Mondi plc (MNDI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Mondi Third Quarter 2022 Trading Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew King, Group CEO. Please go ahead.

Good morning, everyone, and thank you for joining the call this morning to discuss our trading update. I'm Andrew King, your Group CEO. And with me is Mike Powell, Group CFO. I'll start with a brief summary of this morning's announcements before we will take any of your questions. I'm pleased to report that we delivered a very strong performance in Q3, with underlying EBITDA from continuing operations at EUR 450 million, up 55% compared to the prior year period. This was on the back of higher average selling prices and overall volume growth more than offset by the significant cost pressures. We're able to mitigate the impact of the significantly higher European gas and electricity costs, in particular, as most of our pulp and paper mills generate the majority of their energy needs internally. Importantly, our EUR 1 billion expansionary capital investment program is progressing well, and we expect these projects to deliver mid-teen returns when in full operation. Within that portfolio of projects, we are pleased to have recently approved the investment in a new 210,000 tonne per annum kraft paper machine at our flagship Štetí mill in the Czech Republic for an estimated EUR 400 million investment, start-up expected in 2025, with full production ramp-up by 2027. In August, we agreed to acquire the Duino mill near Trieste in Italy. We plan to convert the existing lightweight coated mechanical paper machine into a high-quality, cost-competitive recycled containerboard machine with an annual capacity of around 420,000 tonnes. This converted machine would be expected to start up in 2025. If I then turn briefly to the outlook. While significant geopolitical and macroeconomic uncertainties do remain and we anticipate a continued inflationary pressures on our cost base as we enter the fourth quarter, we are confident that the group will continue to demonstrate its resilience and deliver a year of good progress. We remain well placed to deliver sustainably into the future, underpinned by our integrated cost-advantaged asset base, our culture of continuous improvement, our portfolio of sustainable packaging solutions and the strategic flexibility offered by our unique platform for growth, strong cash generation and financial position. With that, I thank you. And Mike and I would be happy to take questions.

[Operator Instructions] The first question comes from the line of Lars Kjellberg from Crédit Suisse.

I just wanted to try to understand a bit the sequential moves in the various components. We can obviously see pricing. You called out wood costs and energy costs. And as far as I recall, you haven't hedged your energy costs. I suppose that's redirected. But the one question that is really coming in, and that is somewhat [ more to pay ] because the wood cost development in your wood catchment area and, as you already called out at the half year point, availability. And I've seen some comments from my [ investors ], for example, they even talked about suspension of production because of wood supply issues. So if you can elaborate a bit on the sequential moving parts for that EUR 32 million drop in EBITDA versus the prior quarter, given the strong price environment and also how we should view the various components, cost, price and volumes heading into Q4. Those were my questions.

Lars, it's Andrew here. First, I mean that seems to be a very generalized question. So I think we could unpack into a couple of things. I mean, firstly, the wood cost progression, which Mike can follow. I mean, more generally, the progression on earnings, I mean, it's all about a rising cost base more generally and wood and energy being the 2 most specific of those. And as you rightly say, energy is not hedged. So what you see is what you get on our energy bill. We are effectively structurally hedged. So even though you've seen a massive increase in natural gas and electricity and all related energy costs in Europe, clearly, our bill has gone up as a consequence of that but not as much as you might have expected simply because we have a lot of our own energy generation. So the sequential basis, there's a high increase in variable costs, clearly offset to a large extent by increasing sales prices because we entered the quarter with higher prices, and in particular, in things like kraft paper, as we flagged at the half year, we implemented further price increases going into the third quarter. And we've got overall volume growth, albeit it's mixed in different segments. So that's the overall picture. In terms of the wood cost story, maybe Mike can give you a bit more color on that.

Yes. I mean, listen, we're talking about -- that was -- is a good quarter and a good year-on-year increase. So -- but the wood probably at half year, our wood costs were half year -- on half year, up about 40% probably. Energy, obviously, was a lot more than that, and we flagged both. Wood costs continue to inflate as Andrew has said. So we see wood being used for other sources of energy, of course, in some parts of Eastern Europe in particular. But wood costs continue to inflate through the quarter. And as Andrew said, the real quarter despite it being very strong, you do see that delta because we entered the quarter at very high prices, and they've relatively been flat through the quarter, but costs have inflated. And therefore, if you want to look at the downside on the quarter-on-quarter, it's very simple on that basis.

And on the -- sorry.

