Mayr-Melnhof Karton AG (MYM.F) Earnings Call Transcript & Summary

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

Good morning, and welcome on the part of MM Group. It's a great pleasure to have you joining this Q&A conference call on our first half year results, which we released just this morning. Besides the press release and our half year report, we have also published a CEO video statement on our website, mm.group. This call is now designed to give you an opportunity to ask direct questions regarding today's communication to our CEO, Peter Oswald, and our CFO, Franz Hiesinger. Since this call addresses an international audience, we would kindly ask you to ask your questions in English during following Q&A session. And before we open the floor for questions, Peter, may I ask you to start with a brief summary of our key messages?

Yes. Thank you, Stephan. Welcome, everyone, to this presentation, and thanks for the interest in MM. As this call is mainly about Q&A, I would like to be pretty short in my introduction. And I think in the documents and in the video statement, all informed -- information has been provided. The real highlight is that our first half year and also the second quarter are up against last year, which is pretty rare in our industry given the markets we are in. And the reason is that our self-help program has enabled us to achieve this. We call it Fit for Future. Fit for Future is about sustainable structural improvement, so excluding windfalls from the market, and one-off cost savings. And unlike many others, we are not benchmarking against inflation. So let's take the example of personnel costs, they have to go down in absolute numbers to be accounted for as saving and not just be lower than inflation. Whilst we do not like to put forecast numbers on these programs, this time, we have given a very conservative number to help you in your analysis. We take actuals of '24, obviously excluding TANN as a basis, and want to reach more than EUR 150 million sustainable improvements by 2027, with an emphasis on more than. So no run rate, but real '27 numbers. We will regularly update you and hope to revise this number upward over time. Obviously, the real change of the number will be influenced by market fluctuations. So as you could see in the report, the sale of TANN provided us with a onetime windfall of preliminary EUR 127 million, and to make the analysis for you easier, we'll give you both on a group level as well as on the level of Food and Premium, the numbers of last year and this year, excluding TANN. So we have divested a noncore business at record earnings, giving us more financial flexibility. Just to remind you, we financed a lot of our net debt in '21 at 7 to 18 years fixed interest rates of around 2%, and this keeps our financing costs at a low level and will do so for some time. On the outlook, we are not counting on any market improvements. If they come, it would be great, but we have to improve results in a continuing weak market. That's our baseline we work with. We have superior products with market-leading positions with a culture of operational excellence and an excellent service offering, which our customers really appreciate. And so the management team feels confident about our future. And yes, now Franz and I are happy to take your questions. Thank you.

[Operator Instructions] And the first question goes to Michael Marschallinger of Erste Group.

I have two. Firstly, on the overcapacity issue in the Board and Paper division. You said also in your video statement, the persistently higher, could you give us a bit more color on recent developments. I think on the last call, you said you see 1 million tons in overcapacity in FPP. If you could give us some more color on this topic.

Yes. I think overcapacity, the good news is that one mill in Finland, in FPP and one mill in Spain [indiscernible], which was announced in January have really closed down. In the meantime because you never know if sometimes things are announced and then they are not carried through as we've seen with the mill in Italy. So the good news is that they have gone out. But overall, I think the situation, so it has marginally improved but not significantly improved. And as we have highlighted -- as I've highlighted in my statement, in my video statement, so the overcapacity is now somewhat less. But equally, we have the possible secondary effects of the Trump import duties. So some -- those who are very exposed to the U.S. will most likely that our prediction try to relocate some of their volumes to Europe. And so that's why we conclude overall with the market situation will stay as difficult as it is now for the time being until people -- the managers realize that they have to do something and take capacity out. But from experience, I know that this thought process takes always an incredibly long time.

Okay. understood. And secondly, on the EUR 150 million cost savings program you talked about. You mentioned personnel, of course, need to go down in absolute numbers. So to achieve these cost savings, are you expecting any major restructuring costs now in the second half of '25 and '26?

So first of all, just because you said EUR 150 million or more than EUR 150 million. Sorry to be so detailed here. So I guess it will be a bigger number, but let's wait and see. You only can report on savings and profit improvement if they are really done. So we'll have ongoing, let's say, footprint adaptations. And we've highlighted, for instance, that in the Pharma sector in Southwestern Europe, you see a one-off item of somewhat about EUR 5 million, and there will be more to come. Overall, the principle is we will do whatever it takes to improve our profitability. So for this year, I don't expect something big. For next year, yes, everything is possible. Having said that, one should also highlight that our mills are in a very good shape. And therefore, I don't necessarily expect bigger changes, but we really have to see how markets develop.

