Mondi plc (MNDI) Earnings Call Transcript & Summary

Good morning all, and welcome to our full year results presentation. I will provide some of the highlights before passing on to Mike for an overview of our financial performance. I will then move on to an update on our business units and some thoughts on our current trading environment before providing detail on various of the important strategic steps we have taken over the past year to drive value-accretive growth. After that, Mike and I look forward to taking your questions. Before reviewing the past year, maybe some reflections on what we mean by the title of this presentation, "a strong platform for growth." Firstly and most importantly, we are exposed to structurally growing markets. Across our packaging businesses, we remain very confident in the structural growth drivers in the markets that we serve. While clearly demand has been weak for the better part of the last 2.5 years, we firmly believe these are cyclical rather than structural pressures. Packaging demand will always be correlated to economic output, but the long-term growth drivers around sustainability, e-commerce, convenience, et cetera have not gone away; and we are investing behind them. Where we do choose to play, we have great market leadership positions. In flexibles, we are the global #1 in the -- #1 player in the kraft paper and bags value chain. In corrugated, we have leading positions in niche containerboard applications and very strong positions as an integrated player in the regional corrugated markets that we serve. In Uncoated Fine Paper, we enjoy market leadership in the 2 main regions we serve, which are Central Europe and Southern Africa. We pride ourselves in working with our customers to provide innovative and reliable solutions that are sustainable by design. Our range of products and in-depth knowledge of different packaging types and materials gives us a unique platform to be a trusted one-stop shop for our customers. I think this is no more evident than in our e-commerce offering, which spans everything from boxes through hybrid coated paper applications for in-line packaging, to paper bags and mailers. We are working hard to bring this complete offering and the innovation potential it provides to our customers. We have well-invested and integrated -- and an integrated asset base. We have consistently followed the approach of investing through cycle to ensure our assets are appropriately invested for the markets that they serve. I'll speak about it more later, but I'm very excited by the growth opportunities afforded to us by the recently completed investments. We have a great track record of delivering these big, complex CapEx projects on time and budget. We can't do this and all the other things required to deliver for our stakeholders without our fantastic and dedicated people. I would like to take this opportunity to acknowledge all those in our organization, who go the extra mile every day. We do all of this with a steadfast commitment to drive long-term value creation sustainably. If I then move on to what we delivered in 2024. You'll see the year was once again characterized by difficult trading conditions with ongoing self demand, albeit with some improvement on the prior year, and a generally weak pricing environment. In this context, we delivered a resilient performance with stable profitability, excluding some one-off effects which Mike will explain shortly. In terms of our strategic development, I'm very happy with the progress made. We started up 5 major projects. On these, the focus now shifts from project delivery to operational and commercial ramp-up to ensure we deliver the promised returns. We completed the acquisition of the Hinton pulp mill in Canada, providing us access to a very cost-effective wood basket and the opportunity for forward integration into our North American bags network through investment in a new paper machine. A further important strategic step was the agreement to acquire Schumacher's packaging's Western European assets, expanding the geographic coverage of our corrugated packaging network and providing strong integration opportunities with our established and growing containerboard production base. Finally, with ongoing strong cash generation, a strong balance sheet and continued confidence in the future of the business, the Board continues to prioritize returns to shareholders. I'll now then hand over to Mike to provide more color on both this and the financial performance for 2024. Mike?

