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

Good morning, ladies and gentlemen, and welcome to the Mayr-Melnhof Karton AG regarding annual results 2023. [Operator Instructions] Let me now turn the floor over to your host, Mr. Sweerts Sporck.

Good morning, and welcome on the part of MM Group. My name is Stephan Sweerts-Sporck, Heading Investor Relations and Corporate Communication. It's a great pleasure to have you joining this Q&A conference and our '23 annual results, which we released this morning. Besides the press release, a video statement from our Management Board has been published on our website, mm.group. In this call now, we want to provide you 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 would 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 off with a short summary of our key messages?

Yes. Thank you, Stephan. Good morning, everyone, also from my side. I'm not going to repeat our announcement, but let me just try to get to the main point. And the main point was that in 2023, MM experienced two very contrasting developments. For MM Packaging, it was a record year with a strong performance. Our operating margin cracked the 10% [ hurdle ]. Despite the slow market, with strongly improved results, thanks to our innovative products, our superb sales team, our superior logistics network, and last not least, our great cost position, and we've improved costs recently very much. Our organization focusing on distinct market segments has been crucial as well as our CapEx program in '21 and in '22, which improved mainly our operating costs. Our acquisitions of Eson Pac and Essentra have developed beyond expectations. And while pharma coming from a very low profitability is still below our average operating margin, we are confident about our progress in the coming years. And whilst we expect headwinds in '24 in Packaging, first from increasing cartonboard prices and secondly, from rather low volumes, our market leadership gives us a very strong position and with a lot of [ possibilities for self-help ]. Now this stands in contrast to MM Board & Paper, where we had to take significant market [ downtimes ] because of a very weak market, which was roughly 18%, 19% down last year. And on top, we shouldn't forget that we were rebuilding three machines, which were requesting significant downtimes of three of our mills. Now looking where we stand now, I think we have to face the fact that the industry has significant overcapacities also after a rebound in volume. We have done our homework by selling two mills and closing three less competitive machines. And on top of taking out higher-cost machines, which is one way to improve year results, our response has been reducing costs, mainly energy and personal costs via CapEx and also organizational changes and to improve product quality via innovation and our CapEx as well. And while it will take some time until our new and improved products go through the approval process with our customers, our pipeline makes us very confident that we will get additional business and can, therefore, improve our results in the course of '24. Yes, I want to leave it with this. And now our CFO, Franz, Hiesinger and I are happy to take your questions.

[Operator Instructions] There are currently no questions. [Operator Instructions]

Seems that I've been so confusing that there are no questions anymore.

Here comes the first question's from Michael Marschallinger from Erste Group.

[ Will have three on Board & Paper division ]. First one, in the outlook, you mentioned that you expect the capacity utilization in Europe to remain dampen. Can you maybe give us a hint now there was the capacity utilization in the fourth quarter in Board & Paper? And you said in the first two months, the volumes are picking up now, where it is now at the moment?

Should I take them one by one?

Yes, please.

Okay. Okay. Yes. So I mean, it's always very confusing, so to say, what different people mean by capacity utilization. But let's say, compared to if we ran full speed, our capacity utilization was somewhere around 80% and that was more or less 75% to 80% throughout the year. So the same or no improvement in Q4. What we've seen now for -- we don't have a significant industry data only for January. And therefore, we have to see how this develops. But for our group, it has improved to above 90%.

Okay. Above 90%. Also in this respect, my second question because in the fourth quarter, your sales were up slightly in comparison to the first quarter. [ However, results ] adjusted EBIT was down [ EUR 6 million. ] Now with volumes picking up at capacity utilization above [ 90% ], as you said, so can we expect the EBIT to go to a positive reach again already in first quarter?

