Mondi plc (MNDI) Earnings Call Transcript

Good morning, and welcome to Mondi's Q3 Trading Update Webinar. [Operator Instructions] I'll now hand you over to our host for today, Andrew King, CEO. Andrew, please go ahead.

Good morning, everyone, and thank you for joining us today. I'm Andrew King, your group's CEO; and with me is Mike Powell, our CFO. I'm sure you've all seen the announcement today, so I'm just going to pick up on a few points before we go into questions. Overall, we delivered a resilient performance in the third quarter, considering the impact of planned mentioned shuts and higher-than-anticipated input cost inflation. Good order book supported a positive pricing momentum across much of the portfolio. Reported underlying EBITDA was EUR 196 million for the quarter, with no forestry fair value gain compared to EUR 167 million in the second quarter, which included a fair value loss of EUR 43 million. Price increases implemented earlier in the year, lifted average selling prices during the quarter and enabled us to offset the higher input costs experienced in the period. That said, cost inflation remained elevated and increased more rapidly than we had anticipated at the half year. Further price increases have been announced across certain paper grades, although these do take time to be fully reflected in earnings. We remain focused on taking decisive action in areas we can control. Progress continues on operational excellence, cost optimization and improving the efficiency of our plant network. We are successfully transferring customer volumes from the converting plants scheduled for closure later this year. And during the quarter, we completed the sale of 1 solid board converting plant and agreed the sale of a second as part of our ongoing portfolio optimization efforts. As we enter the fourth quarter, higher packaging paper prices are expected to support performance, notwithstanding the ongoing input cost pressures. With that, Mike and I are very happy to take your questions.

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

I'd like to focus on kind of the direction of cost inflation through the end of the year. Could you remind us or give us an update on wood cost inflation? Should we still think about the kind of 35 million wood cost inflation for the second half? And then I'd like to ask on energy cost inflation, which I imagine is particularly gas just what probably surprised negatively, I mean gas prices moved up second quarter into the third quarter and are still very elevated at 86, 85 terawatt hours at the moment for the TTF. So I'm just wondering, what commentary you can give on kind of gas cost inflation and how you're managing it? And am I right to assume that the business is pressured by gas costs would ultimately be Uncoated Fine Paper and Duino?

It's Mike here. Thanks for your questions. I think your first question was on wood. I think wood has worked out probably as we thought. I said at the half year that there'd be a half 2 on half 1 increase of the 35 million, which I think you mentioned yourself. That was the sort of -- if you then go to Q-on-Q, as you know, some of that occurred actually in Q2 at the balance in Q3. So I think wood into Q4 is as we expected, and I don't expect sort of large deltas Q4, Q3. So I think wood is sort of contained, but obviously at elevated levels. And as we've said in the past, there is clearly less economic activity driving that as well as obviously the 2 wars, but also lately, as you know, no wood going into the Middle East and therefore, trees not being harvested, high products, therefore, not being available, pushing the price of wood in Central Eastern Europe, in particular. As expected, I guess, is probably the phrase there, but at high levels. With energy -- on energy, Cole, I mean, again, it sounds like you track the same index that we tended to use. Energy is the increase. Energy related, it's not just gas, of course. But again, you will know because you look at the gas indexes. If you take the average Q3 over Q2, so sequentially, gas is up 35%, 40%. And that is different to when we spoke at the end of July. You just quoted the price today for gas, but the gas when we locked our balance sheet off was EUR 44 per megawatt hour. Through the quarter, it averaged EUR 63. That's the 35%, 40% increase. But it's also the gas, the other related costs, such as transport. So if wood was half of that 35 hit in the quarter, the gas and other energy-related costs were a good 20 million, 25 million. That's the delta, and that's because, of course, the indexes keep going up. If you go to your last part of your question, which I think was what happens from here on in, if you look in the index today, as you say, it's 85. That's another 35% up. Who knows where that goes? It can go down as well as up. But you can imagine this, therefore, more costs coming through Q4 on Q3. As I say, not in wood. But if it stays at 85, something not dissimilar. And then you have to look at what's happening with the price index, which maybe I'll pass over to Andrew. But first of all, Cole, just on cost, does that sort of help shape the cost side and then we should move on to -- that's fine. But what are you doing that...

