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

Hello, everyone, and a warm welcome to the [ OTRAN Air ] Conference. My name is Sarah, and I will be your host for today's roundtable of the Mayr-Melnhof Karton AG, short say MM Group. And I'm delighted to welcome the Head of Investor Relations and Corporate Communications, Stephan Sweerts-Sporck, who will give us some insights just in a moment. And with no further ado, Stephan, I hand over to you.

Thank you, Sarah. Hello, and still good morning to everybody. I'm delighted to present the Mayr-Melnhof short MM Group to you in the following half an hour. It's our first time we are joining the Airtime, but in fact, Mayr-Melnhof is a very much grounded business. It's about basic products, which you know very much from your daily life. The Mayr-Melnhof Group is made of 3 divisions, but basically around the same destination. We are producing consumer goods, and we are organized in 3 divisions. One is doing the printing of consumer goods, which you know from the supermarket. So when you buy your cereals, when you buy sweets, when you buy detergents, all these things could be made by Mayr-Melnhof and hopefully are made by Mayr-Melnhof. So we are printers of consumer goods. We have a specialization also here since 2022 in Pharma and Healthcare Packaging because this is a dedicated business for this industry. But we are not only printing cartonboard and packaging, we are also producing cartonboard. So we are also focusing on the production of cartonboard and paper and especially, I would say, cartonboard from recycling and virgin fiber cartonboard. From our geography, the Mayr-Melnhof Group is quite a European business. When you look here on the split of our geographies, about 80% of our business is located in Europe. Why? Basically, transport costs and the proximity to our customers. However, we do have some business in the Americas. This is particularly our pharmaceutical business where we produce in the U.S. for the U.S. and we do have some business even, I would say, emerging markets and outside of Europe, Middle East and even as far as Vietnam. Just a short word to the U.S. business. We hardly sell products from Europe to the U.S. Most of our business in the U.S. we produce locally. When you look on the map, you see a number of dots. You see that first of all, the red dots, these are our food and premium packaging plants, mainly dominating in Europe. The black dots also in the U.S. and the fair blue dots, these are our big cartonboard mills, which are all operating from Europe. We service about 4,000 customers and sell our products worldwide in close to 130 countries. When we look on the split of the business, where -- how much sales we do in the different segments, where do we get our results from, perhaps a first figure, the Mayr-Melnhof Group is about EUR 4 billion million business. And this EUR 4 billion is split about 40% in Board and Paper and an equal size in the packaging of Food and Premium and about 15% in the Pharma and Healthcare business. When it comes to the current state of earnings, we see that the big bread and butter today we earn in the packaging areas in the Food and Premium and the Pharma field and to a lesser extent, in Board and Paper. I will explain to you why is this the reason, but certainly, we have to have the ambition to get the Board and Paper business on equal terms again with the Food and Premium Packaging business. The company is quoted for more than 30 years on the stock exchange, and we have a core shareholder, roughly 60% by the Mayr-Melnhof family and descendants of this family, the family hasn't been in the management of the company for, I would say, 4 generations. We have 4 CEOs in the past 70 years. That might not be a big number, but ever tell you, well, we are a traditional governed company, some family members are represented on our Supervisory Board and authorize bigger M&A transactions as well as appointment of management and big CapEx projects to put in a nutshell. When we go to an integration of this business because you see, well, we're producing cartonboard, we are producing the packaging out of cartonboard. It's always of interest, how does that fit together? Do you supply all the cartonboard internally? No, since the cartonboard and paper division is much bigger than our packaging operations, about only 15% of the output, which goes internally to our packaging operation. For those, it's about 40% of their sourcing. Why not more? Well, it depends often on the final customer who decides from where the raw material should be sourced or even these customers have direct contracts with other cartonboard and paper producers around Mayr-Melnhof. So we are -- don't get always, I would say, both the cartonboard and the packaging. And we also produce quite a lot of packaging in the high-grade area where our cartonboard is -- I would say we have a very good cartonboard, but we are not in the premium segment of cartonboard, and this can be sourced only externally. So far, this answer, when we give a first summary, Mayr-Melnhof is a global leader in fiber-based consumer packaging. So it's really, I would say, what people consume on an everyday basis when you go to the supermarket, when you go to the drugstore, when you go to a construction market, do-it-yourself market, you find all -- everything which is packed in cartonboard could be a product of Mayr-Melnhof. What we are not doing, we are not in the corrugated area, which is [indiscernible] pulp. This is a separate industry with a different technology and different market as well as suppliers. We are internationally based with a focus on Europe, consumer goods for food, premium, pharma, trusted by brand name. So a lot of our business is with branded products. However, in the past years, since people -- let's say, consumption has been traded down, inflation, purchasing power has come down, also a lot of private labels, retail brands are serviced and supplied by Mayr-Melnhof. We have the vertical integration, which I explained to you and very much important also the ESG profile not as just to do it. It's really an advantage, I would say, in our -- for our product that it is renewable, and it is recyclable. So there is a good future for this product, replacing plastic gradually, I would say, in