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, who will lead you through the conference. Please go ahead.

Hello, and welcome to the part of Mayr-Melnhof. My name is Stephan Sweerts-Sporck, heading Investor Relations and Corporate Communication. It's a great pleasure to have you joining this conference on short notice about our latest news from this morning, MM acquires Essentra Packaging. Peter Oswald, our CEO, will be sharing with you now the highlights of this transaction, the impact on MM Group. This will be based on the presentation, which has been made available on the homepage of our corporate website mm.group, simply mm.group. It's the [indiscernible] between presentation cover. After the presentation, we will enter into a Q&A session in which Peter and our CFO, Franz Hiesinger, who will be happy to answer your questions. Since this call is directed to the international audience, and would very much appreciate your questions to be asked in English. Peter, may I ask you now to start with your points.

Thank you, Stephan. Welcome to everyone. Thank you very much for joining. I'm very pleased about our acquisition of Essentra Packaging. It is a perfect fit in our core business of folding cartons. And I would like to thank our team for the fantastic work they have done to make this deal happen. We had a very, very thorough due diligence, which has convinced us that we can bring a lot of value to this business. MM as you know is the European leader in cartonboard and folding cartons, but we have so far only a limited presence in pharma packaging. With the acquisition of the Essentra Packaging, we will become a global leader in secondary pharma packaging. We like pharma packaging for a number of reasons. It's a growing business given the aging of our society. It's a resilient business because it depends a little on the business [ cycle ]. And it is a business with high switching costs. And we specifically like Essentra Packaging because it is a global business with long-term relationships to 19 of 20 leading pharma companies. It is a global platform for further growth in the still fragmented market. And geographically, it is very complementary to our pharma packaging. We believe that pharma packaging will consolidate over the next years as pharma customers require -- will require more innovation, system solutions and very important compliance with ESG rules. And this gives a competitive advantage to packaging companies and specifically to pharma packaging companies with many production sites. So I would kindly ask you to move now to Page 4 of the presentation, and let's look together at some key figures of Essentra Packaging. So as you can see, sales in '21, we're at around EUR 430 million. So I'm preferring euros. With regards to EBITDA, it is somewhat difficult to determine because it is a [ carve-out ]. Based on our exemption of necessary divisional overhead costs, we have identified a pro forma adjusted EBITDA of EUR 37 million in '21. So while the business has made good progress over the last [indiscernible] it is financially underperforming. And the key point and our key message is we at MM have the competence and the synergies to improve this. Essentra Packaging has a customer base of more than 800 customers. And again, 19 important customers are the biggest pharma companies globally. It employs about 3,500 employees. And it has 21 manufacturing facilities across 10 countries in Europe and Americas. Let's move on to Page 5 where we can see the products. The company produces 3 different products. And that's very important because they are a system, and pharma companies more and more that the whole system is provided by one company. So the most important product accounting for about half of the turnover are folding cartons. Then leaflets are very important, accounting for about 30% of the business. And also labels very focused label production for our pharma needs. So we'll be really in a position to provide a comprehensive service to our customers. If we look to the next page, Page 6, you'll see here the map with an overview about the plants. And let me just run through them. So starting now with the orange plants in Europe. There are 3 plants in Ireland, highly specialized. Ireland is a very important hub for the pharma industry production. We are especially focused on short runs, which is important because there are lot of [ patrons ]. A strong presence in the U.K., also with highly specialized plants on either folding carton or leaflets and labels. And then plants in the Netherlands, in Germany, in Poland. Two plants in Italy, again, one specialized on folding carton, one specialized on leaflets. A small plant in France. Two plants in Barcelona, in Spain, both in the Barcelona hub as well as in the Madrid hub. And then there is a strong presence in the U.S. with 4 plants in Mainland U.S. and 2 plants in Puerto Rico. And you may ask why Puerto Rico. Puerto Rico is a very important pharma hub for the U.S. pharma industry with all major players having a significant presence there. As you can see on the right-hand side, we have the existing MM plants, and you see that it's very complementary. So at the moment, Essentra Packaging doesn't have a position -- has a very, very small position in France, where there are [indiscernible] legacy in MM plants with very good position both in folding carton and leaflets. And recently, we have acquired Eson Pac which has a strong presence in the Nordic market, so Sweden and Denmark. And this gives us a perfect coverage of Europe and a strong position, especially in the Eastern hub of the U.S. and in Puerto Rico. So moving on to the next page and just finalizing before I'm very happy, together with Franz Hiesinger, to take your questions. So summarizing it, Essentra Packaging is a unique opportunity for MM to become a global player in secondary pharma packaging. And this will enable us to offer to our customers more innovation and more sustainability. We like pharma packaging because it is a stable, resilient business with high cash generation, and it's a growing business. Most importantly, it is at the core of our core competence. And so we have substantial synergies on several levels with synergies within our -- with our pharma packaging business, our health business. We have synergies with the overall packaging growth because of our deep expertise in operational excellence in folding carton production. And we have synergies together with MM board and paper where we are an important supplier to the pharma industry with our high-quality [ FBB ] cartonboard. Last but not least, the market is still a very fragmented market. A lot of local purchasing is happening. To a certain extent, that will stay. But the big -- the top 20 pharma companies will require more and more innovation, more and more system solutions, and this will give us a fantastic platform to satisfy their needs, but will also give us the opportunity to grow both organically and potentially with the smaller bolt-on acquisitions. So I think that was the presentation, and we are now looking forward to your questions.

