8 SustainedprofitablegrowthThe above mentioned strategic objectives are being followed to improve CPG’s market position and profitability, while growing its market share in the years to come. Overall, the operations management goal is to reach an average EBIT of 8% (between 5–12% over the business cycles), and an average growth rate of 1% above the market. The aim of the Value Chain Management process is to improve margins, while optimizing the entire supply chain helps to cut costs at customers and CPG. Last but not least, the innovation culture at CPG will open up new segments and markets.

EBITimprovementprocessatCPG

figure 6 EBIT generation process at CPG

Generating customer and shareholder value

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AverageEBIT 2004–20084.8%

EBIT-range2009–onwards:5–12%

Managing business cycle better byactively managing the value chain

Close co-operation withcustomers and end-usersalong the supply chain

As an innovative power house,CPG innovates new productsthat not only create additionaldemand but also drives margins

14 l THE SPECIALITY PAPER MARKET

4 THE SPECIAlITY PAPER MARKET

4.1 Introduction1

Speciality papers are papers that are given unique characteristics during manufacturing, converting or processing and that have properties suitable for specific end-user applications such as inner liner for tobacco packaging. Speciality papers as defined by PIRA Intelligence in their latest report, “The Future of Specialty Papers to 2013” are set in contrast to “common commodities”. According to PIRA, “Speciality paper markets tend to be niche markets that have higher average margins than commodity markets and fairly stable pricing over time”… “Many speciality paper manufacturers have served the targeted markets over many years because:• Speciality paper products are comparatively strong in both good and bad years• The manufacturer has a high customer share of that particular product • The manufacturer may produce a speciality paper that has unique technical properties and is therefore unique to that

customer and application”.

“A strict definition states that specialities are unique and cannot be substituted …but all are subject to competition from alternative technologies and materials…” “Papers which start off as specialities can also become commodities… e.g. thermal paper and (uncoated) inkjet papers …are well on their way to becoming commodity papers”.

However, this is a broad definition of speciality paper and for the purpose of this report we have considered the speciality paper market relevant to CPG. The speciality paper market (relevant to CPG) accounts for 1.4% of the global paper market. Nevertheless, the speciality paper market is of great interest to paper manufacturers given the fact that it is a comparatively high growth segment offering higher margins, lower cyclicality and higher customer loyalty than in the commodity segment.

Commodity paper361.1 MTPA

Market size:USD 22 Billion

Market size:USD 288 Billion

Premium paper 5.3 MTPA

Speciality paper 5.3 MTPA

• Low cyclicality

• High cyclicality

• Operating margins• Customer loyalty

Total market size: 382 MTPA (USD 310 billion)

figure 7 The speciality paper market

1 Sources: CEPI – Confederation of European Paper Industries, Pira International: Speciality Paper Report, CPG estimates

THE SPECIALITY PAPER MARKET l 15

4.2 MarketsizeandgrowthoftheglobalpapermarketThe global paper market which consists of newsprint, printing & writing paper, waste paper, speciality and premium papers grew from 366.2 MTPA in 2005 to 382.0 MTPA in 2006, representing a growth of 4.3%2. The European market (17 CEPI Countries) represented production of 102 MTPA and consumption of 90 MTPA in 2006.Americas were the largest market accounting for 38.8% of the total global paper market by value in 2007, closely followed by Asia-Pacific at 32.3% and Europe at 28.9%3.

Geographicdistributionoftheglobalpapermarketbyvalue4

32.4%

26.5%

9.1%

32.1%

Western Europe USAsia Central & Eastern Europe

figure 8 Geographicdistributionoftheglobalpapermarketbyvalue

International Paper Company was the leading player in the global paper market, generating 7.3% of the total market value in 2007, followed by other major companies, more directly competing with CPG such as Stora Enso and UPM-Kymmene with market shares of 5.4% and 4.6% respectively.

Leadingplayersintheglobalpapermarketbyvalue5

7.3%

4.6%

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International Paper Stora Enso

UPM-Kymmene Others

figure 9 Leadingplayersintheglobalpapermarketbyvalue

2 CEPI – Confederation of European Paper Industries3 Datamonitor: Global Paper Products, Geographic distribution figures are indicative4 Source: Datamonitor: Global Paper Products5 Source: Pulp and Paper International top 100, published 09/2008


4.3 Value chain of the speciality paper market

• Natural fibers (wood, cotton, hemp)

• Oil/ petrochemicals

• Chemical suppliers

Primary Production

Raw materialsupplier

PaperManufacturer Converter Marketer/

Seller

• Printers and siliconizers

• Consumer or industrial brands

• Pulp Producers • Healthcare and consuer goods suppliers• Synthetic fiber

producers (PET, PP, Glass) • Packaging

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Retailer/Consumer

figure 10 Value chain of the speciality paper market

4.4 MarketsizeandgrowthofthespecialitypapermarketThe speciality paper market was estimated at 5.3 MTPA in 2007. It grew at a CAGR of 3.6% in the period 2001–2006. Western Europe was the largest market in 2006, accounting for 32.4% of the speciality paper market volume, closely followed by the US at 32.1%, Asia at 26.5% and Central and Eastern Europe at 9.1%. During the period 2001–2006, Asia was the fastest growing market for speciality papers with a CAGR of 5.3%, followed by Central and Eastern Europe with a CAGR of 5.2%. During this period, both the US and Western Europe grew at a CAGR of 2.7%. Asia is forecasted to grow at a CAGR of 4.9% in the period 2006–2011. Within Asia, China is experiencing the fastest growth rates especially in speciality papers for flexible packaging, which are used mainly in the food, pharmaceuticals, cosmetics and fast moving consumer goods (FMCG) industries.6

4.5 Majormarketsegmentsbasedonend-userapplicationsThe market is segmented based on end-user applications. The most prominent end-user applications include technical papers, self-adhesive labels, flexible packaging and digital imaging. Technical papers include inner liners used by the tobacco industry.

4.5.1 Technical papersIn its technical papers business segment CPG focuses on base papers for tobacco inner liner and wet glue labels. Inner liners are base paper for producing the inner wrap (bundling) for cigarettes. The final product is either an uncoated machine glazed tissue laminated to aluminium, or a sophisticated clay-coated grade either to be vacuum metallised or printed with metallure inks (to give a metallic effect). Inner liner permits cigarettes, having been “bundled” together, to be packed into flip top boxes at high speed. CPG produces various grades of “Inner liner” for specific applications.

6 Source: Pira International: Speciality Paper Report, the CAGR figure is indicative


There are three technologies for producing tobacco inner liners: The first where a machine glazed tissue is laminated to an aluminium foil, a second where special clay coated paper is printed with metallure inks and third where a sophisticated coated paper is vacuum metalized with a fine aluminium layer, thus significantly reducing aluminium use. While the former two technologies are mainly used in emerging markets, more and more manufacturers in mature markets have already shifted to the vacuum metallisation method permitted with CPG base paper. The global market for tobacco inner liner base papers was estimated at 250 KTPA and 130 KTPA in Europe7.

In addition to tobacco inner liner, CPG also manufactures wet glue labels. These are generally clay coated base papers for labelling bottles and cans. They can be supplied in wet strength (WS) form for reusable bottles or non-wet strength for disposable bottles, jars and cans. CPG is active for the main part in the WS sector. A large part of the business is in sheets, CPG sells almost exclusively “on the roll”. Typical application include highly specialized labels for beer, wine and spirit bottles and oil and grease repellent labels for oil bottles.