Andrew, thank you very much. And good morning to everybody. I will just say our performance in 2024 reflected the resilience of our business model, highlighting our cost-competitive, strategically located and integrated assets alongside our ability to adapt with agility to market uncertainties. EBITDA, earnings per share and return on capital measures were all affected by the significant reduction in the forestry fair value gain and one-off loss associated with the Egyptian currency devaluation. The business continued to generate good cash and will continue to do so. The Board have recommended holding the full year dividend at EUR 0.70 per share, reflecting the Board's continued confidence in the future of the business. You can see the resilience of our performance on this slide. And I've shown this with the items in the orange dotted box equating to a flat performance year-on-year even with the soft demand in our markets. We successfully increased our sales volumes, when compared to the prior year, particularly across our Flexible Packaging businesses where we're seeing an increase in demand for our innovative paper and packaging products. Sales prices in 2024 were on average lower than 2023. Most of the price bar here is the average year-on-year movement in Flexible Packaging. And as you'll recall, when we met this time last year, 2024 started with some encouraging signs of recovery with restocking and price increases across all paper grades. As the year progressed, however, the market recovery faltered. Many of our key markets faced subdued demand, leading to an initial stabilization in those prices, followed by a gradual decrease as we approached the year-end. Overall costs were EUR 254 million lower in 2024 than 2023. We remain focused on cost control, driving efficiency improvements and taking decisive restructuring actions where necessary to mitigate the impact of pressures on our cost base. Simply put, it's at the heart of what we do day in, day out; some great work with respect to input costs by the teams, mostly driven by lower wood costs in Central Europe as well as energy and chemical costs. Looking into 2025, input costs are broadly stable and similar to the average levels seen in 2024. We did experience some fixed cost increases primarily due to the inclusion of Hinton's cost base following the acquisition that Andrew has talked about. And there were also some salary inflation costs and some insurance incomes in financial year 2023, as already previously reported. On forestry fair value. Remember it's a noncash item. We had a EUR 7 million gain in the year. That's significantly lower than the EUR 128 million gain recorded in 2023. If you take one number from the other, you see the delta on this slide being the EUR 121 million year-on-year movement in the bridge. And lastly, as reported at Q1, we incurred a EUR 32 million one-off currency loss from the devaluation of the Egyptian pound. Adding up all those results in an underlying bar -- in an underlying EBITDA of EUR 1,049 million for the year. Let me now take you through the movement in net debt. You'll recall the first 3 bars from our half year results in August. We started the year with net debt of EUR 419 million, which included the disposal proceeds received in 2023 from the group's previously owned Russian operations. These were subsequently distributed to shareholders in February 2024, resulting in a pro forma net debt of EUR 1.2 million -- EUR 1.2 billion, sorry, with leverage of 1x. Cash generated from operations, made up of the next 2 items that you see, the EBITDA contribution that I've just taken you through, together with EUR 108 million investment in working capital. And you'll remember, at the half year, that the working capital outflow was somewhat higher than the EUR 108 million that you see here, which tells you that we drove a good release of working capital in the second half, as I said we would at the time. We continue to invest through the cycle, more than EUR 900 million of capital expenditure in the year. This investment represents our continued investment into the major expansionary projects alongside investing to improve efficiency, reduce environmental impacts and increase energy self-sufficiency. Interest, tax and ordinary dividend payments complete the picture, leaving the group with a net debt at the end of the year of EUR 1.7 billion and a leverage of 1.7x. Our capital allocation framework and discipline has not changed. We maintain a strong and flexible balance sheet and continue to generate strong cash flows, which enables the group to invest in the business, alongside paying dividends to shareholders. In a minute, Andrew will take you through the progress we've made on growing the business both organically and through M&A. On dividends, the Board has held the ordinary dividend flat and in line with last year at EUR 0.70 per share despite the decline in earnings. Whilst this dividend gives a spot dividend cover that is below our through-cycle cover range of 2 to 3x, we acknowledge the importance of paying dividends to shareholders as well as reflecting the Board's continued confidence in the future of the business. On to technical guidance briefly for 2025. We are expecting capital expenditure to be in the EUR 750 million to EUR 850 million range, which in addition to the regular stay-in-business capital expenditure includes the final payments associated with our EUR 1.2 billion capital expenditure program and the ongoing investments to replace the boilers at both Richards Bay in South Africa and our Dynäs mill in Sweden. Depreciation and amortization charges, expected in the range of the EUR 450 million to EUR 475 million. Our effective tax rate, around 23%, with net finance costs expected at around EUR 90 million. And finally, just to note and be clear: All of these guidance figures exclude any effects of a Schumacher acquisition, which we expect to complete in the first half of 2025. So let me wrap up. In the face of difficult trading conditions, we've demonstrated the resilience of our business model whilst investing for the future. We have a strong and flexible balance sheet. And we are in a truly super place to deliver in the current market environment and really benefit when the cycle turns. With that, I'll hand over back to yourself, Andrew.

