Mondi plc (MNDI) Earnings Call Transcript & Summary

Hello, and welcome to the Mondi Full Year Results 2023. Closed captions are enabled for this session. If you'd like to use them, please turn them on at the bottom of your Zoom window. Please note that this is an automated service and that transcription errors do sometimes occur. [Operator Instructions] I'll now hand you over to your host for today, Andrew King, Chief Executive. Andrew, please go ahead.

Good morning all, and welcome to the Mondi 2023 Full Year Results Presentation. I'm Andrew King, your Group CEO. And I'm joined by Mike Powell, our CFO. I'll provide some highlights before passing on to Mike for an overview of our financial performance. I'll then give you an update on our performance of each of our business units before wrapping up with an update on our strategic positioning. After that, Mike and I look forward to taking your questions. I'm very pleased to report that we delivered a resilient performance against what was a backdrop of a very challenging trading condition. This is a reflection of our scale, quality asset base and integrated model, coupled with a great commitment and agility of our people in these volatile times. We've often spoken about our strong cash generation in the business, and this was clearly demonstrated this year. Importantly, this gives us the capacity and confidence to continue investing on a through-cycle basis, driving our strategy of sustainable value accretive growth. We are making good progress on our EUR 1.2 billion organic growth projects aimed at leveraging the structural growth we continue to see in the packaging markets that we serve despite the cyclical downturn we witnessed in 2023, while also building on our cost competitiveness and improving our environmental footprint. This, of course, in turn supports progress on our sustainability ambitions, along with many other initiatives encompassed in our Mondi Action Plan 2030, designed to deliver circular solutions created by empowered people taking action on climate. With that, I'll hand you over to Mike to take you through the financials.

Thanks, Andrew. Good morning, all. And let me take you through the group's financial results. And to be clear, all the numbers I will talk to are for the group excluding Russia as we have now completed our exit from that geography. We had a resilient performance against the backdrop of softer markets and destocking across many customer channels. You can see from the first 2 categories that with a lower EBITDA, the business demonstrated its strong through cash cycle -- through-cycle cash characteristics, delivering higher cash generated from operations in the year. With the EBITDA playing into a lower return on capital and EPS, our cash generation, strong balance sheet and confidence in the future leads the Board to recommend a dividend in line with the prior year of EUR 0.70 per share. Whilst Andrew will cover each business unit in a couple of minutes in much more detail, let me give you the high-level group picture of the change in underlying EBITDA when compared to the record year of FY '22. Our volumes were lower driven by softer market demand, in part due to customer destocking. Whilst it's fair to say that all business areas experienced some declines, the large part of this was Flexible Packaging, which only started to see the impacts of softer market demand during the financial year. Selling price was the big move year-on-year. The large part of this was in Corrugated Packaging. We continue to work hard on both efficiency and costs. We saw some forgiveness in major cost categories, the largest deltas, as we've already talked about previously, being energy and paper for recycling on the positives and wood on the downside. Energy prices in Europe reduced and have remained materially lower in 2023. Wood prices declined during the course of the year from the peak levels in early 2023. Average pricing, therefore, in the second half of the year was lower than that in the first half, but remained higher full year on full year. Now, as we enter 2024, input costs are broadly stable compared to the end of 2023, and therefore, below the average of the '23 cost levels. To complete the picture to the EBITDA of EUR 1.2 billion on the right-hand side, we had as expected a lower year-on-year fair value gain. The strong through-cycle cash characteristics continue to be a key quality of the Mondi business. Mondi has generated strong cash flows, as shown by the delivery of more cash generated from operations this year than last, totaling EUR 1.3 billion in the year. This is from a lower EBITDA contribution, which I've just taken you through, which was mitigated by a working capital inflow of some EUR 230 million, which improved as we progressed through the year. Looking forward, we expect the working capital levels of 12% to 14% of revenue through-cycle, in line with our usual guidance. This strong cash generation facilitates our ability to continue investing in the business through-cycle. We spent EUR 830 million in the year and expect to spend a similar amount in 2024. And by the end of 2024, we expect to have spent around 80% of the current EUR 1.2 billion of approved organic investments. We also paid EUR 345 million of dividends together with approximately EUR 300 million of interest and tax in the year. We ended the year with net debt of EUR 419 million, which included receipt of the proceeds from the disposal of the group's previously owned Russian operations, giving us a net debt to EBITDA of 0.3x. These proceeds were distributed to shareholders in February 2024, and adjusting for that amount, the pro forma net debt to underlying EBITDA is 1x. Our capital allocation framework and discipline has not changed. In a minute, Andrew will take you through the progress with regard to our organic growth investments into our long-term growth markets and our excellent position within them, but in short, on track, on time, on budget. As evidenced, the business has strong cash generation, and the Board is confident in the future of the business and has, therefore, held the dividend in line with last year at EUR 0.70 per share despite the decline in earnings. This dividend represents a dividend cover of 1.5x. And as we always say, a dividend is an important part of the capital allocation, and whilst this year's cover is lower than our through-cycle cover of 2 to 3x, you can see from the past 5 years that we remain, on average, comfortably within this. So let me wrap up. Last year, in 2023, we've delivered resiliently in challenging markets, thanks to our compelling customer service and execution, supported by our scale, quality asset base and integrated model as well as our breadth of products, customers and end markets, all of which Andrew will talk in more detail shortly. Our business has shown its strong cash characteristics. We continue to have the financial strength and flexibility to build a strong platform to deliver value-accretive growth. With that, let me hand you back over to Andrew.