The global market for wet glue labels was estimated at 1.3 MTPA and 500 KTPA in Europe in 20078. The market for wet glue labels is stagnating. The market is under pressure from substitute products such as plastics.

4.5.2 Self-adhesivebasepapersThe global market for self-adhesive base papers was estimated at 2.0 MTPA and Europe at 900 KTPA in 20079 (excluding polyolefin coated papers). The tonnage is further split into two components which are brought together to make a self-adhesive laminate – the facestock (the self adhesive label itself), are often clay coated for high quality printing. And the release liner to be siliconised, which is broken down into two grades:Glassine – highly calendered uncoated translucent paper• “CCK” Clay Coated Kraft • “SCK” Super Calendered uncoated Kraft, much used in USA – a cheaper and simpler form of siliconising base paper,

not normally produced by CPG

7 CPG estimates (The inner liner market size is included in the flexible packaging statistics)8 CPG estimates9 CPG estimates


Typical applications of self-adhesive base papers are:

“Clay Coated Kraft” (CCK)10: Laminates for labels in rolls, Computer sheet labels, PVC laminates for CAD/CAM plotter as well as for sheet fed offset and silk screen printing and offset

“Glassine” for roll label converting

“Glassine” for industrial applications, for example tapes

Coated label papers (facestock) for the pharmaceutical industry, FMCG cosmetics and wine bottles

The facestock market is expected to grow by 3–5% p.a. by volume, propelled by the demand for barcoding in the logistics industry and labelling requirements of the pharmaceutical industry. The market for release liners is expected to grow at a CAGR of 3% in volume terms in Europe during the period 2006–2012. The growth in Asia and Latin America is expected to be higher at around 10%11.

Expectedgrowthinreleaseliner

0

200

400

600

800

1000

1200

2006 2007 2008 2009 2010 2011 2012

th t

on

Europe Asia North AmericaLatin America Rest of World

CAGR 2006–2012:5%

figure 11 Expectedgrowthinreleaseliner

10 Coated paper for release liners are often referred to as Clay Coated Kraft (CCK) and are one or two sided clay coated11 Source: Alexander Watson Associates


As a substitute to release liner companies such as UPM Raflatac are pushing linerless labels. Linerless labels are lower cost self-adhesive labels without release liner. Applications for linerless labels include labels for logistics and distribution in various manufacturing industries and postal services. According to Alexander Watson Associates, however, linerless labels account for less than 3% of total self-adhesive label production and are not expected to pose a serious threat to the demand for release liners in the short to medium term (1–5 years).

4.5.3 FlexiblepackagingPapers for flexible (as opposed to rigid or semi-rigid) packaging, used on automatic packaging lines for packing food and non-food. For the purposes of this report, commodities for sack and simple bag making, bleached glassine (“Pergamyn”) and vegetable parchment are excluded, but base papers for lamination, polymer or other coating are included. They comprise one-side clay-coated papers (C1S) including those treated for, e.g., grease and mould resistance and uncoated calendered or machine glazed papers for, e.g., waxed wrappers and twistwrap.

The relevant flexible packaging areas for Cham Paper Group include specialist applications like polymer coating and lamination. They comprise one side clay-coated grades and uncoated highly calendered Kraft (GIP) for waxing. Statistics below include speciality uncoated machine glazed grades, but exclude commodities areas like sackkraft and simple bag grades, bleached glassine and vegetable parchment.

The relevant global market for flexible packaging paper was estimated at 1.8 MTPA and European market at 900 KTPA (thousand tonnes per annum) in 200712. Flexible packaging papers are bought by converters and after conversion are sold either in pouch form or, more often, “on the reel” to end-users who pack the goods on fully automated packaging lines.

Typicalapplicationsofflexiblepackagingproductsare:

Pharmaceutical and personal care products

Dried foods, soups and sauces, and desserts

Dairy products (yoghurt, butter, cheese)

Flour and sugar confectionery Beverages (tea, coffee etc.) Fast food

Clay-coated one side (C1S) and uncoated machine glazed (MG) are the most commonly used paper types for flexible packaging. They together accounted for more than 85% of the flexible packaging paper consumption in 200713.

12 Includes paper for the tobacco inner liner, but excludes cigarette paper itself, filter, tipping and plug wrap13 Source: CPG estimates


Papertypeusedinflexiblepackagingbyvolume,200714

32.8%

8.7%3.8%

54.6%

C1S MG GIP Others

figure 12 Papertypeusedinflexiblepackagingbyvolume,2007

The growth rate of C1S used for flexible packaging is estimated at 2.4% p.a. and may increase depending on the following factors: • Success of sustainability argument: “Sustainability argument” refers to the sustainability of packaging material based on

their environmental impact. The role played by various environmental organizations is expected to promote the use of paper, being a totally renewable resource and also having the highest recycling rate next to glass in place of plastic films for flexible packaging. To illustrate the sustainability aspect: CPG’s total consumption of pulp grows back in 1.5 days in the Finnish forests alone15.

• Need for excellent graphics on packaging: Most FMCG companies are improving their packaging quality as packaging, being a part of the product itself, communicates their brand image. The overriding need for good graphics will continue to favour C1S paper over simpler uncoated grades as it provides better printing quality and over plastic films on environmental grounds and because it is easier to print with water-based inks. It will also be used for printed electronics applications such as displays and RFID.

• Innovation: Innovation with surface and other treatments to improve functionalities of paper such as barriers offering more product freshness and longer shelf-life, ease of opening and ‘smart or ‘active’ packaging could open new opportunities for C1S papers, especially with advances in nanotechnology.

4.5.4 Digital imaging papersThese papers are sold for various types of digital printing (especially inkjet printing) and mainly used for computer aided design (CAD), indoor and outdoor media applications, photo-realistic printing and dye sublimation transfers for personalised sports clothing and equipment.Although the global market for digital imaging, including uncoated grades, is claimed by PIRA to be approximately 2 MTPA and is highly fragmented with over 100 small players. The relevant market for CPG comprises only coated grades and was estimated at 85 KTPA worldwide and 32 KTPA in Europe in 200716. The market has seen high growth in the past because of the booming digital photography market and is expected to continue to grow at 6–8% p.a.

14 Source: CPG estimates15 PaperPlus sustainability report16 CEPIDIP estimates


4.6 Non-cyclicalityofthespecialitypapermarketWhile the global paper market correlates highly with the GDP growth, the speciality paper market relevant to CPG is non-cyclical in nature due to the nature of the main end-user markets targeted by CPG, namely tobacco for technical papers and food for flexible packaging.

4.6.1 TobaccomarketThe European tobacco market is one of CPG’s key end-users as it directly determines the demand for inner liners. Despite the current global recession, the European tobacco market is forecasted to grow steadily at a CAGR of 1.8% from USD 138.9 billion in 2007 to USD 154.3 billion in 2013, thus indicating low cyclicality in demand17.

143.0145.9

148.2150.1

152.1154.3

138.9

3.0%

1.4%1.3%1.3%

1.6%

2.0%

2.0%

120

130

140

150

160

2007 2008 2009 2010 2011 2012 2013

In U

SD

bill

ion

0%

1%

2%

3%

4%

Value Growth

figure 13 Europeantobaccomarket18

An analysis of the tobacco market in developed countries shows that there is very small correlation between GDP growth and growth in tobacco consumption. The correlation coefficient between the US GDP growth and growth in the US cigarette consumption during the period 1980–2007 was very low at –0.05, confirming the non–cyclical nature of the market. Thus, the tobacco consumption will not be affected by the current global recession, resulting in sustained demand.