Thanks very much, Mike. I'll take you now through some further comments on the performance by business units and then come back to some of our key strategic initiatives undertaken through the year. Corrugated Packaging, as you see, delivered a year-on-year improvement in profitability. While average selling prices were similar to the prior year, we did see a steady improvement in containerboard prices over the course of the first half and into Q3, supporting -- supported by a stronger second half -- supporting a stronger second half performance before some price erosion into Q4. This pricing pattern followed the demand changes seen over the course of the year. The first half saw good demand-side recovery clearly supported by restocking, while in the second half, demand flatlined, giving rise to the pricing pressures seen across all grades towards the end of the year. On a year-on-year basis, European industry demand was up around 4%, which is -- clearly is a reasonable outcome in any normal year but not necessarily in the context of the 10%-plus cumulative decline seen over the preceding 2 years. Our box volumes were flat year-on-year, although it was encouraging to see some improvements over the course of the year. If we exclude Turkey, where growth is being negatively impacted by the hyperinflationary environment and the knock-on impact on manufacturing and consumption, our volumes were up roughly in line with the overall market. Coming into 2025, we are seeing improving orders for our containerboard products. We are currently implementing price increases, which should restore most of the price declines seen over Q4 2024. While I know there's naturally concern over the recycled containerboard capacity increases slated for this year and next, in the context of what remains relatively muted demand, I'll remind you that, even with some expected price recovery, industry margins remain extremely weak. I would expect that further higher-cost capacity will be forced to close in the absence of meaningful demand-side recovery. We remain well positioned in this context with very cost-competitive production and a fully integrated system where we are in fact net short of recycled containerboard. As already mentioned, we remain convinced of the structural growth drivers behind corrugated and see the demand weakness over the past 2 years as very much cyclically driven. In Flexible Packaging, I'm very pleased to report good volume gains across all our product categories. Underlying demand recovery in traditional end markets over the course of the year, coupled with strong growth in new end users, most notably in e-commerce for our paper bags business, supported this development. In the upstream business, we also saw some restocking in the first half, but this effect was over by around midyear. Volume improvements and good cost control were, however, offset by lower selling prices. While we did see some price recovery over the course of 2024 in the key paper grades, this was off a low base following price declines during 2023. Looking forward and going into 2025 and following some modest price reductions at the end of 2024, prices are currently generally in line with 2024 averages. We are seeing improving order books and are in the process of implementing price increases for our range of sack kraft paper products. Given the strong vertical integration and contract nature of much of the external paper sales, I would expect these increases to mainly impact second half profitability. The core of our sack kraft paper and bag demand remains in industrial and construction end users. As such, it is typically the most cyclically exposed of our segments on the demand side. We have seen this in the sharp decline in overall demand since the highs of mid-2022. Encouragingly, we are now seeing some improvement in demand from our global cement customers, while at the same time, we are also developing many new applications for our kraft paper offering. Furthermore, except for some new capacity in the specialty kraft markets, supply-side increases remain very limited. With our range of products, strong vertical integration and new projects coming on stream, I'm very excited by the opportunities for this business. In Uncoated Fine Paper, we delivered an improved performance, if one excludes the impact of the forestry fair value gains. We were able to compensate for lower average selling prices through volume gains and good cost control. European industry demand was strong in the first half of 2024, supported by restocking following a weak 2023. By the second half, the restocking effect was over and demand returned to its expected long-term trend of modest decline. Selling prices were, on average, below 2023 levels, with price increases in H1 offset by declines in H2 due to the softer demand and weakened cost support as pulp prices moved sharply lower. Going into 2025, selling prices are currently below 2024 average levels. We are seeing some pickup in pulp prices, which in the first instance supports our net long position in pulp of around 200,000 tonnes in this business. The strategy for the business remains unchanged. We are focused on leveraging our market leadership positions in our 2 regional markets of Central Europe and Southern Africa to continue gaining market share, as weaker players withdraw, while at the same time driving cost optimization measures at our operations. The largest current investment project in this business is a new biomass boiler at our cost-competitive pulp and containerboard mill in Richards Bay, South Africa, delivering both cost and sustainability benefits. I'd now just like to come back to our strategic positioning and highlight the progress we are making in delivering on the strategy. Next slide, I think, will be very familiar to anyone who has been following us for any length of time. It reflects the 4 value drivers that we believe are critical to deliver our key strategic objective of driving value-accretive growth sustainably. I'll now talk to some of the most important achievements over the past year and each of these value drivers. Firstly, in driving performance along the value chain, we do this through a culture of continuous improvement, strong cost control and ongoing review and optimization of our portfolio, which has always been and continues to be a key in how we operate. While we have many exciting niches and innovation, service and quality are very important components [ of our ] offering. We do recognize that much of our business competes on cost. In that context, driving cost competitiveness is key. In addition to investing in the right assets, you also need to run them as efficiently as possible. We do this through our various continuous improvement programs; a relentless focus on costs, productivity and efficiency; and proactive portfolio optimization. On the latter, we announced the closure of 3 operations over the course of the year, with volumes largely transferred to other operations in our network. While never easy for those directly involved, these are necessary steps to remain competitive; and we will not hesitate to take such measures when required. Our capital investment program also brings cost and productivity benefits. And we look forward to harvesting these as the latest series of investments ramp up to full capacity. We, of course, continue to see our sustainability initiatives as a source of real competitive advantage. Our proud track record of delivering sustainability improvements in our operations, which you can read about in details in the "soon to be released" annual sustainability report, coupled with all the work we are doing to support our customers on their sustainability journey, gives us a real edge. You can see on the slide some of our most recent WorldStar award-winning products which are supporting the drive to more sustainable packaging solutions. We invest in quality assets to drive growth. As you will know, our focus for growth in Corrugated Packaging remains Europe, where we have the opportunity to leverage our leading market positions and drive integration benefits. So what have we done this year? We completed the expansion projects at our Kuopio and Swiecie mills, bringing an extra 110,000 tonnes per year of cost-competitive capacity once fully ramped up. We completed significant expansions at 2 of our Polish box plants, reinforcing our leadership position in this attractive growth market. We agreed the acquisition of Schumacher Packaging and are nearing completion of our recycled containerboard machine at Duino in Italy. If I look at more detail, in more detail at the announced acquisition of Schumacher. As you can see from the map, it really offers a great fit with our existing asset base in Corrugated Packaging, extending our geographic coverage in converting across Northern Europe while offering strong integration opportunities with our European containerboard operations in Poland and Italy. We remain on track for completion of the transaction in the first half of the year and look forward to welcoming the Schumacher team to the Mondi family. On the investment in a new recycle machine in Duino, this remains on track for start-up in the first half of 2025. As highlighted earlier, we acknowledge that the recycled containerboard market is likely to be in oversupply in the short term. However, with good long-term structural growth dynamics in this market, an attractive cost per tonne of installed capacity for this machine and also favorable raw material supply given Italy is one of the few countries in Europe where collection of PFR exceeds consumption, together with integration benefits we see with our own converting operations, we remain confident in the attractiveness of this investment. As you can see from the chart on this page, we are currently in a net short position for recycled containerboard. And following the ramp-up of Duino and with the Schumacher converting capacity fully ramped, we will remain in a net short position. In Flexible Packaging, our strategy remains to leverage our global leadership position in kraft paper and paper bags while also developing our niche positions in the most demanding consumer flexibles markets of Europe and North America. Again, what have we done this year? We completed the acquisition of Hinton. We successfully started up the new sack kraft machine in Štetí. And we completed the investment in a new extrusion line at that same Štetí site, increasing our capacity supply -- to supply functional barrier papers in the support -- in support of the drive for more sustainable packaging solutions. Looking in more detail at the Štetí machine. The successful start-up of this new machine ahead of time and within budget towards the end of 2024 certainly represents an important milestone. The project involved major upgrades to the pulp mill to produce an extra 100,000 tonnes of pulp, together with the building of the new 210,000-tonne sack kraft machine on the site. Our operations and commercial teams are now focused on ramping up sack production on this machine to meet the demand from existing customers who have been served traditionally from elsewhere in our network. Once fully ramped up, the net effect following the optimization of our network and including the impact of the recently announced closure of the Stamboliyski mill in Bulgaria, will be around an additional 100,000 tonnes of specialty kraft papers onto the market. Our commercial teams have been working hard to develop the pipeline of opportunities for these products, which serve a number of different end users, including e-commerce and various faster-growing industrial applications. We continue to work with our customers to develop innovative, sustainable packaging solutions. I've already mentioned some of the products that won WorldStar awards for innovation recently. On this page, you'll see a few more examples of recent innovations. They demonstrate nicely the opportunities we have to leverage the knowledge and expertise across our packaging portfolio to develop unique solutions for our customers. So you see, by way of example, a protective mailer, on the left, is a great example of the collaboration across our business using -- units, using expertise in both box and bag making to develop a hybrid product for the e-commerce industry. Similarly, in developing a paper bag without free film -- you'll see the picture in the center of the slide. We utilized our expertise in barrier coating, combined with our bag know-how and customer relationships, to design a more sustainable packaging solution for various industrial applications. Finally, our past successes and future performance is down to the great people that make it all happen. We remain focused on developing an inspiring, inclusive and safe workplace that empowers our people. In this regard, it is important to celebrate achievements, and you'll see 2 examples of that on the slide, while always remaining focused on what needs to improve. We continually strive to get this balance right. I finish with the same slide I started with, reminding you of the great platform for growth that we have established. We are excited by the opportunities that this affords us and remain committed to drive value-accretive growth sustainably. With that, I thank you for your attention and hand you back to the host for the Q&As.

