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

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

Hello, and welcome on the part of MM Group. My name is Stephan Sweerts-Sporck, heading Investor Relations and Corporate Communications. It's a great pleasure to have you joining this Q&A conference call on our '21 first half year results, which we released just this morning. Besides the press release and the report, a CEO video statement has been published on our website, which is a new website, www.mm.group. In this call, we want to provide you now with the possibility to direct questions on today's communication to Peter Oswald, our CEO, who is sitting next to me. 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, may I ask you to start with a short summary of our key messages.

Thank you, Stephan. Welcome, everyone. So most importantly with management are really excited about our two acquisitions. Our Post-merger Integration Manager and two technical consulting companies have, for several months, worked on a clean team basing to prepare the closing and our due diligence assumptions were confirmed or even surpassed. This is a transformation for MM and will put us on a growth path for the next decade. Now operationally, input costs rise extremely strongly even though this had slowed down since July. Given that we have quarterly, half year or, in some cases, yearly fixed prices, this hurts our margin. And this is the main reason why operating profit is down by a quarter. The good news, however, is that we can increase prices, so the customers understand and accept the price increase whenever it is necessary and, unfortunately, with this delay. And I think this is the main message, and I'm looking forward now to your questions.

[Operator Instructions] And we've received the first question. It is from Johannes Grunselius, Kepler Cheuvreux.

It's Johannes Grunselius here from Stockholm, Kepler Cheuvreux. I have two initial questions, but one is on the packaging division because there is a comment in the report about higher cost for packaging when carton price, cartonboard and paperboard prices are moving. Can you elaborate a little bit on what you're talking about there and perhaps some magnitude?

Yes. Thank you. So the packaging division has typically long-term contracts of -- in many cases, three years with typically half year price adjustment clauses. And these clauses were triggered in July because prices, and it's mainly based on April, have moved up at this point in time. So the good news is that we could increase prices beginning of Q3. However, bad news is that this was based on cartonboard prices in April, and prices have since increased further. And this will mean that there will be a certain squeeze in margins in the second half year, which because, yes, cartonboard prices have increased in July, and they will increase again in October. And this is then not fully covered. On top of that, these price clauses typically with only cartonboard whereas we have also seen strong price inflation for chemicals, inks, packaging. You name it. These price increases are also not covered. However, there is also some business, let's say, 20%, 30%, which is negotiated on a short-term basis. And there, we could increase prices. So it's a mixed picture.

Okay. But when thinking about margin compression, I mean, we're talking about relatively mild margin compression, I can assume, for the second half and then more back to normal. Or how should we think about the compression here in the second half?

Yes. It will be, let's say, much less than it was in cartonboard. And for next year, obviously, the target is to fully recover the margin. And we also have to be very thoughtful about secondary inflation effect. So this input cost price increases may lead to a generally higher inflation, especially with regards to salaries and wages. And therefore, we have to be very vigilant how we address this issue, especially if we conclude new contracts.

Okay. Okay. When you now will report the second half? I mean, you're saying in the report that the positive M&A effects from the big acquisition is coming 2022, and I understand that. But you will report nonvolumes, right, for these divisions? So that's my first question. And I was also wondering because you previously highlighted a pretty sizable synergy potential of 5% on the incremental sales. Is this still valid? And what can you say about these assets now when you are a little bit more familiar with them in terms of synergies?

Yes. So I'm sorry, I cannot remember that we said 5% because that sounds a bit high. I think we said in the case of Kotka, it's a low double-digit number in million euros. And in Kwidzyn, we said something, it is also same. It's obviously a bit higher because it's a bigger company. So 5% would seem too high. So we are more in the...

I think you mentioned maybe it was the industry stands at 5%. And then I thought it's an indication. But okay, it's slightly less than 5%.

