international business managemnt

Celbi’s Entry into Non-Wood Pulp

NYU Stern ISP 2016

By: Hannah Chung, Lauren Kim, Embert Lin, Hanwen Liu, Sam Seo,

Tracy Shao, Heesung Son

1. Current Position 2. Recommendation

3. Financial Review 4. Conclusion and Future

Steps

NYU Stern ISP 2016

NYU Stern ISP 2016

1. Current Position

Current Position Recommendation Financial Review Conclusion

Celbi, specializing in Bleached Eucalyptus Kraft Pulp (BEKP) manufacturing, is a subsidiary of Altri Group and currently produces 70% of Altri’s total output.

Current Position

Reach

Current Position Recommendation Financial Review Conclusion

Market Position

Current Position Recommendation Financial Review Conclusion

P ro

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Production Size

Strengths

Current Position Recommendation Financial Review Conclusion

● Distance from fastest growing

markets

● Increasing costs of production

● Stagnating financial performance

● Price-taker

● No vertical integration

Weaknesses

● International expansion

○ In 2014, bleached eucalyptus pulp

demand grew 11%

● Product offering diversification

● Vertical integration

Current Position Recommendation Financial Review Conclusion

Opportunities Threats

● Input costs & prices

○ Wood sourcing from S. America

● Macroeconomic environment

● Rising international competition

● Rising eucalyptus competition:

○ Increasing cost of products

○ Limited local wood supply

● Not diversified products:

○ Exposure to price movements

Current Position Recommendation Financial Review Conclusion

Issues to Address:

NYU Stern ISP 2016

2. Recommendation

We recommend that Celbi add value through differentiation. It can achieve this by expanding its product offering to include non-wood pulp.

Recommendation

Current Position Recommendation Financial Review Conclusion

Non-wood Pulp

● Straw is the most feasible non-wood alternative so far, producing pulp at the

same ratio that eucalyptus does.

● Can be used to produce a variety of paper products, including tissue and packaging

lining. These are the two most rapidly

growing segments.

What is Non-Wood?

Current Position Recommendation Financial Review Conclusion

30% of Celbi’s production will become non-wood fiber, filling the need to import eucalyptus from other countries. We will partner with Portuguese farmers for our inputs. A new mill will be built adjacent to Celbi’ s current location.

● Build a new mill to process non-wood pulp near Celbi’s existing factory.

● Buy machines from Chempolis formicofib ™, which has the latest and most efficient

technology for processing non-wood pulp.

● Work with local farmers for nonwood inputs (straw, tomato and grape pomace).

● Sell to European buyers in order to leverage knowledge of EU trade policies.

Non-Wood Implementation

Current Position Recommendation Financial Review Conclusion

Firm Advantages

Current Position Recommendation Financial Review Conclusion

1. Governmental Regulations

2. Competitors

3. Demand

4. Investment

A strong focus in grassroots partnerships and investment in community initiatives brings Celbi closer to the human and agricultural resources we rely on.

Emissions and wastewater metrics consistently better than regulatory

standards, while competitors focus on forest management practices.

● Strong emphasis on informal personal relationships

● Market leader in sustainability practices through technological investment

● Take initiative to strengthen our brand as high-quality, sustainably-produced fibers

Addressing Celbi’s Disadvantages

Current Position Recommendation Financial Review Conclusion

1. Governmental Regulations

2. Competitors

3. Demand

Growing global eucalyptus prices coupled with limited land resources challenges Celbi’s goal to become self- sustaining.

Diversifying the product portfolio hedges the risk exposure to unfavorable

trends in the eucalyptus tree market.

● Currently only produce and sell short fiber pulp bales

● Non-wood sources such as wheat straw have shorter growth cycles (1 year)

● Growth area: non-wood fiber use in tissue- making projected to increase

Location Advantages

Current Position Recommendation Financial Review Conclusion

1. Governmental Regulations

2. Competitors

3. Demand

4. Investment

While many European countries have strong wheat production, Portugal’s climate and access to water allows for grape, tomato, and olive crops to thrive.

These plants produce fibers suitable

for nonwood pulp production.

