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

Good day, and welcome to today's Mayr-Melnhof Karton AG Half Year Results 2023 Conference Call. This meeting is being recorded. At this time, I'd like to hand the conference over to Stephan Sweerts-Sporck. Please go ahead, sir.

Good morning, and welcome on the part of MM Group. My name is Stephan Sweerts-Sporck, heading Investor Relations and Corporate Communications here. It's a great pleasure to have you joining this Q&A conference call on our '23 first half year results, which we released this morning. Besides the press release and the half year result call as CEO video statement has been published on our website, nm.group. And in this call, we want to provide you now with the possibility to direct, direct questions on today's communication to our CEO, Peter Oswald, and our CFO, Franz Hiesinger. Since this call addresses an international audience, we would very much appreciate your questions to be asked in English in the following Q&A session. And before we go for that, Peter may I ask you to start with a short summary of our key messages.

Yes. Thank you, Stephan. Welcome, everyone, to this conference call about our first half year results. I assume you've read the announcement, and you might have listened to the video message, so I'm not repeating all the stories. In a nutshell, in the first half year of this year, the markets declined significantly. And as a consequence, our EBITDA was around EUR 240 million. And had -- we achieved an operating profit of just about EUR 100 million. Packaging performed well with an operating profit of EUR 86 million, especially considering that this was without our very profitable Russian business, which we divested successfully at end of last year and the EUR 60 million one-offs for a dam closure. And very pleasingly, the development of our previous year acquisition of the Central and Asian Park are above plan. And this should progressively contribute to our operating profit growth going forward. And with these introductory words, I would like to open the floor for questions either to Franz Hiesinger, our CFO or myself. Please ask your questions.

[Operator Instructions]. And the first question comes from Michael Marschallinger from Erste Group.

I have 3. First one on the CapEx related at the same time. It's understood from [indiscernible] is now finished in early March to mid-May. Could you maybe provide some color on the current capacity utilization at these 2 mills and what do you expect now going forward in Q3?

Should I respond to every question? Okay, then. Or do you want to ask all 3?

I will do one by one, please.

Okay, One by one. Fine. Yes. The rebuild in [indiscernible] was extremely successful. The machine is fully operating to the request. In [indiscernible], we had some delays and some complications. But finally, the machine is also up and running. Given the current market circumstances, the capacity utilization is more or less in line with the overall picture and obviously for competition reasons, we do not want to give a concrete breakdown of the various mills.

Okay, understood. And then maybe in Q3, you have the 3 business [indiscernible]. So when we look in quarter 3, should we expect any improvement in earnings definitely some room versus lower input prices, some operational excellence? Or should we expect [indiscernible] the video recoveries take longer. So how should we think of this product paper division in the second half of the year and in Q3, especially?

Yes. And maybe I split this question. So the one thing is our -- the rebate in Slovenia. Unfortunately, so this should start mid of this month. We had -- we were unfortunately affected by the floods. It looks quite good at the moment that we can still progress as planned with this downtime, this rebuild downtime. But it's not 100% confirmed yet because parts of the mill are still affected by the floods. On the other questions, what can we expect from this quarter. One thing is that where the book is still low. So we will have same thing in various parts of our organization in terms of pricing, there is pressure on pricing, obviously, but equally some input costs are coming down as well. So it's also from a timing perspective, very difficult to say exactly how this will work out.

Okay. And maybe I have 1 last 1 and some more general question because in the intro statement, you mentioned you still believe in the strength from plastics to carton. Currently, we see this discussion in the European Union to change the packaging and packaging waste regulation. And this change seems to favor whether recycling plastics and some of your peers there were already quite concerned about these changes. And I would like to ask you how do you see this? And how would this affect the business if it comes into force in this current ratio?

Yes. Several things. So number one, I strongly believe that the trend from plastic to paper will continue. There was a recent poll in Germany a few days ago, for instance, where the plastic problem was highlighted as more concerning issues than climate change. It was 62% versus 59% or so. So I think it is on everyone's mind after this plastic in the ocean thing, that is a very serious issue. However, short term, we've seen due to delivery problems last year that some companies have -- some customers have, in some cases, even voluntarily, switched to plastic because cartonboard wasn't available. I think this will change again. And then we obviously see that some discounters in the market using their own brands instead of FMCG brands have gained some market share and they can typically for simple cost reasons to have more preference for plastic, are not using so much paper. But overall, I think the trend will continue. But for the time being, yes, it's a bit, a rocky situation. Concerning this directive on paper -- on packaging and packaging waste. There are some concerning issues in it and -- but we are hopeful that it will not be passed as initially proposed because we broke with studies that in some cases, a reuse might produce a higher CO2 footprint because of high transport costs. And 1 should not forget about the issue of fresh water usage to wash this bottles and waste and whatever is required for reusable packaging requires a lot of fresh water and also water is a scarce resource. So we have to see how the mine law looks like. I don't think that we will be negatively affected in a major way, but there are individual concerns.

