New opportunities for Segezha Group: a strategy for building leadership

March 10, 2016
We have started the implementation of strategic projects, including the upgrading of the Segezha Pulp and Paper Mill. It is planned to switch to a new organizational model and implement a single strategy for managing structural change.

In early 2015, LesInvest (Investlesprom) Group was renamed into Segezha Group. The new name carries a long history and new business opportunities. The Lesnaya Industriya Magazine talks to Maria Vasilkova, Vice President for Strategic Development, to find out what the Company has achieved in the past year.

Q: What 2015 was like for your Company?

A: The last year was successful for Segezha Group. The strategic goals of improved performance and manageability of the Group set by our Shareholder for 2015 have been achieved. This has largely been possible due to the fact that we were able to build a new, efficient team of professionals with broad industry expertise, to optimize our business processes, to expand our output and achieve a significant increase in revenues and EBITDA.  The financial year is over and according to preliminary estimates, the Group’s revenues increased by 30% and EBITDA more than doubled as compared to 2014.

Q: How did you manage to achieve this?

A: We were able to achieve this thanks to the professionalism and high sense of responsibility of our management team, as well as due to the leadership of our President S.A. Pomelov who guided all of our efforts in 2015.  In February 2015, the Shareholder approved our organic growth strategy and this was a fundamental step in building a new Segezha Group.

Moreover, we have implemented a major part of the program for operational improvements and micro investments and upgraded the processes across the Group.  At the same time, we understand that these initiatives will continue in 2016.

Segezha Group is an export-oriented company, with more than 70% of revenues being earned in foreign currency, which is an additional driver of financial performance in the context of the weakened ruble.

Q: In early 2015, the Company undertook a rebranding exercise. How did this influence its development?

A: Investlesprom (the Group’s former name) did not have a consolidated brand. Rebranding is an important milestone in the development of business. The purpose of rebranding is to consolidate high-quality brands to match the changing market realities and improve the overall competitiveness of the product portfolio, bringing the company closer to the target audience. If your brand is unknown to consumers, they will look at the country of origin.  Russian manufacturers see that although comparable with European goods both in quality and service, their products are often priced 10-20% lower than those of their foreign competitors. Thus, we need to build a strong brand to eliminate the country risk.

When your brand is known and has a good reputation, customers will look at your company in a different way: they will be willing to build long-term relationships.

Reputation is essential in the global market. Customers trust the product and the manufacturer and compensate for this by paying a brand premium.

Although not yet completed, the rebranding program of Segezha Group is already yielding fruit. The image of the Group has significantly improved, both for its Western and Russian assets.  In the end of 2014, we became a subsidiary of AFK Sistema. We have developed and approved an integration plan and carried out serious work in 2015 to introduce the standards of responsible and proper attitude to business as part of the plan implementation. As a result, the best professionals want to work with us, because they can see significant changes as we are building the number one company in the Russian forest industry. This path is not easy and it is our development strategy.

Q: What are the results of the rebranding?

A: For us, the key goal of the rebranding exercise is to show that our business is customer-oriented. We want to be recognized, we want our products to be identified with us.

We are solving two problems: on the one hand, we are becoming more transparent to customers; on the other hand, we are engaging them in dialogue. Another important aspect is that rebranding should be clear to frontline workers. They need to be made aware of what will change in their work and in their lives with the implementation of the program. To this end, we have developed a range of activities, including visits by the President and the key top managers of the Company to production sites to explain the employees what the rebranding exercise is about, how the approach to teamwork will change, and what incentive programs are to be implemented. As all of our businesses operate under a single brand Segezha Group, we have become more recognizable to our customers, partners and the media. We have radically restructured our work with the media as part of the rebranding exercise.

Q: What products make up the Company’s core business?

A: In Segezha Group, the major portion of revenues and EBITDA comes from the sale of unbleached sack paper and paper sacks. The central asset of the Group in this segment is the Segezha Pulp and Paper Mill. We plan to thoroughly upgrade this asset in 2015–2017.