the current state where everybody looks at cost. Sometimes plastic is still the cheaper solution. However, I would say the more sustainable and the more we get regulations in supporting sustainability, the more gradual or the more our product is getting induced in packaging consumption. What is the investment story of Mayr-Melnhof? I think very important when you invest in Mayr-Melnhof, you invest in a market leader. And for us, and I'm almost 30 years with this company, 3 decades, cost leadership, technological leadership and innovation has been a foundation for our development through many years. And this is also, I would say, the way to the future because we are in a market which is continuously consolidating. We have enough supply or even an oversupply currently in Europe since the break of the Russian market, for instance, and since also the consumption levels have come down to some extent. So consolidation is in the hands of those who manage their cost and their technology best. We have been growing organically and through acquisitions. The last big acquisitions were in 2021 and 2022. And since then, I would say we are looking forward to keep up a solid financial grounding. Sustainability in the operations and in the strategy, important for, I would say, for the development of the business, and it's a very long-term orientated story with the core shareholder base, but also with a very seasoned management team who know the business for, I would say, decades. If we look shortly in the past, what has happened in the past 5 years because that's important for the current understanding of our, I would say, status currently, we have invested in the growing markets of virgin fiber cartonboard and pharma packaging in '21 and '22. We almost doubled our sales, doubled the size of the group. We have divested small businesses, which were too small to be, I would say, getting the necessary economies of scales, which required too much CapEx with a too low return. And we have been exiting noncore business, and I would say, prominent business, which we sold this year was TANN. This business was printing on cigarette filters. So it was not producing the paper. It was just doing the graphic works for cigarette filters, and this was sold this year. We invested, however, also in, I would say, in our asset base in particular '22, '23 with a focused efficiency, quality, sustainability and innovation. So Mayr-Melnhof is currently, I would say, and you will see that when I show you the CapEx graph in a well-invested status, requiring, I would say, a decent and limited ongoing CapEx. The circular packaging is very much on work, I would say, when we look into the past, but also in the next years. So we are fulfilling everything, I would say, what the packaging waste regulation on the European scale is looking for, which, I would say, renewable and recyclable packaging and particularly all the CapEx went into optimization also in processes and the digitalization and automation of our business. So these past 5 years grew the business when you look on the bar chart, you see, well, we have been a EUR 2 billion business, now we are about EUR 4 billion sales business. However, profitability has halved in the past 2 years. Why is this the case? It was particularly, I would say, the function of the overcapacity in the Board and Paper business, and we are currently working hard to get back this business. So I think that's the promise, that's the strategy to bring that back on old levels. The CapEx, I told you, this was somehow a sharp activity in '22 and '23. And now we are back at the level of about 5% to 6% of our sales. How did we finance our expansion or, let's say, the doubling of sales? It was by taking out Schuldscheindarlehen, it was by loans. We have since then -- since 2021 when we took out the loan, been reducing constantly, our second loan for the next acquisition to '21, '22 were the big acquisitions. And since then, we have been gradually reducing this debt. This debt was raised at a very, I would say, comparatively low interest rate. Our current average interest rate on this debt is below 2% and 80% of the debt is on a fixed interest base. The equity ratio, I would consider still quite solid with about 40% plus. What is not mentioned here on the slide is the net debt-to-EBITDA ratio, which is currently at 2.5, which we feel, I would say, okay. But at the end of the day, we would like to have an even lower gearing in our company looking forward. What are the challenges this year and beyond? I think the big challenge is getting back earnings levels, focusing on cash generation. This focus is not a new focus. We have already had that very much emphasized in the past year. So particularly both in paper, you will see that we have come back into a positive earnings range, but this is still not enough. That's why we have launched the Fit for Future program, which comprises projects around, let's say, across the whole group, not just Board and Paper. And this should bring more than EUR 150 million EBITDA as a structural EBITDA increase by 2027. So I think that's the promise. And this would also -- if -- and this is, I would say, the promise without market effects. And if that gets done, I would say we can recover substantially on our earnings situation. The investment in share of sustainability and renewable energy would be, I would say, a further perspective, where can we get return -- a short-term return, a good return on investment in our industry that's particularly focusing on the energy side of the business. Where would we be growing? I would say, if you ask me today, not in cartonboard because we have grown that. That's more kind of a consolidating part of the business. But for instance, in Pharma Packaging, there is still good headroom for further expansion. And last but not least, the company at Mayr-Melnhof, we have been always growing and consolidating. So it's not always 2 steps ahead and 1 step back, but I would say, growth always accompanied by structural optimizations. That's how we create competitiveness and a solid earnings position over the years. Our highlights from the first half year, well, that's already passed us, and we have, from the calendar already passed the third quarter. The first quarter we released at the beginning