Mondi plc (MNDI) Earnings Call Transcript & Summary

Good morning, and welcome to the Mondi 2021 Q1 Results Presentation. [Operator Instructions] I must advise you that this conference is being recorded today. I'd now like to hand the conference over to Mondi Group's CEO, Andrew King.

Good morning, and I'm Andrew King, Group CEO of Mondi. And with me today is Mike Powell, our Group CFO. I'd like to briefly summarize this morning's announcements before taking any questions that you may have. Firstly, I would like to give -- take this opportunity to once again give my heartfelt thanks to all our colleagues for their ongoing commitment and collective focus, taking care of each other, our communities and our customers as we continue to navigate these times. Mondi delivered a robust performance in the first quarter with strong demand across our packaging businesses, supported by a broad range of innovative, sustainable packaging solutions and coupled with a higher average containerboard selling prices following the recently implemented price increases. Strong cost control continues to support our performance against the backdrop of input cost inflation and negative currency effects. Underlying EBITDA for the first quarter was in line with our expectations at EUR 353 million, down 8% on the comparable prior year, while up 14% sequentially. Good cash generation resulted in lower net debt at the end of the quarter. We continue to invest in our business to capture growth opportunities; enhance our product offering, quality and service to customers; strengthen our cost competitiveness; and improve our environmental footprint. This ongoing investment enables us to grow in our packaging markets by leveraging structural growth drivers, including e-commerce and the transition to more sustainable packaging solutions. Our major capital investment projects are progressing well. The new 300,000 tonne per annum kraft top machine at Ružomberok in Slovakia and the converted speciality kraft paper machine at Štetí in the Czech Republic, both commissioned in January 2021, are ramping up successfully with the high-quality products being very well received by our customers. Sustainability remains at the center our strategy. Following the launch of our 10-year sustainability plan, MAP2030, earlier this year, we are developing bespoke road maps across the business to achieve our commitments on circular-driven solutions, empowered people and climate action. In summary then, and looking ahead, we are seeing strong demand across our packaging markets, supported by the structural growth drivers of e-commerce and sustainability, and are implementing price increases across all key product segments. We continue to benefit from the contribution of our capital investment program and our relentless focus on continuous improvement, mitigating the impact of significant input cost pressures and currency headwinds. While macroeconomic uncertainties do remain, we are confident that the group remains well placed to make progress in line with our expectations. With that short summary, I'm happy now to hand over to you to answer any questions. Thank you.

Thanks, Andrew. Good morning all. Mike Powell here.

And I'd like to take the first question, and we have Lars from Crédit Suisse.

I guess, I think you've called out around a EUR 50 million benefit for the current year for those projects. And I assume, perhaps normal, there's some start-up related. Can you share with us the sort of cadence of those benefits in any way that can help us understand how you expect this to progress? And also, if you can comment on the current CapEx projects that you're doing and the richest pay and a major stop that you're going to have towards the end of this year, if there's any expansions going on there and the benefits potentially then comes in '22?

Yes. Thanks very much, Lars. Yes, on the EUR 50 million benefit, just to remind you, that's an EBITDA number. So clearly, in terms of the cadence, EBIT is more affected negatively upfront when you bring in the depreciation. And then it's -- and then as the project ramps up, so you get into positive territory. At the EBITDA level, obviously, we're already EBITDA positive on those projects. As I mentioned, very successful ramp-up on both those key projects in Slovakia and the Czech Republic. And more importantly, obviously, selling into a very strong market for both of those segments and being extremely well received. So we're delighted with the speed of the ramp-up. Clearly, the only constraining factor is just how fast we can produce this product. It's a very high-quality product with -- as you know, it's a hybrid product. It's a white top outer layer and the recycle underlayer, and it's really hitting the sweet spot in the market. So we are delighted with the ramp-up. It's happening very fast. So it's a slight emphasis to back-end loading of the CapEx benefits, but I emphasize that it's light. It's not as if there's a huge second half loading of that number. In terms of current projects, as you rightly say, an important project for us this year is the implementation of the new commissioning of upgrade of the recovery boiler and chemical plants in our Richards Bay facility. That is a big driver behind why this year's maintenance CapEx guidance is towards -- is higher than last year. As you know, we're guiding to about EUR 140 million cost of maintenance shuts in place as opposed to EUR 100 million last year. And a lot of that is driven by the fact that we've got an extended shut at Richards Bay in Q3 into Q4. What really that brings to us is stabilizing of the production output at that facility, so that does bring benefit in itself because production has been somewhat unstable there for the last couple of years. And it's important that we stabilize that, and that is what that upgrade is going to bring. On top of that, obviously, it brings some efficiency gains also through cost optimization, environmental benefits and the like.

