Mondi plc

Good morning, all, and welcome to Mondi's 2024 half-year results presentation. I'm Andrew King, your group CEO, and I'm joined by Mike Powell, our CFO. I'll provide you some highlights before passing on to Mike for an overview of our financial performance. I'll then come back to give you an update on performance by business unit before wrapping up with an update on our strategic positioning. After that, Mike and I look forward to taking your questions. Going into the first slide, as you can see, we refer to a robust performance in the context of what remain challenging, albeit improving market conditions. Mike will provide you a lot more detail on the numbers, but it is pleasing to see a sequential improvement in profitability on stronger volumes, notably in our flexibles business, and price increases across our paper grades achieved over the course of the period. We are not yet where we'd like to be, but it is nevertheless does feel like we're seeing some of the much-anticipated upward momentum. Importantly, we continue to work hard on our self-help initiatives to ensure we can deliver value-accretive growth sustainably. I'm particularly excited by the progress we are making on our capital investment projects. While it can be difficult to stay the course on these investments in a down cycle, I firmly believe in our approach of investing consistently on a three-cycle basis to deliver value accretion. As we'll highlight later, we expect a meaningful EBITDA contribution from these projects from 2025 onwards. With that, I'll hand you over to Mike for a review of the group's financial performance.

Morning all, and thanks Andrew. Let me take you through the group's financial results. We delivered a robust performance in the first half of the year, trading in line with our expectations. It's pleasing to see a sequential improvement in profitability compared to the second half of last year on the back of those improving market conditions supported by our strong customer offering and broad product portfolio. So whilst Andrew will cover each business unit in a couple of minutes' time, In more detail, let me take you through the high-level group picture in the next few slides, starting with the change in underlying EBITDA when compared to the first half of 2023. We successfully implemented and increased our sales volumes compared to the prior year, supported by the improved market demand and customer restocking performance. Most of this benefit was achieved in our craft paper business, where we are the global leader. Sales prices were lower on average due to the substantial price decline seen throughout 2023, resulting in us entering this year with prices below last year's first half average prices across all of our businesses. Improving market conditions seen during the period enable price increases to be implemented across all of our paper grades. We expect to realise the full benefit of these recent price increases in the second half of this year in both of our packaging businesses. The largest move on the slide, in line with what we said earlier in the year, was the significant reduction in input costs, mostly due to lower wood and energy prices. If you recall, prices fell through last year and into early 2024. And as we enter the second half of 2024, total input costs are stable overall, despite recent increases in paper for recycling prices. Other net costs were up 123 million euros, again, as anticipated, about half of which was driven by increases in personnel costs as we continue to reward our exceptional workforce. The remaining half mainly compromises operating cost inflationary increases and income received in the prior year from an insurance claim that obviously doesn't repeat in the current period and therefore that impacts the year-on-year change that you see here. The forestry fair value gain in absolute terms was 49 million euros in the period, higher than we may have anticipated by about 20 million euros in absolute terms. though lower than the gain in the first half of 2023 by 37 million euros, which is shown here as the movement. We value our forests at the balance sheet date. Since the half year, wood prices in South Africa have decreased, and therefore we expect a lower forestry asset value at the end of the year, and we'd expect that to lead to a fair value loss in the second half. Lastly, the currency and other impacts total 42 million euros, mainly compromising the one-off loss from the devaluation of the Egyptian pound, as already reported at the end of Q1. Whilst not on this slide, I should note that the Richards Bay maintenance shut was rescheduled from the second quarter of the year to the third quarter. Whilst our full year estimated EBITDA impact from maintenance shuts is unchanged at around 100 million euros, I'd now expect that half one, half two split to be more like a 20-80 split rather than the 40-60 split as previously guided. So let me now take you through the movement in net debt. On the left-hand side, you can see we started the year with a net debt of €419 million, which included the proceeds received in 2023 from the disposal of the group's previously owned Russian operations. These were subsequently distributed to shareholders in February 2024, resulting in a leverage at around one times. Cash generated from operations is mostly made up of the next two items that you see. The EBITDA contribution that I've just taken you through of 565 million euros together with 160 million euro investment in working capital. About a third of this working capital investment is from higher inventory levels, with the remaining two thirds coming from higher debtors, both of which are mainly as a result of higher prices as we exit the half. Looking forward, I'd expect some of this cash to come back in the second half of the year with our working capital levels expected to end the year towards our usual 12% to 14% of revenue through cycle range. Our strong balance sheet continues to support through cycle investment in the business. More than €400 million invested in the half and for the full year, I'd expect to be towards the top end of the €800 million to €900 million range for capital expenditure and in line with previous guidance, as we continue to make good progress in delivering the organic growth investments, which remain on track and on budget. And Andrew will cover these again later. Interest, tax and other payments, as well as the payment of the final 2023 ordinary dividend, complete the picture, and both totaled approximately €200 million each. That means at the end of June, we had net debt in absolute terms of 1.6 billion euros, levered at around one and a half times net debt to EBITDA. So let me wrap up. We delivered a robust financial performance in the first half of the year, in line with our expectations, sequentially improved compared to the second half of 2023. The group has the financial strength and flexibility to continue to deliver value accretive growth. With that, let me hand you back over to Andrew. Thank you.

