Mondi PLC. (MONDF) CEO Peter Oswald on Q4 2018 Results - Earnings Call Transcript

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Earning Call Audio

Mondi PLC. (OTCPK:MONDF) Q4 2018 Results Conference Call January 1, 0000 4:00 AM ET

Company Participants

Peter Oswald - Chief Executive Officer

Andrew King - Chief Financial Officer

Conference Call Participants

Wade Napier - Avior Capital Markets

Justin Jordan - Exane

Moh Musa - Barry Dixon

Cole Hathorn - Jefferies

Alex Berglund - BAML

Brian Morgan - Morgan Stanley

Peter Oswald

Good morning, everyone. Welcome to this Mondi results announcement 2018. Great to have you all here. Thank you for joining us. I'm Peter Oswald, the CEO; and with me is Andrew King, the CFO. We have the usual procedure. I will start with some highlights, then Andrew will walk you through the numbers. And afterwards, I will speak to the various business units, what are the market trends, operations. And finally, we will talk how we do against our strategic framework. And after that, Andrew and I are very happy to take your questions.

So press that. We have again delivered an industry-leading performance for 2018 as we continue our journey of delivering value-accretive growth. So our EBITDA margin is above 23%. Our return on capital employed is above 23%. Year-on-year, we've improved a number of numbers, and I'm not walking you through, but the board have proposed to increase the full year dividend by 23%, and I think this shows they have trust in our development.

Now what were the main reasons? Throughout 2018 but especially in the second half year, we had a very robust operational performance in all businesses, with good productivity improvement, and very important, we were successful in our cost-containment initiatives. Our capital investment projects are on track, and our technical people did a great job in starting up our €335 million CapEx project in Štetí ahead of plan. And the integration of Powerflute in Finland and our 2 bag operations in Egypt are progressing very well and are above expectations.

2018 was a watershed year for the packaging industry because of the plastic debate, and we are excited about the new growth prospects, which this opens up to us. Don't forget, we are the biggest producer of kraft paper and paper bags in the world, and we have the capabilities and the solutions to replace 100,000 tonnes of plastics with our solutions, be it in shopping bags, refuse bags, and I will come to this topic later. But it is something because the kraft paper and bag market is not so much also in the focus of analyst typically, where everyone concentrates on containerboard. It's sometimes not enough appreciated that this somewhat sleepy part of our business with 1% growth has now transformed into something with really nice growth prospects, and we will talk about this later.

So overall, we made good progress on our journey of value-accretive growth, and we will continue this journey. Over to you, Andrew.

Andrew King

Thank you, Peter, and good morning from my side. I'll go first to the operating financial highlights. And as Peter has already mentioned, we were up on all key metrics across the group. As you can see, revenue increased by 5% year-on-year or to €7.48 billion or 4% if you look at it on a like-for-like basis, excluding the net impact of acquisitions and disposals.

We saw higher average selling prices across the group as the main driver, strong market fundamentals supported price increases across all key paper grades, and importantly, we successfully implemented the price increases in the packaging-converting businesses to pass on the higher paper input costs.

The strong revenue gains translated into a 19% increase in EBITDA as we achieved strong cost containment in the face of ongoing inflationary pressures. EBITDA margin for the year of 23.6%, as Peter mentioned, represents a 270 basis point improvement on the prior year. If you look at underlying operating profit, it rose 28%. The depreciation and amortization charge declined modestly year-on-year as foreign currency exchange effects, restructurings and disposals outweighed the increases caused by acquisitions and the ongoing capital investment program.

If I then turn to the EBITDA bridge, looking in more detail at the drivers behind the movement in EBITDA, you can see the price gains in local currency terms were the most significant drivers of profitability in the period. Peter will be providing more detail later in the presentation, but to -- suffice to say that in all key paper grades, we were able to consolidate on the gains achieved in 2017 and build on those. While in the downstream converting business, as already mentioned, we did get there successful pass-through of prices with the usual lag effect. The volume variance masks a mixed picture. We saw good volume growth in our Fibre Packaging unit, supported by a combination of completed capital investment projects, bringing us more capacity, strong productivity gains and good organic growth, particularly in the Industrial Bags segment.

Offsetting this, we saw volume declines in the noncore newsprint segment, following a decision to cease production in Merebank in the prior year and continued weakness in our personal care components segment of Consumer Packaging, together with lower pulp volumes in Richards Bay due to the extended shut that we referred to in this -- the first quarter. As expected, we saw general cost inflation across the group with variable costs -- within variable costs, we saw an increase in average wood cost in euro terms, although the variances in the key operating regions were quite significant.

We saw sharply higher costs in Slovakia and Sweden, offset by lower or any modestly rising cost in Russia, South Africa, Czech Republic and Poland. Similarly, energy and chemical costs were up as rising oil and gas prices fed through to these costs. The notable exception among variable cost was, of course, the paper for recycling, where the impact of the Chinese import ban leads to significantly lower European prices, with the benchmark grade down around 33% year-on-year.