And -- but you said you want to bring absolute personnel costs down. So any social plans then maybe?

Yes, we shouldn't -- I mean, personnel costs was an example and they are -- so there will be a small portion of everything. So it's about procurement. It's about a lot of operational efficiencies which we can drive. We can combine assets. So there are a number of issues. It's not about a big personnel reduction program, but some personnel reduction will be part of it. So it was just an example because it's easier to say, I could also have taken an example that we -- in procurement, we -- the only -- what will only count as savings is, which is a saving on top of market development. So if wood costs fell 3% and we can reduce costs by 8%, then 5% would count as a saving.

And the next question goes to Mr. Cole Hathorn of Jefferies.

A few from my side. I'd just like to understand a little bit better the performance of the Mills division. Yes, profitability is still low, but we saw waste paper prices rise quite a lot through the second quarter. And I was wondering what Mayr-Melnhof did to kind of protect profitability despite the raw material increases. So just trying to understand how you maintain profit despite your raw materials going higher? And then sticking with raw materials, just like your views on what you're seeing in kind of the Polish wood markets and cost dynamics and also anything you can talk about on your finished wood costs considering we are seeing some form of stabilization of wood costs up in the Nordics.

Yes. Thank you, Cole. On the first, it's -- we had, as you correctly mentioned, price increases in paper for recycling. We started the year with a price increase. Unfortunately, we were the only one in our industry. And therefore, we have corrected or had to correct it and have taken our learnings from this. At the moment now, we see a more positive development as you know. But the first half year was really -- we only could keep our margins or slightly improve the margins because of cost reductions, which we did with our Fit for Future project. So it had already a significant effect on the first half year but only limited to very few plants. On the question of wood costs in Poland, they are pretty stable. In Finland, they have been rising a significant clip, but for the grades we need now, we see also an easing of the wood costs. But it's not to an extent which will really drive our profit. So it's very marginal.

And then maybe following up on order books and views in -- let's start with the food side of your Packaging business and then Pharma next, but any kind of changes in order books or thoughts on customer orders. And the reason I ask is we've seen a lot of the consumer staples companies that are trying to manage their inventory levels, there's been variations in what they've been talking about on underlying demand and consumer strength. So I'm just wondering if there's been any stabilization or improvement in your order books or any thoughts you can provide there on the outlook.

Yes. With regards to food and also some other grades like personal care, we see a really flattish market. So statistics are just -- there's just noise in the data, but no real trend. So we haven't seen any slowdown, but equally, we don't see a pickup. In beauty, which is a small segment for us, we've seen definitely a decline given weak demand in China, et cetera, from the big beauty companies. And in Pharma, we had a very weak second half year last year. And there, we have seen that things have improved, but it's not a boom. But definitely, the market has -- we would consider it slightly growing again after a very disappointing last year, especially in the second half. Does this answer your question?

Yes. And then maybe just one more, which is -- it's a difficult question to answer, but I'd love to hear your thoughts. I mean you've been in the industry for a long period of time, and you've seen multiple cycles. When I look at the various players out there, debt financing is becoming more challenging. The markets are oversupplied in a lot of the paperboard grades. What do you think is a trigger for exits? What was the turning point where you saw competitors previously in the past start to close capacity because we do have some -- even the listed bonds of some of your competitors trading at kind of $0.70 to the euro, you've got some smaller players out there that are family owned. It's more difficult to understand their financial structure. But what do you think will be the turning point to actually see capacity closures in the industry? I would just love any thoughts you have there.

I think mainly they happen with changes of management. Unfortunately, with too many managers in our industry who keep to be enthusiastic and optimistic beyond any logic and factual analysis. Most of the time, it's time when these managers are changed that the new manager takes the right decision. That's one trigger. Another trigger is -- and we have seen with some competitors, some changes, and I think that keeps a new perspective. The other thing is obviously CapEx. If you have to spend money on an asset where you make cash losses, it's -- you think twice about it and time will help. So I expect -- I mean, logic will dictate that low [indiscernible] the next month in capacity from the experience, I think it will be somewhere mid next year. that people just run out of money in a true sense or see that they can't fill their machines. I mean we have -- there are mills now in our industry, which run 60%, 70% of their time. And if you do this and you have low prices, when you run it, you are in a scenario which cannot last forever. So I think some players, especially those who have created a new capacity or who are exposed to the U.S. will sooner or later take -- learn the consequence and give up the optimism that they can win lots of market share or whatever.

