Mondi plc (MNDI) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Mondi Half Year Results 2024 presentation. We do have captions on this call, and these can be switched on and off within your Zoom settings, but please be aware they are automated and can sometimes contain errors. [Operator Instructions] I'm now going to hand you over to Andrew King, CEO. Andrew, over to you.

Good morning all, and welcome to Mondi's 2024 Half Year Results Presentation. I'm Andrew King, Group CEO, and I'm joined by Mike Powell, our CFO. I'll provide you some highlights before passing on to Mike for an overview of our financial performance. I'll then come back to give you an update on performance by business units before wrapping up with an update on our strategic positioning. After that, Mike and I look forward to taking your questions. Coming into the first slide. As you can see, we refer to a robust performance in the context of what remains challenging, albeit improving market conditions. Mike will provide you a lot more detail on the numbers, but it is pleasing to see a sequential improvement in profitability on stronger volumes, notably in our flexibles business and price increases across our paper grades achieved over the course of the period. We are not yet where we'd like to be, but it is nevertheless -- does feel like we're seeing some of the much anticipated upward momentum. Importantly, we continue to work hard on our self-help initiatives to ensure we can deliver value-accretive growth sustainably. I'm particularly excited by the progress we are making on our capital investment projects. While it can be difficult to stay the course on these investments in a down cycle, I firmly believe in our approach of investing consistently on a through-cycle basis to deliver value accretion. As we will highlight later, we expect a meaningful EBITDA contribution from these projects from 2025 onwards. With that, I'll hand you over to Mike for a review of the group's financial performance.

Good morning, all, and thanks, Andrew. Let me take you through the group's financial results. We delivered a robust performance in the first half of the year, trading in line with our expectations. It's pleasing to see a sequential improvement in profitability compared to the second half of last year on the back of those improving market conditions, supported by our strong customer offering and broad product portfolio. So whilst Andrew will cover each business unit in a couple of minutes' time in more detail, let me take you through the high-level group picture in the next few slides, starting with the change in underlying EBITDA when compared to the first half of 2023. We successfully implemented and increased our sales volumes compared to the prior year, supported by the improved market demand and customer restocking. Most of this benefit was achieved in our kraft paper business, where we are the global leader. Sales prices were lower on average due to the substantial price decline seen throughout 2023, resulting in us entering this year with prices below last year's first half average prices across all of our businesses. The improving market conditions seen during the period enabled price increases to be implemented across all of our paper grades. We expect to realize the full benefit of these recent price increases in the second half of this year in both of our packaging businesses. The largest move on the slide, in line with what we said earlier in the year was the significant reduction in input costs, mostly due to lower wood and energy prices. If you recall, prices fell through last year, and into early 2024. And as we enter the second half of 2024, total input costs are stable overall despite recent increases in paper for recycling prices. Other net costs were up EUR 123 million, again, as anticipated, about half of which was driven by increases in personnel costs as we continue to reward our exceptional workforce. The remaining half mainly compromises operating cost inflationary increases and income received in the prior year from an insurance claim that obviously doesn't repeat in the current period, and therefore, that impacts the year-on-year change that you see here. Forestry fair value gain in absolute terms was EUR 49 million in the period, higher than we may have anticipated by about EUR 20 million in absolute terms. They're lower than the gain in the first half of 2023 by EUR 37 million, which is shown here as the movement. We value our forest at the balance sheet date. Since the half year, wood prices in South Africa have decreased, and therefore, we expect a lower forestry asset value at the end of the year, and we'd expect that to lead to a fair value loss in the second half. Lastly, the currency and other impacts totaled EUR 42 million, mainly compromising the one-off loss from the devaluation of the Egyptian pound as already reported at the end of Q1. As a note on this slide, I should note that the Richards Bay maintenance shut was rescheduled from the second quarter of the year to the third quarter. Whilst our full year estimated EBITDA impact from maintenance shuts is unchanged at around EUR 100 million, I'd now expect the half 1, half 2 split to be more like a 20-80 split rather than the 40-60 split as previously guided. So let me now take you through the movement in net debt. On the left-hand side, you can see we started the year with a net debt of EUR 419 million, which included the proceeds received in 2023 from the disposal of the group's previously owned Russian operations. These were subsequently distributed to shareholders in February 2024, resulting in a leverage at around 1x. Cash generated from operations is mostly made up of the next 2 items that you see, the EBITDA contribution that I've just taken you through of EUR 565 million together with EUR 160 million investment in working capital. About 1/3 of this working capital investment is from higher inventory levels with the remaining 2/3 coming from higher debtors, both of which are mainly as a result of higher prices as we exit the half. Looking forward, I'd expect some of this cash to come back in the second half of the year with our working capital levels expected to end the year towards our usual 12% to 14% of revenue through-cycle range. Our strong balance sheet continues to support through-cycle investment in the business, more than EUR 400 million invested in the half. And for the full year, I'd expect to be towards the top end of the EUR 800 million to EUR 900 million range for capital expenditure, in line with previous guidance as we continue to make good progress in delivering the organic growth investments, which remain on track and on budget, and Andrew will cover these again later. Interest, tax and other payments as well as the payment of the final 2023 ordinary dividend, complete the picture and both totaled approximately EUR 200 million each. That means at the end of June, we had net debt in absolute terms of EUR 1.6 billion, levered at around 1.5x net debt to EBITDA. So let me wrap up. We delivered a robust financial performance in the first half of the year, in line with our expectations, sequentially improved compared to the second half of 2023. The group has the financial strength and flexibility to continue to deliver value accretive growth. With that, let me hand you back over to Andrew. Thank you.

