Mondi plc (MNDI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Mondi Group Trading Update. [Operator Instructions] At this time, I would like to hand the conference over to CEO of Mondi Group, Andrew King. Please go ahead, sir.

Good morning. 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 announcement before taking any of your questions. Mondi delivered a very strong performance in Q3 with higher average prices across the business and strong volume growth and delivered on a year-on-year basis against the backdrop of what is sharply high input costs. Underlying EBITDA for the third quarter was EUR 388 million, up 27% on the comparable prior year period and up 9% sequentially. Throughout this period of high demand, we, of course, remained very focused on ensuring the security of supply and our high-quality service to our customers. Our growth is underpinned by our leading packaging portfolio, and we continue to develop innovative and sustainable packaging solutions to help our customers achieve their environmental goals. Turning into costs, in particular, in a bit more detail. Input costs were significantly higher in the quarter, both year-on-year and sequentially. If we compare to Q2, we saw higher energy, resins, transport and chemical costs. Paper for recycling, which is obviously a big input, was mostly stable, although it did increase towards the end of the quarter. Energy costs, which is highly topical in Europe, did increase through the period and rose sharply at the end of the quarter on the back of material increases in electricity and gas prices. We expect them to remain at these elevated levels at least in the fourth quarter. Looking at our investments and how we have delivered value-accretive growth. Our major capital investment projects are progressing well. With these investments, we do capture opportunities in our growing packaging markets, we strengthen our cost competitiveness and deliver sustainability benefits. We also have expansionary projects underway at a number of our converting operations, which allow us to grow with our customers, enhance our product and service offering and improve efficiencies and converting costs. We're obviously very excited by the possibilities offered by our high-quality asset base, supported by the strong structural growth trends in the markets we serve, including e-commerce and the demand for more sustainable packaging. We look to continue to evaluate further organic development opportunities in our packaging businesses. Finally from my side and moving on to the outlook. Demand does remain strong, and we are implementing price increases across the business that will support the recovery of the ongoing inflationary pressures. While in the short term, the fourth quarter will be impacted by recent input cost increases alongside the planned maintenance and project-related shuts, the group remains well placed to deliver sustainably into the future, supported by our leading offering of sustainable packaging solutions, our integrated cost-advantaged asset base and, of course, our culture of continuous improvement. With that, Mike and I are very happy to take your questions. So over to the moderator.

[Operator Instructions] The first question is from the line of Lars Kjellberg from Credit Suisse.

Just a couple of questions real quick. I guess you highlighted demand being continuously to be strong. Could you give us any color by the various business lines, broadly speaking, how the order books have developed into Q4 versus Q3? And also, on the cost side, if you can share us any sort of sequential or year-on-year as your quantification of the cost pressures you saw and what you're looking for into Q4.

Very good, Lars. Thanks very much. I'll take the first question on demand, and then Mike can handle the second question on the costs. Yes, I think on the demand picture, as we say in the commentary, it remains very strong. When I look at our order situation across the piece, we certainly don't see any weakness across the order situation or any signs thereof. As we -- well, as you well know, in following the commentary on the sector, typically, we've seen a very strong demand picture for some time now. And as I say, that certainly doesn't show any signs to me of relenting. When you look at it business by business, on the corrugated side, as I say, our volumes were very strong again in the Q3. The comps are starting to get a little bit harder now. But nonetheless, still in absolute terms sequentially and still very strong. And that's really underpinned by, as we well know, the e-commerce effect continues to be very strong. But of course, we're also seeing ongoing strength across pretty much all end users now, and that's really what's driving this. And I think, again, a sustainability sort of structural driver, which shouldn't be underestimated here. We're also seeing a number of examples where we are simply using more corrugated solutions, which might have historically not been in corrugated. So I think that all is -- all goes well. Obviously, we've been saying that ultimately, this is not a 10% compound growth business, whatever, as we saw in industry growth numbers for the first half of the year, but -- and it will slow down over time from that, but I still believe it will continue to grow structurally at healthy levels. In terms of the flexibles business, again, our bag order situation remains very robust. Clearly, we are going into a seasonally slower period. I mean Q4 is always slower than the other months because of the -- the summer months because of the slowdown in European construction. But if I look at it versus this time last year, we've -- it remained extremely strong. We again see it pretty much across the piece and here right of more geographically for us in both Europe but across the Middle East, North Africa into the Americas, a healthy order situation and demand picture. And then finally, Uncoated Fine Paper, again, a decent order situation, obviously, a different paradigm around Uncoated Fine Paper where, clearly, we saw a structural decline taking place pre-COVID, and then we had the accelerated decline in COVID. Clearly, it's recovered from the lows of last year quite healthily, and our order situation remains good in those products. So yes, I think it's -- in a lot of ways, Lars, it's more of the same from what we were talking about a couple of months ago when we released the half year results. But maybe then Mike could also talk about the costs, which have changed to some extent.