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

I'd just like to follow up on demand trends here. I mean there's quite a lot of speculation around what happens with Russia and Ukraine, but Andrew, you alluded to the upside if we do get construction coming back. I'd just like your views of what happens if we do get any Russia-Ukraine peace deals. And how is Mondi positioned, if the construction market comes back, to kind of leverage better volumes through Germany, better volumes through your bag network and sack and kraft? So the first one, on Russia, Ukraine demand recovery. And the second one is on your CapEx projects. It's good to see Štetí ahead of time and ramping up, but as we move forward from here, how should we think about your priorities for capital? Am I right to assume that in containerboard, just considering the oversupply in Europe, it's more beneficial to effectively buy versus build here, versus Flexible Packaging? I'd just like your thoughts there. What are your opportunities to continue to invest in that value chain? Because oversupply is just clearly not as much of a concern in flexibles versus corrugated.

Thanks very much, Cole. I don't think I should be drawn into all the hypotheticals around the geopolitical dynamic, but I think more broadly, if you're asking the question around the demand side -- and particularly related to construction, I think, was your question. What is encouraging is if you look at the evolution of our bags demand in Europe. Now a lot of it is into building materials. There is still a cement demand in Europe, but a lot of it is what I'd call a DIY market, as opposed to bulk cement, because that's largely in ready-mix form these days which doesn't use our bags. But if you look at the bags demand and how it's trended over the course of the last, call it, 18 months, we saw sharp declines, as I said in my earlier comments, from about the middle of 2022, all the way '23, into early 2024. And it was going -- it was in sharp decline over that period. I think cumulatively, if you look at the industry stats, it's probably about a 15% decline in overall demand. Since then, since about the second quarter of last year, we started to see some form of base forming and a steady but -- slow but steady recovery into the second half. And certainly that's continued into this year, which is encouraging. And I think a lot of that is driven by the traditional end users, as you would expect, of building materials, cement, chemicals and aggregates and all the others. Plus, of course, we are also seeing new demand sources for our bags, which is very exciting. Obviously the e-commerce is a particular focus for us. And we have a fantastic portfolio across all our businesses to supply the e-commerce market. And it's particularly growing in bags, but we're also seeing other applications for our bags also in the consumer markets. So all of that is clearly supporting some recovery overall. And as we said in the commentary, we are seeing improving order situation coming into this year. That is clearly in turn supporting the price increase initiatives we're out with at the moment in the kraft paper markets, so it is a encouraging sign. I do emphasize we are still well behind from a overall industry demand perspective relative to the highs of, call it, mid-2022. Clearly, if the geopolitics is favorable in that sense, that could help stimulate further demand, but irrespective that, we have seen a improvement. As you know, in the bags business, we reported 3% volume growth year-on-year, not bad in a normal world, again, obviously off a low base given the demand-side challenges over the preceding 18 months but at least encouraging to see some progression. On the CapEx front, I mean, in terms of priorities, as you say, I mean, we -- clearly in -- there are really 2 different markets, yes, on the paper side. In recycled containerboard, which I know everyone is very focused on, it's a big market. And clearly there are a lot of people exposed to that market. Clearly that is the market where there is oversupply. We're very clear on that. We are very confident with the production we're bringing in from Duino that, a, we'll place it because we need it ourselves. As I said in the -- in my comments, we are net short of recycled containerboard and will continue to be so post the acquisition of Schumacher, so for us, the security of supply that it brings to our box business and hence to our customers is very important, but the overall market, clearly in the short term, will be in oversupply. And you're right: That implies that it is not sensible to be allocating new capital to expanding capacity in that market. And certainly it feels more like a buyer's market from a -- from that perspective. Similarly, in the virgin grades, and that is very much, as you rightly point out, in the kraft paper grades which are virtually all -- well, dominated by virgin product, but also in the niche virgin containerboard products, there the supply side is far more restrained, very little new capacity coming on around the place. As you know, the main new capacity is ours with the new PM 10 that we are now ramping up at Štetí. As I emphasized, again on a net basis with the unfortunate closure of Stamboliyski, we are effectively neutral in terms of bringing on any new sack kraft capacity to the market. It's net 100,000 tonnes of the specialty grades, which again are the fast-growing grades also going into supporting all the various new applications that are being developed, so we're very excited by that. And we're very confident in placing that volume. And as the rationale which drove us to invest in the Hinton mill tells you, it's very difficult to find quality capacity in the type of sack kraft product that we make and we consume ourselves as well, so typically that is more of a build-versus-buy sort of opportunity for us, but at the same time, our pipeline is well stocked on that. And our focus in the short term is very much optimizing the ramp-up of our new PM 10, which we're delighted came in ahead of time, ahead of budget. And the team have done a great job in continuing to now ramp that up, and so we're very excited by that, but that is near-term focus. Outside of that, the CapEx program is very much focused on cost optimization. We mentioned the biomass boiler, for example, in Richards Bay which gives us both cost but also security of energy production and environmental benefits. We have other such opportunities which we are looking at, at the moment which are very much more cost-driven rather than capacity expansions. So I hope that gives some color for that.