of November. But I would say the basic message was that we had a group-wide -- that we had a profit increase compared to the previous year by almost 29%. But on the level, still, I would say, from the Board and Paper division from a negative to a positive operating profit. So it's improvement, but I would say, not enough and therefore, the cross group or group-wide improvement program. We sold TANN, so for -- with a gain of around EUR 127 billion. So when you look on the net profit, it's very much up compared to last year, but that's why we have the adjusted figures, which give you the real, I would say, operational business development, which also improved. We see that the market stays soft. Well, look around, I would say, economies in Europe as they are and consumers are saving. But I would say we have a resilient, stable business, however, quite competitive. So it's our first interest to keep market share and look on the profit line as well. And in the second half year, there will be some maintenance work, which will filter into the P&L, as we said. A short -- very short view on our P&L, just showing you with the red signs, the improvement of operating profit, operating margin, and I would say the terms where we came on our CapEx figure, we guided that CapEx will be below EUR 250 million for this year. When we have a -- to round up -- in the roundup, look at the development in our 3 divisions. First, MM Food and Premium Packaging. When you see -- look here on the left-hand side, you see sales development throughout the past several quarters. It's quite a stable business to say so. It's stable on the top line, it's stable on the profit line and the margin, I would say it's a superior margin in the overall industry, yielding 8.5%, 9%. And to keep that, it's already, I would say, a big exercise because who is on the other side on the table of this business, it's big multinational consumer goods producers, it's big retail chain. And in times as they are today, everybody is, I would say, saving. And so cost leadership and cost optimization projects are here on the agenda to keep up this business as solid as it is. Second, Pharma and Healthcare Packaging. This business, which we acquired in '22 was a breakeven business with a perspective to turn around this business for 4 years. So we are now in year 3. And when you see well with this business is a profitable business. It's a stable business. However, last year was seeing, I would say, an emptying of the supply chain. We are back. We see a recovery in the demand of this business. We see a recovery or had an improvement in the profitability of this business. However, not yet at the levels where we think it should be after, I would say, a full implementation of our productivity increase measures and also, I would say, the sales development of this business. In the long run, this should be equal to our Food and Premium Packaging business with a yield of about 8%, 9% operating margin. So there is much headroom still left here. And last but not least, I have a look on the Board and Paper division. You see, well, this business has also been stable from the sales point of view. However, we saw, I would say, the situation that cost and it was energy cost, it was utilization, capacity utilization, which was historically high in the 90s has come down to the mid-80 level at Mayr-Melnhof. Now we are back at the, I would say, higher 80 level, but still the pricing power is quite weak due to the overcapacity. And on the other hand, the demand side in an overcapacity, you see, well, the utilization is important to run this business because cartonboard is a 24/7 business. And in order to run it, I would say, at an operating margin of 7%, 8%, you should be running more than 90% in the operations. So here, we are, I would say, focusing on cost reductions. We are focusing on market share. And we ourselves have been very, I would say, reluctive in capacity expansion. However, apart from, I would say, the breakoff of the Russian market, the reduction of the consumption in Europe, we see still saw some Scandinavian capacities increasing because their idea was that in the midterm or short term even plastic would be to a much higher degree replaced by cartonboard. But unfortunately, this did not happen. And so we are in a situation that we have an overcapacity of more than 20% in Europe, which has to be digested. And I would say, here, it's important as at the beginning mentioned to be a cost leader in this business because cost leadership is the decisive factor. And we would say Mayr-Melnhof operations are all in the upper half of cost competitiveness. When we go to a final slide with the outlook, I would say, we don't see much of a change in the current market situation. It's continuing to be a challenging market environment, I would say, more a flattish development. We don't experience a sudden decline in the market. The inventory levels are on the normal, I would say, normal size. Very much important for us enhance competitiveness by this -- and contributing to the competitiveness and earnings side by our Fit for Future program. This is not a very short-term program. I would say it's a program over 18 months, which has been kicked off, I would say, in these days, but we recently, and we will further comment on the results and on the progress of this program over the -- I would say, at least a quarter, half, annually. And I would say the first insight, a substantial insight we might give you with the release of our '25 full year results. For the short term, we just highlighted that we have our annual maintenance in Q3 and Q4, so the Board and Paper figures will be impacted by this annual maintenance, which is more or less done by now. I think summing up for Mayr-Melnhof, you see that it's a basic business. Mayr-Melnhof is a market leader in this business. We have always strived for cost leadership. We are here to stay in this business and do everything we can in order to improve the profitability of this business as early as possible. However, in the near term, when you think in months, we do not see or foresee a particular change of the overall consumption demand situation. Thank you for listening. It was a pleasure having you here. And I think Sarah can now enter into our Q&A session, which is open.

