95, ,000 Hectares of forest plantations. Customer. Brand. Innovation. Chapter 2 > Business Strategy. Competitiveness.

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1 Chapter 2 > Business Strategy Network with over Stores ,000 furniture makers registered MASISA Placacentro, the largest specialized distribution network in Latin America. 188,000 Hectares of forest plantations Customer Innovation Brand Competitiveness Innovation: 5 branches of MASISA Lab, innovation centers in Latin America 32 Informe Integrado MASISA 2016

2 Core Business MASISA s corporate strategy defines its main business as the production and sale of wood boards for furniture and interior architecture (MDF and MDP/PB) in Latin America, and it is the second largest company in this segment in the region in terms of production capacity. MASISA has an installed industrial capacity of 3,546,000 cubic meters per year for the production of boards, in addition to 1,908,000 cubic meters per year for melamine and film-coated boards. Likewise, it has total production capacity of 691,000 cubic meters per year for sawn lumber and MDF moldings. MISSION To bring design, quality and sustainability to every item of furniture and interior space, improving people's lives. VISION To be the No. 1 company in Latin America in bringing added value and solutions for furniture and interior spaces and the most attractive company to customers, investors, employees and communities. STRATEGIC PILLARS Customer Focus Most valued brand Innovation Competitiveness in costs and expenses FOUNDATIONS Superior Quality Product / Safety / Sustainability / Corporate Governance / Committed Organization 33 Integrated Report MASISA 2016

3 Solutions for furniture and interior spaces MASISA has an extensive product mix for the furniture and interior architecture industries, which are produced following strict quality controls and high social and environmental standards. Interior cladding Decorative modular solutions for cladding walls and interior spaces in a quick, simple and clean manner using different forms and designs, available in paneling, grooved, film-covered, melamine, plated and painted formats. MDP boards Medium density particle board is ideal for making furniture with straight lines or organic shapes. It is notable for its homogeneity, resistance, dimensional stability and density, which makes it ideal for new uses in printing, painting and coating processes. MDF boards Medium density fiberboard, which is characterized by its excellent finish, reduced wear and tear on tools and the significant savings on paint it offers compared with other types of wood boards. MASISA manufactures MDF boards of different characteristics, formats and thicknesses, which are marketed as raw or film-, melamine- or paint-coated boards. Melamine boards Melamine boards are PB, MDP or MDF coated on both sides with decorated sheets impregnated with melamine resins, which give them a totally closed pore-free surface, which is hard and resistant to surface wear and tear. These boards come in a wide range of colors and textures and offer the best variety of designs. Edge Banding MASISA sells edge banding in different materials to cover the edges of boards and give a perfect finish to furniture and other projects. We offer edging strips in the same designs and textures as the melamine boards. Furniture Fittings MASISA offers a wide range of products to complement, decorate and add value to furniture and interior projects, such as door fittings, rails, hinges and other accessories. PB boards Medium density fiberboard, which is characterized for being resistant and lightweight. PB is used in the manufacture of furniture, mainly in applications where a flat finish is required. MASISA produces particle boards of different characteristics, formats and thicknesses, which are marketed as raw, or film- or melamine-coated or plated boards. Sawn lumber MASISA produces dry sawn lumber, which is marketed in various thicknesses and lengths. It is mainly used to manufacture packaging or pallets, furniture and in construction. MDF moldings MDF moldings are sold in different profiles and thicknesses. They are mainly used for finishes in wall-floor and wall-ceiling joins and in door and window frames. 34 Informe Integrado MASISA 2016

4 MASISA Facilities nominal capacity (m 3 ) 2016 Planta PB MDF MDP Melamine Sawmill Moldings MDF Energy Resins Formaldehyde Mapal Cabrero MwH 0 0 Ponta Grossa Montenegro Macapaima ,000 tons. 0 Concordia Durango ,000 tons. 63,000 tons. Chihuahua Zitácuaro Lerma ,000 tons. 28,000 tons. TOTAL MASISA Land (m 2 ) 2016 Country Plant Land Chile Brazil Mapal 215 Cabrero 1,189 Ponta Grossa 842 Montenegro 799 Venezuela Macapaima 1,080 Argentina Concordia 305 Durango 396 Mexico* Chihuahua 209 Zitácuaro 130 Total 5,165 Land in thousands of m 2 This does not include the land at the Lerma plant as it is rented 35 Integrated Report MASISA 2016