And then Mike, maybe just as a quick follow-up from your side. Is there any guidance that you're giving on contributions from the major projects? I know you talked about EUR 100 million at mid-cycle, but we're not quite at mid-cycle prices, so I'm just wondering if there's any broad figure you're putting out there for 2025.

Yes. I think, from our side, Cole, I mean, our confidence is in the projects. Hopefully, you've heard that from Andrew and not just from Andrew but also from the delivery in 2024 that's already been achieved, which gives us that confidence into '25 and further. The mid-cycle guidance hasn't changed, to be clear. We remain very confident of delivering those mid return on -- capital returns from this growth asset program. So I think our mid-cycle. It clearly depends on pricing and being in mid-cycle. And I think you've heard and you'd expect us to say that we're certainly not at mid-cycle today in terms of the returns we're making on the core business and/or the margins that are being achieved in the industry or indeed by ourselves. So I think, at the moment, we would probably be -- the guidance for '25 would be based on wherever the price ends up. We clearly don't know that, but I would guess somewhere -- today, low end would be EUR 50 million. The mid-cycle number haven't come off, which is EUR 100 million, but clear to say we're not at mid-cycle returns. So I doubt it will be EUR 100 million unless prices sort of stick and flourish from here, which certainly isn't where we're guiding today. So somewhere between EUR 50 million and EUR 100 million is probably a sensible number for '25, Cole, if that helps you.

Our next question comes from Patrick Mann of Bank of America.

Maybe just to keep going on that and thinking about the EBITDA bridge which you showed for 2024 and extrapolating that into 2025, can you maybe talk a little bit more about the major components there? So I think you're starting 2025 up about EUR 80 million given that you have the currency devaluation in the base and assuming a more normal forestry fair value gain. And then you said on the new projects ramping up now EUR 50 million to EUR 100 million at the top end. I mean maybe just on prices and organic volumes and where we stand with costs relative to 2024 just so we can kind of think about that bridge into '25 as you see it today.

Patrick, thank you. Let me start. And I'll pass to Andrew to comment too. I mean let me start with sort of the items you touch on to give you our view. Fair value, the 5- and 10-year average for fair value is about 60 million. That's our best guess today. We're always wrong on that because it moves. As you've seen in the last 2 years, it's moved one way dramatically and low in FY '24, but we'd probably guide to around a 60 million number being the 5-, 10-year average. I think it's probably a good guide today. I wouldn't expect anything in Q1 on that, so again that will be probably second half loaded. You touched on the Egypt devaluation. Again we wouldn't expect that, so that comes back towards us. Projects, I've touched on. The other one is the cost base. Let me split that into two. I've been pretty clear in the commentary and indeed in the release that I'd see input costs pretty stable as we sit here today. We've seen some increase in energy, in the gas prices. You can see that in the indexes. I think we'd be confident in offsetting that through the hard work to drive other costs down, so I'd say, sat here today, input costs, pretty stable year-on-year. And then in terms of fixed costs, salary costs are still increasing. Again we continue to work hard on productivity and driving costs down, but salary inflation this year is probably about 3% to 5%, somewhere in between those 2 numbers. And the cost base that applies to is about EUR 1.2 billion, so call that, I don't know, somewhere between EUR 30 million and EUR 50 million of a cost headwind on salary costs. Andrew, do you want to touch on the greatest unknown?

Yes. Thanks very much. I think, firstly, in terms of the volumes, I mean, we were very encouraged, in 2024, that we did see some volume growth. I know it's masked by the selling price adjustments, et cetera, but you can see that in the bridge, particularly in the flexibles business where we saw a good growth in volumes, particularly in both the paper side and, as I already mentioned, on the converting side. And that's in the bag business and also our consumer flexibles and functional paper and films business, which was encouraging. From a -- and so we certainly see further organic growth opportunities, if one doesn't want to double count the benefits of that plus the CapEx projects because obviously the CapEx projects and the capacity that gives us is also part of the growth story for this year, but I think it's encouraging. And as I say, the demand side certainly looks a bit more encouraging than it has been. I mean it's improving, as I keep emphasizing, off a low base. On the selling price. Clearly some of these price increases we're achieving now is about restoring some of the price erosion we saw towards the back end of last year. In the containerboard grades -- I mean I know you guys can see the indices and things like that. We did see some price erosion towards the back end of last year, most pronounced in the recycled grades. Typically that is always the case. The recycled grades are the most volatile, whereas at the other end of the extreme, the white top grades and semi-chem and these sort of more niche grades are less volatile, but they all saw some sort of price erosion through the back end of last year, so a lot of these increases we're discussing now is restoring that price erosion. In the -- similarly, in sack kraft, obviously not so visible to the market as it were, but there was a bit of erosion towards the back end of last year. And again, these price increases we're discussing now will restore some of that. So that is what we are currently working on. That will get us to a reasonable margin, but I emphasize particularly in the recycled grades this will not rescue the industry more broadly. I mean we continue to be profitable in these segments because we have a very cost-competitive asset base. We're not as exposed, as you will know, to the energy price pressure that the recycled market in particular is experiencing at the moment. So this market remains under pressure. And as I say, I suspect that will give rise to further capacity rationalization in one form or the other unless there is further price increases and driven by further demand-side recovery. So I think, as Mike said, that's the difficult one because, of course, it's the big variable, but right now it is encouraging to see some upward pricing momentum. But I hesitate to say that it is -- a lot of it is restoring some of the margin lost towards the back end of last year.

