8/3/2019 IFC EMPEA Sustainability Case Study - Newpack

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The Company

NewpacksStory

2011

The Impact of Private Equity in Emerging Markets:Achieving Business Results Through Sustainability

Sustainability CaseStudy:Newpack (Madagascar)

A Malagasy entrepreneur founded New-pack in 1989. During twenty years ofoperations, he grew the company withhis own nancial resources by acquir-ing second-hand equipment and lever-aging the assistance of two expatriatemanagers in the companys production

and maintenance departments. Overthe years, the founder built up a highlysuccessful company from its headquar-ters in the capital city of Antananarivo.

In 2006, the founder decided it was timeto realize cash before getting too old. Hereached out to Antoine Delaporte, the founderand Managing Director of I&P Manage-ment, whom he had known for a long time,to discuss succession options. In the courseof discussions over an 18-month period, thescenario of a total exit became the preferredoption. Beyond the nancial benets to thefounder, he was condent in I&Ps capabil-

ity to take over the business and build a newgeneration of leaders for the company.

At the time of acquisition, Newpack had cap-tured 60% of the Malagasy marketwhere thebulk of the companys clients were concentrat-edand was generating total annual revenuesof roughly US$9.6 million with 215 permanentemployees. The company, which received anISO 9001 certication in January 2002, had aproduction capacity of 15,000 metric tons peryear as well as the quickest delivery lead timein Madagascar as a result of its investment in

ve printing/transformation machines. In July2008, I&P took 100% control of the SME.

Essentials

Company: Newpack, www.newpack.com

GP: I&P Management (I&P), a private equityfund manager active in Africa and based in

Madagascar, Mauritius and Ghana(www.ip-mngt.com)

Region: Africa

Country: Madagascar

Sector: Manufacturing

Business focus: Corrugated cardboardpackaging for transformation industries (e.g.,textiles, household goods, food and beverage,agriculture and shing)

Size: Revenue US$10.4 million1 (2010);242 employees (2011); 460 clients

Investment: I&P Management acquired100% of Newpack in July 2008 through aleveraged buyoutthe rst LBO involvingMauritius and Madagascar

Impact Highlights

Newpack leveraged its sustainabilityachievements to attract new clients, includingone of Madagascars leading seafoodcompanies, and to penetrate export markets(Mauritius, Seychelles and la Runion island)

Through resource efciency and the recyclingand sales of paper waste, Newpack generatedroughly US$539,000 in savings and income

over two yearsOver three years, Newpacks sustainabilityinitiatives led to dramatic reductions in resourceconsumption, including decreases in electricity(29%), water (47%) and starch (5%) usage

With I&Ps help, Newpack designed andimplemented an Environmental and SocialManagement System to track performancemetrics and prioritize corporate sustainabilityobjectives

1 All currency gures have been converted from to US$ as of 19 August

The Role Played byPrivate EquityI&P considered an investment inNewpack as a perfect match with itsfund strategy as: rst, it promised togenerate sizeable nancial returns

to the funds investors, and second,it was a great platform for drivingbroader economic and social devel-opmental impacts in the region.

Newpack clearly showed a competitive edgein the market: it had a domestic marketshare of 60%two times larger than itsdirect competitorin a capital-intensiveindustry with signicant barriers to entry.Moreover, the company had strong andregular cash ows with little exposure toexchange rate risk and a clean, debt-free bal-

ance sheet. I&P could unlock value throughimproved working capital managementand by empowering middle management,which had previously been working under

the shadow of the companys founder.In addition to Newpacks promising nan-cial return, the company showed signicantpotential for a strong development impact.The company had roughly 400 clients servingalmost all sectors of the Malagasy economy.Moreover, in the case of Newpack, I&Psdevelopment impact sought to ght povertyby sustaining employment with living wages inthe face of political instability and an economicslowdown. On average, Newpack staff is paid31% above the national minimum wage.

Newpacks Operations in Madagascar

HeadquartersAntananarivo

Satellite facilityAntsiranana

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Increasing Newpacks ValueThrough SustainabilityOne of the rst initiatives I&P pursuedfollowing the buyout of Newpack was toconduct a post-investment audit on thecompanys E&S standards and perfor-

mance. IFCs Performance Standards onSocial and Environmental Sustainabilitywere critical in helping I&P to analyzeNewpack comprehensively. IFCs ques-tions enabled I&P to identify issues andrisks within the company but also topoint out strengths and opportunities.