Absolutely. Thank you so much, Stephan, for presenting the MM Group to us. I guess we get a really detailed impression of what MM Group is doing. So ladies and gentlemen, we're now open for your questions, if you may have. So if you would like to speak directly to Stephan, just raise up your hand. And if you prefer to submit your question in our Q&A session, you're more than welcome to do that as well. And we will read the questions up for you. So let me take a briefly look. By now, we have no virtual hand, but received a question in the chat. So Stephan, from which resources do you intend to generate the more than EUR 150 million profit improvement within your Fit for Future program?

Well, that's a key question we get in these days because EUR 150 million, it's not doubling our operating profit, but it's quite a substantial step up. I think we have -- it's not the first project, I would say, centering on improvement in a scale because we did, I would say, 3 projects with our sites in newer sites, newly and recently acquired sites in Poland and in Finland. And I would say, practically speaking, most of the savings or improvement we get from operations; second, from the purchasing, procurement; third, from SG&A. So it's more the administrative part. And last but not least, from sales. So I think these are the 4 resources and in the ranking of the resources. And that's what we can say from the current experience and also from the current stage of the project. But the more we proceed, I would say, the more precise we can be explaining what's behind and where -- from which resources we draw this improvement.

All right. So let's have a quiet look in the queue. But everybody seems to be a more interested listener than asking questions. So...

No problem.

But we have another written question. So is there any major reconstructuring to be expected?

Restructuring, as I told you, is a constant -- a constant activity at Mayr-Melnhof with a constant duty to consolidate and restructure where necessary because we are a business in which you have to always concentrate on scaling up your business. And even from the past acquisitions, I would say, we acquired more than 20 plants producing Pharma and Healthcare Packaging. We have closed, I think, now 2 of them and another one is now in discussion. So I would say the ongoing restructuring is also on the agenda now, but not, I would say, in a massive or highly recognizable level. And from the current perspective, any major restructuring is also not foreseeable. But I would say we are still in our projects, also the FFF project. We might see something like that, but I would say it's too early. We think that our competitive position is good enough to sustain the current weather situation in the markets. And I would say, closing a business currently would just benefit perhaps the less competitive competitor. And therefore, we stay with our business, but I would say, in an industry as ours, you never can rule out more pronounced restructurings to be seen in the future time.

Thank you. And in the meantime, we received another question. So how do ESG guidelines influence investment decisions or the product portfolio?