Our next question comes from Oliver Wojahn from Alster Research.

I have 2 questions left. The first 1 is on the development in packaging in the second quarter. So if I'm mistaken, you had a roughly 20% year-on-year growth rate there overall. Could you tell us about what part of that was due to organic growth and what part due to the acquisition?

Yes. So the organic growth was actually an organic decline of 4%. So growth, minus 4%. In volume terms, we see a weaker market in food, but also to a certain degree in [indiscernible]. We see at the moment -- so going forward, it's always difficult to judge how things will develop, especially now after the summer break. So it's a bit of a difficult time to answer this question because summer is traditionally a very weak month. So we're really to see in September how things will pick up, but we will expect this year an overall decline of the market. And we think that our number is -- there are no concrete industry statistics better than the market development as we've gained market share. Because customers just value very highly that we are backward integrated. I think we have great -- we had -- we've developed some good innovations in terms of working closer with our key customers, we see overall a positive trend. But of course, the overall sluggishness in the market and the lower consumption of people does have some effect.

Okay. And my second question would be on the cost savings, which you mentioned. Could you maybe put some more color on what exactly you are planning to do and maybe the volume and cost savings you are targeting?

Yes. I think we don't want to throw out the ticket because to make our judgment calls in a very measured way over the next months. So first of all, we have already started with cost reductions. So we've taken our shifts, et cetera. We look into all various spending categories in order to -- that we don't overspend, equal it at this point, wherever it's about strategic, long-term sustainable spending, we continue or even increase spending like for IT. As an example, we really have to take it market by market, plant by plant, mill by mill to see exactly what measures are possible. So for instance, to give you an example, in Finland, you can do some temporary shuts which are subsidized in this way from a company perspective, in other mills, you can't do it. So it's shift reduction over working our reduction. It's various measures. And of course, we are prepared also to do restructuring and close plants if necessary. I think we were [indiscernible] is maybe the wrong word, but it was it's a good decision that we closed 1 plant in Germany in January this year. Because that would have been a big problem if we hadn't done it. It was also very good that we shut down a small cartonboard machine in the fourth quarter of last year in [indiscernible]. So we've tried to be as preemptive as possible. But equally, always thinking about the long term. We don't want to -- where we have competitive machines, competitive plants, obviously, we will not sacrifice our long-term development just because the market is temporarily in a bad state.

And our next question comes from Markus Remis from Raiffeisen Bank International.

A couple of questions, please. I'd like to return to the second quarter result in the packaging division. Maybe looking at it from a different angle when I compare it sequentially, there's been about EUR 6 million top line loss. Nevertheless, you've been able to maintain the EBITDA at about EUR 80 million level, which we also saw in the first quarter on an underlying basis. So that actually surprised me a bit to the upside. Can you maybe shed some light on the quarter-on-quarter development by earnings were flat despite lower revenues.

That's a very good question. I think there were 2 aspects. First of all, if you look to the first quarter, we shouldn't forget that we had this one-off EUR 60 million. And unlike many other companies, we are not showing a comparable EBITDA or trading EBITDA or however 1 might call it adjusted EBITDA, but as reported EBITDA. So this includes if you want to have it like-for-like, you have to add EUR 60 million, which were simply affecting the EBITDA and also the -- to a large extent, the EBIT number. Number two, because especially white line chipboard prices, so recycled cartonboard prices declined. We had some price -- we have contracts with our end consumers where we had to reduce our price. But equally, the input costs of especially recycled cartonboard fell as well. Some other costs also fell and therefore, this was not a volume loss, but it was more or less a price change, which was compensated by cost reductions. And then what we should not underestimate as a third factor, which is -- has a smaller impact, but the constant impact now is -- when we took over Essentra Packaging, it was actually more of less a breakeven company. So it's a restructuring case. And we do see progressive results here quarter-by-quarter. So that also had some positive effects.

Essentially, you're saying there was a tailwind because input costs were falling quicker than selling prices?

Yes. I mean if we take EBITDA EUR 62 million plus, EUR 16 million would be 78 to 80. So we have more or less a flat result marginally improved. And this means that more or less sales prices and input costs fell at the same level, same marginal progression in pharmacy and obviously, also the closure of the mill had a positive effect to save -- or has a positive effect from the second quarter on. And this complicated for some, a small decline in volume.

Okay. I know a bit surprised to hear the food demand in the packaging segment is weakening. I mean I would assume that this is probably the most resilient pocket in your end market. I mean is that just because retailers are -- consumers are increasingly leaning towards the retailers proprietary brands because of the pressure on disposable incomes? Or is there, I don't know, other factors behind?

