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

Dear ladies and gentlemen, welcome to the Mayr-Melnhof Karton AG Conference Call. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Stephan Sweerts-Sporck. Please go ahead, sir.

Hello, and welcome on the part of Mayr-Melnhof. My name is Stephan Sweerts-Sporck, heading Investor Relations and Corporate Communications at MM. It is a great pleasure to have you joining this Q&A conference call of Mayr-Melnhof Group 2020 annual results, which we just released this morning. Besides our press release, a video statement of the Management Board has been published on our website, mayrmelnhof.com. So please have a look at it if you couldn't do so far. In this call, we want to provide you now with the possibility to direct questions on today's communication directly to Peter Oswald, our CEO; and Franz Hiesinger, our CFO. Since this call addresses an international audience, we shall very much appreciate your questions to be asked in English in the following Q&A session. Before we go for that, Peter will sum up briefly once again our key message. So Peter, may I ask you to start with the short summary?

Thank you, Stephan. Welcome, everyone, and thank you for your interest. So as you have probably read the announcement and maybe listened to the video, I want to make it really short and take the time then to -- as we can use the time to take your questions. If we look at 2020, we saw a solid business performance, and there were 2 main business drivers. The one negative one was a number of one-off items due to restructurings and impairments, which has, on an EBIT level, an effect of minus EUR 64 million. And on the positive side, we benefited from favorable input costs. So paper for recycling, January is ticking low even though there was an uptick in the middle of the year and then it increased towards the end of the year. Also pulp costs were very favorable, so which means, in our case, low, and chemical costs, et cetera. And this is something which has changed at the end of the year and, I guess, will be a topic also of several of your questions with the outlook for this year. So I would -- and therefore, we concluded in the outlook that we see overall a good order book, both on the packaging side and cartonboard side. We are convinced that we will see growth in the current year. However, we are affected with serious enough accelerating price increases of our input costs, be it paper for recycling, be it pulp, energy, but also a number of chemical products. And we've already started to compensate for that by increasing our cartonboard prices. But it's, so to say, a catch-up process. And therefore, it will have -- these increases will have a negative impact on Q1 as it looks now also on Q2. So that will be the main theme for this year. So overall, a positive environment because with good order books, but on the other hand, cost pressure which we are confident to pass on, but there is a time lag, which affects the profitability, especially if these cost increases are rather short term and [indiscernible]. And with this, I want to finish with the introduction and ask for your questions.

[Operator Instructions] And the first question we received is from Markus Remis of RBI.

Yes. Firstly, I'd like to start with cartonboard. If you could maybe provide us with a cost breakdown as of 2020 so that we basically have a base to do our calculations. Then when it comes to paper, energy, logistics or the cash production costs, provide us some sort of indication here. That would be very helpful.

Yes. I mean, we cannot detail also for competition reasons our cost split up. But basically, we are using 1 million tons of paper for recycling. And so if costs have moved up, it depends now both periods you actually compare. But let's say, compared to the first quarter, we are now in the first quarter of 2020, roughly, let's say, EUR 70, EUR 80 above last year. So you can calculate the effect which this has on our impact. That's for sure the most important raw material. With regards to market pulp, this is less significant because it only affects our FBB volumes, and the pulp input is only about 1/3 if we take a chemical pulp as a benchmark, which we have to buy-in. So here, we talk about an annual volume of, let's call it, less than 100,000 tons. And then we use chemicals and they are also a significant portion and we see at the moment fluctuations. So let's say, the overall cost increase, maybe to answer it in this way, which we are facing in the first quarter is towards a low double-digit million amount on our cartonboard side. And as a consequence of that, we have increased the price. But this price increase, which only kicks in, in Q2, only reflects the cost increases, which we had up to February when we fixed -- when we agreed with our customers on this price increase for the second quarter. And a rapid increase, further increase of paper for recycling costs and now a number of chemicals and pulp means that also the second quarter, which -- where we have now agreed selling prices will suffer from these cost increases, and we will need another simplified -- another cartonboard price increase from July on.

That was already my second question. Thanks for answering that already.

Sorry. Reading your mind.

That's all right. Okay. In terms of the margin progression, would you then say that Q1 will already be the trough? Or would you say that more of the price pressure or the cost pressure filtering them through into Q2 also thinking of this price rally, but it might be rather Q2, the margin should bottom out?

To be honest, this is a very difficult call because it will depend exactly where our main input prices go on from here. If we see further increases, especially again, paper for recycling but also in chemicals and market pulp, then the trough could be Q2. And if we see now a stagnation of prices or even a small decline then the trough is the first quarter.

And coming to the positive surprise from my point of view. The margin in packaging has been the highest for -- at least on a quarterly basis for quite some time. I mean, as always, I guess, there is a mix -- presumably a mix effect to it. Volumes have been quite strong also. My question would be to which extent is that kind of sustainable? And in terms of the cost measures, you have mentioned how much in terms of efficiency gains, would you target for the current year?