Many thanks, Mike. I'll now take you through a review of the business unit performance before again coming back to the progress we're making on our key strategic initiatives. Moving to corrugated packaging, you can see profitability was down on the first half of last year, but we delivered a sequential improvement on the second half. Container board prices fell sharply over the course of the first half of 2023, if you'll recall, before stabilising through the second half and increasing now through a series of price increases in the first half of this year. It is encouraging to see an upturn in demand for our container board grades, partly due to restocking but also indicative of underlying demand recovery. This, together with ongoing cost support, has driven these price increases. Our corrugated solutions business continues to deliver strongly despite the pressure from increasing container board prices. Box volumes grew in the period and efforts are underway to pass on the recent container board increases with the usual three to six month lag. Looking forward, we expect continued structural growth in these markets, supported by the drive for sustainable packaging solutions and the ongoing development of e-commerce markets. Clearly, a return to macroeconomic growth in our core European markets will also be supportive. To this end, we continue to invest for the future. We are currently ramping up production at various of our projects in both our upstream and downstream operations. to expand our product offering while improving cost competitiveness and enhancing our environmental footprint. Again, I'll come back to some of these later in the presentation. In flexible packaging, profitability was down on the first half of last year due mainly to the sharp fall in prices in the paper value chain over the course of 2023. Pleasingly, we have seen a recovery in sales volumes during the first half with a particularly strong recovery in demand for craft paper and a combination of restocking and, again, improving underlying demand. We continue to enjoy success in developing new sources of demand for our craft paper, primarily linked to the increasing need for sustainable packaging solutions in consumer markets. Again, I'll show you a few examples of these later in the presentation. On the back of the stronger demand, we successfully implemented price increases across our range of craft paper products over the course of the first half. Consumer flexibles and functional paper and films delivered good volume growth, which in turn supported better margins. We remain excited by the platform these businesses provide to develop innovative new products by combining our deep customer relationships in consumer flexibles with our breadth and depth of knowledge and expertise across the various substrates ranging from resin to paper. Again, in flexible packaging, we are making good progress in delivering our various projects to better serve these exciting growth markets. Uncoated fine paper delivered a stable result compared to the first half of 2023 and a sequential improvement on the second half. Good volume growth in our European business, driven by restocking and strong market share gains, coupled with selling price increases successfully implemented over the course of the period, supported this performance. As we move into the second half, it is clear that restocking phase is over and we are now moving into a more normal demand environment. The strategy for this business remains unchanged. We are focused on leveraging our market leadership positions in our two regional markets of Central Europe and Southern Africa, while driving productivity and efficiency measures at our operations. Our customers value our long-term commitment, together with our ongoing focus on quality, reliability and service, as reflected in the recent gains as others have exited these markets. I'd now like to come back to our strategic positioning and highlight the progress we are making in delivering on this strategy. Much of this will be familiar to you, but I make no apologies for this, as the strategy we have been pursuing for a number of years remains as relevant today. First, I'd like to remind you of how we are positioned as a group. As you know, we have leading positions in the markets that we serve. In corrugated, we have real strength in the niche virgin container book grades delivered out of our well-invested and cost-advantaged integrated pulp and paper mills. Further, we have a strongly integrated network with the leading corrugated solutions business in emerging Europe. In flexible packaging, we are the global leader in craft paper and paper bags with a strong position in the more sophisticated niche markets in consumer flexibles. In uncoated fine paper, we enjoy leadership positions in those two regional markets of Central Europe and South Africa. On the next slide, we illustrate our geographic positioning in our two growing packaging verticals. In Flexibles, as mentioned, we have a truly global platform with market-leading positions in the two biggest markets of Europe and North America and important positions in other regional markets spanning Central America, Middle East, Africa and Southeast Asia. We intend to continue growing wherever people need our high-quality, reliable supplies of our paper bag products, leveraging our unparalleled scale, know-how and integration strength. Excitingly, we are also consistently innovating new products to add to our portfolio, driven by the need for sustainable packaging. with the most obvious example being the growth we are seeing in e-commerce applications for our flexible paper bags. In corrugated, our focus is very much on growing in our core European markets, where we see significant further growth opportunities given our existing well-invested integrated platform and the still relatively fragmented nature of the market, even following recent high-profile consolidation steps in industry. which have largely been about transcontinental combinations. I am particularly excited by the opportunities that we have to leverage our unique platform to better serve our customers' needs, driven mainly by demand for more sustainable packaging