And then maybe if I just link that to Mayr-Melnhof business, I mean, you talked about CapEx being below EUR 250 million this year, but you have made quite a few investments over the years to improve your cost competitiveness. Would you mind just giving some examples of some of the older investments that you've made and maybe framing it? An investment to reduce energy consumption in one of your mills, how much does it save versus someone else that hasn't done it? Because I'm just wondering if you're if you're struggling to fill your machines, are you necessarily investing in the maintenance of your mills? Or are you becoming less competitive as the[years] go past if you don't make those investments? And how do you stack up versus the competitors?

Yes, I mean it's a different story for every investment. There isn't an underlying theme. But just to give you one example in coated liner, we have because of our investment, we had the worst product in the market with its technical parameters. And now we have the best product in the market. We have reduced -- we reduced our energy consumption by more than 10%. We have -- so technical parameters are better, energy consumption is lower because it's -- capacity has increased. So -- and still, we couldn't really benefit in the market because we see time and again that these rebuilds just take time until they are fully utilized. There were the delays in the CapEx, the machines didn't -- immediately people have to relearn it because they are much more sophisticated, the machines. And these -- all these benefits flow through. And basically, we are there now in a situation where customers really want to buy from us. And that's just one example. But we have also other projects underway, for instance, in increasing to make a step up in -- or a step down in our energy consumption, where we will save for the whole mill by end of '26 roughly 20% of our energy. So we also have things still in the pipeline.

And the next question goes to Markus Remis of ODDO BHF.

I would like to follow up on this more than EUR 150 million of cost savings. Can you maybe shed some light on the expected phasing in? Will that be very much back-end loaded? Or should we see kind of a meaningful effect also in 2026? And related to that, I mean, you mentioned some footprint adjustments. Okay, so I take this as plant closures. Anything you can tell us already in terms of one-off effects that we should bake in into the second half?

Yes. Yes, to start with your last comment. So you shouldn't expect too much extraordinary costs or one-off costs for the second half of this year. So taken a number similar to the first half year, and you will pretty much be on -- to the point. For next year, obviously, that's difficult to predict because it does depend on market development. So on the phasing in, we had the first benefits already in '24, something about EUR 20 million. We had quite substantial number already in the first half year. In the second half year, we expect this number to go up. So it's gradually coming in. It comes -- the positive effects are obviously now limited to two big mills where we are in an advanced stage of the process and are really harvesting the benefits in -- we've already kicked off the project on a group-wide basis in February, but obviously, it takes time until these things work out. But they -- so every half year, a new chunk comes in, and we will see where we will end then for '27 overall, but there we'll need more visibility.

All right. Okay. So just to kind of have -- a kind of an earnings bridge, how much of this EUR 100 million or more than EUR 150 million, you would still see as incremental after 2025, and you see EUR 20 million already '24, a substantial part in the first half, more in the second half, so how much incremental is remaining for the next two years then?

Yes, that's big, so on this year, we have a pretty good outlook and the number will be a high 2-digit number for this year. That doesn't mean that there is nothing left for the next year, but just that our projects are not so concrete that we have enough data at hand. And therefore, in the update, which we will provide in March, then we will see what we really have achieved this year, which we pretty much know, but also what the outlook for '26 is and potentially '27. But it's too early. We are in a concept phase. So people have good ideas about how we can save things, but then it needs a detailed analysis and obviously, an implementation and the implementation sometimes takes up to a year.

Okay. That's a fair statement. And I mean you talked here about sustainable profit improvement in the outlook statement, excluding market fluctuations. So the interpretation that it clearly depends on kind of the general trading conditions, how much you will actually be able to retain is the right one, right?

Yes. Let's say, in a bridge, we had -- which would be '27 against '24, we would say, okay, prices in our various products have increased by so much. So market, major input costs, wood and paper for recycling have increased or decreased so much or energy. And the rest is where our measures where we could achieve the procurement savings beyond changes in the market prices, where we together have reduced fixed costs, your combined plants, whatever it is. So our result '27, we don't know what it will be because we don't know yet the changes in the market, but it's just over and above what the changes in the market. So hopefully, if, let's call it my prediction is right, that the market will turn in mid of '26, This would then, if it's in a positive way, be on top of it.

Okay. The market turn you mean for Board and Paper?

