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

Good morning, ladies and gentlemen, and welcome to the Mayr-Melnhof Karton call regarding the half year results of 2024. [Operator Instructions] Let me now turn the floor over to your host, Mr. Stephan 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 call on our first half year results, '24, which we released this morning just 2 hours ago. Besides the press release and the half year report, CEO video statement has been published on our website, mm.com. In this call, we want to provide you now with the possibility to direct question on today's communication to our CEO, Peter Oswald, who is sitting next to me. Since this call addresses an international audience, we would very much appreciate your questions to be asked in English in the following Q&A. Before we go for that, Peter may I ask you to start with a short summary of the key messages.

Yes. Thank you, Stephan. Welcome, everyone, and thanks for joining this conference call. I do not want to repeat my video message here, which you might have seen. But let me briefly summarize the main highlights. First, in this quarter, we have improved results sequentially and also compared to quarter 2 in '23, which is very encouraging. Our Board and Paper business has returned to operating profit. Our volumes in board and paper are substantially up. We are from now on reporting Packaging in 2 divisions because we think that the Pharma and Healthcare business is a very distinctive business also with a different business model. And to remind you, it's not just selling folding cartons, but also leaflets and labels. And therefore, we think it's in the interest of our shareholders to be here more transparent and show it as 2 separate divisions. In Food and Premium Packaging, we've seen some profit decline, but by and large, our record results of '23 have been defended. In Pharma and Healthcare Packaging, we are making steady progress, not as in '23 when we more than doubled our EBITDA from our newly acquired EssentraPackaging business on a like-for-like basis. but it's a steady improvement. And going forward, we expect here to benefit from the GLP-1 analogues for weight reduction, where huge capacities are being built up. Looking at our balance sheet, it is stable. Looking at the cash flow statement, our operational cash flow and free cash flow are significant -- have significantly improved. And going forward, our extensive CapEx program has now been finalized, and so we will automatically enjoy a substantial free cash flow. So with this brief summary, I would suggest that we open the Q&A.

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

I will start with 2 questions on board and paper. Firstly, you guide for annual maintenance shutdowns in Q3. I just wanted to ask what impact on volume should we expect here? And secondly, on board and paper, as I said, is slightly positive now in -- EBIT positive in Q2 for the first half year, still negative, minus EUR 11 million. So with the selective price increases, the question, will it be enough to turn positive year-end?

Yes. So I'm quickly calculating the numbers. So basically, the standstill will be both mills 2 weeks or half a month. So give me one second to calculate it, it's -- the effect should be EUR 25,000, roughly, which we will lose due to these rebuilds. And on your second question, we are not giving any profit predictions. So I fully understand your question, and it's a question which is internally very much on our mind. The impact of the standstill obviously, is a double-digit million figure as you can calculate from this volume loss. And therefore, it will be a challenge, but we don't know where prices will be in the fourth quarter.

Understood. And then 2 questions on your Pharma and Healthcare division. You are saying you're seeing inventory reduction of the industry. Could you give us some color how long this should take in your view? And also, could you give us some update on the Essentra integration, if it's possible also on the margin level that you see?

Yes. So first, I think the destocking should pretty much come to an end. I think we have first signs that it has come to an end. But yes, it's more a question of is it a few more months or not? On the second question, the Essentra integration. So formally, the integration has now been done also with the integration of our computer systems and all the work one has to do in the post-merger integration. We have made many organizational changes. We have delayered. We've hired very experienced people from our industry. So we are -- and now we are on track, first of all, to rebuild the customer confidence because the delivery reliability of the [ former ] EssentraPackaging wasn't the best one. And now we have a path forward to -- so compared to when we bought it, we have, on a pro forma basis, improved it by well above 2x, so roughly 2.5x the EBITDA. EBIT was practically not existent. So you can't make a multiple on that. And we -- our target is until '26 to have the same profitability than in our traditional Food and Premium Packaging business.

Okay. This means a 10% EBIT.

10% is the target and finally, it should be lower. But it also takes time.

And the next question is coming from Markus Remis from RBI.

A few questions, if I may. The first one on board and paper. So is the interpretation of a bottoming out in volumes accurate, meaning that this run rate 570,000, 580,000 tonnes is also realistic than for Q3 and Q4 adjusted for seasonal fluctuations.

Sorry, could you repeat the run rate? I was -- I didn't get the number and what you meant exactly.

So Q1, Q2 run rate in terms of volumes was about 570,000, 560,000 tonnes in terms of sales? And is the interpretation accurate that this will also be a decent proxy for Q3 and Q4?

Yes. I think -- so, I mean, I would hope that it -- overall that it improves, but we should not forget we have to deduct the standstill in our 2 mills, which will have a negative impact. But apart from that, we would even hope over time that things recover more because our run rate should be above 600,000 tonnes if we run full capacity.

