Mondi plc (MNDI) Earnings Call Transcript

Good morning or good afternoon all, and welcome to the Mondi Q1 Trading Update. My name is Adam, and I'll be your operator for today. [Operator Instructions] I'll now hand the floor over to Andrew King to begin. So Andrew, please go ahead when you are ready.

Good morning, and welcome to Mondi's sales quarter results. I'm Andrew King, Group CEO; and I'm joined by Mike Powell, our CFO. I'm sure you all have read our statements. I'm only going to make a few comments before we can move on to questions. I'm pleased to report that the market conditions did improve through the first quarter with stronger order books leading to higher sales volumes. While costs were broadly stable when compared to the fourth quarter of last year, as we did indicate in February, selling prices were generally lower than the averages achieved in the second half of 2023. This resulted in underlying EBITDA in the first quarter in line with our expectations at EUR 214 million after a one-off effect of EUR 32 million from the devaluation of the Egyptian pound. With the stronger order books and higher sales volumes, we implemented paper price increases across all paper grades during the quarter, which will start to come through during the second quarter of the year. We remain well positioned to benefit from these improving market conditions with our strong operational leverage, broad product offering and organic growth projects, which do remain on track and on budget. With that, Mike and I are very happy to take questions.

[Operator Instructions] Our first question comes from Lars Kjellberg from Stifel.

Just a couple of questions from me. You're talking about improving volumes. Can you give any sort of qualification how it compares to the prior quarter and Q1 '23, maybe? Also a couple of just housekeeping points. You comment on lower fair value again. A quantification would be helpful for those forestry gains and also if you had any maintenance activity. Final question for me. You, of course, decided not to pursue DS Smith given what IP did. It's difficult to get a similar deal in place, but are you actively pursuing any other M&A opportunities to integrate your containerboard business? Is that an ultimate target for you? Those were my questions.

Thanks, Lars. It's Mike here. Let me start with the sort of administrative side of stuff. The forestry fair value gain, I think we've always said that the average, if you look at the last sort of 5 years because it is a number that goes up and down, it's generally about a EUR 60 million gain on average. And that's what we've sort of, as best as we could, given people as guidance for this year. We true that up at the half year and the full year. And therefore, in the quarter, we booked EUR 15 million of that EUR 60 million, being 1/4 of the EUR 60 million. I still think, sat here today, that the full year guidance is probably the most sensible number I've got. That's about [ 10% ] delta than the Q4. If you're looking at Q4 to Q1, Q4 was [ 10% ] more than that EUR 15 million roughly. Maintenance, the first quarter is always a quiet maintenance period, Lars. So there's nothing material in maintenance. Again, for the full year, we guided pretty similar to last year, around 100. That's normally split sort of 40% first half, 60% second half. And therefore, Q2 will have a number of maintenance shuts in it. Andrew?

Yes. I think in terms of volumes, it's always dangerous to sequential -- like a quarterly volume number, particularly on the paper side because it's affected by all manner of different things, including maintenance shuts. As Mike rightly said, we didn't take planned maintenance shuts in the quarter. Obviously, we were like others affected up in Finland with our Kuopio operation being impacted. So we did have to take some production downtime there. But as you know, for us, Finland is a small component of our overall portfolio. If you look on the converting side, you've seen volumes pick up on an industry-wide basis that we're very much in line with what one is seeing in the industry. The bags business, European is flattening out offshore -- I mean, non-Europe is very mixed because we sell into a lot of different regions. America is probably a bit softer. Middle East, North Africa, as you could imagine, quite volatile, but starting to pick up as you see it today. And then finally, on your question, I think we've covered most things on the M&A side. I mean very, very clearly, we've always said we see growth opportunities in both our packaging verticals of corrugated and flexibles. We continue to pursue opportunities in both organic and potentially inorganic. On the organic opportunities, clearly, we have a full pipeline of expansionary investments, and we're making very good progress on those. As we said at the full year, we expect to be sort of 80% complete in terms of the payments, at least on that big EUR 1.2 billion expansion program, and then starting to ramp up particularly into next year and the year thereafter in terms of the profit contribution. So we're excited by that, and we certainly believe those investments remain very well placed. And of course, we continue to seek further opportunities around that, the most recent being the Hinton acquisition and hopefully the follow-on investment into a forward integration into the paper machine there as well. In terms of M&A, again, we see both those verticals as offering M&A opportunities. You mentioned specifically about forward integration on containerboard. I think, clearly, we have a very strong niche containerboard position producing a lot of niche grades like the white top, semi-chem, et cetera, which is sold on a global basis. You don't necessarily need to forward integrate those. Where we see a benefit in being more balanced is on what I'd call the bulk grades of the unbleached kraftliner and testliner grades. And there, we're actually currently short of paper on testliner, but it's building onstream now, which is exciting for us. And we see it as an opportunity to further the expansion of that business if the right opportunities come at a price that makes sense for our shareholders. So we will continue to actively look at those. But importantly, we have a number of options on the organic front. And so anything we do is more from an opportunity perspective rather than anything defensive.

