Mondi plc (MNDI) Earnings Call Transcript & Summary

Good morning. This is the conference operator. Welcome, and thank you for joining Mondi's Q3 2024 Trading Update Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Andrew King, CEO of Mondi Group. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today to discuss the third quarter trading update. I'm Andrew King, your Group CEO; and with me today is Mike Powell, our Group CFO. I'm sure you've all seen the announcement this morning, so I'll just pick up a few points before happy to go into questions. Our performance in the third quarter was, as we expected, lower than the previous quarter with an underlying EBITDA of EUR 223 million. As we mentioned in August, we moved some of our planned maintenance shuts from the second quarter into the third quarter. Combined with the normal shut scheduled for Q3, this resulted in a higher impact of planned maintenance shuts in the third quarter when compared to the previous quarter. In addition, we advised of the likely forestry fair value loss in the second half of the year when compared to the gain that we booked in the first half. Together for the third quarter, these resulted in a difference of EUR 90 million when comparing the third quarter result with that of the second. Seasonally softer demand and modestly higher input costs, mainly related to paper for recycling price increases and higher external energy purchases also impacted the quarter. Packaging paper price increases implemented earlier this year benefited our upstream businesses in the quarter, while uncoated fine paper and pulp prices declined in the quarter following a recovery in pricing earlier in the year. Going into the final quarter of the year, trading conditions remain muted against the backdrop of an uncertain macroeconomic environment, but there are fewer planned maintenance shuts, and we do expect a normal seasonal pickup in demand. We are very excited by the progress we are making on our capital investment projects. Our 2 biggest expansionary projects, the paper machine investments at Steti and Duino remain on track for startup next year. It can be difficult to stay the course on these investments in a down cycle. I firmly believe in our approach on investing consistently on a through-cycle basis to deliver strong value creation. Together with the recently announced acquisition of Schumacher's Western European assets, which we expect to complete in H1 next year, we are very well placed to capitalize on the structural growth in sustainable packaging. With that, Mike and I are happy to take your questions.

[Operator Instructions] And the first question comes from the line of Lars Kjellberg from Stifel.

Just to be clear, can you please call out the fair value changes and the mix activity in the quarter after a pretty big items and specify them? And also if you kind of look at your underlying performance, excluding those items, it does look quite a sizable deterioration and with a backdrop of somewhat improving demand year-on-year, at least. And with a significant part of your revenue base in progressive pricing, if you can walk us through the buckets there, if there was any particular negative volume movements in the quarter that you want to call out. And you talked about modest cost increases. We know about OCC, but it does seem as if there's more than modest cost increases. But if you can put some color there, that would be helpful. And finally, what do you expect the forest value in Q4 in the total annual maintenance costs, please?

Thanks, Lars. Yes. No, certainly, let me give you some numbers, and then maybe Andrew can broaden out across the rest of your questions, just recognizing this is obviously a trading update, and we'll help you with that. In terms of fair value, as we've already said, there was about EUR 50 million in the first half, of which probably around EUR 35 million was in Q2. So if you think of the sequence, it was EUR 15 million, Q1; EUR 35 million, Q2. These are approximate numbers. Q3, we have booked EUR 15 million, and I think you also asked about where we'd expect it to land at the full year. Unfortunately, I don't know that. But I think you can expect at least the same as the Q3 number in Q4 here today. That number will change, I won't be wrong on that, because there's a detailed valuation done at year-end and at the half year, as you know. But if I was to sort of think about where that number may trend, it's probably at least the same, again, sat here today.

That was a negative EUR 15 million.

Correct. Thank you, Lars, for clarifying. So therefore, the delta, which I think was your question, between Q2 and Q3 goes from a plus EUR 35 million to minus EUR 15 million. That delta, therefore, is EUR 50 million, 5-0. So I think that covers off the fair value. In terms of maintenance shuts, we guided at the very beginning of the year, and there's no change to that of EUR 100 million roughly, EUR 20 million of that was in the first half. Therefore, EUR 80 million was in the second half. Of that EUR 80 million, about EUR 60 million is in Q3, and we said that Q3 could be the heaviest quarter. And therefore, I'd expect about a EUR 20 million number in Q4. Again, the Q-on-Q delta, because most of the first half was actually in Q2, the Q-on-Q delta through Q2 to Q3 is therefore about EUR 40 million. If you add up the EUR 40 million delta for the maintenance Q2 to Q3 delta and the fair value delta for the same period, which I said was EUR 50 million, that's the EUR 90 million that you see in the release. So hopefully, that clarifies it. And Andrew, maybe we can touch on the business environment.