Yes. Sorry, I think I was going to add on the availability issue. Yes, I mean wood resources in Central Europe are particularly tight. I think it's particularly in the hardwood segment because hardwood is an alternative energy source. So it is really linked to this whole energy game because in certain Central Europe -- well, in a number of Central European countries, you're finding households and the like are burning hardwood in as a fuel source instead of gas, so people have the alternative to switch between the 2. So clearly, with these ultra-high gas prices and, of course, concerns around security of gas, people have been switching to burning wood in their homes. So that has been a different demand source, which has risen. Of course, it's extremely difficult to predict how that might continue because, of course, gas prices actually seem to be coming down in the spot market and maybe there's a sort of sense that actually the availability issue isn't as chronic as people might have expected. And so you could easily see that switch back over time. But undoubtedly, at the moment, that is causing pressure, particularly in that Central European wood. We've been managing that -- the wood and energy situation. We've also taken some modest downtime in certain of our mills, well, particularly in the fine paper mills, so Slovakia and Austria, in order to manage what effectively balance off the high wood cost and availability issues with the demand picture. So there has been some modest downtime that we've taken as a consequence of wood availability and simply the energy pricing, particularly relevant to Austria because as you know, we have an integrated facility there, which consumes a lot of energy.

So based on those comments, I suppose, unhedged energy, somewhat softer energy prices, at least for now, wood continues to rise. So how should we think about cost inflation and your ability to offset that by pricing? I guess it seems as if containerboard prices are, broadly speaking, stable; fine paper, stable-ish or slightly up; and kraft paper, I guess we will find out. But is that an area where you called out still strong demand trends or at least resilient demand trends in craft? Does that continue to see that positive price progression? That was my final question.

Yes. Well, I think, firstly, on the cost side, and of course, it's all -- these things are all linked. I guess it depends which day of the week you ask me because we're seeing -- I mean I'm sure you guys also track the spot gas prices in Europe. They're all over the place. I mean more recently, they have come down, actually the last, literally, few days. So clearly, in our case, that gives immediate relief because we don't hedge. And particularly, for example, the unintegrated, obviously, more generally, it gives relief to those players who are more exposed, I suppose, to the external price of energy and, of course, if one looks at the recycled containerboard cost curve. And this links into pricing, I suppose, because you're seeing some cost relief actually taking place just at the moment because energy prices have come off to some extent. As you well know, PFR prices have come off to some extent. And I guess that the cost pressure that existed actually a few weeks ago has probably alleviated to some extent. And that, in turn, is clearly feeding through to the fact that, generally speaking, the price increase at the recycled containerboard industry we're talking about not that long ago has dissipated but dissipated because it was premised on higher -- on cost inflation, which seems to have modified a bit. But I mean, as I'm sure you could all appreciate, this is a highly volatile world, and one simply doesn't know from 1 day to the next 1, what the spot price of energy and PFR and the like might be as similar -- related to that is also the whole issue of the capacity that was taken out on a temporary basis as an industry over the sort of summer months. It seems like some of that is coming back as people have got confident in their cost base as being mitigated to some extent. And of course, that will have an impact on the supply-demand balances going into the back end of the year.

And on the kraft paper question, just on the demand part of the question.

Kraft paper, we -- as I mentioned, we've got a meaningful increase at the half year. That's held very well. We've had a very good quarter in our kraft paper and more generally in our flexibles business going into the final quarter. Obviously, bags has a seasonally weaker quarter normally, and I stress it's seasonal because the construction period is through -- the height of construction, particularly in Europe, is obviously through the summer months in Europe. And so generally, seasonally, you expect a weaker quarter. And of course, we also take a lot of our kraft paper downtime. The maintenance shuts and stuff in Q4. So quarter-on-quarter is always dangerous to look at in terms of -- because there's always a sort of seasonal, and as a consequence, that's the way we retime our shuts as well into Q4. So Q4 is normally a slower quarter than Q3 for seasonal reasons, not necessarily driving -- calling on the cycle.

I get that. But the kraft paper price, that was more what I was referring to, if that maintains that momentum.

The kraft paper price is holding steady, yes.

The next question comes from the line of Cole Hathorn from Jefferies.

One, just following up on the demand question Lars raised. Is there any commentary you can give on what you're seeing in some of your end markets, the construction end markets for the paper bag side as well as your -- generally, your retail, et cetera, just so we can get an understanding of how that's developing on the sack and kraft or Flexible Packaging business? And then similarly, on the corrugated, any kind of demand commentary you can provide? And then the second question is on the Russia disposal. Could you just clarify the process from here? Hopefully, we get the Russian approvals for the transaction to come through. But what would be the process from Mondi side once you've got those Russian approvals? Would it effectively be once the Russian approval is in space, then you do the shareholder meeting and then ultimately complete and get the cash? Just to understand the sequence of events.

Carl, thanks for your questions. Let me start with the second one, and I'll let Andrew take the first. So yes, just a reminder, so the approvals that the buyer has to deliver are twofold. One is on antitrust. And the second one is to get approval from the subcommission, and with that approval for the agreed SPA that we have with them is the agreement on the funds being delivered to an account of our choice in a currency. Once those approvals have been cleared, there is -- because it is a Class 1 transaction, we need to have a shareholder meeting, which we would call. And then once that has been done, then we can close the transaction, and then, of course, the funds will flow. And then just as a reminder, we have committed that the net cleared funds would be repatriated to shareholders as soon as we practically can. Hope that answers that one for you, Cole.