ChangeinUSGDPvs.%changeinUScigaretteconsumption

–8%

–6%

–4%

–2%

0%

2%

4%

6%

8%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

% change in GDP % change in cigarettes consumed

figure 14 ChangeinUSGDPvs.%changeinUScigaretteconsumption19

CPG’s products and quality image are creating new opportunities in Asian and Eastern European tobacco markets, where converters and end-users have become increasingly attracted to the CPG offering.

17 Source: Datamonitor: European Tobacco18 Source: Datamonitor: European Tobacco19 Source: US Department of Agriculture


4.6.2 food industryThe global food products industry which consists of packaged food, meat and agricultural products is expected to grow at a CAGR of 3.5% from USD 3,022.3 billion in 2007 to USD 3,594.2 billion in 201220. The key driver of the global food products market is increasing population and increasing quality expectations in emerging markets. As shown in the following table, with the exception of Europe, all regions are forecasted to see a significant increase in population until 2050.

Expectedglobalpopulationgrowthbyregion21

2007 2050Projected

changein%

Africa 944 1,953 107%

North America 335 462 38%

Latin America / Caribbean 569 784 38%

Asia 4,010 5,378 34%

Europe 733 669 –9%

Oceania 35 49 40%

World 6,625 9,294 40%

The demand for packaging paper is directly related to production trends in the packaged goods industry, which primarily includes nondurable goods. Food products are the main pillar of the sector in terms of demand for packaging. The demand for convenience foods and smaller family units require smaller packs with a proportionately higher ratio of packaging to content. In addition, increase in population is expected to lead to stead growth in the global food products industry. Both these factors will not only ensure steady demand for packaging paper but also offer further growth potential for CPG, despite the current recession.

Pastandexpectedfuturegrowthoftheglobalfoodproductsmarket

25942705

28122914

30223131

3245

3594

3362

34784.3%

3.6%3.3%

3.5%3.6%3.6%3.9%

3.6% 3.7%

2000

2500

3000

3500

4000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

In U

SD

bill

ion

0%

1%

2%

3%

4%

5%

Volume Growth

figure 15 Pastandexpectedfuturegrowthoftheglobalfoodproductsmarket22

20 Datamonitor: Global Food Products21 Source: UN / EUROSTAT22 Source: Datamonitor: Global Food Products


4.7 Keydemanddriversandtrends

4.7.1 IncreasinglevelofenvironmentalawarenessAll levels of the supply chain from raw material suppliers to consumer including filler-packers and retailers show an increasing level of environmental awareness. This is reflected by NGO’s pressurizing both supermarket chains and politicians to enforce eco-labelling as well as ensuring recycling and sustainability are taken into consideration at all stages of product development. CPG’s certification under ISO 14001 (environment and hygiene) and OHSAS 18001 (health and safety at the workplace) and purchasing all pulp, either from sources with certified forest management systems or from sources following those forest management principles, are especially relevant parts of the Group’s reputation as responsible supplier and are intimately linked with the brands. An increasing level of environmental awareness is also promoting the use of CPG’s inner liner base papers for metallisation which, require a lower usage of aluminium are even bio-degradable, (unlike alternative laminates) and thus have a lower environmental impact.

4.7.2 Changing consumer needsConsumer needs are changing with life cycles and demographics (aging population) in developed economies. There is a link between the age structure of a population and the types of products demanded. Generally, aging populations have higher disposable income and demand more functionality (e.g: easy open packs but, nonetheless, tamper-proof). In many European countries such as Italy, Germany, Portugal, Switzerland, and the United Kingdom more than 20% of the population will be over 60 years in 205023. Changing customer needs should, therefore, open further growth potential for innovative companies such as CPG.

0

5

10

15

20

25

30

35

40

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Sha

re o

f p

op

ulat

ion

ove

r 65

yea

rs o

ld(in

%)

World Europe USA China Japan India

figure 16 Changing consumer needs24

4.7.3 VolatilerawmaterialpricesHigh prices of pulp increase pressure on gross margins of paper manufacturers. The Northern Bleached Softwood Kraft Pulp (NBSK) price in Europe saw an upward trend after a sharp correction in 2001. Historically, it was observed that pulp price cycles lasted 5–7 years. Based on the analysis of historic data of NBSK pulp prices from 1990 to 2007, we can see that the pulp price reached a peak before the recessionary periods in 1995–1996, 2000–2001 and 2008–2009. The current pulp prices in Europe showed a declining trend from September 2008 onwards and reached a low of 649.92 in Dec 2008. Reduced pulp prices will ease the pressure on profit margins of paper manufacturers.

23 Source: UN / Eurostat24 Source: United Nations Population Division, World Population Prospects 2006 Revision


Trend in NBSK pulp prices

300

600

900

1200

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

In U

SD

/to

nne

figure 17 Trend in NBSK pulp prices25

In addition to the pulp price, the oil price also saw a reversal, correcting sharply from the all time high in July 2008 to less than USD 40 per barrel in Jan 2009. Both these factors would have a positive impact on the profitability of paper manufacturers. However, the low oil price also has negative implications on CPG as plastics, the substitute product for flexible packaging papers, become cheaper.

Trendinoilprices(2000–Jan2009)

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008

In U

SD

/Bar

rel

figure 18 Trend in oil prices26

CPG generally benefits from decreasing commodity prices; however, this is not the case with aluminium. While every tonne of laminated of aluminium/paper laminate contains more than 200 kg of aluminium, CPG’s vacuum metallised, only contains few kg, thus reducing the use of aluminium. Due to high costs involved, the vacuum metalizing technology is only cost efficient with aluminium prices exceeding 2000 USD/tonne. In the course of the current global recession, aluminium prices have dropped sharply. However, prices are expected to rebound once the economy picks up again, thus opening further growth potential for CPG’s inner liners.

25 Source: Bloomberg26 Source: Bloomberg


Trendinaluminiumprices(2000–Jan2009)

3500

3000

2500

2000

1500

1000

500

02000 2001 2002 2003 2004 2005 2006 2007 2008

in U

SD

/to

nne

figure 19 Trend in aluminium prices27

CPG has paper mills located at Switzerland and Italy. Power price has a significant impact on the total energy costs. Power prices in Switzerland vary across the year. Prices are lower during summer and increase significantly during winter season. Italy, being a net importer of electricity, primarily from Switzerland, the average power prices is higher than Switzerland. A comparison of electricity prices in Switzerland and Italy is shown below.

ComparisonofelectricitypricesinSwitzerlandandItaly

90

80

70

60

50

40

20

0

Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

I 2005 I 2006 I 2007 CH 2007

figure 20 ComparisonofelectricitypricesinSwitzerlandandItaly28

4.7.4 Consolidationofconvertersandend-usersThe trend of concentration and consolidation continued this decade with converters and end-users undertaking mergers, acquisitions and divestments during the period 2000–2005. While the top 10 converters accounted for 38% of the total market in 2000, their share increased to 57% in 200529. Some major players such as Amcor Flexibles (UK), Alcan Packaging (France), and Constantia (Austria) have acquired many smaller-sized converters over the past few years. Major players are not only gaining in size but are also expanding into new markets.