We consume roughly 1.3 million tonnes per annum of paper for recycling. So this price decline provided a year-on-year benefit of roughly €50 million. While difficult to predict, given that much depends on the future direction of the Chinese legislation, we are seeing some stabilization in the OCC price at the moment. We saw inflationary pressures on wages across the group, most evident in Central and Eastern Europe, Russia and South Africa, and we planned higher maintenance shuts at a number of our key mills, which gave rise to the €67 million negative fixed cost variance.

As Peter has already mentioned, we are very pleased with the success of the productivity improvement and cost-reduction initiatives across the group, which allowed us to maintain strong control of the fixed cost base. While the variance analysis you see shows the local currency effect, you will note, for example, that personal costs in absolute euro terms were down year-on-year.

If you look at it as a percentage of sales, fixed costs were reduced from 23.1% to 22.1% year-on-year. As always, you see that we capture the currency effect in a single line item in this variance analysis. This reflected a negative effect of 72 million in the period. The weaker Russian ruble and the sharply weaker Turkish lira gave rise to translation losses on their domestically focused businesses, more than offsetting the benefits of the modestly weaker rand on the South African export business. The year-on-year weakness in the U.S. dollar also had a negative impact, although this was moderated by the strong second half recovery of the dollar.

At a group level, the net impact of the acquisitions and disposals after all input -- all transaction costs was relatively muted. The positive contribution from the 425 million -- €424 million worth of acquisitions completed around the midyear were largely offset by one-off transaction costs and the acquisition accounting effects, all of which we booked in underlying earnings. And this also was mitigated by the disposal effects caused by this -- related to the sale of the Pine Bluff facility in the U.S. in June. In 2019, we clearly look forward to a full year contribution from these acquisitions.

If we're going to look at the movement by business unit, some brief comments to me, but of course, Peter will be providing a lot more detail later in the presentation. The Fibre Packaging business unit, as you can see, remains the standout performer, generating €253 million worth of incremental EBITDA or 30% increase year-on-year. Similarly, it remains the largest contributor to the group profit, delivering 60% of EBITDA. The Uncoated Fine Paper business also continues to perform strongly, with EBITDA up €52 million or 11%, despite the ongoing structural challenges in the market more holistically.

By contrast, Consumer Packaging business continues to experience a challenging trading environment. Pleasingly, we saw good growth -- good progress in the consumer goods packaging segment, but this was masked by a combination of one-off effects, rising input costs and declining volumes in the personal care components segment. If I then go to look at the items below the underlying EBITDA level, you will see that the very strong operating performance led to a 27% increase in underlying earnings per share. As mentioned previously, depreciation and amortization was marginally down due to currency effects, while net finance costs were marginally up. I'll provide more detail of this on the next slide.

The tax charge was sharply up on the prior year, driven largely by the significant increase in profitability but also the expected increase in the tax rate. The tax rate increase was due in turn due to the full utilization of incentives in Poland in the prior year. We would expect the tax rate in the coming year to be modestly upwards to around 23%, given the current profit mix in the business.

In the period, we booked special net -- net special item charge of €92 million or €126 million on a pretax basis. This mostly related to items booked in the first half, including a €55 million charge related to this decision to stop production of in-line silicone-coated products at our paper mill in Štetí and the Czech Republic. We also booked charges totaling €29 million relating to the restructuring of our Consumer Packaging operations. While in Uncoated Fine Paper, the decision to close the small un-integrated paper mill -- paper machine at Merebank led to a charge of €21 million.

The main item booked in the second half of the year related to the restructuring of our U.S. Industrial Bags plant network involving the closure of a plant and the restructuring of the fixed cost base.

Importantly, of the total pretax special item charge of €126 million, around €80 million of this relates to non-cash impairment charges. If I go -- then go to the net debt and interest, as I mentioned already, the net finance costs were up marginally on the prior year. This was due to the expected increase in the average net debt more than offsetting a lower effective interest rate.

We ended the year with net debt of 2.22 billion or 1.3 times net debt to trailing 12-month EBITDA. I'll explain the movement in net debt shortly, but suffice to say, we have a very strong financial position with metrics well within those required to maintain our solid investment-grade credit ratings and importantly, providing us the strategic flexibility to take advantage of growth opportunities as and when they may arise. Our liquidity position remains robust, given our ongoing strong cash generation and having issued a €600 million eight year eurobond in the first half of 2018.

Looking then at the cash flow effects in more detail. I'd first like to remind you that as advised at the half year, we early adopted IFRS 16, which had the effect of increasing our reported net debt on the opening balances by around €200 million. All comparative figures you see in the financial releases are restated on this basis. You can see that the net debt increase was then driven by two factors, namely the €424 million worth of acquisition spend in the period and the payment of the €1 per share special dividend in May. If I exclude these effects, net debt was down around €220 million, again, demonstrating the very strong cash generation of the business.

Capital expenditures, you'll see at €709 million, came in at the lower end of our guidance of between 700 million and 800 million cash outflow for the year. This is due in turn more to timing issues rather than a change to our investment plans, and we would expect some catchup over the coming years. If I incorporate this and the recently approved capital projects, we anticipate capital expenditure to be in the range of €700 million to €800 million on average for both 2019 and 2020, and that, of course, is in the absence of any other major investments we might consider.