Yes. In packaging, we will see the cost impact from increasing cartonboard prices to a certain extent already in Q2 and to a certain extent then mainly in -- from -- in Q3 and 4. Equally, we have -- for about half of our volume, we are completely flexible. So half of our volume, we typically have 1-year contracts with price adjusted clauses at mid-year, and then it will depend on the indices -- increase indices trigger, the possibility to increase our prices. But at the end of the day, the bottom line story is that the increase in costs will, mainly in the second half of 2021, also affect our packaging business, which will be partly offset with our ongoing cost adjustment programs.

Okay. Very clear. Final question. Coming back to the waste paper prices. It seems that Asian buyers are returning to Europe as a sourcing market. And I mean, looking back, it seems the stellar margin trajectory of carton, the carton segment was basically also driven because of the lack of -- from Chinese buyers. So I mean how concerned are you that we will see a return to the historic average margin sales between 7% and 8% on a more sustained growth basis, not only on a shorter-term basis?

Yes. I fully agree with your analysis. I think the last 2 years, 2019 and 2020, were influenced by an extraordinary situation, which was that Chinese buyers abruptly left the market in 2018, basically for all the legislation. And therefore, it's -- we are going back more to a new normal. Having said that, the recent dramatic price increases which we've seen may also be just a short-term effect. So I would hope that the market becomes more stable again, but it will be more on the levels we've seen previously, to answer your question, than according to the last 2 years.

We now go to the next question, it is from Johannes Grunselius of Kepler Cheuvreux.

Yes, hello, everyone. Can you hear me now?

Yes. Yes. Sorry.

Perfect. Yes. I just want to go back to the earlier question about how one should think about the near-term margin progression. I mean could you give us some kind of maybe a range or something for my Mayr-Melnhof Karton, how we should see to think about margins for Q1 and Q2? Or is that sort of difficult for you to estimate?

I will pass on to Franz, if he cares to say something.

Yes, obviously, due to the reasons Peter already mentioned, it is difficult to estimate. We are faced with increasing paper for recycling costs and, on the other hand, try to push through our price increases starting with Q2 and Q3. As such, as already mentioned, margins will be under pressure in the first and most likely also in the second quarter, but we hope to see a recovery afterwards.

Okay. Can I ask you -- you mentioned that you need a new price hike to stabilize margins or take back margins. What kind of magnitude on that price cycle are we talking about for MM Karton?

Yes. It is a bit different between recycled and virgin. In recycled, we have had a price increase, and we will roughly need the same price increase again based on today's cost structure to fully recover the margin. In FBB, the margin squeeze, so to say, has been much lower. There wasn't a price increase yet. But there, we will need roughly in one step that -- or close to the price increases of both increases for coated recycling board. So I think the good news is that, estimates, as we look at the market now and also some announcements which have been made, we are very confident that we can restore the price, but it will take basically until Q3, not because customers are resistant to this price increase but simply because this is an industry where you typically have a quarterly or half yearly price agreement and we are not breaking any contracts. And therefore, we simply have to wait until -- basically until end of June in order to reestablish our margin.

Yes. Okay. I see in the volume side that you had stellar volumes on packaging. But carton, I think your volumes were down 4% year-over-year. Was this due to your own planning? Did you say no to volumes? Or what's behind the -- that volume development, but perhaps it's very difficult comparisons. Can you help us there, please?

Sorry, you are referring to cartonboard now?

Yes, yes. And then maybe you can touch upon the volumes in packaging, which was stellar good.

Yes. So in cartonboard last year, our volumes were already somewhat influenced by the closure of Hirschwang. And in this year, volumes are also affected by the closure. Some of that will be compensated by our higher output from the other machines. But definitely, the closure of Hirschwang has a negative impact on volumes this year. And with regards to packaging, we see a good progression and expect a higher volume. But I remind you also last year, we had the higher volume with especially heavier parameters, which was only, to a certain extent, reflected in the turnover. And I hope that this year, we will also see it in the turnover number. But obviously, it's early times now -- March to have a view on the whole year. But now we see a positive picture at the moment.

Okay. Then my final question is on your 2 ongoing acquisitions. Can you say something about the latest margin development for those businesses that will be consolidated in the next few quarters?

Yes, it's very early. And I think with some legal restrictions also to say anything on these businesses, especially one is part of another listed company, but overall, let's say, they are -- have so far been less affected by the price increases for 2 reasons. Generally, first of all, FBB, as I already outlined also in our portfolio, is less affected because they are not dependent on the main increase of paper for recycling. And the second effect is that Kwidzyn is backward integrated in pulp. So chemical pulp, so also the chemical pulp increases are has no impact on their results.

The next question is from Matthias Pfeifenberger of Deutsche Bank.

A couple for me, if I may. Sorry, I haven't been part of this call. So apologies if there's some reiteration. I'm just trying to reconcile the dynamic here. I mean typically, you say it takes 2 quarters to restore the margin. So my question is, have you been a bit late with the price increases this time. Obviously, there's change of industry as well. We -- in the last 10 years, we're more used to maybe a quarter of that. Now you're hinting slightly more than that. And also, I think the price increase, the cost inflation is already visible for some time. So could you have flagged this squeeze already when you announced the last acquisition? And then also I don't know if this has been asked before, but I assume the guidance is excluding the acquisitions. So what do you expect in terms of consolidated EBIT or EBITDA roughly, if the consolidation goes as planned for the fiscal?