Yes, I think we have two things. So the good news is that volumes are materially up. The other thing is that prices are down. So we have a constant slide of prices throughout last year and this has unfortunately continued in Q1. So without making a concrete prediction, you should not expect it because prices are at the low level. We are out now with price increases for the second quarter and if they go through, then we can see an improvement in the results. But let's say, compared to -- so Q1 compared to -- of this year to last year will be, yes, higher volumes at lower prices, significantly lower prices. And the cost -- some costs obviously have come down, wood costs, for instance, but the number, of course, for instance, paper for recycling is up and also personnel costs are up into the high inflation.

Okay. And then also coming to my third and last question. So you said price increase in the second quarter. Then on top, you said in your [ leader ] statement, you see on the benefits from strategic transformation instead already also in the second quarter later. And what does that mean for the full year and for the second half to think this will be these two effect price increases and strategic transformation will bring margins in the second half of back to normalized levels, what we've seen in the past from 7%, 8% to [indiscernible] too early, if you could give some comment on that, please?

Yes. Yes, I don't have this crystal ball. I mean, what we see very clearly is thanks to our CapEx that will improve cost structure. Secondly, we have a better process to higher-quality products business services, et cetera. And that is very, very well taken up by our customers. So this is encouraging. However, we should also not forget what I highlighted in my introduction that in our industry, the customer cannot just switch from one minute to the other, but we have to go through this quality approval processes and qualifications of products, the homologation and that takes some time. So I think it will be very backloaded towards the second half of -- to see the benefits flow through overall will be mainly in the second half. For some cost items, obviously, it's already the first half, but the main effect will be in the second half.

The next question comes from Markus Remis from Raiffeisen Bank International.

Yes, although I had an issue with getting through, but here I am. First question relates to the cash flow development in the final quarter, which was absolutely stellar. I'm struggling [ to see to ] reconcile the drivers. Apparently, it was working capital. But I mean, doing the math, I don't think that this was an operational improvement only. So can you outline what has happened in Q4 with the capital?

Yes, I think you're absolutely right. So first of all, we did indeed do a lot operationally and we shouldn't forget that the result is not as fantastic as I would like it because we build up working capital strongly the year before. So it was a natural reaction and it was also carried by two things. One is obviously that our, let's say, inventory came down by volume in a significant way, but we shouldn't forget that prices pay huge roll because prices declined throughout the year. Obviously, it also means that the valuation of our both receivables and our stocks were much lower. But on top of that, we use both this is quite common more factoring.

Okay. Can you give us a bigger order factoring level at year-end and where it was at the end of 2022?

Yes. Maybe I'll hand over here to Franz.

Yes, good morning. So we have basically increased our factoring volume by around EUR 200 million.

EUR 200 million .

Yes. And overall, we had a working capital improvement in this year, EUR 470 million, including this EUR 200 million.

Okay. It's very helpful. Is that now a level that you consider kind of a sustainable or stable going forward?

Yes. Generally, yes, it will obviously depend. So to say, I think in terms of volume reduction, we can do some -- a bit of more work. However, depending on the price development, it might well be that our working capital is slightly going up if prices go up. And obviously, that's something we would hope for.

Okay. And factoring in absolute levels, how much is it?

It's about EUR 260 million.

EUR 260 million. Okay. That's very helpful. Staying with the cash flow. You invested or CapEx was EUR 425 million in '23. I think the most recent guidance, a little bit below EUR 400 million. Now you're guiding for EUR 300 million in the current year, that's including carryover. So I was wondering now that actually we've invested a bit more than guided in '23, what the carryover would actually be?

The carryover is out of the open project, which still ongoing, but it's not in a huge extent. And as you correctly said, we are guiding now the EUR 300 million CapEx payments in 2024, and that is all the same-store profit and cash protection plan, which should take us in this regard.

Okay. And maybe coming to operational topic. I mean, what I found particularly striking in the fourth quarter was the performance of Packaging, earnings-wise. I mean, the margin of 11%, that's very strong. That kind of the result of the cost-cutting measures and all the restructuring that is done in this segment, meaning this is the level that also will be sustainable at least for the next quarters or were there some special effects? I mean, I guess, a good product mix, but anything else that we should consider?