solutions. On this slide, you'll see, for example, in each of those columns, some e-commerce solutions that are made from both corrugated, flexible packaging, or a combination of the two. We can truly be the single source of truth for our fast-growing e-commerce customers as they look to optimize their packaging. In the central column, we have some other examples where we have combined our expertise in flexibles and corrugated to solve some of our customers' most urgent challenges. On this slide, we show you a few examples of how we have innovated for our customers to develop sustainable packaging solutions, changing from the less sustainable option. In the first example, you will see we have moved from a non-recyclable multi-laminate structure to a fully recyclable monomaterial structure for pet food. In the bottom left-hand quadrant, you will see a new product we have developed in conjunction with our customer to produce fully compostable coffee pods. I particularly like this example because it was developed through a combination of our expertise in consumer flexibles, functional paper and films, and craft paper. a truly collaborative effort across our organisation, and of course it is a great product. We also continue to develop corrugated products to displace less sustainable solutions, as shown in the example on the top right of a corrugated pallet solution replacing a traditional plastic pallet. Finally, in the bottom right-hand quadrant are a couple of examples where we have replaced non-recyclable, multi-laminate plastic products with laminated paper-based solutions that are fully recyclable in a paper recycling system. So as you all have heard, we continue to have a clear strategy going forward, and let me summarize what that is. We see great growth opportunities in both our packaging verticals of corrugated and flexibles. In flexibles, we have a global platform in the paper-based value chain, which we'll continue to leverage through both organic growth and bolt-on acquisitions, if available. In corrugated, our strength and focus for growth, both organic and through acquisitions, remains very much in Europe and adjacent markets. In fine paper, we will continue to optimize our existing positions as supplier of choice in our two regional markets of Central Europe and South Africa. We believe in the strength offered by integrated value chains, providing security of supply, efficiencies between upstream and downstream operations, and enhanced innovation capabilities. To bring the full value to bear, we will continue to drive productivity and efficiencies across the entire value chain, invest in assets with cost advantage, and actively seek and deliver the synergies that exist in our integrated model, both vertically and horizontally across the different product lines. I remain very excited by the huge potential we have to drive innovation with our customers. I showed you a few of the many examples we have. and there's plenty more to come as we fully leverage this unique platform. Lastly, none of this can be done without the right culture that provides a committed, inclusive, diverse, and above all, safe working environment. We have made great strides in this area and can be proud of our many achievements, but clearly there's still more to do. All of the above must be achieved within the framework of our disciplined capital allocation framework. You have seen this slide often enough, but we never tire of showing it. We'll continue to grow through selective organic investments while supporting returns to shareholders and evaluating inorganic growth opportunities, all while ensuring we maintain a strong and stable financial position. The good news is that this is facilitated by a business model that drives strong cash generation, even in the toughest of market environments, as we have witnessed recently. Here quickly we illustrate how we have put into action our capital allocation approach over the past 10 years, balancing the allocation of cash generated from the business between investing in the business and rewarding our shareholders. I've already mentioned the progress we are making on our current capital expansion program, but just to remind you, we are currently in the midst of a $1.2 billion expansionary program spread evenly across our two growth verticals. We expect this program to be about 80% complete by the end of this year, with a meaningful EBITDA coming through from 2025 as these projects ramp up to full operational capabilities. To make this more tangible, I thought I'd show you a couple of pictures of what our shareholders' money has bought so far. On the left, you can see our newly expanded corrugated plant in Warsaw, Poland, while on the right is our corrugated plant in Simmet, Poland. Both are now in full operation, with the major expansion projects at these sites having been completed on time and on budget, and most importantly, with no injuries. Warsaw is now the largest plant in our network and the largest corrugated plant in Poland, with a production capacity of around 320 million square meters per annum. In the center picture, you'll see is the building of our new state-of-the-art, for our new state-of-the-art craft paper machine at Steti, capable of producing over 200,000 tons per annum of high-quality sack craft paper when in full production. We remain on target for startup in H1 2025. As you'll see, the building is still very much a work in progress, and in that building is the bones of the paper machine which is being built. Total craft paper production at Stettie after this expansion will be over 800,000 tons per year, extending its lead as the largest dedicated craft paper mill in the world. So finally, I finish with this slide, which summarizes our investment thesis. I won't reiterate all the points, which I believe have largely been covered in the presentation, but suffice to say we are a well-informed exposure to structurally growing markets, providing great growth opportunities, both organic and inorganic, a track record of disciplined capital allocation, and the financial strength to continue investing to deliver value-accretive growth sustainably. With that, I'll hand you back to Mike to facilitate the Q&A.