Thanks very much, Mike. And I'll take you through in a bit more detail on the business unit performance for commenting on some of our key strategic initiatives. In Corrugated Packaging, you could see profitability was down from the very high levels achieved in the prior year, due largely to the sharp paper price declines seen over the course of the first half of this -- of 2023. Second half performance was also, of course, impacted by extended maintenance and project-related shuts due to the commissioning of our organic growth projects, most notably those at Swiecie in Poland and Kuopio in Finland. We are very excited by these and the other ongoing projects we have in corrugated packaging that are expected to deliver growth, enhance our market positions and maintain our cost competitiveness. As Mike has already mentioned, containerboard sales volumes were broadly flat year-on-year, supported by our strong cost position, integration strengths and the broad geographic reach of our sales infrastructure. Importantly, containerboard prices stabilized during the second half following the end to destocking, which had clearly exacerbated the softer underlying demand picture. At these price levels, there's also a degree of cost support as the higher end of the cost curve is clearly underwater, and we are seeing capacity reductions, both temporary and permanent, across the market. Pleasingly, despite the volume pressures in the first half, our Corrugated Solutions business was able to deliver stable year-on-year profitability due to strong margin management. It is similarly encouraging that we achieved year-on-year volume growth in the second half of the year. Going into 2024, while Q1 containerboard prices are lower than the average for the second half of last year, we are seeing an improved demand reflected in our strong order situation, and on the back of this, have recently announced price increases across our full range of containerboard grades. In Flexible Packaging, we delivered a resilient performance despite the volume pressures and price decline seen over the course of the year. Strong integration, a broad geographic reach and important exposure to more defensive consumer markets supported this performance. In the kraft paper and bags value chain, we saw sharp volume declines relative to the very strong performance in 2022. The general macroeconomic slowdown impacted demand for building materials, cement, chemicals, and other key industrial applications, in particular. This was partly offset by good growth in nontraditional end-users such as e-commerce. I'll come back later to more on our e-commerce applications in bags. As anticipated, prices in this value chain did weaken over the course of the second half, but remained on average at similar levels for the year compared to the prior year, supported clearly by our high levels of integration. As we enter 2024, price levels are below the average for 2023. But recently, we have seen a steady improvement in our order books and have announced price increases in all kraft paper grades, which we expect to take effect from Q2. Pleasingly, our more consumer-orientated segments, Consumer Flexibles and Functional Paper and Films, delivered a steady performance as higher selling prices and mix benefits offset higher costs and softness in demand. Uncoated Fine Paper profitability was down year-on-year and roughly flat second half onto the first half, if you exclude the impact of the forestry fair value gain. In Europe, market demand fell very sharply in the first half, a combination of destocking, cyclical pressures and the ongoing structural decline we continue to plan for. Pleasingly though, in Q4, we saw a year-on-year improvement in our volumes. While we do continue to gain market share as the supply of choice in the markets we serve, this does also reflect a general improvement in demand, largely, we believe, due to an end to destocking and possibly some short-term restocking in the system. Given the stronger order situation, we recently implemented price increases for all European deliveries. Demand for our Uncoated Fine Paper products in Southern Africa held up well during the year, while pulp volumes were up due to the full year contribution from the Richards Bay pulp mill which, if you remember, underwent a rebuild in late 2021, early 2022. Market pulp prices did fall sharply during the year, although there was some recovery in the latter part of the year, which has continued into early 2024. In Fine Paper, we remained very focused on leveraging our market leadership positions in those 2 core regional markets of Central Europe and Southern Africa, while driving productivity and efficiency measures at all our Uncoated Fine Paper operations. We continue to invest selectively to further improve cost competitiveness and our environmental footprint. Coming back then to our strategic positioning, I'd just like to highlight some of the progress we are making on our key strategic initiatives. I spoke briefly in my opening remarks about our strategy of developing value-accretive growth sustainably. Our focus remains very much on leveraging our unique packaging platform to continue to grow in the structurally growing markets in which we operate. We believe we are and will continue to be a leader in sustainability to the benefit of all our stakeholders. In the short term, we have seen the world naturally distracted by heightened geopolitical and macroeconomic risks, at times slowing down progress on key sustainability issues. We see this in the rate of adoption of some of the sustainable packaging solutions we have developed, where our customers, and ultimately the end consumer, has been reluctant to make the change due to cost considerations. However, we firmly believe that this is more of a cyclical phenomenon and the imperatives around sustainability haven't gone out. Importantly, we continue to put our shareholders' money to work in investing for growth. I'll come back later to the progress we are making on our expansionary investment program. We talk about our exceptional packaging platform, which I appreciate can easily be dismissed as a throwaway line. But I'd just like to spend a couple of minutes reminding you of why we believe we can make this claim. Firstly, I'll remind you that we are in 2 packaging verticals, corrugated and flexibles. In both, we are strongly vertically integrated, giving our customers security of supply. We produce quality products at our 12 cost-competitive mills, located primarily in Europe, but also with important operations in South Africa and most recently Canada. And we convert paper, but also other substrates depending on the barrier properties required into packaging solutions for our broad range of customers at our 85 converting sites. In Corrugated Solutions, we are a focused European business, while our flexibles business, while also centered in Europe, has a global offering with a production presence in key markets of North and Central America, North and West Africa, the Middle East and Southeast Asia. Few can match our scale and global reach in paper-based flexible