Yes. I think your broader question on the volume story, Lars, to be clear, if you look at the overall industry numbers and you also look at our numbers, we have seen a year-on-year pickup in demand. And clearly, the first half, in particular, was also supported recently by a restocking effect. Clearly, that is over now, and one looks to the underlying demand picture. If you look at it, generally speaking, volumes, as I said, demand is up year-on-year. But I think it's also fair to say the momentum around the increase in demand is probably more muted than one might have anticipated earlier in the year, if I could phrase it like that. So we are seeing a reasonable volume picture, but it's reasonable, not strong. And I think, if anything, one felt this year should have been more of a rebound year off of a pretty low base of last year. It's modestly improved on the demand front and, certainly, our volumes as well on a year-on-year basis, but it's not the type of really strong rebound that one might have anticipated certainly at this point. And I think, again, as we say, one doesn't want to blame everything on the macroeconomic environment, but it happens to be true that, I think, the consumer remains fairly reluctant and nervous, and that affects everything in terms of the different end users. But -- so I'm clear, it's -- things are up year-on-year. But the rate of growth probably is not as strong as it might have been if we'd sort of sat here at the beginning of the year. So I think that's the key sort of impact of that. In terms of our overall -- our own demand picture, the quarterly numbers are always very noisy because of all the shut effects and things like that. We try and quantify that shut effect, but it doesn't necessarily encompass all the knock-on impacts on energy usage and all of the other effects that occur around shuts. This year, in particular, we obviously also got a few projects that are being commissioned and the like, and that makes it even more complicated. But I'm very confident we are well on track on all of that. We are executing very well on all of these things, but that does create a bit of noise in the numbers, certainly on a quarterly basis.

And in terms of prices, are you seeing any -- we can see the index prices by -- are you actually seeing a benefit from those prices into your P&L?

Yes. So prices, as you know, again, I'm giving a bit more color by segment as it were. In the containerboard grades, we saw prices recovering through the first half of the year and into the second half. They clearly are higher than they were on average through the first half. Clearly, you don't see that all booked in one -- in lockstep as it were because it takes time to filter through into your P&L. But we are seeing that, and there should be further effect of that into Q2 -- sorry, Q4. The only modest sort of decline we've seen is in the recycled grades. I think you can all see it in the industries where we have seen some modest price erosion there. That's largely, I believe, because the PFR prices are now coming off a bit, having gone up. And of course, the costs support at the high end of the cost curve in a muted demand environment means that you see some price erosion at the top end as a consequence of that sort of, call it, price support -- sorry, cost support. So you are seeing a bit of price erosion in the recycled grades, but the virgin grades are holding well. And the prices are higher than they were in the first half. Kraft paper, it's a similar story. We're also seeing some price increases through the first half of the year and continued holding in the second half. And the -- sorry, uncoated fine paper, there, we saw price increases actually start at the back end of the prior year, into the first half of the year. We have seen a bit of price erosion there in Q3. And it's well documented. The pulp size declines, which, of course, does affect that business unit because we do have open market pulp sales. But in addition, it obviously, I think, has contributed to some slight erosion in the fine paper space because of the -- again, the lack of cost support at the higher end of the cost curve with the unintegrated producers. And so there's been a bit of price erosion in the fine paper space. So that, I think, covers the main paper growth.

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

And I'd just like to have a little bit of a follow-up on uncoated fine paper. I know it's a trading update, and you don't give the detailed splits, but it's -- it'd just be useful to understand which segments was kind of the relatively weaker aspect in the third quarter. Any comments you can give? Because I suspect there was probably relatively more weakness in UFP and wider pulp just considering price deterioration there. So any further comments you could add on that would be helpful. And then just following up on your comment earlier, which was we've seen waste paper costs roll over a little bit into the third quarter, and we'll probably give back some pricing later today on that in Germany. But how do you see virgin containerboard performing on that? We haven't seen wood costs easing in the Nordics. Do you think we could be in a position where the U.S. exports are -- supply-demand in the U.S. is a bit better, I suppose, in Europe, and we've got cost support up in the Nordics? Could we get a bit of a divergence in virgin and recycled containerboard pricing?