[Operator Instructions] And the first question is from Matthias Pfeifenberger, Deutsche Bank.

Yes. The first one is a bit on the profitability. So why has it been underperforming in the current environment? Is this cartonboard costs not being passed on? So how difficult is it for them to pass on price increases on their end? How competitive is the pharma packaging industry? And then also, what's your -- what's the margin of your pharma packaging business? And what do you think Essentra can get to? So obviously, 3 questions packed in one. I'll leave with that -- that was the second one.

Yes, thank you very much. So in terms of profitability, it's clearly below the industry standard and also below our numbers. Instead of -- Essentra, we've spent a lot of time on the due diligence. I personally visited a 1/3 of the plants covering more than half of the turnover to be sure that we understand if we really can bring something to the party and increase profitability. And I will see the main areas for improvement in operational excellence, so machine speed, et cetera, improvements in the supply chain. And also the synergies and the cooperation with -- there was an issue of lack of cartonboard, which where we can add a lot of value and also make the customers comfortable that they have the backward integration and can rely on the supplier. Yes. I hope this answer your question.

And maybe more strategically, so you've now done the 2 fresh fiber packaging acquisitions. And you're now doing a deal that's a very nice fit in this fresh fiber packaging, if I'm not mistaken. So my question is with Kwidzyn and Kotka, how much of tonnage or revenues can you actually downstream integrate? And if so, is this also your goal? I mean is this the goal for the next 5 years to make Mayr a more downstream-integrated business or as much as possible downstream integrate the risks downstream acquisitions, especially in pharma, where you said there's lots of consolidation going on?

The answer is the downstream integration is not important for us. Different to the corrugated industry, folding cartons are a much more bespoke and differentiated business and much less of a commodity, especially in pharma because of the regulation that it's much more difficult to change suppliers. So we see it more from the other side. We want a very resilient, strong packaging business. And of course, it is an advantage for the packaging business that it can offer the backup of -- to the customers to say that we can guarantee, so to say, our own cartonboard supplies. In terms of -- because it is very high margin, so high gross margin business, the consumption of board is relatively small in this area and our integration does not play a very important role from a board and paper perspective.

The next question is from Markus Remis, RBI.

Two questions, please. Firstly, related to the industrial footprint of the target. Are you happy with the stepup? Do you see any need for consolidating one or the other plant? That is the first one.

