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

Good morning, ladies and gentlemen, and welcome to the annual results call 2022 of Mayr-Melnhof Karton AG. [Operator Instructions] Let me now turn the floor over to your host. Stephan Sweerts-Sporck.

Good morning, and welcome on the part of Mayr-Melnhof. I'm Stephan Sweerts-Sporck, heading Investor Relations and Corporate Communication at MM. It's a great pleasure to have you joining this Q&A conference call on our '22 annual results, which we released early this morning. Besides our press release, a video statement on the results by the Management Board has been published on our website, www.mm.group. In this call, we want to provide you now with the possibility to direct questions on today's communication to our CEO, Peter Oswald, and our CFO, Franz Hiesinger. 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.

Yes. Thank you, Stephan. Good morning, and welcome to everyone. Thank you for participating. So I want to be very brief in 2022, MM was growing strongly, and our strategic decision yielded good results. We have a strong balance sheet, we will propose to increase dividends by 20%. So this is all good news. If we look to the more recent development, the consumer board markets have declined significantly by roughly 20% year-on-year depending what the area -- how you define Europe exactly, even more if you include Russia. And as the CB figures show, this has continued until at least February. And my reading of March is that it's pretty much the same. So my reading is that destocking has not yet run its full course and that we might be in for a few more difficult weeks and maybe months. And with this, I want to finish and Franz, and I are looking forward to your questions.

I just want to hand over to the moderator, who will give you a short technical introduction how to ask questions in the system.

[Operator Instructions] And there is 1 first question coming from Michael Marschallinger, Erste Group.

I have 2, and the first 1 would be on the volumes in board and paper, they dropped quite significantly now in the fourth quarter down to some 500,000 tons, you can give me a comment on the outlook further market-related machine downtimes. You're now at 75% capacity utilization. Should we assume that this as a run rate now for the first quarter? Or should we expect a further drop in volumes and capacity utilization in the first quarter?

Yes. If I may answer that. Thank you for the question. I think the number is roughly right, that is the fact of the first quarter with very little visibility towards the second quarter because our order books are typically in a range anywhere from 10 to 30 days. So it would be very speculative to make any predictions here. But as I said in my introductory words, we see from our customers that stocks are still on an elevated level, so in the packaging companies. And we also see some evidence that stocks with the customers of the packaging companies. So the brand owners, for instance, have too high stocks and therefore, we should not assume that this situation changes immediately.

Understood. And second on your hedges. In the video message is that you significantly can be hedged on the energy side. Could it be more specific for electricity, natural gas, what does it mean for '23 and '24?

Yes. So for '23, we are fairly high leverage. So let's say, in a range of above 70%. And for the next year, we are also leveraged, but to -- sorry, yes, not leveraged, hedged, but to a lower degree. And this, so to say, is for us a stabilizing factor because our customers want that we can guarantee them prices and have no certain upcharges, et cetera, like we had last year. And with these hedges, we can guarantee that. However, just to emphasize it, of course, we have an overall inflation, which is driven like by personal costs and service costs, et cetera. And this is something we have to pass on to our customers.

So at the moment, there seem to be no further questions. [Operator Instructions] And the next question comes from Markus Remis, Raiffeisen Bank International.

A couple of questions, please. Firstly, following up on the energy topic. When you say more than 70% of the needs are covered. I guess that is basically a forward buying, and is that gas and electricity? Or did you refer to gas only?

It is a bit different. We don't want to go into the details, but I was referring basically to overall energy. For us, gas is more important than electricity.

Yes, sure. Okay. I mean we've seen quite a drop on the energy market. I mean, to which extent do you think you are -- your kind of prices that you've locked in competitive with the current spot prices?

At the current spot prices, it is still very competitive.

Okay.

But if the gas price would fall to EUR 20 per megawatt hour or we would see electricity costs below EUR 100, then it would definitely be a disadvantage that we are hedged.

Yes. Yes. What's your -- I mean, the general feeling on the pricing side? I mean basically, waste paper has come down quite significantly. Energy is coming down, your customers have well-built inventories. I mean, I guess that [indiscernible] price pressure. Is that something you're already feeling. And with regards to that, I think you've implemented a much shorter -- a much shorter-term driven pricing strategy over the course of last year, if I'm not mistaken. So compared to the past, is it then fair to assume that the price declines will be felt much quicker, I guess?

Yes. So the 2 topics, I mean, on recycled cartonboard. So WLC, we have seen a strong decline in wastepaper prices, even though 1 has to be careful because not all grades fell so much. And therefore, some of that will have to be passed on to customers on FBB. So the virgin cartonboard, we see a fairly stable picture because wood cost, industrial wood costs are rather up than down. And therefore, yes, energy costs are somewhat lower, but with integrated mills, you do not have so -- I mean, energy costs are significant, but not so high. And therefore, here, the price level is fairly stable. Overall, yes, especially in our contracts with our FMCG customers and other customers, we have moved to typically quarterly price adjustments, whereas previously, there have been a number of contracts with half year price adjustments. And also the formulas are somewhat different that it refers not to average prices over a long period, but to spot prices. And both effects mean that price adaptations are quicker than. We always knew about that, obviously, in a market with rising prices, that was a big problem for us in a market with declining prices. Obviously, we would like the opposite, but that's not fair to our customers. And I think the situation which we have now, where we try to manage the margin is the right approach. And if we have cost reductions, we are, so to say, happy to pass them on. Equally, where we have increasing prices and with the situation has changed very much compared to last year, it's now not the big bright spikes like with energy, or raw material, but now it's more about, let's call it, general inflation or co-inflation, now the challenge in the task for us is to make sure that these prices can be passed on to the customer. So it's a more complex situation.