Got it. And just to follow up a bit on the demand side. Can you give us any sense of how you're traveling? Of course, demand was strong in Q1. But across your containerboard, corrugated and kraft paper, in particular, the cement construction activity, if you can share any color on demand trends as we go into the second quarter.

Yes. So I think it's fair to say that across the piece on the fiber-based -- well, across our packaging businesses, we are seeing very strong demand. Q1 in corrugated as you -- as we referenced there, extremely strong growth performance on the volume side, and that's obviously also being seen in the upstream in the containerboard. Frankly, we are capacity constrained on the containerboard front. The markets are very tight. And certainly, as we see it today, going into Q2, we are not seeing any change in that dynamic. It remains very strong. Clearly, what's happening there is we've had the ongoing driver of e-commerce, which everyone knows about and speaks a lot about. But it has been, through the course of 2020, was the real driver of growth there that has continued into 2021. But I think what's also interesting is you're seeing an improvement in some of the categories where you were seeing a bit softer performance last year. So some of the industrial applications, obviously, other FMCG remains very robust as well and the consumer durable sort of business end users as well are coming back nicely. So I think that is all contributing to extremely strong demand environment on the corrugated, translating into similar demand picture on the containerboard front as well. As I say, no real letup in that from what we can see. On the kraft paper, similarly, also very robust demand picture. We were very delighted with our first quarter performance on our paper bag business. Again, the traditional end users of cement, building materials, et cetera, very robust. I think cement coming back strongly in the emerging markets, in particular, but also underpinned by growing e-commerce business and, of course, the sustainability trends we are starting to see pickup in usages in traditional FMCG applications as well. So I think all of that is underpinning both the near-term growth dynamic, but also importantly for us the longer-term structural growth that we are certainly seeing in that market. So again, Q1, good. Q2, we are certainly seeing a continuation of that trend, meaning also on the kraft paper side, frankly, again, we are capacity constrained there. Pricing is moving up, albeit, as we keep mentioning, pricing in terms of the drop-through takes longer because, as you know, in that value chain, you have a lot more contract business. So in the short term, you don't see the huge -- the big benefit coming through on that. But certainly, we are very encouraged by both the demand picture and the pricing momentum at the moment.

Thanks, Lars. Our next caller is Cole from Jefferies.

Just a follow-up on cost inflation. And particularly, I'm trying to understand the cadence into 2Q. My understanding is wastepaper cost will be a little bit sequentially higher. And the one cost that we probably have less visibility on is the polymer prices. And I'm hoping you could give a little bit of color of how the polymer prices are expected to impact the business into the second quarter and for the full year. And then on the polymer or resin prices, just a clarification, can you remind us how the contracts work in your flexible plastic packaging businesses and how you pass through that resin to your customers in time?

Cole, thanks, Yes, let me take that. Yes, I mean let me take, firstly, paper for recycling. So the consumption, as you know, is about 1.5 million tonnes for the year. The Q1 prices are up about EUR 100 per tonne. Therefore, if you do the math, the sort of the math on the quarter is about EUR 30 million. I think you also then asked about the full year. If you took spot prices today, which are clearly a bit higher than even the average for Q1, actually, the math is about the same because, of course, prices increased through last year. They were quite lower in Q1 FY '20 and then increased through last year as well. So actually, the math for the full year is probably about the same, which is 1.5 million tonnes, about EUR 100 million -- sorry, it's EUR 100 a tonne. So that's the PFR. In terms of the resins, yes, I mean you can see from the indexes, resin prices have doubled. Of course, the difference between the resins and the PFR is, as you say, it's the mechanism in terms of the pass-through. What that gives us, of course, is more of a timing issue. So PFR clearly needs to be recovered through prices. But in resins, there is the business mechanism and the business model with customers. I think the resin prices have increased through back end of last year, through Q1 and very much into Q2. Therefore, it will sort of hit our books more in Q2 as we move into Q2 and out into Q3. And there, you might expect us to see the margin squeeze as it takes us time to pass those through in the contracts, which will take a variety of time. But if you say a quarter, it's Q2 where you'll see it. But again, in the scale of the group, it's important to note that we will pass those through, and therefore, it's more of a timing issue on the resin prices.