Okay, operator, if we could take the first question and just remind people how they can ask questions through the various methods. Thank you.

Of course. If you do have a question, then please use the raised hand function on your screen and we'll allow you to unmute once you've been asked for your question. If you are calling in from a phone, then please type star nine to raise your hand and star six to unmute. Our first question comes from Lars Schellberg of Stiefel. Lars, if you could go ahead and ask your question, please.

Just coming back to costs, I mean, obviously, there's quite an interesting dynamic on the European side with your wood costs coming off a bit from the very high cost you had earlier, while the Nordic wood costs continue to escalate. Are you seeing any sort of incremental cost pressures coming through into the pricing discussions, i.e. there's a significance, of course, about craft paper and craft line of production in the Nordics. Can we see that as a net benefit for you because they would seriously be struggling with their profitability and kind of piggybacking a bit on that, you mentioned that you have raised fine paper prices through the first half, none of which seems to be recognized in recent publications. But, of course, the cost pressures are immense for those that don't have their own pulp. So if you can talk about, you know, the dynamics through those cost buckets and how that translates into pricing in your view.

Lars, I'll take that. It's Andrew here. I trust you can hear me. Yes, I mean clearly cost support is a factor in the price increases more generally on the paper side. Obviously it's been most pronounced frankly in the recycled grades where the huge PFR increases have been a cost support because recognising that even with these price increases the true margin expansion for the recycled grades has been relatively limited. As you say in the virgin grades and craft paper is primarily a virgin product. Clearly we compete with a range of different suppliers both in the Nordics but also in other jurisdictions and clearly the relative cost competitiveness has changed again. It should be noted of course that Central Europe for the brunt of the wood cost increases at the height of the energy crisis following the Ukraine invasion, and then they've come off since then. They are still structurally higher than they were pre-crisis, but the direction of travel has been moderating downwards rather than going upwards now, while the Scandinavian wood costs continue to go upwards to, I guess, reflect the full effect of the structural change, which is that the Russian and Belarusian timber is no longer available to Europe. And yes, these things do change the relative cost competitiveness. I wouldn't say that these craft paper and virgin container board grade price increases have been driven by cost as much as by the normal supply-demand dynamics. Demand has picked up. There has been no real new supply into the market, and that has pulled prices up. but I guess on the margin it is also supported by costs as well. On the UFP price progression, yeah, I think, you know, while indexes are useful, I guess they don't cover every color nuance in the markets, and of course they just average benchmark prices. I think what the indices probably missed was there was some price erosion towards the back end of last year in Europe in fine paper, and then we've seen some price recovery into the beginning of this year and that's the sort of price increases we're referring to here. It seems as though the indices sort of reflected a more flat line sort of outcome but it's really masks maybe what has been some movement there. But that is reflective of our experience. Obviously we can't talk for the market in total and of course there's always the regional differences and product differences and things like that but that is our experience. But I think on the fine paper side, it should also be noted, I mean, we've done a lot of self-help there. As you know, we took out some capacity in Neuseidler. Clearly, we've also been gaining share at the expense of others who have fallen out of the market because we are a long-term player here. And our cost structure, we worked very hard. on that cost structure, and I think that is bearing fruit now. So, you know, there's a number of self-help measures in there as well as some support from pricing.

Cole, if you'd like to unmute and ask your question. Thank you.

