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.

So we have a number of questions coming through. If I could take the first one. Cole Hawthorn from Jefferies. Morning, Cole.

Hi, Mike. Andrew, thanks for taking my question. Can I start with one to better understand the Hinton pulp mill acquisition? Am I right in understanding that you're getting the pulp mill for kind of a low value and then you're putting in the 400 million euros so that the fact that you're getting the pulp mill for the low value, that's gonna be able to allow you to generate your 15% return on capital. And when I think about that business, can you talk about the fiber supply agreement with West Fraser Timber, so you're getting low cost. And maybe some of the specifics, considering you called out your leadership position on slide 19 with your SAC and craft paper business. But maybe just explain why, you know, if you're operating in premium SAC, you can produce the grades lower on your machinery, but, you know, people can't compete with you on that premium grade. Thank you.

Very good. Yeah, thanks, Cole. I think for us, this is a very exciting move. I mean, as you rightly say, in terms of the acquisition price, it was a low price. Very much for us, this is an expansionary project that we are looking at here. What we acquire day one is a unbleached craft pulp mill, a 250,000 ton mill. Obviously, we're in an area with vast experience of pulp and paper production, so we're very excited to have a highly skilled team coming with the pulp mill. But our intention very much is then to forward integrate that pulp into a high-quality extensible sackcraft. We have performed, as you could imagine, a number of tests on the pulp itself because you need a particular quality of pulp to be able to produce the high-end sackcraft products. And we're delighted with all the characteristics of that pulp, and that gave us the confidence to look at this project for forward integration. So, yes, our intention is very much then to spend the capex in expanding on that pulp resource by forward integrating into 200,000-tonne sackcraft machine. There will also still be market pulp available after that as well, but it will be relatively small pulp sales. Why is it, you know, why are we confident this is highly cost competitive and, frankly, it's very difficult for others to replicate? Firstly, as I say, the quality of the pulp itself is very important, which in turn comes from the quality of the timber resource. We have a long-term supply agreement with West Fraser who owns the forestry in the area and also, very importantly, the sawmill activities. And as you know, there's always a symbiotic relationship between pulp mills and sawmills. So West Fraser is very much focused on what they call the upstream business of trees and sawmills. As you know, our expertise is in pulp and paper production, so I think there's a great marrying of capabilities there. We will be enjoying the benefits of a lot of the offtake of the chips from the sawmill, which is on site, coupled with the other sawmills from West Fraser. And the supply agreement we have, we are, you know, very confident that the cost of timber will be highly cost competitive on a global basis. That in turn gives rise to the cost competitive of the pulp mill and in turn also the paper What we also have that simply others don't have is A, the expertise in this type of paper production, because this is a very sophisticated form of paper, which is called extensible paper. It stretches and breathes. It's extremely strong. And I think it shouldn't be underestimated the depth of capability we have in our group in this particular product, which is simply not available to others. And then, of course, we also have the forward integration benefits. Our Americas business continues to flourish, to grow well, and obviously logistically getting paper on trains to distribute into our Americas bags business is simply something that's not available to others and gives us real competitive advantage there. And this is an area which I think has been underinvested typically in the North American markets for various reasons. But certainly for us, it's a core product, strong vertical integration benefits, and I believe also really exciting growth I mean, as you might have seen recently, for example, one of our key e-commerce customers mentioned that they are now doing away with plastic wrap on their products. The obvious alternative to plastic wrap in e-commerce packaging is paper bags. It's a big growth driver already in the European markets, and I'm convinced it will also be in the America's market, in addition, as I said, to the traditional use of paper bags, which continues to develop very strongly. I think it's a combination of all those factors which gives us a lot of confidence that this is going to be a highly cost competitive production base with very strong integration benefits and all of that combined gives us really confidence that we'll deliver superior returns through this investment.

Thanks, Andrew. Cole, did you have a second question?