packaging, while our presence in both corrugated and flexibles in Europe provides the opportunity to engage with customers as a single source of truth for their packaging needs. I think this ability to offer multi-material solutions to our customers is illustrated by our e-commerce offering. As you can see from the slide, we can offer our e-commerce customers a range of solutions depending on their exact needs, from the high protection and functionality of corrugated boxes through the convenience and lightweight of flexible mailer bags to a deep knowledge and product range in kraft paper and barrier papers used typically in in-line applications by our e-commerce customers, all supported by the scale and backward integration that ensures security of supply to these large and demanding customers. Despite the near-term challenges created by the macroeconomic environment, transitioning to more sustainable packaging solutions does remain a priority for our customers. Again, we are uniquely placed to bring together our deep knowledge, expertise and customer relationships in both consumer packaging and paper-based solutions to solve our customers' problems. Typically, in industrial markets, we are currently seeing a transport packaging move from single-use plastic to paper solutions, while in Consumer Packaging we see a strong focus on recycling. This naturally involves replacing single-use plastic solutions with paper-based solutions. But where paper doesn't provide the necessary barrier properties or consumer appeal, fully recyclable plastic solutions are favored. Some great examples of recent developments are included on this page. You see our Hug&Hold product, where we bring together our expertise in both corrugated and flexible packaging to deliver a solution that replaces traditional plastic shrink wrap. Similarly, our MixBerry solution in corrugated eliminates the need for plastic entirely in the transport of delicate groceries. Our Finish pouch product using technology developed by our Functional Paper and Films business replaces 75% of the plastic in the previous solution with paper while at the same time retaining the necessary properties around sealability, durability and water resistance and at the same time being recyclable in existing paper recycling streams. As already mentioned, sustainability is at the core of what we do, both in terms of how we make our products and what products we make. I've just taken you through some examples of the new products we are developing, centered around circular-driven solutions. This offers us many exciting growth opportunities while also fulfilling our commitment to make all our products reusable, recyclable or compostable. Currently, as you can see from the slide, around 85% of our revenue comes from products that meet this criteria, up from 74% in our 2020 baseline year. All our Corrugated and Uncoated Fine Paper products already meet this commitment, while in Flexible Packaging, we currently have sustainable packaging solutions in place or identified and in development for around 94% of our product. On empowered people, again, I'd just like to take this opportunity to pay tribute to our fantastic people for their huge dedication, commitment and skills in navigating what are clearly highly volatile and uncertain times. They have confronted and overcome any number of obstacles and distractions to remain focused on the job at hand and keep delivering for all our stakeholders. You'll see on the slide here, we quote a key metric we use to measure safety performance, always the top priority for the organization. We are rightly proud of our safety performance, which puts us very clearly among the industry leaders, but there's always plenty more to do, and we remain fully committed in our goal to eliminate all fatalities and life-altering injuries in our organization. I've already mentioned how our CapEx projects are contributing to reductions in the environmental footprint of our operations. There is, again still much more to do to reach our net-zero targets by 2050, but we are very clearly on the right track. A reminder then of our balanced EUR 1.25 billion organic growth projects, which touch all aspects of our packaging businesses, both upstream and downstream. As a consequence, we are not overly exposed to any one geography, product segment or production base and remain very confident that this pipeline will deliver mid-teen returns on a through-cycle basis when in full operation. It is important to note that around 80% of the capital investment, as Mike has already mentioned, is expected to be spent by the end of 2024, while a meaningful EBITDA contribution -- with a meaningful EBITDA contribution expected from 2025 onwards. As is usual for the big upstream projects in particular, we would expect them to take around 2 to 3 years to reach full potential. We've, of course, continued to seek further organic growth opportunities within the framework of our disciplined capital allocation policy. I'm very excited by the opportunity provided to us by the recent acquisition of the Hinton Pulp mill in Canada, which completed earlier this year. The priority in the short term is to optimize the current operation through a combination of best practice sharing with our other mills and selected capital investment. As noted, when we acquire the mill, we will also be developing out the option to build a kraft paper machine on site with the intention to backward integrate our leading paper bags position in North and Central America. To finish then, a quick look at what we have achieved historically and how that frames our thinking going forward. We pride ourselves in our disciplined, value-focused capital allocation framework, which we have pursued consistently over many years and I believe holds us in good stead into the future. Underpinned by the very strong through-cycle cash generation, again amply demonstrated in a very challenging 2023, we have sought to invest selectively in our cost-advantaged asset base to drive organic growth, cost optimization, and of course, environmental improvements while also seeking to supplement this with selected acquisitions at the right value. At the same time, we have not shied away from restructuring or divesting of assets that are non-core or underperforming. Importantly, of course, this has facilitated strong returns to shareholders, in line with our cash flow priorities. Again, this year's proposed dividend of EUR 0.70 per share, together with the recent special dividend, returning the proceeds from the disposal of our Russian assets, illustrates the importance we place on shareholder returns. We believe this disciplined capital allocation strategy has created a unique platform for Mondi to be a market leader in sustainable packaging with a high-quality integrated asset base, well positioned in structurally growing markets, offering a broad product range. This allows us to deliver strong cash generation, and most importantly, sustainable value-accretive growth through the cycle. With that, I thank you very much for your interest, and I'll now hand over to Mike to host the Q&A session.