Yes, it is less. So I think we should think about it in the range of 2.5% to 3%. And there, we feel so far, I mean we still have very limited insight, obviously, because all the workstreams only start now. But we feel from what we see so far, very confident about it, and hopefully, we can be more precise than in our full year statement and move in the direction of euro 5%. But I think 5% won't be reached. It always depends also how you calculate these things, and we do it on a very conservative basis.

Right. But in P&L, there's not much positive effects, I assume for the second half, but you will report the new volumes, right? So I'm guessing we should see a mathematical effect of sort of lower EBITDA, EBIT per ton, et cetera, but that's just -- that count...

Yes. We will be fairly detailed on all the acquisition effects, mainly then in the full year report when we have all the effects clarified.

The next question is from [indiscernible]

[Foreign Language]

Yes. So the start was that the most people important that we, as a management, are excited about our two acquisitions, and that we have had the chance by a clean team to do some prework. And this has confirmed our assumptions to even be more positive and that we see these two acquisitions is really transformational for MM. And we see especially Kwidzyn but also Kotka as a platform for the next several years.

Yes, speaking from -- the last 2 acquisitions?

Yes, acquisitions of Kwidzyn and Kotkamills.

I do not have the names. Could you repeat it? The names of the companies.

The companies are Kwidzyn in Poland and Kotkamills.

How to spell it?

Yes, I would kindly ask you to go to our homepage where you have the full text.

Well, I can't go back to this because I'm on my computer, I have your invitation. And my pin code and all the numbers you want to know.

Okay. I'll spell it in German. [Foreign Language]

[Foreign Language]

Yes. It's about a volume of EUR 1 billion sales -- will be close to EUR 1 billion.

[Foreign Language]

Yes, together. Yes.

[Foreign Language]

Yes, further acquisitions are planned.

Yes. No, for the time being, I mean, we are prepared to do small acquisitions in packaging. But obviously, our task is now to make these two big acquisitions work for us. That is the absolute priority.

The next question is from Markus Remis, RBI.

A couple of questions, please. Firstly, staying with packaging. Can you quantify the capacity additions you're mentioning in your video statement, maybe also with some granularity on the sites where you're modeling plans? And what would be the net effect versus the closure of Bielefeld?

Yes. Do you refer now to our divestment where we said it's a capital gain of EUR 45 million to EUR 55 million? And there like we all said...

From a volume perspective, so apparently the shutdown of Bielefeld kind of stands against capacity additions elsewhere. So I would kind of be interested in the net effects and at which plants you're [indiscernible] expansions.

Okay. We will transfer these volumes of the plant in Bielefeld to other plants in Germany, Russia and Ukraine and the production loss should be absolutely marginal because we deal with international customers. And basically, they do not care where we produce. The capacity reduction is not a difficult question, depending if it's based for all our packaging, it's something like 2%. But the important thing is because it's that it's we are specialized they are mainly on rotogravure packaging. And for our rotogravure packaging is probably in the range of 10%.

I think Markus, [indiscernible] also your statement in the video versus where we have these CapEx projects on the way exactly.

Okay. Those benefits overall MM Packaging capacity looking forward. Okay. So these expansions will expand our capacity, so our CapEx by around 10% to 12%. And this is offset by the CapEx, if you want to by about 2%, in rough terms. In mix now different printing technologies, so to say, into one number.

Okay. And this new capacity should be available as of next year already?

Part of it is available. So let's say half of this increase is available as of Q1 next year, and part will be only available a year later, so starting 2023.

Okay. Then on the general pricing environment, you mentioned price hikes on both packaging and on cartonboard. I mean where would you see yourself against your competitors? Would you say you're among the price leaders? Can you maybe shed some light on the general pricing discipline in the market?

Yes. I mean as we've just acquired two competitors. We have seen that it's a pretty similar picture with all -- so the issue today is -- or the topic is it's easy to increase prices when it is contractually possible. But equally, we have taken the decision, which is a bit of deviation from the past, to stick to our contracts, which we have. So if someone had a fixed price for the full year, then we will not change that and only increase in January, by example. And this is a significant burden for our profitability in the short run, but we think we -- it's the right way long term.

