Mondi plc (MNDI) Earnings Call Transcript & Summary

Good morning. This is the conference operator. Welcome, and thank you for joining the Mondi First Quarter Update Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Andrew King, Chief Executive Officer. Please go ahead, sir.

Good morning, everyone, and thank you for joining the call to discuss today's trading update. As mentioned, I'm Andrew King, your Group CEO; and with me is Mike Powell, our CFO. I'm sure you'll all have seen the announcement this morning. So I'll just pick up on a few points before going into questions. As you would have seen against the backdrop of softer markets, both in terms of volumes and pricing. As expected, we are pleased to report a stable performance in the first quarter of the year. Underlying EBITDA of EUR 351 million is in line with the fourth quarter of last year when you exclude the unusually high fair value gain that we booked in the final quarter of 2022. The business was generally -- impacted generally by softer demand and destocking, which in turn led to some lower selling prices mitigated in part by falling input costs. Our investment in expansion in capital projects continues, and we are making good progress across our project pipeline, including importantly at Steti, where we're growing our kraft paper capacity to meet our customers' demand for sustainable paper-based flexible packaging. And the modernization project at our containerboard mill in Kuopio, Finland, which we expect to complete towards the end of this year. As always, we remain very focused on partnering with our customers as they continue to move towards more sustainable packaging and paper solutions. With that, we're happy to open up to questions from Mike and I.

[Operator Instructions] The first question is from Cole Hathorn with Jefferies.

Three from my side. The first is on cost inflation. If you mind just giving a little bit of color. Are we right to assume that cost inflation is effectively peaking in Q1, and you should get an easing through the rest of the year. And in particular, just a little bit of color on what you're seeing on your wood costs because there's diverging wood costs between, I think, Central Eastern Europe and the Nordic region. So just some color there on the cost inflation on wood costs. The second is around recycled containerboard pricing or containerboard pricing in general. I mean we're at a position now where I think we've had a lot of commercial downtime, but also a position where the high-cost players are into the cost curve. I'm just wondering what you're seeing. Do you think we're close to the bottom on containerboard pricing? And we've seen some announcements in the market on price increases. Just your thoughts around the ability for price increases or any commentary around that, if you can? And then the final one is on destocking and demand. You've got a number of different end markets. Would you mind just giving a bit of color on, firstly, corrugated packaging, where we are in the destocking cycle and then flexible packaging as well, maybe splitting that between your traditional bags business and your consumer flexible?

Well, thanks. Let me take the first one. Andrew can take the next 5. The costs -- input costs are reducing, Cole. I think you can see that in many indexes and from others. We've seen that across all cost categories. So energy and the energy-related categories, so Q4 versus Q1, those are falling and continue to fall. You specifically mentioned wood, as we did in the release as well. Wood has been high into Q4 and has stayed high in Q1, probably stay flat in Q1. And then we -- at the year-end, certainly called out that we would expect that to fall as the rest of the year happened. We are now seeing that, it is clearly falling in Central Europe a little quicker than Scandinavia. So I would say the Scandinavia sort of flattish for us as we sit here today. But certainly, in Europe, those wood costs are falling and we'd expect that to continue.

Yes. And Cole, on the pricing, I mean, in the way your questions are interlinked, obviously, with the demand questions and the pricing environment. I mean in terms of -- specifically on the containerboard pricing development, as you know, I mean, Q3 into Q4 was the peak pricing and then came off quite sharply thereafter. Partly also due to demand and the destocking effect and obviously, also as a consequence of the change in the nature of the cost base with a lot of the -- particularly on the recycled side. Obviously, the energy is a particularly important cost and it came down materially. So obviously, that pulls through. We've seen further price erosion through Q1 into this year and into the beginning of Q2. As you rightly say, it feels as though -- I know this is not exactly sticking my neck out, but we are clearly nearer the bottom than the top. It does feel as though there's a set of stabilizing in that pricing environment now in that market. As you say, there are price increase initiatives out there. We are fully booked in our unbleached grades. And we will be looking at what -- and what the dynamic looks like going into the back end of Q2 now and into Q3. I think it's too late for Q2, put it this way, but certainly in our indications, I think that one would expect the next move in prices to be up rather than down on the containerboard side. And on the -- more generally on demand, yes, I mean, we've said Q1 clearly was softer in terms of the overall industry demand across the piece no doubt exacerbated by a destocking effect because clearly, when people assume price declines, then it's a natural instinct to run down your stocks, and that's undoubtedly what has happened. As I say, that would feel like it's coming to an end, particularly in the containerboard space. Kraft paper, the pricing held up much better through Q1. I think it is price erosion going into Q2. But -- and clearly, the demand picture remains as we say, subdued into Q2 or generally there. In terms of end users around it, I think it's a reflection more generally of a slowing macro. You cannot -- well, have already slowed macroeconomic environment. So I think every area of demand has been impacted one way or the other. As you would expect, the more consumer-related areas would normally be more resilient. I mean they have proved. But even there, you've seen softness industrial applications also softer. So it's not any one area where you've seen a softening of demand. It's more general as a reflection of the macroeconomic situation. But I think at the same time, particularly on the containerboard side, the signs of stabilizing. On the kraft paper side, it's a bit more sort of late cycle. But -- and then Fine Paper, weak Q1 for the industry. I mean we gained share in the face of other industry players falling out and taking a lot of downtime. I think while Q2 remains difficult, there are signs of life. I mean it's nice to see that, for example, the folio business, which has a lot to do with industrial printing and advertising and things like that seems to be picking up, which is encouraging. I think the cut size market, which is office usage, et cetera, remains relatively subdued. But I think, as I say, one assumes an economic pickup, you can also assume that, that will also improve over time. So yes, it's a mixed picture. I wouldn't want to say we're seeing the bottom everywhere in Q2, but it certainly feels as though it's bottoming out. Long answer to a long question.