5 Forestry Business The forestry business meets the strategic role of supporting MASISA s development and growth in its quest to gain leadership of the boards industry in Latin America. When it comes to its forestry business, MASISA is looking to develop the synergies necessary to supply industrial plants by generating forestry products directly from the forest, as well as through recovering byproducts from the sawmill industry and third party clients that supply our forestry unit. To this end, it is promoting the development of an active market in its areas of influence with the objective of maximizing the economic value of the investments made and developing new forestry hubs that offer attractive returns for the Company, mainly through supplying a competitive source of fiber for board manufacture. Plantations are managed under a diversification strategy. MASISA has generated forestry mass with premium quality genetic material whose products are focused on different industries and markets. As of December 31, 2016, MASISA s forestry equity amounted to 302,906 hectares of land, including 188,588 hectares of forestry plantations spread across Chile, Brazil, Argentina and Venezuela. Most of MASISA s plantations have Forest Stewardship Council (FSC ) certification. The financial results for the Forestry business are detailed in the chapter Annual Performance. Forest equity as of December 31, 2016 Type of plantation* Chile Argentina Venezuela total Pine plantations 48,285 28,785 86, ,464 Eucalyptus plantations ,272 18,648 Plantations of other species 139 6,337 6,476 Land to be forested 7,572 7,071 43,391 58,033 Native forest and reserves 22,869 8,941 2,082 33,892 Other land 3,942 9,314 9,137 22,393 TOTAL 83,182 72, , ,906 * Forest equity is measured and valued annually. **The Company owns only 27% of all the hectares of land in Venezuela. The remaining 73% is owned by the Venezuelan government. However, MASISA owns100% of the easement and rental rights. Average age of forestry assets as of December 2016 Edad Chile Argentina Venezuela years Integrated Report MASISA 2016

6 Investment and divestment plans for 2016 Investment plans In 2016, MASISA invested a total of US$70 million, mainly to complete the new MDF plant in Mexico. Some investments were to optimize processes, in safety and protection of the industrial plants and also recurring investments in the forestry area. Plan to divest non-strategic assets In 2016 MASISA implemented the second part of its divestment of non-strategic company assets that had begun in They mainly consisted of the sale of forestry assets in Brazil for US$39.0 million. This plan to sell non-strategic assets had achieved US$120.8 million by December 31, 2016 CAPEX Governance Program MASISA began a new stage in the management of its portfolio of capital investment initiatives, generating a CAPEX governance system designed to optimize the use of the resources available for investment, aligning their use with the implementation of the Company s strategy. This was achieved by creating a single platform to bring together all of the initiatives from the five countries with industrial and forestry operations. This has been designed so that, with support from specialists in different areas, the costs and benefits of implementing or not implementing a particular initiative can be assessed and prioritized in a standardized manner. With this analysis and after drawing up a list prioritizing the initiatives, the investment corporate governance team can take investment decisions based on impacts and risks. 37 Integrated Report MASISA 2016

7 Objectives and Corporate Strategy To successfully meet our objectives and fulfill MASISA s vision, we focus on strategic pillars that guide our activities and are underpinned by our principles and values, essential foundations for our Company. Customer Focus We are in constant contact with customers that process boards so as to understand their behavior and be aware of trends that should guide what we offer and the development of new products and services. In this way, we secure their custom and ensure sustained growth in the long term. Meanwhile we reach them with a renovated, strong and constantly revitalized brand. The customers for our products are carpenters, furniture makers and industry, who buy wood boards and other complementary products to turn them into furniture and/or environments, both in the remodeling and building markets. We have also identified architects, designers and decorators as clients and influencers. MASISA has a multichannel marketing strategy, mainly comprising retail chains, MASISA s Placacentro network, distributors and large surface areas, besides furniture wholesalers and industries. In this way we achieve wide geographical coverage and meet the needs of different market segments. We therefore generate differentiated value propositions with an appropriate mix of products based on a profound knowledge of our customers and their buying behavior in the different channels. In 2016, MASISA finished the implementation of a complete program in Chile, Peru, Ecuador and Colombia to provide excellent service levels to customers, mainly by enhancing our competitive differences, implementing excellence at sales points and fulfilling commercial promises efficiently. Recently, MASISA has implemented similar programs in other markets, like Brazil and Mexico. Customer Satisfaction CAs part of its Customer Focus pillar, MASISA measures customer satisfaction in the different channels where it directly serves customers, both in Latin America and the main export markets. Its objectives are to identify opportunities and establish the best standards in important variables, such as product quality, service provision and customer care. In 2016, MASISA again achieved a high average level of satisfaction, maintaining an upwards trend in most markets. Among the aspects most valued by customers are product quality, the attention received from sales executives, customer care, as well as the timely shipping and delivery of products. MASISA scores well on each of these aspects and continues focusing its management to achieve levels of excellence in all markets 38 Integrated Report MASISA 2016

