Letter to stakeholders

A challenging year

2018 was a very challenging year for the tissue industry.
The year was characterised by a sharp increase in the cost of the raw material, cellulose, and by increases in the cost of energy and transport. These factors have had an impact on the industry’s margins for the year in general.
In this scenario, Sofidel continued its investment policies in the USA and Europe (designed to ensure higher efficiency standards over time for both the product and the service) and has taken action on several levels to increase the profitability of its business by increasing sales prices for its customers, bolstering the renewal of its products in all segments and implementing a plan of efficiency measures to mitigate the negative effects that the tissue market has had to face in the short and medium to long term.
The greenfield investment in new production capacity in Circleville, Ohio, saw the start of production. The new integrated plant, which will significantly fuel growth in the American market, is now the Group’s largest and most advanced and represents a benchmark in terms of technological innovation for the whole sector; it will also contribute to a full recovery in an area that had previously undergone a period of economic hardship. Also in the USA, the second greenfield investment on the American continent has been launched in Inola, Oklahoma, which will lead to the construction of another large integrated plant in the central southern part of the country by mid 2020.
In the latter half of the year, investments in new production capacity came fully on stream in Europe at the Ciechanów plant in Poland and the Buñuel plant in Spain, which are also characterised by the use of advanced paper mill and converting technologies.
The availability of new production capacity will optimise the process of supplying customers thanks to a simplified logistics chain and higher quality standards that will ensure more efficient and sustainable processes and products.
At the same time, Sofidel has implemented numerous actions to increase its efficiency and boost its competitive capacity. This includes: continuation of the project to decommission the Horwich plant in the United Kingdom (completed in March 2019); closure of the logistics company Thüringer Hygiene Papier Logistik GmbH (THPL) in Germany; and starting the winding up of SofidelTurkey in Turkey (to be completed by mid-2019). Our increased focus on cost management should also be mentioned, as it has already led to the reduction of some non-strategic production costs. All these operations are designed to produce significant savings over time.

As far as the market is concerned, in order to counteract the sharp rise in the cost of cellulose, starting in the second half of 2017 and with increased determination and vigour from the first quarter of 2018, Sofidel has taken steps to increase sales prices for its customers, through a careful selection of orders with insufficient or negative margins. The pressure exerted has led to a partial recovery in margins, but has also temporarily forced the company to refuse orders, with a consequent loss of unprofitable volumes. This policy of raising sales prices, which continued throughout 2018, is also being pursued in 2019.
Alongside action to restore margins, Sofidel continued to renew its Brand and B brand product lines, also proposing innovative and unique products in the private label (PL) segment. Fully in keeping with the policies to limit plastic use launched by institutions, governments and organisations worldwide, after reducing the thickness of the polythene film in its packaging, Sofidel has further implemented the programme to limit use of this material by introducing the first products with new paper packaging in several European markets. Sofidel’s overall strategy of innovation and differentiation, supported by new paper mill and converting technologies and aimed at creating shared value also for distributors and final consumers, will be further expanded.
As early as the last quarter of 2018, some customers who had postponed or not fully adhered to the request for a price increase signed new agreements and, starting from the first quarter of 2019, a gradual recovery of volumes and new margins has been underway, while new temporary credit lines have been opened to cover existing investments.
Our sound performance in terms of environmental sustainability has once more been confirmed. The qualifying elements include: the improvement attested by the CDP Report 2018 - a global system for measuring, disseminating, managing and sharing information about the environmental impact of businesses and cities - which saw Sofidel ranked towards the top of the Climate Change and Timber Forests categories, scoring in both cases above the European and global industry averages.

Emi Stefani President Sofidel Group

Luigi Lazzareschi CEO Sofidel Group