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

Welcome, ladies and gentlemen, to this audio webcast interview on the Mayr-Melnhof Group's interim results for the first quarter of '23 with the company's CEO, Peter Oswald.

Peter, could you explain the reason for the 45% decline in MM's operating profit for the first quarter of '23.

Yes. I mean, the decline was mainly due to weak sales volumes in our division, Board & Paper, which we had already cautioned about during the presentation of our strong '22 results. However, the historically unusual 20% volume decline in Europe in the overall market during Q1 was higher than we had anticipated. The loss of the Russian market also contributed to our volume decrease. And with regards to overseas exports, there was weak demand and strong competition. And on top of all that, MM faced major CapEx-related standstills at the Frohnleiten and Neuss mill in Q1. And all this together caused a substantial decline in the Board & Paper division's volume and results compared to last year's record levels.

Could you shed some light on the reason behind the strong market decline?

Yes. In addition to destocking in the supply chain, there has been a shift in consumer behavior due to the very high inflation of wood, which is much above the general average. And this led, on the one hand, to reduce consumption of wood, and on the other hand, also to consumers shifting towards, let's call them, budget products that typically use more plastics. Therefore, there is now a hot debate, is the trend from plastics to cartonboard still valid? And I personally think, yes, this trend will continue. However, the extent of its broad-based adoption remains to be seen. And we will only know which trends were temporary and which were sustainable in about a year or so.

We could also notice that the packaging division's operating profit was down almost 20%. Could you elaborate on this?

Yes. I think that has a very specific reason. MM Packaging was affected by onetime costs of EUR 15.5 million for the closure of a plant in Germany. And if we excluded this effect, operating profit would have been up by around 20%, which I believe is a strong development, also given that we have sold our highly profitable Russian operations, which are not included anymore. Sales have grown considerably. First, due to the inclusion of last year's acquisition in pharma packaging, Essentra Packaging and Eson Pac, somewhat offset by the divestiture of our Russian plant. But there was also, and we are very proud about this, organic growth of 2% in the first quarter. However, we have seen a decline in our order books throughout Q1.

Could you comment on how sales prices developed in Q1?

Yes. In our Board & Paper division, our prices declined very differently for various grades. For instance, virgin fiber board prices were fairly stable, while prices for recycled cartonboard were declining as paper-for-recycling costs decreased. In packaging overall, prices were stable. However, the decline of cartonboard prices or part of the cartonboard prices via index clauses will likely feed into price declines in packaging going forward, however, also mitigated by inflation clauses.

This leads us to input prices for fibers and energy and to general costs. Could you provide a brief comment on the impact of current developments, especially compared to Q4 of last year?

Yes. That's a very complex question. As already mentioned, paper-for-recycling costs significantly declined at the end of last year and potent in February. And currently, we are seeing a slight upward trend. If we look at market pulp, that has been declining, which recently accelerated. And the very potent pulpwood costs are, contrary to that, more on an upward trend since more wood is used for energy and several sawmills are facing downtime. Chemical costs have shown a very heterogeneous picture. But overall, we have seen limited cost reductions in Q1, and we hope to see higher cost reductions in Q2. Energy costs have been decreasing, but hedging for '22 has mitigated this effect. And lastly, and that's very important to note, is we have seen strong personnel cost increases as well as increases for various services.

Given that '23 is a year of significant capital expenditure for MM Board & Paper with 3 major board machine modernizations taking place in the first 3 quarters. Could you comment briefly on the progress of these projects?

Yes, the rebuilding of Frohnleiten was completed on budget and on time with the successful start-up of our board machine 3 in early March. And our team and suppliers did really here an excellent job. The Neuss rebuild began in mid-March and is expected to be completed by mid-May. And Kolicevo rebuild is planned for Q3. The overarching goal of these projects is to offer our customers higher quality, better sustainability through lower grammage, reduced energy and water consumption, and increased innovation and, of course, improved productivity. Our clear aim is to be the technology and cost leader, building on the quality leadership of our leading brands. This is MCM for white lined chipboard, Alaska for FBB, Absorbex and IPACK for kraft paper, and Flo for uncoated fine paper.

The integration of the ex-Essentra pharma packaging business has been identified as a major priority for the packaging division in the current and next year. How do you view this project from your current perspective?

Our entry to the pharma packaging business on a large scale was a smart move because this market is a resilient, growing and profitable business. In the current market, we have seen much more stability than in other markets. And there is significant potential to improve the historically marginally profitable Essentra Packaging results. In the past 6 months, we've made good progress in the turnaround, achieving some quick wins and establishing a new and flatter organization for our entire pharma packaging business with reduced overhead costs. We've been launching a large number of projects to secure future growth opportunity with our customers, increase innovation, drive shop floor productivity, improve supply chains and OTIF, and improve pricing calculations.

Can we expect more restructuring and one-offs this year?

Yes. I mean, operating more than 70 production sites on 3 continents. And after acquiring a few unprofitable sites with the former Essentra Packaging Business, there is undoubtedly room for improvement and further consolidation to enhance our competitiveness. A lot also depends on how markets develop and how much markets grow. So further one-offs cannot be predicted.

Despite your focus on CapEx and integration work, do you see any potential for further acquisitions, given the current challenging market condition?

We are continually scanning the market for good add-ons, but only add-ons, not major acquisitions. Our clear priority is to improve what we already have.

Looking ahead to the second quarter and midyear, how do you assess the chances of a market recovery?

Yes, the visibility in our industry is limited, as our order book is defined in weeks. As the issue at hand is not only destocking, but also the effects of reduced purchasing power, consumer spending, my personal opinion is rather that recovery will likely be slow and take longer. Unfortunately, we have closed a small machine for recycling cartonboard in Slovenia in Q4 last year, as we had predicted a longer downturn, even though we were now a bit surprised by the severity of this downturn. Now all short- and medium-term projects must focus on enhancing competitiveness. And at MM, we are very well prepared for this.

Finally, how would you compare the year '23 to the exceptional previous year '22?

'23 will be a transitional year for MM Board & Paper and an integration year for MM Packaging. '22 was above trend line profitability, '23 is expected to be below trend line profitability. But overall, MM, as a matter of fact, is a strong company.

Thank you, Peter, for this interview.