Yes. So let's go back what drove it. I think there were some self-help issues. So for instance, I mean, we had some product innovations and show some a number of customers allocated additional volumes to us because of our product quality. By the way, also because of our improved board qualities, which we have. That was one thing, then we had the number of cost measures. One thing, and this will more or less continue and this is absolutely sustainable, the additional tailwinds, which we benefited from in '23 and also in the first quarter of '24 is obviously a decrease in cartonboard prices. And once the cycle reverses, and we see it now reversing. So we will have increasing cartonboard prices. Obviously, there is some delay. Now unlike in the past, when the delay was really very much delayed by up to a year or so, we have no contract in place, which allow for a quicker adjustments to new prices. But still, there will be some lag of 3, 4 months typically. And this will be a sort of headwind. On the other hand, a headwind which we like because it will be reflected then in better Board & Paper results.

Sure. Okay. [indiscernible] one question because you are flagging some price increases as of the second quarter in Board & Paper. I mean, given trend that we're seeing now on the pricing side, I mean, how confident are you that this goes through? And in relation to that, is that across the board? Or is it for specific product areas?

So we have already increased prices for uncoated fine paper. We -- I'm very confident on the recycled cartonboard, so WLC, that we will get a price increase. There is -- there were also the market leader in FPP. So in virgin cartonboard, we are the #3 in the market, and therefore, we are not taking any initiatives there and there seems to be no movement in prices for the second quarter. So it's a [ good pick ].

Okay. So paper and recycled cartonboard, but not for virgin fiber?

Yes.

Okay. And the final question would be on the restructuring and potential plant closures. I mean, of course, you can't -- or you won't give us concrete details, but can you just outline your general plans? Is this more of a, how should I say, of the small scale and closure that you're targeting? Or is it more of a comprehensive program?

So I think over the years, we have downtime again, the structural adjustments and they might happen again this year. But let's say, the focus is not on taking plants out simply because almost all our plants and all our paper mills are very competitive. And therefore, there is generally -- it wouldn't make sense to take them out. So we are not hesitating with a very simple philosophy. We invest well and structure companies well to be strongly positioned. And if we believe that we will not achieve a strong competitive position, then we close it. And at the moment, there is very little need. We do have some companies which are loss-making, which are mainly from the Essentra business, but there, we have done -- made good progress, so one should never exclude anything because the year has been 10 months to do, but it will not be a major lever, so to say. It's more on maybe taking some shifts out and other cost reduction programs.

There are no further questions at the moment. [Operator Instructions] Next question come from [indiscernible] from Homeport Family Services.

I was wondering if you could comment on your hedging of the energy and the potential impact it might have had on volume declines and potential market share losses in Board & Paper? How is your hedging at the moment? And yes, did you lose market share because of higher hedges than competitors, for example? And how do you see this going forward?

Yes. So first of all, we haven't lost any market share. I think we are gaining everywhere market share. In hedging, we always have a continuous policy of hedging a part of our products. That also depends how efficient the respective markets are. And if we talk about hedging also to add, it doesn't necessarily mean that we use financial instruments. It's just that we agreed with the seller on a fixed price for a certain percentage. So we do have some hedging, if you call it, or fixed prices in place. And naturally, it's the market prices move up, you benefit from the hedging part. And if prices become cheaper, then you obviously lose out on it.

Okay. You're very confident you didn't lose market shares. That's good to hear.

Yes. Not that I know. [ I mean, we've now to go through all ]. I can't say it for every small part of [indiscernible]. But overall, we either held it or increased it.

[Operator Instructions] There are no further questions at the moment.

So since there are no more questions, it seems that everything seems to be quite clear as foreseeable, let's say so. We thank you very much for your participation, questions and interest in the company. Our next results will be Q1 results on the 23rd of April. And saying -- having said this, we wish you a great day and say goodbye to you. Bye-bye.

Goodbye.