Frantschach: painting a new "big picture"; the Frantschach Group's recent acquisitions have enlarged and clarified the big picture of supply and demand for the various grades it competes in.

It's not easy to paint with a broad brush to get the big picture. The minutiae of everyday business and plans need to be understood and carefully sketched in. Still, companies with vision and an unerring ability to "see" the big picture are the ones that typically survive and thrive.

For paper companies, part of that big picture is to define and supply solutions through innovative product strategies. The dreaded "C" word (commodities) is to be avoided at all costs--solutions are the preferred "answers" to customers needs.

The Frantschach Group, Vienna, Austria, regards itself as "a global provider of packaging solutions and high performance materials," with a long-established reputation as one of the world's leading producers of high quality sack kraft papers and industrial sacks. Frantschach is a unit of Mondi Europe, which itself is owned by the Anglo American Group. Mondi Europe owns 70% of Frantschach, with the remaining 30% held by Frapag Industrieholding.

CHANGES AND CHALLENGES

The Frantschach Group acquired 25 plants from AssiDoman in 2000 and then, like the rest of the industry, found itself in the middle of a global economic down-turn in 2001. Having had to restructure and digest the acquisition meant that Frantschach was vulnerable. Yet the company weathered the slack market remarkably well, primarily through its new, larger size, which enabled it to absorb market weakness. Frantschach ended 2001 with sales (turnover) of EUR 1.833 million (US$ 1.976 million) and earnings (EBIT) of 8.6% of sales.

The five divisions formed in 2001 comprise pulp and paper, industrial packaging, flexible packaging, coating, and release liner (including B&K), The pulp and paper division has four production sites--in Austria, Poland, Sweden and the Czech Republic--and 46% of total production is sack and wrapping paper (machine-glazed paper).

INDUSTRIAL PACKAGING

Frantschach is the clear leader in sack kraft capacity in Europe (see Figs. 1 and 2). Its strategy is straightforward: Having low cost converting operations near customers using first-class paper supplied by a company within your group translates to certain market share. That is what Frantschach plants in Morocco, Jordan, and Hungary have in common. Still, geographical diversity can come at a price and not all acquisitions are necessarily about pure market share. Some, for example, involve maintaining good relationships with I large customers who happen to be unloading non-core business.

[FIGURES 1-2 OMITTED]

Industrial packaging, like most paper grades, faces serious threats. One of the threats comes in a primary market--sacks for cement. Rolf Tauss of TEC Trading Engineering Consulting Ltd., Switzerland, said plastic (polypropylene) sacks are not the industrial sack market's chief threat--bulk sales of cement are. He cited the example of Egypt: within three years, one third of the cement sack market share was lost to bulk sales.

The market for sack kraft is mature, and in the United States production capacity for unbleached kraft packaging papers has dropped by 1.4 million short tons, or 40%, over the 10-year period from 1985 to 1995. Still, there is hope. Truss said that although there has not been a quantum leap in sack making equipment, one of the opportunities for growth is in new equipment able to make small bags. Add to that equipment offering greater versatility and more opportunity to make the equivalent of "grade changes" and all is not lost for sack kraft. The industry just needs to, quite literally, "think outside the box."

INDUSTRY CONSOLIDATION

The paper and cement industries mirror one another in that they are both cyclical and capital intensive. Both have undergone consolidation to survive. Franz Tauber, managing director of Frantschach Pulp and Paper Austria (FPP), said that consolidation in the cement industry has been extreme. This has reduced the number of customers, yet he says both general demand and demand from within the Group increased in 2002. Frantschach Industrial Packaging (FIP) has had to look for other markets; its Austrian customers are ordering from group plants closer to those customers. Cement is subject to seasonal demand and when the northern hemisphere's plants have a slower period in autumn and winter, they turn to supplying southern hemisphere demand. Growing markets are also to be found in Russia and China. FIP currently exports 200 million units a year, with 80 million of these coming from the Austrian plant at Zweltig.

Integration means that, for example, the HP sack plant in Zwelteg will get orders and then estimate quantities of the various grades and order on a "just in time" basis from sister FPP Frantschach mill in Austria. The downside of being integrated is that FIP might want to sell sacks into an area where FPP wants to sell paper. But FPP Austria has also astutely marketed specialized flash-dried market pulp, and its Advantage brand of sack kraft is well established in the market, giving it some strong marketing advantages.

Commenting in September 2002 on industry consolidation, Veit Sorger, chairman of the Frantschach management board, said, "There will not be many acquisitions [in the pulp and paper sector] as we already have supply strength and are the world's largest supplier of paper sacks. However, we will probably add another sack plant in Asia and in South America. We will also have a focused look at the United States on the coating side. We will increase market share step by step. However, flexible packaging is the most dynamic area and currently has the lowest levels of consolidation. Having recently entered this market we see great potential for growth via acquisitions."

Frantschach is expected to step up its investments following the acquisition of Wheatly Packaging, an English manufacturer of packaging for frozen food and hygiene sectors with annual sales of EUR 24 million. Sorger described the acquisition of Wheatley as "... an initial logical step in building up our flexible packaging division to a decisive European scale."

Another key strategy of Frantschach Pulp and Paper is to keep costs down. The positive aspects of vertical integration come into play here, with Mondi Richards Bay's Baycel eucalyptus pulp being one source available to Frantschach (both Mondi SA and Mondi Europe, which owns 70% of the Frantschach Group, are owned by Anglo American Group).