Yes, going then -- yes, on the full capacity. That would actually be my next question. I think in the fiscal '23 conference call, you said capacity utilization was something like 75% to 80%. Can you provide us with an update where it was in the first half?

Yes, it was -- now we are running at around 90%.

Okay. And then on the price increases, at least on calculating average prices, you could see an uptick in Q2 versus Q1. Can you share maybe some details on the magnitude and also in which product areas you will further increase the prices in coming quarters or in the coming months, actually?

Yes. I mean, we can't be too detailed also for competition reasons. But basically, we succeeded with price increases in the second quarter in Uncoated Fine Paper and our saturating kraft paper and also in a few areas in both, we should not forget that in board, there is obviously, given the fact that the market has declined and the overall market has by far not recovered as we have recovered, but more -- a very low double-digit number. And so there is a price war going on. And we have to be patient to not overreact and carry it out because some weaker players have to close their mills. But from experience, we know that it always takes time with the same experience in saturating kraft paper. There are only 3 main players in the global market. And we were fighting each other like hell until one of them closed the mill. And now the situation has improved. And I think we have to do the same in the board segment.

Okay. Is there a difference in the price dynamics between virgin and recycled cartonboard?

At the moment, not so much. So for this year, we should for both expect rather flat prices. Based after price increase, we did now for the third quarter in -- for the [indiscernible].

Okay. And then I would have a question related to the cost cutting measures that you have implemented and then the outlook statement, you indicate that actually the bulk of this would impact 2025. So can you shed some light what's currently going on in terms of cost cutting act, I would have assumed that lot of has been done in '23 already becoming effective also this year, but there seems to be a bit of a different curve, high impact in '25. So if you can put that into perspective.

Yes. So, as you say correctly, in '23, we already had some cost reductions, which benefits for us this year. But given the overall, let's say, very difficult market environment, it took some time, for instance, also in our procurement to make comprehensive tenders on a bigger scale. And these benefits are start to flowing in. But the full effect, so some of them will be, let's say, valid from the second half year on, et cetera, then we have reduced the number of people of employees. And obviously, as you know, if you terminate these contracts, you have to pay them for half a year, one year, et cetera. So let's say, typically one year. And so the full effect, if you do actions, even at the beginning, the actions we took at the beginning of '24 will only have the full impact, more or less, yes, from beginning of next year. We also have done some cost savings are linked to like mix changes for our products where we can make savings and that needs extensive testing with customers, et cetera, to be sure that these replacements have the same quality or another example is some savings are the consequence of -- even if they are high-return CapEx projects, but the consequence of CapEx and then we have to wait for this CapEx sometimes a year or so until that can be implemented and has a de facto impact. So especially I'm here referring especially to the energy segment, where we do a lot of things to reduce our energy consumption, but this is typically linked to some CapEx and the order time is anything from 6 months to 15 months just to get the new equipment and then only then you have the impact. So we will see it gradually quarter-by-quarter, it flows through. But if you look at an annual result, it will only fully be impacted by '25.

All right. Okay. You gave a keyword, which is energy. So I mean we've seen so many companies that have an energy-intensive business model quite a relief on the cost base. So is it fair to assume that board and paper has also seen quite some tailwinds from lower energy costs?

Yes. It's basically correct. However, we also have a policy to constantly hedge our energy. And obviously, we were a huge beneficiary in '22 and also in '23. But in '24, the hedgings we have are drag on our profitability. Yes, so to sum up, our energy costs are lower. So we are benefiting, but we -- it might not be a benefit if you look to spot prices in electricity and gas and calculate the benefit then -- so we have hedged. It's just our standard policy to hedge our bets, so to say, and hedge some part of it, and we've reduced that. But still, we have, for this year hedged some gas and electricity at higher prices -- higher prices than the spot prices now.

Yes, -- do you have -- and I'm sure you have, but can you share the estimate when -- what kind of your unfavorable hedges are running out and do you also kind of down to what levels?

No. I mean until end of the year, basically, the bulk is done for next year. We also have some hedging in place, which are the much more favorable level, and then it will depend where the energy costs will be if these hedges are a benefit or a disadvantage, which we will only know by then. And this year, we have the burden of hedges, which we have done last year. Fortunately, we didn't do some at really high costs, but we did some at costs which we thought then were very much down when we did them but from today's point of view, they were too high. But this is -- let's say, we are not speculators in a way. So we have the policy that we generally try to hedge around half -- half of our volume, some time ahead in the previous year. So we give ourselves discretion to make judgments, but we are not betting the pharma and say, for 1 year, we are hedging everything and next year, we're hedging nothing. So we have a consistent policy, which smoothens the cycle, but when prices significantly come down, hedging is a disadvantage.

