Mondi plc ($MNDI)

Hello, everyone, and welcome to this Mondi Q1 event. [Operator Instructions] I'm now going to hand you over to Andrew King, CEO. Andrew, please unmute and go ahead.

Good morning, everyone, and thank you for joining our call today. I'm Andrew King, Group CEO. And with me is Mike Powell, our CFO. I'll apologize in advance for the slightly croaky voice as it seems like both Mike and I have managed to pick up a change of season sniffles, but I'm sure we can be heard. I'm sure you've all seen the announcement today. So I'm just going to pick up a few points before we go to questions. Market conditions in the first quarter of 2026 did remain challenging with underlying EBITDA for the quarter of EUR 212 million, broadly in line with the fourth quarter of 2025. On a sequential basis, sales volumes increased across our range of paper grades. There was also no planned maintenance shuts in the quarter. These volume increases were offset by lower average selling prices and towards the end of the quarter, higher energy-related input costs. With our converting operations, Corrugated Solutions and Paper Bags experienced some margin pressure, while Consumer Flexibles delivered a broadly stable performance, supported by resilient end markets. Geopolitical tensions in the Middle East increased volatility in an already complex operating environment. Across the business, we have seen higher energy, raw material and logistics costs, and we have responded with pricing actions. While there is an inherent time lag, we do expect these measures to take full effect by the third quarter. Despite the uncertain outlook, we continue to focus on what we can control and deliver great products and services to our customers. With that, Mike and I are now happy to take your questions.

[Operator Instructions] Our first question comes from James from Prescient Securities.

Could I just ask 2 questions? Firstly, there were energy credits that were quite substantial last year. Could you talk about what the difference is in that on a quarter-on-quarter basis and a year-on-year basis in the quarter? And secondly, you've increased your cost-cutting progress from what I can see. Before, you were saying the cumulative impact was offsetting cost increases. So I'm wondering whether there's now more than that or whether it's now simply offsetting the higher cost increases that we've now seen because of what's been going on in the world?

Yes. Let me start, James, and then Andrew can add in. Just energy credits, I was pretty clear at the year-end. That would be about a EUR 60 million adverse, if you like, year-on-year. It's probably -- you could probably average that over the quarters very simply. So -- and then on costs, just to be clear, when we were saying we were taking a number of actions, which we continue to take and you see we've closed -- the announced closure of another 3 converting sites since we last spoke, that's very much to control, if you like, the fixed cost, the overheads in the business. That's not really direct materials or input materials, which is clearly the cost increases you alluded to. So we do continue to work very hard on our fixed costs. We take advantage of scale in plants and production efficiencies and that allows us to move less sustainable converting plants into the more efficient ones. And that's something that as Mondi we've done over the years. You've seen us accelerate that a little bit in this economic decline, but that really allows us to hold our fixed cost base flat, which is the guidance I gave at the full year and I'll hold by that today. Clearly, on input cost, that's a different story.

I think that's really important, James. I think obviously, at the beginning of the year, the outlook for the cost base for the year was somewhat different to what it is today, simply driven by the effects of the war in the Gulf. I think we can, I'm sure go on to talk about it a bit. But of course, as Mike said, the input cost dynamic has changed materially from the beginning of the year because we had started the year assuming a relatively benign input cost environment. But of course, it has changed quite materially since then with the sharp rise in energy costs and the feed through to all the other aspects. And that is why, obviously, our big focus is obviously in part mitigating that in part ensuring security of supply, which is critical in the current environment and of course, driving the necessary price increases.

Our next questions come from Detlef Winckelmann from JPMorgan.

Maybe first one, just on demand. You kind of called out that demand was relatively stable, maybe potentially slightly higher, but that is helped by a little the capacity expansions. I'm just curious to what extent you guys are seeing this as a restock or prebuy. We are seeing, obviously, testliner prices up, call it, EUR 100 cumulatively, normally see some prebuying activity. Just curious what you see as underlying and what is not?