Low cost production must affect the "where and how" of paper manufacture. When a low cost producer country is also forecast to grow 10 times faster than its neighbors in the European Union, there can be no better place to be. This is exactly the case of Central/Eastern Europe.

FOCUS ON POLAND AND CZECH REPUBLIC 

Poland is the largest producer of corrugated case materials (CCM) in Central/Eastern Europe, with more than 750,000 metric tons of annual production and 45 corrugated packaging plants. Of the CCM production, 547,000 metric tons come from Frantschach Swiecie.

Swiecie is impressive for a number of reasons. The mill does not have the latest equipment but, through an intense focus on efficiency, production and quality has steadily improved. PM 5 had a rebuild in 2000/2001 and in June 2001 the mill started up a new wood yard run by only three people (previously, the job took 20.) The difficult part of change has been a reduction in personnel from 5000 to 1050, a tough situation since unemployment in the area runs at around 27%. Yet, Marek Motylewski, technical service manager at the mill, said despite this there is enormous local pride in what the mill has achieved.

The next largest producer country in Central/Eastern Europe is the Czech Republic. Frantschach's interest here is the mill at Steti, know as FPP Czech. Norske Skog operates a newsprint machine in the same mill producing 120,000 metric tons/year. FFP Czech supplies the furnish comprising 48% groundwood, 40% deinked pulp, and 12% kraft pulp.

FPP Czech's CEO Tomas Sabatka is a specialist in motivating his team and has been with the mill since privatization and restructuring first began in 1992. His enthusiasm is contagious (the story of how the mill moved from communism to capitalism was covered in the June 2002 issue of Solutions!) The mill's aim for 2003 is a return (ROCE) of 25%, with stable machine efficiencies of 90%. PM Poland (formerly Beloit) completed the upgrade to PM3 that increased production of machine glazed (MG) paper from 12,000 metric tons/year to 31,000 metric tons/year.

USA: FUTURE BATTLEFIELD

Consultant Rolf Tauss said that the United States is "the largest island in the world" and that this is where the next chapter of market share and growth for the pulp and paper industry will be written. Why? Equipment and mills are not "state of the art," he said. "Even some of the so-called banana republics have the latest technology and cost of production is sufficiently low to justify such investment."

In the past, Frantschach has not marketed in the United States, but Tauss said this will likely change. Veit Sorger's comment that they will take a "focused look at coating opportunities in the USA," also suggests potential for acquisition in this region. From a world perspective, RISI vice president Peter Cardellichio, speaking at a paperloop conference in October 2002, said that a total of 61 new paper machines, with total capacity of 7.7 million metric tons, are due to start production throughout the world from 2002-2004. That net growth will actually be around 6.0 million metric tons, or 1.9% per year growth because of mill closures in the United States.

All those years of not investing are catching up with U.S. paper companies. With China expected to start 19 new machines in the next few years, Asian producers will likely have surplus production to move elsewhere. Richard Storat, industry consultant and publisher of the "Scoring Boxes" newsletter, speaking at the same conference, suggested that there will likely be a "reversal of historical trade flows, with Asia exporting containerboard to the United States, which is the world's largest market for containerboard and corrugated packaging." His opinion is that if

Europe joins the fray, between them they could "push back to the United States as much as 1.5 million metric tons in 2003, and as much as 2.4 million metric tons in 2005."

Frantschach may not be a large global player, but it has an important history. The various heritages that make up its corporate culture range from those of the original 1881 Austrian owners through to the owners of its millennium purchase, AssiDoman. They are a mix of Austrian and Swedish perfectionism, Czech passion, Polish determination and courage, African adventure and gold, all heading out to play wherever there's a market--including the United States. An ability to work with history informs this particular company's strategy; only time will tell whether the choices made are the right ones. S!

IN THIS ARTICLE. YOU WILL LEARN:

* Why the Frantschach Group regards itself as a global provider of packaging solutions and high performance materials.

* The challenges and opportunities in the industrial packaging market.

* Why flexible packaging will be a growth market for Frantschach.

* New market areas in which the company may choose to compete.

ADDITIONAL RESOURCES:

* Frantschach Group web site: www.frantschach.com.

* "From iron to velvet to gold" (profile of Tomas Sabatka and Frantschach Steti), Solutions. June 2002, page 36. Available free online to TAPPI and PIMA mere bars. Go to www.tappi.org. click on Solutions/and click "Table of Contents Archives." Click on June 2002.

* "An aver-improved Swiecie mill," TAPPI JOURNAL, February 1999, page 51.

First Quarter: Printpac Company in Sweden acquired

Second Quarter: Frantschach Coating Czech was founded Three plants of OIP in Morocco acquired

Third Quarter: Hungary--Cempack acquired Acquisition of Ekovreca in Croatia finalized Jordan--MOPICO acquired NAPIAG Company was divided and operations integrated into FIP Austria, FC Austria, and FCB Austria.

Fourth Quarter: Lebanon--SNPP acquired

Acquisitions 2002 Frantschach AG acquires Wheatley Packing Ltd

About the author: Jane Molony is a freelance journalist who edits the TAPPSA Journal for the Technical Association of the Pulp and Paper Industry of Southern Africa, She is based in Durban, South Africa and can be contacted by phone at [phone] or email at [e-mail]