The next question is from Justin Jordan with Davy.

I've got I suppose a 3-point question. Firstly, given it's your most profitable division and the business that you have the largest market position in, can you just give us a bit more color on flexible packaging, specifically in terms of destocking that may be going on in the world of sack kraft and packaging paper generally for you? And secondly, is there any update on your proposed Russia disposal? I appreciate you still appear to be waiting approval from Russian government. I'm just wondering if there's any color you can give on that. And thirdly, just on Neusiedler, you announced some modest restructuring recently. Can you just give us a little bit more color on what you're doing in uncoated fine paper generally, please?

Sure. Maybe I can work backwards from that. The Neusiedler restructuring, as you say, is -- there are 5 machines in Neusiedler complex. We are intending to shut one of those machines being PM6. It's Neusiedler, we've always recognized does best when you fill it with specialty products. The problem with PM6 is it's too big to be filled with fewer specialty products and, of course, doesn't enjoy the integration benefits, for example, that we enjoy in Slovakia down the road. So this restructuring, we believe, will allow the mill to be able to fill with those -- the core business, which is the specialty products, we can reshape the cost base accordingly, and we think that, that gives us a very strong position in that niche specialty fine paper market with a very compelling portfolio. On Russia, as we say in the press release, we continue to work on that approval. There's really is no update. I'm afraid on that. But our priority remains to divest of our Russian assets. And clearly, we are working with Augment on Syktyvkar and the Gotek Group on the 3 converting plants to achieve the necessary approvals, which is what is outstanding to complete on this transaction. On the flexibles, I mean, there's really a little more color I can give you than I already hope to mention to answer to Cole's question. I mean we are -- clearly, the pricing environment was extremely strong through the course of last well through last year and particularly into the second half. We have seen some price erosion into the beginning of this year and further into the second quarter. Generally, it's a softer demand picture, which is fairly natural when you think of the macroeconomic backdrop, our strength in integration, our broad offering, both in terms of the nature, the specialty kraft paper through to the sack raft papers and of course, our significant geographic reach because although Europe is probably the softest market at the moment, we, as you know, our global business there with a big presence in the Americas, Middle East, North Africa also very important for us. So that mitigates any one regional and/or end use sort of weakness, but it's a more general reflection of the overall macroeconomic backdrop. There's no one area of particular weakness or strength is that that may be I think what's most important though is the structural growth drivers are very much still in place. What we are continuing to see is all the work being done with our customers to drive the innovation around using paper-based solutions to displace less sustainable solutions. And of course, a lot of that involves these kraft paper products and also that, importantly, the way we increase the functionality of the kraft paper with barrier properties that we use in our functional paper and films business and in turn also the converting we do in our consumer flexibles. So there's a -- those discussions with our customers continue, and we continue to drive all the innovation that I think is very exciting around the whole kraft paper area because that is where we see the biggest opportunity for using these paper-based solutions as our customers demand more and more sustainable packaging solutions.

The next question is from Joffrey Bellicha Meller with Bank of America.

The first one I have is considering you are flat quarter-on-quarter on EBITDA and you mentioned the containerboards was low on pricing, and it seems like demand was still subdued. Where was the positive contribution coming sequentially? That will be my first question. And the second question I have is that we have seen industry reports on export of kraft paper to Middle East and Africa. And I was wondering how this was potentially affecting prices heading into the second quarter for you or how you differentiate yourself there?

Yes. Thanks, Joffrey. Yes. No, I mean the profit Q-on-Q, as you say, if you strip out the fair value gain from last year, we saw a good performance, as Andrew has talked about in kraft paper. So prices were somewhat stable there, and you've heard the cost story. And of course, we had good production and sales in kraft paper, a bit weaker in containerboard and in European USP South African USP, as we said in the release, in good shape.