The second important business area for the Group is birch plywood. This is an interesting product which is difficult to replace and is highly profitable due to its uniqueness. The global output is limited by the availability of the raw material. Birch suitable for the production of this type of plywood is found in Russia, the Baltic States and Finland.  Birch plywood is used in high-rise construction, heavy engineering, and in building LNG tankers. In addition to its quality and appearance characteristics, the product is unique in its crisis-resistance. If we analyze the downturn of 2008–2009, we will see that it has certainly affected demand for plywood, but not so heavily as for other products of the timber industry.  Now we are also observing some slowdown in the consumption of plywood in the Russian market, but in the global market the demand and prices remain stable.

Q: What are the competitive advantages of the Company?

A: First, it is the vertical integration of business. The stronger vertical integration, the better off the company is. This trend is seen in all industries not only in Russia, but also worldwide. For the business, it is an opportunity to control costs and growth points and thereby to survive the crisis or perhaps even use it to become larger and more effective. 

You cannot endlessly cut costs. You should develop by leveraging on your competitive advantages and focusing on the key business processes. Today, we are a strong manufacturing company, but we are not competent enough in sales. In 2016, we plan to put a special focus on building a strong sales team.

An important advantage of the Company is that it has its own raw materials. Forest raw materials account for a high share of our production cost, ranging from 35% to 70%, depending on the product. The more own resources we can use, the lower our dependence on third-party suppliers and the market and the more manageable the business is.

Another significant competitive advantage, in our opinion, is that the Company’s production facilities are located in Russia and most of the output is exported.  We charge the production cost in rubles and receive revenues in foreign currency. Today, it is a positive factor.  Of course, we understand the risk of strengthening of the ruble and we should control it by improving our operational performance, expanding automation and enhancing competencies.

To this end, we will launch a business process automation project this year. This will enable us to control pricing in a highly competitive market and make effective strategic and operational decisions.

Q: What methods does the Company use to make its products more competitive?

A: What determines the competitiveness of a product? In our case, it is cost leadership, consistent quality, and solutions we can offer to our customers. To improve competitiveness, we have a micro investment program. It helps eliminate bottlenecks in production, make products of higher quality and reach the highest possible performance. At the moment all the production facilities of the Group are utilized. If we want to grow, we need to expand our production facilities, and this is included in the development strategy of Segezha Group for 2016 and following years.

The productivity cannot be improved without skilled personnel. The production process involves operation of high-tech equipment which should be maintained in good condition and, most importantly, operated properly. All businesses of the Group make major efforts to select, train and develop their staff. The rebranding exercise will do a lot to ensure that employees understand that they can develop, grow professionally and feel secured. These important aspects certainly influence our productivity.

Q: What is a priority market for the Company, Europe or Asia?

A: An advantage of Segezha Group is that its product portfolio is structured in such a way that its products are in demand in Europe, Asia and the U.S., even though the American market is balanced.  We see Asia and the countries of the Gulf as a very interesting and promising area. Europe is our traditional market. We have been here for a long time; we understand and value this market.

Q: What are the Company’s plans for 2016?

A: The Company has a long-term strategy which is updated annually taking into account changes in the market trends and in the political and market environment both in Russia and globally. The key goal is to improve our business performance and increase the Company’s shareholder value. Our long-term strategy is to build a global player, the leader of the Russian timber processing industry. Our key goal is to generate shareholder value. We will do everything possible to prove that the Shareholder's decision to invest in our assets was a right one.

We have a large-scale, serious program for 2016. We have started the implementation of strategic projects, including the upgrading of the Segezha Pulp and Paper Mill. It is planned to switch to a new organizational model and implement a single strategy for managing structural change. We are introducing a product management function and centralizing the sales team by product line.

AFK Sistema is a public company; therefore its subsidiaries must be transparent. We are implementing a project for switching to the International Financial Reporting Standards (IFRS).

In addition, we are launching a process automation project and doing many other things. Apart from our strategic and operational activities, we plan to implement a number of projects for the development of personnel and enhancement of motivation.

Q: What will your Company look like in five years?

Q. Our plans are ambitious. We should meet all the goals set by the Shareholder. We work to become the industry leader, an asset with a high return on the investment made by the Shareholder.

Polina Trifonova

(Sponsored article)


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