Looking then at the dividend. As always, the payment of an ordinary dividend within the context of our 2 times to 3 times cover policy is a key pillar of our investment case. If I exclude the special dividend paid earlier this year, we've achieved a compound growth in the ordinary dividend over the past five years of 16% per annum. The proposed final dividend of €0.5455 per share brings the total dividend for the year to €0.76 per share, representing 23% increase over the prior year. And as Peter has already said, that's clearly testament to both a very strong financial position of the group and the board's confidence in the future of the business.

Finally, from my side, just to summarize some of the technical guidance, much of this you've heard already in the presentation, but just to highlight a couple of other items. In terms of the maintenance shuts, it is in the documentation, but we're guiding to around 150 million cost for this year versus 110 million in the prior year, largely due to the extended shut at Syktyvkar and also CapEx-related shut at Ružomberok. Working capital, very much in line with previous guidance and as already mentioned, the effective tax rate nudging up from around 22% this year to 23% in 2019. Obviously, happy to take any questions on this and other things at the end of the presentation.

To that, I hand you back to Peter. Thank you.

Peter Oswald

Yes, thank you, Andrew. So now turning to our markets and businesses. Fibre Packaging saw EBITDA of close to €1.1 billion, up 30%, with an industry-leading EBITDA margin of 26%. This was mainly driven by price increases but also by shifting volumes to higher value-added grades, some volume growth, the contribution of our Powerflute acquisition and our cost management initiatives.

This was partly offset by normal cost increases, negative currency effects and our disposal of flat kraft paper mill in Pine Bluff U.S. With the acquisition of Powerflute, Mondi has become the clear European market leader in virgin containerboard, and we have now a global production capacity of well above 2 million tonnes per annum. Most importantly, we own the lowest-cost assets and enjoy good positions in the containerboard specialty markets of semi-chem fluting and white top kraftliners and in two years' time, kraft top white.

These products make up about half of our virgin containerboard production. This broad portfolio is appreciated by our customers. It's typically less cyclical because the specialty grades are less cyclical and because we have this portfolio. And very importantly, it gives us more resilience in case of new capacity in one of these product areas.

So looking at the price development, we saw strong prices in virgin containerboard. So last year, brown kraftliner was up year-on-year over 16%; white top kraftliner, 6%; and semi-chem fluting, around 10%. So the typical pattern which we see that the more commodity grades are shifting more up and down, whereas the niche markets are more stable. From November on, we saw price declines so that brown kraftliner is now below the average of 2018, whereas white top kraftliner and semi-chem fluting are around the average of 2018, actually, semi-chem, even a bit better.

The good news is that for 2019 to '21, no significant new capacity expansions in virgin containerboard in Europe are to be expected. And with regards to imports from the U.S., we see very marginally more activity, and the further development will very much depend on Chinese import. So mainly from the U.S. so where will the surplus of the U.S. go to? Now with regards to recycling containerboard, Mondi is a small player with an output of 550,000 tonnes, so we are slightly short on recycled containerboard. In 2018, prices have moved up strongly by 12%, but they have now fallen back to below the average of 2018.

In recycled containerboard, new capacity is coming onstream over the next two years. And assuming a box growth of 1% to 2% for 2019, below are trend assumption of 2% to 3%. This could lead to some local overcapacities. And therefore, it will be crucial to watch if China will import more as domestic producers will not have enough paper for recycling due to import restrictions. And in Corrugated Packaging, we increased prices more than just passing on price increases during 2018. I think that's a -- something which -- where we stand out because we are a value-driven and not a volume-driven company. And these capped sales volumes, the price we paid was that sales volumes were constant over the year, whereby if you compare the second half year for Europe, excluding Russia, we were up by 2%.

Our focus on new products and service, a better service is paying off. We continue to benefit from e-commerce, and we are proud that our corrugated products won 7 WorldStar Awards this year, more than any other company -- packaging company in the word. So the WorldStar Award, like the Oscars of packaging, just maybe a bit less exciting, so.

Let's look now at the development in kraft paper, and that's actually a very pleasing story. So we saw last year price increases -- we saw last year but later -- first, talk a bit about the long-term picture. We see now clearly the shift from plastic to paper carrier bags, especially shopping bags, enhanced, increasing demand for our kraft paper for this market. And the European directive should fill the drive growth over the next years as a big part of about 15 billion plastic bags should leave the market, and some of that will be replaced by paper. And to capture this opportunity, we are pleased to announce that we will upgrade our paper machine in Štetí to focus on this new grade. I will talk about this a bit later.

Looking at the next 5 years, we expect some plastic to be replaced by paper, and being the biggest kraft paper and paper bag company in the world, we expect growth rates of this value chain within Fibre Packaging to move up. So, so far, it was the bit, the Cinderella compared to containerboard, growing by about 1%. And now we will see higher growth rates, even though it's difficult to estimate what exactly it will be.

And don't forget, kraft paper and paper bags represent about quarter of Mondi's business. In 2018, kraft paper prices were up around 10% on average year-on-year, and I'm very pleased that with the increase, which we realized at the beginning of this year, the level is up about 7% to 8% compared to the average of last year. So this is a very strong start in this year and is really something, which is also not so much appreciated because we -- there are less statistics, it's a worldwide niche markets, not so many peers. But it is a very important aspect for -- both for this year but also for the coming years.

