Mayr Melnhof Karton AG
VSE:MMK
Earnings Call Analysis
Q3-2023 Analysis
Mayr Melnhof Karton AG
In a detailed discussion of the Mayr-Melnhof Group's performance for the first three quarters of 2023, CEO Peter Oswald provided a candid outlook in the face of a challenging environment. The company's two divisions, board and paper, and packaging, experienced low sales volumes, with the board and paper division also dealing with declining sales prices. Despite these headwinds, including the unexpected closure of the Kolicevo mill due to flooding, the company's third-quarter operating profit exceeded that of the second quarter, driven by a strong contribution from its packaging division.
Oswald attributed the market downturn to protracted destocking and a shift in consumer behavior prompted by high inflation, leading to a greater presence of budget products and plastic packaging. He remained optimistic about the medium to long-term shift from plastic to cartonboard, citing cartonboard's renewable and recyclable qualities. The company has continued to focus on competitiveness, profitability, and cash generation to weather the adverse conditions.
Mayr-Melnhof Group has been modernizing its board machines, leading to downtime, which impacted results. However, Oswald remains positive, noting that the timing coincided with the market downturn. The projects aimed to enhance the company's competitiveness by improving product quality, sustainability, and operational efficiency. Customer feedback on the improved products has been highly encouraging.
Despite a 6% decline in volume, the packaging division's results significantly outperformed the previous year. Oswald highlighted that the integration and restructuring measures, including a plant closure in Germany and a major IT integration from Essentra Packaging acquisitions, were paying off, contributing positively to profitability and steadying the company amidst the loss of the Russian business. These actions, coupled with operational improvements and a focus on innovation, have exceeded initial business plans.
The inclusion of the pharmaceutical packaging business has shown strategic merit due to its resilience and growth potential in the current market. The division has achieved a turnaround, with a successful IT integration of 21 sites by the end of the third quarter and significant improvement from cost reductions and operational enhancements.
Regarding sales prices, the board and paper division experienced declines in both cartonboard and recycling cartonboard categories, with the latter witnessing consistent declines through all three quarters. The packaging division has seen cartonboard price declines moderately impacting costs due to adjustment clauses. On the cost front, many items remained flat compared to Q2, while chemical costs decreased, and pulp prices showed a decline.
The profit and cash protection program introduced in the first half of the year is centered around reducing working capital, cutting CapEx, and operational cost savings. Q3 saw progress, particularly in working capital, and a continued focus on cost reductions is expected to improve profitability. For CapEx, the figures are predicted to be below EUR 400 million this year and under EUR 350 million for the following year.
Looking into the fourth quarter and beyond, some recovery in order intake for board and paper has been observed, signaling an end to destocking. However, the uptick in the packaging market is yet to be seen. Oswald is confident in the company's strategic positioning, thanks to past closures of high-cost cartonboard machines, recent investments in competitive technology, and the profit and cash protection program. With a focus on sustainable packaging and a commitment to resilience in crises, he anticipates a promising long-term future for cartonboard packaging.
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Welcome, ladies and gentlemen, to the audio webcast on the Mayr-Melnhof Group interim results for the first 3 quarters of '23. I have the pleasure to have the company's CEO, Peter Oswald, with me for some firsthand information.
Peter, could you please share with us your initial reflections regarding Q3 results?
Yes. If we start with the markets and look to our board and paper division, we saw sales volumes continuing at a low level and with declining sales prices. And in our packaging division, we saw on a lower scale also declining sales volumes, but prices held up fairly well. On top, if we look at our results, we should forget that our mill in Kolicevo in Slovenia was stopped by the flooding in Slovenia and then for the rebuild.
And I'm very pleased to say that despite this difficult environment, MM's Q3 operating profit came in above Q2, thanks to a strong contribution from our packaging division. And of course, we are continuing our profit and cash protection program, and we are in these times, placing even greater emphasis on competitiveness, profitability and cash generation.
Can you provide an update on the factors contributing to the significant market downturn and the still gloomy outlook?
Yes, longer than expected destocking in the supply chain was the major reason brought forward throughout the first 3 quarters of this year. And we were surprised that it took so long. And it looks like that most inventories have now come back to normal levels. However, since we have returned to buyer's market, customers can to wait longer and still delay orders. We can also observe that consumer behavior has changed due to high inflation, resulting in reduced consumption of food and other daily life FMCG products. And in some areas, consumers have shifted towards budget products with some of them using more plastics.
However, on the question of plastic substitution, I'm convinced that the trend from plastics to cartonboard will continue medium and long term since cartonboard is renewable and efficiently recycled. We shouldn't forget it's used -- it can be used up to 25x, which is a fantastic fact.