Thanks, Andrew. [Operator Instructions] Now whilst you're working through that technology, as you're all aware, on the 8th of February, we made a statement about being in the early stages of considering a possible all-share combination with DS Smith. As you will understand, given Mondi is now in an offer period, we're unable to share any additional information with you today. And as such, we won't be able to answer any questions on the topic of a potential combination with DS Smith. So if you keep your questions to business as usual, that would be much appreciated. Thank you. And with that, back to the operator.

Our first question today comes from Cole Hathorn from Jefferies.

I've got a few from my side. I'd just like to start off with the order books and price increases. Am I right to assume kind of the order of conviction of order books and price increases is effectively Flexible Packaging, Uncoated Fine Paper and then in Corrugated? I'd just like to understand what's the forced ranking of that. Given the commentary, you seemed to be more convinced around the Flexible Packaging and Uncoated Fine Paper. Then maybe a difficult one on the Corrugated Packaging. The market is exceptionally challenged at the moment with low price levels. I mean, in a very challenging market, you still had a good performance. But it is probably the lowest EBITDA margin I've seen from Mondi's corrugated business. I just like a bit of color around how much this is related to impacts from projects that you're implementing in the fourth quarter, any drag from that? And maybe a bit of perspective of the benefits of being integrated into boxes and maybe how some of the other long containerboard producers are, because the others out there in the market, which have down 70% plus EBITDA margins year-on-year, significantly worse than yourselves. And maybe put it into perspective what other people's margins might be like in the industry? And then finally, on the dividend. Have you thought about changing potentially the dividend policy? I'm glad to see stable dividend. Is there scope to change the 2 to 3x cover to kind of a sustainable and growing dividend with obviously investment grade in the background?

Thanks, Cole. That was quite a mouthful. So we'll try and take those in order. I think I'll take the first 2, and then, you would like to comment, Michael, on the dividend policy. I think -- in terms of order, I think you can't look at it that way. I can say we're very confident on the fine paper price increases because they're implemented. So that -- those are already in. Obviously, it takes time for all of these -- any increase to come through the books because you're selling it -- selling through stock and things like that, but those price increases we implemented. In terms of timing, the kraft paper price increase in the containerboard are more recent events, so those have been announced, and we are in discussions with our customers on increases across both our kraft paper and our containerboard grades at the moment. So I don't think it's appropriate to put any sort of ranking behind that. It's simply a matter of timing that we have already achieved some price increases in the books already on the fine paper side. And we are still in discussions with our customers on both the containerboard and kraft paper price increases. And I would say, as always, with price increase initiatives, it takes time for these things to be implemented and certainly even more time for them to come through the books because you don't just change the pricing from 1 day to the next, you take -- you change it for implementation of deliveries into the future. And, of course, there's also the stock that you work through. So I just caution that any price increases, it doesn't just immediately translates into bottom line effects from day 1. On that question, the corrugated industry, yes, the corrugated industry is under a lot of pressure right now. You can see that anecdotally in what's happening out there in terms of project delays, in terms of cancellations, in terms of closures, which is hardly surprising. I mean, everyone could do their own sort of estimates in terms of what the cost curve looks like relative to current pricing and things. But it's fair to say there's a significant volume that is cash -- a significant amount of the capacity in Europe would be cash loss making at these levels. And I think as a consequence, there's a lot of downtime that has been and continues to be taken. But at the same time, encouragingly, order books in our situation certainly are good now, and hence, the reason we're going with these price increases. As to what the effect was in fourth quarter, clearly we did see some project-related impact. As I mentioned in my opening remarks, we had Kuopio down for quite an extended period in the fourth quarter because that's -- we're doing that modernization commissioning. And likewise, the projects we were doing in Swiecie with some upgrades there also had some effect in fourth quarter. But, of course, the primary impact is the fact that the market has been under pressure, and you have seen pricing erode through the course of 2023. And, of course Q4, by definition, had the lowest pricing through the year. But as you rightly say, we are a low-cost producer who can still make money in these times, and importantly, as we kept emphasizing, still generates a lot of cash in these times. But undoubtedly, it is a reflection of how difficult it is more generally in the markets. Obviously, I can't comment on everyone else's relative profitability. Maybe on the policy.