No. I think you are painting our volumes with industry demand there. So our volumes were up, obviously driven in part by the investments we made over the course of the last few years, which we are in the process of ramping up. Undoubtedly, we gained some share in certain markets as a consequence of the increased capacity and obviously, the offering we have into the wider markets that we serve. So first things first, our volumes were up because of those effects. In terms of the market demand as we see it, I mean, if you look the year started quite softly. Undoubtedly January into February was pretty soft year-on-year. If you look at the industry stats, and that's across most of the markets. But it has improved sequentially as the months have gone on. If I look at our order books now, typically in the Paper business, in the paper grades, our order books are strong. I think there's a confluence of factors in that. As you say, there probably is a bit of prebuying because undoubtedly price increases are coming through. But I think there's also been some supply side effects. For example, I think there's been less exports from the U.S. into Europe as a consequence of the U.S. containerboard market in particular, with capacity rationalization taking place there. And of course, exports were marginal for them. So that has probably tightened things up. And simply put, the stock levels in containerboard have come off quite materially. I think that's also a function of the fact that -- as we've been saying for some time now, people simply can't make money at these price levels. And there's been, I think, quite a lot of industry downtime across the piece, which has reduced stock levels and frankly, is supporting these price increases we're seeing coming through at the moment in addition to the impetus that's been brought through by the significant cost inflation we've seen since the start of the war in the Gulf. So it's really a confluence of those things which have tightened up. The markets tightened out. Certainly, our order books are strong at the moment. That's the reason we're going for price increases at the moment.

Cool. And then maybe if I can do one more. Just regarding -- I mean, normally, testliner prices go up, and I think you even called out there's normally a lag that we should have to wait for. And normally, I think about box lags of, call it, 3 to 6 months. Is there any chance of those lags moving a bit sooner given how fast and how aggressive the cost inflation has been? I think we saw something very similar during Russia-Ukraine period, maybe cost inflation not as severe as that, but just curious on if there's any room to shorten those lags?

Yes. I think that is a big focus across the piece. I mean it varies again, you mentioned particularly the boxes, but obviously, across the business, we're seeing different levels of cost inflation. Probably, frankly, the most severe is in, as you could imagine, the resin-based applications where we're seeing significant cost inflation. There undoubtedly, call it, the normal lag is going to be shortened. It has to be because of the significance of these increases. And I think our customers respect that and acknowledging of that. So you are seeing a shorter time period, I think, from the cost input going up through to the selling prices going up. In terms of boxes specifically, there's still quite a lot of index business, which does take time, but it does happen invariably. I often say a big paper -- price increase is easier to get through the boxes than a small one. And clearly, we're seeing some pretty significant paper price increases going through at the moment in addition to the other cost items because, of course, in converting businesses, of course, paper is the single biggest input, but there is also energy, transport logistics and other cost items that are also being affected at the moment. So yes, I think net-net, it is realistic to assume that the lag effect would be probably a bit shorter in this environment where we are seeing pretty sharp cost inflation.

Our next one comes from Lewis of Goodbody.

I just wanted to break up what you're seeing on raw material costs, specifically fiber. I understand much of your energy sources there is biofuels, but just to get a sense of the group's exposure to natural gas or electricity. And then just also interested to see what you're seeing on the price and availability of plastics. I know that you use that in some of your consumer flexibles products and just what might be happening there?

Sure. Thanks, Lewis. The on energy, again, we have a very good natural hedge in the use of biomass across large parts of our energy needs. So our gas consumption, I guess, relative to the industry is super low, which puts us in a good place. In terms of the specifics, I guess, in Europe, we probably spend about EUR 100 million on gas in Europe. So if energy is in March, it doubled, but it's a bit less than that today. That sort of gives you the scale of the gas. The rest, as I say, is biomass. The other category you mentioned, I think, is sort of plastic resins. I mean that's moved materially. Again, a lot of that is index based. But I mean resins are 40%, 50%, 60%. But again, these price through mechanisms and that whole industry, frankly, is having to pass those on. So whilst those are large increases, there are mechanisms and those are already being passed through relatively well. And I think you touched on availability as well, which I think is a good point. At the moment, we're seeing clearly no availability issues, frankly, across all the categories. We're keeping an eye on that because obviously, we're in a pretty volatile world across about everything right now. But at the moment, no availability issues. We have really good relationships, both on the customer side and on the supplier side. And at times like this, those become super important because that just gives you extra flexibility in a world where you need to be really agile. So super pleased with how both our sales side and our procurement side are responding to that, but no availability issues or something.

Our next question comes from Brian of RMB and Stanley.

Just actually quite an easy one. Just if you could just update us on where we stand with maintenance. There was no maintenance in the first quarter. What are you expecting for the second quarter and maybe into the second half of the year?

I was worried, but easy ones, Brian. [indiscernible]. So no maintenance shut. Again, there's no maintenance first quarter. We guided pretty similar year-on-year. That means it's about EUR 100 million as we sit here today. I'd expect about EUR 20 million in quarter 2 and therefore, EUR 80 million in the second half. I hope that gives you what you need.

Our next question comes from Cole of Jefferies.