And then just one follow-up on Uncoated Fine Paper. We've seen some capacity closures. If you just give a view of how demand is trending in that Uncoated Fine Paper business and how you potentially see pricing developing through the rest of the year because how I calculate it now, the low-cost producers like yourself are well placed, but higher-cost, nonintegrated producers at current price levels with the pulp price are probably making cash-negative profits on production.

Yes. Thanks, Cole. I think -- I mean, clearly, if one looks sequentially, there has been a pickup in demand on Uncoated Fine Paper side into Q2 versus the back end of last year. Clearly, if you look at it on a year-on-year basis, Q1 last year was a kind of pre-pandemic quarter. So the market, on a market basis, is still down year-on-year. But as you rightly say, there has been some movement now on the capacity side with the Stora Enso announcement in particular. I still believe this is a market that is structurally in oversupply, and we still need to see further capacity rationalization. But to your latter point, I agree with you that I think there must be a lot of capacity that is under a lot of pressure right now. Clearly, the unintegrated producers who've seen significant pulp price increases are being squeezed by that. And I think that is putting pressure at the high end of the -- or exerting further pressure at the high end of the cost curve. But as you rightly say, as a low-cost integrated producer, we are in a good position. We're encouraged by the fact that we continue to gain market share, I believe, with the expensive, the more marginal producers. And certainly, we are well placed, and it's good to see at least some sequential improvement in demand, albeit it still is below precrisis levels. And I certainly don't believe we will see a recovery to precrisis levels in demand. So this, I think, is a good first step in terms of capacity rationalization in the industry. I would expect more to come.

Thank you, Cole. Next caller is Wade from Avior Capital.

Just a quick one from my side. You guided for the maintenance cost impact to remain at EUR 140 million. Given that we've seen price increases across the board, would then the component of that cost come through from opportunity cost of downtime? So why is that maintenance downtime sort of unchanged? And then maybe just a second one. As a reminder, on the sort of sack kraft side of things, you sort of got price increases through, but indicated it would be for the noncontract sales. Just a reminder, that's about 1/3 of your volumes, if I'm correct.

Yes. Firstly, on the maintenance, Wade, I mean, yes, you're right in the sense that there is an opportunity cost and every hour that you're down that there's an opportunity cost associated with the margin loss. But I mean to finesse the numbers to that extent is difficult. So it's there and thereabouts. It's always an estimate. It can never be a precise number. But it's in that order of magnitude. But I fully agree with you that every day, we are down and that it's costing us increasingly and more, which, of course, is a good problem to have in that sense. On the issue of the pricing dynamics in the kraft paper value chain, yes, I mean as we would try and simplify it because this is always complicated, but if you look at the value chain in totality, so whether you sell a tonne of paper into the open market or a tonne of paper in the form of a paper bag, roughly 1/3 of our volume is fixed for a year, about 1/3 of it is fixed for 6 months and 1/3 of it is open markets at any one time. That's a rough estimate. But that does try and summarize all our kraft paper position. Clearly, within that, we have some speciality grades, which have a slightly different pricing dynamic to, for example, sack kraft. Clearly, the sack kraft is where we're seeing the most upward momentum in pricing at the moment, albeit that is the one similarly that has a lot of fixed price business. On the speciality grades, we're also seeing upward pricing momentum, which is encouraging, but it's a bit more muted. And in a way, that's more biased towards the open market business. But in summary, the market is good. We're very encouraged by the demand picture. And as I say, those long-term structural drivers of e-commerce, sustainability, et cetera, really coming through nicely, which is good in the short term, it takes time for that pricing dynamic to flow through the numbers. That's what we would suggest.