● Low supplier bargaining power: agricultural players are somewhat fragmented

● Low Farmers and consumers gaining interest in organic, “green” products

Mitigating Risks

Current Position Recommendation Financial Review Conclusion

1. Governmental Regulations

2. Competitors

3. Demand

● Tight government environmental regulation led to the shutdown of largest European nonwood mills ○ Saica in Spain ○ Frederica in Denmark

● New technology has made nonwood pulp a viable, sustainable option

Governmental Regulations

Current Position Recommendation Financial Review Conclusion

Competitors

Current Position Recommendation Financial Review Conclusion

There is no large scale nonwood pulp producer in Western countries

Countries with large natural forest reserves

Research into highly niche, novelty products

Nonwood pulp production focused primarily in Asia-- China produces over 70%

Small, inefficient, unsustainable mills due to

lack of capital to update technology

Asian nonwood pulp producers face large transportation

costs + trade barriers

Industry forecasts predict greater consolidation in the Asian

nonwood pulp industry

● Demand must be created for new nonwood pulp market in Europe ○ Consumers are increasingly placing more importance on

sustainability ■ Environmental impacts are the third most important factor for

EU consumers, after quality and price

■ Investors and executives are increasingly looking for more sustainable practices

○ New technology allows Celbi to produce high quality nonwood pulp at low cost ■ Readily available supply of low cost inputs, like straw ■ Very efficient production systems ■ Need for fewer process units

Demand

Current Position Recommendation Financial Review Conclusion

3. Financial Review

Financial Performance

● Revenue sees a linear growth while operating margins shows stagnation ○ Environmental Factors as well as

current Costs Expenditures create

low Marginal Revenue for Celbi

○ Shareholders want a company that can churn out profits while being

sustainable

Current Position Recommendation Financial Review Conclusion

Potential of Non-Wood Alternatives

● More efficient yield ratio for non- wood chips drives down costs per tonnes giving Celbi a 2:5 ratio

● Project a 10% capture of the non- wood pulp production in the European market within a few years

Current Position Recommendation Financial Review Conclusion

● Commodities will follow a random walk model ○ Raw materials and Pulp prices follow

a random walk

○ The volatility of the commodity will stay constant through time horizon

● Growth of demand and revenue will follow a normal distribution ○ Upkeep cost and Efficient Tax Rate

will be held constant

○ Run a monte carlo simulation to estimate returns and revenues of the

investment

Assumptions

Current Position Recommendation Financial Review Conclusion

● Can borrow 200 million euros in bank loans at 5% ( 3 month Euribor + spread) to pay for project

Project Investment

● The market penetration for Non- Wood pulp allows a fast Return on Investment ○ With an initial investment with 200

million euros, Celbi is able to

generate payback the project in

about 4 years

○ The project will return around 50 million euros in free cash flow per

year

Current Position Recommendation Financial Review Conclusion

Is the Project Beneficial for Celbi Long-Term?

● Celbi’s cash flows are stagnating if nothing changes

● This project will increase Celbi’s revenues and cash flows by 20- 30% every year

Current Position Recommendation Financial Review Conclusion

NYU Stern ISP 2016

4. Conclusion and Future Steps

Recap

Current Position Recommendation Financial Review Conclusion

● Diversify Celbi products ● Increase revenue base by 20-30%

Why?

How?

Outcome

● Stagnating financial performance ● Rising eucalyptus competition ● Exposure to price movements

● Enter non-wood pulp market ● Build infrastructure for new mill

Market Position

Current Position Recommendation Financial Review Conclusion

P ro

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Production Size

Future Prospects

Current Position Recommendation Financial Review Conclusion

● Celbi is an early mover in the non-wood market ○ Market leadership potential

● Strengthen recognition as an efficient producer

● Short-term goal to dominate European non-wood market ○ International expansion is a

possible long-term goal

Thank You

NYU Stern ISP 2016

Appendix

NYU Stern ISP 2016

Chempolis formicofib ™

Current Position Recommendation Financial Review Conclusion

● Specialized: 3rd generation biorefining technology

● Efficient: ○ Uses residual biomass ○ Sulfur-free technology ○ Low carbon ○ Low wastewater

● High quality: pulp is similar in quality to BEK

1. Existing Customers

Leverage current relationships

to encourage customers to add

nonwood pulp into their

products

Cost advantages

Marketing benefits of nonwood

products

3. Recycled Paper Companies

Target recycled paper companies,

who are already environmentally

conscious and looking for new

sustainable technology/practices

Growth in recycled paper

companies in Europe

Demand: Potential Customers

Current Position Recommendation Financial Review Conclusion

2. New Customers

Look for new customers who are

interested in environmentally

friendly products

Target new customers in the

tissue segment, which is a

growing industry

Financials: DCF

Financials: Project Cash Flows

Financials: Project Cash Flows

Financials: WACC

Financials: Price Movements