Could I just start with how we see the various moving parts developing into the second quarter, just so we can get the quarters in a reasonable position. Could you give some color? You've given some maintenance commentary, but color on the forest fair value gains considering that's going to be nil versus kind of EUR 30 million or EUR 40 million normal expectations on your annual run rate. So just wanting to know forest fair value and then any other items that we should be thinking about into the second quarter, particularly on the cost inflation. It's been clear that it's costs come first, but any kind of quantum would be helpful.

Yes. So let me -- I mean, Andrew can talk about price versus cost because I think cost is such a significant input in a material cost increases, it's the net that obviously matters. And we can touch about that price development versus cost in Q2, but more importantly, through the year because as you know, this isn't a quarterly game. On your specific on fair value, the price of wood chips in South Africa has declined. That means we need to value the asset on a spot basis. For the full year, I'd expect 0. If I just sort of step back up a bit, we normally -- the average I've always said for fair value is EUR 4 million to EUR 6 million a year. That's normally growth with little price. So if you think of growth [indiscernible] is the sort of norm and price at [indiscernible] recognizing price goes up and down. You saw the EUR 10 million roughly fair value in the first quarter, I think it was EUR 8 million to be precise. That's the growth. You'll see that in quarter 2, quarter 3 and quarter 4. So you'll get roughly EUR 10 million a quarter of the growth. The issues is obviously the price. That will hit us all immediately in Q2. So I'd expect that to be a sort of the price element to be about minus EUR 40 million in Q2. And then, of course, it will depend what happens in the future. But if you put in for Q3 and Q4, what that means is you've got for Q2, EUR 10 million growth, minus EUR 40 million on price, giving you minus EUR 30 million for fair value. And then in Q3 and Q4, it comes back at us for growth. That adds up to for the year. I would just mention, of course, the world is pretty volatile. That's our best guidance today is for the full year. But obviously, with that negative in Q2 being the price effect [indiscernible]. Does that help on fair value, Cole, just before we get back on to the [indiscernible] business?

Yes, that's very clear.

As Mike said, in terms of bridging into Q2 and beyond, it's very dangerous, I think, just to look at one side of the equation. Undoubtedly, costs are going up. And to a degree, we didn't foresee at the beginning of the year. But at the same time, we are now clearly seeing pricing momentum. So one has to recognize that call it, January, February was pricing at its lowest point. I mean we saw generally pricing coming off through the back end of last year. As you will recall, we spoke about at the full year results announcement. And that meant that we came into the year with, call it, low pricing levels. We pre-war, should we say, there were already some price increase initiatives that were being successfully implemented. We were starting to see some movements in the recycled containerboard grade. We're starting to some movement in the fine paper markets with some price recovery there, obviously, also supported by some modest increases in the pulp prices. And we were starting to look at price increases also in the kraft paper and virgin containerboard grades. Clearly, what then happened was we got the one-off of the sudden shock of energy price inflation and all the knock-on effects. So clearly, March was particularly badly affected by that because obviously, there was not yet a price response and yet we've seen almost immediately a big spike in gas, which, of course, hits us immediately to the extent we are -- we do buy some on the open market, as Michael already referred to. And there was immediately surcharges on transport, et cetera, from certain regions of the world. So that was quite an immediate cost effect. Obviously, we've been continuing to work on the pricing side, which has been added impetus now for obvious reasons given the significant cost inflation. So that is why, a, we're very confident of getting price increases because there is cost support. But in addition to that, as I've already alluded to, our order books are strong. I think it has been supported by improvements in the relative trade flows, as I say, on the virgin containerboard grades, kraft paper grades, even though industrial bags, Europe is relatively flattish to slightly softer into the start of the year, now recovering. And we're also seeing lots of good demand from what I refer to as nontraditional sources for kraft paper and the likes of the e-commerce markets, demand is coming through strongly. So these are tightening up those markets. And hence, the reason we are pushing price increases across all our main paper grades, which undoubtedly then feed through into the converted products. So undoubtedly, we're seeing, should I say, the worst of it right now. But as we see these price increases, we're confident we can restore and improve certainly the margins from where we are today. So there is undoubtedly something of a lag effect, and we see it. I mean that's what we're experiencing right now. That's what we experienced in March into April as we saw the worst of this cost inflation and again -- but we are now starting to see the prices move, which will take effect through Q2 and into Q3. So if I try and summarize that in terms of quarter-on-quarter effect, I do expect to see on an underlying basis, ignoring the noise around fair value and things like that, an improved margin environment in Q2 and then obviously, better still, all else being equal. I mean who knows what happens next on the cost side if peace breaks out tomorrow and you have some settling down in the costs, but we are certainly not predicting that. I think the forward [indiscernible] is going to be higher for longer even if we have some resolution on the Gulf for long. So that is certainly what we are planning for and we are working towards in terms of [indiscernible] actions.