Can you comment on anything about the timing? And do we now confirm the timing?

It's very much on track. We expect it complete and be ramping up next year.

The next question comes from Cole Hathorn from Jefferies.

Could you give a little bit of color on the cost developments into Q1 and how we -- how you see the picture from here? Effectively, what I'm looking for is any commentary you can provide on the wood costs you're seeing in your Central Eastern European basket considering all the Nordic producers are calling higher wood costs. And I'm just wondering if that is steepening the cost curve.

Cole, so let me start -- I mean let me talk about costs in general so that we cover the broader topic. I mean I said at the year-end results presentation that costs are going sideways into Q1. That's proved to be the case sort of overall. There are some movements in that. The small uptick in resins, small uptick in wood, mainly around the Nordics, as you commented on, but I would say, generally, most costs are flat. There's some relief in other areas, but they're all sort of roughly sideways if you add them up. In terms of wood specifically, as you know, Central Eastern Europe wood costs went up quicker than the Scandinavian costs and then the Scandinavian costs follow sort of slower for longer and have stayed high and continue to increase. So the Scandinavian costs have gone up probably some 5%, but Central Eastern European costs have not. And therefore, our wood costs are sort of in relative good shape, if I can put it like that. They're still obviously higher than '22. I think that's a structural change that we talked about prior, but the Central Eastern European costs are relatively sideways, but Scandinavian wood costs are up. Hope that's clear.

Great. And then, I mean, you've completed the acquisition in Canada now. Just like your thoughts -- now that you've got the keys, how you're thinking about that business? Will you see some benefit from kind of higher softwood pulp prices as they're developing? And just any color you can give on that small Canadian acquisition and the plans for the conversion.

Yes, Cole, we're very happy with that acquisition. We've -- as you say, we've got the keys now, and we are proactively working with the team in Hinton. Clearly, we've -- we are having to establish our own infrastructure on there because it is very much part of West Fraser performance, and that's all done basically because we had plenty of time to plan for it. The focus initially has been very much on optimizing the pulp mill that is there. And I think we've already made some very important gains there. So the pulp mill production and cost structure and stuff is already starting to improve. So I'm delighted with the contribution, I think, our team has been able to make and working with the local team in Hinton around that. So that is always priority #1. Obviously, alongside that, we are working on the feasibility study around the paper machine. So that is, call it, Phase 2. In terms of the pulp, it is a pulp that it's sort of unbleached kraft pulp that goes primarily into the Asian market right now, so into China. It's a very important market. It hasn't been moving as much as, call it, the European softwood and hardwood pulp prices that you see in the sort of PIX indices and things. So it's fair to say it has been more muted. It has gone up, but much more muted than you'd see in, I'd call it, traditional pulp benchmarks that you would be following. But our primary focus, as I say, there is optimizing the operations, optimizing the pulp mill and giving ourselves the option to invest in the paper machine, which is ultimately our ambition there, which, as I remind you, then allows us to backward integrate the big bag position we have in the Americas. We enjoy very strong positions in both the U.S. and Mexico. And I think -- I mean you asked about wood development. Sorry, you asked about the wood development, obviously, a major attraction to us of -- Hinton was the very cost-effective wood and the right type of wood for the specific pulp we need for kraft paper. And needless to say, we are delighted with that access. It is highly cost competitive and it's the right quality, so very excited by that.