27 Source: Bloomberg28 Source: EEX29 Source: ABN-AMRO; Euromonitor International, Strategic Directions International Inc (SDI), IMS Health – Midas


Year Consolidationofflexiblepackagingconvertersandend-users

2008 Avery Dennison acquires DM Label Group

2008 Philip Morris International Inc acquires Rothmans Inc.

2007 Aditya Birla Group-owned flagship company Hindalco Industries Ltd. acquired Novelis Inc.

2007 Alcan targeted for take over in a hostile bid by Alcoa

2006 Constantia acquires 70% interest in Color Cap and Hueck Folien

2005 Constantia acquires 60% of Kuban (Russian converter)

2005 Alcan buys Parkside International's Polish subsidiary

A similar trend can be seen with end-users. The top 10 players are consolidating their position in their respective industries. The consolidation of the customer base creates pressure on both prices and performance of generic suppliers; however, it also favours high quality suppliers like CPG.

Share of top 10 industry players in key markets

46%

35%

58%

18%

52%

46%

74%

20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Cosmetics andToiletries

Pharmaceutical Tobacco Food

1997 2004

figure 21 Share of top 10 industry players in key markets30

Note: Cosmetics & Toiletries exclude the Japanese market, Tobacco excludes China National Tobacco Company and the figures are of the

top six players, Food Industry initial figure 1995.

30 Source: ABN-AMRO; Euromonitor International, Strategic Directions International Inc (SDI), IMS Health – Midas

COMPANY OVERVIEW AND MANAGEMENT l 27

5 COMPANY OVERVIEW AND MANAGEMENT

5.1 CPGinbriefCPG is one of the renowned manufacturers of high quality speciality papers, ranking fourth in Europe. In its three paper mills, CPG manufactures a range of speciality papers for flexible packaging, self-adhesive labels and various technical-industrial applications such as inkjet and transfer printing. CPG’s speciality papers are used in diverse fields and are used by numerous leading brands of the world, ranging from food, sweets, wines, beers to soft packs and inner liners for cigarette packaging or the world famous “Panini” pictures. CPG is the dominating player in the Western European market for metalized inner liner with a market share of approximately 85%. Complementing its product offering of high quality speciality papers, CPG also offers tailor-made solutions that perfectly fit into its customer’s value chain.

Someofthekeyfiguresfor2008are:

Key figures

Sales volume (in '000 tonnes) 187.2

Revenue (in CHF million) 348.3

Net revenue per employee (in CHF) 518,000

Capacity increase 2007–2008 from „Speed“ +18%

Number of full-time employees 673

5.2 Business model and strategyAs part of its strategic re-orientation, the Group focuses on state-of-the art technology to provide converters (printers, laminators, coaters, siliconisers, finishers etc.) with speciality papers offering unique functionalities. In order to understand customer needs and anticipate market trends, CPG not only closely co-operates with converters but also with end-users such as tobacco and food and beverages companies.The overall objective is to gain access not only to the buyer of CPG’s products but to the end-user and the retailer who influence the quality and development of the product. This market understanding not only creates – through intense value chain management – additional demand for CPG’s products but also enforces the ties with customers enabling higher margins.

CPG’sapproachtospecialitypaperbusiness…

End-User

Product Flow

VALUE CHAIN MANAGEMENT

Raw Material Flow

Material Expenses Revenue Flow

Dre

am f

or

CP

G's

Pro

duc

ts

Sup

ply

of

CP

G's

Pro

duc

ts

Close co-operation with customers and end-usersfor the development of new products

Universities andTechnical Colleges

Raw Material

Clo

se associatio

n in

gro

und-b

reaking research

Direct customers:Converters

Need for new products due tochanging market needs

…toincreaseoperatingmargins

figure 22 CPG’sapproachtospecialitypaperbusiness

28 l COMPANY OVERVIEW AND MANAGEMENT

5.3 Product offeringCPG categorizes its products in four core business segments: technical base papers, self-adhesive base papers, flexible packaging papers, and digital imaging papers. The commercial portfolio of CPG’s products in these core business segments is shown in the following table:

Business segments Products offered Applications

Sales volume2008

Relativecyclicality

Technical base papers

Inner liner for tobacco industry

Papers for the tobaccoindustry

16%

VERY LOW

Wet glue labels Wet glue beverage labelsOil/grease repelient labelpapers

6%

Specialities Transfer printing on fabricsMetallised label papers

6%3%

Self-adhesive base papers

Clay coated kraft (CCK) for graphic arts Glassline for two-side silicorisinc CIS facestock for self adhesive labels

Blank labels for computers,lables for barcodes in supermarkets, High gloss lables, Release liners for large format self adhesive advertising media (e.g. signage on buses, billboards etc.)

16%

44% LOW

Flexible packaging papers

Clay coated base papersUncoated base papers

Food packaging of all types including yoghurt pot lids packaging for products containing fat products containing fat or grease Soap packaging

24%MEDIUM

Digital imaging Inkjet papersDigital sublimation paper (Transjet)

Water based printing solutions for plotter systems Indoor/outdoor media applicationsCAD sector (engineers, architects, copy shops)Photo-realistic printing

7%

HIGH

Technical base papers contributed 25% to the sales volume in 2008. CPG’s main focus is on inner liners for the tobacco industry which accounted for 16% of the sales volume in 2008. In this market, CPG has a global share of 25% to 30% and enjoys high visibility due to long-term contracts with major international companies. Tobacco inner liners play a crucial functional part in the highly automated packaging of cigarettes. Similarly, wet glue labels and speciality technical papers offer superior quality in order to fulfil unique and varied end-user requirements such as oil and grease repellent labels and transfer printing on fabrics. Due to their unique value, technical base papers have the highest degree of pricing power within CPG’s product range.

Self-adhesive base papers contributed 44% to the sales volume in 2008. Self-adhesive base papers are especially developed to meet the highest performance standards. The advanced process control in the CPG mills guarantees consistent quality to meet the most stringent end–user requirements. Continuous co-operation with converters is necessary in order to understand end-user requirements and accordingly develop new speciality grades.


Flexible packaging papers offer ease of handling, great converting properties and excellent printability. This business segment contributed 24% to the sales volume in 2008. Flexible packaging papers offer further growth potential due to new market opportunities such as pasta packaging. Furthermore, flexible packaging papers enjoy high consumer acceptance and are considered “environment friendly”.

Digital imaging papers was the smallest business segment with a contribution of 7% to the sales volume in 2008, but the one with the highest margins. As a competence centre within CPG, the Digital Imaging division provides inkjet and digital sublimation papers. The digital imaging business segment provides high quality and complete solutions through products which are available either in jumbo or finished plotter rolls. CPG is also developing custom made products in response to the fast changing market requirements.

5.4 Strong foothold in EuropeCPG’s most important market is Europe, which accounted for 81% of the total sales volume of 187,195 tonnes in 2008, followed by the Americas at 7%, Asia at 7% and the Rest of the world at 5%. CPG’s export tonnage to Americas reduced by approximately 22% in 2007 due to unfavourable exchange rate developments, urging the Group to significantly increase prices, thus resulting in the loss of certain customers to local American producers.

Regionalsalesvolume2008

5%

7%

7%

Europe AmericaAsia Rest Of the World

81%

figure 23 Regionalsalesvolume2008

Since growth in most market segments in Western Europe seldom exceeds the gross national product, converters and end-users in industries such as food and tobacco seek growth opportunities in emerging markets such as Eastern Europe, India and China. The packaging markets in these regions are growing by 4–10% p.a. CPG is following this trend by taking its brands into strategic markets and establishing itself alongside converters as well as food and tobacco manufacturers.