Yes. So would you say that the price cost spread that you will be able to sustain them at -- yes, at comparable levels and then the earnings pressure will basically come from the lower utilization rates. Is that a fair assumption...

Yes. Yes. That is the situation as it is now.

All right. Are you mulling plans to take out capacity beyond -- say the downtimes, I mean in case there is more of a prolonged weakness in the market, any plans already in the drawer? And I mean, what's your take on your competition? Are you seeing any similar actions that your capacity is idle or at least temporarily taken out?

Yes. I mean we have taken the measure to take out 1 of the board machines in our [ collegial ] mills. So we have reduced capacity and we have currently no plans to take out machines permanently also because we feel that the machine part we have now is very competitive and therefore, wouldn't be justified to take any capacity out.

Right. And on your peers behavior?

They also do stand still because the lower order intake hits everyone. And yes, and I hope that some of them who have less competitive mills or machines take the right action.

What's your general take on the price discipline in the market? Are you concerned that there will be a pipe for market share via pricing?

Look, we are always in -- we are in a very competitive market. And I think, generally, everyone tries to get market share, but I haven't seen or we haven't seen any unreasonable prices so to be low cost.

Okay. Yes. Yes, final follow-up question. I mean the CapEx volume, I think it was maybe EUR 50 million or so above what you've most recently guided in 2022. Now there's also quite a uptake in 2023 so more than EUR 400 million. Is that -- I mean is that a reflection of the general inflationary environment? Are there any extra projects coming on stream? And also then maybe looking beyond 2023 is then kind of a decline to the EUR 300 million level a realistic scenario?

Yes. I mean, one, the biggest change. So actually, we feel it was in line with what we planned. We even had some delays, but the change is indeed Essentra. So we bought here a business which needs substantial improvement and part of this improvement, not all of it, but a part of it means additional CapEx. And so the CapEx for the ex Essentra business and to a certain extent, also the Eson Pac business have increased this guidance of -- I think it was EUR 350 million to EUR 400 million. Beyond -- for what will happen in -- your other question was what will happen in '24, following. I think we are working on a midterm plan and once we know more about it, it will be announced. But generally speaking, let's say, we are in a mode of growth, but not so much even growth, but more on bottom line improving measures and this will further CapEx, for instance, we have also to address to get towards our -- to reduce CO2 emissions according to the commitments we've made, et cetera. And that will also include some money. So at this stage, we do not want to predict '24, but rather wait until we have complete approvals from -- by the Executive Board and from the Supervisory Board until we give further guidance to next year. I mean the philosophy is very, very easy is if we feel that we can create substantial shareholder value with CapEx, then we would do them and otherwise not. And we do not always get it right, but in many cases, I think we historically get it right, then we will continue with this policy.

All right. Okay. I'll get back into the line.

[Operator Instructions] As there are no further questions at the moment, I'd like to hand back to the speakers.

I would just like to say, again, you're very welcome to ask a question. I see it's many of you participating who usually ask questions. So -- that's the time to raise your hand. And we wait still some minutes, 1 or 2 minutes before we come to a conclusion if no further questions are asked. And I hand over -- do we have another question?

Yes, there seems to be 1 follow-up question coming from Markus Remis.

It's actually 2. If you could provide us an update with regards to your operations in the Ukraine, how business is progressing there and maybe some indications on the capacity utilization, et cetera? And then also, I'd be interested to get a sense on the Turkish plants, how business is evolving there with all this, I mean, economic turmoil the country is facing?

Yes, pleasure. So Ukraine, we are very proud that Ukraine continues to produce roughly now at half capacity. This is fairly low. But given our low overhead costs, it means that the plant is profitable. We have, from time to time, our blackout. But overall, it's amazing how engaged people are that we can continue. We are producing to a large extent for Western Europe because our customers in Ukraine or some of our customers have been badly hit by the board and bring the cartonboard into the country and export them to Western Europe, and we want to continue it. Overall, Ukraine is a small plant to remind every 1 of it. So it's not a big issue, but I think it has a high symbolic value. With regards to Turkey, we have in Turkey 4 plants. And unfortunately, 1 plant was in the zone where the earthquake took place, and this plant has not been -- so fortunately, we had no injuries, no death and the plant is fully -- was well built, let's call it this way. And so it can work. We will start up production in this plant next week. And then we have to evaluate what the overall situation is because a lot of infrastructure has been destroyed and great to see at the end of the day, which customers continue production or resume production, it's probably the better world. Overall, in Turkey, that -- we are happy with the business. We are suffering from this high inflation accounting. I don't want to get into any technical details, but we think, overall, so our business there is viable. And yes, it will say with no big investment plans, but equally also no plans to reduce our output. So we believe that the Turkish market overall is an attractive market. It's a good production site with high productivity or our plants have high productivity, and therefore, we continue there as normal.

And from the, say, the volume side, if you compare 2022 to the prior year?

The volume was growing.

Okay.

Yes. And we also see at the moment it's softer. It's more difficult, but we -- but overall, it's a fairly stable demand except for the 1 plant, which is near the Syrian border where obviously, we had to stop so for some time.

Thank you, Markus, for your questions. So we are coming here to an end of this Q&A session. Many thanks for questions, participation and the interest. For your information, our annual report will be available on the 5th of April, and we will release first quarter results on this year on the 25th of April. We wish you good day, and say goodbye.