Yes, sure, on the dividend. No, Cole -- I mean, we keep -- if you think of our -- the framework sort of broader than the dividend, we always keep that capital allocation chart. It's what guides us. I think it's a good balance right now between the opportunities for organic growth, which Andrew has covered, and clearly returns to shareholders features very importantly. You've seen the coverage on the EPS chart, but you've also seen Andrew's 10-year history, where those returns to shareholders remain important. Of course, in terms of the policy, it's a sort of on average 2 to 3x policy. You've seen us go under that cover this year. We think that's appropriate. We've got good confidence in the future. We've got this organic growth platform coming through, and we've got good end markets. So sure, we keep everything under review as you'd expect. But I think the 2 to 3x on average has served us well. But -- so no plans to change that here today, once clearly we'd have communicated it. I think it's a good capital allocation framework that serves us well as an overall.

Our next question comes from Charlie Muir-Sands from BNP Paribas Exane.

So just to really follow up on those topics in a bit more detail, if I may. Firstly on the pricing, is there any indication at all you can give around sort of the quantum of price increases that you've sought? And then secondly as we think into 2024, can you just give us a few bridging components, otherwise, to think about? You've obviously given us some color around cost run rate, but maintenance -- yes, scale of maintenance impact in '24 versus '23, what early benefits we should see from return on -- of expansionary projects? That would be interesting. And then finally, also on costs, I've seen that the Polish government ordered a reduction in logging, quite significant reduction in logging in the country in the year ahead. I just wondered what that might mean for fiber costs in your Central European operations.

I'll take the first and the last, shall I, and if -- and Mike will take the bridge question. Just in terms of the price increases, clearly it ranges across all our different grades. I mean, as we indicate -- as it happens, we are out with price increases pretty much across all grades at the moment. And the quantum of the increase depends on the different subgrades, the different geographic markets, et cetera. So I don't think I want to give you a sort of general steer on that other than it's important that we discuss these things with our customers, and we are out in those discussions at the moment. But suffice to say, we're obviously looking at fairly meaningful increases. Otherwise, frankly, it doesn't make sense to go out. So that is the discussion we're having at the moment with our customers. Just on the wood cost situation in particular, I mean, generally speaking, obviously wood costs, as we indicated, were coming down off the really high levels. If you recall going back in history now, we saw big price increases through the height of the energy crisis in Europe, where wood as an alternative energy source was being pushed up, compounded obviously by the lack of -- the inability to import wood from Russia and Ukraine and Belorussia. And that tightened up wood markets considerably in Central Europe. So wood costs went up very highly during 2022 and started to come off through 2023 and certainly exited at lower levels in the average for 2023. If anything, we're seeing a little bit more relief going into 2024 on the wood cost situation. Of course, Central Europe is our key wood basket. So the short answer is we're not really seeing any particular adverse impact of those sort of developments because we are a long-term incumbent player in the Polish markets and have a long and very successful track record of doing business with the state -- the Polish State Forestry, and we see that continuing. So wood costs are definitively higher than they were sort of pre the Ukraine crisis, but demonstrably lower than they have been at the peak. I think, if anything, we're starting to see a little bit of pressure in Scandinavian wood costs. Obviously, the big Metsä pulp mill that's been set up there is obviously increasing demand in that region, but more for softwood-based products. And in Scandinavia -- I mean, in Sweden, we do consume some softwood. But in Finland, it's more hardwood, which we're exposed to, which doesn't have the same dynamic at the moment. So all in all, a fairly benign picture off the high base we saw last -- beginning of last year, and certainly, no particular pressure points at the moment.

