Mayr Melnhof Karton AG

VSE:MMK

Earnings Call Transcript

[Unknown Attendee]

Welcome, ladies and gentlemen, to this audio webcast interview on Mayr-Melnhof Group interim results for the first quarter of 2021 with the company's CEO, Peter Oswald.

[Unknown Attendee]

Peter, having just reported the first quarter, what is your summary on the MM Group start into the current year?

[Peter Oswald, executive]

Since the beginning of this year and even the last month of 2020, we've been facing a 2-sided situation. On the one hand, we've seen ongoing growth in demand for cartonboard and cartonboard packaging, and our order books continue to be well or even abundantly filled. On the other hand, we currently face an extraordinary strong cost inflation after last year's cost deflation. It is an extraordinary situation, which we haven't seen in this extent during the last 10 years.

Prices for recovered paper have risen sharply, but also prices for energy, pulp, chemicals, logistics and so on, and they are all significantly up. In the first quarter, this has severely affected our cartonboard division's results. Prices for recovered paper mix quality were at the level of around EUR 120 per ton, 3x the level of around EUR 40 per ton in Q1 last year. Due to price validities, the cost pass on for recycled cartonboard becomes effective partly in the second quarter and partly by the middle of the year.

And for our virgin fiber-based cartonboard grades, we will have higher prices only by the middle of the year. However, since our packaging division saw an overall positive performance and was still only marginally affected by the cost increase in Q1, the group's operating profit and margin came in just slightly below the previous year's level.

[Unknown Attendee]

What does this mean for Q2 results?

[Peter Oswald, executive]

Since the cost inflation has gained momentum, gross margins in Q2 will be even more affected by strongly increasing variable costs. So let's take, again, the example of recovered paper. We expect to recover paper prices in Q2 at a level of around EUR 170 per ton compared to EUR 60 per ton in Q2 last year, so an increase of EUR 110 per ton or almost tripling of prices. Sequentially, prices increased from EUR 115 in February when we determined the cartonboard selling prices for Q2 to EUR 165 in April, so more than 40% in just 2 months. Also, higher chemical, pulp prices will impact on Q2 results in FPP. That's why we expect EBIT of the cartonboard division in Q2 to be down on Q1.

[Unknown Attendee]

Since the packaging division stabilized Q1 results, the question arises if this can be prolonged into Q2, with packaging input costs such as cartonboard, paper, inks, manages also being on this?

[Peter Oswald, executive]

In the packaging division, we can typically adjust costs as per January and July of each year. It also depends on the scope of the cost increase. And since the overall cost increase has been substantial in these days, the cost pass-through in packaging shall be affected. That's the good news. But this will only happen from the middle of the year onwards for most of the business. And given that we face now cost increases, as you said, for coated recycle board and other materials like ink, glue, pellets, et cetera, margins in the second quarter will be negatively impacted.

[Unknown Attendee]

Could you please shed some light on the causes for the price spike in recovered paper?

[Peter Oswald, executive]

The reasons for these price hikes are, in my opinion, threefold. With regards to demand for recovered paper, it's the strong demand from the corrugated industry and from Asia. With regards to supply, it is the significant decline of recovered paper from magazine papers and newsprint. So less supply and more demand are driving up prices for recovered paper at an unprecedented speed and to record levels.

[Unknown Attendee]

Facing current strong cost headwinds, how do you assess the group's timing for a recovery?

[Peter Oswald, executive]

In our outlook statement, we post that it is our goal to return to Q1 earnings levels for the group's current business in the second half of this year. This assumes that cost inflation stops now. Therefore, there is a high level of uncertainty because of the high cost volatility.

[Unknown Attendee]

Apart from essential price increases, you're addressing necessary further structural adjustments in your release as a part of your strategic cause for growth and improved competitiveness. Could you shortly explain the reasons for the planned closure of MM Graphia Bielefeld and the transfer of this packaging business to other sites of the group?

[Peter Oswald, executive]

Yes, we've entered negotiations with employee representatives on the closure of MM Graphia Bielefeld with about 210 employees. First, as far as significant exports from Germany to Russia, Ukraine and Asia are concerned, our customers demand to source locally. So we will move our production to our local folding carton plants in Russia, Ukraine and Vietnam. This step was overdue for a long time and will save a lot of money and CO2 emissions.

Second, with regards to sales volume in Europe, we have had several plants in Germany with too low capacity utilization for a number of years. And so part of the production will be moved to other German plants. Given the market demand for lower prices for top quality, we need to increase our efficiency through economies of scale and specialization.

I think it is very important to underline at this point that management has initiated the envisaged structural adjustments at MM Graphia Bielefeld after all other measures have been tried and all other options exhausted. MM is committed to handle this measure in a socially responsible way. From this internal consolidation, we expect one-off costs of EUR 25 million to EUR 30 million in the second quarter.

[Unknown Attendee]

In the previous statement, you highlighted intensified future investments in growth projects for several sites of MM Karton and MM Packaging. Consequentially, annual CapEx should rise to EUR 250 million to EUR 300 million in '21 and '22. How are these projects proceeding? And will you be able to keep the time frame and costs despite current lags, for instance, in building capacities and the price hikes?

[Peter Oswald, executive]

We are overall well on track. Due to COVID, we have some delays and due to cost inflation with some cost increases, but both are not material. From a cash-out perspective, some of the spending might be delayed to '23.

[Unknown Attendee]

And finally, could you please give an update on the closing of your recent acquisitions of the cartonboard division.

[Peter Oswald, executive]

Yes. The update here is a quick and good one, unchanged. We expect the acquisition of Kotkamills in Finland to be closed by midyear in Kwidzyn in Poland during the third quarter of this year. And we have started to prepare the post-merger integration.

[Unknown Attendee]

Peter, thank you very much for this interview.