Hi, Andrew. Thanks very much. I'd like to ask on your flexible packaging business. I mean, you've got lower cost mills, and you're benefiting from the steeper cost curve, as Lars was alluding to there. However, IP on their most recent call highlighted the importance of the converting network and ensuring that maintenance and operating costs are well managed. Thinking about your flexible bag network, where you're number one globally, do you feel you're well invested in that network? Ultimately, how much of a cost advantage do you have on the converting side in Europe and globally, particularly considering the old number two, the GAZER, had to sell their EU business, and I suspect has probably invested less in it recently.

Thanks, Cole. I think I can say without contradiction that we clearly have the preeminent bag converting network. We've got 40-odd plants, which is significantly above what anyone else has. Clearly in a number of those plants you're producing a very similar product because obviously the industrial – the traditional industrial applications of cement building materials, et cetera, you're running quite similar lines. So we have the ability to drive a very consistent approach. We have very standard procedures, very standard processes across all our plants. We know centrally what every plant is doing all the time because we have really developed systems around all of that and of course that allows us to optimise, to benchmark religiously across the different plants. We just came off a 24 hour marathon challenge where the bag makers are challenged to drive production as effectively as possible within a safe environment and these sort of things which all drive performance across the plant network. As you say, I mean, we are well invested. We always want to invest more where we have the ability to continue to grow that business, but I think that's off an extremely strong base. So, yes, we have a very well invested, very integrated, and very extensive network there which provides extreme and real strength and, of course, is a benefit because as the biggest global producer of the craft paper that goes into those bags, that network is extremely powerful.

Thank you. Our next question comes from Charlie Mersans from BNP Paribyrexane. Charlie, please unmute and ask your question.

Yes, good morning. Can you hear me okay?

Yes, we can.

Three questions, please, if I may. The first, you mentioned restocking a number of times, but also underlying improvements in demand. I just wondered how much of the improvement you think would be attributable to both of those and whether you're seeing that restocking fade out yet in any way other than filing paper. That's the first question.

Do you want to load us with the other two, Charlie, and then we can... Yeah, sure.

And then, yeah, just a second one on the capital project and the significant contribution you're flagging to come through from 2025. Just wondered at this stage whether you could give us a little bit more colour around the phasing. You know, should we be expecting, you know, a third of the benefits already from the 1st of January, or is it going to be a bit slower than that? And then the third bit was just on Hinton, you've disclosed the revenue contribution in the period and the net. I just wondered how much EBITDA there was there and whether that included the $9 million valuation gain. And is that why your pulp production, your market pulp production, jumped so much year on year? Or was that more about the delay in the maintenance? Thank you.

Thanks, Charlie. Maybe I'll take the first and last questions, and then Mike will come back with the CAPEX phasing question. Maybe the last one first on Hinton. We roughly break even on Hinton at the moment, which is where we anticipated we would be. As we said when we bought it, the first phase of the process was to improve the pulp operations and upgrade that. We're making good progress on that. We're delighted with the progress the team is making in Hinton in improving the pulp facilities. There's some capex involved, but it's frankly a lot of it has to do with process and that's going very well. Obviously the end goal there is then to be forward integrating that into the craft paper machine and we are starting obviously the feasibility work on that So we're very excited by the opportunity there with a very clearly structurally cost-advantaged wood access and all the benefits that that brings and then in turn the ability further to the last question from Cole to integrate into our large ag network in the Americas. So that's in the short term, you don't expect much, and by way of from Hinton, it's really about breaking even at a cash basis in the short term. The answer to the second part of that question, which is about the pulp increases, yes, it's largely due to that pulp contribution from Hinton, which is an unbleached craft pulp sold mainly into the Asian markets, so a bit different to the other pulp grades of ours, which are largely bleached chemical pulp. On the question of restocking, yeah, I mean, we mentioned it a few times intentionally because clearly it has been a factor. Just as last year, frankly, destocking was a big theme and it was correct. It was true. It always happens. in a down cycle where you're seeing prices, the expectation is for price reductions. People destock and reduce stocks through the value chain. And similarly, when the expectation is that the next move in prices is upward, people start to rebuild stocks. If you look at it purely from a an upstream to downstream within the value chain, part of the value chain that we can see, which is obviously container board into boxes and craft paper into bags. You can see, for example, in Europe, I think the industry numbers say container board grew, what, six, seven percent or something like that in the first half, while box volumes grew somewhere around four percent. There is a difference there and largely that must be due to a restocking effect. It's a bit more pronounced in the bag side where you're seeing craft paper volumes exceed bag volumes in terms of the growth, the rates of growth. So I think there is some restocking in the bag systems there. And, of course, what is difficult to tell is how much restocking there is downstream into our customers because we obviously don't have full access to that. So, yeah, there clearly has been some restocking effect in the first half. But what I would also say is the underlying demand side is showing recovery. I think everyone's being a bit cautious about calling just how strong a recovery it is because seeing is believing so we'll need to see how this unfolds over the next three to six months and of course it's always going to be a function of how the macroeconomic picture develops as well but at least it's encouraging that it's not just a restocking effect it is clearly also an underlying demand improvement obviously we'll watch how that develops over the next half.