Yes. Lars, thanks for your question. I mean the -- just to cover the broad range of costs, but I'm sure you really want to -- me to talk about energy. But transport, I think, remains tight and continues at both availability and costs. Resins are probably stable at a high level. Wood prices are nudging upwards, and PFR actually remains relatively high. And again, I would describe that as sort of nudging upwards slightly. Those, as Andrew has just alluded to, are a bit more of the same with a little bit more. And the major change has obviously been energy. It's getting a lot of press coverage as well. Just to give you Mondi's overview, I mean, Mondi generates from its pulp and mills about 2/3. About 70% of our energy needs are actually biomass, so generated from the process. So about 70% of our energy is biomass. The remainder, we have clearly gas in Russia. That is obviously not affected by the recent increases, which really, therefore, bring us in Mondi terms back to our Central European asset base, and that's really gas and electric. And clearly, you've seen the gas indexes, they've moved fivefold in the last little while. And clearly, that does have an impact. To scale it, I would say, Q4 versus Q3, depends where the prices sort of end up, but to try to sort of put some numbers around it, it's probably EUR 30 million, EUR 40 million, if we sat here today, Q4 versus Q3 impact. Clearly, we need to continue to manage energy. We don't really manage the business by quarter, as I've always said, Lars. And therefore, it comes back to the strength of the business model and how the industry prices that through. But those are the sorts of impacts that we're dealing with on a Q4 basis. And clearly, it will depend how high those prices stay and for how long and then the impact in terms of selling prices into next year. Does that help?

It does. Can I have 1 quick follow-up just on the sustainable packaging and the pipeline that you commented, Andrew? Are you seeing any wins? Or is it just a pipeline that is building? Because I figured that it's -- the market has been so tight. You can't really take on incremental business. Or how should we think about that?

Yes. I think, Lars, I mean, the incremental business on the containerboard side is more difficult simply because, as you say, we're capacity constrained, and so you typically see that reflected in price. And the same applies effectively to the kraft paper on the flexibles side where we're also seeing a big benefit of, call it, structural driver around sustainability. Clearly, where you have the ability to be a bit more, you can adjust in terms of -- from a volume perspective is in the converting operations. And no, I think it's not just the pipeline. It's for real. I mean we are selling more product both on the corrugated side and probably even more so on the speciality kraft and flexibles areas where we are seeing ability to displace other forms of less sustainable packaging. We quoted at the half year some examples around that. I mean in the corrugated space, for example, using less and less polystyrene inside the box in order to support fridges and other consumer nondurables and things like that because you can use corrugated there. Similarly, in the flexibles space, everything from consumer -- sorry, industrial applications, for example, that stretch-wrap product that we are now making and successfully commissioned with the customer and has a lot of demand for -- through to the consumer applications where you're using more and more paper-based products, displacing either -- different forms of substrates, which is very exciting and also our recyclable plastic solutions as well, which are clearly in high demand because that is also a huge environmental benefit if you can drive the sustainability or recyclability of those products. So I think it's not just pipe dream to use your phrase, but it's real and it's happening. But I agree with you in the short term on the paper side, it's a bit frustrating because one is obviously capacity constrained to some extent, but it's obviously reflected also in the price, which is positive.

We have the next question from Brian Morgan from Morgan Stanley.

Just a point of clarification, if I may. Your energy costs in the past has been sort of EUR 400 million a year. Just want to clarify that. I assume that, that relates to the 1/3 that you buy externally, electricity and gas. Is that right?

Brian, it's Mike. Thanks. I mean in rough numbers -- and again, rough gives you the guide. Last year, the total energy build, including biomass, gas, electric and other forms, was about EUR 320 million to EUR 330 million. This year, I guess, it would be about the EUR 500 million, but that includes all 4. You do need to remember in that, of course, 2020 was a light-volume year. So those are sorts of absolute numbers that hit the income statement. Obviously, 2019 costs were somewhat higher because the volumes were higher. But if that answers your question, those are the absolute sort of year-on-year numbers that we're dealing with.

No, that's perfect. And then, can we just touch on chemicals? And I don't know if I missed this in your commentary, I was writing pretty furiously. But in terms of the Q-on-Q change in chemical costs, is that a smaller concept than the energy change?

Yes.

Okay. So not quite as inflationary as energy?