Yes. I mean, minus 4, I agree also in this industry number, we are not used to. And I guess that the market was somewhere like minus 6. I mean the retail statistics for food retailing, so for instance, I just got the German number on top of my head was in the first quarter minus 8%. So it's interesting that people can save so much on buying food. So the retail business -- the food retail business is weaker. People are -- from a volume perspective, obviously, consuming the extra consuming products, which are now packaged in cartonboard. And obviously, we have a number of products where instead of your new state or [indiscernible] or whatever you have, you can just skip it and whatever other things. Sorry, please continue .

Apologies, I didn't want to interrupt you. I thought you were done with your remarks. This might be something that's probably here for the next couple of quarters, I mean, pressure on disposable income won't go away quickly, most likely.

Yes. I think it will finally go away, and people will find a back normal pattern. It's also after COVID, people were very fond of dining out. So we see a boom in restaurants, et cetera. For some time being, which is generally bad for us because it's better to consume the food at home, buy a sample. Some people are in a sort of economic stress to the overall environment and consumer as some people have like myself, I have probably -- there's no [indiscernible] food, but another fast-moving consumer groups an whatever for personal hygiene to space had [indiscernible] tubes at home. And now I'm using them until I need to buy new ones. So this will finally go away. Will it go away in the third quarter and fourth quarter? And to what degree will it go away in the third and fourth quarter is difficult to say.

Okay. Can you then maybe turn to [indiscernible] division. Is the volumes we've seen in the first quarter is 470,000, 180,000. Is that a good proxy for the development in the second quarter. So is that accurately reflecting the underlying demand with all these downtime is separate, it's probably a bit difficult to assess the underlying trend here, but is that representative of what you're seeing now in Q3? And maybe a bit of an uptick than in Q4 once the downtimes are digested?

Yes. I think what we have in the market is a lot of destocking in the whole supply chain going away from retailers, fast-moving consumer goods companies, packaging operations. Everyone was so best last year to end on some cartonboard that everyone decided to have higher safety stocks. And so I think destocking has a big impact, and over and above it, it's all the reasons which we discussed in packaging. For us, obviously, it comes in a way as an additional burden that we have this -- take into spend sales. On the other hand, if the market picks up, we had this technical downtimes exactly as the time when we -- when the market was anyhow sluggish. So the final judgment, we will see next year, how fortunate the timing goes. But it was indeed very important that we improve the quality of our products. We consider ourselves the leader in -- especially in WLC, the leader both in technology, quality and product features, and we have enhanced that further. And we do get the price premium for it, and we do see that especially in the narrow market also our customers turn towards those who have the better quality. And therefore, I think it was the right decision to do this CapEx even though they come at the -- an additional -- short term an additional layer of stress like also in the third quarter when [indiscernible] will be the factor closed almost for the whole quarter.

Just to add, WLC, what Peter mentioned, is recycling cartonboard. But like we're not [indiscernible].

Okay. I mean talking specifically about the Q3 earnings trend in Board & Paper. I mean the level we see in Q2, would you say that, that is also something we might you might generate in the third quarter, this I don't know, EUR 20 million EBITDA?

You see we do not make the guidance. But as we -- so I don't want to be too precise. And anyhow, it's difficult to assess because we see a lot of movements also in our input costs. And -- but we said very clearly that from the volume perspective, we do not see an improvement in Q3.

Okay. Final 2 questions. Firstly, on the CapEx side, I mean, you said that you want to -- that you made a cash protection program. So a question related to that, what would be the CapEx guidance for the current year? And also if you could shed some indication on 2024 and maybe with the assumed working capital impact, I guess there will be quite a swing because of lower prices, lower volumes. So anything on that? And the final question would be, why did you change the reporting structure in the P&L on gross profit to total cost?

Yes. So if I start with the first question on CapEx, we've guided about EUR 400 million for this year, and it will be now below EUR 400 million. How much is a bit -- always a bit difficult to say because it depends on the startup of the various projects. As you can read in the report, we also have a number of committed CapEx. So it's not like we stop buying. So also next year, we will come probably at around EUR 350 million and then it will really become lower in the following year simply because we just the pipeline of whether it's material. So this is with regard to CapEx. And now I hand over to Franz to talk about our change in [indiscernible] but just to add 1 thing, I told the big thing because I think it's more meaningful, but Franz, you can explain it better.

Yes, actually following up what Peter said, we believe it's more meaningful. It gives also more transparency to our site. And it also has a majority of our peers are reporting in that format, and therefore, we have changed in line with our peer group where the majority of our peer group reports in this format.

