Mondi plc

Good morning, all, from my side. I'm Andrew King, your group CEO, and I'm joined here by Mike Powell, our CFO. I'll provide some highlights before passing on to Mike for an overview of our financial performance. I'll then give you an update on performance of each of our business units before wrapping up with an update on some of our key strategic initiatives. After that, Mike and I look forward to taking your questions. I'm pleased to report that we delivered a strong performance against the backdrop of what were very challenging trading conditions. Macroeconomic factors have resulted in a slowdown in demand, in turn pressurising margins and profitability relative to the very high levels achieved in 2022. While EBITDA is down, the resilience of the business is amply demonstrated by the still strong margins and returns achieved and our very strong cash generation of 554 million euros in the period, up from 519 million in the prior period. The commitment of our people, our diversified portfolio of sustainable products, strong vertical integration, and enviable cost competitiveness are what enable us to deliver strongly in these market conditions. Importantly, we are able to take a long-term view on investing in our portfolio thanks to the strong cash generation. of a robust balance sheet and the confidence we have in the structural growth offered by the markets we serve. We remain fully committed to our 1.2 billion euro expansion investment program and we're making good progress with all projects on track and within budget. I'm delighted that we could also open up a further growth option during the period by concluding an agreement to acquire the Hinton pulp mill in Canada. but it provides unity to build on our global leadership position in craft paper and bags. We continue to make good progress on our Mondi Action Plan 2030 sustainability commitments, despite the many end winds that arise during an economic downturn. I'll come back later to some of the exciting new products we are developing with our customers centered around sustainable packaging solutions. I remain convinced that the current slowdown in our packaging markets is cyclical rather than structural. And I believe the investments we are making today will put us in a great position to leverage the strong structural growth trends in these markets well into the future. I'll now hand over to Mike for the financial review.

Thanks, Andrew. Good morning, everybody. So let me take you through the group's financial results. And to be clear, all the numbers that I talk about are for the group's continuing business, which exclude Russia though I will touch upon that separately later. We delivered strongly in the period against the backdrop of challenging market conditions. Underlying EBITDA of 680 million euros and basic underlying EPS of 67 euro cents per share were both lower when compared to the exceptional performance seen in the first half of 2022, which saw favorable market conditions. Though, as can be seen when comparing to the first half of 2021, it's clear that we continue to deliver strongly. The cash generation of the 554 million euros was up on the prior year, testament to the strong cash characteristics of the business, and return on capital employed, which is a 12-month rolling measure, was 19.1%, similar to the prior year. Here you can see the main drivers of the change in underlying EBITDA when compared to the first half of 2022. Our volumes were down driven by softer demand, in part due to customer destocking and softer markets, except for containable volumes which were broadly flat. Selling prices were higher in flexible packaging, lower in corrugated packaging. Input costs were higher half year on half year across most major categories. Now, given the economic environment has been incredibly volatile over the last 12 months with significant changes seen in both selling prices and costs. On this occasion, I've therefore included a bridge of sequential performance from the second half of 2022 to the first half of 2023 to explain the current momentum that we see in the business, which I think is more helpful. Volumes were lower due to softer demand and destocking, and as you can see, the decline in selling prices. Container board prices were lower, half one on half two, and make up a large part of that bar. These started to reduce in the second half of last year and stabilized towards the end of the first half of this year. Craft paper prices, which generally lag container board prices, along with uncoated fine paper prices, only started to reduce during the first half of 2023. Input costs were lower compared to the second half of 2022. Wood costs remain elevated during the first quarter, but declined during the second quarter, whilst paper for recycling costs were lower throughout the period, with energy costs easing from the winter months. We continue to see easing input costs as we progress into the second half of the year. forestry fair value gain in the period was 86 million euros driven by a higher than usual second quarter of the year though down 53 million euros on the second half of 2022. as we look forward into the second half this year we expect the forestry fair value gain to be in line with historical averages that's around 30 euro millions though clearly this is a best estimate The strong through cycle cash characteristics