Correct. I would go to say far -- so far to say, Brian, it's not nearly as big of a deal as energy. In terms of increments, that energy cost that Mike outlined is by far the most significant. I mean paper for recycling, which is a story which as you -- is well documented, is obviously another cost that's been going up year-on-year, but it's stabilized more generally. But remembering also that energy number that Mike quotes has also a volume effect in there as well because, obviously, 2020 was a lower-volume year than 2021. So there is some volume effect there. But obviously, there's a lot of price effect because, simply put, if you see European gas prices about fivefold, that does have an impact even on a business like ours, which is, I would say, more insulated than a lot from these types of things because we produce a lot of our own energy because the big integrated virgin production, as you all know, is your own biomass energy generation largely. And of course, we also, to the extent we buy gas and not -- we buy in Russia, which is not impacted by the current dynamics. But as I say, in any business which is exposed to a fivefold increase in that single cost item like that, there is an impact. But I think we're in a relatively strong position on that front. And one must not forget, as we keep saying, that the pricing environment remains very strong for our products.

We have the next question from Mikael Doepel from UBS.

Just coming back to the volumes comment there. Have you experienced any logistical constraints there? I mean we are hearing some of the e-commerce companies voicing some bottlenecks in deliveries. I'm just wondering if that is something that you are feeling and if it's having any impact on your volumes. That would be my first question.

Yes, Mikael, I think to be honest, the logistics issues, I mean, there are logistics issues, and obviously, we're seeing it particularly in the cost of logistics. I mean it's again as well known that seaborne containers, et cetera, has also gone up materially in price. I mean logistics, certainly through the height of the COVID period -- and I don't want to suggest that COVID period is over, but through the height of all the restricted lockdown restrictions, et cetera, last year was a major issue for everyone, I believe. That has, I certainly believe, has alleviated. I think we've got well-established logistics chains. Obviously, we've got a very wide network of plants, and I think particularly, for example in the bags business where we are the local producer is where we have a distinct advantage there. So I wouldn't want to suggest that logistics isn't an ongoing challenge for everyone, but I think I don't see it as a particular bottleneck at this stage. Whether it's a bottleneck for certain of our customers or not is more hard to determine. But we certainly have worked very hard to make sure we get inbound and outbound logistics working. And I think our guys have done a great job in making sure that, that has happened.

Okay. That's very clear. And then secondly, on the corrugated box pricing in particular, just wondering what kind of a magnitude of progression you're seeing on the pricing there. If you think about Q3, for example, compared to Q2, if you can elaborate a bit on that perhaps.

Yes. I think, Mikael, I mean, we will always say that there's always a typical 3- to 6-month lag on box prices going through on the back of paper prices. In some ways, a good thing about big paper price increases is that the box makers have no choice but to get the box prices up. And I think, if anything, that allows you to do it a bit quicker than you would typically, say, on average. So -- and really, that's what's playing out. I think the box price development is typically following the containerboard price development. If anything, slightly quicker than maybe you would sort of traditionally believe simply because of the magnitude of these paper price increases and the fact that, as I said, the box makers simply have to get the pass-through. And I believe, again, our business has done extremely well in this regard. I think our corrugated solutions business, as we call it, has done a great job in making sure we retain our margins in that business in the face of, obviously, for them, a very sharp cost increases on the containerboard side. Obviously, net-net for the group, a clear positive because of the long position we have there. But yes, it's -- and of course, they continue to work hard on that because, as you all know, containerboard prices have continued to rise.

Right. Right. No, that's clear. And then just finally, on fine papers. Just wondering if you -- I mean, you alluded to a strong or decent order situation there. I'm just wondering if you still see kind of a year-over-year improvement in volumes there heading into Q4, and also, if you see some further price recovery heading into Q4.

Yes. I think -- I mean, certainly, relative to last year, we are well above last year. I mean we -- I mean, the industry more broadly is -- and as we said at the half year, I believe we've certainly outperformed the industry, and we continue to do so as our customers value that security of supply, that commitment to continuing to deliver both in terms of service and quality of products. So that has ensured good order situation. Clearly, we are well above last year as an industry, but at the same time, still below, call it, what I call precrisis levels. And as I've said before, I don't believe demand in this sector is going to recover to precrisis type of levels. But at the same time, the good news is, obviously, we have seen some supply side response as well, which is also very important in this context. I think that's also helped tighten up the order situation on the back of -- obviously, at the same time, as we've said already, the costs have been going up. I mean clearly for the unintegrated producers, the pulp prices might be another input cost, less impactful for us, obviously, but certain of our production is also unintegrated. And in addition to that now, we've got this energy pressure on, again, the unintegrated producers primarily is where the pressure falls. So we are in the market for price increases because the cost base has gone up there as well.