The following table shows the CAGR of region-wise revenue from 2003 to 2007 of major end-users31:

Company Europe Americas Africa/Asia

Unilever 0.2% 3.4% 7.7%

Nestle 2.8% 7.5% 6.5%

British American Tobacco 7.7% –6.8% 15.7%

Diageo 4.2% 2.2% 23.0%*

Colgate-Palmolive 10.1% 8.2% 7.5%

*Note: includes Asia-Pacific and Rest of world

31 Source: OneSource


Due to saturated domestic markets, end-users such as Unilever, Nestle, British American Tobacco, Diageo and Colgate-Palmolive have been expanding into emerging economies in Asia and Africa, where they achieved the highest regional growth rates in the period 2003–2007. This trend opens further growth potential for CPG through expansion along with its end-users.

5.5 OverviewofCPG’sproductionplantsCPG operates a total of three paper mills of which one is located in Cham, Switzerland, and two mills are located in Carmignano and Condino in Italy. CPG operates a total of five paper machines and has an annual capacity of 250,000 tonnes.

Company Details

• Founded: 1657• Capacity: 105,000 tonnes• Personnel: 300• Capital expenditure: CHF 8,3 million• 2 Paper machines (width: ca. 310 cm)• 2 Off-line coaters• 1 Super calender• 1 Curtain coater (from Q1 2009)

• Founded: 1877• Capacity: 93,000 tonnes• Personnel: 210• Capital expenditure: CHF 6,7 million• 2 Paper machines (width: ca. 330 cm)• 1 Off-line coater• 1 On-line coater• 2 Super calenders

• Founded: 1970• Capacity: 52,000 tonnes• Personnel: 120• 1 Paper machine (width: ca. 330 cm)• 1 Speedsizer• 2 Super calenders

Note: Capital expenditure includes annual maintenance investments in the period 2007 to 2009

5.5.1 OverviewofproductsmanufacturedatCPG’smills

CPG mills Cham Carmignano Condino

Technical papers Inner liner Wet glue label papers, Metalized base papers

Self-adhesive base papers CCK siliconising base papers for graphic arts

C1S Facestock Glassine for two-side siliconising

Flexible packaging papers C1S FlexPack Highly calendered uncoated FlexPack

Digital imaging Inkjet, Transjet

CHAM

CARMIGNANO

CONDINO


5.5.2 OverviewofqualitystandardsimplementedatCPG’smills

Initial certifications ISO 9001 ISO 14001 OHSAS 18001

Cham 1991 2000 2005

Carmignano 1994 1997 2007

Condino 1994 1997 2007

Note: All certificates are valid until 2009. Certification body for all plants: BVQI Switzerland

5.6 CPS’svaluechainmanagementPaper manufacturing requires sourcing paper pulp. Here, the bargaining power of CPG is limited due to low annual requirements of high quality pure pulp (approximately 250,000 tonnes). CPG is a relatively small player in the market, and thus enters procurement pools with other paper companies such as Ziegler Papier AG in order to realize better conditions and volume discounts.

CPG’s products are directly bought by converters such as printers, laminators, coaters, siliconisers and finishers (Alcan, Amcor, Novelis, Vaassen), who in turn provide the final products to end-users in the food and tobacco industry (Philip Morris, Ricola, Nestle). The demand for CPG’s products is directly influenced by end-users, retailers as well as consumers. The close integration and interlinks within the value chain necessitate an active value chain management. CPG’s value chain management strategy strives to create a win-win situation across various links in its value chain from its suppliers through to the consumers. CPG achieves this by:

• Co-operating with partners in various links across the value chain • Networking with customers and end-users at various levels, both hierarchical and interdisciplinary• Early identification of market trends and technological shifts, by analyzing each process throughout the chain • Target-oriented development of solutions, which positively influence the whole chain• Due to active partnerships with converters, printers and end-users CPG is able to define the best combination of

product features

5.7 Supply chain managementThrough an Service Level Agreements (SLA) with large customers CPG creates a long term customer engagement and closer association, integrating CPG’s and its customer’s processes through jointly agreed supply lead times, customer-specific rolling sales plans and cost reduction by eliminating unnecessary steps. For example, due to closer inventory management under the SLA, CPG can provide its customers products within 48–72 hrs for standardized products and up to 28 days for non-standardized products, eliminates an interim warehouse requirement and reduces inventory for converters.

5.8 RestructuringprogrammeofCPG:Speed“Speed” is the restructuring programme introduced by CPG in 2006 in order to improve profitability. Through a plan of operative measures including standardization and simplification of production processes, efficient supply chain management, and improvement of the procurement and sales structure, the EBIT can be increased.

CPG was restructured into two profit centres as of January 1, 2007 to implement measures more effectively. As a result, the Cham mill was reorganized under the profit centre Cham-Tenero Paper Mills Inc (Cham profit centre) and the two mills in Italy were reorganized under the profit centre Cartiera di Carmignano SpA (Carmignano profit centre). Condino is to become an independent profit centre in spring 2008.


Shareofnon-standardizeditemsinChamprofitcentre

0200400600800

10001200140016001800200022002400260028003000320034003600

0200400600800

10001200140016001800200022002400260028003000320034003600

0369121518212427303336394245485154

Jan

07

Feb

07

Mar

07

Ap

r 07

May

07

Jun

07

Jul 0

7A

ug 0

7

Sep

07

Oct

07

No

v 07

Dec

07

Jan

08

Feb

08

Mar

08

Ap

r 08

May

08

Jun

08

Jul 0

8A

ug 0

8

Sep

08

Oct

08

No

v 08

Dec

08

Volume (t) Exceptions (%)

figure 24 Shareofnon-standardizeditemsinChamprofitcentre

Overviewofthemeasuresimplementedandtheirimpacts:

Operativemeasures Implementations Impacts

Standardization/simplification • Transfer of product lines to defined profit centres

• Simplification and standardization of products and processes; focus on profitable grades, unprofitable grades such as décor papers were abandoned

• Better control over production costs allowing CPG to calculate EBIT of individual orders

• Optimized product portfolio, reduction in non-standardized items from over 40% of sales volume in 2007 to 10% in 2008 in Cham profit centre

• Increase in the average price per tonne• 53 job cuts in Italy• 28 job cuts in Cham

Optimization of Value Chain Management

• Intensification of co-operation throughout various links in the value chain to increase knowledge of market requirements as well as the cost structure of various links

• Identification of tailor-made value propositions to customers, resulting in higher margins

Optimization of Supply Chain Management

• Active Supply Chain Management through implementation of SLA tailored to individual customer needs

• Guaranteed delivery to customers and reduced lead time due to elimination of unnecessary process steps, resulting in decreased costs and inventory

Improvement of procurement and sales structure

• Profit centres established as self-directed units responsible for the production line, sales and pricing

• Flexibility to adjust sales prices systematically to pass the volatility in raw material prices to customers

• Increased accountability, responsibility and quick decision making in the individual profit centres

• Closer customer proximity

Profit calculation (PROCAL) • Introduction PROCAL to calculate profit of each enquiry or order. Comprehensive system of price for special services and small order surcharge.

