Mondi plc (MNDI) Earnings Call Transcript & Summary

Good morning. This is the conference operator. Welcome and thank you for joining Mondi's Third Quarter 2023 Trading Update Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Andrew King, CEO of Mondi Group. Please go ahead, sir.

Good morning, everyone. It's Andrew King, Group CEO. And with me is Mike Powell, our CFO. I'm sure you've all read today's announcement. So I'm just going to pick up a few points before we go into questions. The weak macroeconomic environment continued through the third quarter resulting in a continuation of the challenging market conditions we've seen throughout the year. Market demand has generally remained subdued with lower averaging selling prices largely mitigated in the third quarter by lower input costs and tight fixed cost control. You will have seen that the forestry fair value gain was EUR 14 million in the quarter, significantly lower than the EUR 72 million recorded in the second quarter of the year. All of this then resulted in the group delivering underlying EBITDA of EUR 261 million for the quarter compared to the EUR 329 million for the second quarter of the year. We do anticipate the trends seen in the third quarter will continue through into the final quarter of the year, but with further significant cost relief as wood and other costs are now stabilizing. We will be seeing a greater impact from maintenance and project related shuts into the final quarter as well. Despite these short-term challenges in markets, we do remain very well positioned to benefit when market conditions improve with our very low cost base, broad product offering and fully integrated business model, which continues to provide resilience in this current environment. With that, Mike and I are very happy to take your questions.

[Operator Instructions] And the first question comes from the line of Cole Hathorn from Jefferies.

Can I just start off firstly with the cost relief? I think expectations were hopeful that we continue to see some further kind of wood cost relief into the fourth quarter and into 2024. So I'm just hoping you can give a little bit of color on what you're seeing regionally on kind of wood costs and expectations into 2024 and if there are any other major cost buckets that are worth calling out beside the wood cost? And then secondly, on sack and kraft paper, I'd like to ask something around kind of the cyclical versus the structural side of that. I mean focusing on the paper side, Mondi is a leader in sack and kraft paper; you forward integrate it into your bags, you've got visibility on the supply chain medium term of what customers are doing and planning. Yes, right now it's very cyclical and is destocking in a number of regions and markets. But have you seen any changes to your kind of medium-term growth prospects of 2% to 4% given the tailwinds of plastic to paper versus potentially some reductions in demand from other items? And linking this to the supply and demand of sack paper, which is different to containerboard, it's 20th the size. What does this mean for supply and demand over the next few years?

Cole, let me start with the first one and then Andrew can take the second. I mean cost relief into -- I think your question really is Q4 and Q3 so let me answer that and let's see if that helps you. I mean we saw wood, if I take wood first, come off as we expected in Q3, it's flattening out. It stayed high in Scandinavia and is flattening out from sort of like the exit point in September. So we will see some sort of averaging in fact Q4 on Q3 forward. Difficult to call 2024, Cole. The reason it's sort of flattening out in our view is because of course the economic activity for the whole of the tree isn't being used so the sawmills are quiet. The economic activity in the saw mills are quiet, which means that there's little chips and people are leaving the trees in the ground right now. Of course what we really need is economic activity, those sawmills to start and that might give us some both economic activity and also some help on wood into next year, but I think it's a bit early to call. And so I think flat line from an exit point in Q3, sort of going sideways into Q4 maybe with a little bit of relief on the averaging on wood. I would say on other costs, I mean energy is public. We use a lot of biomass as you already know. I would say still sort of it's moving sideways mostly on most costs. I mean some of the chemicals, some of the commodity inputs are flattening, maybe even early signs that they're starting to turn. I don't think we see that as a bad thing because that's a sign of economic activity picking up and frankly, I think we'll take that. But I think the other areas are definitely stabilizing, maybe even early signs of a turn. But again we'll have to wait and see on economic activity. So sort of stabilizing to some small cost relief into Q4 on wood and other stuff sort of sideways and flat. Does that help?