And then, Andrew, just following on from Lars' question with DS Smith. Will there be any changes to your supply agreements in Central Eastern Europe? I imagine not just considering the logistics transport benefits of your mills, but I'm just wondering if there will be any implications of kind of changing sourcing if IP ships more paper across from the U.S. And then finally, I suppose, have you also gone out with a price increase for June similar to SCA and Smurfit Kappa?

Yes. I'm not sure if I followed the exact question around the implications of IP to logistics. We will be continuing to optimize our logistics. As you know, we sell containerboard both into our own businesses, but also into our global network. I don't see a particular change in that. But obviously, like always, we will adapt as and when the competitive landscape, if and when it does change. So I don't think I can comment now on any specifics around our sort of commercial offering. Just very quickly on the prices, yes, I mean, we are -- I mean, as we say and I think we said at the full year and we've reiterated, the order situation has materially improved. We are seeing a very strong order situation, a series of price -- I mean, price increases have been going through, and we are looking for further price increases at the moment. I mean one cost item that, of course, is going up is paper for recycling. It doesn't affect us as much as supply does because, as you know, we obviously are wood-based, but we still procure 1.3-odd million tonnes of paper for recycling. So that is a cost item that's going up. But it's going up, as you know, for everyone, which is, of course, to your point about steepening the cost curve, clearly, that is both raising and steepening the cost curve. And I would suggest that the bulk of the first price increase on the recycle side has been almost eaten up by the paper for recycling increases.

The next question comes from Charlie Muir-Sands from BNP Paribas.

Just a couple for me, please. Firstly, just coming back to Hinton, given where pulp prices are at the moment, can you give us any kind of approximation as to the EBITDA contribution that, that business will give you this year or on a kind of annualized run rate basis? Secondly, I just wondered if you could talk about the performance and the pricing dynamics of your plastic flexibles business. And then lastly, just on PPWR, I know it hasn't got much change in the final draft, but now it's gone through EU Parliament. Have you got any kind of evolved thoughts on the positives and the headwinds that it's going to generate for your business over the next 5 years?