The responses to IFCs Performance Standardsled Newpack and I&P to design and implementan Environmental & Social Management Systemthat facilitated managements ability to:

Identify and prioritize E&S objectives;

Elaborate upon corrective action plans;

Establish dedicated E&S budgets;

Monitor progress toward E&S objectivesthrough a corporate dashboard, which mea-sured data on social indicators, waste, energysavings and resource consumption; and,

Set up a company-wide cash bonus incen-tive system that drove reductions in New-packs environmental footprint.

The sustainability strategy enabled Newpackto penetrate new markets, to capture sizablecost savings and revenue opportunities throughresource efciency, and to increase employeehealth and safety standards.

New Markets

The sustainability strategy created exciting op-portunities for Newpack. In 2010, one of thelargest companies in Madagascara leadingshrimp exporting company with yearly outputof 7,500 tonswas made aware of Newpackscommitment to sustainability. While this com-pany appreciated Newpacks ISO 9001 certica-tion (only 20 companies in Madagascar have

achieved this credential), it wanted to sourcepackaging from an environmentally and sociaresponsible supplier.

As soon as Newpack was able to demon-strate its dramatic reductions in resourceuse, improvements in workplace hygiene andadvanced production processes, the seafoodcompany undertook several site visits andsoon decided to shift 100% of their cardboarpurchases to Newpack. This company is nowone of Newpacks top 10 customers, out ofapproximately 460 clients, and its businesshas helped to develop export markets in otheIndian Ocean countries, which now represent19.8% of total sales versus 2.5% at the time oacquisition.

In mid-2009, Newpack started to sell paperwaste to a local paper mill, which in turn sothe recycled paper back to Newpack for theiproduction needs. In 2010, Newpack gener-ated roughly US$150,000 in income througwaste paper sales.

When the local paper mill shut down in early2011, Newpack had to nd new buyers of itpaper waste; it identied one Indian mill andone Vietnamese company, which subsequenbrought in US$36,000 in waste paper salesfrom May to July 2011.

Cost Savings and Resource Eciency

Resource Efciency

The implementation of Newpacks Socialand Environmental Management Systemrevolutionized the companys perspective onproduct inputsprimarily water, electricity astarchwhile creating new ways to monetizunused outputs (e.g., waste). Over three yeaNewpack has reduced electricity consumptioby 317 megawatt hours, water consumptionby 11,000 cubic meters andfor years oneand twostarch consumption by 14 tons.

During the pre-investment phase, I&Ps duediligence process revealed that Newpack had noenvironmental and social (E&S) policy in place,which was presenting risks but also opportuni-ties. Cline Rabemampianina, an InvestmentAssociate and E&S Ofcer at I&P notes that thelack of E&S standards ultimately proved to be anasset: We identied a huge potential for valuecreation through E&S performance monitor-ing. This is a key component of I&Ps strategy,and with majority ownership of the companywe were well positioned to generate nancialreturns through improved E&S standards.

Since the acquisition, I&P has worked closelywith Newpack senior management to professionalize business management systems andreporting, and to provide advice and guid-ance on business strategy. As a non-executivshareholder, I&P leverages Newpack management to achieve common goals by primarilyusing management accounting and capitalexpenditure budgeting reviews, as well asexecutive committee meetings to shapeNewpacks strategic and operational guide-lines. Sustainable environmental and socialpolicies lay at the core of these discussions.

We identifieda huge potentialfor value creation

through E&Sperformancemonitoringwith majorityownership of thecompany we werewell positioned togenerate financialreturns throughimproved E&S

standards.ClineRabemampianina,InvestmentAssociate,I&P Management

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EnhancingNewpacksSustainabilityProfleThe initial step in enhancing Newpackssustainability prole was for I&P toconvince company management of therelevance and legitimacy of sustain-ability initiatives. This posed a bit of achallenge to the fund manager, givenits non-executive role and its reluctanceto enforce policies not mutually agreedand decided with management.

Once management was on board, the secondtask was to raise employees awareness aboutenvironmental and social issues. Accordingto Xavier Rosenrib, in Madagascar, it is notan established practice for employees to betrained on environmental considerations;explaining the importance of sustainabilityand resource conservation to our employeeswas our top priority. Newpack hosted andorganized internal training sessions, createdbrochures and posted sustainability billboardsthroughout the factory.

Convincing employees of the merits of sustain-ability was a difficult task. For example, the costof safety shoes represents up to one third of anemployees monthly wage, making it hard toconvince employees to wear them as a safetytool instead of selling them to get additionalmoney. Moreover, it was difficult to advocatesustainable development priorities when nolegal framework is in place at the national levelto support the companys initiatives.