Yes. Thank you. So on the delay, I think the philosophy has not changed. We typically need 1 quarter. It depends exactly on -- at what time of the year it happens because the increases are, so to say, beginning of April, beginning of June, beginning of October. And so it depends on at what time we fix the price increase. I think the main difference is that this increase in paper for recycling, the magnitude and the speed is unparalleled over the last 10 years. And so we are faced with the situation when we determined the price increase in -- it was mid-November, negotiated with our customers mid-February to end February. We included the price increase, the cost increases we have made at that point in time. And we just have to experience that, since then, there has been a rapid increase in several other costs. Now even if we had foreseen it, and we didn't foresee to that extent, I have to be honest, but even if we have, so to say, foreseen it, our customers have probably not accepted that we agree on a price based on future speculative price increases. And so if you have very strong and very short-term price increases, and you have a business model whereby you are not as volatile as, for instance, in corrugated packaging, where immediately they go for a price increase but have fixed prices partly per quarter in time also for half year, then you are faced with the fact that you have to wait somehow. So basically, if we would be in the corrugated industry, we would now come already with another price increase and said that one was mid of February, and another would make -- one mid of March. In our case, we more or less have to wait now because the second quarter is fixed basically for May to assess then the situation because, at that point in time, could well be that prices -- costs have moved up further, can also be that costs have retreated somewhat and then in -- what price increase we need to restore margin as per 1st of July. On your second question -- sorry, do you have the question here on that?

No. No. Fair enough.

And on the guidance, excluding acquisitions, you're absolutely right. If we talk about or -- we don't give the guidance, but whatever we talk about, it is the status excluding any acquisitions. On the acquisitions, so we said the Kotkamills acquisition should happen mid-year. And I said, we don't know the exact time. It could be 1st of June, but it could also be 1st of August, for instance. But if it was 1st of July, typically, you have -- you can assume that given all costs involved, so first, you have the acquisition accounting, so you sell your stocks without any profit margin. And you have some cost investment bankers, et cetera, who have to pay an acquisition fee in tax. So for all these reasons, I would roughly assume that the first 3 months are profitless and/or more or less profitless. And from then on, you are -- what you're currently earning we've given at least what it earned last year. And the same story, so to say, repeats with roughly from this point in time, 2 months delay for the Kwidzyn acquisition. So the expansion on profits will be, I would say, in this year, will be not so significant most likely. But again, if things go answer -- to quicker. And obviously, there is much more effect.

Okay. But you're not today in a position to say that results are going to be up year-on-year, including the acquisitions because it might not be the case?

Yes. Your statement is correct. Depending on all the parameters, how much do costs increase and also in a sort of negative scenario, costs increased strongly. We have the delay of basically a lost Q1 and a lost Q2 and some delay in the acquisitions. It could be that, yes. It is, as you said, it's difficult to predict.

There are no further questions at this time. [Operator Instructions] We've received another question. It is from Claudia [indiscernible] of [indiscernible].

I have a simple question. So you mentioned the cost adjustment program. Could you tell us more about this?

Yes. It's an overall program to increase our profitability. And it's -- a part of this program were some restructurings which we did last year. And you can expect also some for this year, and it has a lot to do also with digitalization. As we said, it also includes that we want to create overall economies of scale with bigger entities. And the third leg is specialization. So we are shifting volumes from one plant to another in order to get more efficiency if a plant focuses, for instance, on health care only or on food only. And this means also some adjustment costs, which we will take in order to increase our future profitability. And it includes -- sorry, that maybe should be added a number of investments which we are doing. Of course, these investments will increase our capacity and our output. But to a certain extent, they would also automate more and make the plants more efficient and more and more cost-efficient.

There are no further questions. So I would like to hand back to you.

Yes. So if there are no further questions, I want to say a big thank you for joining us. I think one element I want to draw your attention to is that we will have higher CapEx over in 2021 and 2022. So we guided that it will be -- instead of the typical 150,000 -- or EUR 150 million, which is about our depreciation, it will be in the range of EUR 250 million to EUR 300 million. But the biggest investment is Frohnleiten, which we've explained, where we increased our ecological footprint to some digitalization but also expand capacity. It will be over a 2-year horizon starting then somewhere in spring 2023. But on top of that, we also have brownfield projects in a number of our operations, both our other cartonboard operations in Germany and in Slovenia but also in packaging, mainly focus, the biggest project is here in Poland, but we also have projects in Romania, in Austria and in U.K. And the idea is to increase the volume because we see, especially in some segments, a strong growing demand. And the other one is exactly to have a better cost structure and more efficient machinery. And this will be, medium term, also an important growth and profit driver. So thank you very much for your attention, and have a good day. Goodbye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.