Okay. But what would be kind of the benefit, I guess, you have long-term relations with your customers anyway? So if the industry overall is disciplined, so you might give on some profit, I would argue. Am I missing...

Yes, that obviously, our target is to use a strong market also to reestablish a decent profit margin with customers where this was more the case in the past, to say in, in careful words. But overall, you're right, we want to marginally expand our margin.

Okay. Would you say that in cartonboard, Q2 was the trough in terms of operating profitability? So as of Q2, you had a bit of a...

Yes,it's a clear yes. Unless there is tomorrow a huge increase in recycling paper or pulp, which we do not foresee, but one always has to use this caveat because if tomorrow, recycling paper goes from [ 170 to 240 ] then we would have -- so they have moved so far from [ 40 to 170 ], and this was not expected. So maybe they move to [ 220 ] tomorrow. And then my statement would not be correct. But if we want to exclude this rather unlikely event, then we will have seen the trough in Q2.

Okay. Clear. And then final question. I mean it's maybe a bit of a crystal ball, but on the price development for waste papers. We all know the drivers for the increase. I mean do you see any of these issues, like Asian demand or lower collecting volumes, kind of abating on a more sustainable basis? Or what would be like your working assumption for waste paper prices? Is it just the leveling of a plateauing at current levels? Or any hope that it kind of comes down in the next months again?

Yes. I mean the position we have also towards our customers is that we do not believe in a reduction in waste paper prices. Is it a possibility? Yes, of course, it could be. But we see there are, I think, the structural issues speak against it. And these are, first of all, there is a consumption of graphic paper, and this means there's less waste. So those rates, which produced -- which are made out of virgin fiber are declining. And this means that there is a shortage of waste paper in the system. And then the second effect is probably that more historically containerboard, which is the main driver of demand for waste paper, the containerboard, the recycling rates of containerboards go down because B2C grows more than B2B and P2P so if containerboard is delivered to retail, the recollection is extremely high because they have all professional systems in place whereas if you get your Amazon delivered to your home in the B2C market, some of the cartonboard aims in the general collection and therefore, is not recovered. So we see a trend that recollection goes a bit down because B2C grows more than B2B. And these structural effects speak against a structural big decline in waste paper. However, then you have effects of the business cycle and [indiscernible] and of course, it can go down tomorrow as well. I mean it's like predicting where the dollar will be in half year is impossible.

Yes, that's why I said crystal ball.

I think we should, as an industry, not fall into the wrong belief that these high prices will anyhow come back. And therefore, we don't see full pricing persistency. I think the working assumption has to be that these high prices are going to stay, that there will be even secondary inflationary effects with salaries. And this has to be the basis for any price negotiations for the next quarter.

Okay. But there is no structural reason why you shouldn't kind of reclaim that maybe historical margin levels between 7% to 8%. I mean we've seen extraordinary years recently, but...

I fully agree. I mean we have to restore our 10% plus EBIT margin.

At the moment, there are no further questions. [Operator Instructions] The next question we've received is from Michael Marschallinger of Erste Group.

I have two, first one, a clarification on the Board and Paper division and a follow-up to Markus' question. Given there are no major raw material price changes for recycled paper, do you believe in the first quarter you will return to first quarter margins? or still below the 7%?

Yes, that's a difficult question. I think we should -- 7%, first quarter. 7%, yes, it's achievable, but it's not clear whether we will achieve it. It really depends on what our product mix, et cetera, will be also with regards to overseas. And if recycled paper prices -- I mean we are now a bit off, of August. So there are 6 weeks left in this quarter. They could can move EUR 10 up or EUR 20 down, and that will influence at the end of the day.

Okay. Understood. And second question, can you give us some indication of the integration costs for the two acquisition of Kotkamills and Kwidzyn and just understanding when will this majority of this quarter will fit in the first quarter, fourth quarter or also some of this cost mix?