Yes, just as a follow-up, going on to the division specifics, I'm just wondering how you feel about, you know, the cyclical side of things. I mean, your release seems to call out that you're feeling container boards starting to stabilize with pricing and kind of volumes here. Could you just talk maybe about the sack and cough paper business? I see you've taken a fair amount of downtime on the production side. I'm just wondering where we are in the destocking cycle in the flexible packaging business. Thank you.

Yeah, I think, Cole, as you know, the cycle is somewhat different in the paper-based side of flexibles. I think one should differentiate between, Cole, more the paper-based solutions and the consumer flexible side, which has been very robust throughout this, as you would expect, because it's a highly defensive business in a lot of senses. you know, just in terms of the journey on the fat craft side in particular or craft paper more broadly, as you know, I mean, the pricing was going up sequentially through the whole of 2022. It didn't go up as fast as the container board grades. You know, container board peaked in about mid of 2022 and then has been coming off since then. Craft paper really peaked towards the back end of 2022, resilient into Q1, and then you started to see some price erosion into Q2, and we've said very clearly into Q3 as well. I think it typically is a sort of later cycle product than the container board grades. That said, we obviously operate very much on a global basis in SAGcraft, as we demonstrate from those slides. So the different regional markets that we serve, both in the upstream and the converting side, are seeing different dynamic supplies. So Europe has clearly been softer. America is much more resilient globally. similar with Middle East, North Africa. So they are different. The different markets have been reacting somewhat differently. I think even within Europe, you see different end uses reacting differently. It's interesting that building materials, I mean, everything is off year on year, again, with very high comps from a volume perspective. But, you know, you're seeing things like the building materials actually be fairly resilient relative to, call it, cement and chemicals and the more I suppose, cyclically influenced business and uses. So I think, yeah, I mean, recalling obviously pricing to be sequentially soft, I mean, just on averaging effect, it will be lower in the second half. I think the the de-stocking is coming towards an end. But obviously at the same time, I think it's, as I said in my opening remarks, I think it's too soon to call any kind of pricing, you know, upward pricing momentum in the SACRAF grades at this stage. I would suspect that's into the new year before you'll see that.

Thank you. Thanks, Cole. If I could move on to the next question, which we'll take from Lars at Credit Suisse. Morning, Lars.

All right, thank you for taking the questions. A bit moving on to the prior questions. Generally, there's a lack of outlook, of course, in your statement this morning. I appreciate there's a lot of uncertainty. But given what we said today, you kind of discussed about improving order books on the container board corrugated side. You obviously gave some details now on the graph paper side. How should you have us think about H2 versus H1 in sequential profitability and taking out the forest value gain, which, of course, can be anything? And with a particular focus then, I suppose, on price over cost, what you can see today in terms of your cost base. And then I also want to just stay with the Hinton pulp mill a bit. I suppose the one conclusion one could draw is the low price reflects a cost base or potential investment needs in the pulp mill. So can you give us any view on are you intending to reinvest in the pulp mill as part of that $400 million investment, or is that completely dedicated to the paper machine? And then final point, wood cost. You mentioned it has declined through Q2. Can you quantify? And then what do you see? seeing for that particular item heading into page two. Thank you.

Thanks Lars. Why don't I start with wood costs because that plays into the sort of costs as we go into the second half and then Andrew can talk about the commercials as we head into the second half which includes both selling price and the costs and then we can get on to the end. Wood costs As you know, we called at the beginning of this year that we believe that they would ease through the year. We have certainly seen that into Q2, and I would expect to see that continue into Q3. You have to really dissect it because wood costs in Central Eastern Europe went up quite sharply through Q4 of last year. stayed high in early parts of Q1 and have come down in our purchased basket through Q2, and I think they will continue to fall into Q3. Scandinavian markets are slightly different. They didn't go up as sharply, but they have stayed at relatively high levels through Q1, Q2. there's less sign of those easing, to be honest, Lars. But, you know, a large part of our basket, Central Eastern European, we have seen ease through Q2, and I would expect to see that continue to Q3.

Can you quantify?