I mean, Cole, to your question on particularly the bags and sack kraft value chain. I think the short answer is no, in terms of any change we see in terms of our medium-term expectations for this market. We do still see it as a good structurally growing market. Why is that? Obviously we've got the traditional uses of bags and I'll come on to that, but of course there's always cyclicality in that because you have a lot of building materials; cement, chemicals; type of exposure and in a macroeconomic downturn, you do see pressure on those and that's what we have seen. But outside of that, we're also seeing sort of nontraditional uses growing, everything from the e-commerce applications, which typically didn't exist previously, but now are a growing source of demand for bags and kraft paper. Also the consumer applications which are, as you mentioned, displacing the likes of nonrecyclable plastic solutions for paper based which are renewable, recyclable, et cetera and of course there is a growing demand for that. Now in the short term that also gets impacted by the cycle because people are focused on cost of living and the ability to transfer costs on to the end consumer. So I think there has been a slowdown in the rate of takeup in certain aspects. But certainly when we talk to our customers, they remain extremely committed to driving a more sustainable packaging solution in the products that they use. And as you all know, legislation is also pushing in this direction as well. So I think that will continue as a trend albeit in the short term, we are clearly being affected by the cyclical pressures that one sees. It is a product, which we've seen extremely strong period of demand followed by this current weaker period of demand. I'm convinced that that is a cyclical issue. As we say in the sort of announcement, it is typically a bit later cycle than the box business in the sense that it was holding up much better into actually the beginning of this year whereas containerboard pricing and volumes were coming under pressure back end of last year or in Q3 last year. So it's a bit later cycle, but I'm convinced it's a cyclical thing. It's certainly not a structural question here and we remain very confident in the structural demand growth into the future. As you say on the supply-demand side, what does it mean in the short term? Obviously if you see a softening in demand, you see an imbalance in supply and demand. The good thing though this product is very limited. New supply coming on. As you say, it's a very well consolidated sector typically both upstream and downstream importantly, and the only new volume of any significance coming into the market is the product that we're going to be bringing in 2025 with the ramp-up of Steti into '25 and '26 and beyond as we ramp it up. So again the supply side is a different dynamic to what it is in other grades and I think all is well for the future as when we see a pickup in demand driven by no doubt a macroeconomic recovery.

Andrew, and maybe just on the short term. Is there any color you can call out on the flexible paper side on demand order books? Any changes you've seen recently and thoughts into '24 and if you can say anything on volumes pricing?

Yes. I mean one always looks at the downstream business so particularly in the bags business, which is sort of the lead indicator I guess in terms of the demand picture going forward. I mean what's I think somewhat encouraging is if you look at Europe, which is still the biggest market for us by some distance, we see first half was very difficult on the demand side. It seems to be stabilizing now. If you look at the sort of the year-on-year numbers coming through, we're certainly stabilizing in Europe but clearly off a lower base than we enjoyed at the peak back end of last year or second half of last year. So you are seeing a stabilizing. U.S. is a bit later in slowing down so it has been slowing down a bit into the third quarter now relative to where it was. Other markets that we serve, which are very important for us; Middle East, North Africa clearly volatile as always; but generally I would say okay. So we've seen the real decline has been in the core European markets in the first half of the year. I would say that there seems to be some stabilizing going -- coming back into back end of Q3 into Q4, but it's obviously early days in that. But again like we've seen in other sectors, there's been a destocking effect. I mean that doesn't last forever and it's probably come to an end now and that's why we're starting to see things stabilizing. But it's still early days to call a turnaround at this stage.

And the next question comes from line of Charlie Muir-Sands from BNP Paribas Exane.

Three from me, please. The first, very short. Just in terms of the maintenance shutdowns that you're flagging will impact Q4 a bit more. Can you put any numbers around the impact in the third quarter of this year, the fourth quarter of this year as you anticipate it and also what the fourth quarter of last year the maintenance impact was?

Sure. Do you want to give the other 2, Charlie, and then we'll answer?

Okay. So question two is I know it's early days, but I just wondered if you could give us any of the key puts and takes you think about or you think we should be thinking about as we look into 2024. Obviously some new -- the fruits of some new projects should start to deliver, but the run rate as you see it to the limited extent you have any visibility and any other considerations there? And then the third question is really obviously the next draft of the EU PPWR is due to come out I think next week. Wondered if you could talk to what your hopes and fears are on that and not wanting to prejudge how the revised draft might change from the first draft?

Charlie, we'll take those in the order as such. Maintenance shuts, we said at the annual results and then actually again at the half year, the number for the year is about EUR 100 million. We had about EUR 40 million in the first half of the year. The delta between Q3 and Q4 is about EUR 30 million and therefore, we probably had EUR 10 million to EUR 15 million in Q3 and we'll have EUR 30 million more than that in Q4. So we've got a big maintenance shut program, some of that to introduce the new projects as well. So it's not just the normal maintenance, but we have got the shuts to introduce some of the new projects in the month of October and all of that is going well. The maintenance shuts I think you asked for Q4 last year, pretty similar numbers actually both Q3 and Q4. So if you want the year-on-year delta, pretty small. Projects 2024, I'll guide those at the end of the year once we get a bit closer, that's what we would normally do. It's fair to say all the CapEx expansion projects on track, on time and being well executed and that will bring good growth. As we've said in the past, the big upstream projects come on in '25, '26. The converters do start to come through a little bit earlier because of course the build phase on those is a shorter time. So we will see some effect into 2024 and I'll update that at the year-end.