Very good. Everyone is using the opportunity to ask multiple questions, and I hope I can keep up. On Hinton, I mean this year, we wouldn't -- we would expect basically a breakeven EBITDA at Hinton because, clearly, I mean, and that's -- we've absorbed some transaction costs in the first quarter. We've got -- we are optimizing the pulp mill and the like, obviously, very dependent clearly on the pulp price and what it does because that can have a swing effect. But that is roughly what we are planning for this year. As I said on the pulp price, you have to be a bit careful because it's not -- the increases on that unbleached kraft pulp into Asia is not the same as we're seeing, as I say, on the benchmarks that you might be following into other markets. It is more subdued. On the question of CEFLEX pricing, I mean, I always think about the margins because the absolute price is not what's relevant here. It's effectively the margin over resin prices which really counts. And there, we are seeing a very stable performance. I think the defensive qualities in that business are being amply demonstrated through this period where you've seen a very stable performance across all the volatility we've seen over the last 3, 4 years, frankly, and that really continues in the short term. Clearly, pricing and to extent margins can oscillate, depending on what's happening with resin prices, that can be one time. But you get a bit of a sort of lead and lag effect on the margins as a consequence of movements in that. But there's a pretty swift pass-through and it's, I was going to say it's automatic, but it's largely built in and the part prices move with resin prices. But the margins, which is what I care about, have been very robust. And I think excitingly, and this probably links into your last question about PPWR, we do see ongoing opportunities in that business to continue to drive the sustainable packaging agenda. I appreciate people might think it's adverse -- plastics-based business, but there is a lot of opportunity to drive fully recycled plastic offering. Obviously, PPWR is pushing for more recycled content, and we're fully supportive of that, and. We have the capacity and the capability to do that, and we are developing a lot of innovative solutions around it driven by the sustainability agenda. And I think that brings us in another leg of growth opportunities in that business combined, that is with our paper offering. And we see more and more commonality between our paper-based bags business and our consumer flexibles offering, whereas historically, they serve very different markets. Paper bags focus very much on industrial as consumer flexibles on, as the name suggests, on the consumer offering. Whereas now more and more we're seeing paper offering also into our consumer customers. And I think, importantly, into other more industrial applications, which are driven by sustainability needs. For example, our StretchWrap product that we are using to wrap pellets, instead of shrink wrap, all the e-commerce applications around the paper bags or replacing plastic wrap, it's done in Europe, for example, as well as transition totally away from plastics and is using our paper bags. And we're delighted with that, and we're looking to expand that offering into other markets. So we have a huge number of opportunities, both in leveraging our consumer flexibles relationships and also developing new products. And I think following your question specifically about PPWR, as I noted, it's clear what the legislation is at the EU level. And I think we're very content with the outcome. I think it's a sensible outcome. We are believers in promoting the appropriate regulation to drive the need for sustainable packaging solutions. And we're very much at the forefront of investing in that trend. And so in that sense, we are very happy with the right regulation that promotes that sort of activity. And we think this legislation is perfectly workable. But of course, the devil is also in the detail. And now the next phase is how this actually gets implemented at a country level. And clearly, we'll need to be watching that and understanding the ramifications of that. So in some ways, I don't want to be kicking the can down the road. But frankly, one has to reserve judgment on the -- until you understand all the details at the country level, and that's obviously the next phase of how these things get implemented. But in short, we see it as a net positive for us. Certainly our consumer flexibles, our general bag and kraft paper offering, we think, is a net beneficiary of this, and it's pretty neutral for boxes, I would say.

The next question comes from Justin Jordan from Davy Capital Markets.

I've got 2 questions on essentially paper bags or flexible packaging. Firstly, when you talk about volume growth in Flexible Packaging, I'm assuming you're referring to Q1 sequentially over Q4 because I'm assuming that volumes in a year-over-year sense are still down because of subdued industrial and construction end markets? And secondly, just on pricing in sack kraft. According to RISI, it would appear like there were some modest price increases achieved in early Q2 2024. Would we be right in inferring, given the sort of positive pricing momentum we're seeing in containerboard from, let's say, a second round of increases from mid-2024, should we infer a similar possible potential positive momentum in sack kraft for the second half of the year as well, please, in terms of pricing?

Yes. So firstly, on your question on bag, yes, I mean on a sequential basis, we are seeing -- we've seen an improvement in both the bag and, obviously, the kraft paper volumes. Clearly, kraft -- one has to be a bit careful on paper volumes from one quarter to the next because, of course, it can be impacted also by maintenance shuts and the like. But very clearly, I mean when it comes to, for example, downtime driven by market demand issues, we've taken materially less in the first quarter this year than we did in the second half of last year. It's a -- demonstrably, the market is much further there. I mean we've seen this sharp upturn in deliveries more generally for kraft paper in Q1, and that's obviously manifested in a much stronger and longer order book for us on the kraft paper side. Clearly, the downstream business has been slower than, call it, picking up because that you don't have the stocking and the restocking effect there, but it does seem to be flattening out now. And obviously, it will be important to see how that develops into the summer months because recognizing the summer months in Europe are where the really big bag volumes come through when it's a typically slower monthly anyway. And just on pricing, yes, I mean we're looking to see the price increases. What's most important will be into H2, clearly, on a lot -- we still have some important business on the open market, which is priced on a half year basis. So the half year price negotiations into that open market business will be important. But it's encouraging that we are getting price increases through at the moment, and we certainly look to see further price increases.