We have the next question from David O'Brien from Goodbody.

Three for me, please. We focus a lot on the negatives in terms of costs. I guess on pricing, could you give us some quantification of what the positive impact could be or pricing overall, either into Q3 or what you're expecting into Q4? And as an add-on to that, we often think about just OCC, wood or pulp as a driver for price increases or conversations with customers. Typically, how have price increases around energy being received by your customer base? Secondly, you've talked about capacity constraints. How do you think about your own capacity situation on a 3- to 5-year view by recognizing you are just ramping up a couple of machines at the moment? And then finally, you guys have talked about your paper where possible, plastic where useful, which is a reasonably unique facet of the Mondi Group and the sustainability agenda. I guess how has that helped with the wins you're seeing at the moment in terms of that offering and beginning to pivot between both?

Okay. I hope I've got all that. On the pricing, I mean, David, I'm not going to give you absolute numbers because, obviously, one has to always look at these things in the round. But I mean, very clearly, we continue to see pricing benefit. I mean Q3 average pricing was sequentially up on Q2 across the piece pretty much as we saw the full effect of the Q2 price increases coming through. And as you well know, I mean, you've seen the industry commentary with the numbers and all that sort of thing, we continue to get the price increases through the Q3 and into Q4. So I remain confident on a sequential basis that Q4 pricing will be on average higher than Q3. Obviously, at the same time, as we made clear also the cost base is also going to be higher in Q4 than Q3. So in short, pretty much across the piece, without exception, we are seeing positive pricing momentum. That obviously varies, to some degree, by segment but also by grade within those segments. As you well know, the brown grades, typically in containerboard, have been moving faster than the white, as we call it, the white top and semi-chem largely because that's always been more volatile and it went down further than others and is now going up faster. But across the piece, we're seeing price increases there. Same on the sack kraft. Sack kraft, as we always say, in terms of the mix effect and how it affects our received price, there's always a bit of a delay there, both on the way up and on the way down because of the contract nature of that business. So this is a spot price, but then there's also the kind of average price achieved, which takes longer to come through. So we're very clear on that. I mean we can't reprice our whole book whenever the spot price moves in sack kraft, takes a bit of time. But we remain confident that as we -- as those contracts come up for renewal, they will be repriced to higher price levels. And then fine paper. As I mentioned already, we have had some modest price increases there. I fairly believe that there's every motivation to push further price increases on the back of what are increasing costs. And I guess, that alludes to your second question, I mean, particularly in the fine paper space where there is still a lot of unintegrated capacity, which is very exposed to energy prices and the pulp price. It is a discussion we're having with our customers right now around that. On the question of capacity expansion, yes, I mean, we continue to look. I mean, obviously, we have a number of projects, both in commissioning and in the pipeline, which will continue to incrementally add volume. I mean if we tot up what we currently are optimizing and/or have in the pipeline, it's around 8% capacity expansion in our upstream businesses. Obviously, we are continuing to optimize that PM19 in Slovakia, which is obviously a deal coming into what is a very strong demand market. And we optimize it in 2 ways. We obviously incrementally every month getting more volume out of that mill and also optimizing the product mix into those, what we would call, the higher-value kraft top products as opposed to a pure unbleached recycled containerboard. But that's -- and that's an ongoing optimization. I mean we've done -- we've got a long way this year, but we'll go much further next year as well. And then clearly, we've also been optimizing that new expansion in Štetí, and that's going exceptionally well. As I remind you, we're producing more paper for the paper bag, paper retail bag -- retail paper bag market, sorry. And I mean, that -- there's exceptionally strong demand for that, and pretty much we sold out on that product and producing as much as we can. And then we got ongoing debottlenecking in the likes of Syktyvkar, which is a very valuable time there. It is, by definition, a low-cost production, and we're modernizing our Richards Bay facility, which will also give us stability and improve production output there. And as I alluded to, we continue to explore other opportunities because we do have that privileged low-cost asset base, in conjunction with strongly growing markets that we serve, and that clearly lends itself to onward investments. So we are proactively looking at the next options around that. And I'm very confident that we will come up with some good ways to spend our shareholders' money to make sure that we can continue to develop and grow into these structurally growing markets that we serve. I'm sorry. And the last question on paper/plastics discussion. Yes. I mean I keep talking about our unique platform. And genuinely, we have this unique platform there that we have deep knowledge of particularly kraft paper making. We have knowledge of what we call functional papers, where we add functionality to the paper by doing a small layer of coating and the like. And a lot of the current development and thinking is how you make it so such a small layer of resin that you can make it fully recyclable and yet still have additional functionality that paper doesn't have. We have a lot of capability there. And of course, we have all the converting knowledge both in the full paper-based solutions where we are the biggest globally and also in other substrates, on conversion, be it resin, aluminum, et cetera. And that serves an extremely demanding consumer -- consumer products groups where we are producing that primary packaging for them that you see on the supermarket shelf. And we're seeing every day examples where we can bring all of those capabilities together to offer them the best solution, as you say, under the banner of takeaway possible plastic when useful. And I think that does encapsulate how we think about it. So as I said in my opening remarks, I mean, driving further paper-based solutions is obviously immediately beneficial from an environmental perspective because it's widely recyclable already as a solution. But I think also, one shouldn't forget that for certain applications, you need plastic. Simply, you can't -- you don't have the barrier properties with paper. And in those solutions, the trick is making it with less raw material and making that raw material -- the product fully recyclable. And we're doing a lot of work in that regard. We have a lot of great solutions there, and we'll have more solutions around that. So we're doing a lot of work in terms of making sure we bring the full capability of the group there for our customers' benefit in driving those value propositions for them. And I think we made great strides in that. I think there's more -- a lot more to come in that area. And this is no longer, as I said to -- I think in answer to Lars' comment, this isn't just sort of waving around and showing the odd sort anecdotal innovation example. I mean this is now becoming real, and it's really making a difference. And we've seen real volume will pick up and real machine time taken up paper machine time. Paper machines are big beasts that produce a lot of volume, and you need volume business, and these sort of solutions are really generating good volume opportunities and obviously also good pricing opportunities for us. So we remain very excited by it, and we've got lots more to come from that area.