We are not aware about any significant new capacity. Downstream and Industrial Bags, we achieved 6% growth and 3% growth for -- on a like-for-like basis. We further strengthened our footprint in high-growth markets by acquiring NPP and Suez Bag, both in Egypt. And this has increased our forward integration of kraft pipe by now -- by about 60,000 tonnes, so that we are now roughly three quarters forward integrated, and we feel very comfortable about this. And Industrial prices -- Industrial Bags increased their prices at the beginning of the year, passing on the full paper price increase. So it's really something along the value chain.

Now coming to Consumer Packaging. In Consumer Packaging, we realized an EBITDA of 194 million, 13% down, and this represents now 11% of Mondi's EBITDA. We are pleased, as Andrew already said, to see progress and profit growth in flexible packaging, so what we call consumer goods packaging. However, as predicted at the half year results' announcement, the volume decline in personal care components has continued in the second half of 2018, which had a significant impact on our profits.

On top of that, as Andrew has mentioned, we had adverse currency effects and some non-recurring items. As for 2019, we expect stable volumes in personal care components due to market share gains. Our focus for this business unit is very clear. It's on operational improvement, innovation and organic growth.

In Uncoated Fine Paper, we achieved an EBITDA of €516 million, up 11%. Also, here, we benefited from price increases, and that was partly offset by cost increases and negative currency effect. But again, we focused very much also on cost containment so that the cost inflation was fairly low.

We've improved our paper machine portfolio by stopping one uncoated fine paper machine at Merebank in South Africa during H2, which produced about 70,000 tonnes. So we are staying now there with one machine, which produces 270,000 tonnes, so it's a very competitive machine.

And to secure our wood supply for our Richards Bay mill, we acquired around 11,000 hectares of well-located forest plantations in KwaZulu-Natal in South Africa. Strategically, going forward, our cost-advantaged Uncoated Fine Paper mills in Russia, Slovakia and South Africa offer three options for us. First is to take market share from high-cost mills, which are closing, and we see some of that now happening. We would come to that to grow the Packaging Paper capacities at those sites, and already now, they are all mixed mills producing both uncoated wood-free and containerboard. And the third option is to sell market pulp. From the point of view of invested capital, the majority of these assets are used in the production of pulp and only a minority is, so to say, the paper assets.

Now let's look at the price development. So first, the demand. Demand in Europe for Uncoated Fine Paper declined by 4% and was flat in Russia and South Africa, and Mondi grew its volume by 1%. Prices at the beginning of 2019 are stable to marginally up. Now we've learned about the closure of 600,000 tonnes of uncoated wood-free capacity in the U.S., and this should positively impact both exports from Europe to the U.S. but also be positive for Europe as some of the Asian volume, which is now going to Europe, will go to the U.S., where prices are much higher. So this is a positive story, and we've seen now our bankruptcy, and there is an announcement that further capacity will be taken out I think in Q3 or Q4 of this year. So we will see how prices develop, but it was a good start to the year.

Now on these three key strategic developments, let's first look at our capital investment projects. So overall, these capital expenditure projects have been a major contributor to our profit growth. And for 2019, we expect another contribution of around €50 million EBIT. Our technical team has done a really great job to start up our 335 million Štetí CapEx project ahead of plan which is a disadvantage in this, so slightly negative for the marginal profit contribution in 2019, but we were happy to take the profit already, end of 2018.

Our CapEx projects in Ružomberok and Syktyvkar are in plan. The additional pulp production of 100,000 tonnes in Ružomberok should start up, end of this year and contribute to our 2020 results. And the kraft top white paper machine, end of 2020, then contributing in 2021. And we have now good news in terms of that on Tuesday. Our boards have approved the 67 million CapEx, converting one, let's say, fairly inefficient containerboard machine in Štetí to be a dedicated machine for specialty kraft paper for shopping bags. And it will be a dedicated machine producing up to 130,000 tonnes.

We can continue to produce also containerboard on the machine, but it is earmarked now for much lower [indiscernible] with much higher speed. And the net capacity change is 45,000 tonnes. So this needs a bit of explanation, which would go now too far, but basically, we produce this product to a smaller extent already in Swiecie. We can move it and then focus the Swiecie production. So we are someh0w reducing our containerboard capacity with this step. And be -- and remember, there are 50 billion plastic bags used in Europe every year, and if just a small part of it converts back to paper and we see this development, then this machine will be very quickly filled.

Unfortunately, our customers have to wait for another almost two years until the machine starts up. At -- as at every results' presentation, I'll illustrate our innovations approach with three examples. This time, we have picked three. One is our washing powder packaging from recycled plastics. So our great story with flexible packaging is we reduced plastics consumption by 70%.

Now we can also say, we do not just reduce plastics consumption by 70%, but on top of that, it is recyclable. The second example is one of our many innovations in e-commerce. It's a solution for wine, and the biggest cost item for online retailers is the time to fill it. This is actually what they have to manage, and with this product, the filling time has increased by 80%. And so our customers are very pleased about it. And the third example shows our Benetton shopping bags just as one of the many examples. The growth rate of shopping bags will move up. We don't know exactly how much. There's one study out there, 4%. They are higher numbers. Anyhow, we will want -- we want to capture the value of that with our investments.