Yeah, I think working backwards, I mean, on the Hinton investments, I mean, you're correct in the sense that that $400 million indication, and we don't actually own the mill yet, so we have to complete the acquisition, and then obviously we will be working up the project feasibility and plans, etc., But certainly, you know, that $400 million includes not just obviously a paper machine on its own, but also the related mill infrastructure, the upgrade of the pulp mill and the like as well. So it's not purely that. Similarly, I mean, it happens to be a similar number that we are investing in Steti, but as you know, that also incorporates a paper machine plus, plus pulp mill upgrade and the like. So it's not purely the cost of a paper machine and its infrastructure. In terms of, you know, forward-looking, call it guidance, I mean, you're correct in that, obviously, I think it's an uncertain world out there, and I think there are any number of moving parts, and that makes all our lives complicated at the moment. But I think, you know, what I would say is – there are indications, you know, positive indicators out there. You know, I look at the order situation and it's definitely stabilizing. And I think it's interesting that we are starting to see a more regular pattern of ordering from our customers. I mean, we've had anything but regular over the last, frankly, two to three years when you consider the ups and downs and volatility created from COVID through energy crisis, Ukraine, etc., and all the implications of that over the last, you know, number of years where everyone's having to manage extremely volatile sort of situations. And volatile means up and down. I think sometimes people always seem volatile means only down. I mean, it's been volatile both up and down. And it would appear to me certainly that, you know, when we start to see our order situations now, it does feel more, it's getting more normal again, which is frankly encouraging. And I think, you know, stock levels in the containable grade seem to be sort of normalizing on an industry basis. All of these type of indicators are encouraging. But, of course, it's always extremely difficult to call a turn. And, you know, I think that's always a challenging position. But, you know, what we know is for facts is what we say in that outlook commentary is entering into the Q3. I mean, prices are down on average 8%. versus the first half because by definition they've been coming off through the first half but at the same time costs are also coming off and certainly we would I mean, it feels as though there's more to come on that regard. I mean, wood is obviously one of the big drivers and Central European wood costs, as you know, were very adversely affected through the energy crisis, but we have seen that turn and it's coming off and I think there's more to come on that. Scandinavian wood costs, which we are not as exposed to, but we do have some exposure, seem to be, you know, slightly different sort of cycle. They didn't go up as fast as Central Europe, but they still seem to be, you know, progressing sequentially up to you know maybe flattening now so so yeah moving parts but you know I think what's also important to bear and what gives us confidence here is and I know this sounds strange but there is clearly a lot of pain out there I mean we are seeing you know you take that you take that cost situation in in recycled container board I mean there is a lot of capacity, which is underwater right now. It's manifesting in the short term in a lot of commercial downtime. But I think that is not a sustainable picture in even the medium term. So is it a demand-side recovery or supply-side rationalization? But these things will happen. one way or the other. So I think, you know, that also gives us confidence that, you know, we're seeing the worst of it right now.

Thank you, Lars. I can take the next question from Charlie at Exane BNP.

Morning, Charlie. Three quick ones, please. First, on wood, since Central European markets aren't sort of well managed, tracks in terms of public data. Could you just give us a feel for the quantum of wood cross headwind you had in 2022 so we can understand, you know, obviously if it all unwound, you know, where might we eventually get back to? The second question relates to Russia. I appreciate that, you know, discussions are ongoing with central buyers, but you did a small, relatively say that a small impairment of the and the net book now is about 850 million euros. If you were to achieve that, is that what you'd receive or would there be a tax on that? I'm just trying to understand the potential there. And then the third and final question just relates to your MAP 2030 program. I think last year you said 83% of your sales were recyclable, reusable or compostable. I just wonder where do you expect you might be at the end of this financial year in that regard?

