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

Welcome, ladies and gentlemen, to this audio webcast interview on Mayr-Melnhof Group Interim Results for the First 3 Quarters of 2022 with the company's CEO, Peter Oswald.

Peter, having just reported third quarter results, what is your summary on the MM Group's development so far this year?

I'm very pleased that we managed to achieve a strong performance throughout the first 3 quarters of this year and this despite huge unprecedented challenges from spiraling cost inflation, instability of supply chains, persisting COVID and increased global uncertainties. Demand for our renewable consumer packaging stayed strong and resilient. The past 2 years transformation of MM has started to pay off. We have concentrated on value-enhancing acquisitions and focused organic growth combined with a strong emphasis on the improvement of productivity, sustainability and innovation. In the first 9 months, organic volume growth in Packaging was close to 6%. On top, our income statement has been particularly influenced by the inclusion of the cardboard and paper mills, MM Kwidzyn and MM Kotkamills, which we acquired a year ago. And I'm very pleased to say that their returns have exceeded plans by a wide margin. And now the acquisition of Essentra Packaging, which we finalized at the beginning of October, marked a further milestone in our strategic transformation. This acquisition positions MM as a global player in secondary pharma packaging and contributes to more resilience and growth throughout our business.

In your Q3 report, you are addressing a looming recession. How are you preparing for this scenario? And how far are you already experiencing early indicators?

Yes. I don't know if there will be a recession and how tough it will be, but as a matter fact, the packaging order book remains very strong. The order book in Board & Paper has significantly come down from all-time highs towards a normal pre-pandemic range. And the reason for that was destocking in the supply chain part, and that's very important, not a drop-off in final demand. Now how are we preparing for it? We are continuously reducing our costs, we're improving our service and sticking to a conservative financing.

In Q3, capacity utilization in Board & Paper came down to 91% from 99% in Q2. Do we expect more downtime to come in the next months or quarters?

Over the next 6 months, there will be further destocking in the supply chain. But as I said before, our consumer markets are resilient and noncyclical.

Prices for energy, gas, electricity and recycled fibers have come down significantly from past months' peak levels. What impact do you expect on your margins looking forward?

We apply a flexible pricing strategy, amongst others, with energy surcharges. So if energy prices go down, we pass this reduction onto our customers with some delay.

Since you are within a historically high CapEx program, how does cost inflation and availability of technical parts affect your planning?

Most of our long-term CapEx project target to increase quality, reduce energy consumption and raise output. And indeed, they do face some delays, but overall, we are on track. All machinery builds in Board & Paper, which are at Frohnleiten in Austria, Neuss in Germany, in Kolicevo in Slovenia, are now scheduled for implementation during 2023. And we stick to the indicated CapEx range of up to EUR 300 million per annum for both '22 and '23.

A competitor has announced a 750,000 tonnes machine for FPP, which is virgin fiber-based cartonboard, by 2025. What will be the impact on the FPP markets?

Just to look at the numbers, this volume of 750,000 tonnes represents 30% of current European demand of around 2.5 million tons, so it's huge. Market growth has been improved due to a plastic substitution, but it's around 1% to 3%. And in overseas markets, we see more and more competition from Chinese overcapacities which have been built over the last 2 years. So this CapEx will create significant overcapacity in FPP from '25 onwards and will last for many years. However, we will defend our position as our FPP mills, Kwidzyn, Kolicevo and Kotkamills, are already well placed on the cost curve. And we will move them further down the cost curve with a number of investments.

When presenting the Essentra Packaging acquisition for the first time, you mentioned that, on the one hand, it is a great move market-wise. But on the other hand, the business is underperforming. So what profit impact do you expect for this year and the years to come?

Yes. So first, we are very happy that we've become a global leader in secondary pharma packaging. And since closing beginning of October, I've had the possibility to visit many customers and have a number of meetings with the new management. And this makes me very confident to achieve and probably overachieve our business plan. We have started to work on improving customer service, operational efficiency and realizing our synergies. For the fourth quarter of this year, the impact on operating profit will be close to 0 because of nonrecurring acquisition accounting. And over the next 3 years, we will increase our operating margin to MM standards.

Securing energy supply and the move to alternative more sustainable sources is a much discussed topic. What are your precautions and how are you planning for MM's future energy supply?

There is the risk from potential gas rationing except our mill MM Kwidzyn. And this has been mitigated with 3 actions. One is we've built up some reserve cartonboard stocks. Secondly, we have rented gas storage facilities in Austria, from which we could supply not just our Austrian but also our German mills. And we have done investments in alternative oil firing in Finland. So I think overall, we are well prepared. And midterm, we will invest in energy savings, that's the most important, significantly into biomass and, to some extent, also photovoltaic to replace carbon-based energy. And on top of reducing our economic risk from high energy costs, we follow ambitious science-based targets to mitigate climate change. This includes the reduction of both direct and indirect emissions from operations as well as emissions from the value chain.

Looking on the MM Group balance sheet, net debt currently amounts to around EUR 1.5 billion. How is this financed? And do you see room for further acquisitions?

Yes. As everyone may recall, we financed most of our acquisitions and CapEx activities through Schuldscheindarlehen issued earlier in '21 with an average duration of about 8 years and an average fixed interest rate of 1.6%. So we are very -- we have a very solid financing. And we consider a net debt-to-EBITDA ratio of 2.5x as a conservative threshold. And currently, we are well below this threshold. As we focus on post-merger integration, acquisitions will not be a priority over the next 18 months. However, we might do smaller bolt-on acquisitions if they appear attractive to us and we have the financing to do that.

And finally, can you give a flavor on your perspectives and priorities beyond '22?

We will continue our strategy of long-term profitable growth by promoting innovative renewable consumer packaging. And we will put strong focus on cost reduction, productivity, innovation and sustainability. So '23 will most likely be a difficult year, but I'm convinced we are well positioned to develop our business further.

Peter, thank you very much for this interview.