Many thanks, Mike. I'll now take you through a review of the business unit performance before again, coming back to the progress we're making on our key strategic initiatives. Moving to Corrugated Packaging. You can see profitability was down in the first half of last year, but we delivered a sequential improvement on the second half. Containerboard prices fell sharply over the course of the first half of 2023, if you'll recall, before stabilizing through the second half and increasing now through a series of price increases in the first half of this year. It is encouraging to see an upturn in demand for our containerboard grades, partly due to restocking but also indicative of underlying demand recovery. This, together with ongoing cost support has driven these price increases. Our Corrugated Solutions business continues to deliver strongly despite the pressure from increasing containerboard prices. Box volumes grew in the period and efforts are underway to pass on the recent containerboard increases with the usual 3 to 6 months lag. Looking forward, we expect continued structural growth in these markets, supported by the drive for sustainable packaging solutions and the ongoing development of e-commerce markets. Clearly, a return to macroeconomic growth in our core European markets will also be supportive. To this end, we continue to invest for the future. We are currently ramping up production at various of our projects, in both our upstream and downstream operations, to expand our product offering while improving cost competitiveness and enhancing our environmental footprint. Again, I'll come back to some of these later in the presentation. In Flexible Packaging, profitability was down on the first half of last year, due mainly to the sharp fall in prices in the paper value chain over the course of 2023. Pleasingly, we have seen a recovery in sales volumes during the first half with a particularly strong recovery in demand for kraft paper on a combination of restocking and again, improving underlying demand. We continue to enjoy success in developing new sources of demand for our kraft paper, primarily linked to the increasing need for sustainable packaging solutions in consumer markets. Again, I'll show you a few examples of these later in the presentation. On the back of the stronger demand, we successfully implemented price increases across our range of kraft paper products again over the course of the first half. Consumer flexibles and Functional Paper and Films delivered good volume growth, which in turn supported better margins. We remain excited by the platform these businesses provide to develop innovative new products by combining our deep customer relationships in consumer flexibles, with our breadth and depth of knowledge and expertise across the various substrates ranging from resin to paper. Again in Flexible Packaging, we are making good progress in delivering on our various projects to better serve these exciting growth markets. Uncoated Fine Paper delivered a stable result compared to the first half of 2023 and a sequential improvement on the second half. Good volume growth in European business, driven by restocking and strong market share gains, coupled with selling price increases successfully implemented over the course of the period supported this performance. As we move into the second half, it is clear that restocking phase is over, and we are now moving into a more normal demand environment. The strategy for this business remains unchanged. We are focused on leveraging our market leadership positions in 2 regional markets of Central Europe and Southern Africa, while driving productivity and efficiency measures at our operations. Our customers value our long-term commitment together with our ongoing focus on quality, reliability and service as reflected in the recent gains as others have exited these markets. I'd now like to come back to our strategic positioning and highlight the progress we are making in delivering on this strategy. Much of this will be familiar to you, but I make no apologies for this as the strategy we have been pursuing for a number of years remains as relevant today. First, I'd like to remind you of how we are positioned as a group. As you know, we have leading positions in the markets that we serve. In corrugated, we have real strength in the niche virgin containerboard grades delivered out of our well-invested and cost-advantaged integrated pulp and paper mills. Further, we are strongly -- we have a strongly integrated network with the leading corrugated solutions business in emerging Europe. In flexible packaging, we are the global leader in kraft paper and paper bags, with a strong position in the more sophisticated niche markets in consumer flexibles. In Uncoated Fine Paper, we enjoy leadership positions in those 2 regional markets of Central Europe and South Africa. On next slide, we illustrate our geographic positioning in our 2 growing packaging verticals. In flexibles, as mentioned, we have a truly global platform with market-leading positions in the 2 biggest markets of Europe and North America and important positions in other regional markets, spanning Central America, Middle East, Africa and Southeast Asia. We intend to continue growing wherever people need our high-quality, reliable supplies of our paper bag products, leveraging our unparalleled scale, know-how and integration strength. Excitingly, we are also consistently innovating new products to add to our portfolio, driven by the need for sustainable packaging, as the most obvious example being the growth we are seeing in e-commerce applications for our flexible paper bags. In corrugated, our focus is very much on growing in our core European markets, where we see significant further growth opportunities given our existing well-invested integrated platform and a still relatively fragmented nature of the market even following recent high-profile consolidation steps in the industry, which have largely been about transcontinental combinations. I am particularly excited by the opportunities that we have to leverage our unique platform to better serve our customers' needs, driven mainly by demand for more sustainable packaging solutions. On this slide, you'll see for example, in each of those columns, some e-commerce solutions that are made from both corrugated, flexible packaging or a combination of the 2. It can truly be a single source of truth for our fast-growing e-commerce customers as they look to optimize their packaging. In the central column, we have some other examples -- we have some other examples where we have combined our expertise in flexibles and corrugated to solve some of our customers' most urgent challenges. On this slide, we show you a few examples of how we have innovated for our customers to develop sustainable packaging solutions changing from the less sustainable option. In the first example, you will see a move from a nonrecyclable multi laminate structure to a fully recyclable mono-material structure for pet food. In the bottom left-hand quadrant, you will see a new product we have developed in conjunction with our customer to produce fully compostable coffee pods. I particularly like this example because it was developed through a combination of our expertise in consumer flexibles, functional paper and films and kraft paper, a truly collaborative effort across our organization. And of course, it is a great product. We also continue to develop corrugated products to displace less sustainable solutions, as shown in the example on the top right of a corrugated pallet solution, replacing a traditional plastic pallet. Finally, in the bottom right-hand quadrant are a couple of examples where we have replaced nonrecycled multilaminate plastic products with laminated paper-based solutions that are fully recyclable in a paper site recycling system. So as you all have heard, we continue to have a clear strategy going forward. And let me summarize what that is. We see great growth opportunities in both our packaging verticals of corrugated and flexibles. In flexibles, we have a global platform in the paper-based value chain which we'll continue to leverage through both organic growth and bolt-on acquisitions, if available. In corrugated, our strength and focus for growth both organic and through acquisitions remains very much in Europe and adjacent markets. In Fine Paper, we will continue to optimize our existing positions as a supplier of choice in our 2 regional markets of Central Europe and South Africa. We believe in the strength offered by integrated value chains, providing security of supply, efficiencies between upstream and downstream operations and enhanced innovation capabilities. To bring the full value to bear, we will continue to drive productivity and efficiencies across the entire value chain, invest in assets with cost advantage and actively seek and deliver the synergies that exist in our integrated model, both vertically and horizontally across the different product lines. I remain very excited by the huge potential we have to drive innovation with our customers. I showed you a few of the many examples we have, and there's plenty more to come as we fully leverage this unique platform. Lastly, none of this can be done without the right culture that provides a committed, inclusive, diverse and above all, safe working environment. We have made great strides in this area and can be proud of our many achievements. But clearly, there's still more to do. All of the above must be achieved within the framework of our disciplined capital allocation framework. You have seen this slide often enough, but we never tire of showing it. We'll continue to grow through selective organic investments while supporting returns to shareholders and evaluating inorganic growth opportunities, all while ensuring we maintain a strong and stable financial position. The good news is that this is facilitated by a business model that drives strong cash generation even in the toughest of market environments as we have witnessed recently. Here quickly, we illustrate how we have put into action our capital allocation approach over the past 10 years, balancing the allocation of cash generated from the business between investing in the business and rewarding our shareholders. I've already mentioned the progress we are making on our current capital expansion program. But just to remind you, we are currently in the midst of a EUR 1.2 billion expansionary program spread evenly across our 2 growth verticals. We expect this program to be about 80% complete by the end of this year with a meaningful EBITDA coming through from 2025 as these projects ramp up full operational capabilities. To make this more tangible, I thought I'd show you a couple of pictures of what our shareholders' money has bought so far. On the left, you can see our newly expanded corrugated plant in Warsaw, Poland, while on the right is our corrugated plant, SIMET Poland. Both are now in full operation with the major expansion projects at these sites having been completed on time and on budget and most importantly, with no injuries. Warsaw is now the largest plant in our network and the largest corrugated plant in Poland with a production capacity of around 320 million square meters per annum. In the center picture, you'll see is the building of our new state-of-the-art -- for our new state-of-the-art kraft paper machine at Štetí, capable of producing over 200,000 tonnes per annum of high-quality sack kraft paper when in full production. We remain on target for start in H1 2025. As you'll see, the building is still very much a work in progress. And in that building is the bones of the paper machine, which is being built. Total craft production at Štetí after this expansion will be over 800,000 tonnes per year, extending its lead as the largest dedicated kraft paper mill in the world. So finally, I'll finish with this slide, which summarizes our investment thesis. I won't reiterate all the points, which I believe have largely been covered in the presentation. But suffice to say, we are a well-invested business with privileged exposure to structurally growing markets, providing great growth opportunities, both organic and inorganic, a track record of disciplined capital allocation, and the financial strength to continue investing to deliver value-accretive growth sustainably. With that, I'll hand you back to Mike to facilitate the Q&A.