I think the former, I know the present management has done some consolidation, and this is not a value driver. So we don't want to exclude anything, but it is not about consolidation or [ shorting ] plants because also our footprint is -- there is a big overlap, it's very complementary. It's really about driving operational efficiency, quality and customer service in terms of sort of supply chain.

All right. Can you shed some light on the synergies? I mean both in terms of top line or on the cost side? I mean how much of percent of the cost base or in absolute terms do you think you can take out over the next 2 to 3 years?

Yes. You know as well that we are very conservative people. So it will be a double-digit million running rate improvement to be achieved in '24. We will see them as anything great if we find more synergies, certainly not less. So it's in the low teens.

Okay.

Sorry, and on top of that, there will be -- just to make one thing on synergy where there's a real advantage because we combine our sales and other things. And the other topic is, so to say, stand-alone improvements, which would also be an important driver of the profit improvement.

Clear. Then one question, just to get a sense of the target kind of historic profitability so that roughly 9% EBITDA margin that you flagged. Is that representative also for prior years?

Yes. The profitability was -- so without going or commenting too much, but Essentra is a conglomerate consisting of 3 different businesses, and they [ bought ] into these businesses. And the trajectory has been after 2014, '15 not very good. So it has a historic problem with profitability.

Okay. Can you also provide some granularity on the current capacity utilization of the plants? So is there a lot of spare capacity you can build on? Do you see any need for kind of extra investment is the asset base value invested? And also the final question would be on the product offering. Anything you can kind of transfer from Essentra to [indiscernible] or Eson Pac or vice versa?

Yes. So there is spare capacity. Still, we'll need to improve to make some investments because the age of the machinery, let's say, is a sort of a mixed bag. There are good and newer machines, but also some older ones, which are pretty inefficient. And so in order to achieve our profit improvements in terms of operating profit, some CapEx will be necessary. In terms of -- sorry?

Can you indicate the capacity utilization rate roughly, [indiscernible]?

It doesn't make so much sense in this industry because it's not a commodity industry. So sometimes you have a specialized equipment which is fine if it just runs 1 or 2 shifts. But overall, let's say, that the company could produce, let's say, 20% more without the problem. And transfers of volumes, yes, some will take place. But it's a more a game of speaking now to our customers and see where we are complementary. And so if the customer is a customer of Eson Pac we have good success now to offer services and products in France, for instance, where we have our traditional [ legacy ] business. And obviously, these opportunities will now become much larger.

Okay. And final question, maybe to Mr. Hiesinger. The GBP 312 million that you indicated as purchase price, is that the actual enterprise value? Are there any pension obligations coming on top maybe in the U.K. or so? Or is that excluding pensions? And what would be like the book value of the assets? Or in other terms, will you have to activate significant [ goodwill ]?

So the GBP 312 million, that is an enterprise value. There are hardly any substantial pension liabilities, which we will take over. However, obviously, will be adjusted with the cash or net debt at closing which will be deducted -- arrived as an equity value. And actually, we expect only a fairly modest goodwill what we have to activate our digitalization. So yes, that is our current understanding. But obviously, we have to look forward to the purchase price allocation to identify all the assets and the remaining difference amounts to be goodwill.

At the moment, there are no further questions. [Operator Instructions] There are no further questions coming in. I hand back to you gentlemen for some closing remarks.

Yes. Thank you very much. So thanks again to everyone for the questions and for participating. We are all here very excited because it is a major step for MM going forward to have a strong position in the growing resilience and a generally very profitable way. We have done a very thorough due diligence to understand why the current profitability is not up to the level. And we are convinced that we have the competence and that we have the synergies to improve this. And in this way, I think it will -- our shareholders will be very happy in a number of years when we have executed the stand-alone improvements as well as realize the synergies in this way. Thank you very much. Franz, you want to add anything?

Thank you for the questions, participation and interest. And the next plant news from our side will the release of half year results on August 11. Wish you nice Friday and say goodbye.

And enjoy the weekend. Thank you. Bye.

Thank you. Bye-bye.

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