And Charlie, on the PPWR, I mean we've published some thoughts on our positioning around PPWR and it's available on our website. I mean I think as an industry generally, we are urging the European Union to consider reuse and recycling as equivalent whereas I think early drafts at the PPWR were promoting reuse over recycling. We say it has to be guided by the science in every situation. It can be different as to which is frankly better from the environmental perspective, whether it's a reuse solution or a recyclable solution. And I think the amendments that have been tabled, the directional travel of the drafting is positive from that respect. I think there's been a lot of carveouts. As you know, corrugated has been carved out of a lot of the reuse requirements. And so generally speaking, I think it's moved in a better direction. And to be very clear, we support good legislation in this regard that drives the use of sustainable packaging solutions. It's just important that the legislation doesn't have unintended negative consequences for the environment. And we certainly believe that recycled product in a highly established, very efficient recycling stream is a very important contributor to the environment and the box business in particular has a fantastically established circular economy system. So I think that just augurs very well forward and I think it's been recognized by the rule makers. But yes, we will adapt to whatever the circumstances dictate. And similarly on the Flexibles business, we certainly see it actually as a net positive for us the direction of travel of the regulation. As I mentioned earlier, it is driving the use of recyclable, renewable paper-based solutions displacing nonrecyclable plastic solutions. And similarly on the plastic solutions is driving the use of recyclable solutions including a recycling content. And we've got a lot of great new products that we are developing and have developed and brought into the market already to serve those requirements. So we actually see it as a very good opportunity for us on the flexible side.

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

I have 3 as well, please. First on corrugated. I think at the half year stage, Andrew, you talked about the pressure on containerboard manufacturers and particularly independent guys in Europe. Just could you give us an update on where you think these guys are positioned now and what the potential timing around any price increases in containerboard may be? Is it a 2024 event or is there any chance that pre-Christmas people are kind of forced into price increases just given you see OCC tickup and maybe other pressures in the system? And related to this, any evidence that the box price is adding more stickier this cycle than previous cycles and what is the Mondi experience been? That's number one. And number two, you guys have been renowned for tight cost control and you called it out again in this morning's statement. As we look at a pretty sluggish environment into 2024, do you guys have anything planned incremental in terms of a cost takeout program or anything you could point us toward above and beyond kind of your normal cost takeout? And then finally, and maybe a little bit more from philosophical. There's a lot of debate about GLP-1 diabetes drugs in the market and the potential for reduced food consumption and maybe I'm one of the people who should be taking them. The question to you guys, have you guys thought about the potential impact for you on packaging consumption in the market or how it might structurally impact the Mondi business kind of long-term view?