continue to be a key quality of the MONDI business. MONDI has generated strong cash flows, as shown by the delivery of more than half a billion euros in cash generated from its operations during the period in challenging market conditions. On the left of this chart, you see our opening net debt position of approximately a billion euros, followed by the cash generated from the EBITDA contribution that I've just taken you through. We continue to invest in the business through cycle, The 412 million euros that you see includes 310 million euros on our organic capital pipeline in the period, 90% of which is into our packaging businesses. And for the full year, we expect total capex as previously guided in the range of 800 to 850 million euros as we continue to progress on our approved expansionary investments, which I'll elaborate on in a minute. The 412 also includes the acquisition of the Duino Mill, which was completed in January 23. And working capital was a small cash outflow, which got better as the half progressed and was significantly better than the prior year. I'd still expect us to have total working capital to revenue at the end of the year within our normal range of 12% to 14%. The rest of the chart is self-explanatory, and all that leaves us with a strong balance sheet levered at .8 times with net debt of approximately 1.2 billion euros. And this gives us the continued financial strength and resilience to invest through cycle in the business. And I just want to actually remind you of organic investment pipeline on the next couple of slides. Here you can see the approved expansion projects totaling the 1.2 diversified across geographies, value chains, and products. We're confident in the long-term growth of the packaging markets that we operate in and our position within it and are investing through cycle to deliver value-accretive growth and meet the growing customer demand for sustainable packaging and paper products. The pipeline is well executed. It's on track and it's on budget. The horizontal lines on this slide are representative of when each project is expected to ramp up. starting with the project's commissioning date and ending when the project is fully operational. And as you can see, these projects are expected to start up over the next two years and then take two to three years to ramp up to full production. We look forward to completing and commissioning the modernisation project at our Kopio mill in Finland towards the end of this year, together with some investments in the converting plant network, and we will see their contributions from next year as production is ramped up Some of the larger projects, including the new paper machine at Steti, are only planned to start up in a couple of years, and therefore we'd expect meaningful EBITDA contribution from 2025 for these projects. As we said prior, these projects will deliver through cycle mid-teen returns when fully operational. Our capital allocation framework and discipline has not changed. As I've just taken you through, we're investing behind the growth packaging markets that we operate within. Payment of ordinary dividends to shareholders remains an important part of capital allocation. And as you will have read, the board has declared an interim dividend of 23.33 euro cents per share, following our normal mechanical process being one-third of last year's total dividend. M&A opportunities continue to be evaluated in line with core strategy. And indeed, opportunities may increase in the current environment where there are more challenging conditions and higher costs of money through interest rates. As ever, if we believe we have surplus capital, we'll distribute that back to shareholders on a timely basis. And all that whilst retaining a strong balance sheet with investment grade credit metrics. Let me touch briefly on the Russian operations. As I'm sure you're aware by now, they've been treated as discontinued operations and held for sale and, therefore, not part of the figures presented on the previous slides. We completed the sale of the three packaging converting operations during the period and received cash of 30 million euros. The board remains committed to divest 64 mil, and as you'll be aware, we terminated the proposed sale to augment investments due to a lack of progress in the buyer obtaining the required approvals. As soon as that happened, we restarted the sale process and we are in receipt of a number of conditional offers from potential buyers. We continue to work through that process, though as I'm sure you understand, the situation is highly complex within an evolving political and regulatory framework. So lastly, on to the group's technical guidance for 23. I've referred to most of these already by now. all of which are unchanged other than the net finance costs, which based on prevailing interest rates are expected to be slightly lower than previous guidance at around 100 million euros due to higher than previously anticipated interest income on the cash balances held in the group. So let me wrap up. We've delivered strongly in the challenging markets. Our expansionary capital investment pipeline is on time, and on budget to deliver value accretive growth with strong cash generation and a strong balance sheet with continued confidence and strategic flexibility. With that, let me hand you back to Andrew.