And if I could have a really quick follow-up. I mean if we just think about the execution risk of these major projects. And I think it's impressive that you've delivered 5 basically at the same time without any slippage, and Štetí kind of ahead of schedule. As we move from sort of project commissioning to ramp-up, are we through the trickiest part of it? Or we -- does it get easier from here? Or is there still significant hurdles to clear? Or we -- the execution risk is gone now. How should we think about that?

No, you're right, Patrick. I always -- I think we should be rewarded more for the fantastic achievement of delivering on these complex projects, but I would say that our teams have done an amazing job. I mean you saw the picture of the team with the first reel of the machine, which was early December on that new PM 10 in Štetí. And I remind you that was a new machine coupled with a big upgrade to the pulp mill so that we squeezed out another 100,000 tonnes out of what is obviously a very cost-effective mill. It is the flagship mill globally for kraft papers. And what is something we can do that others can't is optimize our whole portfolio to make sure this sack kraft machine only produces sack kraft. So that makes it, in some ways, a bit simpler to operate, albeit I don't underestimate the complexities of making what is a very sophisticated product, but again the great thing is we have all the expertise at that mill to make this product. So they've -- it started off extremely well, but at the same time, to your point on what's left, I mean, clearly from a mechanical perspective, it's up and running and the like. It always -- the papermakers will always tell you it takes a long time to fully optimize these machines. The ramp-up period for a new machine is 3 years, when you look at it from a perspective of both the technical ramp-up but also the commercial ramp-up, as I would call it, to make sure the portfolio is as optimized from a profit perspective as possible. And that takes time to develop into the right markets and the like. So yes, the primary technical hurdles are largely behind us, but it's still now in ongoing process to fully optimize from a production perspective and also importantly a commercial perspective. And that, it takes a period of time, undoubtedly, for all those major projects that clearly the brownfields type of ones happen a bit quicker. And similarly, the converting ones happened -- the technical capacity ramp-up is easier. The commercial ramp-up takes -- is always a protracted period of time.

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

So just a question on Duino. I think I've asked it before, but maybe just to catch up on the strategy with that and where you're going to place the paper. And also if you could just chat to us a little bit about the trade barriers in Turkey. You also mentioned that with Schumacher you need a lot more testliner now, so is there a bit of a change in strategy with the way you're going to be utilizing Duino going forward?

Do you want to take that?

Yes. Thanks, Brian, yes. I mean clearly Schumacher does slightly change our whole portfolio in terms of integration and capacity utilization, so taking it one step at a time. I mean you mentioned about the Turkey trade tariffs. Yes, there are tariffs on the import of certain containerboard grades into Turkey. That is clearly making it less attractive to send paper from somewhere like Duino into Turkey. That being said, the -- Turkey is having to rely on importing paper for recycling now, so the price of paper for recycling delivered to Turkey is very high, so it is making imports potentially competitive again even with the trade tariffs, but we have certainly changed our thinking to some extent in the sense that there's less volume allocated, as we sit today, to Turkey. At the same time, as you rightly point out, with Schumacher, clearly that gives us a lot more leverage for sales into the more, call it, traditional European markets. And when I say leveraging, we -- there is obviously benefit in sending some of the volume directly into, call it, the new converting operations that we'll be owning. To the extent it logistically makes sense not to do that but to sell it somewhere else, there's a lot of what they call swap deals done in this market to optimize logistics between different suppliers and customers. So certainly, in terms of the -- call it, the purchasing power for containerboard that the acquisition of Schumacher brings, that strengthens our hand with regard to the Duino commercial ramp-up. As I said in my opening remarks, we are currently net short of recycled containerboard. We'll continue to be net short of recycled containerboard, even with the full ramp-up of Duino, if one assumes, I mean clearly we are assuming, completion of, successful completion of the Schumacher acquisition. So that puts us in a very strong position with regard to the commercial exposure around Duino in the short term.

Okay. Can I ask a question on Hinton, if possible? Just if you could just give us an idea there of how you're managing that mill. It's -- obviously it's got a bit of a checkered history as a pulp mill. Is it burning cash at the moment? Is it making cash? Are you making any changes there?

Yes, we certainly are making changes. I think my colleagues in Hinton would confirm that they are delighted to be part of a group that sees making pulp as a core business. And it sounds maybe a little bit flippant, but it is a big -- it wasn't necessarily a focus of West Fraser because they are very much a lumber and forestry company. I think we've immediate -- seen immediate opportunity to improve the operating performance of the mill. We were delighted that they made their production targets. In fact, they exceeded their production targets in our first -- not full year of ownership but the first calendar year of ownership. And clearly we've upped the targets again for the second year. And this is really about process improvements, some minor CapEx allocation, but it's more around process. We also are obviously working on a CapEx program to further improve both the energy and pulp complex and similarly working on a feasibility study for a paper machine as well. The first 2 elements will obviously further improve the pulp mill and both from a cost perspective and a output perspective and gives us then the optionality on the paper machine which is very exciting and an option for down the road. So we're working proactively both on improving the operating performance of the mill itself as of today but obviously also the feasibility study for the further CapEx-led improvements as well. So I'll remind you why did we -- why we were attracted to it. I mean it has got an extremely competitive wood basket. Yes, we think it was under-operated. And I think everything we've learnt is -- testifies to that, and we've improved markedly already. The team has done a great job there in that. And we have certainly seen more improvement on the pulp mill itself and obviously an exciting expansion potential as well.