Maybe, yeah, so on capital projects, as we've said in the past, Charlie, and today, you know, we're on track on time. In the past, we have said that the return on capital through cycle for the new deployed capital of 1.2 billion, so that's EBIT over capital employed, would be about 15 returns through cycle. That hasn't changed. I think people have done the maths on that, added on some depreciation, and you get to about 20% EBITDA through cycle on capital. That means about $242.50 million of extra EBITDA from this growth program. Now, clearly, that gets ramped up as the machines get ramped up, so it takes some time. Clearly, the converters come on. The downstream operations come on somewhat quicker. And Andrew's covered places like Warsaw that are operating today but clearly need to be filled up. And then places like Stettie take time to ramp up, both in terms of starting the machine and then filling it to full capacity. So we have previously guided, you know, if you wanted a rough estimate, and it will depend on where the cycle is in the market, of that 250. We've said about 50 this year. And then 100, 100 isn't a left assumption. We'll clearly keep you updated on that. And some of that will depend on the market, the market demand and where we're on in the cycle, because those are mid-cycle returns. But that's what the previous guidance has been. That isn't changing at all. We're on track and on time. Thanks, Charlie.

Thanks. Thank you for your question, Charlie. Our next question comes from Brian Morgan of RMBM Stanley. Brian, please unmute and go ahead.

Hi, guys. Good morning. Just kind of cycle back to Kraft Paper, just following up on Carl's question there. Are you seeing any signs of Kraft Paper coming back into the European market from Russia through any channels?

The short answer is no. Obviously, paper starts to lose its identity depending on how far down the value chain you look. But certainly in terms of craft paper, as you well know, it's a sanctioned product. and so it's specifically identified as a sanctioned product. We suspect most of it is going east, so to the extent it's not being utilized in Russia and or just simply lower production. I think a lot of it is going into China. We don't have huge visibility into China because we don't sell much into China ourselves because there's import tariffs from Europe. But that's where we suspect most of it is going to the extent it's being exported.

Super. Thanks, Andrew. And then if I can follow up. Assuming we get a bit of a return of industrial and construction demand, Could we see the craft paper markets in Europe, North Africa, sort of Mediterranean area becoming tighter in the future than it has been in the past?

Yes. I mean, clearly, you know, on the craft paper side, I mean, we are the only ones really bringing – well, certainly on the – when you refer to those industrial applications, which is typically where we're using the SAC craft, which is the – you know, the highest grade extensible products and the like, that typically is going into sort of cement building materials and that. So clearly, from a demand perspective, if those markets pick up, that's undoubtedly helpful. I mean, it's fair to say that in export markets, as we refer to them, so that's kind of everywhere, but Europe and the US, we are seeing a pretty decent demand picture for, you know, cement-based products and the like. So into Middle East, North Africa, all these other markets, you are seeing a pretty decent demand picture right now. But clearly if that picks up, that can only be more helpful because on the supply side, We are bringing in new capacity, as you know, with the Steti machine next year. Of that 200-odd thousand tonnes, roughly half of it is designated for those industrial Thackcraft markets, and the other half we'll effectively be bringing in speciality craft products for more for consumer and e-commerce and all the other applications. But we will obviously be bringing that into the market very cautiously and of course if we can bring it into an upturn in demand that is doubly helpful. So yes, it can obviously get better. I mean I don't think we should be leaving you with the assumption that the markets are rampant by any stretch. I mean the demand recovery is tentative. It's been okay in the first half. see it's still okay but you know it's not you know and I think it's clear to we should be clear it's not a you know a very strong demand recovery right now but you know we haven't really seen much help from the macroeconomic environment but if that comes through then of course that can be supportive that's great thank you thank you thanks Brian thank you for your question Brian our next question comes from James Perry of City James please unmute and ask your question

Yeah, thanks for the presentation. I just want to ask about pricing in flexible packaging where it's a bit harder for us to use benchmark data. And so what kind of pricing dynamics are you seeing into H2 for craft paper and for paper bags? And how does this differ in Europe compared to North America?