Andrew, can I follow up on that last point? Because I mean, how do you see the cost curve for the industry over the next, let's say, 2 years? Because even if we do see resolution tomorrow, which we all want because it will come back for demand and you'll see the benefit, hopefully, for construction, et cetera. But gas prices, chemical prices, logistics costs, are you of the view that those costs probably don't come down for a while and that steepens the cost curve over the next 2 years? And how is Mondi relatively positioned as that? I mean, is this ultimately good for you that this probably steepens the cost curve even if the war was to end tomorrow?

I mean in terms of the relative positioning, as you say, I mean, given that we make so much of our own energy and it's biomass based and yes, biomass prices have historically also had some impact -- to some degree being impacted by energy, it's not nearly on a one-to-one basis. So undoubtedly, we have a call it, natural hedge when the energy prices go up and particularly gas relative to -- especially our competitors, especially those who are obviously much more predominantly sort of recycled based. Because almost by definition, the recycled containerboard producers are not backward integrated into their own energy production, they would be buying a fossil fuel typically to make that energy. So you do see, yes -- the whole cost curve goes up and undoubtedly to be clear, our costs also go up, but not nearly to the same extent as you rightly say, more exposed producers that are buying fossil fuel. So that is what's happened already. I mean the cost curve for containerboard has gone up and has steepened materially. Those players who were underwater, should we say, at the beginning of the year and a certain cost dynamic are under even more pressure today. Even with the type of cost increases -- sorry, price increases we see going through the market at the moment, it is not enough, should I say, rescue the top end of the cost curve. And it's very clear that there's a lot of producers are simply not producing in the current environment. As I said to an earlier comment, the stock levels for recycled containerboard are actually at -- quite significantly below average levels for this time of year. And I think that is a clear function of the fact that simply put, there is no margin for a lot of the high-cost producers to be producing into this market. And these price increases are not necessarily supporting a material change to the margin dynamic for those producers. Of course, if you've got less cost pressures, you don't see quite the same margin squeeze. Similarly, I think we also have to recognize in our kraft paper business, obviously there is still cost inflation around undoubtedly. It's again less exposed. But I would say there, it's also a strong demand side dynamic that's taking place, as I say, even though, call it, the traditional industrial uses in Europe, it's a bit flattish. Outside of Europe, demand is good into our export markets, and that's everywhere from Latin America to Southeast Asia. Obviously, the Middle East by definition right now is volatile, but it's still holding up. But as I say, we're also getting good demand from nontraditional sources, e-commerce in particular, which is really tightening up that market and hence, the reason we're also pushing some meaningful price increases in our flexible paper output.

Our next one comes from Kevin of Deutsche.

Just on the pricing dynamics point, just can you remind us how much of the business is indexed across the various segments? Or does that become less of an issue at the minute, just given the sort of scale of price increases and the urgency to get these through? Just thinking about how quickly these price increases will impact as we sort of kick through second and third quarter? So any clarity you can give on that would be great.

Yes. If I look from -- as I say the business that's experiencing the greatest cost pressures at the moment are our resin-based businesses. There, for all intents and purposes, just about all the business on what we call our consumer flexibles is indexed. And as I said in my earlier remarks, the challenge now for our teams is to move the pricing in advance of index linked, call it, calculations simply because of the magnitude of this cost inflation, and as we have been very successful in that because our customers understand the dynamic with these really significant cost increases. So it's a bit of a lag, but it will be -- I firmly believe very well contained. In the paper businesses, our bags, there is a lot of index linked. I mean it's significant index-linked business there. The question is when is the repricing event. Some of it is on a quarterly or half yearly basis. So there is that delayed effect. That's why we say by the third quarter, both the paper price increases will be through, but also the bag prices should have adjusted by then. And of course, we are talking to our customers right now about bag price increases because of the significant cost inflation, not just from paper, but all the other [indiscernible] as well. And then the boxes, yes, the traditional rule of thumb is kind of 3 to 6 months for the boxes to react to price increases. As I say, with the magnitude of these price increases going through on the paper side, I think that will be a shorter time period before you get full pass-through depends on the region of the customer base, et cetera. But obviously, I think it's in every interest to move those prices faster than the traditional timeframe. [indiscernible].

Our next question comes from Gabriel Goldman Sachs.