Okay. Operator, if we could take the first question and just remind people how they can ask questions through the various methods. Thank you.

[Operator Instructions] Our first question comes from Cole Hathorn of Jefferies.

Mike, just to start on the cost. Could you give a little bit more color on your various cost back...

I don't know what's happening. We can't hear Cole, if he is talking.

Andrew, can you...

Cole, if you could please unmute again. I can hear you in the call. I think we just need to push you through to the speakers in the room.

Sorry about the technical difficulty there. Mike, if I start with the costs, please, could you give an outlook on what you're seeing on your key cost the second half.

Operator, if you could -- if you've heard Cole's question, you could relay it to us.

Sorry, Cole, I think they're struggling to hear you in the room. If you could please go ahead and ask your question again.

On the costs into the second half, please, could you give an outlook on what you're seeing for the main cost buckets?

Could you please give an outlook for the current cost buckets is the question from Cole.

Okay, operator, at this end, there's people trying to solve it, I believe. Can I suggest you ask Cole's question on his behalf, if you have heard the question, and then we can at least keep the call and use people's time to the best effect.

Yes, if you can hear me, then the question was, can you please elaborate on the cost buckets, please?

Okay. Yes, let me take that whilst we try to resolve the issues that we cannot hear the questions. Yes, in terms of input costs, the input costs at half year was exactly as we expected. You've seen the big bar on the chart, which we've talked about, and we headlined that as we came into this year. I think, Cole, what you're probably asking about is what we see as we move forward. As I said, we see costs pretty stable. In terms of the major categories, wood, we have seen sort of higher prices in Scandinavia, lower costs in Central Eastern Europe as we've gone through the half. And that probably continues as we go into the second half as far as we can see, which is [ certainly seen ] in the European wood basket coming off a touch and Scandinavia still increasing a touch. But overall, for us, I would say, wood cost is pretty stable as we go into the second half. And most of the other costs, I mean, energy usually goes up a little bit as you go into winter. But as you know, we tend to use a lot of wood and biomass, and energy has been a bit of a gain in the first half as the energy markets have softened. But I'd say, from an input cost perspective, we've seen a pretty stable environment. PFR obviously has gone up in the second half, but that's obviously somewhat higher than we might have expected.