Thanks. Shall we work backwards? I will take the third question and maybe Mike will take wood and Russia. On the map 2030, yes. I mean, as you know, our commitment is to drive fully in our full portfolio to be recyclable, compostable, renewable. We, I can't, I mean, I don't know what the exact number is in terms of the percentage today, you know, at the half year. And it's, frankly, it could be a bit misleading because, you know, half year numbers are invariably impacted by seasonality and things like that. So one always looks at it more on an annual basis. It's safe to say we are making very good progress from a development perspective in terms of developing alternative solutions if we do have products which are, for example, non-recyclable in our portfolio. I think our development and innovation teams are working very hard to develop alternative solutions. I think the challenge at the moment is is obviously also introducing those into the markets because, as I said in my commentary, in an economic downturn, invariably people become that much more cost-conscious and also, frankly, a little bit more conservative when it comes to introducing new product categories and the like. And I think that is playing out to some extent. But having said that, our customers remain very committed to driving the change their customers in turn want to see so they want and need these products but obviously the rate of adoption I think it is fair to say has slowed down somewhat but I'm convinced that the trend remains very clear so in short I think we're doing everything we can on our side but of course it also takes our customers to adopt some of these solutions and that is always a difficult thing to predict as to how fast that rate of adoption happens but The long-term trend is very clear. All the conversations we're having with our customers points to a rapid desire for these sustainable solutions. And, of course, the regulatory environment is also incentivising these sort of changes. So we're very convinced that the long-term trend is clear. Sorry, maybe Mike could go to the other questions.

Yeah, thanks. Let me take Russia first, Charlie. I mean, I think the important thing on Russia is, you know, the board remains committed to divest the mill. We have clearly, we clearly continue to run a process. We believe this is a good asset that a number of people are interested in. It's clearly quite a difficult environment and a difficult process for all. And therefore, the board's taken a judgment on the valuation, which you've talked about I think the first thing we need to do is agree a deal, which we haven't done at this stage. And as soon as we've done that, we can clearly give a bit more clarity, because only once you've done that do you know all the answers, or at least some of the answers to the questions you're asking. So I think at the moment, we've taken our best judgment from the available information. We continue to work it hard and clearly. if it moves forward to a position of any change from that that we've said either in the past or today will clearly update the market soonest. In terms of wood costs, I mean, I said last year we spent about a billion on wood last year as a rough number. That was weighted towards the second half, probably 45%, 55%, something like that, 40%, 60%. Again, first half of this year has been relatively high, so not that different to the second half of last year, because, of course, it takes time for the wood prices to have fallen and then come through the income statement. I think the question, therefore, is how low can the second half be? We don't know that yet, but sequentially, so half two on half one, we're certainly seeing in Central Eastern European wood prices coming off certainly high single price. low double digits. So, you know, but meaningful as we move into the second half of the year. Does that help Charlie? Great, thank you very much.

Yes, very helpful, thank you.

Next question from David O'Brien. David, good morning, good body. Morning guys, can you hear me okay? Yeah, very well, thank you.

Great, thanks for taking my questions. If I could start on corrugated first. Looks like volume's down 8% to 9% in the first half. I wonder, could you quantify what the exit rate is coming into the Q3 period? And maybe just a little bit more color on what's driving the improvement in order patterns. Is it certain customer types, or is it just a broad base? Look, we've run our inventories down. I just have to start ordering more normally. And I guess you've also talked about the pain out there and potential M&A opportunities. Are you seeing more M&A coming over your desk or opportunities to take advantage of some of that pain. And then in UFP, clearly a difficult environment, you've taken action to streamline production by closing the mill in Austria. What benefits should we see from that into the second half? If you could quantify them, or maybe if there's a benefit into 2024 that you could call out as well from just that streamlining of production, please.