And last, not least, I have to come back to our Oscars, our WorldStar Awards. Overall, as a group, we got 8. It was last year five, which was by the way also more than any other packaging company. Seven were in corrugated packaging, and one was in Consumer Packaging. And I hope that it will speed up a bit. So eco-solutions. That's are really important initiative, and this initiative is spearheaded by Consumer Packaging. I will talk about this later. And it is aimed at -- it has three targets, so three counts. One is replace plastic package packaging with renewable fiber-based paper packaging.

So our typical example would be the shopping bag, but it's not just the shopping bags. There are a lot of backs in the do-it-yourself market, which over the last 10 years have moved from paper to plastics, and we want it back. But it's not just producing the bag, it's to increase the functionality of the products to make sure that it's -- for customer, it's important, it's not just about they are sustainable. They also want convenience, reclosability, easy opening, you name it, and we've improved that. We have developed the splash bag, so a paper bag which you can store outside in the rain. We -- and several other products we have in our coating, Sustainex, which is a bio coating. So a coating which gives you perfect barrier properties without using any oil-based polymers. So that's step number one.

Now a lot of packaging will not move away from plastics because we need its barrier properties. So to have the appropriate life shelf, in order to have the time in your -- that it can stay in your fridge for a long period of time. We will continue to use plastics. And then two things are important, number -- what you see here, number two is that you make sure that the consumption of plastics is reduced. This is sometimes overlooked in the debate.

The first thing is reduced plastics. And with our flexible packaging solutions, if we replace a plastic bottle, we typically save 70% of the material. And the third leg of our effort is to make all our plastic packaging recyclable, and our research teams have done a great job of developing this BarrierPack Recyclable.

Now it is a group-wide effort, which requires that our -- all our business units work together and what does everyone really contribute to it. So flexible packaging, which is part of Consumer Packaging has consumer products design and innovation capabilities and the contact with the FMCG customers. And obviously, in kraft paper and paper bags, we have the paper expertise.

And if we -- and we combine these two competencies to develop more sustainable packaging solutions, which will drive our growth. So eco-solutions is about new business, which we will win. We have a lot of sustainable products already now, but this is a specific project to say, we want to make one of these three transformations. So we account -- we count against this, if we can move plastic product to a paper product, if we can move a non-recyclable plastic to a recyclable plastic, if we can move a product from a rigid plastic to a flexible packaging. And this is a great contribution to the world, but it's also good for our business because it will grow faster.

So looking now at our strategic framework. You know it from our Capital Markets Day in 2017, and we give here the examples what progress have we made against the various metrics. I'm not going to read it out because we have talked about most of that, but it's very pleasing to see that we could strengthen our position on all these metrics, which is what we have to do and want to do.

This finally leads to the outlook. I'm not going to read it out. It's sufficient to say here that the base message is that our robust business model, our strong balance sheet and our culture of continuously driving performance makes us that we continue to look to the future with confidence.

So before we come to the Q&A, let me just briefly summarize the main messages. First of all, we had, in 2018, again, a very strong year, industry-leading performance, EBITDA margin, more than 23%, ROCE, more than 23%. Much more important than that is there is more to come. So this year, we will benefit from the Štetí 335 million project. Next year, we will benefit from the pulp mill in Ružomberok, which will start up, and which will sell as market pulp and from some investments in Russia in Syktyvkar. The year thereafter, in 2021, we will benefit from the kraft top white machine in Ružomberok, the Štetí project, which I explained with EcoVantage, the shopping bag paper, which we are producing and some further investments we do in Russia.

So we have -- and this sets us into unique position, a real pipeline.

But I think the third aspect is the most important one that we have a more robust situation than ever before, with a strong balance sheet, we have better margins, we have industry-leading margins, which means that we can produce throughout the cycle even in bad times and make profitability. We further improved our product portfolio by taking out machines which might not perform so well in a downturn. So we closed one paper machine in South Africa. We sold one paper machine in the U.S.

We have a broad product portfolio, especially also in containerboard, which doesn't isolate us from any ups and downs in the industry. But we have seen historically, if the last 10 years is any guidance, that the fluctuations in this specialty markets are less and all that. And we have finally now -- especially with this inflection point on packaging solutions where people really reconsider the use of plastics, we have this window of opportunity now to capture some of that. So plastics is here to stay, no doubt about it, but there are specific applications where our paper solutions are just ecologically much better, and we get also tailwind from the European Union. In this way, I think we are very well placed, and we will continue our journey of value-accretive growth.

So I open now the questions, and Andrew and I are very happy to take them. Andrew over to you.

Andrew King

Thank you very much, Peter. I think, as always, we'll take some questions from the floor. We'll also have questions coming through on the lines, but maybe, to the floor first. I think, Wade, you are first up.

Question-and-Answer Session

Q - Wade Napier

It's Wade here from Avior Capital Markets. Just a couple of questions from me. The 50 million in incremental EBIT that you're guiding for, for 2019, is that only from the Štetí project or does that include the acquisitions that you made last year? And then just a question regarding containerboard markets. Can you just give us an indication as to how tight markets actually are when -- in the space of the -- some market uncertainty and a bit of inventory build, prices could fall by sort of 8% in the sort of space of three months. Can you just give us a bit more color on what's happening with the inventories and sort of demand at the moment?

