Cousin Meg’s husband shooting lights out as Mondi justifies the past year’s doubled share price

David Hathorn is married to my cousin Megan. They are both chartered accountants. We’re not close, but because of the

David Hathorn - been running Mondi for 13 years already, and he's still only 51.
David Hathorn – been running Mondi for 13 years already, and he’s still only 51.

family connection I’ve watched his career. Mostly in awe. David was identified as a rising star early on former Anglo American CEO Tony Trahar. And when Trahar, also a CA, was promoted from then wholly owned subsidiary Mondi to the top job at the holding company, Hathorn took over as CEO of the paper and packaging group. That was in the year 2000. He was just 38 years old – frighteningly young for that much responsibility. Now, 13 years later, David Hathorn is loved by the investment community and  is confidently driving an independent  group worth R18.5bn with 25 700 employees in 102 locations across 30 countries. Mondi’s shares are listed in London and Johannesburg where SA holders have seen their price doubling in the past 12 months. The group’s interim results, released on Thursday, reflected strategic acquisitions and major expansion projects kicking in strongly, with operating profit was up 35%, earnings soaring 60%. Superb returns from a geographically diverse group at a time when the world is still struggling to shake off the economic downturn. David, who still lives in Johannesburg but was in the UK for the release of the results, was unable to get to CNBC’s London offices, but we did grab some of his time on the telephone. The interview was full of fascinating insights from another of the world class SA-born chief executives making their mark globally.      

DAVID HATHORN: How are you doing? Are you well?

ALEC HOGG: Yep, as always – as always, but not as well as you. I see the numbers are sparkling and the share price of Mondi today up by 2.5%. It started at 4% higher on the JSE today. It’s all coming together, David.

DAVID HATHORN: It is. I think these results do reflect a sustained period of delivering on a strategy which is seeking to position ourselves with higher growth and low costs and high growth comes from packaging and emerging markets and also low costs come from the geographic locations to give you structural advantage. So despite a pretty sluggish economy out there, we really are delivering very nice numbers and are delighted with them.

ALEC HOGG: When you read through the details of your outlook, you do warn that demand is softening in Europe and that you go into your maintenance period and there’s new capacity coming on stream. Are you warning us that this could be the high point of growth?

DAVID HATHORN: No – not at all. I think we’re very confident about the way the business looks going forward. We’re simply highlighting the maintenance issue normally spread between Q2 and Q3. This year it’s predominantly in Q3 so there’ll be a slight profit impact on Q2. We’re just cautioning/highlighting that for people. On the packaging side – the contrary – we’re very optimistic about where things are. The business is in good shape. We’ve got price increases going through right now. Recycled Container Board for example is in the process of being finalised. We announced a €50 per ton which is being finalising at around €40 per ton – another 9% price increase, so that’s looking good. The caution on uncoated fine paper which is less than a third of our business, is that there is a bit of new capacity in the marketplace and demand being as it is at the moment, could be bad for pricing. But we don’t think it’s going to be a significant issue, so just cautioning that there could be a pricing issue there. Overall, given that packaging is 70% of Mondi, the pricing momentum and packaging is positive. We continue to get growth in our recent acquisitions, Nordenia, which is part of our consumer packaging business. Adjusting for the acquisition up by 11% gives a very solid performance in a good stable business sector, so we’re very happy with that.

We’re very confident about where Mondi is, the business is in great shape. We are positive looking forward, but people must just bear in mind the maintenance shunts this year were unusual mainly in Quarter 3 versus Quarter 2.

ALEC HOGG: Alright. So this re-rating that we’re seeing of the shares is well-founded. Just as a broader topic; we’ve had two world-class paper and packaging groups – if you agree that Sappi is also world class – that have come out of South Africa. What was it about this country that gave birth to both yourselves at Mondi and Sappi?

DAVID HATHORN: I think in a nutshell, South Africa from a paper point of view and a packaging point of view, is a very small market so although we started there, we reached saturation in South Africa pretty early on. Either one stopped growing or you expanded internationally. We went a certain route. We went the Eastern European packaging route. Sappi on the other hand, went the global coated fine paper route. Strategically we’re very happy with the direction we’ve gone – for sure.

ALEC HOGG: Uncoated versus coated paper, I guess. And then vertical integration, David; that is a business model that you’ve pursued. It’s one that not too long ago people thought was the wrong way to run businesses – wanting more specialisation. But vertically integrated seems to be working.

DAVID HATHORN: Well, I think it’s important in that you can secure your cost structure. Ultimately a lot of our product is a commodity and even if it goes into a very specialised end package it’s the raw materials that’s fairly commoditised. So how do you get profit advantage in a commodity? You have to be very low cost. So backward integration. If you look at our business – fibres are a third of our cost base. So if you can backward integrate your fibrous source and tie in low-cost fibre – that’s very, very valuable. Make the pulp, turn it into paper and then of course turn that into the end product itself. Its demanding from a management point of view, in that you’ve got different sets of skills running a big pulp mill versus a set of skills running a highly bespoke converting business with multiple colour printing and very fancy applications and a lot of innovation to meet the customer requirements. So that is the challenge. But if you can get that right and do that by decentralising to some degree then you can get it to work. That’s the route we’ve gone down. We’re delighted with it. We think it gives us – structurally – a very strong position, because our cost base is secure and we’re not subject to raw materials price changes all the time.

ALEC HOGG: And the other big move was of course, six years ago for Mondi as a group, when you unbundled from Anglo-American. Did it release energy that you didn’t even know was there?

DAVID HATHORN: It certainly did. I think Anglo was always a good parent to us. We were always happy with the way we were allowed to run, but being independent is great. We got much more focused. You become more diligent about every element of the business. It has released a lot of enthusiasm and excitement and we’ve driven our own agendas very successfully. We’ve more than doubled the market capitalisation of Mondi throughout that time despite having distributions – 10% of our assets through a de-merger in South Africa on the one part of the business – and having paid pretty decent dividends along the way. I think certainly from a value point of view it’s been a fantastic step.

ALEC HOGG: That was Mondi Chief Executive David Hathorn. Thanks for joining us, David.

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