I think it should never -- we talk about the market demand. I mean, clearly, we are in an extremely strong position relative to the market. So for example, in fine paper, even though the overall market was softer, we gained share in Europe. Similarly in that Flexibles business, we have an extremely strong vertical integration position. And so even though kraft paper markets might have been a bit softer, obviously, our strong vertical integration means we continue to show real resilience. I think to your specific question on [ BNAP ]. I think you're clearly referring to the Segezha volumes. I mean, Segezha has obviously always going to be looking for alternative markets now that they're excluded from Europe. We always expected them to be seen around in different markets. We haven't per se seen them any -- particularly influential in any one of our markets, that Middle East, North Africa market is important for us, but it's largely selling to our own converting operations. We have a big converting network there. So let's call it captive volume from -- to our own converters. So there's no particular interest that we see from exports from Segezha, but you'd have to ask them where they are selling, not -- we don’t know.

I have a quick follow-up just on the cost reduction that you've been mentioning in the release. Could you, if possible, quantify what would be the tailwind that you expect at this stage from, I guess, energy, chemical and resin costs in 2023? And if you could -- and if you also have a view on the level of price reduction in wood as well, that would be super helpful.

Joffrey, I wish I had that crystal ball. What we do know is the momentum and the trajectory -- and that's what I've shared. I mean it's very difficult to call out the full year, things will change. I think we've all learned that they tend to change quickly. But as I've said, we'd expect wood to continue down. The other ones are continued to trickling down. Energy is where it is. It's been pretty stable for the last sort of 6 weeks, but who knows with energy. And a lot of the other cost handoff, energy some of the chemicals. So -- and some of it will depend on the economy as well. I mean as Andrew has said, we are seeing some early signs of destocking coming to that bottom and some economic activity. That may well change some of the input prices too as we go into the second half, our challenge as ever. And we do a good job is to make sure that we service our customers and charge appropriately. So I think we'll have to see where the full year ends up on all of those input costs. But the trajectory at the moment is those trickle downwards as we go through Q2.

The next question is from Andrew Jones with UBS.

I was also going to ask about the 2023 cost bridge, but I guess that's already covered. Can you just talk about maybe not cost explicitly, but about margin progression? Obviously, you called out that prices and costs will be lower in 2Q. Can you talk about which one dominates how you see margin progression into 2Q and possibly 3Q given what you know today. And also, if we think about the sort of normalized profitability in the business, I'm curious about what that looks like in each division. I mean, clearly, last year was an exceptional year. Prices probably are normalizing down. It may not be quite there yet in some grades. But I mean, if you couple that with your expectations on what the cost base does and what wood price too. Could you just give us a feel for how far margins are from "normalized" levels in your view?

Yes. I mean, Andy, the normal is an interesting word. I mean, we're a business where the interaction between the 2, I'd just also remind you, we don't run the business by quarter. We haven't talked about our good investments and belief in our long-term market yet. But -- so I'm certainly not going to get into Q2, Q3 projections because the interaction between the 2 is not known. I mean Andrew has been pretty clear as is the release. I think we see Q2 more difficult than Q1. Therefore, input costs versus where we are on the entry point on the selling prices isn't going to generate more profit in Q2. How that interacts through Q3, we'd expect, as Andrew has said, that to turn, how sharp it turns, we'll have to see, but we are pretty clearly staying in the statement and this morning that we are seeing that bottom in Q2 and into Q3, that relationship will invert, if you like. But as I say, the investments that we're making into particularly the 2 packaging businesses and the core markets where we've got a great offering will continue to stand us in good stead with our customer relationships going forward. So there is no normal, we'd expect to continue to grow the business.

The next question is from Charlie Muir-Sands with BNP Paribas Exane.

There may be some follow-ups. I just wondered on firstly on wood costs. Can you actually help us by just putting any numbers around where they have moved to so far? Obviously, I appreciate the outlook is still uncertain. But how much was the headwind last year? How much have prices come down from the peak as now? And then secondly, regarding the planned conversion of your -- of the milling [indiscernible] to containerboard next year, I imagine that the engineering is already underway, but we're obviously seeing others defer those kind of projects, given the price fall that we're seeing and the potential glut in the market. Have you got any view on whether it's perhaps as opposed to slightly defer the start-up there?

Let me take the first one, Charlie. Wood [indiscernible] has probably dropped about EUR 10 a cube from its highs. So -- but of course, Q4 was the high point. Q1 still been pretty flat. So who knows where we'll end up year-on-year because, again, we don't have the visibility. But I wouldn't expect sort of huge gains year-on-year, but the trajectory on wood is definitely downwards. And therefore, as we go through this year, I would expect that to be beneficial sequentially, [indiscernible].

And then on -- the short answer is no, we haven't changed our plans. We think this is a very compelling investment, and we are working full steam to rebuild the containerboard machines or rebuild what is the lightweight containerboard machine into a recycled containerboard machine as was the plan when we acquired Duino mill. We believe this will give us a cost compelling production at a very compelling installed cost per tonne of capacity. And remembering, we need this volume for forward integration both into our Turkish business, and it's also well placed to serve into our Central European business and sell into a relatively underserved domestic market. So we are continuing with that investment plan.