Our next question comes from Lars Kjellberg of Stifel.

Most of my questions have been asked. Just a couple of follow-ups. When it comes to the sort of contribution, EUR 50 million to EUR 100 million in the current year, just to confirm that, that number then includes any start-up related costs that you're currently having and will have [ for Duino ], I suppose. And then Schumacher: When you commented on the acquisition, you, of course, spoke to the last 12 months profitability. Given the volatility we have with paper prices and seems-to-be relatively tough corrugated markets and especially maybe in Germany, can you comment at all if you think this is going to be sort of fairly immediately accretive to your earnings and EBITDA as and when you acquire -- as in when you absorb the mill in question -- or the system in question? Those are my first questions.

Okay, listen. I mean I'll quickly answer that -- I mean that I don't stand -- I do know the answer. The CapEx, I mean it's we try and be as helpful as possible. It's the incremental contribution from CapEx all in, if that makes sense, yes. So it's -- yes...

There's no extra losses or anything there, Lars. It's all in.

And that's -- yes, there's pluses and minuses in that number because obviously there are some costs, but it's [indiscernible] we try and bake it all in.

Sure, overall. It's in that number.

Yes. And then on Schumacher. We certainly expect it to be EBITDA contribution -- contributing from day 1. Obviously I don't really want to go into the details of what is our competitor's profitability as of today, but we certainly expect it to be positively EBITDA contributing. And we remain very excited by everything we've seen, so far, in terms of the synergy opportunity and the upside opportunity also to continue -- to grow as a combined business. We really think that the offering we have across the Northern European region, in combination with Schumacher, will -- takes us to a different level in terms of the customer base we can access and in term -- the product and service offering we can provide with a asset base which -- hopefully, that slide I showed you really just tells it in a single slide. It's highly complementary from a geographic perspective, as I said, both in terms of how it expands our converting coverage and also how we can utilize our own containerboard production into the wider base on a very much a optimized basis. So certainly very excited. And we can't wait to get going as soon as we cleared all the regulatory hurdles to complete on the transaction.

And just a quick one...

Thanks, Lars. Now I'm respectful of time. I know we're approaching the hour, but I'm happy to take another 2 or 3 questions.

Our next question comes from Sean Ungerer of Chronux.

Can you guys hear me?

We can hear you.

Awesome. So just to follow up on that: Does the guidance for earnings accretion from Schumacher in the first year still remain the same, or is that unclear now?

Sean, we're not sort of updating any guidance on Schumacher. If you remember, at the time of the announcement, we agreed with Schumacher as a competitor that they -- to disclose that they made EUR 66 million in FY '23. We're not in a position to disclose their FY '24 because they are a competition. And as you know with these things, we have clean teams in place, but we also said we would make EUR 22 million of synergies at full run rate at the end of year 3. There's no change to any of that guidance at all, Sean.

And then just turning to dividends for this year. It was obviously encouraging. It was flat year-on-year. Was this a pretty straightforward decision to make this year? And then, I guess, sort of looking into 2025, outside of the Schumacher acquisition being concluded, should we expect [ Mondi to ] sort of be free cash flow positive?

Yes. I think, in terms of the dividends, like any capital allocation, we discuss it widely. I think, the importance of the dividend in the capital stack I've covered in the presentation, that's not changed. I think, certainly since I've been here for "4 and a bit" years, we've been really clear that dividends is an important part of that. And as I said, on a spot basis and -- we're comfortable being outside the 2 to 3x range. Why? Because we've got confidence in the future. Clearly, every year, we reassess the dividend. I mean that's the Board's absolute duty. And it did so again this year, so -- but again, we've got that confidence in the future. We've got the -- a lot of the build phase of the delivery of the growth projects behind us. Andrew has talked about the operational phase and the commercial phase that we're into in the different projects. So we've got good confidence on that. So that was the dividend discussion. Free cash flow, yes. I mean very simply it's the function of the EBITDA. Tax and interest is always about [ 300 ]. Dividends is about the same, depending on where we decide on the dividend at the end of the year. And I've given you the CapEx guidance. I wouldn't expect much on working capital. That will be a function again of where the market goes. I'm always happy to invest in inventories, and if working capital gets high because of higher prices, that's good as well. So we've always said in a growth market we'll invest in working capital. Where markets decline, we always get that inflow. And you saw that heavily in FY '23, so I think overall you can plug those numbers in. I hope that helps, Sean.

That's useful, Mike. [ I have sort of one more ] question, if you don't mind.

What was the question?

Sure.

And just to confirm on the sack price increases. That's rather demand-driven, whereas you did confirm on -- I think, on the testliner side, there's a lot more cost pressure. Is that correct?

Well, I think we're suggesting we've got improving order books across our packaging businesses, but as I -- we all know, that there's a lot of capacity expansion in the recycled containerboard side. But at the same time, that is the grade that's suffering most from the -- well, has the most cost support, should we say, because it's the one where, frankly, if you look at any cost curve, you see a lot of capacity heavily underwater right now. By contrast, in other grades, there's a lot -- there isn't really significant or much, if any, new capacity coming on. And at the same time, the demand side is improving as well, so it's a tighter supply-demand dynamic which is also driving the price increases.

Our next question comes from James Twyman of Prescient Securities.