So the first one would be on the kraftliner side. So kraftliner is better positioned, as you were mentioning in this scenario, but the gap between the prices of kraftliner and testliner is elevated what you consider historicals, right? So although it's better positioned, would you expect that grade to also capture the full benefit of the higher costs and the potentially higher prices for testliner that we should see ahead? So that's the first question. And on -- my second question would be on the -- if you could give us an update on the ramp-up of the new capacity and your expectations for 2026 specifically, on how you would expect that to reach the market? And if you see like given the whole demand environment, if you could see other capacity being taken offline to -- and actually being replaced by the new capacity?

Yes. On the question of virgin versus recycled, yes, the virgin has been trading at a premium to sort of at the higher end of its traditional range versus the recycled. I think that's perfectly understandable. All the supply side additions are coming in the recycled side, all the easy wins in terms of substituting virgin by recycled have taken place. The supply side on the virgin is much more constrained. And as I mentioned, it's probably even more constrained because of business coming in from the U.S. And so that's tightened. The virgin market is -- virgin demand looks good. The order books look strong. And of course, if you get these price increases through on the recycled side, that then supports the ability to move prices on the virgin side because on the margin where that substitution risk exists, it's obviously mitigated by price increases on the recycled side. So in short, of course, these price increases in virgin are predicated primarily on the fact that there's a strong order book and the supply/demand is tight, supported in turn by the fact that you're starting to see it on the recycled side and so the risk of substitution gets reduced. In terms of capacity ramp-up, et cetera, so as I mentioned, we saw volumes grow year-on-year and also on a sequential basis. That's obviously partly due to the ramp-up of the capacity that we are bringing into the market, primarily on the paper side, it is some on the recycled side from our mill. And obviously, we've also been ramping up the optimized capacity on the virgin side, both the semi-chemical fluting and the [indiscernible], which we expanded capacity there last year. So all of that is coming into the market as we produce it. In terms of does it require closures, I mean, I think that talks to the overall supply-demand dynamic in the market. Undoubtedly, as I think we've all been saying for some time now on the recycled containerboard side, we undoubtedly need capacity closures in the market to properly balance this market. There's been some closures, but I think we're all scratching our head as to why it's taking so long because undoubtedly, there's every incentive for closures. As I said in my earlier comments, everything tells us that the capacity that's out there is running well below capacity. And that is extremely expensive because, of course, you've got a fixed cost base with no revenue when you're doing that. And I can't understand how that can sustain for a lot longer, but I guess people are saying that because it's been a while now, but the economics will come through in due course. And we will watch that to understand how it happens. We've time for one more because we're going to have to go to our AGM and talk to the shareholders.

We have one final question from Pallav of Barclays.

Two of them. So firstly, how does the current market environment impact your Duino optimization, if at all? And should we expect it to be loss-making in 2026 still because I think that is what you had highlighted at the full year results? And then secondly, I appreciate all the detailed commentary earlier. But simplistically, given higher input costs due to the conflict and recent price increases around EUR 100 on testliner, is it enough to offset the cost increase? Or is it over -- is it just enough to offset that increase? Or is it over and above and it could lead to margin expansion in the second half?

Thanks, Pallav. I guess the 2 questions are very much interlinked because Duino, of course, is a pure recycled containerboard producer. I mean, clearly, Duino is still in ramp-up. And obviously, every day that you produce and sell more products, your unit costs go down, and that's a process underway. And of course, we work very hard on improving the mix effect and markets we sell into, et cetera, for Duino. So that is still a work in progress. Of course, Duino has been in the eye of the storm when it comes to the gas price increase -- the gas cost increases that we've only just recently seen because, of course, Italian gas costs, which Duino is exposed to have gone up. And that is a headwind that they now face, which we certainly didn't see at the beginning of this year. At the same time, as you rightly said, Pallav, there are meaningful price increases going through at the moment. Obviously, it's not fully implemented as yet, and we'll have to see exactly how much of the price increases go through. But there's, I think every reason to believe a significant price increase will go through. Obviously, that will then in turn determine the overall profitability of Duino into the second half. So right now it is loss-making, obviously, compounded by the recent gas inflation. And undoubtedly, we need price increases to mitigate that. That is that work in progress, which as I say, I'm very confident we'll see coming through into the second half of the year. Very good. But on that note, I really appreciate your interest as always. As we've said, clearly, we are seeing an uncertain outlook. At the same time, we are driving hard on all the controllables. We are seeing very importantly, good pricing momentum and equally importantly, it is on the back of solid foundations with really strong order situation. And of course, we are only too aware of the cost inflation that is impacting the market more generally. So with that, we are confident that while Q1 was difficult, we are starting to see some improvement into Q2 on an underlying basis and certainly into Q3 and beyond as we see the full effects of these price increases, which we're very confident in, we will see an improvement in the underlying operating profitability. So with that, really appreciate your interest, and thank you very much.