Thanks. And Charlie, I think picking up your other points, maintenance for the year-on-year is probably flat. It's always second-half weighted, as we tend to do the maintenance shuts in the second half. In terms of other cost categories, Andrew has covered wood. I've already said that cost year-on-year gets relief, of course, because we had highs at the first half of last year coming down. I think the new word on costs in our organizations from Q4 into this year is sideways. Lots of things are going sideways at the moment. There are variations within that, of course, from Q4, energy softened a touch. But remember, we generate a lot of our own energy. Transports spiked a little bit with issues around the Red Sea and the Middle East. But I think as I watched, sideways is a good guide, some cost relief, as I say, year-on-year, but sideways really Q4 into the new financial year. And we'll see how that pans out as we go forward.

Our next question comes from Justin Jordan of Davy. It appears that we seem to be having a problem with Justin. We'll come back to him in a short moment. Instead we're going to go to Brian Morgan of RMB at Morgan Stanley.

Can you -- would it be possible to dive into Duino, the mill that you bought in Italy? And maybe just for -- just to avoid my future embarrassment, just correct me on the pronunciation. And then maybe just help us understand what you're doing there. We've seen some mixed results from Graphic Paper conversions in the past. What are you doing? Are you putting in a new paper machine? How does it integrate into your business in general? Where is it going to come out on the cost curve? Just maybe a little bit more on this project, please.

Thanks, Brian. I'm not a native Italian speaker, so I hope I'm pronouncing it right, but we call it Duino. And -- but I stand corrected as to the exact pronunciation. So yes, I mean, Duino, it's actually quite a large site. It had 2 paper machines on it, but our focus is very much -- which are not currently operational. We stopped the operations of those last year. They were making LWC paper. Our intention is very clearly to convert those machines. So it is a rebuild of existing machines, but it's a major rebuild. As we indicated, it's a EUR 200 million spend. So as you could imagine, we're leveraging a lot of the existing infrastructure, which materially reduces the overall CapEx per tonne, but at the same time, it's a major rebuild of existing machines. So we are very confident that the machine will perform in line with what we expected to do. But obviously, it's early days in that process. And we are -- the existing machine has been dismantled to the extent with the bits that we don't need, and we will be now in the process of building it up. So it's not a new machine, but at the same time it's a significant rebuild of existing machine. And frankly for the uninitiated, you'd probably almost think it is a new machine if you saw the pictures of kind of what's left. And a lot of it is the infrastructure that we effectively are utilizing of the existing complex. And most importantly also, we have a very highly skilled paper-making workforce there, which is hugely valuable assets in itself. And it will be great to be able to leverage those skills in making albeit a different paper product still on the same fundamentals as you make paper. So we're very confident, both in the technical capability there, but also most importantly, the skills of the people we have to support us in developing the rebuilt machine. I mean, just in terms of the dynamics around that, I mean, part of the reason we like this opportunity is, if I look at it on a cost per tonne of installed capacity, it will be EUR 600, EUR 700 a tonne of installed capacity versus a new machine, which is probably near EUR 1,000 a tonne type of installed capacity. So you get an immediate cost advantage, and that includes the cost that we had -- the purchase price of the mill. So you can see there's an immediate cost -- or CapEx advantage there. On top of that, it's obviously in the location, which, as we've said before, allows us the ability to export to our Turkish operations where we are short of paper. At the same time, we are very well positioned to serve what is a very strong, vibrant market in that region. It's in North Italy, which can access obviously the Northern Italy industrial basin, but also into other countries -- surrounding countries. So we think that offers us a lot of integration opportunity. And then on the cost structure, Italy is one of the few places which is actually net long of paper for recycling. Now we shouldn't oversell that because obviously there is arbitrage across Europe, but where you -- if you are located where there's a surplus of the paper for recycling, that obviously gives you a cost advantage. So typically in recycled containerboard, it is those -- any number of those sort of smaller factors from integration through CapEx benefit, through PFR access or privileged PFR access, and of course, a skilled workforce. It's those combination of factors which give you that competitive advantage. It's unlike the virgin grades, for example, where obviously a single biggest determinant of relative cost competitiveness is wood access. So, hopefully, that gives you a little bit more color on Duino.

We have a question from Justin Jordan. Can you update on both the containerboard and sack kraft production volumes in 2024 for the year-to-date?