Thanks, Wade. Next caller is James from Prescient.

I just wondered whether you could talk about the 2 new machines and just how quickly they ramped up, how close you are to fully utilizing that. And then secondly, I think it must be the first time that Mondi hasn't had any big new projects that are sort of on the go. And I was wondering if you could detail your thoughts on that, given there must be a lot of opportunities now at your existing mills given that market conditions are obviously very good and funding is clearly not an issue for you.

Thanks, James. I'll take those. I mean in terms of the machine ramp-up, as I said earlier, I mean we're delighted with the rate of -- the pace of ramp-up. But of course, we're always frustrated because in a market like this, you wanted to go even quicker. But in short, we're right on track in terms of the ramp-up. The new machines always take long -- have a longer ramp-up time. I mean I would guess that by the end of this -- well, if you look at this year on a contribution basis, you're probably going to be at 70% of total capacity, that sort of order of magnitude. Clearly, we're running a bit below that still because you ramp up through the course of the year. But by the end of the year, we'll be above that sort of level. But on average, for this year, it will be in that order. The Štetí machine is that -- it will ramp up quicker because it's a rebuild of an existing machine, so it's a different dynamic. But clearly, we're still not yet at 100% there, and we're in the throes of ramp-up on that. But as I said earlier, I mean we're delighted with the progress there. As I say, even more delighted by the fact that it's a great product that has been extremely well received, and both of them are great products that have been very well received into the market. And just to remind you, I spoke about the hybrid product in Slovakia on the containerboard side, the product in the Czech Republic is obviously a kraft paper product mainly used in retail packaging to displace plastic-based pack -- retail packaging and also with a good recycled content. So I'm very encouraged by that. On the new projects, I mean, clearly, we continue to look at our portfolio. And as we've said before, I think there is more we can do, and we're not swayed by short-term dynamics in the markets. I mean we always look at an investment. These are long-term investment projects, and we continue to look at all our options around that. As you rightly say, I think we've got -- I mean we do have a privileged asset base, which lends itself to onward investment, and we continue to look at the options around that, clearly, targeting those strong structurally growing markets that we see. Funding, frankly, has never been an issue. We've always looked to invest through the cycle, and we'll continue to do so. And so, yes, we are certainly actively looking at our options on that, and I certainly believe there's a lot more to come in terms of organic investment opportunities for growth in our core markets.

Just quickly, could I just ask on the uncoated paper market, with the closure that's happened, do you think that that's close to balance now? And is there anything that you are likely to do in terms of closures, too, just thinking about Neusiedler, but I know you've said there in the past, but just thought I'd just update on that.

I think, as I said earlier, I mean, clearly, this move by Stora Enso is supportive for the market. It was needed. But I do believe that there is more capacity that needs to come out of this market. I believe we are extremely well placed to be a supplier of choice into a smaller market. And as I've always said, we are extremely well positioned in these markets, remembering that in -- we really serve 3 regional markets here, I mean, Southern Africa, CIS out of Merebank and Syktyvkar, respectively. And then we have the European offering, which is really Slovakia, which is the universal grades and then the Neusiedler complex, which is the speciality grades, which really needs to be seen in a slightly different context. So again, I believe we are extremely well positioned. But at the same time, I see there must be a lot of pressure at the high end of this cost curve, particularly with the recent pulp price moves. We are seeing some paper price moves, and I mean they're inevitable because of the sharp rise in the input costs for the unintegrated producers, but I do believe there needs to be more capacity rationalization in this market over time.

Okay. I think that was our last question. So thank you, James. Andrew?

Very good. Well, thank you very much for your attention. As always, we are available if there's any follow-up questions. But just to reiterate, I think we're in a very strong position. We've seen good structural growth in the markets that we serve. And we continue to look for opportunities to grow into that market and have them delivered a very robust performance in the first quarter. So again, thank you for your attention. We will close the lines now, but always happy to take further questions offline. Thank you.

Thanks.