Thanks, Mike. I'll now take you through some more of the highlights around the business unit performance before coming back to some of our key strategic initiatives. Turning firstly to corrugated packaging, as you see, profitability declined from the very high levels achieved last year on the back of the generally softer demand and pricing pressures. Pleasingly, though, our container board volumes held up well despite the softer overall market, supported by a highly cost-competitive production base and integration strength. Similarly, a robust margin performance in corrugated solutions, despite volume pressures, mitigated the effects of the generally sluggish markets. While we have seen a sharp reduction in containable prices since the highs reached in mid-2020, prices do now appear to be stabilizing. On the demand front, it seems that the worst of the inventory destocking is over, and we are seeing an improvement in the order situation for our paper mills and converting operations as we enter into the second half. Similarly, on the supply side, at current levels, we would estimate that around one third of European recycled container board capacity is cash loss making, clearly an unsustainable position. We have seen this play out in announced capacity closures, both temporary and permanent, and delays or cancellations of new projects. I do expect this to continue without a meaningful change in the margin dynamics for the industry. In this context, our focus on investing in high-quality, low-cost paper production with strong forward integration positions is extremely well to deliver through all market conditions. Our pipeline of new projects will enhance the leadership positions we enjoy and reinforce our cost competitiveness while also selectively expanding our geographic reach. Flexible packaging, turning to that, you can see it delivered a resilient performance. While we are seeing the effects of the economic slowdown on demand for our products, and pricing in the key paper grades has come off from the highs seen at the end of 2022, again, our broad product offering, very strong integration, and global reach have supported the strong delivery. Prices in key craft paper grades increased significantly through the course of 2022, as you'll remember, and held up well through the first quarter of 23, despite the slowdown in demand. Through Q2 and into Q3, we have overseen prices come off. With demand appearing to remain soft in the short term, and given the structure of the industry with significant fixed price contracts, we would not expect any real upward momentum in pricing in the near term. We nevertheless still see good, strong structural growth dynamics in this market in the medium term, something that I'll come back to later in the presentation. Positively, as Mike already mentioned, input costs are generally coming off from the highest seen in the second half of 2022. Most notably, central European wood prices, which were significantly impacted through the European energy crisis, came off through Q2 and we'd expect this to continue into the second half. Consumer flexibles and functional paper and films delivered a particularly resilient performance as higher selling prices and mixed benefits offset high input costs and some softness in demand. Again, in flexible packaging, we continue to invest to leverage our unique platform and the strong structural growth drivers we see in our markets. Again, I'll come back later in the presentation to give you a bit more color on some of our initiatives in this regard. Anchor's refined paper delivered a flat year-on-year result, but as Mike explained, excluding the higher forestry fair value gain, the result was down. Our European business was negatively impacted by a sharp decline in demand. While we continue to gain market share as the long-term supplier of choice into our chosen markets, the extent of the decline in demand in Europe in the first half has resulted in us taking selective downtime in our European mills. While there's clearly a strong cyclical element to this demand decline exacerbated again by de-stocking in the supply chain, there's no doubt that there's also structural pressures. We are, though, seeing a supply side response with significant capacity having left or leaving the market. I suspect that more is needed. We recently closed one of our machines at Neusiedler Mill in Austria and the supporting infrastructure, removing around 150,000 tons of capacity. While European markets have been under pressure, the South African business enjoyed a more favorable trading environment, with good demand and stable pricing in the domestic uncoated fine paper market. Profitability was negatively impacted by declining pulp prices over the course of the period, although it is pleasing to see some stabilizing of pulp prices in Asian markets more recently. Here we remain very focused on driving productivity and efficiency measures at our uncoated fine paper operations, while investing selectively to improve cost competitiveness and our environmental footprint. Turning then to some highlights on the progress we are making on some of our key strategic initiatives. Mike has given you an overview of how we are doing with our broader CapEx investment programs, but I wanted to focus specifically on our recent initiatives in the craft paper and bags value chain. where we enjoy a global market leadership position and I know is one of the less understood parts of our group. I remind you first of our leading global position in the craft paper market, in particular the subgrade of SACCraft. We currently produce around 1.3 million tonnes of craft paper from five mills. We are both the largest global producer and