Correct. Mainly for Board and Paper, but also in Packaging, if you analyze also our reports of our competition, you see that it's also a very tough market at the moment and at certain point in time, then people become more reasonable again.

And because then they come to the U.S. aspect that you mentioned the import duty is it set at this 15% that is now the...

Yes. I mean, to make predictions on the U.S. is impossible, not even for half an hour. But it is the fact we calculate we have to work with. So we are -- we have very little exposure of exports to the U.S. But of course, we had plans to grow these exports. And given the current circumstances, that doesn't look very likely because 15% is a figure which is more than our profit margin. And given the weak dollar, this is unlikely. The problem -- this isn't so much a problem for us. But as I mentioned with the secondary effects, some of our competitors in virgin cartonboard have a very strong exposure to the U.S. And we will see if they are realistic in their capacity or whether they try for some time to reallocate this to Europe and then learn when it doesn't work to take, anyhow what they should have done in the first place without burning a lot of money.

Okay. And how much of European production flows into the U.S. or did flow before the tariff was set?

I'm now not sure because there are also different statistics. Unfortunately, it's a bit an unclear figure for the reasons that it's combined with other grades like liquid packaging board. So the numbers in the export statistics are sometimes misleading. But let's say, there are players who sell 10% to 20% or 25% of their production to the U.S.

Okay.

This is -- so I'm specifically now referring to virgin cartonboard. In recycled cartonboard, this is a very small topic. So there are hardly any exports. And therefore, the topic is not really relevant. That's again our advantage of being somewhat diversified. So with our packaging business, which is not affected of that at all. We have our recycled cartonboard business, which is not affected by this effect as well or very little. And with virgin cartonboard where the possible secondary effect can be significant for some time.

Okay. My final question relates to the factoring. If you could remind us of the figure or the level at the end of the first half, and although if you could elaborate on the outlook until year-end? At the end of last year, it was like close to EUR 380 million. Is that kind of also the target level for year-end?

I hand over here to my colleague, Franz.

We are about EUR 30 million below this figure.

30 million below the EUR 380 million, okay.

Yes, so we are around EUR 350 million.

With the scope of an increase to that level by year-end?

Slightly, but not in a big extent.

Yes, there's one final question, sorry. This -- just to put this EUR 150 million or more than EUR 150 million into perspective. Can you indicate how much of the addressable cost base that is because you've got currently quite a big share of variable costs, so how much of the addressable cost 2024, does this represent?

Yes, it's about 5%. So EUR 3 billion, more than EUR 150 million, but EUR 150 million is 5%. I would go benchmarking it against our current operating profit, and there, I think it's quite significant, especially if we can upgrade the numbers later on.

Ladies and gentlemen, we didn't receive any further questions. In the meantime, we will leave the line open for a couple of moments. [Operator Instructions] We have a follow-up question. It goes to Mr. Hathorn. Please go ahead.

I just wanted to ask, do you have any views on the direction of travel for the waste paper markets, effectively OCC for your business? I know we've seen a pullback in OCC prices. And I'm just wondering if you're starting to see them stabilize or any direction or travel or thoughts you can provide into the back half of the year?

Yes. Thank you, Cole, for asking it. But actually, I have no view. I think you might have a more educated view than I have listening to more market participants. So I have no idea, they may go up tomorrow or go down. It's like prediction on the U.S. dollar. Our experts say it's on the way down, but also our experts have a good view over the next 4 to 6 weeks and not beyond it, so yes, sorry I have no particular view on that.

Okay. We didn't receive any further questions, so let me hand back over to your host.

Yes. So I would like to take this opportunity to say a great thanks to all our employees because such a program like Fit for Future, obviously, of course, there's also a lot of concerns. And I can see that to a very high extent, people are very enthusiastic contributing. We have seen in the two mills where we are far advanced that there is a completely -- a complete cultural mind shift that people now consistently think about how to do things in a new more efficient way. And this is already spreading now throughout the organization. So this is absolutely great because a lot of companies do such projects and the outcomes are very, very different. It can destroy a lot of culture and just lead to frustration, and it can evaporate the teams and bring them to new levels. And that's what we see. And therefore, with the management team also have a high trust in this project. And we also think that we are very well placed for the future, but the next 12 months, I think, will still be very challenging until some management concept failed or changed. And with this, yes, thank you for your interest and Stephan, please.

Thank you, Peter, for your final words. Thank you all for your participation, questions and the interest in our company. Our Q3 results will be released on the fourth of November. So we wish you now a great day and say goodbye.