Thanks, Cole. I think just quick on the UFP question, clearly, Q3 is always a more difficult quarter for UFP for a variety of reasons. Some of it is because, obviously, we take the preponderance of the UFP shuts in Q3. UFP is the one that, clearly -- whether that fair value gain is booked or not. And then on top of that, there's the normal seasonal weakness, particularly in Europe, because, obviously, in Europe, we see everyone goes on holiday in August. And so there's -- no ones printing at their photocopier. So there's a normal seasonal weakness. That's obviously partly why we also take a shut in that quarter as well. So there's a combination of factors, yes, whereby UFP would be naturally -- on an annual basis, it's -- typically, Q3 is its weakest quarter. It's been exacerbated this year by the distortion created by that fair value gain. The shuts have been pretty much all in Q3. And on top of that, there's the normal seasonal demand decline. And of course, as we've already picked up the pulp price decline coupled with the -- now, we're seeing some price erosion in the paper prices. What changes into Q4? Obviously, the shuts are behind us. It is normally a seasonal pickup. Albeit, the pricing clearly is not showing any signs of recovery in the short term. Pulp prices, frankly, who knows where they go next. On the paper side, there's some modest price erosion into Q4, but it will -- it started in Q3 really, and it's into Q4. Obviously, when you're not selling a lot of volume into the quarter because you're down on your machines and the seasonal weakness, it's -- the price effect is there, but it's not particularly highlighted. So -- and then, sorry, on the second question on the containerboard and particularly the VC, virgin containerboard, you're correct in the sense that, obviously, the dynamic on the cost bases are quite different. Recycled containerboard, the paper for recycling is the key input cost. And of course, in a market which we're currently experiencing, where the demand is not extremely buoyant. And so pricing is effectively determined by the marginal producers. Then by definition, you -- when the costs move up and down, it does have an impact potentially on pricing. And we are seeing that in the recycled side at the moment. And by contrast, the virgin grades, as you say, if anything, the cost base for the industry more generally continues to nudge up with -- because, obviously, the Nordics are important players in this segment. Our costs in -- our wood costs have typically been -- seem to be more stable. Obviously, we do also have a couple of mills up in the Nordics, our semi-chem mill up in Kuopio and Swiecie is a kraft paper mill. But clearly, in terms of our relative exposures, it's relatively limited. So there is ongoing cost support clearly in the -- on the virgin side. And yes, it would appear that, certainly, there is some divergence taking place with the virgin grades holding in terms of pricing and some erosion in pricing on the recycled grades.

And if -- then Andrew, if I can just follow up. Any big delta buckets that you're calling out into 2025? I know you've talked about EUR 100 million contribution from the major CapEx investments. But I'm just trying to understand if there's any other bigger moving pieces that we should be thinking about into 2025, including maybe some impact from a recent fire at one of your mills or anything like that, that you can call out at this stage.

I'm sure Mike can help us on that one with some of the moving parts. You mentioned the mills, Stambolijski. As you rightly point out, we mentioned the fact that, that mill will be down at least probably until the middle of next year. We are still assessing all our options around that operation. It's an important contributor to our kraft paper offering, but it's obviously by far the smallest mill in our kraft paper suite with 100,000 tonne capacity. So it certainly is an earnings contributor to the group, but it's not material to the overall offering. In terms of the other sort of key moving parts in terms of, call it, nonrecurrings, for lack for a better term, maybe Mike can help us.

Yes. So Cole, you talked particularly about the projects. Yes, the way we think about the projects, and I think about the projects, it is the build phase that's on track, on budget, that's in good shape. As we've said before, we're very much moving into the commercial ramp-up phase. Clearly, the converters always come earlier, so those are clearly in good shape. And then, obviously, the sort of the upstream paper making commercial ramp-up phase, again, that's in good shape, but clearly sort of high on our agenda today, which is finish the build, do the commercial ramp-up. The EUR 100 million you referred to is the number we quoted as the mid-cycle returns on the capital investment. If you remember, EUR 1.2 billion mid-cycle returns is about EUR 250 million of EBITDA, which splits EUR 50 million -- EUR 100 million, EUR 100 million, EUR 50 million in FY '24, EUR 100 million, EUR 100 million. I will just say they are mid-cycle returns. And do I think we're at mid-cycle today? No, we're clearly not. What's the difference, therefore, if build is on track, on budget and commercial ramp-up is in good shape today, the variable is price, Cole, yes. If the cycle is good. as we've always said, it will be more than EUR 100 million. If the cycle remains muted, it will be less than EUR 100 million. But we don't know where the price is. But today, we're certainly not mid-cycle in our view. So we'll clearly give a bit more guidance on that number as we get closer to next year. But if it was on today's muted markets, we're clearly not mid-cycle.

Yes. Fair value, we normally use the 10-year average, which is sort of 40 to 60 for next year. Again, I can give more guidance to that as we get into next year. But if you think, what would I be putting into my internal thoughts, it would be that sort of 40 to 60 range positive for next year. And therefore, we're likely to get a small upside year-on-year, most likely, but relatively small. Hope that helps, Cole.

And the next question comes from the line of Patrick Mann from Bank of America.

Just to ask again around containerboard. So you're saying kraft liner or the virgin grades holding up on costs and test liner rolling over. And I think the price has just come out, and it's a little bit lower in Germany. I'm just trying to think how that feeds through to your box prices into the fourth quarter. So we usually have that lag between containerboard and box prices. But given that they sort of seem to be diverging now. And how should we be thinking about maybe box prices delta from here into the fourth quarter and then into next year?