Mayr-Melnhof Karton AG (MMK) Earnings Call Transcript & Summary

Good day, and welcome to the Mayr-Melnhof Karton AG Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stephan Sweerts-Sporck. Please go ahead, sir.

Good morning, ladies and gentlemen. On behalf of Mayr-Melnhof Group, we hope this call finds you all well. My name is Stephan Sweerts-Sporck, Head of Investor Relations and Corporate Communications at Mayr-Melnhof, I would like to welcome you to this Q&A conference call following the release of our 2020 first half year results earlier this morning, which we released together with a video statement by our CEO, Peter Oswald, which is available on our group website, mayr-melnhof.com. Let me once again summarize the basic message on our ongoing business development. The Mayr-Melnhof Group could report a solid and stable performance for the first 6 months of this year, providing a rather resilient business model -- proving the rather resilient business model of Mayr-Melnhof. Sales and operating profit were 1% below the first half of last year. Apart from some 1, 2 weeks downtime at several smaller sites, we could keep all our plants running almost all the time. After an extremely strong demand for food, home care and pharma in April, May, we have seen a decline in our order books since there was strong stock building by customers, consumer goods companies. This has turned to a more normalized level situation now with still careful planning by our customers. On the other hand, there was a sharp drop in sales in premium products like beauty, cosmetic products, spirits, cognac distributed by our duty-free shops as well as fast food service packaging, where we are still below the pre-COVID levels despite some recovery. For the whole year 2020, earnings are expected to remain below those of last year due to the economic downturn and necessary adjustment measures. However, cash generation should stay at a good level. In this call, we now want to provide you with the opportunity to address questions directly to our CEO, Peter Oswald, who -- which is a premiere and who is 150 days with us and sitting next to me.

Yes. Good morning, everyone. It's a great pleasure to participate in this phone call, and I'm very much looking forward to your questions.

So -- and now it's also the time to invite you to start with your questioning. [Operator Instructions] So please go ahead. The line is yours.

[Operator Instructions] Our first question will come from Markus Remis of RCB.

Markus Remis from Raiffeisen CENTROBANK. A couple of questions, I'd like to take them one by one, please. Firstly, I would be interested to get a sense on the margin improvement we've seen in the packaging division. So stripping out the impairment, the margin has been up quite markedly compared to the first quarter and also compared to the second half of 2019 despite an arguably weaker product mix. If you could shed a bit more light on the underlying dynamics here. And related to the segment, I listened to your video presentation, and you mentioned that you have implemented a shift from a geographic approach to a business segment approach. If you could provide a bit more information on that and on the kind of facts in terms of, yes, revenues presumably you would expect going forward.

Yes. Thank you, Markus, very much for these 2 questions. So yes, we had a margin improvement in packaging if we take out our impairments, which we had to take. And the main reason is that we have worked on -- that we had a good volume, which was helpful also to a certain extent for the margin. As you've seen, sales were not up, they were more or less flat. The volume was up. The second effect was that we took some initiatives -- started with some initiatives to reduce costs and provide some savings. On the second question, the geographic and -- the shift from geographic organization to a more business segment-oriented organization simply means that we think that we can be more efficient from a sales perspective, increase our customer know-how, increase our customer contacts and also get some operational efficiencies if plants are generally focused towards individual segments because also the equipment is somehow different. So very simplistically said, a plant which produces for cognac packaging shouldn't necessarily produce cereal packaging. And we will try to intensify the specialization of the plants. And more importantly, the responsibility of what we call the business units will be more focused on having someone responsible, let's say, for personal care instead of having someone -- across Europe than having someone responsible for Germany, by example.

All right. So that should basically then help both in terms of generating top line synergies and cost reductions.

Exactly. But we should also be aware that what we want to do it to improve our results, but it also means, at the same time, certain necessary adjustment -- measurements because machines have to be transferred, et cetera, and there are some upfront costs involved.

Okay. So that's already the prelude to my second question coming to your outlook and the reference to further nonrecurring costs in the second half. If you could provide a bit more granularity on what you have in mind, if that basically -- yes, refers to capacity adjustments, relocations or even potentially plant closures.