Yes, thanks David. There's a few questions wrapped up in that. So I think firstly on the corrugated kind of volume situation. So I mean, I always remind you in terms of our converting position in corrugated, you know, we're very much regionally focused in Central Eastern Europe and Turkey. So, you know, it's never a reflection of the overall market dynamics. And I think the other caution I'd give at the moment, of course, is because of all this volatility around, you know, the comps and things confuse the story to some extent. I think in simple terms, in overall volumes, they've been roughly flat Q2 on Q1. In terms of relative to prior year, that indicates an improvement, quarter on quarter, but that's because the comp got progressively easier, if that makes sense. And I think you'll see the same sort of play out into the second half because, of course, the comp gets progressively easier because it was really from the middle of last year that you saw a turn in the markets and the softer demand picture. So one has to be a little bit careful how one interprets these sort of year-on-year numbers and the like. But certainly it feels as though, you know, as I say, sequentially things stabilised And I guess more importantly, going into Q3, you know, for us, both the upstream and the converting business, you know, the order situation seems to be, you know, sequentially improving, I would say, is the way to describe it. What is driving that improvement? No, I think you wouldn't point to any one segment or any one area of recovery. You know, so much is more, frankly, geographically is where you sort of might see differences as opposed to end uses. I mean, Turkey's had a very up and down time, but it does seem to be getting better, which is encouraging. And similarly, Central Europe also, you know, feeling a bit better, but it's not one point to different end markets per se as being, you know, starkly different from each other. Your question on M&A, as we said, at the full year results and clearly in a more challenging market environment, potentially it gives rise to greater – it gives more strength to buyers over sellers, I guess. But obviously one has to be careful what you look at and – And as always, one needs to retain one's disciplines. But it always is and remains an avenue for us to continue to explore. But does that give rise to anything? That's always impossible to put a prediction on. But we continue to look for opportunities here. You know, that give us synergy opportunity in the footprint that we work in and where we believe we have strength. and we will continue to do so, and that applies across our packaging offering. In terms of the fine paper question, I think it's specifically related to the restructuring at Neuseidler. I mean, it does take a bit of time for the benefits to come through, because obviously, you know, your restructuring doesn't just happen overnight. I mean, we're in the process of optimizing it now. So the machine is closed and obviously all the related infrastructure and resources around that are being reorganized at the moment. I certainly expect some, you know, some improvement in the underlying cost base, you know, into the second half. Obviously much of the sort of Profitability improvement also depends on, you know, the market dynamics in the short term, and frankly that overrides, I believe, any near-term changes in the overall cost base. So, you know, it does have effect, but it's not that material in the overall picture. But obviously what it does mean is, you know, we are able to optimize the remaining machines in Neusiedler, which are the smaller, more agile machines, focus very much on the speciality products, which is, you know, where we can make money in that mill. With Rijon Baroque in Slovakia being our bulk business, where we focus very much on the bigger volume grades.

I'm conscious of time, and I do want to be respectful of your time and finish at 10 o'clock. We'll see if we can get two more in. First one from Justin Jordan at Davey. If we could get Justin.

Thank you. Good morning, everyone. And thanks for the additional disclosure in the paperbacks. Just using that, turning to slide 19. I suppose first two quick questions on paperbacks. Firstly, it would appear like your volumes are down about 8% year-over-year in the first half. And I appreciate there's a myriad of different end markets and different geographies here, but can you give us some sense of is that sort of indicative of underlying end market demand down about 8% or are you gaining share? Do you have any sense of, within that minus eight, how much of that is destocking and how much is underlying demand weakness? I appreciate that's difficult to disaggregate. Thirdly, there is a Russian competitor that recently sold its European packaging operations to a Luxembourg firm. I don't know, has that in any way changed the competitive dynamic in recent months, specifically in European SACs?