Nevertheless, having successfully devel-oped a culture of sustainability withinthe company, Newpack has just begun tomarket its sustainability initiatives discretelyto select clients. While Newpacks clientsthat are sensitive to E&S issues are satis-fied with the companys standards, I&P andNewpack have decided not to market theirprogress on a broader scale because theybelieve there is more progress to be made,especially in the environmental field.

The only limited marketing initiative New-pack has undertaken on a broader scale wasto provide cardboard bins for the Mada-gascar International Fair. However, once the

new wastewater treatment plant is opera-tional (end of 2011), Newpack will be in aposition to market their environmental andsocial enhancements to a broader audience.

Paper represents 66% of the rms totalcosts, so Newpack undertook a collectiveeffort to raise employee awareness aboutreducing consumption and waste, and reusingand recycling paper. According to NewpackManaging Director Xavier Rosenrib, manage-ment posted billboards in the factory withproduction costs of cardboard boxes; this waypeople could know what it costs to waste ordestroy a box without a good reason.

Newpack uses a variety of recycled papers inits operations: uting paperwhich is usedfor the corrugated part of the cardboardpackaging and is made of 100% recycled

paperconstitutes 39% of Newpacks paperconsumption. The testliners and whitelinersused for exterior and interior covers are madeof roughly 70% and 30% recycled paper, re-spectively. In total, partially or wholly recycledpapers constitute 81% of the paper used forproduction.

In addition, Newpack invested in a new bailerto compress cardboard waste into balls for re-cycling, and refurbished an unused bailer suchthat it was capable of creating denser paperballs450kg versus 200kg.

Newpack purchased a new boiler to replace itsoutdated waste paper boiler because it threat-ened employees safety. While the companyconsidered purchasing another biomass boiler,it opted to invest in a diesel boiler insteadbecause it created more permanent and stablesteam pressure.

Newpack now meets international industrybenchmarks for resource efciency. The companyevaluated IFC EHS GIIP guidelines for the printingindustry, but since they did not fully apply tothe corrugated cardboard industry, Newpackcontracted European consultants to assess the

companys environmental footprint relative toappropriate industry benchmarks. The consul-tants conrmed that the indicators Newpackused for monitoring use of resources wererelevant, and that the companys results were line with international industry standards.

Wastewater Processing

I&P and Newpack believed that the construction of a new wastewater treatment plant wa priority. In early 2010, Newpack conductedcomprehensive analysis of wastewater facilitand explored policies in similar industries fornew ideas on sustainable water usage.

By November 2010, Newpack was experimening with ways to recycle wastewater by reusinit for the production of corrugated cardboardThis process helped the company simultaneoly to identify ways to reduce water consump-tion while decreasing the volume of efuentsthat needed to be treated; it also helped thecompany determine the appropriate size for iincipient wastewater treatment plant.

By early 2011, external consultants issued recommendations on how to limit the volume oefuents. These recommendations have geneated new ways to reduce pollution and reducthe cost of the planned wastewater treatmen

plant, as fewer efuents incur lower treatmencosts. Newpack started the construction of thwastewater treatment plant in June 2011, anit is due to be operational by the end of theyear. When complete, the treated wastewatewill be recycled to make glue.

A Focus on Health & Safety

A key priority for management was to increasemployee safety through the adoption of acompany-wide re plan. Newpack undertooka complete refurbishment of the companys

Reductions in Resource Consumption 20082010

MegawattHours(MWh)

CubicMeters(m3)

Kilograms(kg)

Electricity Water Starch

1,100

1,000

900

800

700

600

500

400

25,000

22,500

20,000

17,500

15,000

12,500

10,000

250,000

200,000

150,000

100,000

50,000Year 1 Year 1 Year 1Year 2 Year 2 Year 2Year 3 Year 3

29% 47% 5%

ESG Initiatives Impact on Newpacks Value

Hire external E&S consultants

ESG awareness training for employees

Development of Fire Plan (alarms, emergency exits, etc.)

Focus on hygiene in the workplace

Energy savings and waste management

Improves brand image Confers greater pricing power

Facilitates employee recruitment and development Increases employee productivity

Improves risk management Reducesnancingandinsurancecosts

Improves brand image Attracts new customers and new business opportunities

Createsoperationalefciencies Expandsprotmarginsthroughcostsavings

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The Emerging Markets Private Equity Association (EMPEA) is an independent, global membershipassociation whose mission is to catalyze private equity and venture capital investment inemerging markets. EMPEAs 290+ members include the leading institutional investors andprivate equity and venture capital fund managers across developing and developed markets.