We have the next question from Justin Jordan from Exane.

I've got 2 separate questions. Firstly, thank you for the detail on energy and transport. Just moving on to more positive aspects of pricing. You've clearly achieved substantial price increases across many of your product areas in Q3 given the 9% sequential increase in EBITDA, and well done on that. Just thinking about 2022, specifically within flexible packaging, clearly, you have a number of semiannual and fixed annual price contracts with some of your major global industrial customers. Does the strong demand and pricing environment that you're seeing give you greater confidence of achieving material price increases on those annual contracts for 2022? And then secondly, on completely unrelated area, I'm assuming given the successful ramp-up to date in Ružomberok and Štetí, you're very comfortable with the prior guidance of EUR 50 million of additional EBITDA in 2021 from a couple of projects. And then just if would we take a step back and think about the strong demand environment that you're seeing, does that potentially accelerate some of the Board's thinking on further capital investments? And I'm thinking in the context of Mondi having spent EUR 1.9 billion net investment on capital projects and bolt-on M&A in the last 5 years, and clearly, in general, they've been phenomenally successful. But given the strong demand environment, are you seeing -- does that make you, if anything, accelerate future plans into potential future capital investments going forward in '22 to '25?

Justin, let me take the second one first, and then we'll pass over to Andrew. Yes, the EUR 50 million projects, the -- I think the only reason that would be less is because of the energy that we've discussed, which I think you described as bad news. The cost pressure is obviously on that project. What I would reiterate, though, is the projects have ramped up just exactly as we expected. But clearly, the costs in the short term may well affect that number just because the costs have moved so quickly in the short term. But the projects are in great shape ramping up and will provide us great platforms into 2022 and beyond, which probably leads nicely. On to you, Andrew.