I think ESG guidelines, yes, because we made commitments in ESG. I did not show them in the presentation. But when you go through our annual report, you see that we have hard commitments on CO2 emissions. We have water consumption. We have, I would say, renewables from in our sourcing, biodiversity, et cetera. So these are criteria to which we committed ourselves. And when I -- when you just remind -- recapture what I said, well, what is our perspective in investment? Well, it's a reduction of energy consumption. It's an increase of the efficiency of our energy. And we have, I would say, that's the main focus of -- in our CapEx pipeline currently. So I would say ESG is influencing our business when it comes to CapEx, but also on a day-to-day basis because our customers who are branded products producers who have to see what they are sourcing responsibly produced products. Well, here, our -- let's say, the evidence that we have to show is a bit of a high, high importance. So sustainability is part of our everyday business.

Thank you so much. Another written question. Which specific milestones and levers will contribute the most to the bigger EUR 150 million Fit for Future program by 2027, e.g. cost blocks, plans, procurements, network optimization?

I would say it's the plants. It's the operations and the procurement. These are the 2 major contributors from today's perspective.

All right. And the next question is concerning the CapEx 2025. You mentioned around EUR 300 million initially, but recently guided below [ EUR 20 million, EUR 150 million ]. Which projects are being reduced or postponed without harming your market position?

Okay. Well, I think we have not postponed any project, which will harm our -- I would say, market position or I would say it's more, I would say, those projects, which were perhaps looking for more positive market development and had an expansionary effect. These were postponed or reduced. We have now a strong focus on all those projects supporting us on the cost side. And as you have seen, we invested a lot, I would say, in the past years. So the company is well invested. We have a good asset base. And with these reductions, we do not -- I would say, we do not inhibit any potential of development for the company.

All right. And now the investors are hot. So we received another question.

That's good. Keep on asking.

Here. So following the TANN proceeds or TANN, what is your target leverage, net debt-to-EBITDA? And how will you prioritize between deleveraging dividends recently plus 20% to 1.80 and selective M&A?

Okay. I think it's all about the cash situation and the cash flow situation. I think from the leverage or net debt-to-EBITDA, 2.5 is good if we can go below, we will -- we can do. We have, I would say, generated funds from the divestment of TANN and prioritize here the reduction of debt. On the other hand, we are a family, I would say, have a family key shareholder in our company and families usually like dividends. So the dividend will also be of a prime importance looking forward, but also, I would say, in line with the profit development. Mayr-Melnhof has always, I would say, followed a payout policy to pay out about 1/3 of our net income and I would say, be more on the dynamic side, if possible. The dividend will always be decided when we've got the final figures. So it's a bit too early to speak now about dividends, but the principle is to pay out the dividend and to pay out 1/3 of the net income. When we look forward to M&As or further growth, I told you we are positive about it in principle. But I think, first of all, we have a priority in getting the profit situation in a direction, which is, I would say, back to normal or at least a feasible size. On the other hand, if something comes by, let's say, small and medium transaction, we would look at it. And from the focus, I told you, particularly in the pharma area, we see space for more, I would say, for more market concentration, some spots which geographically, which we have not filled so far. So there is also a yes for, I would say, medium -- small and medium-sized M&A activity in the time forward, perhaps not in the next quarters, but I would say, looking into the next 1, 2 years.

All right. Thank you so much. The next question has North America bought Essentra Pharma, developed independent growth targets? And how do you secure raw materials, energy and talent in that region?

That's a good question because -- and I can say, yes, we have growth targets not just for the whole Pharma and Healthcare division, but also for its regional presence and I can say that the U.S. is the fastest-growing and best-performing part of our Pharma and Healthcare division so far. So that's good news. We are positive about it and allocate, I would say, resources to the development of this area independently and the sourcing works mostly locally there. So we are not depending, I would say, from -- on imports, and that's important that, I would say, we have an independent situation in North America.

Thank you so much. So with a view to the queue and the chat, it seems by now there are no further questions. So dear participants, if there's still anything you would like to know or ask Stephan, just give us a short sign. Otherwise, I guess we're good in time. So with this, we will come to the end of today's roundtable. So thank you, everyone, for joining and your shown interest in the MM Group. And also a big thank you to you, Stephan. It was a pleasure to hosting this roundtable together with you. So from my side, thank you very much. And some final remarks, Stephan, from your side.

Yes, I would say this was just a brief introduction or summary of the current state of our company. You're always invited to drop me a mail or call me if you have a particular interest, if you have a suggestion, if you want to engage more. So I'm here to help you to guide you through the company, to answer your questions. And so it's just a hello and it would be a pleasure to continue to stay in contact with you.

Thank you very much.