Peter Oswald

Yes, thank you, Wade. So the 50 million do indeed refer to Štetí only, excluding and on top of that are our acquisitions, which were the three acquisitions which we did. In terms of containerboard, the situation is such as you highlighted and is public knowledge that stock levels are elevated. I'm not particularly nervous about it, but obviously, it's not a sign of strength. So we have to see how overall demand develops. We are a bit more careful like we typically are. Sometimes then we are punished as if it was war, but we just make general predictions, not specifically to us. I mean for us, the year has started very well also in the containerboard sphere and in Corrugated Packaging because customers really like us. And so we could put up prices even in this year.

But I would be very careful to make any predictions how this develops because obviously, our first competitors are starting to pass on price decreases, and last year, we were prepared to lose a bit of market share in order to even improve our margin. That's obviously not long-term strategy. So I think, with -- over the next few months, I think the risks are a bit more to the downside. Beyond that, it really depends how China develops. And maybe just to say a few words on China. So China has had this special development that corrugated boxes were up by about 6.6% something, whereas containerboard was down.

Now this is not because they're producing boxes without paper, but the reason was simply that they destocked a lot. So they had huge stocks, which, therefore, run down. There's a certain point in time, they have to come back to the market. If they don't allow paper for -- it's more paper for recycling to be imported, logically they have to import some of that. And you can run hundreds of different models, what they will do exactly, but bottom line is, they -- I think, at a certain point in time, they will come back to the market. And therefore, I said that this is the point to watch. I hope that has not just answered your question, but a lot of questions I had to receive.

Andrew King

Yes. Maybe just to be very specific on the CapEx that we guide to 50 million, that's all our CapEx contribution from the major projects, the bulk of which is the Štetí project because clearly that is the big moving part year-on-year. Clearly, the acquisition effect, in other words, the full year contribution from the acquisitions, is over and above that. In round terms, one would expect something around a 30 million to 40 million incremental benefit year-on-year from acquisitions because even though, we had them for half a year as I highlighted earlier, we put -- I mean there were a lot of transaction costs and all the noise around the acquisition accounting, which we take into the underlying earnings number, and obviously, that we clean of that in 2019. I think Justin, you had a question.

Justin Jordan

Justin Jordan from Exane. I'm going to be daring and have two questions. Firstly, just on bags, you've enjoyed, I think, this is what, 6% volume growth, at 3% like-for-like volume growth in 2018. And you're sort of giving us nice, warm feeling, shall we say, of potential acceleration in organic volume growth in future years because of the plastic-to-paper switch. Is that sort of how I should read it? And just assuming that is the thesis, you talked about being 75% forward integrated at the moment of post-Egypt acquisition. Strategically, is that something you would like to build on in terms of further forward integration, either organically or potentially through further bolt-on M&A? My second question is just specifically to the Uncoated Fine Paper business, where you talked about 3 strategic options. This is a very cost-advantaged business, and I was just surprised that you were talking potentially about conversions here. Is that sort of something we should think about on a 5-, 10-year view? Or is it something where you're sort of signaling as a 2019, '20 option or something?

Peter Oswald

Yes, thank you, Justin. So first of all, great -- thanks to get a question on bags because normally we have hardly the option to speak about it. I mean, we see that -- it's actually two different developments. In bags, we are, at the moment, much more concentrated on industrial usages. We call it Industrial Bags. And this is, so to say, an independent development, which has nothing to do with our shopper bag thing. In kraft paper, however, this higher demand is very helpful, both for pricing and for volumes. But for volumes, we have to free up the necessary capacity. So yes, we expect higher growth in this segment overall. But on the other hand, we have to be a bit cautious in terms of there's only limited capacity available short term, and we have to wait until the end of next year.

In terms of Uncoated Fine Paper, I was really -- it was the visionary thing on the 5- to 10-year basis, where we wanted to highlight. At the moment, Uncoated Fine Paper is a very good place to be, even when pulp prices now declined in the fourth quarter. And beginning of this year, we could marginally increase both in the fourth quarter and now, our prices, which is actually good, so we are very happy about it. We just wanted to highlight that it's an -- that our philosophy is, if you have a bad paper asset, a bad uncoated fine paper asset and you move it to a containerboard, it still stays a bad asset, might be a bit in a higher growth market. And that's what many of our competitors do. So they just move one bad thing to another bad thing.

We have great thing, and I just wanted to convey the message, we're very happy to be in Uncoated Fine Paper, but we have these both optionalities, which we are using on one-hand side to simply not really convert but to grow the mills, like we do in Ružomberok. We build a new additional paper machine there and utilize the competitive advantage of that location more. And the other option, which we always have that, should Uncoated Fine Paper prices be really unattractive, and we were very close to that end of last year, we do have the option to sell the pulp because we have drying capacities in Ružomberok and Richards Bay, anyhow, drying all its pulp.

Andrew King

Good. I think maybe we could go to the phone lines. I think we've got a call from Davy, a question.