Yes. So I think that's a very key question, and we expected this. So we will have a number of initiatives, which are partly driven by the crisis, because not all of our businesses were equally affected. Some -- for some, it was a bit more positive. For some, it was fairly negative. And we highlighted this, for instance, in the whole duty-free product areas with personal care, beauty. And so this means that -- and then there are some of our customers who are having various initiatives relocating their plants, et cetera. And as a supplier to our customers, we have to be in close proximity. And a number of other issues and then this issue of specialization, then we have to do some catch-up with our IT systems. And all this means at the end of the day that we will have individually one-off, as you call them, nonrecurring items. But however, we will have recurringly nonrecurring items, so to say, over the next, about 2 years. And therefore, we are very careful to call them nonrecurring items, where we simply undertake adjustment measurements in order -- either in order just to react to a development with no increased earnings, and in some cases, if it's proactive, it should increase earnings. But it will be a burden on the bottom line for some time to come. So for the second half of this year and also next year for sure. But no fixed decisions have been taken, and so we cannot make any announcement but have to make them -- I mean, many will be below the radar with small adjustments. But otherwise, we can only announce things once the decisions have been taken.

Sure. And you mentioned also in the video message that you have demanded from the Supervisory Board to consistently meaningfully grow the business. And you also referred to M&A. Can you kind of outline the core pillars of your M&A strategy? I mean, Mayr-Melnhof has been known for a company that actually refrain from buying into turnaround cases. So would you still confirm this, so buying just basically healthy companies and develop them further? If you could give some idea about the geographic focus, and also maybe on the product side where you see the biggest opportunities.

Yes. So on the M&A strategy, it has to be value-accretive. And this means a number of things. Number one, it has to be in our circle of competence. So we will want to grow much, most likely, in folding carton and cartonboard. Preferably even so, we wouldn't exclude at this point in time to go into adjacent areas, for sure, not new areas. Secondly, we -- it's always in packaging also a value game, so the price has to be right. On the question of turnaround or high-quality companies, generally, I would agree that in most cases, we want high-quality companies. But sometimes you also -- I've seen in my professional career also companies which need a turnaround, but the underlying things which might be not visible immediately are very positive. So for instance, buying loss-making companies in Central and Eastern Europe and turning them around because you see a very good basis there. So I wouldn't be so strict on this criteria. It could in one or the other case also a turnaround situation if we have a strong conviction that we have the capabilities to improve it. And again because M&A is always a whole topic, we will be disciplined on pricing because we have to have a high certainty that we can create value for our shareholders.

And on the geographic, I mean, looking back a few years, it was a push into overseas market, South America, Asia. Where do you see the priorities at this stage?

So the priority would be -- is Europe. Because even though we are a market leader in folding carton, there is still -- it's a very fragmented industry, and there is still room to grow. And on a continent, you have the highest synergies. But equally, we will also grow overseas where it makes sense and where we see synergies with our existing business. The key question we always ask with any acquisitions, what do we bring to the party in terms of how do we increase the value of what we are buying? And on the other hand, what is this adding to our existing operations in value and not just on a stand-alone basis?

Okay. A final question from my side, please. On the dividend, you mentioned continuity. I mean, now looking at the results development, if we strip out the one-offs, EBIT is actually EUR 152 million compared to something like [ EUR 129 million ] or so like-for-like in the prior year. Just to get a sense if the one-off costs this year should we take into the dividend base, should be treat this referenced to continuity rather as a flattish dividend given the uncertainty in the market. How should we kind of take the one-offs dividend?

Yes. I think you touched on the considerations which the Supervisory Board actually has to take at the end of the day. Of course, there is a -- so generally, it is the net profit as a basis. But as you say, you might make adjustments and look at what was cash relevant, so how was the cash flow development, and we look specifically at the cash flow from operations. You also may make judgments on what is one-off and what is recurring, but you also have an outlook on the next year and say, okay, what additional costs might come. So I think it's too -- it was a high level of precision anyhow to say that we expect continuity to go at this point in time in any -- would be too speculative. And it's also not a decision which is only taken by the Management Board, but the Supervisory Board is here in driver seat, then I can't preempt this -- their final view.

[Operator Instructions] Our next question will come from [ Madelyn Stuttmeier ] from [ D-press ].

Yes. Good. I have a question. It was your first quarter as the new CEO. Has the coronavirus changed your original strategy outlook or your initial strategy as a manager?

With regards -- thank you for the question. With regards to remuneration, we have a bonus system in place. And this bonus system, as such, is sensible to the fluctuations. And it will mean for some managers that their bonus will disappear or be lower and others who have done well in this environment [indiscernible], but we haven't changed our policy. We've announced our policy to the stock market at the AGM. And this is valid as is, and we are fortunately one of the companies which is fairly resilient. And so whilst we are affected by the COVID crisis, we are by far not affected as seriously as many other companies. And sorry then -- and your second part of the question was -- was that remuneration? Or did I miss something?