Contact us at www.empea.net Email: empea@empea.net Phone: +1 202 333 8171

Results of the PartnershipTogether, Newpack and I&P have weatheredrecent political and economic turbulencein Madagascar, growing the companys

workforce to 242 employees and annualrevenues to US$10.4 million. First half 2011turnover is 32% higher than in 2010. Thecompany now captures 70% of the domes-tic market for corrugated cardboard andexports now represent 19.8% of total sales.

Newpack and I&P are working together toexpand their sustainability efforts and per-formancepartly by developing new E&Sindicators so that management can identifyadditional ways to generate revenue throughsustainability initiatives, but also by reaching

out to external consultants when necessary tbring in fresh ideas and maintain positive mmentum in implementing E&S programs. I&and Newpack believe these efforts are criticato help keep the company protable in todauncertain global economic environment.

re protection facilities and trained 78 em-ployees on re prevention and reghting.Additionally, the company sponsored 18 em-ployees to undergo rst aid training providedby the Malagasy Red Cross.

Following a re in Newpacks secondaryproduction unit in Antsiranana in July 2010,management immediately implemented newprocedures to complement the initiativesalready underway, including assessments andequipment test-

ing with localremen, therefurbishmentof re hosesand extinguish-ers and invest-ments in alarmsystems. Intotal, Newpackhas invested US$53,000 in its re plan.

In addition to its re-ghting policies, the com-pany purchased personal protective equipment(PPE) for employees and developed a Hygiene,Safety, Occupational Health, Social and Envi-

ronmental Charter. All employees were givencopies of E&S internal brochuresavailablein both Malagasy and Frenchwhich provideenvironmental and social (including hygiene, oc-cupational health and safety) best practices. Thenumber of minor employee accidents decreasedby 20% between 2009 and 2010, and no major

accidents have occurred since I&Ps investmentin 2008.

Financial Returns

Since the acquisition by I&P, Newpack has in-vested US$220,000 in social and environmentaprojects. To date, these investments have yieldedtotal savings or generated additional income tothe rm of nearly US$539,000, roughly 5% ofNewpacks 2010 revenue. This represents a 145

return on investment in just three years. More-over, as a result of its continued re and safetyimprovements, Newpack has not faced increaseinsurance premiums, notwithstanding the rethat broke out in one of its facilities in July 2010

Newpack employees are now condent thatsustainability and resource efciency pay. AsXavier Rosenrib notes, At the end of the yeafor the rst time, there will be a bonus for aemployees based on the ratio of waste overthe realized turnover. The more we conservethe more our employees benet.

About IFC

IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the privasector. We help developing countries achieve sustainable growth by nancing investment, providing advisory services tbusinesses and governments, and mobilizing capital in the international nancial markets. In scal 2011, amid economuncertainty across the globe, we helped our clients create jobs, strengthen environmental performance, and contrib-ute to their local communities all while driving our investments to an all-time high of nearly US$19 billion. For moreinformation, visit www.ifc.org

In partnership with Norway, IFC is providing support directly to private equity and portfolio companies to managesustainability risks and identify environmentally benecial business opportunities in Africa. IFC is training fund manageproviding resource efciency assessments for portfolio companies, and supporting research on clean technology.

TheCompanyView

I&P has been a critical partner inseveral ways. First, I&P raised myawareness on sustainability, which iscrucial because it enabled me to fostera change in mentality throughout thecompany.

Second, through the Social andEnvironmental Monitoring System, whichwe launched jointly with I&P, I learnedhow to manage the numerous E&Sprojects we had underway, and to doso by relying on my managers. Theywere critical in helping Newpack to setup a fire plan, construct a new wastewatertreatment plant and empower our HRdepartment and employees.

Finally, I&P helped me to developcommunication skills toward myemployees so that I could provide a realeducational impact. I&Ps support andvalue creation capabilities have beenprecious to me and to our company.

Developing a sociallyresponsible and environ-mentally sustainable businesshas become one of thelargest priorities of Newpackover the three yearswe have beenworkingwith I&P.XavierRosenrib,ManagingDirector,Newpack

E&S Investments

Savings & Income

Investments in E&S SustainabilityNewpacks investments in E&S activities generated a 145% ROI

$0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,00

$220,000

$539,000