Moh Musa

Moh Musa here on for Barry Dixon. Just kind of few questions again on kraft paper pricing. Could you perhaps please put a figure to the secular growth trends that we're seeing from plastics to paper-based packaging? And is the supply of kraft paper for bags, for example, is that currently a bottleneck for the entire industry? Or is the -- then you plan really just to -- then you guys can supply them all yourself?

Peter Oswald

In terms of kraft paper market, let's say, is more balanced or you could also say tighter for a number of reasons, which has, at this point in time, relatively little to do with these bags because that will only come over this year and next year. So it's more a function of the overall work capacity, stronger growth in many emerging markets. I think -- or I do not just think, I know we are doing better than others because of our product offering, the quality and then all this good stuff. But the market is overall in a very good balanced situation. And I mean the advantage that we are the global market leader officially makes some things easier for us.

Andrew King

Good. Thank you very much. I think we've got a call from Kevin Hellegård. Kevin?

Kevin Hellegård

Yes. Yes, I think quite a few of my question has been asked already. But could you just sort of clarify once more like the expectations of increasing demand from replacing plastic bag, has you -- have you already seen that strong demand? Like I know you don't have the capacity, but are already having the incomings? Or is it more a trend you expect to come in the coming sort of 24 months?

Peter Oswald

Yes. We see more volume, and we produce it today in a less efficient way because the machines are not optimized for that kind of products on other machines or on kraft paper or containerboard machine. So we can already take advantage of it but only to a limited extent and not in an optimal way.

Kevin Nielsen

And then in your Consumer Packaging division, are you also -- you were seeing the positive from -- you're saying you can replace sort of normal plastic bottles in a less plastic-intensive way. How customers are engaging in those conversation? Do you have to convince them? Or are they actively reaching out to you?

Peter Oswald

Yes. Yes, that's a very good question. Thanks. So first of all, this transformation from rigid plastics to flexible packaging, there is a lot of interest, but it's not moving as well as we thought, simply because people are -- the fillers or the fast-moving consumer companies have invested a lot of money in filling equipment. And in such a case, they are not prepared to move even if they acknowledge all the benefits. So it's more a step-by-step approach. If someone is going to invest, they make the changes.

But if someone has invested two years ago in filling equipment for rigid plastic bottles, they are not going to take it out and put the new thing in. So it is a long-term trend, but it's not so quick. With regards to recyclable plastics, obviously, for the whole industry, it's a zero-sum game because we replace one product with another one. Obviously, for those who are more ahead in the curve, and we are, it's a benefit that you get more volume because you have found the recyclable solution, which some of your competitors haven't developed yet.

Andrew King

Thanks, Kevin. I think we've got another call from Matthias Pfeifenberger.

Unidentified Company Representative

We must have answered his call already. I think we still have a few more on the phone, but maybe another opportunity on the floor. Cole?

Cole Hathorn

Cole Hathorn from Jefferies. Just on your virgin containerboard, you've got quite a spread portfolio with some benchmark grades but also the niche grades. With your hybrid kraftliner grades, are you seeing a bit of price protection there because of the fact that it is a cheaper price point product?

Peter Oswald

Yes. Thank you, Cole. We see that we get compared to our cost to premium, but the premium is not changing. So prices are typically in a certain spread to kraftliner. So as kraftliner goes down, this product gets down. So it gets overall a premium, but no change year-on-year.

Cole Hathorn

And then Andrew, on input costs inflation for 2019, what are the kind of moving parts we should be thinking about?

Andrew King

Yes. It's always very difficult to generalize. I mean, if I maybe step back and look at 2018 holistically, I mean, obviously, when we show those variance analysis, we're always doing it in local currency terms, which is always a bit somewhat confused by the currency effects, et cetera. But looking back at 2018 first, I mean, if I exclude, what I call, pass-through costs, in other words, with pulp price increases or paper price increase, which, in turn, gets fed through the boxes or the bags, et cetera, but if you look at the pure input costs, we were up around 3% year-on-year.

That was slightly flatted by that paper-for-recycling effect with the paper-for-recycling costs, as I mentioned, a 50 million-odd effectively gain through reduced OCC prices. But -- and if you excluded that, it was more like 5%, 6% at the local -- in a local currency effect. I think going forward, I mean clearly, we are in a slower-growth world more generally, and generally speaking, that also feeds through to your cost base. So I think we certainly see cost inflation around, but clearly, it is a bit more moderated relative to last year. But at the same time, we probably don't have the benefit of that kind of one-off windfall type of effect from any one input cost. So very round way, I would say, something around 2% to 3% on average is what one could expect as we sit today, given all the moving parts within the input costs.

Cole Hathorn

Sure. And then just one final one on Consumer Packaging. On the personal care component volumes, are you starting to see that starting to stabilize now and potentially getting some price increases for release liner paper that you use in that business, supporting profit next year? Or how should we think about that?

Peter Oswald

Yes, so the situation is such that we believe that the overall market will continue to decline. We believe that our volumes will be stable because we got market share. We got new long-term orders, and therefore, our forecast is, with all the knowledge and all the risks that has -- that it's -- that it will be pretty flat. In release liner, we suffered from the paper price increases, and it continues to stay a pretty tough market. We are increasing prices, but it's a challenge to improve profits.

Andrew King

Good. We better go back to the phone because it looks like we're not making any headway with a number of calls. We still have a number of questions. So maybe to Alex Berglund from BAML.