Yes. No, just in general, like, I mean, this is your first quarter as the new manager and like in general, you stick to your original strategy plan. I mean, I guess you had some ideas before you became CEO and if like the impact of the coronavirus, that changed your initial plans for the company, like in more in a broad sense, not in terms of numbers.

Yes. Now I understand your question. So sorry. So to start with, Mayr-Melnhof is a very successful company, and so there is no need to step in and change direction completely. On the other hand, every person has his own personal signature. And so, of course, the new management team will make the one or the other adjustments. That's actually the positive things about such a change, that you can look with fresh eyes to the existing situation and to do some things differently. But we've touched on it with the question we got before. It's not that we'll change now 180%. So it's, whatever, 10%, 20% -- degree change in some changes. So we will be a bit more active on M&A. No one can forecast exactly whether this -- how this materializes because you obviously need a partner to come to an agreement. But these are gradual changes. But on the other hand, they should, over a couple of years -- there will be a noticeable effect. Did I answer the question?

Yes. Yes, definitely. And do I assume right that there is no -- there are no plans for employee cut?

Look, in this generality, it's impossible. It would be irresponsible if I said I exclude anything because we are also, unfortunately, in times of change. And whilst we are less affected, we have to adapt in some ways. And we will do this with a high social responsibility if it is necessary. But to exclude it in times like this, I think, would be irresponsible to -- if any company says this, I would be very skeptical.

And were there some sectors where you actually could profit from the corona pandemic in terms of pharmacy packaging or something like that?

Yes. I mean, we had stronger segments, like some food segments or also the pharma segment. But it is not to a degree that it enables us, let's say, to double a plant or so high growth in the segments, which are strong. We talk about a few percentage points, and we also have to see how sustainable it is at the end of the day because we know that stocks have been built up. I assume that the higher stocks will be kept because the corona crisis is not over, but at a certain point in time, there will also be a return to normalization. So there is no specific now business opportunity, if you call it like this, which I see with regards to corona. But I do see a business opportunity with regards to sustainability and replacing plastic packaging.

[Operator Instructions] Our next question will come from Johannes Grunselius of Kepler Cheuvreux.

I have a few questions from my side. Could you just perhaps start talking about your plans for CapEx, if you can share them for this year and next year? I think I saw somewhere in the report that you're indicating higher CapEx than earlier planned for because of the high uncertainty in the environment. Can you elaborate on that, please?

Yes. Thank you, Johannes. So on the CapEx plan for this year will be broadly in line. I mean, that was set, and there is a little to change in the short term. What can be changed is at the level of last year in broad terms. For next year, actually, it's a bit too early to ask because we work on a number of projects. But we are, at this point in time, haven't taken the decision simply because some facts and investigations are still missing. So it's very difficult to speculate if it will be, again, on the same level or whether it will be higher. It's just not decided yet. What I do see is that we have some catch-up to do in some plants. And after careful planning, we will devise a plan. So the most likely scenario is that our CapEx will be up. But again, I couldn't give you any number. And due to circumstances might also be that it's rather flat. But more likely, it will be up but not in a big way. But it's -- yes, it could be whatever, EUR 30 million, EUR 40 million, EUR 50 million.

Okay. Understood. Then I have a question for your thoughts about volumes mix for Q3, Q4, because you had some inventory restocking effects that was also positive for you in the second quarter. So if I start with the volumes, is it fair to still assume modest volume growth in the third and the fourth quarter year-over-year, would you say?

Very modest. So I -- from the order intake, the order intake has very much normalized in the packaging area. In the packaging division, we are more or less where we were last year. So the peak was beginning of -- the order book peak was beginning of April. In box -- in our cartonboard, actually, the order intake is coming down very rapidly. And we will have to take already maybe some standstills. So I think we should plan for a very flat development for the remainder of the year. And see, the buildup or the higher volumes, which we saw, for instance, in cartonboard, plus 3% in the first half year, that was stock -- definitely stock building. That's clear from today's point of view.

All right. Then you mentioned, obviously, that food was a very strong segment for you in the second quarter, whereas more exclusive consumer products such as tax-free boxes and what have you were weak. Is it fair to assume that, I mean, if things normalize, would the tax-free product -- do they come with higher margins? Do you foresee a better mix when things normalizes in the second half?