offer the widest product range. Our extensive machine park allows us to specialize machines on different craft paper grades, giving us cost and quality benefits, and ensuring security of supply, which is critical for our large multinational customers. Importantly, we see good growth in demand for these products. The traditional end-use applications in the industrial space remain robust, while we are seeing good growth in new applications centered around e-commerce and plastic substitution in consumer applications. The new machine, Steti, which is due to start production in 2025, will build on this leading position. I remind you that while the Steti machine is dedicated to satcraft paper, it will allow us to specialize other machines on different craft paper grades. So you can assume the market impact is roughly 100,000 tons of satcraft and 100,000 tons of speciality craft paper. I'll come back later to our latest move in the space, the acquisition of the Hinton pulp mill in Canada. Turning quickly to this chart, which illustrates our leading position in the global sackcraft market quite clearly. We are the largest sackcraft producer by volume, have the most machines dedicated to its production, and are the largest player in the downstream converting market. No other player can match our scale, geographic reach, and integration strength in these growing segments. Looking at the downstream presence in the paper bags market, we currently sell over 6 billion bags per year with leading positions across Europe, North America, Middle East, and North Africa. We see good growth dynamics in these markets, and our scale, efficiency, reliability, and quality give us confidence that we'll continue to grow market share. Focusing briefly on our position in the Americas, we're currently the number two player in the US market. enjoy a significant market leadership position in Mexico, and have a growing presence in the north of Latin America. Summarizing then our strategic position, we are a global market leader in both craft paper and paper bags. Our integration across the value chain brings real competitive advantage and high barriers to entry, and we see good growth prospects in these markets. As already mentioned, the recently announced acquisition of the 250,000 tonne per year Hinton pulp mill in Alberta, Canada builds on this platform. We are excited by the opportunity it brings to invest in a new paper machine onsite, giving us a cost competitive, fully integrated production base for high quality extensible sackcraft with capacity of around 200,000 tonnes per year, a grade which is currently not produced in North America. The cost competitiveness comes from a combination of highly cost competitive wood resources, supplied mainly through a long-term supply agreement with West Fraser, and good logistics into the main end markets we serve, we intend to serve in North America, with the majority of the volumes intended for our bag converting network in the Americas. Access to these high quality sack calf grades will ensure we are extremely well positioned to continue building on our leading market positions in the large and growing America's market. Turning then to our sustainability commitments, I'm pleased to say we're making good progress on our Mondi Action Plan 2030. As you know, this encapsulates the group's sustainability commitments and guides the actions we are taking for the next decade. Circular-driven solutions created by empowered people taking action on climate. On circular solutions, while we recognize the short-term headwind created by the global macroeconomic challenges, the cost of living crisis, energy security concerns, and the like, we continue to make good progress in developing solutions for our customers that are fully recyclable, compostable, or reusable. By way of some examples, we launched a paper ban to hold individual products such as bananas, and we continue to gain recognition for sustainable solutions in retail applications such as our Hug and Hold solution to replace plastic shrink wrap in, for example, the wrapping of soft drink bottles. Recent investments in Poland are also expanding our capacity in mailer bags and an alternative to plastic wrap in e-commerce applications. In the period, we also completed our most recent group-wide employee survey. We got a lot of positive feedback and also areas for improvement to ensure we meet our ambition of being an employer of choice. Important now is we take this feedback and implement the necessary actions, a task our teams throughout the group are embracing. We continue to work hard to build on our leading safety performance, striving to ensure our people return home safely every day. Finally, we continue to work in taking action on climate. Greenhouse grass emission reductions is clearly the key focus with ongoing investments in our facilities to reduce our Scope 1 and 2 emissions and increasing focus on Scope 3 emissions, requiring strong collaboration across the supply chain. To summarise again then, we delivered a strong performance in the period in what were and remain challenging market conditions. is testament to the inherent strength we enjoy as a business and the fantastic commitment of our people. Our focus on operational excellence, customer service and quality, our highly cost-competitive asset base and strength in integration bring real advantage. This gives us the confidence to continue investing in the business in support of the structural growth we see in the markets we serve, ensuring we are well-placed to continue delivering value accretive growth sustainably. With that, I thank you very much for your interest and welcome any questions Mike will facilitate. Thanks, Andrew.