Our second question comes from Lars Kjellberg of Stifel.

Yes. Can you hear me to start off with?

I can hear you, Lars. Are you able to hear Lars in the room?

If you could ask people to stay on the line, we're just going to take 2 minutes to sort out the sound in the room we're in, and we'll be back with people.

Understood. So to everyone on Zoom, including Lars with your question, if you can just please bear with us. We are having a technical issue in the room with the people being able to hear your questions. We can hear you here on Zoom, but struggling to hear you in the room. Please bear with us for just a couple of minutes while they sought a technical problem and we'll be back very shortly. Thank you. [Technical Difficulty] Okay. I think we have now sorted the problem in the room. Lars, sorry, if you could please go ahead and ask your question again.

Yes, I can be hear just to control, Andrew and Mike?

Are you able to hear Lars in the room. If you can please let us know if you can hear us.

I can hear you.

Wonderful. Lars, please go ahead and ask your question. Apologies for the technical issues.

No problem at all. Can you hear me now, Mark and Andrew?

I can, Lars. It's Michael.

So just coming back to costs, I mean, obviously, there's quite an interesting dynamic on the Nordic -- on the European side with your wood costs coming off a bit from the very high cost you had earlier while the Nordic wood costs continue to escalate. Are you seeing any sort of incremental cost pressures coming through into the pricing discussions, i.e., there's a significant cost to both kraft paper and kraftliner production in the Nordics. Can we see that as a net benefit for you because they would seriously be struggling with their profitability? And kind of piggybacking a bit on that, you mentioned that you have raised fine paper prices through the first half, none of which seems to be recognized in recent publications. But of course, the cost pressures are immense for those that don't have their own pulp. So if you can talk about the dynamics through those cost buckets and how that translates into pricing in your view?

Lars, I'll take that. It's Andrew here. I trust you can hear me. Yes. I mean clearly, cost support is a factor in the price increases more generally on the paper side. Obviously, it's been most pronounced, frankly, in the recycled grades where the huge PFR increases have been a cost support because recognizing that even with these price increases, the true margin expansion for the recycled grades has been relatively limited. As you say, in the virgin grades and kraft paper is primarily a virgin product. Clearly, we compete with a range of different suppliers, both in the Nordics, but also in other jurisdictions. And clearly, the relative cost competitiveness has changed again. It should be noted, of course, that Central Europe bore the brunt of the wood cost increases at the height of the energy crisis following the Ukraine invasion. And then they've come off since then. They are still structurally higher than they were precrisis, but the direction of travel has been moderating downwards rather than going upwards now while the Scandinavian wood costs continue to go upwards to, I guess, reflect the full effect of structural change, which is that the Russian and Belarusian timber is no longer available to Europe. And yes, these things do change the relative cost competitiveness. I wouldn't say that these kraft paper and virgin containerboard grade price increases have been driven by cost as much as by the normal supply-demand dynamics. Demand has picked up. There has been no real new supply into the market, and that has pulled prices up. But I guess on the margin, it is also supported by costs as well. On the UFP price progression, yes, I think while indexes are useful, I guess they don't cover every color nuance in the markets. And of course, they're just average benchmark prices. I think what the indices probably missed was there was some price erosion towards the back end of last year in Europe in Fine Paper. And then we've seen some price recovery into the beginning of this year. And that's the sort of price increases we are referring to here. It seems as though the indices sort of reflected a more flat line sort of outcome, but it really masks maybe what has been some movement there. But that is reflective of our experience. Obviously, we can't talk for the market in total. And of course, there's always the regional differences in product differences and things like that. But that's -- that is our experience. But I think on the fine paper side, it should also be noted. I mean, we've done a lot of self-help there. As you know, we took out some capacity in Neusiedler. Clearly, we've also been gaining share at the expense of others who have fallen out of the market because we are a long-term player here. And our cost structure, we worked very hard on that cost structure. And I think that is bearing fruit now. So there's a number of self-help measures in there as well as some support from pricing.

And I just...

Operator, can I just suggest given that we have now fixed the technical issue, to which I apologize to all. We go back to Cole to make sure we answered his question, and you may have another. So operator, if I could leave that with you to go back to Cole.

Yes, of course, Cole, if you'd like to unmute, and reask your question.

I'd like to ask on your Flexible Packaging business. I mean you've got lower cost mills and you're benefiting from the steeper cost curve as Lars alluding to there. However, IP on their most recent call highlighted the importance of the converting network and ensuring that maintenance and operating costs are well managed. Thinking about your flexible bag network, where you're #1 globally. Do you feel you're well invested in that network? Ultimately, how much of a cost advantage do you have on the converting side in Europe and globally, particularly considering the old #2 Segezha had to sell their EU business, and I suspect has probably invested less in that recently?