Sure. So as we said, craft paper prices clearly differ entered the year at a low point. So just, you know, we have to remind you that we saw price reductions over the course of 2023. And so we entered 2024 at the sort of low points. Through the course of the first half, we have seen, we have got some price increases in Europe. For us in the first instance, that doesn't make a huge amount of difference to the bottom line because a lot of that is internal volumes. But also importantly, we've also repriced into the export markets over the course of the first half, or more importantly, towards the back end of the first half. So as we enter the second half, we have got prices up relative to call it first half averages. I won't give you the exact quantum because obviously it's fairly commercially sensitive, but it's not dissimilar to the type of increases we've been seeing in the container board side as well. And so that means that, yes, going into the second half, prices will be higher on average than we saw in the first half of the year. If you talk about our regional differences, and of course, then what the trick is, of course, to pass that on through the bags. I think undoubtedly one can expect some margin compression in the short term on the bags because you can't immediately pass these things on, but of course the teams are working hard on that because it's only appropriate to pass these increases on ultimately. In terms of the US markets in particular, I think US is a bit behind Europe, so Europe softening before the U.S., but it seems to be recovering a bit ahead of the U.S. The U.S. markets for bags in particular are still relatively weak, but hopefully starting to turn. As I say, export markets in other markets, Middle East, North Africa, Southeast Asia, these markets are actually pretty robust at the moment. So it's a mixed picture around the different geographic markets, but in total it seems like there's a bit of recovery on the volume side or demand side, and certainly we've got prices up relative to what we saw through the first half of the year.

Okay, thank you. Thank you, James. Our next question comes from James Twyman from Prescient Securities. James, please unmute and go ahead.

Thank you very much. If I could just ask, firstly, regarding the craft paper business, you did mention that craft paper has been particularly strong rather than sack paper. Could you just talk around how important craft paper is for your business now? And with the expansion you're doing in the sack paper business at Steady, how the crop, how you're going to manage that growth in crop paper going forward, and maybe some idea of timing of the steady startup, which you may have said that I missed. And then secondly, just on the uncoated paper business, the pulp price has gone up very strongly. Now, I know that the Riches Bay pulp business is not huge in your lives, but I know it is pretty profitable and the pulp price has gone up pretty dramatically. Some idea of how important pulp is to you in terms of profitability would be very helpful. Thank you.

I think there's a few questions in there, but I hope I can get them. In terms of, firstly, the importance of craft paper in our lives, I mean, craft paper more More broadly we make 1.2 million tonnes of it. We consume about 800,000-900,000 tonnes internally. Obviously with the Steti expansion that you can add another 200,000-odd tonnes to that, so that will be our new capacity once Steti is fully up, so it will be more like 1.4-ish million tonnes. It's very important in our lives and obviously it's a higher value product. I mean craft paper prices are typically higher than the container board and certainly on the recycled grades. And so yes, it's a very important product for us and of course it is the feedstock in that very extensive bag network that we have. If the question is more, you know, sackcraft relative to the speciality craft papers, sackcraft is about 900,000 of that 1.2 million. When we add Steti, as I say, it'll go up to about a million tons of sackcraft and around 400,000 tons of speciality crafts. And those specialities, as I said earlier, are going into all the different new applications that you see and that's why it's a very exciting product because it's conducive to being used in these consumer applications, in e-commerce applications where we are rapidly growing in our e-commerce applications for bags. which combines with the offering we have in corrugated and these hybrid solutions that we've also developed using a combination of bag and corrugated technology. So lots of exciting developments there. So, you know, the new market's developing all the time for those speciality craft papers. So, yeah, important and growing business for us. Steti Startup, it's H1 next year. We're on track for that. You saw the picture of the building. I can assure you there's frenzied activities within that building with the paper machine going up very rapidly, and we're very much on track for H1 Startup next year. And finally on the pulp, yes, I mean, pulp is obviously a very important business for Richards Bay. Net, I think we're about 300,000 tonnes long these days of pulp. I think that excludes probably Hinton. Hinton is really a slightly different pulp product. It's not, as I said, it's an unbleached craft, which is a very specific application. But the broader bleached chemical pulp, we're about 300,000 times net long these days. So it's a relevant driver, but it's not a hugely important one. And, of course, with the Steti expansion, we will reduce that exposure by about 100,000 tonnes because we're integrating Steti pulp into the new paper machine. So I hope that's clear.