Yes. I think Justin, the first question you want to answer, yes, we believe that the current environment is conducive to reprice -- upward repricing of whatever contracts are coming due as we head into the new year. I certainly see no reason at this stage. One doesn't want ever be too presumptions around these things because, obviously, it's always a question of the circumstances at the time. But it's very clear that these markets remain very strong. Our order situation remains extremely tight. We continue to struggle, frankly, to meet all the demand that we see out there, and this is just talking specifically about the sack kraft and kraft paper segments. Because in addition to the traditional industrial applications having been very strong and the likes of the cement market, et cetera, remain very strong, building materials and Europe remains very strong. In addition to that, you are seeing these other demand sources come out. The e-commerce growth in bags is coming through very strongly, which is great. In addition, these consumer-related applications for paper bags is coming through. And in the kraft paper space, all the speciality segments are growing really well, and we continue to see new uses, which are displacing other forms of packaging. So all of these things say to me that the order situation is extremely strong. And there's certainly no reason to believe that as those contracts come due, we shouldn't be able to reprice them upwards. And then in terms of -- which probably links also to your final question on the CapEx front. Yes, I mean, I think we see a real demand for the products we make. Now one should always be make sure and picks the difference between the sort of cyclical sort of effects and the structural effects because it's the structural stuff you want to invest behind. But very clearly there, we do see good, strong structural growth for the reasons I've just articulated in these markets. And as I said earlier, I mean, our asset base lends itself to further investments and focus very much on those things that we've always held dear to us, which is high-quality, low-cost production that we can expand. So yes, we are actively looking at that. And one also shouldn't forget that the downstream converting businesses also lend themselves to onward growth. And then that growth doesn't come for free. But as we demonstrated more recently, the value of the investments we've been making systematically over the -- in those businesses over the years is coming through with the strong growth we're seeing right now. We're prepared to continue to support the growth in those businesses. We have a fantastic flexibles converting platform. And I see ongoing opportunity to incrementally expand that both through expansion of existing production or just for brownfield expansion, but also selectively on either greenfield and/or clearly on the M&A front where we sequentially buy things. And I think there's certainly more opportunity to come, and as I say, all these new sources of demand are very exciting for that business. And likewise, in the corrugated space, we have a fantastic platform, Central, East European focus. Obviously, also in a very strong position in corrugated in Turkey. We've seen very strong demand, particularly obviously from the e-commerce sector but from a number of other sectors. And again, that lends itself to our ability to continue to invest and grow behind that. So yes, I'm very excited by the potential there and I certainly see the ability to support that growth with CapEx. As always, it's dependent on making sure it drives the right type of returns for us because it's value-accretive growth, which I always stress, which is most critical for us or which is what we take on.

The next question from Cole Hathorn from Jefferies.

Just wanted to follow on Lars and Justin's question around kind of the demand environment and the strong order situation. You talked quite positively about trying to price that and having pricing power to offset the cost inflation. But I'm wondering what the broader market is thinking, particularly in containerboard. I mean there are a lot of recycled containerboard players that are smaller, may not have any hedging in place and do have much higher energy costs. How do you think they are going to deal with this cost environment? Is it going to be a situation of them really pushing price because demand is good to offset this cost inflation? Or are some of these players effectively taking some downtime because they can't operate at the current price levels, which I suppose will end up tightening the market?

Cole, I have no idea what our competitors are thinking. As you could imagine, I'm -- we don't talk to them. But yes, I mean, your observation that there is -- there must be cost pressures on unintegrated -- or sorry, I should've said recycled containerboard, stand-alone recycled containerboard because, by definition, they don't have a biomass energy that you buy typically off the grid normally or you might have some sort of boiler systems, some of it would be gas fired. I mean some people have some multi-fuel boiler capacity, I guess. So generally, if your question is, is the cost curve for containerboard steepening as a consequence of this as a -- because the recycled producers are seeing incrementally stronger cost pressures, the answer is yes. Exactly what people are then thinking as to how they're going to mitigate that pressure. Obviously, it's impossible for me to speculate. What I see, obviously, in our business is we're obviously always working on our cost base anyway. We're in the fortunate position of having a lot of biomass energy generation, as Mike has already alluded to. And at the same time, there is good fundamental reasons from the simply partners of these markets in supply and demand terms as to why prices have been going up. And to me, that's the most important here, is we've got strong demand. And yes, there's incremental supply, but the fact is these markets remain very tight. And hence, we've been able to achieve good price increases here. But as I say, what others are thinking or doing, I can't speculate on.

And then just a quick clarification, I just didn't quite hear it, on the flexible plastic packaging business. Have you recovered the impact from the high resin prices by the end of the third quarter? Or is there still a little bit of recovery to go there on the polymers and the various resin inputs?

Yes. I mean it's largely through. As we've always said in that business, we're in the fortunate situation that a lot of the business is driven off a formula. So you get effectively an automatic pass-through with a delay of sorts. It normally takes around about a quarter for that to wash through. Obviously, there is some business which is not formula-led. And obviously, we have some business where there might be some resin content as it were, which is not material to the overall offering or whatever, but -- which is in a way less or more difficult to pass through. But by and large, it's a pass-through. So that resin story, even in absolute terms, it goes up. It's not as big a drag on anyone -- on our margins simply because there is a lot of pricing mechanism and, frankly, no converter can take price risk on resin prices.

Next question from Sean Ungerer from Chronux Research.

Just going back to corrugated. I mean, obviously, you've alluded and everyone knows that the market has been pretty tight. And I guess, on the sort of maybe 12-month to 18-month view, sort of barring any major macro shocks, I mean, what could you see sort of alleviating the tightness in the market? Or do you sort of see this as business as usual for the next 12 months?