Sure. And my last question would be related to your investment budget, if you then provide us with an updated figure for 2024 and maybe also outline a bit of a direction for '25?

Yes. I mean as you see, we feel very comfortable. We guided for EUR 300 million, and we feel very comfortable that we will undercut it. It's always a bit tricky to -- because the cash flows are not exactly as the machine starts up with prepayments, you sometimes have delayed payments, but we will be comfortably below EUR 300 million. And for next year, we don't want yet to give final figures as we are considering a few CapEx. But for sure, we can say it will be down -- significantly down on EUR 300 million.

Significantly down, okay.

Maybe if I may add to the CapEx policy. So generally speaking, the CapEx, let's say, decisions which have been done in '20 and '21 have now come to an end, including then the CapEx we have done in EssentraPackaging after we bought it. So we enter generally now years of low CapEx. However, of course, first, it's not no CapEx because we see still selective opportunity, especially in the energy sector to lower our energy and also move to more renewables. That's one aspect. And the other aspect is we have some attractive growth businesses, like, for instance, in pharma and some of our CapEx have been for growth. And as we win contracts obviously, we will invest in order to participate in that growth. But it's not a sort of standard CapEx program where we say we want to bring ourselves to the next level of technological standards, but it's more a very selective -- say a very selective investments with high return projects.

So what would be like a normal run rate expressed in percentage of sales, maybe something like maintenance plus, minor growth prospects.

Yes, I think our target overall, excluding any growth prospects would be in the range of our depreciation or somewhat below, which is, let's say, roughly EUR 200 million, a bit above EUR 200 million. So normal CapEx should be below EUR 200 million.

Okay. All right. And the very last question, sorry, on factoring because that has been quite on the upward part towards the end of last year. Can you remind us of the factoring level by the end of the first half?

It was on a similar level.

[Operator Instructions] And the next question is coming from Cole Hathorn from Jefferies.

The first is just around the input cost trends that you're seeing in your business. I just like some color on what are you seeing for your wood costs for your virgin cartonboard and fine paper in Poland and then as well as what you're seeing in Finland? And then separately on the waste paper for your recycled side on the board, how do you see those waste paper markets developing?

Yes. Thank you, Cole. So wood is generally on the way up. Fortunately, in Poland, things have stabilized again where we were for some time last year, well ahead of the European level, but it's still on a relatively high level, but stable. In Finland, it has stabilized now as well. I think there are some other countries where wood price -- wood costs go up. With regard to waste paper, we have seen a steady increase this year. And obviously, therefore, we should have increased our product prices much more. But due to this market share fight, it was not possible, and I don't expect that to change quickly. And now we see the first signs of a softening and some people believe now that we will see a rather quick decline in waste paper prices. But yes, that's anyone's guess how it will develop. So, so far, let's see the peak was in July. And now we will see if the decline -- the slight decline in August goes over to a threefold or whether they stabilize again.

And then could you just remind me of when we will start to see the full benefits from the investments that you've made in kind of the recycled side of your business? I mean I know you've done a number of CapEx projects. You've done a number of energy investments. I just like some context around how much of a saving can some of those energy investments do? I mean, maybe not a dollar number, but an efficiency versus the mill or something that you can give us context to understand how you're trying to shift your position down on the cost curve.

Yes. If we think about that we've done, let's say, CapEx program depends now what you include, exclude but of -- in recycled container -- cartonboard of EUR 250 million. You can assume that we wanted a decent return on this EUR 250 million. And I leave it on your guess what would be -- what we would consider as a reasonable IRR. What is interesting in this market is that the complexity of the rebuilds require, so to say, it gives you a longer start-up curve than what one is used to in -- liking in containerboard because the products are much more -- is much more difficult to produce and to use more qualifications from your customers. And therefore, indeed, we have in '24, so to say, the benefit that we don't have the standstills, but we are still in the ramp up in terms of we produce almost full, but still not the optimal product and still with some qualifications being outstanding. So again, the benefit will come in basically in 25, of course, a lot will come in -- was there already in the second quarter, and there will be more in the third, et cetera. So it's gradually building up. But the real benefit is only coming next year, so more or less a year after this CapEx were formally completed and started up.

[Operator Instructions] There are no further questions.

Okay. Then if there are no questions, thanks for the questions you've asked and for your participation. And just to summarize, we are cautious about the challenging trading environment in the next future. But overall, we've become a leaner and much stronger company with regards to asset-based management, sustainability, innovation in our product portfolio. And therefore, we are convinced that we have a solid basis to benefit from the upturn in our markets whenever they will come. And in this sense, yes, thank you very much for the participation, and have a good day. I just want to remind you that our Q3 results will be released on November 7. So Mayr-Melnhof says goodbye and wishes you a good day. Bye-bye.