Yes. They typically have somewhat higher margins. Obviously, the higher prices are also reflective of much higher costs because more printing, embossing, hot foil, you name it, what special things we have here. That's right. The key question will be, will these premium segments, how we call them, personal care, et cetera, beauty products, cognac, will they come back to normal levels? And we have seen, fortunately, a recovery from the very bad situation from June on. But they are still well below, well below pre-COVID crisis. And so the question is, if you go today to an airport, do you believe that in October, airports are as full as they were in February? And we think rather not. But I would see the improvement more longer term, hopefully, next year when a vaccine has been found, things really normalize.

Yes. And are you planning for bigger stoppages in the operations in the third and the fourth quarter? I can imagine you had basically very few stoppages in Q2. Am I right there? And how should one think about a negative -- a possible negative delta effect from stoppages?

Generally not but some smaller stops also at the one or the other cartonboard machine might be possible.

Okay. Okay. But not high...

Necessarily [indiscernible].

Then my final question, I mean, it's more -- it's a better understanding the underlying results, but is there anything else from the EUR 21 million in impairment cost in the second quarter that affected the numbers? Is there any more EU-related item? Just to check with you.

Sorry, I didn't understand it. Again, so if this EUR 21 million is...

Yes. So I understand that -- yes, I understand that the Q2 EBIT includes EUR 21 million or so in asset impairments or some kind of amortization, which is more one-off character.

Yes. This is a one-off thing. So if you analyze and want to have it before one-off, you can do it. The reason why we do not emphasize the one-off is that we believe that over the next quarters -- actually over the next 2 years, we'll have, time and again, adjustment measures. And if one highlight it now, it's one-off. Then you ask after the next half year and saying you have again a one-off, in the next half year again a one-off. So I think the impairment is what it is at the moment. But there might be other also cash-related costs going forward, which are sort of one-off but will become part of normalized for some time.

Yes. My question then is, is there anything on top of this impairment that has affected the reported earnings in Q2? Or is this the only sort of accounting effect or EU item, or whatever you want to call it?

Yes. It's the only one. I'm not aware about...

[Operator Instructions] Our next question is a follow-up from Markus Remis of RCB.

A question related to the cartonboard business. Your margins are climbing from one record to the other, at least the underlying ones. How intense is the price pressure at the moment? I got your point that you expect maybe a leveling off of demand in the second half. How should we think about [ intensifying ] price pressure in the next quarters? And my second question would be related to energy prices. We've seen quite a deflation of power, natural gas in the recent past. To which extent already you've benefited in the first half? And how much more tailwind you would expect in the near future?

Yes, thank you. So the price, as you can see from the volume development and the sales development, these prices in the first half year are marginally down compared to the first half year of 2019, but very minor. But we benefited from cost deflation effects, as you mentioned, energy, also paper for recycling. We had a spike in April, May. But still overall, the level is on a -- if you take a 10-year basis, are very low. And we do see, like always, pressure on prices. So I wouldn't necessarily foresee now any cartonboard price increases, but we have to defend, so to say, the prices as they are. But with a very positive cost environment, and as this environment continues, with paper for recycling and energy costs, margin should be fairly stable. But there was a secular trend over the last years in terms of cost deflation, and prices were rather stable. And that led to this result, which is in -- on a 10-year basis, let's say, on a very high level. And I would, for sure, see here more downside than upside.

A final question, coming back to M&A, you also indicated that the folding carton business could be an interesting area given that we've seen the market becoming very consolidated over the last decades. I mean, this would actually imply also larger scale acquisition in that business area. So you're not shying away from larger deals, is that correct?

Yes, that's correct. The preference are bolt-on acquisitions. But if the right larger acquisition becomes available and if the value is right and the culture of both companies fit together, then we would also go for a larger acquisition.

Did you consider any kind of financial leverage ratios as appropriate case of larger deals? Any thresholds you can share with us in terms of, I don't know, temporary uplift in gearing or net debt EBITDA?

We have no specific number, but you can be sure that we always want to be conservatively financed. And for me, that means -- but a bit dangerous to name a figure, but just in terms of how we would think, 2.5x net debt-to-EBITDA would be probably somewhat magical number in terms of -- below that is conservatively financed. And depending on many other variables, outlook of the business and in the end, but that is a sort of order of magnitude where we would see then the maximum. But we want to be solidly financed because we are a conservative company.

[Operator Instructions] Our next question will come from Christine Petzwinkler of Börse Social Magazine.

I have a question on your plans on innovations you mentioned in the press release. Could you please give us more insights into your plans on innovation?