Just a clarification. So you'd kind of get the funds in, I would consider, like an escrow account until the shareholders approve, and then it would flow out. There wouldn't be kind of risks of...

No, I don't think -- I think the timings may well interact with each other. So I mean we'll work through that, but we would need to have the shareholder approval before we can close the deal.

And on the demand -- sorry, on the demand question. So on the flexible side, as I reiterate, I mean, we had a strong quarter in Q3, very resilient demand across, frankly, most end users. I remind you, in terms of our sort of mix, we have probably 400,000 tonnes odd now of speciality kraft papers and then 900 million, somewhere around that, tonnes of sack kraft. On the specialty kraft papers, clearly, a lot of that goes into retail applications from that rebuilt machine of producing the paper bags for retail. And then a lot of it also goes into things like foodservice and some into industrial applications. I think the retail paper bag is probably a bit softer right now. I think simply footfall in retail shops is probably a bit lower, and you see a bit of that coming through at the moment, not terrible, but it's certainly a bit softer. And foodservice, these type of things, extremely resilient, if anything, quite strong. And industrial, a bit softer, maybe, but as we look forward -- but it's certainly not particularly concerning or anything like that. So I mean when you ask the detail of our end users, you can hear it's a mixed picture, but -- and you really do have to look at the individual end use applications. On the sack kraft side, as you know, a lot of it goes into building materials. In Europe, that's the building materials for, call it, DIY applications and things on bulk delivery in that, whereas in what we call our overseas markets, the export markets from Europe, a lot of that is into cement and the like. The export market's holding up very well, very resilient. Europe, it feels a little bit softer, but certainly, no real concern around that but just a bit softer than it has been in what was extremely strong markets for the last couple of years. On the corrugated side, likewise, I always remind everyone that we are very much a regional business in Corrugated Solutions, and we distinguish here between Corrugated Solutions volumes and our containerboard volumes. Containerboard volumes held up very well, continue to do well. We are a low-cost producer delivered into the markets that we serve. So we do extremely well there. On the Corrugated Solutions side, we are a regional market in northeast in Europe and Turkey. Obviously, every one period can be a bit different, particularly in the likes of Turkey, where it is volatile. So it's more of a regional difference rather than a kind of end use difference. In terms of end users, as you would expect, the food and beverage and those sort of things are pretty resilient. E-commerce has been -- continues to be good, but signs that it's slowing down. Industrial is mixed because, again, I think it will be dangerous to generalize. It's more of a regional differences there than anything else. So I hope that helps.

And the next question comes from the line of Justin Jordan from BNP Paribas Exane.

Just 2 quick questions, if I may. Just firstly, following up, Andrew, on -- I suppose, your comments on outlook being flexible. Can you just remind us, you've got clearly a number of, I suppose, annual and semiannual fixed price contracts, which I believe typically are renegotiating in Q4 of the year. Given the index price moves we've seen and the comments you've made regarding further price increases achieved in around H1 and into Q3, I assume we should be expecting price increases on those annual contracts post renegotiation? Or is that now in question given there's some slight softness in demand that you're commenting on? And then secondly, I just want to clarify something on Russia. I appreciate it's a very complicated situation. But I just want to clarify that the Board's intention is ultimately 100% of whatever net proceeds are received will be distributed to shareholders. Is that still the Board's intention just on the Russian disposal?

Okay. I'll take that easy one first. Yes, that's the intention. So as we stated, and it remains the intention on the dividend story. On the question of flexibles and you're talking specifically about -- well, actually, sack kraft paper is the one that has a lot of annual price -- well, some annual price contracts. I mean it is less than it used to be. More and more, that business is going to either semiannual or, if not, floating pricing. So the annual contract sort of negotiations on quite as big a deal as they would have historically been. But nonetheless, they still are important, and it is still the sort of next pricing event, I would say. But on the speciality kraft paper, it's much more fluid, and it encompasses a number of different subgrades that you would be pricing at different times at different -- on a different basis. But going into the annual price negotiation, I mean, we haven't started those, simply put. So I think it would be extremely premature to be able to sort of prophesize what might happen. And I think it's incumbent on us to be talking to our customers first before we tell you what might be happening. So I think we're going to be -- going into those negotiations. I mean, clearly, there's a general increase in costs, and that is self-evident for everyone to see. And the markets remain resilient, but we need to have those discussions with our customers.

And our next question comes from the line of David O'Brien from Goodbody.

Just 3 quick ones, please. Mike, you were good enough to give us a steer around energy costs at the interim stage. I think you said you might be looking at up to EUR 950 million for the year. I just wonder if you could give us an update on where you see that. We know it's quite volatile. Secondly, just on the move into Italy with the Duino mill. I guess how should we think about the opportunity to build a more substantial Western European corrugated business over the medium term when you see moving into kind of paper assets into the likes of Italy? And finally, just on the CapEx projects, what kind of EBITDA contribution are you expecting for 2022? And do you have an early steer on maybe what the contribution for '23 could be, please?