Thanks, Sean. I mean it's difficult to predict next week, let alone 18 months. But I think if you look at it longer term, as I keep reiterating, there are good strong structural growth drivers here. I mean this e-commerce thing is not going to go away, and every dollar spent through an e-commerce channel just uses more box than -- or more packaging more broadly than through sort of traditional bricks-and-mortar channel. And I firmly believe that we're not going to see a kind of reversal in the business that's gone online as it were. And similarly, as I said, the sustainability trends are only really gathering momentum, if anything. So I think that's a firm drivers behind the ongoing good strong growth in demand. That said, as I said at the half year, and I'll reiterate them, in the first half of this year, the industry as a whole grew volumes at 10%. That, to my mind, is not sustainable. It was obviously exacerbated by the fact that you saw both the ongoing very strong e-commerce picture in addition to recovery play in a lot of the, call it, traditional sectors as well. So I think, over time, what will happen is the growth in e-commerce demand has to slow down. And I say that it will still be growing. It just can't be growing at the rates that we've seen. Clearly, through the pandemic, e-commerce had an open goal, and I think that everything else was closed. And people were spending all their money on buying things off the Internet. Clearly, as the world opens up, then people can spend their money on other things like travel and entertainment and the like. I think that will have an impact. And you're starting to see that anecdotally. I think if we look at the commentary out of the e-commerce producers or companies, that rate of growth has to slow down, albeit it's not going to reverse, in my view. So I think that will, over time, cause a slowdown from the current very strong rates of growth we're seeing in corrugated. But as I say, I emphasize that I certainly believe the structural trends are, frankly, stronger than they would have been 2 or 3 years ago in terms of the way we see things. So in my view, that's the way it's going to probably unfold over the next 12 to 18 months, but it's always difficult to predict an end. Of course, there's always going to be a sort of macroeconomic overlay on all of this. Albeit in 2020, there was a massive decoupling of corrugated demand from macro because, I mean, we saw all the macro indicators go backwards, and yet, even in 2020, corrugated demand grew. But I think that clearly, it would subdue the rate of growth that we're currently seeing if you saw a sort of macroeconomic slowdown of some sorts. But I -- as I said, I still think it remains a very robust picture as we look forward.

Okay. Cool. And I mean, just sort of a follow-on in terms of the volume growth. I mean, this is very strong. So here in H1 was around 18% on resins, sort on that trajectory gains in Q3, Q4.

I'm not sure if I caught that. What -- could you just repeat the second half? I didn't hear it properly.

So I'm saying the corrugated volume growth printed in H1 was up 18% year-on-year. And I'm just asking if that is a similar sort of trajectory that's happened in Q3 or has Q3 outperformed that.

Yes. I mean the thing with year-on-year numbers is that can be a bit misleading because it depends on what the comp is. Obviously, the comps are getting harder in H2, but the volumes growth remains very good. But you just have to always be aware of the comp.

Okay. Okay. Got you. And just switching over to the uncoated woodfree business. Just into -- I know there was a bit of commentary about it earlier. But I know, I think, in the last update call when I asked about it, you sort of were still seeing the need for further capacity rationalization. And just sort of linking to that, obviously, there's been a couple of percent price increases going through and it's probably a bit more before the end of the year. Could you just comment on how you're thinking about that in terms of your sort of cost push versus supply/demand balance in Europe specifically and any sort of read-through for North America?

Yes. I wouldn't know about a read-through for North America. If you look at Europe, which is really -- I mean, there's very little trade flow between the 2, there's a bit of volume from Europe, which typically goes into North America but not vice versa. I mean I would say it remains the case that there still needs to be capacity rationalization in this market. I mean what's happened recently with this cost inflation is, of course, the cost curve has gone up -- has moved up. And of course, that was the marginal players, and it's probably -- and it's deepened even further in my view because the unintegrated producers who dominate the high end of the cost curve are the most exposed to this energy story, and obviously, pulp as well. And so that most to put even more pressure at the top end of the cost curve. And we've seen strong structural decline in demand last year. Now its recovered, which is encouraging. And we've -- I think we've gained more than our fair share of there -- or not our fair share, we deserve it. But we've done well in terms of gaining share in that context. So I can only think that there's a lot of capacity which is under enormous pressure right now. And yes, I retain the belief that there should be more capacity closures. I mean clearly, we've seen a recent big move with Stora Enso's capacity now coming out in the markets, having been announced earlier this year, but I would suspect there needs to be more to come.

Okay. Great. And I'd just get a follow-up for Mike. I mean the commentary around the energy costs and maybe I misheard you. I sort of heard that FY '20 was in the EUR 300-ish million mark versus a normal range of EUR 400 million. But I'm looking at what was reported under variable costs, and I have energy of about EUR 452 million for FY '20, which sort of the jump from EUR 452 million to EUR 500 million doesn't seem as aggressive.