That's very helpful on the costs. I mean, maybe I'd ask a difficult question on what you're doing about it. I mean if if I'm right in assuming that the impact is maybe the Uncoated Fine Paper. And do we know which is Italy and gas exposure? Do we need kind of more radical action to potentially take more economic downtime at these facilities? Or is that even possible to kind of hold in...

What's happened with selling price total? Andrew, when you want to...

Yes. So I think first thing, Cole, the first thing you do is look to get your selling prices up. And the good news on that side is we are getting selling prices up. You are right in the sense that the most impacted business almost exposed purely to input gas is the the unintegrated businesses that don't make pulp from wood, simply put. In our world, that is isolated to two areas. It's stand-alone Duino recycled mill and it's to a lesser extent, the Neusiedler unintegrated fine paper operations. But as Mike rightly says, input gas -- well, gas -- energy more generally affects a number of cost items, which -- so I wouldn't say our other businesses are immune from the input gas because even if you make your own energy, is having a knock-on effect even into biomass energy costs, but also to transport logistics, et cetera, which, of course, everyone is exposed to. But yes, the primary areas of where you get that direct exposure is those unintegrated facilities. I think it's, in a way, encouraging that the market we are seeing quite material price increases in spite of the well-documented oversupply and the recycled grades, et cetera. And I think it's a testament to the fact that as we keep saying, there is no margin to play within the industry. on these price increases -- I mean, sorry, this cost inflation is being translated into price increases kind of across the board on that front. And interestingly, to your point on downtime, et cetera, industry stock levels are at pretty reasonable levels. So it's not as if the, call it, overcapacity is producing into stock. People are clearly taking downtime, which is logical because the marginal tonne is not making them any money. So I think there is an element of that. I mean downtime is always something one looks at on a commercial basis. because you're always looking at the profitability of your marginal tonne and one interrogates that. But we have the luxury of the vast bulk of our business having extremely low costs in the markets that they compete in. Thanks.

Our next question comes from the line of Gabriel Simoes.

So I'd just like to add a follow-up on the cost front. So I understand gas prices have moved up significantly, but I just wanted to understand if you hedge any of the energy cost or have any longer-term contracts? And I just wanted to confirm if we already see the full impact of that higher energy cost of there's still to come as potentially hedges roll over. And my second question would be mainly on the pricing side as well. So given the lag that we usually see for prices on the containerboard side, I just wanted to understand how much pricing there is still to be passed through to boxes out of the price increases that we've seen on the paper side. And how is demand for boxes, given the higher prices? How are customers reacting to the potential increases?

Thanks. Let me take the first one, Andrew, maybe you take the second. So we do not hedge. I mean just a reminder, we probably make 80% to 85% of our energy obviously from the tree. So we're much less exposed to that, right? Therefore, we are talking about costs, in answer to the first question and in the numbers because obviously, gas has frankly doubled since even quarter 2, and therefore, a doubling of an input cost even if it's relatively small, has an impact, notably in the quarter as well, never mind on an annual basis. But to answer your question, no, we don't hedge. We do not to pass those costs through quickly in pricing, and therefore, there's no under, overexposure in our numbers. clean in that respect, which I think is your question, Andrew.