• Profit situation at all stages of offer• Prices increase of 5% due to billing

of special services and small order surcharge


The implementation has started showing results; Cham profit centre alone has been able to improve its gross margin which reached 43.8% in 2008, among others things through the reduction of non-standardized items in Cham profit centre. Overall, Cham profit centre EBIT reached 7.3% in 2008. Implementation of “Speed” was started in Carmignano profit centre where further productivity enhancing measures, including additional investments and a reduction in workforce have been initiated, the positive effects of which are expected to be seen in 2009.

Status of “Speed”

Measures Cham Carmignano(Condino+Carmigano)

Profit centre organization

Standardization of processes

Standardization of products

Mill development plan

Supply Chain Management

Value Chain Management

5.9 InnovationatCPGCPG’s strategy of focusing on speciality papers requires a high degree of innovation, which is ensured through close co-operation with customers in the development and application of products and by close association with universities and technical colleges in ground-breaking research. Close co-operation with customers allows CPG to identify market needs and develop tailor-made solutions to specific customer requirements. While the Cham profit centre is well-known for its high degree of innovation, the innovation centre in Italy has only been set up in the later half of 2008.

On the new product development front, CPG uses a systematic approach to innovation, resulting in development of products that fit perfectly into the customers supply chain. The increased focus on innovation is demonstrated by the growing contribution of new products to CPG’s revenue. CPG aims at generating more than 20–25% of revenue with new products (defined as: products younger than five years and new meaning at least 3 specifications of an existing product have been amended). This target has been achieved in the Cham profit centre and the Group expects its research and development initiatives implemented in Italy to bear fruits soon.

CPG’sinnovationprocess

STEP-I STEP-II STEP-III STEP-IV STEP-V

Idea Customer and market

research

Developmenttrial

Customer and machine trials

Market introduction

Projectreview

STEP-IISTEP-I STEP-III STEP-IV STEP-V

IdeaCustomer and

market researchDevelopment

trialCustomer and Machine trials

Marketintroduction

Projectreview

STEP-IISTEP-I STEP-III STEP-IV STEP-V

IdeaCustomer and

market researchDevelopment

trialCustomer and Machine trials

Marketintroduction

Projectreview

figure 25 CPG’sinnovationprocess


CPG’s attitude towards innovation is reflected in its readiness to quickly embrace new technologies. CPG lays emphasis on nanotechnology as it completely understands the unprecedented growth potential it may open, especially in the flexible packaging segment. Using nanotechnology barrier coating, unique functionalities might be added such as self-adjusting packaging that control the internal moisture and atmospheric environment of packaged goods.

5.9.1 Curtain coating technologyIn order to maintain technological leadership, CPG has invested CHF 20 million in a curtain coater with a potential capacity of 65,000 tonnes p.a. The coater will have the capability to simultaneously apply two layers of coatings. The curtain coater, which will be located in the Cham mill, is expected to start production in Q1 2009.The Curtain Coating Technology (CCT) overcomes the limitations of conventional coating methods by delivering uniform pinhole-free coating layers with complete coverage even at low coat weights and offering easy and effective control over the coating layer thickness. CCT also enables the use of the latest coating components such as polymer dispersions and nano-particles. This technology opens opportunities for speciality papers with new functionalities such as optical and electronic properties, thus enabling entry into new market segments.

Process of curtain coating technology

5.9.2 NanotechnologyNanotechnology is one of the emerging technologies in the speciality papers market and is expected to affect up to 25% of the food packaging industry. Nanotechnology offers opportunities for the speciality paper industry in all fields ranging from the production of raw materials, adding value and functionality to existing products and creating new applications.

Some of the opportunities offered by nanotechnology are as follows:• Production of lighter-weight papers with reduced raw material input of up to 60% without losing end-use performance,

while significantly improving strength and durability• Improve food packaging papers by increasing barrier properties and increase functionalities such as manage microbial

growth, detect toxins and improve tamper visibility• New types of surface coatings adding functionalities such as resistance to decay and fire

5.9.3 Printed electronicsThe market for RFID label papers was estimated at EUR 29.3 million in 2007, representing a CAGR of 39.5% from EUR 10.8 million in 2004. RFID labels are used in various applications such as packaging and logistics management. Due to concepts such as Just-In-Time inventory management, there is a growing need across various end-industries such as pharmaceuticals, textile, retail and transportation to track products easily and accurately in order to better manage the supply chain. Typical applications include pharmaceutical products, books and CD libraries, garment labels and postal deliveries. Due to the high growth potential, CPG plans to develop RFID-based speciality papers.


5.10 Group structure

Cham Paper Group Holding AG

Cham Paper Group Inc

CPG Management Inc

Cartiera di Carmignano SpA

Cham-TeneroPaperMillsInc

Condino Energia Sri

Profit centres

PapierfabrikChamAGRealEstateOwner

CPG Sales Agencies•CPGDeutschlandGmbh•CPGFranceSarI•CPGUKLtd

100%

100%

100%100%

100%

100%

100%

figure 26 Group structure

As of January 1, 2007, CPG was reorganized into the profit centres Cham-Tenero Paper Mills Inc and Cartiera di Carmignano SpA with CPG as a holding company. CPG Management Inc provides management services to all the group companies in areas such as business development, finance & controlling, marketing & sales, quality management, technology support and management development. These functions are charged to the profit centres according to service agreements. CPG Management Inc has the legal and economic right to exploit the CPG trademarks and brands, is responsible for the registration, maintenance, defence, and marketing & advertising and further development of the brands and charges royalty to the profit centres for the use of the same.

5.11 Board of Directors and Management Team

5.11.1 Board of Directors

Philipp BuhoferChairmanMr. Philipp Buhofer, born in 1959, completed college studies in business and administration in Lucerne. He has been the Chairman of IC Cham since 2004 and is elected until 2010. He is also Board member of Kardex AG, Rapid Holding AG (Chairman), BURU Holding AG (Chairman and Delegate), Board member of various small- and medium-sized companies, and co-owner of DAX Holding AG, an industrial holding company. Since 1997, Mr. Philipp Buhofer has been an independent businessman and company director. His professional background includes: Chairman, Member of Executive Board, Group Head – Purchasing & Sales of EPA AG (1987 to 1997), Purchasing Head of Metro International (1984 to 1987), and Professional Pilot in the US (1978 to 1981).


Dr. René furlerMember of the BoardDr. René Furler, born in 1949, holds a M.Eng and D.Sc. from the FIT and MA in Economics from the University of Zurich. He has been Board member of IC Cham since 2000 and is elected until 2009. He is also the Chairman of HG Commerciale, Board member of various subsidiaries of HG Commerciale, and Board member of Alcover AG. His professional background includes: CEO of ZZ Wancor AG (1999 to 2001), Head of Construction Materials Division of Conzzeta (1994 to 1999), Head of Construction Materials of Hard AG (1985 to 1994), and Product Manager Construction Materials of Conzzeta (1980 to 1984).

Urs ZieglerMember of the BoardMr. Urs Ziegler, born in 1948, holds a MA in Economics from the University of St. Gallen. He has been Board member of IC Cham since 2007 and is elected until 2010. He is also Board member of EBM Elektra Birseck and Executive member of ZPK (Association of Swiss Pulp, Paper and Cardboard Manufacturers). His professional background includes: CEO and Chairman of Ziegler Papier AG, Director of Customer Projects and Consultancy of Eldag AG (1975 to 1980), Director of Business Management and EDP Organisation of COC AG (1975 to 1980), and he worked as an accountant with Eldag AG (1973 to 1975).