I think we have two sorts of cost, one of the acquisition costs. So investment bank, lawyers, et cetera, and especially transaction taxes, which were fairly high in Poland especially, and this will be booked in the third quarter. And we will -- either in the third quarter or in the annual statement, we will also be explicit about these costs. And then we have integration costs in terms of one-off costs like setting up, changing computer systems, et cetera. And that's too early to give precise data because it will -- we have to look at the cost benefit analysis. And if things make sense because returns are very good, then we will change things and have more upfront costs but higher returns going forward. And obviously, some of these benefits will depend on capital expenditures, and that will -- and these can be quite significant numbers, but then we also get significant returns. But we can't give one figure which would include everything.

The next question is from [indiscernible].

I have two questions, if I may. The first one, what was the average price increase you had in the second quarter? And what is it in the third and fourth quarter? And the next question is, you mentioned that you have some input costs, which you cannot pass on contractually to your customers. Could you share the amount of this cost which you cannot pass on?

Yes. These are fairly detailed questions. So we -- for competition reasons, we are not allowed to give you precise numbers here because a competitor might listen in and do then know how much we've increased prices, and the commission might see that as an implicit collusion. But we are -- I mean in recycled paper has increased roughly, let's say, from the start of over 1-year period, by about EUR 120. And so with the price increases, we have done and have already implemented 1st of October. This is, so to say, reflected a bit more because other prices have increased. And on your second question on what are, so to say, other costs, I think they are in the range of 10% to 15% of our overall cost structure. So it's ink and glues and various others...

Overall costs.

Which are also inflated and are typically not reflected in any index mechanism with customers.

Meaning that you cannot pass them over to your customer then?

No. Sorry, that's not what I meant. So in board and paper, we really negotiate prices on whatever quarterly, half year, yearly basis, and there we can pass on everything. I mean it's a free negotiation. So we can also increase our margins if we can do so. But in the cases where we have 3-year contracts for folding cartons and have fixed mechanisms there, we can't pass it on because it's typically not included in the contracts. And what I was referring to is that, going forward, when we sign new, for instance, 3-year contracts with customers, we will build in more clauses, which do not just reflect the fiber input but other costs as well, like potentially salary increases, et cetera. So I think that 10 years ago, it was very useful in the 3-year contracts to include general inflation clauses. Then this went -- because inflation became so low that customers typically say you have to improve your cost structure, at least in the same amount as inflation. And therefore, typically fixed prices meant they were fixed for three years. And going forward, this looks very dangerous to me because we do not know how inflation will develop over the next 3 years.

We now received a follow-up question of Johannes Grunselius of Kepler Cheuvreux.

Yes. It's Johannes again. I just have a question on the two divestments that you announced during the summer. They are, of course, highlighted in the second -- first half report. How should we think about the earnings impact from the divestment from a modeling technical perspective? I mean you're giving us the volume. Is it about the same profit on this unit as in cartonboard as overall, for example? Or could you give us some help, how to think about the negative effect from it?

Yes. Can we say this?

Roughly.

Yes. So we talk typically about, let's say, in EBITDA in this case of EUR 25 million to EUR 30 million.

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

Yes. Thank you very much for attending this Q&A session. Again, if you look at our numbers, it looks a bit frustrating at the moment. However, we are convinced that this is a temporary effect because we are confident and we see it actually that we can pass on these prices. So if I look at my daily pricing report, I can see that the order intake prices are significantly higher than the prices which we charge to our customers for what we sell. And overall, yes, as I said, we are very excited. We think that these two transformational acquisitions give us a lot of -- will be lots of work but will give us a lot of benefit going forward. And our offering to our customers in terms of sustainability, of innovation, is something which will be shown over the next years. And probably more short term, we will see some positive cost effects because they are both two, very competitive wins. And in this way, thank you very much for your participation.

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