Sorry, I lost your numbers. Can you just repeat the question for clarification?

Yes. Earlier on the call, when you were speaking about energy costs, you sort of said the usual run rate is about EUR 400 million per annum. But then with the bill in FY '20 closer to sort of the EUR 350 million mark, but obviously, you said that does include biomass. I'm just tying that into the -- what was reported under variable costs in FY '20 of about EUR 452 million.

Yes. Firstly, I don't recognize the EUR 452 million. I mean what I'm trying to get over is the absolute numbers in FY '20 for energy, biomass, gas, electric in the main and a few of the fuels was about the EUR 320 million mark. That number in FY '20, of course, was quite a low number because volumes were somewhat lower in FY '20 because of the world. The FY '19 number would have been nearer the EUR 400 million mark. This year's number will be nearer the EUR 500 million mark. So whilst there is a year-on-year delta of about, let's call it, EUR 180 million, clearly, we haven't finished the year yet, that delta needs to be taken into consideration with the stronger volume that we're making as well. So that was the point I was making that, if you'd like, on a normalized year, call it, EUR 100 million. But again, I'd reiterate, we often talk about -- in the past, we talked about PFR. We've talked about resins. Now we're talking about energy. As Andrew says, I'm sure next week, we'll be talking about something else. The strength of our business model and the structural drivers that Andrew has talked about leave us in good shape. Sure, there's Q-on-Q impacts, and we've got to get on to manage those, frankly, and make sure our customers get our products and our employees are great at servicing that. But it's our job to pass through that, and we've got some good drivers to do that.

We have the last question from James Twyman from Prescient.

Yes, I've got 3 questions, hopefully they're quick. The first one is, the maintenance costs were obviously pretty high this year. Could you just give an idea of what you think the cost would be next year or assuming next year is more of a normal year? Secondly, you sell a lot of pulp to Asia. I think it's around 200,000 tonnes. Can you just talk about the fact that prices have clearly weakened there, but they haven't weakened in the rest of the world. What are you seeing there in terms of that market? Are things stabilizing there? Or maybe things improving a little bit? And then thirdly, your white top products and your semi-chem products, I know they are less cyclical than the brown papers. But it's even more extreme this year than normal. I mean the brown paper -- the white top kraftliner price is pretty much the same as normal kraft right now, which is extraordinary. So just interested to know why you're seeing that the gap closing quite as much as it is.

James, thank you. Let me take the first one. Yes, I mean, I'd expect next year to -- on maintenance to be lower and back on to sort of more normal levels, if you like. So hopefully, that answers your first question. And then on the second and third questions.

Yes. So I think, James, in terms of the Asian pulp, I mean, yes, we sell some pulp into Asia, but we're a small player in that market. So I wouldn't say we have any particular great insight. I mean the pulp pricing has generally stabilized, having risen, as you know, extremely sharply over the last number of months. Clearly, China is generally slowing down, to some extent. But I think beyond that, I don't really have much wisdom there in terms of the Asian markets. On the white top kraftliner story, yes, I mean, there has been a narrowing in the gap. It's not quite the same price. It's still trades at a premium to the unbleached kraftliner. I mean white top kraftliner is a niche product, which is used for certain very specific applications. As with everything, when people are -- when prices of things are going up, your customers are looking at ways to mitigate those costs in some ways. Sometimes you buy down as it were. So I expect there's an element of that with people trying to substitute a more expensive product for a slightly cheaper product, albeit that slightly cheaper product is getting increasingly expensive in itself. But it is safe to say we still make a lot of money out of that white top product, and we'll continue to do so. And I suspect it will remain less volatile through the cycle. There are fewer producers, and it's a very discrete sort of niche markets that are served. But I suppose, on the margin, where people try and use something cheaper, that's probably what's happening right now. But it's not to say there isn't a very strong picture for the white top market. It's just probably -- we just haven't seen quite a rate of increase in prices. And it's always a sequencing thing as well, these things, 1 each from 1 quarter to the next that the relationship can change. But I wouldn't read anything more into it than that.

Okay. So broadly, you're saying that those markets are -- you're seeing strong order books like you are in the rest of the business?

I'm seeing what? I didn't hear you.

You've got still a strong order book in the same way as if you have this...

Yes, absolutely. Very good. Well, thank you very much, everyone, for your interest, as always. As always, we are available on the end of the phone, if any further clarification or comments or questions are required. So once again, thank you very much, and enjoy your day. And over to you, operator.

That concludes the conference for today. Thank you for participating. You may all disconnect.