Yes. And on the pricing, I mean, to add to Mike, I mean, the best hedge is to get your prices up because that's the only thing that protects you in the longer term because hedges just buy you a bit of time and we want to react -- we want our people to react, as Mike says. It's not -- it's a big cost item, but it's different exposures to others. . When you look at the pricing dynamics, I think the two elements we call it price pass-through that are relevant here. The one is, obviously, some of these price increases on the paper side are only just being implemented Q3 into Q4. So there is a, call it, spillover effect into Q4 and, frankly, beyond with some of these price increases coming through in the paper side. At the same time, you're right in that the pass-through of the boxes then still has to take place. Now clearly, containerboard prices, there's been a sequence of price increases through the year. So the box converters have been kind of chasing their tails to pass that on. That has that has been happening, but it remains very much a work in progress. Clearly, there is a lot of competition in these markets. And net-net, we're still seeing a fairly muted demand-side environment, depends on which market you're talking about because they're quite big regional differences in box demand. I wouldn't say that increased prices are per se having an effect on demand. The demand is being impacted more by the macro considerations, consumer confidence and the like rather than call it a price sensitivity. But I think it's more of the same in the context of the overall market dynamic on underlying box demand. Northwestern Europe remains fairly muted. Southern Europe, where we don't have -- direct box exposure, is more robust. Poland, price -- I mean the growth is pretty resilient. I think it was 4%, 5%, something like that in the first half of this, albeit there is a lot of competition in the Polish market. We -- if you look at year-on-year like-for-like, we did about 1% volume growth in our business, not where we wanted to be. But in the context of a pretty flattish European markets, a decent outcome.

Our next question comes from the line of Detlef Winckelmann.

Maybe my very first one would be -- I mean, it does sound like there's a little bit of difficulty passing on some of the recycled containerboard price increases downstream. But just any kind of commentary on any kind of Flexible Packaging price increases we're seeing in the crop paper and the paper bags, if we're seeing any similar pushback in those end markets? And then my follow-up question, which is a little bit of a technical one, is I see your our kind of vertical value chain that you put on your presentation still calls out kind of a 1.6 million tonne long kraftliner position. I'm just curious if you have a sense of how much of that is like semichemical fluting or anything like that, where presumably price increases have been a bit more muted. Yes.

Yes. So firstly, on the question of the Flexible Packaging, I mean firstly, again, you look at the upstream side, in sack kraft, in an almost unprecedented way, we're onto our third price increase for the year, reflective of two things. Again, there is input cost inflation there as well. I mean wood is obviously a major input for what is essentially a virgin product. And then you -- and -- but I guess more importantly, the order situation is good. While the industrial applications for that sack kraft remain flattish, it depends on, again, the geographic exposures, As we've spoken before, we are seeing new sources of demand there that is tightening things up. That is tightening things up. And that's allowing us to get some further price increases. Those are effectively only being implemented now. So it's really a 2027 story at this stage because it's too late to materially impact '26. At the same time, the pass-through on the boxes -- sorry, the bags, it is a slightly different dynamic there because you have semiannual annual contracts and the like. We did get the necessary increase in bag prices at the half year to reflect the paper price increases implemented to date. There will be more to come as we implement these latest price increases in the bag prices into the new year, but you have a lot of semiannual contracts there, one would typically be waiting. So it's a positive momentum on the pricing side both in the paper and the bag side, you get the full pass-through only into the New Year contract business. Sorry, and I -- forgive me, the second question?

Yes. And I mean, the second question was just related to your long kraftliner position. Just a rough sense of how much of that may be semichemical fluting because my understanding is semichemical fluting prices have been a little bit more muted as a price progression kind of...

Yes. So I mean, if you take in round terms, we make between 2.8 million and 3 million tonnes of containerboard in total, of that 450,000 to 500,000 tonnes is semichem. And you're right that semichem. it typically is much more -- much less volatile obviously didn't come up as much, but the increases are all muted in some ways, a bit like the white top, which also operates in a slightly different dynamic. And to your next question, we made about 0.5 million tonnes of white top product. Again, typically a bit less volatile up and down. So the increases, when we talk about sort of benchmark unbleached kraftliner, it could be more muted. So yes, you have to be a bit careful around that in terms of sort of running sensitivities on price increases.

Our next question comes from the line of Brian Morgan.