8 MASISA Placacentro network In 2016 Placacentro MASISA retained its position as the biggest network of specialist stores delivering products and services to furniture-makers in Latin America. The Placacentro network, which is present in Argentina, Bolivia, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela, plays an essential role in MASISA s commercial strategy. It facilitates the marketing of MASISA products, diversifies the sale of products to a wide group of customers and contributes towards positioning the MASISA brand in the region. During 2016 the Placacentro network implemented an ongoing program to enhance store performance within the framework of its value proposition: Specialist mix of products that are always available; Specialist attention that is customer-focused; Response within the promised timeframe; Production and Customer Care Services. This program has been implemented in Chile, Colombia, Peru, Ecuador and Bolivia and will be rolled out in the other countries where the network is present during With the goal of enhancing service quality and customer care, the Network went through a period of alignment and in some countries the decision was taken to reduce the number of stores that were not meeting the desired standard. Thus the network ended with 317 stores and US$143 million in purchases from MASISA, accounting for 27% of MASISA sales in terms of volume and 33% in terms of value in the countries where it is present. Red M, Furniture Maker Engagement Program During 2016 Red M program continued its consolidation program in the markets where it is present: Chile, Argentina, Peru, Colombia, Mexico and Venezuela. At year-end, the program was present in 239 Placacentro outlets and over 95,000 furniture-makers were registered. Of these, 36,500 were active (had made more than one purchase in the last 12 months) and more than 17,000 received training from MASISA. It is worth highlighting that when asked about the impact of Red M on their business, 84% of furniture-makers evaluated it positively, up from 77% in Among the milestones of 2016 was the progress with the Certification Program in Chile, which began in This has enabled more than 120 furniture-makers throughout the country to gain certification that is backed by the Universidad de Chile. 39 Integrated Report MASISA 2016

9 Innovation We seek to be the most innovative company in our industry by generating new business and value-added products that anticipate our customers needs and help to increase operating income. MASISA Lab milestones in new branches: Sao Paulo, Buenos Aires and Concepción, in addition to Santiago and Mexico City. In 2016, MASISA set itself the target of searching for innovative solutions based on social, technological and digital resources that could be applied to the architecture, design and construction industry and exported from Latin America to the world. The MASISA Lab platform is designed for this end, in order to generate new business and value-added products that anticipate the needs of our customers and contribute to the growth of the business. MASISA Lab has, in fact, become an undisputed regional benchmark for creating an ecosystem for entrepreneurship, innovation and technological development for Latin American industry. It brings together and incubates a portfolio of products with a high impact on the design and architecture market with the objective of transforming them into business opportunities for the Company was a year marked by open competitions, in which 500 start-ups from different Latin American countries took part in the fourth edition of LeanPlay in Chile (Santiago and Concepción), Mexico, Argentina and Brazil. Among the projects that entered the MASISA Lab portfolio in 2016 were Tecsus Innovation and Échale a tus muebles. The details of the whole portfolio of projects can be viewed at www. masisalab.com. In 2016 we also formalized the MASISA Lab network of mentors, comprising 21 Company employees from different areas in 3 different cities (Santiago, Concepción, Mexico City). Through this initiative, the mentors accompanied the entrepreneurs in the development and scaling up of their business in Latin America, prior to a complete training process with the Newfield consulting firm. Another milestone achieved by MASISA Lab in 2016 was the creation of the first virtual reality showroom, where people can visit a space with different environments and exchange the different products, thereby gaining an impression of the boards they could possibly use in future projects. 5 Lean Play: Santiago and Concepción in Chile; Mexico, Argentina and Brazil. 498 projects entered the Lean Play contest. 26 active projects in the MASISA Lab portfolio. Investment in Innovation 21 mentors, who have invested 12 hours in training and 6 hours directly mentoring the entrepreneurs. US$750,000 in seed capital. US$850,000 for maintaining the process. US$350,000 in public funds (Corfo, World Bank etc.). 40 Integrated Report MASISA 2016

10 Most valued brand We seek to generate brand value and preference for our products by means of the unique and visible positioning of MASISA s main differentiating features. Masisa s Top of Mind by Country Chile* Perú* Colombia* Argentina México* Ecuador Venezuela Brazil MASISA has significant brand asset in the main markets in Latin America, which has contributed to retaining customer loyalty for our products and leadership within the main customer segments and influencers in the region. MASISA is reflecting an evolution of recent years, achieving high brand awareness at regional level. In Chile, Argentina, Ecuador, Venezuela, Peru and Mexico, MASISA is the top of mind brand. This customer awareness is reflected in the main brand and purchase intention indicators when consulting distributors, furniture-makers, architects and designers. We updated our research in 2016 in Mexico, Chile, Peru and Colombia, verifying the results obtained in previous years. It is worth highlighting that this study for the first time measured brand awareness among end consumers and, in the case of Chile, revealed surprising levels of positive awareness, with 41% top of mind and 57% cognitive presence. In 2016 we continued to consolidate our new brand positioning your world, your style through the different points of contact with customers and strengthening the digital platforms (websites and social networks) to further increase our reach and generate a positive and useful experience for different audiences who follow us through these platforms. MASISA Main Competitor * Last study in Integrated Report MASISA 2016