Thanks, Cole. I think I can say without contradiction that we clearly have the preeminent bag converting network. We've got 40-odd plants, which is significantly above what anyone else has. Clearly, in a number of those plants, you're producing a very similar product because obviously, the industrial -- the traditional industrial applications of cement building materials, et cetera, you're running quite similar lines. So we have the ability to drive a very consistent approach. We have very standard procedures, very standard processes across all our plants. We know essentially what every plant is doing all the time because we have very developed systems around all of that. And of course, that allows us to optimize to benchmark religiously across the different plants. We just came off a 24-hour marathon challenge where the bag makers are challenged to drive production as effectively as possible within a safe environment and these sort of things, which all drive performance across the plant network. As you say, I mean we are well invested. We always want to invest more where we have the ability to continue to grow that business. But I think that's off an extremely strong base. So yes, we have a very well invested, very integrated and very extensive network there, which provides extreme -- a real strength. And of course, is a significant integration benefit because as the biggest global producer of the kraft people that goes into those bags, that network is extremely powerful.

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

Can you hear me okay?

I can hear you in the call, Charlie. Are we be able to hear Charlie in the room?

Yes, we can.

Great.

Sorry, Charlie, if you could please mute again and ask your question.

Right. I've unmuted myself. Three questions, please, if I may. First, you mentioned restocking a number of times, but also underlying improvements in demand. I just wondered how much of the improvement do you think would be attributable to both of those and whether you're seeing that restocking fade out yet in any way other than [indiscernible] paper. That's the first question.

Do you want to load us with the other 2, Charlie, and then we can...

Yes, sure. And then just a second one on the capital project and the significant contribution you're flagging to come through from 2025. Just wondered at this stage whether you could give us a little bit more color around the phasing. Should we be expecting a third of the benefits already from the 1st January? Or is it going to sort of be a bit slower than that? And then the third bit was just on Hinton, you've disclosed the revenue contribution in the period and the net. I just wondered how much EBITDA there was there and whether that included the EUR 9 million valuation gain. And is that why your pulp production -- your market pulp production jumped so much year-on-year? Or is that more about the delay in the maintenance?

Thanks, Charlie. Maybe I'll take the first and last questions and then Mike will come back with the CapEx phasing question. Maybe the last one first on Hinton. We roughly break even on Hinton at the moment, which is where we anticipated we would be. As we said when we bought it, the first phase of the process was to improve the pulp operations and upgrade that. We're making good progress on that. We're delighted with the progress the team is making in Hinton in improving the pulp facilities. There's some CapEx involved, but as, frankly, a lot of it has to do with process and that's going very well. Obviously, the end goal there is then to be forward integrating that into the kraft paper machine, and we are starting, obviously, the feasibility work on that. So we're very excited by the opportunity there with a very clearly structurally cost advantaged wood access and all the benefits that, that brings. And then in turn, the ability -- referring to the last question from Cole, to integrate into our large bag network in the Americas. So that's -- in the short term, don't expect much. And by way of EBITDA from Hinton is really about breaking even at a cash basis in the short term. The answer to the second part of that question, which is about the pulp increases. Yes, it's largely due to that pulp contribution from Hinton, which is an unbleached kraft pulp sold mainly into the Asian markets. So a bit different to the other pulp grades of ours, which are largely bleached chemical pulp. On the question of restocking. Yes, I mean we mentioned it a few times intentionally because clearly, it has been a factor. Just as last year, frankly, destocking was a big theme, and it was correct. It was true. It always happens in down cycle where you're seeing prices -- the expectation is price reductions, people destock and reduce stocks through the value chain. And similarly, when the expectation is that the next move in prices is upward, people start to rebuild stocks. If you look at it purely from an upstream to downstream within the value chain, that part of the value chain that we can see, which is obviously containerboard into boxes and kraft paper into bags. You can see, for example, in Europe, I think the industry numbers say containerboard grew at 6%, 7% or something like that in the first half, while box volumes grew somewhere around 4%. So there is a difference there, and largely that must be due to a restocking effect. It's a bit more pronounced in the bag side, where you're seeing kraft paper volumes exceed bag volumes in terms of the growth -- the rates of growth. So I think there is some restocking in the bag systems there. And of course, what is difficult to tell is how much restocking there is downstream into our customers because we obviously don't have full access to that. So yes, there clearly has been some restocking effect in the first half. But what I would also say is the underlying demand side is showing recovery. I think everyone is being a bit cautious about calling just how strong a recovery it is because seeing is believing. So we'll need to see how this unfolds over the next 3 to 6 months. And of course, it's always going to be a function of how the macroeconomic picture develops as well. But it's -- at least it's encouraging that it's not just a restocking effect. It is clearly also an underlying demand improvement. Obviously, we'll watch how that develops over the next half. Maybe...

Yes, so on capital projects, as we've said in the past, Charlie and today, we're on track, on time. In the past, we have said that the return on capital through cycle for the new deployed capital of EUR 1.2 billion. So that's EBIT over capital employed, that would be about mid-teen returns through cycle. That hasn't changed. I think people have done the maths on that, added on some depreciation and you get to about 20% EBITDA through cycle on capital. That means about EUR 240 million to EUR 250 million of extra EBITDA from this growth program. Now clearly, that gets ramped up. As the machines get ramped up, so it takes some time. Clearly, the converters come on, the downstream operations come on somewhat quicker. And Andrew has covered places like Warsaw that are operating today, but clearly need to be filled up. And then places like Štetí take time to ramp up both in terms of starting the machine and then filling it to full capacity. So we have previously guided -- if you wanted a rough estimate, then it will depend on where the cycle is in the market of that EUR 250 million, we've said about EUR 50 million this year and then EUR 100 million, EUR 100 million isn't a daft assumption. We'll clearly keep you updated on that. And some of that will depend on the market, the market demand and where we are in the cycle because those are mid-cycle returns. But that's what the previous guidance has been, that isn't changing at all. We're on track and on time.