Alex Berglund

I have another question on the kraft paper side and really kind of on the barriers to entry. What's the -- if it -- this is becoming more and more attractive market, and especially as containerboard looks a bit weaker now, what's the risk that, kind of, other companies or other producers get kind of converting into kraft paper and to specialty kraft, like you, I think, are doing now? And also then obviously, Europe -- I mean I'm also kind of in the U.S., is -- does this product travel well? Is there a risk that U.S. producers look at instead something kind of containerboard into Europe, looking more at selling kind of specialty kraft and kraft paper generally?

Peter Oswald

Yes, Alex, so entry barriers in this segment is, obviously, it's a small market, and therefore, to set up any new capacity has a high-risk, especially if you don't have good contact to all the retailers. Everything is possible, but I mean you talk still about a niche market, which is around 500,000, 600,000 tonnes in Europe. And so to put in capacity for someone entering the market I think is fairly dangerous, unless you are very well connected, and -- yes, and go up against the number one, which is us.

In terms of kraft paper imports and also semi-chem fluting, I mean as we see the development now, it's -- there is still a premium in the U.S. So for U.S. players to export to Europe is just, let's say, taking the better of two very bad options, one is to stop your machine, the other is to sell at the margin, but it's bad business. So I can't imagine that U.S. companies plan to really do that more than just for an interim period to sort their capacities out. And for sure, the U.S. industry needs to sort out if -- its capacities because it has too much kraftliner.

Andrew King

Very good. I think we've got time for maybe two more questions. So maybe from Brian Morgan of Morgan Stanley.

Brian Morgan

Just on Consumer Packaging, just -- if you could just give us an update on the strategy there. So it's a business that, I don't need to tell you, is challenged -- has some challenges, and plastics and semi-chem has favored. And your personal care business is difficult. And it's dilutive to group returns. And I understand the eco-solutions side of things, but could you just touch a little bit about how this business actually fits into Mondi?

Peter Oswald

Yes, Brian, the line was very bad. I hope I got it right, otherwise, please shout. So yes, in Consumer Packaging, we have our challenges. What I wanted to highlight with the EcoVantage product is that some of the value which sits within Consumer Packaging, obviously, then on a business-unit P&L accrues then to other businesses. They have the good customer contact. They know how to present and develop these things. But if it's a paper product, then you will see the P&L of our paper business or of our Fibre Packaging business. But I'm not sure I really got your question fully. Maybe Andrew, if you...

Andrew King

I think it's a strategic question about whether Consumer Packaging fits within our portfolio.

Peter Oswald

Ah, okay. So yes, it fits because we are an integrated packaging solution provider. We see that the sophistication is in primary packaging. So strategically, it fits well. There are a number of synergies, especially, between flexible packaging and bags. This is where it historically developed. So we produce both for our packed food business, as an example, paper bags, which sit in Fibre Packaging and plastic bags, which sit then, from a P&L perspective, in Consumer Packaging and with more or less the same customers as in Corrugated Packaging. So strategically, it's -- it fits well.

Andrew King

Very good. I think we'll take one last question from the line. So Lars Kjellberg, you.

Lars Kjellberg

Yes. I just want to come back a bit to the kraft paper market, if I may. I mean, you -- we've sort of seen what's going on in containerboard. You've seen price increases in kraft paper at the beginning of the year. What are we seeing in the certain medium-term and the outlook for this market? I mean cement seems to be in good demand certainly in the Asian market. Do you still continue to see good demand growth and supportive pricing? Or do we see any negative pricing -- potential negative pricing trends on the horizon? And the other question I had was really on the Štetí conversion. Why are we waiting until year-end 2020 as opposed to accelerating this shift from containerboard to kraft?

Peter Oswald

Yes. On the first question, in bags, we see a very strong growth in emerging markets. It's partly double digit and the -- and within our portfolio, emerging markets are becoming more and more prominent because, for instance, of the acquisition in Egypt but also because of their organic growth, which has been higher. Our mode or our competitive advantages are two. First of all, we have really good paper and are the only one with global service, and we have a strong cost position. So it's not immune to any fluctuations, and if building markets collapsed around the world, then we would be affected. But again, it would be others who would first leave the industry. And your second question?

Andrew King

I think the question was why wait for 2020.

Peter Oswald

Ah, yes. Yes, we would love to do it earlier. Unfortunately, our machine suppliers are well booked. And so we need this -- that simply are -- we're out of time for all the equipment, which we need. It sounds long, but that's what it is. So we are not waiting in terms of delaying it artificially. It's the earliest possible date, and we will do everything which is financially reasonable to have the start-up as quick as possible. But that is end of next year.

Andrew King

Very good. I think our time is up. There are a couple of questions on the e-mail, which is probably a nice way to end off, which is asking basically, are our margins sustainable. And I think I will defer that because we're not in the game of giving profit forecasts. But I think you've heard a lot today about how we see the fundamentals in our business. We remain extremely strongly positioned and look forward to the future with confidence. So with that, I think we can say thank you very much. I don't know if you would like a last word, Peter, or...

Peter Oswald

No. Just thank you very much for your participation. Have a good day.

Andrew King

Thank you.