11 Competitiveness in costs and expenses We are enhancing programs to improve processes, costs and the efficient supply of raw materials, thereby ensuring the competitiveness we need for our long-term business development. Our operating efficiency goes hand-in-hand with the projected improvements, the quality of our products and our goal of eco-efficiency. Operational Excellence Program During 2016, MASISA consolidated its culture of operational excellence under the Lean Manufacturing model with a strong focus on customers, all within a non-negotiable framework of quality and safety. Thus operations in Chile, Argentina and Mexico gained important achievements related to adding value to the customer and improving quality, safety and reliability standards in the processes. Globally, savings of US$5.9 million were achieved in 2016, up from US$5.5 million in In 2017, our objectives are to complete rolling out the Lean methodology in our operations in Brazil and Venezuela, to consolidate the best practice synergies system in Chile, Argentina and Mexico, and to continue improving our production processes with a view to adding value for customers. During 2016 we also continued developing different savings initiatives associated with operational efficiency to support the continuous improvement of our processes, thereby contributing to reducing costs, and operational efficiency. These achievements reveal the maturity that our operations have achieved in the implementation of the Lean methodology. Optimization of procurement and tenders The optimization and homologation in the process of procuring melamine papers at regional level has continued to generate important synergies between countries and savings in excess of US$4.7 million in An important optimization was also achieved in a tender of maritime transport companies in which we achieved savings of 30% compared to This resulted in an improvement in excess of 25% in the competitiveness of MASISA s exports from Chile to over 130 markets around the world. Restructuring of Operations MASISA restructured its operational areas so as to address its production processes in a more competitive and efficient manner, as well as to adapt to current levels of demand in the markets. In 2016 this restructuring was mainly applied to the industrial operations in Chile and Brazil. MDF plant, Mexico In June 2016 the new MASISA MDF plant in Mexico officially started operating This project, which began in 2014, entailed investment of US$123 million. It has the capacity to produce 220,000 m³ of MDF boards each year, in addition to a melamine or board coating line with a production capacity of 110,000 m³. The project also included the expansion of the resin plant located in the same complex. This is the first MDF production plant in Mexico and it has achieved the anticipated levels of production and quality, something very much appreciated by our customers. Quality The Lean program s results come mainly from the increase in the quality factors on MASISA s industrial lines due to the implementation of tools for controlling deviation. This, together with our strict compliance with the quality standards promised to customers has consolidated MASISA s levels of excellence and complaints are below 5 units for every million sold. It is worth highlighting that in 2016 all production units earned recertification for the following Management and Product Quality standards ISO 9001 certification All MASISA s subsidiaries have quality management system certification in accordance with the ISO 9001:2000 standard, thereby ensuring the same level of management quality across all the company s operations. In 2016, the Chihuahua, Zitácuaro and Lerma plants in Mexico underwent a certification pre-audit and they are currently working with the ISO systems while awaiting certification. These systems favor the communication and engagement aspects of MASISA s quality policy. They also help align objectives, identify and manage key processes and the organization and reliability of documentation. Finally they help the Company to generate confidence about the compliance of the products sold and to improve the efficiency of its processes. 42 Integrated Report MASISA 2016

12 Product Certification Low formaldehyde emissions MASISA produces boards with low formaldehyde emissions in all its operations and has E-1 class certification in accordance with the European standard, and the CARB Phase 2 standard, as required by the state of California in the United States, as well as other certifications required by specific markets. In recent years MASISA has promoted a range of initiatives to increase the standard of emissions in the markets. It should be mentioned that urea-formaldehyde resins are used as adhesives in fiberboard, which enables consistency to be given to the board. Compliance with this standard is externally audited. FSC Chain-of-Custody MASISA has FSC chain-of-custody certification in the markets of Venezuela, Brazil and Argentina for the pine-based wood board and MDF molding lines. In Chile it has this certification for sawmill products, MDF moldings, MDP/PB and melamine. Recycled Content Certification MASISA has Scientific Certification System (SCS) certification for all its MDF products and MDF moldings at its mills in Argentina and Chile. This international certification guarantees that a certain percentage of the product content, which varies among different countries, comes from wood recycled in industrial processes. This certification enables a quality and environmentally responsible product to be offered, as its process encourages the use of recycled material or byproducts. MASISA has also voluntarily adopted certification guaranteeing that its quality control systems ensure compliance with the physical and mechanical properties of products, confirming what customers are informed. 43 Integrated Report MASISA 2016