Thanks. I appreciate the time. Can you just dive into the sack kraft business a little bit deeper, if you don't mind. How much of the price increases that we've seen year-to-date have been sort of a restocking cycle? And then if you could just maybe chat to us a little bit about demand drivers. I would have thought given what's happening in the Middle Eastern demand would be pretty soft. And that's always been a pretty strong growth driver for you guys. So maybe just unpack it a little bit more for us, if you don't mind.

Yes, sure. So on the sack craft, I mean, I don't think restocking, destocking is always on the margin in a rising price environment, I guess there is a bit of restocking, but I wouldn't overplay that. No. I mean the order books are good for a couple of reasons. One is, I mean, we're not seeing a lot of demand-side growth in, call it, the traditional industrial uses for -- in Europe and in particular, which is obviously still remains a very important market. But it's flat to marginally growing. It's not a bad demand-side environment in that context. Middle East, North Africa, you mentioned, I mean, these are always volatile markets. It's a portfolio of very different countries, obviously, that is represented there. So yes, there's challenges in 1 or 2 of those markets at the moment, but the other markets doing well. So on average, it's doing pretty reasonably. Countries in Lat Am, these sort of markets are actually doing pretty well. Mexico is strong. North America is a bit weaker at the moment because a lot of agricultural exposures there, and that's a bit softer. But at the same time, as I said already, we're also seeing other demand sources coming through from the nontraditional demand. E-commerce is a very important one there. our extensible sack kraft is being used in e-commerce applications. So mailer bags, as we call them. So these are the things which are coming to your front door in more and more numbers. I'm sure -- those are -- that is a strongly growing area, which is tightening up that extensible sack kraft market. Again, it is a bit different in what we call our specialty pulp kraft papers, which is more actually a lot more core consumer-orientated these are everything from a simple retail shopper bag to a lot of what we call our paperization opportunities where we're displacing paste with paper solutions in primary retail packaging. That is a bit softer at the moment. The demand side is okay, but there is some new capacity that's come in both newly installed or recently installed -- relatively more recently installed capacity in the European market. And also you get some of these, what I'd call, soft conversions. So one or two of the more traditional fine paper makers are at what I'd call the lower grades, the less where you don't need the strength properties or the products that we produce might be able to use some of that sort of thing. And so you see a little bit of pressure from those sites. So a little bit less -- it's not quite as tight on those products as it is on the upward is our core product, which is the sack paper.

Our next question comes from the line of James Twyman. Okay, we shall move on. Our next question will come from the line of Sean Ungerer.

Excellent. Great. Just in terms of maybe harping on this, if I just look at the underlying EBITDA bridge ex forestry adjustments for Q2 to Q3, so sort of FX looks maybe a little bit positive. You've got a delta and maintenance of about 10. You're calling out, if I understand correctly, about 35 million for wood costs in Q3 and another 20 million to 25 million for gas. That sort of implies a sort of price or revenue delta of about $31 million odd between price and volume. Is that correct? Or are there any other elements that I'm missing?

I wouldn't want my boss to be bridging quarters. But the one thing you should have a look in there is the wood. The wood was a half -- to be half [ 135 ]. The quarter-on-quarter is about half of that.

Cool. And then just in terms of other cost buckets, anything major there?

I do think I've covered the cost of already.

Okay. Cool. And then just going to the sort of outlook statement. Is it fair to assume that one is comfortable that price increases are going to outweigh sort of cost inflation in Q4, assuming spot prices hold or pretty much everything?

Yes. I mean, Sean, as you can appreciate, the one big variable in that is the energy inputs because, of course, it's extremely volatile. So you can only say as it stands today, and with spot prices where they are spot input costs, I guess, where they are today; yes, the shortfall. The price increases should offset the inflationary cost pressures. But of course -- and these costs are moving -- well, particularly those energy input costs are moving in a fairly volatile fashion. So things can change again quite quickly. One could only yes, as you say, use current spot and sort of take a view on that. And in a way, that's the impact on all these related cost items. So that's always a little bit also difficult to predict is the sort of second-order effects on logistics and things like that, but that feels as though it settled a bit.