Thank you. Yeah, thanks, Justin. I'll take those. I mean, in terms of – I think it is fair to say that we typically have been gaining share, you know, as a – it's always difficult because, you know, we frankly operate on a global footprint, so you can look at individual market shares, et cetera. But, you know, we have been very successful, and I think we continue to be very successful in gaining share in all the markets that we operate. because, you know, frankly, we are by far the biggest, the most efficient, I would believe, and frankly have the best quality of product and service. You might say I would say that, but I think our customers would also agree with that. And that really gives us a fantastic – and, of course, our integration strength as well is key in this as well. So I think that, you know, those attributes really allow us the opportunity to continue to both – both expand on a global basis, but also gain share in the markets that we are, you know, already present and have leadership positions. And so, you know, I think you've seen over the years, you would see over the years that we have progressively gained share as we've developed our pet business. In terms of, you know, destocking versus sort of underlying demand, As you rightly point out, that is an extremely difficult question and one, frankly, I wouldn't even hazard a guess. I mean, it's impossible, frankly, to unpick all of that because you don't have total transparency through the value chain, but undoubtedly there has been an effect of destocking, which has been a common theme across most segments because, again, one mustn't forget that it wasn't long ago that everyone was nervous about security of supply and we're building up stocks wherever possible. But of course, and also with anticipation of price increases coming through, of course, the reverse happens when prices have been moving down, when supply has been available, and then everyone almost takes the reverse position. but to just aggregate and give you sort of firm numbers, I think, frankly, would be misleading. I cannot remember if there was another question.

Yeah, sorry, just on the Sagasa sale to a Luxembourg investment firm, whether that in any way has changed the competitive dynamic in recent months?

Not that we can see. I mean, obviously, the main change, was when the Russian craft paper was no longer allowed into Europe because of sanctions, and that clearly did tighten things up. The volumes out of Russia on the craft paper side, I think, are far more relevant to us than the converting capacity that remains in Europe. It's very difficult for us to tell what's happening with that competition.

Thank you. Thanks, Justin. I'm going to squeeze one last one in, which is James Twyman from President James. Mike is yours.

Thank you for all the disclosure. Two quick questions from me. SAC paper production was down 17% in the half, which was a lot less than the bag decline. And given that Russian exports should be reducing significantly, Could you talk around why that decline was so large? And then secondly, in uncoated paper, you mentioned Rosenbrock is your bulk business, and therefore there's not really a lot of interaction between that and noise either, I'm assuming. Given that market is declining potentially fairly sharply, what's your plan there to convert product from uncoated to other products? And my assumption is that it's not a huge cost for you, it's something that you could manage in the mill, but I'm just not sure about that.

James, I think, I mean, that's your question on the sort of, and I think you're looking at the production stats, so just to be clear, those volumes we show are production as opposed to sales, because sales is difficult to sort of disaggregate between the different segments, but I mean, a lot of that is to do with The destocking, I mean, we've also been sort of managing stock levels and the like. And, you know, we have taken down time in our craft paper machines to ensure our stock levels don't get to, you know, unmanageable levels. So it's a function. It's partly a function of that. Obviously, we also sell into the outside markets in craft papers. That's not a direct correlation with craft paper and the bags business. But it's also safe, as to my previous comments, to say that our bags business has done exceptionally well in a difficult market environment. So, yeah, it's a combination of those factors. In terms of the plans around Réjean Baroque, I mean, very clearly we see Réjean Baroque as a core asset selling into the Central European fine paper market. We think it has a great position in that market. Our customers value that security and reliability of supply. You know, we know there's a lot of pain in that market at the moment. We are seeing supply-side changes. We certainly believe, you know, we are the supplier of choice into that market, and we remain committed to supplying those customers. I agree with you that the asset base in Rojamborough does offer flexibility over time. I mean, you've, as you know, we've invested in that new container board machine in Rajon Baroque. We also have a craft paper machine at Rajon Baroque. And, you know, given the great asset base there, the great people we have there, and the flexibility that all that gives, you know, there are options we can look at down the line, but certainly it's not a near-term priority.

Okay, James, thank you very much.

Good. No, well, thank you very much, everyone. I see we're on the hour, so we'll let you go. But again, thank you very much for your interest. Just to remind you, I think we have delivered strongly in what we fully acknowledge is a very challenging market environment. but investing for the growth that we do see in these businesses and the strong structural growth that we know is out there and really building on that fantastic platform that we have in the different packaging businesses we operate in. So I look forward to continuing the conversations. As always, Fiona and team are available if you have any follow-up questions. But otherwise, thank you very much for your attention and goodbye from us.