Our next question comes from Brian Morgan of RMB Morgan Stanley.

Just can you circle back to kraft paper, just following up on Cole's questions there. Are you seeing any signs of kraft paper coming back into the European market from Russia through any channels?

The short answer is no. Obviously, paper starts to lose its identity, depends on how far down the value chain you look. But certainly in terms of kraft paper, I mean, as you well know, it's a sanctioned product. And so it's specifically identified as a sanctioned product. We suspect most of it is going east. So to the extent it's not being utilized in Russia and/or just simply lower production. I think a lot of it is going into China. We don't have huge visibility into China because we don't sell much into China ourselves because there's import tariffs from Europe. But that's where we suspect most of it is going, to the extent it's being exported.

Super. And then if I can follow up, assuming we get a bit of a return of industrial and construction demand, could we see the kraft paper markets in Europe, North Africa, sort of Mediterranean area becoming tighter in the future than it has been in the past?

Yes. I mean, clearly, on the kraft paper side, I mean, we are the only ones really bringing -- certainly on the -- when you refer to those industrial applications, which is typically where we're using the sack kraft which is the highest grade extensible products and the like. That typically is going into sort of cement building materials and that. So clearly, from a demand perspective, if those markets pick up, and that's undoubtedly helpful. I mean it's fair to say that in export markets, as we refer to them, so that's kind of everywhere, but Europe and the U.S. We are seeing a pretty decent demand picture for cement-based products and the like. So into Middle East, North Africa, all these other markets, you are seeing a pretty decent demand picture right now. But clearly, if that picks up, that can only be more helpful because on the supply side, we are bringing in new capacity. As you know, with the Štetí machine next year, of that 200-odd tonnes roughly half of it is designated for those industrial sack kraft markets and the other half will effectively be being in specialty kraft products for -- more for consumer and e-commerce and all the other applications. But we will obviously be bringing it into the market very cautiously. And of course, if we can bring it into an upturn in demand, that is doubly helpful. So yes, it can obviously get better. I mean, I don't think we should be leaving you with the assumption that the markets are [ rampant ] by any stretch. I mean the demand recovery is tentative. It's been okay in the first half. We see it's still okay, but it's not -- and I think it's clear to -- we should be clear, it's not a very strong demand recovery right now, but we haven't really seen much help from the macroeconomic environment. But if that comes through, then of course, that can be supportive.

Our next question comes from James Perry of Citi.

Can you hear me?

We can.

I just want to ask about pricing in Flexible Packaging, where it's a bit harder for us to use benchmark data. And so what kind of pricing dynamics are you seeing into H2 for kraft paper and for paper bags? And how does it differ in Europe compared to North America?

Sure. So as we said, kraft paper prices clearly entered the year at a low point. So just we have to remind you that we saw price reductions over the course of 2023. And so we entered 2024 at the sort of low point. Through the course of the first half, we have seen -- we have got some price increases in Europe for us in the first instance. That doesn't make a huge amount of difference to the bottom line because a lot of that is internal volumes. But also importantly, we've also repriced into, call it, the export markets over the course of first of all, more importantly towards the back end of the first half. So as we enter the second half, we have got prices up relative to, call it, first half averages. I won't give you the exact quantum because obviously, it's fairly commercially sensitive. But it's not dissimilar to the type of increases we've been seeing in the containerboard side as well. And so that means that, yes, going into second half, prices will be higher on average than that we saw in the first half of the year. If you talk about our regional differences, and of course, then what the trick is, of course, to pass that on through the bags. I think undoubtedly one can expect some margin compression in the short term on the bags because you can't immediately pass these things on. But of course, the teams are working hard on that because it's only appropriate to pass these increases on ultimately. In terms of the U.S. markets in particular, I think U.S. is a bit behind Europe. So Europe started softening before the U.S., but it seems to be recovering a bit ahead of the U.S., the U.S. markets for bags, in particular, are still -- is still relatively weak, but hopefully starting to turn. As I say, export markets in other markets, Middle East, North Africa, Southeast Asia, these sort of markets are actually pretty robust at the moment. So it's a mixed picture around the different market -- geographic markets. But in total, it seems like there's a bit of a recovery on the volume side or demand side. And certainly, we've got prices up relative to what we saw through the first half of the year.

Our next question comes from James Twyman from Prescient Securities.

Yes, if I could just ask firstly, regarding the kraft paper business, you had mentioned that kraft paper has been particularly strong rather than sack paper. Could you just talk around how important kraft paper is for your business now? And with the expansion you're doing in the sack paper business at Štetí, how the kraft -- how you're going to manage that growth in kraft paper going forward? And maybe some idea of timing of the Štetí startup, which you may have said that I missed. And then secondly, just on the uncoated paper business, the pulp price has gone up very strongly. Now I know that the Richards Bay pulp business is not huge in your lives, but I know it is pretty profitable and the pulp price has gone up pretty dramatically. Some idea of how important pulp is to you in terms of profitability would be very helpful.