So it could support to understand our side better. And maybe if I just add to CapEx because Stefan reminded me that I should mention this, with regards to the CapEx, we have postponed the decision to next year, and we think we have to see how the market develops and various other parameters to see if we kick started. So nothing has been committed on that front.

Our next question comes from Cole Hathorn from Jefferies.

The first 1 is just on cost inflation and the trends that you're seeing. Had stuck a little bit of color, firstly, on what you're seeing on the wider kind of waste paper and OCC markets? And then importantly, what are you seeing in wood costs for your kind of key mills in Poland and then up in the Nordics as well. And then I've got a follow-up after that, I'll take that separately.

Yes. Thank you, Cole. So on waste, so we are more using mixed grades than OCC. So it's different to containerboard. But overall, we see a slight increase now. It depends a bit by grade. We use some very expensive mix grades, but also cheaper mix grades. So I think we have to be very cautious on that front that we might see some cost pressure which we then have to pass on in prices. In terms of wood costs, wood costs are generally slightly moving up. Fortunately, we've seen in Poland now after extreme high prices moderation and therefore, convergence to European levels. But it's overall difficult to touch because obviously, less wood is used. So 1 might expect the drop in prices. On the other hand, it's also cost-driven. And so it depends on oil prices and on many import effects. But overall, I would -- for both grades rather suppose -- or plan for a slight increase, which necessitates price -- increasing prices for our products, which at the moment is a bit difficult.

And then Peter, shifting to the demand and destocking side. I'm trying to understand where we are in the destocking and demand cycles across various packaging products. And I just wanted to hear your thoughts. I mean, my view is that on the cartonboard side, it's generally a little bit later cycle. So you only -- the industry probably only started to destock maybe December last year. And you're only going to start cycling those kind of destocking comps in the fourth quarter or in the beginning of 2024. So just first understanding when kind of the destocking and volume started to decline for the industry just to when you're going to start fighting those easier comparators?

Yes. I mean it is -- as you said, I think a very rational foresight full person, our manager has started to destock in September, October last year, and people didn't do that because we're still in this mood of you can't get your product at the right time. So for our industry, I mean, we don't know about all our customers, but we know it from our own packaging operations. We seriously started destocking a bit too late, around December exactly, as you say, and the destocking will be finished by end of September. And we are -- so if we are typical for the industry, then we -- just from a destocking perspective, we need to weather more or this time period where we are destocking will be finished. Obviously, we don't know it for our competitors exactly. We've just apply insight via our board and paper operation. But it will come to an end, but I don't see it yet in any statistics.

And then, Peter, I'd like to understand the benefits of having multiple different kind of mill sites and scale and kind of the forward integration at this point. I mean I know with destocking and it is impacting profitability and you have things to take downtime. But would you mind comparing that to let's say, a smaller player out there that wouldn't be able to manage their overall mill system because I imagine the cost per tonne from a smaller player would they'd be under significantly greater pressure than your asset base because they're going to have to absorb those fixed costs over -- even lower tonnes. I'm just wondering how you think you're fearing to some of the smaller players and the benefits of having a bigger mill system to...

You're referring to cartonboard or folding cartons, so upstream or downstream?

I'm referring to both the benefit of being able to firstly manage your mill system but then also secure those volumes into your converting operations?

Yes. So in packaging, it's definitely an advantage because we can specialize our plants to a certain degree and with more flexibility. So if things get really ugly, obviously, if you have 1 plant, you can either stay with it or close it. If you have 10 plants, you can take up the smallest plant, and this is what we are doing anyhow from time to time. And with regards to cartonboard, it's the same thing. This is why we could say, okay, we have a fairly small machine in Slovenia. So let's rather close it and take costs well out, and we can see that was very beneficial. So yes, we do have more flexibility. In terms of integration, it also helps to a certain degree, but different to corrugated. Our integration level is much lower for a number of reasons. First, there are many more different grades, and we don't produce all of them. Technically, there are direct deals in this market where the end consumer -- the packers, so to say, so the FMCG company buys cartonboard and folding carton separately. And so it's not always the decision of the folding carton producer to decide where -- from whom they buy a carton board.

[Operator Instructions]. Now the next question comes from Bridget Liseberg from RF Stenmark.

Yes, my name is [indiscernible]. I can tell my questions and the answer -- is it possible to speak in German because they need a short interview for our radio.

Okay.

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Yes, [Foreign Language].

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Thank you. And as it seems there are currently no further questions in the queue. [Operator Instructions]. If there are no further questions in the queue. I'd like to hand the call back over to our hosts for any additional or closing remarks.

Thank you. We come to an end to -- of this Q&A session, as there are no more questions in the pipeline. Thank you for the questions, the participation and your interest. We wish you a great day and say goodbye, and we will be back with Q3 results on November 7. Bye-bye.

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.