That sounds like a very paraphrased question from Justin. It would normally be longer than that. So I'm not sure exactly -- I assume he's talking about the sort of sales volume situation in Q4 -- Q1 this year. I mean, as we said -- I mean we're certainly seeing a much stronger order book than we have witnessed for some time, and I say this across the piece more broadly. We saw in the fine paper business, it picking up through Q4 and into Q1. I think I mentioned that Q4, we were seeing year-on-year volume growth for the first time for some time, and that's certainly been reflected in a stronger order situation. We've also seen a stronger order situation across our kraft paper businesses, admittedly off a lower base or low base, and similarly on the containerboard side, where we indicated we were flat year-on-year in volumes last year anyway because we are a low-cost producer. But on top of that, we've obviously seen a lengthening of that order book. And so generally speaking, I don't want to get carried away here because, obviously, we've seen a pretty rough demand picture for some time now. And I'm not saying it's rampant by any stretch, but it certainly has improved relative to the very soft markets we saw. We spoke a lot, I think, at the half year about the destocking effect. I mean, clearly, that was a major exacerbating factor behind the softer demand picture we saw last year. That had run its course probably by the third quarter into the fourth quarter. And then -- so we saw that come to an end, and that's certainly reflected in a better order situation. And now, potentially there's also a bit of restocking going on as well, which is maybe also supporting what are definitely better order books. I hope that's answering the question I assume that Justin would ask.

Next up, we're going to go to James Twyman, Prescient Securities.

I've got 3, if I may. The first one is a few other companies have got some fairly significant energy gains during 2023 from various EU countries. And I'm just wondering whether you've achieved any of that. Secondly, the forestry gain, have you got any idea of where you would see it for Q1 this year and book for the year? And then thirdly, just in terms of the order books, you're saying that they're picking up. Could you just give us some idea of the scale of that in sort of weeks? Sometimes you do give an idea of where that is. That was it for me.

Sure. Let me take the first 2 there, James, and then, I'll pass on to Andrew. The energy costs, I mean, the energy subsidies from various states are relatively small within the total energy. So yes, we continue to work with all states on those, but material year-on-year change is minimal. And of course, a reminder that a lot of our energy costs actually come from the self-generation and biomass energy. So the subsidies are generally, whilst important and we work to -- with all the local states to maximize that opportunity, they're relatively small for us in the scale of our energy bills. In terms of the fair value gain, we have no idea about the future. We normally forecast it and get it wrong because it's unpredictable. What do I tend to look at, therefore, to try to be a bit more helpful is we tend to look. If you look at sort of 5-, 10-year averages, probably averages around EUR 60 million. The last 2 years have been high. So whilst last year in FY '23, it was actually lower than FY '22, it was still a big number, and both '22 and '23 were unusually high. But listen, it's not really a forecast, it's just -- if I use the 10-year average, EUR 60 million would be the number to try to be helpful to you there, James.

Yes. And I think, James, on order books, I don't think I can say much more than I've already commented on. Yes, the situation improved. I'm not going to give you days of delivery of orders, et cetera, because it frankly won't be particularly meaningful. I think that -- all I can say is that they have improved and certainly are looking stronger at the moment. So, yes, short of that, I can't add anything else.

Our next question comes from Pallav Mittal of Barclays.

Can you please talk about how the customers have reacted to the recent price increases that you're trying to pass and how the negotiations are proceeding? Because in the U.S., the companies have tried to do that, but they have not been able to pass on the entire increase because the benchmark indices did not increase in Jan and Feb.

Yes, sure. Pallav, it's very early days. I mean, to the extent -- I mean, obviously, as I mentioned already, our fine paper business, we have implemented price increases already. And so those are implemented on the packaging grades. We are engaged in those discussions right now with our customers. All I can say is, as always, we wouldn't be engaging if we didn't feel there was proper grounds on which to get these increases. And so we are confident that we have a solid base on which to go and have these discussions with our customers. But I can't preempt those discussions with them because, as I said, it's early days. As I already indicated though, I'd just caution that any increases don't just immediately hit the bottom line, it does take time for them to come through the books. So, yes, I mean, there's lots of discussions taking place, and we'll be able to tell you as and when the prices are implemented.

Our next question comes from Cole Hathorn of Jefferies.

Andrew, Mike, I'd just like to ask on the major CapEx projects. I mean, if you're talking about 80% of that CapEx done by the end of 2024, just like can you give any color on what the incremental EBITDA or EBIT contribution would be over the next number of years? I know it's still quite a way out, but I'm just thinking you've deployed a lot of CapEx. I mean, if you had that -- obviously, that earnings now, your return on capital employed at the bottom of the cycle, it will be a lot higher than it is now. So I'd just like to understand that.

Yes, let me start, and then, Andrew can add if he chooses. Yes, I mean, Cole, we've always guided, if you remember, to mid-double-digit returns on capital from this investment program of EUR 1.2 billion. I think a number -- I've done the maths on that. And if you had a little bit of EBITDA over the term, as it ramps up, that's roughly -- and of course, it's through cycles, so it will depend on markets, but you can get to sort of numbers around the EUR 250 million of EBITDA from that returning program. How does that come through? We've always said you get a little bit at the start, the converters tend to come through at the beginning. And then, obviously, as the paper machines come through, they take time to both build and to ramp up. But to try to sort of help on that, what would be sensible, we'll probably get EUR 40 million, EUR 50 million in the current year FY '24 over FY '23 and then the balance of that over the next 2 years. Clearly, the machines do need to ramp up through '25 and into '26. But that's what we mean by meaningful EBITDA. It will clearly depend on market situations, which is why we always quote -- as Mondi, we always quote a through-cycle return on capital because that's how we view it when we plan the investments, that we can make good returns at any point of the cycle. So clearly, the return will depend on where the market is. But as a rough guide, hopefully, that gives you what the British meaningful EBITDA is. Andrew?