Yes. Of course, the -- we're, for number -- so innovation is part of what Mayr-Melnhof has done so far. I think the difference will be that we will intensify and especially focus on what we consider as a unique opportunity to replace plastic. I think sustainability is a topic which will stay. And there are opportunities. There are not endless opportunities, one shouldn't overestimate them to caution here because plastic has barrier properties, which carton does not necessarily have. Even so we have also good barrier properties but not -- sometimes not to the same effect. And this is something where we intensified our -- and will intensify our efforts. They were a bit now held back by the corona crisis, which makes just a creative collaboration more difficult if everyone sits at home and you're just linked via a video conference. But that's an area where we see interesting opportunities for the one or the other product to grow well above market -- normal market growth rates.

[Operator Instructions] We have received a follow-up from [ Madelyn Stuttmeier ] of [ D-press ].

Yes. I have a question. Did employees at Mayr-Melnhof [ will remain ] Kurzarbeit? And would you consider, I mean, the second of the Austrian government of another period of Kurzarbeit?

No, we did not use the Kurzarbeit in Austria. And your second question was? Sorry, I didn't get it.

Yes. So I assume that you don't consider a second period what the Austrian government offered -- wanted a prolonged period of...

No. No, no, no.

Okay. Okay. I understand. And you also said that almost all plants were working during corona crisis, is that right?

Yes, that's right. So we managed, and with a lot of challenges, obviously, because we had to separate out the teams. So we did have also some smaller plants globally which had to stop for 1 or 2 weeks. Because there were corona infections or because the local government just didn't consider them as system-relevant. But in most countries, we are consistent -- are considered a system-relevant because of food and pharma. And so we were in a good position that we were not forced, from a legal perspective, to shut them down, and we could keep our overall infections with COVID to a very low level. And all the precautions we took with different shifts, et cetera, at the end, enabled us to continue in most of our operations almost all the time.

And in which countries the plants were closed?

There, for instance, we had shutdowns in Colombia, we had them in China, where we had a prolonged New Year in China. Russia was affected to some degree. So there were some plants which were affected, mainly outside Europe.

Our next question will come from [ John Hendricks ] of [ ROQ ].

My name is [ John Hendricks ] from [ ROQ ]. I still have a question on the amortization. In the press release, it's mentioned that it's market-related impairments and the noncurrent assets. Could you please elaborate a bit more on the -- on what these noncurrent assets are?

Yes, thank you. So I mean, it is as we outlined on Page 15 of our report. So it was -- it mainly affected our operations on -- if I start with packaging in Jordan and one Polish site. And the Polish site, for instance, is not a typical example. It's producing premium products. It had its issue already before the crisis, and this meant that we had to do some impairment of assets but also of intangible, so customer contacts. And Jordan was also -- that is what I could have mentioned in the last question I got is one of the plants which we had to shut down. But apart from a temporary shutdown, we have also some structural issues there. So these were typically, let's say, the situation is it's typically weaker performers who were hit by the COVID crisis.

Okay. And my second question is more a general question. You have been active as a CEO since about 150 days. After 4.5 months, what do you consider to be the main domains or internal domains where you see potential for improvements? You have been mentioning that M&A might be a corridor for growth and that cost awareness is important, but do you see other domains within Mayr-Melnhof as a new CEO where you could achieve improvement or performance improvement?

Yes. So I repeat that Mayr-Melnhof is a well-run company, so what I'm saying is not to be interpreted, this was bad, and now it's me who is coming and improving things. So I'm very humble here to put that into the right context. But I do see possibilities on the sales and product management side that we can move more to more sophisticated products. And that's one area where we hopefully can get somewhat higher organic growth. The second area where -- for instance, one example would be -- or one subsegment would be to focus more on sustainability and replacing plastic. It's one area. The other area on the cost side I think there are some inefficiencies where we did not follow our customers, deliver from high-cost countries to low-cost countries even though we have local plants available. And this offers opportunities to improve our structural cost position. However -- and that's again the link with the so-called one-offs, this does not come for free. So one has to carefully -- one has to readjust things. One has to move machinery, et cetera. And so there are one-off costs included in that, which have to be taken up upfront. But in totality, I see the one or the other opportunity to have higher organic growth. I see the one or the other opportunity to improve our cost structure. And I see potentially also possibilities, but that's the field which is most difficult to predict, to do more acquisitions.

At this time, it appears there are no further questions in the queue. I would like to turn the conference back to our hosts for any additional or closing remarks.

Thank you very much for joining in this Q&A. So thanks for the very good questions. And since there are no more left, I want to thank you very much for participating in this call. Our next results release will be for the third quarter of this year released on November 12. Thank you all. Goodbye and stay well.

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.