Dr. felix A. ThöniMember of the BoardDr. Felix A. Thöni, born in 1959, studied business administration at the University of St. Gallen. He has been Board member of IC Cham since 2008 and is elected until 2011. He is also Board member of Raiffeisenbank. His professional background includes: CFO and Member of Group Management of Charles Vögele Group, CFO of the Carlo Cavazzi Group (1992 to 2002), and he worked as Area Controller with Schindler Management AG.

Hans SchallerMember of the BoardMr. Hans Schaller, born in 1944, holds a MA in Economics from the University of St. Gallen. He joined the Board of IC Cham in 2009 and is elected until 2012. He is also Board member of Healthco-Breitschmid AG and board member of CepiPrint, the European Paper association. His professional background includes: CEO Chemie + Paper Holding (2003 to 2009), CEO Perlen Group (1996 to 2002), CEO Gipsunion (1980 – 1996) as well as Business Controller with Kontron and Project Manager with Hayek Engineering.

5.11.2 Management Team

Peter StuderChief Operating Officer & Managing Director, Cham Profit CentreMr. Peter Studer, born in 1968, holds a MBA and a M.Sc. in Chemistry from the University of Applied Science in Berne and a Management diploma from Verein Schweizer Kurse für Unternehmensführung. He has been the Managing Director of the Cham Profit Centre of CPG since 2007. He is also Board member of ZPK, Executive at Employer’s Federation of Swiss Paper Industries (ASK) and Executive at Technology Forum Zug (TFZ). His professional background includes: Vice-Director R&D of CPG (2004 to 2007), Member of the Executive Management Board of Kimberly-Clark (2000 to 2004), Deputy Head of Civil Protection and Sports – Department of Defense (1996 to 2000), and he worked as Development engineer with MPA (1995 to 1996).

Nicolas frochauxChief Financial OfficerMr. Nicolas Frochaux, born in 1966, holds a MBA from the University of Chicago and a MA in Economics from the University of St. Gallen. He has been the CFO of CPG since 2007. He is also Board member of Imesch Vins Sierra SA. His professional background includes: Financial analyst and Lubes controller of Shell Global Lubricants Switzerland AG (2004 to 2007), Head of Finance, Personnel and Administration and Member of the Executive Management Board of Shell Aeol AG (1998 to 2004), he worked as Shell Treasury bank trader with Shell International B.V. (1997 to 1998), Money market trader and analyst with Shell International Ltd (1995 to 1997), and as Head of Financial Accounting of Shell Switzerland (1992 to 1995).


DaanWaubertdePuiseauManaging Director, Carmignano Profit CentreMr. Daan Puiseau, born in 1956, is a graduate engineer in paper making from the Darmstadt Technical University. He has been the Managing Director of Carmignano Profit Centre of CPG since 2007. He is also in the Advisory board of Tönnesmann & Vogel GmbH & Co. AG Paper Mills. His professional background includes: Consultant with Kartogroup S.p.A and Kartogroup Deutschland GmbH (2007), CEO of Arjo Wiggins Deutschland GmbH (1999 to 2006), Project manager for Titisee-Neustadt and Pularski, New York, of Felix Schoeller jr. Holding GmbH & Co. KG (1998 to 1999), Technical Director Paper Mills of Cartiere Fedrigoni SpA (1994 to 1997), Paper Mill Works Manager of Cartiere del Garda SpA (1988 to 1993), and Production manager in Uetersen and Hagen-Kabel of Feldmühle AG (1984 to 1988).

Gerold ZueggManaging Director, Condino Proft CentreMr. Gerold Zuegg, born in 1949, gratuated as an engineer at the University of Applied Science in Munich. He has been a member of the Executive Management Board of the Carmignano Profit Centre since 1994. His professionlal background includes: Director of the Condino Paper Mill (1989 to 2009), Production Manager of the Condino Paper Mill (1985 to 1989), Technical Director with Cartiera del Garda (1982 to 1984), as well as Production Manager (1979 to 1980) and Technical Assistant (1977 to 1978) with Cartiera di Carmignano. Markus KasparHead of Organizational Development & Shared Services and Head of Innovation & MarketingMr. Markus Kasper, born in 1955, holds an M.A. in economics and organizational psychology from the Independent University of Berlin as well as two Management diploma from Verein Schweizerische Kurse für Personalfragen and Verein Schweizer Kurse für Unternehmensführung. He has been Head of Innovation & Marketing of the Cham Profit Centre since 2009. His professional background includes: CEO of Corporate Advisers AG (2001 to 2009), various management functions with Zurich Financial Services (1985 to 2001), among them Head of the regional branch in Zurich (1997 to 2000) as well as COO and run-off CEO of Altstadt (a former subsidiary of Zurich Financial Services) (1994 to 1996), and Head of the Human Ressources department of Tages-Anzeiger AG (1981 to 1984).

5.12 Capital structure and major shareholders Cham Paper Group Holding AG is listed on the SWX Swiss Exchange (Ticker: TPGN). The total number of issued shares of Cham Paper Group Holding AG is 745,000. As of March 18, 2009, Cham Paper Group Holding AG as of June 9, 2009, 51,640 treasury shares. The number of outstanding shares was therefore 693,360.

MajorshareholdersasofDecember31,200832

Major shareholders %Holding

BURU Holding AG 24.33

Golden Peaks Capital 6.91

Valartis Bank AG 6.33

Bestinver Gestion SGI 5.45

Buhofer Heinz 5.28

Kahli Beat 3.59

32 Source: IC Cham annual report 2008

38 l PEER ANALYSIS

6 PEER ANAlYSIS

The speciality paper market is fragmented and can be divided into large, fully integrated companies such as Stora Enso and UPM-Kymmene, the world’s two largest paper manufacturers, as well as numerous small niche players focusing exclusively on speciality papers such as CPG.

SalesvolumeofspecialitypaperofmajorEuropeanpapermanufacturers

680

450 450

260230

0

100

200

300

400

500

600

700

800

Ahlstrom UPM Stora Enso CPG Sappi

In K

TP

A

figure 27 SalesvolumeofspecialitypaperofmajorEuropeanpapermanufacturers

TotalrevenueofmajorEuropeanpapermanufacturers

2409

13789

16217

374

5304

0

2000

4000

6000

8000

10000

12000

14000

16000

Ahlstrom UPM Stora Enso CPG Sappi

In U

SD

mill

ion

figure 28 TotalrevenueofmajorEuropeanpapermanufacturers33

Integrated paper manufacturers have a scale advantage and mainly focus on attaining cost leadership. Small niche players on the other hand mainly depend on innovation to develop high margin products and services as they do not have a scale advantage. In the following section, CPG’s innovativeness and operational efficiency are evaluated against its peers.

33 Source: CPG estimates

PEER ANALYSIS l 39

6.1 InnovativenessWhile the paper industry as such is largely considered a commodity business, success in the speciality paper market depends on a company’s ability to constantly innovate in order to create a better value proposition to customers. CPG has a strong focus on innovation, which is confirmed by its higher R&D expenditure in relation to sales. The higher expenditure on R&D solely may not indicate the innovativeness of a company in case of inefficient use of allocated funds. Therefore, the average price per tonne is used as an indicator for the price premium a company is able to command from its customers, which in turn reflects the innovativeness of a product. The 25% turnover with new products that CPG achieves is a comparatively high number in the industry.