I'm good.

Our next question comes from Sean of Chronux.

I think a lot of the questions have been asked already. Maybe just some more color around the Flexible Packaging business. Outside of the sack kraft value chain, I think, at least on my numbers, volumes tend to disappoint. Just from your end, you're obviously seeing your pricing is pretty decent. You have set cost bridges on that. And -- but if I'm looking at demand specifically and capacity perspective, are you happy with the performance of the business? And do you sort of see any necessary restructuring required?

I think if I caught that properly, the question was effectively around our Consumer Flexibles business because you've heard a lot about our kraft paper and bags. No, I think Consumer Flexibles, I appreciate we quote production numbers and things. I'm always almost hesitant to give you those numbers because in Consumer Flexibles, that's not really a great reflection of the overall picture because so much depends on mix effects and because a square meter or a tonne of extruded plastic is a very different thing to a fully converted standup pouch. So it's always slightly dangerous to look at that metric. I mean, in short, our Consumer Flexibles, as you would expect, is a very defensive segment where we are largely exposed to the primary retail packaging that you see on the -- consumer packaging you see on the supermarket shelf. And there's always a bit of mix in that, that changes place. But it's a very solid business and performed extremely solidly through this period. And the demand -- there has been a bit of consumer softness, as you could imagine. But it's more, I would call it, trading down than material change to the overall demand picture. Of course, in the short term, you can also get lead and lag effects as a consequence of movements in the resin prices and paper and other raw materials that go into those products because we are using more and more paper substrates in those products as well. So, no, it's really solid. And I think, as I said in my opening remarks, very encouragingly we are leveraging a lot of those customer relationships also to bring to bear sort of the paper-based solutions, which were typically much more industrial-orientated. And I think that's a very exciting area that we are looking to continue to leverage.

Our final question today comes from Charlie Muir-Sands of BNP Paribas Exane.

Thank you very much for continuing to include Page 27 in the appendix with all of the tonnages of your annual production. Just wondered in terms of the project pipelines that you've got, can you just remind me, on top of the 1.3 million tonnes of long containerboard position, how much longer will you be by the end of your projects? I appreciate you're obviously building up converting facilities as well. And similarly on the 0.4 million tonnes of kraft paper, where will those numbers move to by, let's say, '26 or '27?

Sure. I mean, it's a very easy answer. On the paper capacity side, we're adding 400,000-odd tonnes of recycled containerboards, and you can add plus 400 there once in full operation. And then we are adding 200,000 tonnes of kraft paper, albeit the new machine in Štetí is focused on sack kraft paper, as I think we said when we first announced that machine. The net effect on the market will be roughly 100,000 tonnes of sack kraft paper, 100,000 tonnes of specialties because we have the luxury of then being able to specialize a number of our other machines into some of the speciality kraft paper offerings. So in rough -- but in simple terms, we'll add another 200,000-odd tonnes of kraft paper capacity. But obviously, you shouldn't just sort of assume that, that will be an increase to the net long position by those. Because obviously, we have ambition to continue to grow our converting operations, and we are successfully growing those. We've obviously invested for that. In corrugated packaging, we've spent money on the converters, and we are commissioning capacity expansions there. But it's -- capacity is not measured by the size of your machines or anything like that, it's by your market and how you develop into those markets. So a bit more difficult to define. But obviously, we -- this is historically a 2% to 4% sort of growth market. We've typically done better than that, and we certainly expect to do better than that going forward, and particularly accelerated by the recent investments we made in corrugated and also in our bags business, where we are the big global leader there. We have a huge geographic reach. As I illustrated in my opening comments, we continue to find new ways to expand both geographically, but also investment in our own facilities, most recently and excitingly. And I mentioned it also, the money we're putting behind the bags in our e-commerce offering where we are seeing good growth because the paper bags is a lightweight alternative, if you don't need the protection of a box, and that's proving very successful. So we're putting more money behind that. So there's a lot of also organic growth supported by investment. And of course, if we can supplement that through acquisitions, we would also do that. So yes, you can easily calculate the capacity on the paper side. But certainly, we also expect to continue to grow in terms of the paper demand from our downstream businesses, which we continue to invest behind. So with that, Mike, I think we should bring it to a close. Yes.

So listen, thank you all for your interest and your questions, and I'll hand back to the operator.

That's all today. Thank you very much for joining. Have a good rest of your day.