I think there's a few questions in there, but I hope I can get them. In terms of, firstly, call it, the importance of kraft paper in our lives. I mean, kraft paper more broadly, we make 1.2 million tonnes of it. We consume about 800,000, 900,000 tonnes internally. Obviously, with the Swiecie -- Štetí expansion that you can add another 200,000-odd tonnes to that, so that will be of our new capacity once Štetí is fully up. So it will be more like 1.4-ish million tonnes. So it's very important in our lives. And obviously, it's a higher value product. I mean, kraft paper prices are typically higher than the containerboard and certainly on the recycled grades. And so yes, it's a very important product for us. And of course, it is the feedstock for our -- in that very extensive bags network that we have. So if the question is more sack kraft relative to the specialty kraft papers, sack kraft is about 900,000 of that 1.2 million. When we add Štetí, as I say, it will go up to about 1 million tonnes of sack kraft and around 400,000 tonnes of speciality kraft. And those specialties, as I said earlier, are going into all the different new applications that you see. And that's why it's a very exciting product because it's conducive to being used in these consumer applications, in e-commerce applications where we are rapidly growing in our e-commerce applications for bags, which combines with the offering we have in corrugated and these hybrid solutions that we've also developed using a combination of bag and corrugated technology. So lots of exciting developments there. So there are new markets developing all the time for those specialty kraft papers, so important and growing business for us. Štetí startup, it's H1 next year. We are on track for that. You saw the picture of the building. I can assure you there's frenzied activities within that building with the paper machine going up very rapidly and we're very much on track for H1 startup next year. And finally, on the pulp. Yes, I mean, pulp is obviously a very important business for Richards Bay, and net-net, I think we are 300,000 tonnes longer these days of pulp. I think that excludes probably Hinton. Hinton is really a slightly different pulp product. It's not -- it's -- as I said, it's this unbleached kraft, which has a very specific application. But the broader bleached chemical pulp, we're about 300,000 tonnes net long these days. So it's a relevant driver, but it's not a hugely important one. And of course, with the Štetí expansion, we will reduce that exposure by about 100,000 tonnes because we're integrating Štetí pulp into the new paper machine. So I hope that's clear.

Our next question comes from Ephrem Ravi of Citi.

Just 2 very quick questions. Hinton, the EUR 400 million investment that you're planning out to 2027, is that dependent on what you see in terms of the market development? As you mentioned, the U.S. seems to be a little bit behind Europe in terms of going into the downturn and recovery. So would that investment be in theory, staggered out a little bit more if the downturn is a little bit longer than you expected? And secondly, are there any product categories where you are really capacity constrained rather than market constrained in terms of the volumes that you can sell? And again, is there kind of an opportunity for further pricing increases in those product categories?

Sure. Firstly, on Hinton, we're doing the feasibility work at the moment. Clearly, the project hasn't been approved. So by definition, we have flexibility around when it will come in. But at the same time, I mean, we are convinced that it has huge structural cost advantages. We have the integration opportunity into our North American bags network. And yes, North American bags is a bit softer at the moment. But these are -- these are long-life assets that we are betting on long-term structural dynamics rather than any short-term cyclical dynamics. But of course, we take all of this into consideration when -- when approving the investment. But I remain convinced that this is a highly attractive opportunity. I mean the wood costs in coming delivered into Hinton are extremely attractive relative to, frankly, anywhere else. It's the right grade of pulp, which is also very important for the very specific product we make. It's a very niche product, which requires a very particular type of pulp. And as I say, we have natural integration opportunity with our extensive bag network in the U.S. and Mexico. So all the attributes are there and we'll obviously be working up the feasibility study at the moment. That's what we are doing and come to a decision over -- it's not an imminent decision purely because we have to work up the feasibility work. On the question of capacity constraints, we have the luxury, particularly in our containerboard grades, for example, and particularly those virgin grades where we have a priveledged cost position. So in some ways, even in the toughest of times every tonne we produce, we can make profits out of it. And obviously, we'd love to have more of those type of tonnes, and we've been doing a lot of investments around that. For example, the latest debottlenecking at Swiecie, which is the preeminent European containerboard operation. And so we're squeezing our capacity in that low cost -- those low-cost production basis. So that's the sort of constraint we have in that regard. Obviously, some of these markets are still oversupplied. I mean the recycled containerboard market is an oversupplied market and you can only make money there if you are constructionally low cost, where we have that advantage. So you have to be very selective in terms of capacity expansions. And so that's the way we would look at it.

Our next question comes from Andrew Jones of UBS.

Can you hear me?

We can hear you, Andrew.

Excellent. So just a question on the wood costs. I mean it's encouraging that you've said that wood costs are currently sort of stable to falling in your markets overall? That's clearly better than we're seeing from a lot of your peers. Is -- you did call out the fact that obviously, energy was a huge driver of the wood market in 2022. I'm wondering whether as we go into the fourth quarter, there could be some seasonal increase in wood costs in Central and Eastern Europe in your view once we begin -- the winter gets cold and energy demand goes up, could that be a factor which could start to reverse those wood prices and push them higher into 4Q?

Andy, I think we have directly -- I mean, winters come every year. But the big structural change -- well, the big impact on the markets in 2022, in particular, was the extreme situation where, as you recall, I mean, there was an energy crisis and there was a worry about security of supply. Gas prices went through the roof. And of course, that meant that burning trees became a real viable option at a much higher price levels than would have historically been the case. And that -- so it was a very peculiar one-off -- we hope, a one-off event that caused that and the subsequent decline. But I think the normal ebbs and flows of the seasons yes, they have some limited effects on availability. But we are a long-term buyer of timber. We have long-term relationships with our suppliers. And so you typically don't see major seasonal fluctuations in wood prices.

Understood. And you don't see any catalyst for any conversion between the wood price that you see in Central Eastern Europe and the rising cost in the Nordics. That difference could potentially accentuate going forward, per your view?