Your 3 large board machine modernization projects this year, necessitated long periods of downtime and had a major impact on the results in board and paper. What's the current state of these projects? And what shall we expect for the time ahead?
Yes. Importantly, the rebuild of the first 2 machines are [ done ], which is very pleasing. And with regards to our third rebuild at Kolicevo in Slovenia, we are just now in the start-up phase somewhat ahead of plan. So it will affect Q4, but only with probably 1 month.
In [indiscernible], the timing for carrying out the significant modernization projects in '23 worked out well given the market downturn. The primary objective to remind us of this project has been to enhance our top-class competitiveness in recycled cartonboard and coated test liner, offering our customers better quality, higher sustainability through lower grammage and reduced energy and water consumption, increased innovation, and most importantly, improved efficiency and productivity. But most pleasing for me is that we've got a lot of positive response from our customers, who say that our already top-notch products have got even better.
Could you comment on the strong development of MM Packaging so far this year?
Yes. Indeed, our packaging delivered strong results well ahead of last year. Although volume was down by around 6% on a like-for-like basis. And this result is remarkable, taking into account restructuring costs of EUR 31 million in the first 9 months related on the one hand side to the closure of the German plant in Q1 and the integration and restructuring costs of the former Essentra Packaging plants.
And on an operating profit level, the newly acquired pharma businesses compensated roughly for the lost Russian business. The integration of the ex-Essentra pharma packaging business has been a major task for the packaging division in the current year. What progress have you achieved in the past 12 months? And what are the future prospects?
Yes. Let's start with the IT integration, which was the biggest challenge of integrating 21 sites, and this was successfully completed by the end of the third quarter. So that's indeed very pleasing. And in the past 12 months, we have made good progress in turning around the historically marginally profitable ex-Essentra Packaging business, focusing on price discipline, operational improvements by increasing productivity and reducing waste as well as cost reductions in administration and low-performing facilities. And we have launched and that's even more important, a large number of projects to secure future growth opportunities with our customers, increasing quality and innovation from an improved asset base.
And so overall, we are ahead of our business plans at the time of the acquisitions. And reminding ourselves of the strategic rationale, our move into the pharmaceutical packaging market has proven to be the right decision given its resilience, growth and its profitability potential. And in the present market, we can clearly observe a higher level of stability and resilience, compared to some other markets.
Coming back to current market developments, how did sales prices develop in light of the overall weak market situation so far this year?
Yes. In the board and paper sector, we saw with regards to FBB, a rather stable market in the first half year with a slight decline towards gain, but unfortunately now a stronger decline in the third quarter. Whereas in WLC, so in recycling cartonboard, we saw that the decline, which we saw already in the first quarter and in the second quarter continued in the third quarter.
And in packaging, decline in cartonboard prices are gradually feeding into prices through cost adjustment clauses, even though the price level held up relatively stable.
And how did the costs develop in Q3?
Yes. If we compare it to Q2, a lot of cost items were flat, so paper -- for recycling, wood energy, personnel costs. However, we could reduce chemical costs and also pulp prices declined.
You informed about the launch of a profit and cash protection program, along with your half year results. How is this paying off? And what can be expected for the upcoming year?
Now this program emphasizes significant reductions in working capital and reduction of CapEx in addition to cost reductions. In Q3, already demonstrated, clear improvements on the working capital side. And on CapEx, we expect a level of below EUR 400 million this year and below EUR 350 million for next year. And our cost reduction initiatives cover all areas: procurement, personnel, OpEx, and they are gradually filtering in and had already a positive effect in Q3. And overall, for Q4 as well as the next year, the improvement of our profitability and making further cost savings is our main objective.
Finally, looking into Q4 and next year, what is the outlook?
In our division board and paper, we presently see a slight improvement in order intake as cartonboard stocks -- destocking comes obviously to an end. However, our packaging markets, which have seen a much lower decline there, we don't really see an uptick yet. If we look back over the last 3 years, we have closed 2 high-cost carton board machines, and that's a big advantage in the present time. And this and our recent investments in latest competitive technology and our profit and cash protection program, position us strategically well.
Over the last years, MM has structurally strongly improved the asset base and its product portfolio. And the entire MM team is strongly dedicated to take the necessary measures in the current market crisis in order to emerge with enhanced strength and resilience. And I am pleased and strongly convinced that in the long run, cartonboard packaging has a promising future since customers value, sustainable and renewable packaging preserving consumer goods. And in times like this, we should not forget about this medium- to long-term outlook.
Peter, thank you very much for this interview.