Paper prices of major European companiesNotes: Prices are calculated based on paper deliveries in tonnes and revenue. For Ahlstrom, only the speciality paper segment was considered

to calculate price per tonne. The tonnage for speciality papers has been taken from CPG estimates for 2006 applying the estimated growth

rate of 4.9% from Ahlstrom’s annual report 2007. For Sappi, the fine paper division producing coated and uncoated fine paper and speciality

paper grade products were considered to calculate price per tonne. Stora Enso and M-real prices reflect the commodity paper prices as

no clear segmentation was available. In case of UPM-Kymmene, the fine and speciality paper business segment is considered for the

calculations.

6.2 Operational efficiencyAs shown in the table below, CPG’s strategy of focusing on high quality speciality papers has already shown first results with CPG having the second highest margins, ranking only behind Sappi Ltd. Considering further margin improvements expected by further implementation of Speed especially in the two Italian mills, CPG is well positioned to convert its high innovativeness and strong reputation into superior margins.

ComparisonofCPGwithpeercompaniesbasedonfinancialperformance34:

Company

Market cap(inUSDmillion)

Revenue(inUSDmillion)

Revenuegrowth

(in%) P/EROCE(in%)

EBIT margin(in%)

Net profit margin

(in%)

UPM-Kymmene OYJ 3,503.03 13,844.34 –5.72 NA NA –0.93 –1.89

Stora Enso OYJ 3,241.15 16,138.51 –6.92 NA NA –6.75 –6.11

Sappi Ltd 866.86 5,863.00 10.54 3.01 6.21 5.07 1.74

Ahlstrom OYJ 410.48 2,637.46 2.36 NA NA 0.00 –0.99

M-real OYJ 114.61 4,735.26 –27.12 NA NA –1.89 –15.98

CPG* NA 302.87 –6.01 NA 4.00 3.00 0.00

*CPG numbers are sourced from 2008 annual report, CHF/USD 1.15

34 Sources: Bloomberg, Company websites. The financials are for FY 2007. Market capitalization and P/E trailing are as of March 12, 2009.

40 l SUMMARY

7 RISK ANAlYSIS

PriceincreaseofrawmaterialsandenergyRaw material and energy price risks arise from procurement on the global raw material markets of pulp, chemicals, and fillers that are needed to manufacture speciality papers. In fact, pulp and chemicals account for approximately 50% and energy for 15% of the total production costs in a typical paper mill. Thus, increases in raw material and energy prices would have a significant impact on CPG’s profitability. CPG partially hedges these risks by means of raw material price derivatives such as pulp swaps.

Trendinenergyprice(Basis1.1.2003=100%)

100

110

120

130

140

150

160

170

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

In %

figure 29 Trend in energy price

UnfavourabledevelopmentofexchangeratesAs a globally active Group, CPG is exposed to risks associated with foreign currencies, especially exchange rate fluctuations of the EUR and USD. While the accounting currency is CHF 86.2% of the net revenue in 2008 was generated in EUR, 9.0% in USD and only 0.9% in CHF. Exchange rate risks arise both in procurement of raw materials and sales to international customers. A strengthening of the CHF against other currencies, particularly the EUR, therefore would have a detrimental effect on CPG’s results.

FailuretocomeupwithinnovativeproductsfasterthancompetitorsIt is of utmost importance for speciality paper manufacturers to keep themselves abreast with the latest technologies in order to have a competitive edge over competitors. Despite its focus on innovation, CPG might fail to come up with innovative products well ahead of its competitors. Since the paper industry is highly capital intensive, any investment in capacity and innovative technologies requires huge expenditures. CPG competes with companies which are significantly larger and have more financial resources, and hence might be able to create innovative products faster than CPG.

Market riskMarket risk refers to the risk of unfavourable market developments which might have serious implications for comparatively small companies such as CPG. Above all the tobacco market, one of CPG’s most important end-industries, has seen continuous contraction in volume terms in industrialized countries since the 1960ies. Growth in terms of value is attributable only to continuously increasing prices which in turn were mostly driven by higher taxes. Since demand for inner liners depends on the number of cigarette packs sold, shrinking demand could negatively impact CPG. However, this risk is comparatively small as the company’s technology is relatively new and just about to substitute the prevalent, out-dated laminating technology.

SUMMARY l 41

Economic riskThe current global credit crunch triggered by the US mortgage crisis has led to a global economic slowdown. This has had a negative impact on CPG since demand from end-users such as automobile manufacturers, computer manufacturers and textile companies has declined due to their reduced industrial output as well as reduced spending of end-users. This has resulted in decreased sales of CPG’s products such as backing for PVC foils used to decorate vehicles, blank labels for computers, labels for barcodes used in supermarkets and flexible packaging used for fast foods. However, CPG is less affected by the current crisis than commodity paper manufacturers due to the non-cyclical nature of its main end-industries, namely tobacco and food.

OvercapacityinspecialitypapersExisting overcapacity at most levels of the supply chain resulted in increasing pricing pressure over the past years. Despite of significant capacity being removed from the market recently, there is still overcapacity in the market. Therefore, pricing pressure remained high in 2008.

ConsolidationalongthevaluechainThe changing dynamics along various links in the value chain can have a negative effect on CPG. The industry has recently seen many mergers and acquisitions and closures of suppliers as well as end-users. Shrinking number of suppliers and end-users results in increased bargaining power of suppliers and end-users, and thus might negatively impact CPG’s results.

CompetitionfromsubstituteproductsPaper is under continuous threat from substitute products such as plastic which is often cheaper than paper based laminates. Also, CPG’s vacuum metalized inner liners might fail to substitute the currently prevailing laminated foil inner liners. However, the increasing level of environmental awareness favours CPG’s products, thus reducing the risk of substitute products.

Credit and counterparty risksCredit risks arise from the possibility that customers are unable or unwilling to fulfil the obligations they have agreed to and CPG thus might suffer financial damage. To manage this risk, CPG regularly evaluates the creditworthiness of various customers, sets credit limits for individual customers, and continuously monitors their receivables. A large part of CPG’s customer receivables is insured against credit risk. The danger of cluster risks is minimized by the large number and wide geographical distribution of the customers. The counterparty risk includes the creditworthiness, credit and non-payment risks from financial instruments. This risk is minimized by the fact that CPG only purchases money market contracts and securities with an AA rating or above.

8 SCOT ANAlYSIS

Strengths• Strong foothold in the European speciality paper

market• Focus on high margin speciality papers• Strong brand image• High degree of innovation and close association

with universities and technical schools• Close co-operation not only with converters but

also with end customers• Broad customer base

Challenges• Increase efficiency in the two Italian mills in order to achieve

the targeted EBIT margin range• Anticipate future market needs• Maintain technology leadership despite consolidation efforts

of bigger competitors

Opportunities• Increase in environmental awareness (plastic vs.

paper)• Enter new markets especially in Eastern Europe

and Asia• Develop new paper solutions based on the new

curtain coating technology• Enter new market segments due to advances in

nanotechnology• Growing global population will lead to increase in

demand for packaging materials • Changing customer needs requiring additional

functionalities

Threats• Increase in raw material and energy prices• Unfavourable development of exchange rates• Competition from substitute • Increase bargaining power of suppliers and end-users due to

consolidation• Overcapacity in the market• Critical mass• Economic crisis

42 l SCOT ANALYSIS

Contacts

Cham Paper Group AGInvestor RelationsFabrikstrasse CH-6330 ChamTel + 41 (0) 41 785 33 33 www.cham-group.com

cham paper group – investor handbook...

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