Well, I think one has to recognize that structurally, wood costs in Europe are higher than they were pre-crisis. There was -- the initial effect was the energy substitution, we call it. But of course, the longer-term impact is simply the nonavailability of Russian and Belarusian wood. That's clearly impacted the Nordics quite significantly because they were importers, mainly Central Europe. There was also some import mainly from Belorussia. So that supply source has gone. And so wood prices are structurally higher than they were before. And you can see that, I mean, our wood costs today are still materially higher than they were pre-crisis. They're just a lot lower than they were over the '22, '23 period and that's why you see this year-on-year effect. So there is a lasting impact or structural impact in terms of, call it, the arbitrage opportunity between the Nordics and everywhere else. Yes, there is some flow of timber that takes place. I mean people do ship it around. But of course, it's not a product that travels very well. I mean it's extremely expensive to move timber around. And so you always have a natural advantage being located where the timber -- the cheapest timber is available. And so that's -- that will hold true. But of course, Europe more generally, wood costs are up on where they were historically, and that affects everyone. But as the current dynamic is that the Nordics are seeing wood costs still going up while having gone up very high, Central Europe is coming off. And I don't see any reason why that arbitrage should sort of [ wrap ] up differential. I mean, it will continue as it historically always did.

Our next question comes from Sean Ungerer of Chronux. We seem to have lost Sean there. So we're going to move on to another question. Sean, have we got you? Please go ahead.

Can you hear me?

Yes, we can.

Okay. Great. In terms of corrugated box growth, as you exited June, could you maybe sort of give us any insight as to how that sort of compared to the H1 growth rate? That's the first question.

Do you want to give us all your questions, Sean, and then maybe we can join...

Perfect. Great. And then the second question, just on the market pulp sales outlook, given the ramp-up of new projects. How should we sort of think about that compared to current levels? And then thirdly, are you able to provide any sensitivity given the depreciation of the Turkish lira? That would be very helpful. And then lastly, just in terms of the fair value gain to loss moving into H2. How much is that sort of supplies to this demand compared to sort of FX [ news ]? That would be very insightful.

Could you just repeat your question on Turkey for me, Sean, because I didn't catch it?

Sorry, the line is bad. In terms of the depreciation of the lira, can you provide any sensitivity on EBITDA or EBIT given the drastic moves?

Sure. So let me take the last 2. The forestry fair value is really a case of, if I oversimplify it, sort of number of trees times pricing. Obviously, that pricing of the South African wood moves with markets and supply and demand. But it's not -- it's a pricing effect times the trees, if that makes sense. And that's what we value it at, at the balance sheet date. In terms of Turkish lira, it's linked to inflation, of course, as well. So it's quite hard to call that because you've got hyperinflation accounting, you've got currency. I think the real issue in Turkey which is how the economy pans out. And of course, that got somewhat better in the last little while, better this year than last year. It's still quite a difficult economic environment, but clearly, the team there are doing a good job. We've got a great business, but we need to clearly manage in what is quite a volatile economy. But I guess my point is it's not just around lira, it's around inflation. It's around how the basic economic environment works, and that impact is much bigger, frankly, than the currency impact, which is pretty small actually. Andrew?

Sean, I got the question on the box volume growth, which I can't really answer because I mean, I think your question is the sort of exit run rate on box volumes versus the kind of what we saw over the course of the first half. The reason I can't answer that is because there's always huge seasonal impacts from one month to the next and the like. So it would be misleading for me to give you a kind of exit run rate. It doesn't really work like that because you have to look at it over the course of a period. But I think it is fair to say. I mean, I think the industry numbers are up 3%, 4% for the first half of the year. It feels as though there's been a fairly steady positive progression on that. But obviously, there's always seasonal fluctuations. So it's looking better, it's off a low base, one has to recognize. I mean, last year was already pretty difficult in that in from a volume perspective, but encouraging nonetheless that we are starting to see some growth in those markets. And again, I have to apologize. I couldn't get the second question properly. Could you repeat, sorry, the second question you had on pulp?

Are you able to hear me?

Yes.

Just in terms of the capacity ramp-ups in the next 12 to 18 months, how should we think about Mondi's market [ pulp ] sales as they ramp up?

Market pulp sales?

Yes, external -- your pulp sales -- your [ niche ] net long position are going to become a lot shorter?

Yes. So short, long position will become shorter because, as I say, with the integration -- I mean with the Štetí expansion, we will be integrating 100,000-odd tonnes of pulp. The pulp that we sell into Asia, which is largely coming out of South Africa, obviously, that doesn't change in terms of the overall -- the net exposure. But as I said earlier, it's roughly 300,000 tonnes long our pulp position, probably going down to about 200,000 tonnes after the Štetí expansion. So it's important, but it's not -- it's not a major profit driver for us. And clearly, pulp is one of the most volatile of products. But our position generally is not to be an open market pulp producer. We see our strength in our integration both into paper production and also into our converted products. So clearly, over time, we are looking to, if anything, reduce our open market pulp exposure, but it's really not particularly material.

I think that is all the questions we have time for now. So I will hand back. Thank you.

Very good now. Thank you, everyone, and thanks for bearing with us with the technical difficulties. We apologize for that. But I hope you managed to get your questions in. If not, I'm sure you'll follow up with Fiona and team. And we're always available. But in short, I think a decent first half performance in difficult conditions. We are seeing some pricing momentum. Clearly, the world remains an unpredictable place, but I think we're well positioned within that. And most importantly, we see good, strong structural growth in the longer term which we are investing behind, leveraging what we believe is extremely strong platform. So with that, thank you very much, everyone, and we will no doubt be in touch. Thank you.

Thanks all.