My first question is in terms of the Štetí ramp-up, this extra capacity, this extra production, given the markets are fairly flat. I'm just wondering where you're sending that extra production. Is it sort of being exported outside Europe? Or is it -- are you able to find a home for all of that on -- in the retail sector? Secondly, on the Hinton mill, that 400 million of CapEx, could you give us some idea about which years that's going to be spent in? And then just finally, in terms of the kraft paper business, roughly how much would you say is in sort of retail, and it looks like about 35% for retail; and construction; and industrial? Just to give us an idea. And I'm assuming that the Hinton business is in kraft, the kraft division, but I don't know.

[indiscernible].

Yes. So in terms of the PM 10 capacity. So as I've already mentioned, net PM 10 effect would have been 100,000 tonnes of sack kraft, 100,000 tonnes of specialty, in round terms. Clearly, with the closure of Stamboliyski, the net impact on the overall market is now simply 100,000 tonnes of additional specialties. As to where we are selling that: We're very encouraged by the pipeline of opportunities we've been working on for some time now, for obvious reasons. We knew this capacity was coming on. And so we've been actively developing that pipeline of opportunities. And it really is a combination of obviously some more, call it, traditional users but also a lot of new applications. I think in previous presentations we might have shown you everything, from these industrial applications, through to pure consumer applications. A lot of the substitution of plastic by paper is in -- the paper being used are these kraft paper applications. We also have a lot of technical knowledge in adding functional barriers to that paper with our functional -- FPF team. And they are working hard also, in conjunction with our papermakers, on developing a lot of these new solutions, so yes, we are very confident we can place this volume. And we are very confident we can place it in markets that offer us attractive margins. This isn't about sending volume to a place just to fill up a machine. It's -- it will be good, attractive volume. In terms of Hinton, on the timing. I mean I emphasize we are in a feasibility study at the moment. So we haven't -- we are still working up all the permutations, the total CapEx requirements, the timing of it, yes, the sequencing of it, et cetera. So simply put, I can't tell you right now. That is that guidance that Mike gives for this year clearly doesn't include -- I mean we're spending a bit of money on feasibility, but that's in the operating numbers right now. Certainly it's not in the 2025 guidance because that -- it will be beyond '25, to the extent we decide exactly what we're going to do there and the timing of it, so I'm afraid that is a watch and wait. We'll tell you as and when we know and have finalized our thinking around that. And we can articulate to you also the expected returns from the investment there. And I think the final question was, generally speaking, more generally, our kraft paper kind of end users. In round terms, we make 1.2 million tonnes of kraft paper. Around 800,000 of that is sack kraft that is mostly going into the traditional end users of cement, building materials, chemicals, aggregates, agricultural, feed and seed and the like, coupled with some commercial exposures or -- commercial exposures -- some consumer exposures. And the 400,000 tonnes of specialties, this has a myriad of different end users. And probably about half of it is into industrial, and half of it into consumer applications, if one took it in the round. So hopefully, that gives some clarity on that.

James, thank you. Operator, I think we'll move to the last question, if we could.

Our final question comes from Ephrem Ravi of Citi.

Can you talk about the impact of potential tariffs in North America, especially from your Mexican paper bag business into the U.S.; and if tariffs would have any impact on your Hinton investment and the thinking process there?

Yes, thanks very much. It's clearly a bit of a moving target, this one. I mean, in round terms, to keep it simple, we sell -- probably about 2% to 3% of our turnover at any one time is exports from somewhere else in the world, into the U.S. And that's -- as you rightly say, that's there is some from Mexico. There's a little bit right now from Canada, but the bulk of that is actually from Europe, into the U.S. Clearly it's a moving target as to what may or may not transpire. And of course, you have to think about it from both the direct effect on our volumes but also the effect on competitive volumes in and out of the country. So you're right: We do sell some bags from Mexico into the U.S., but the biggest single competitor in the U.S. is actually imports from Canada from a competitor of ours, so I guess it's kind of swings and roundabouts, what might happen. I suspect what would happen is the price of bags in the U.S. will go up as a consequence of something like that, but in short, it's not -- our direct exposures are relatively small -- obviously impossible to sort of predict what might be happening in terms of the more macroeconomic effects on -- of tariffs. So I hope that helps on that. Just in terms of directly on Hinton. Yes, clearly -- there are 2 aspects to Hinton. One is upgrading the pulp mill. And that product actually sells on a global basis, a lot of it into Asia, most of it into Asia. In terms of our vision of putting a paper mill -- sorry, a paper machine at -- on -- at that site, clearly that is predicated partly on exports into our Europe -- U.S. bag operations. Clearly, whatever tariffs there may or may not be would have to be factored into our thinking in terms of the overall return expectations and attractiveness of the different options, but as I say, that is a work in progress, anyway. I mean it was -- we were never going to be in a position to make a final decision on that paper machine in the short term, but we are working on it. And we clearly are going to -- we'll throw in all these different variables in terms of our understanding and the feasibility then of the machine, but again I emphasize this will be structurally, we believe, a highly cost-competitive machine. But clearly, tariffs and all other variables need to be considered as we think about it from a feasibility perspective. Very good. Well, thank you very much. I know we've taken more than our fair share of time but appreciate all the interest and the questions, so thank you very much for your time today. I'll just leave you with a reminder. I think we've done a lot of very important -- taken very important steps this last year to really build that platform for future growth. We certainly believe we are in exciting growth markets. We know there have been some cyclical headwinds. And clearly we need to be agile in the face of a continually volatile world, but we are extremely well positioned within that and look forward to the ongoing conversations. So thank you very much for your interest.