Okay. David, that's certainly quite left field. A lot of questions and I must say not something I've dwelt on particularly. I mean clearly food and beverage is an important component of the end use demand for boxes. As you know, the good thing about boxes is it touches just about every sort of industrial and consumer application at one point or the other because it's the primary transport packaging. As I said, to be honest, I wouldn't know what the longer-term consequences would be if people sort of eat less; but it's something we would have to consider as one of our risks going forward. But I think it will be a very long-term issue if it was indeed an issue and I think there are probably other issues which will impact the market both positively and negatively well before that becomes a major consideration, but something we will certainly be considering. Coming back to the recycled containerboard markets and the pressures. Yes, I mean I think the pressures have only continued to build. While pricing has been relatively stable since we last spoke at the half year results announcement, the cost base has stabilized and, as you rightly say, I mean you're starting to see energy prices tick up a little bit. Nothing like what we saw through the course of last year, but they are going up a bit. And PFR prices are also picking up a bit so of course that means the whole cost base for the industry goes up. We are relatively less affected because we've got such an integrated energy system. But if that has the effect of pushing up the cost base, of course not by definition, margins become even more squeezed and the top end of the cost curve comes under even greater pressure. So yes, I mean I think there is huge pain at the top end of the cost curve and we're seeing it manifest to the extent of project delays, cancellations, et cetera and also some capacity permanent closures. But of course there's also lot of temporary closures. Temporary closures are extremely expensive and cannot assist for too long because you basically got no revenue in a fixed cost base. And so one believes that something has to give here because the current paradigm really is not sustainable for the industry. I think clearly in the longer term, I certainly believe that the demand picture will improve because again we're seeing a few people down and right now there's nothing to my mind that is structural in this. But at the same time there is new supply coming on and I suspect there will be some supply side rationalization as well, which is always forgotten about in the sort of traditional supply and demand sort of calculations that you see that consultants do and the like. As to pricing expectations, obviously I'm not going to sort of be preempting any of that in terms of the discussions we have with our customers. But yes, it's fair to say that the margins right now are unsustainable for the industry as a whole. We still make money because we are a low cost producer, but it's very tough for the industry. In terms of box price stickiness, I don't think there's any real -- one cannot generalize it's different this time or any other time. I mean generally speaking, my perspective on it is when you see sharp moves in paper prices, the box prices move quicker relatively and if it's modest moves, it takes longer for the box prices and that applies up and down frankly and that's really what differentiates it. It's not that the market has changed dynamics and suddenly it takes longer or it's either stickier or less sticky for that matter. And finally, as regards to cost takeout, I mean the short answer is no, we don't believe in big bang oneoff headline grabbing cost takeout programs. We believe in constantly driving cost out of our system, constantly searching for efficiencies, productivity gains and the like and of course we're constantly doing that. Some of our CapEx opportunities obviously will also bring cost benefits and that's why they're very attractive. They not only bring sort of top line growth, they also bring cost optimization in a lot of cases. But of course in the short term, the impact of market standstills and things in the industry more broadly is also to play [ hazard ] with cost structures because, as you can imagine, it's extremely inefficient to be starting and stopping machines and the like. And so that also impacts the cost curve more generally. We're in the fortunate position that we can quickly manage that better because being of a low cost producer. In the containerboard grade for example, we can typically still run full even in a softer market and that also helps our cost position. But in short, it's something -- it's ingrained in our culture to continue to drive that. Obviously in a downturn like you currently see one puts some pressure on the organization to drive costs out, but I still believe that that's the best and most sustainable way to manage your cost base as opposed to sort of oneoff restructuring programs, which grab headlines but not necessarily all that effective.

And the next question comes from the line of Sean Ungerer from Chronux Research.

Just a quick one from my end. Just in terms of the Flexibles business specifically focusing on the sack kraft side. Just maybe -- I know you have really given some color, but perhaps you can give a little bit more in terms of the cadence of the sack kraft price declines that have been coming through and sort of on the volume end as well, that would be appreciated.

When you say cadence of the sack price, we've seen as we say in the literature and we said at half year we've seen really what happened was unlike containerboard, which started to -- the price erosion started happening really Q3 into Q4 last year and sack kraft was still going up through the whole of last year. It really peaked sort of at the end of the year into Q1 it was fairly stable and then you started to see some price erosion as a consequence of the softer demand and destocking and these things into Q2 and that's continued into Q3 as we suggest. So it is really a bit early to call it later cycle, as I said, in the containerboard pricing, but it's followed a similar pattern but off a obviously different base, but slightly delayed relative to how we saw the containerboard [indiscernible]. But I think what's also important to note and this applies across the piece. I mean it's really since the middle of last year that you've seen volumes starting to come under pressure, industry volumes I'm talking about more generally and that's both in containerboard and kraft paper and of course the box and bag, respectively. And so we now, what are we, 15 months into sort of a down cycle as it were. I mean that's normally quite a long down cycle. I'm not suggesting that history always tells you exactly what's going to happen to the future, but it feels like it's been a pretty long down cycle, which I think people tend to forget. Sometimes the commentary is that it's only just been happening. I mean the volume side has been under pressure from an industry perspective since really the middle of last year.

Maybe just a follow-up. I mean if you go back into H1, I've got something to correction there, but look at paper bag volumes were down about 8% year-on-year. Going to sort of Q3, Q4; what sort of run rate are we looking at there?

I didn't get the paper volumes, what?

In the Flexible Packaging business, the paper bag volumes sold or produced in H1 I think were down about 8% year-on-year if I understand the correction. And I was just asking for a bit of color as to the sort of movement that we're seeing in Q3 and potentially Q4.

Yes. I mean this is a trading update, we don't give all the production volumes and things like that on that level of detail. But it's continued a similar trend I think this is what we suggested and that's appropriate. But as I was saying if you look at the industry trends in first half of this year, Europe was particularly under pressure. That seems to have stabilized into Q3 and going into Q4. Americas was a bit later sort of to the party, I mean it held up for longer. It comes off a bit now, but that's been sort of bigger quite a sequential contributor as you go into Q3 into Q4. So we obviously sell bags on a global basis, it's not any 1 regional market. You have to look at the whole bigger picture. But in totality, yes, the trend of softer price and softer volumes has continued.