Thank you very much.

Very, very helpful. Thanks. Thank you for your question, James. Our next question comes from Ephraim Ravi of Citi. Ephraim, please unmute and ask your question.

Thank you. Just two very quick questions. Hinton, the $400 million investment that you're planning out to 2027, is that dependent on what you see in terms of the market development? As you mentioned, the U.S. seems to be a little bit behind Europe in terms of going into the downturn and recovery. So would that investment be, in theory, staggered out a little bit more if the downturn is a little bit longer than you expected? And And secondly, are there any product categories where you are really capacity constrained rather than market constrained in terms of the volumes that you can sell? And again, you know, is there a kind of opportunity for further pricing increases in those product categories? Thank you.

Sure. We're doing the feasibility work at the moment. Clearly the project hasn't been approved, so by definition we have flexibility around when it will come in. But at the same time, I mean, we are... convinced that it has huge structural cost advantages. We have the integration opportunity into our North American bags network. And yes, North American bags is a bit softer at the moment, but these are long-life assets that we are betting on long-term structural dynamics rather than any short-term cyclical dynamics. But of course, we take all of this into consideration when approving the investment. But I remain convinced that this is a highly attractive opportunity, and the wood costs in coming – delivered into Hinton are extremely attractive relative to, frankly, anywhere else. It's the right grade of pulp, which is also very important for the very specific product we make. It's a very niche product, which requires a very particular type of pulp. And as I say, we have natural integration opportunity with our extensive bag network in the US and Mexico. So all the attributes are there and we'll obviously be working up the feasibility study at the moment. That's what we are doing and come to a decision over there. It's not an imminent decision purely because we have to work up the feasibility work. On the question of capacity constraints, We have the luxury, particularly in our container board grades, for example, and particularly those virgin grades, where we have a privileged cost position. So in some ways, even in the toughest of times, every ton we produce, we can make profits out of it. And obviously, we'd love to have more of those type of tons, and we've been doing a lot of investments around that. For example, the latest de-bottlenecking at Switchy, which is the preeminent European container board operation, and so we're squeezing out capacity in those low-cost production bases. So that's the sort of constraints we have in that regard. Obviously, some of these markets are still oversupplied. I mean, the recycled container board market is an oversupplied market, and you can only make money there if you are structurally low-cost, where we have that advantage. So you have to be very selective in terms of capacity expansions. And so that's the way we would look at it.

Thank you. Thank you for your question there. Our next question comes from Andrew Jones of UBS. Andrew, please unmute and ask your question.

Thanks. So just a question on the woodcast. I mean, it's encouraging that you've said that, you know, woodcasts are currently sort of stable to falling in your markets overall. That's clearly better than we're seeing from a lot of your peers. You did call out the fact that obviously energy was a huge driver of the wood market in 2022. I'm wondering whether, as we go into the fourth quarter, there could be some seasonal increase in wood costs in Central and Eastern Europe. In your view, once we get into the winter, it gets colder, energy demand goes up. Could that be a factor which could start to reverse those wood prices and push them higher into 4Q. Thank you.

Andy, I think we have to recognize, I mean, winters have come every year. But, you know, the big structural change, well, the big impact on the market in 2022 in particular was the extreme situation where, as you recall, I mean, there was a energy crisis and there was a worry about security of supply, gas prices went through the roof, and of course that meant that burning trees became a real viable option at much higher price levels than would have historically been the case. So it was a very peculiar one-off, we hope, one-off event that caused that and the subsequent decline. But I think the normal... normal ebbs and flows of the seasons, yes, they have some limited effect on availability, but we are a long-term buyer of timber. We have long-term relationships with our suppliers, and so you typically don't see major seasonal fluctuations in wood prices.

Understood, and you don't see any pathways for any conversion between the wood prices you see in Central East Europe and the rising cost in the Nordics, that difference could potentially accentuate going forward. Is that your view?

Well, I think one has to recognize that structurally wood costs in Europe are higher than they were pre-crisis. The initial effect was the energy substitution, we call it, but of course the longer-term impact is simply the non-availability of Russian and Belarusian wood. That clearly impacted the Nordics quite significantly because they were importers, mainly Central Europe. There was also some import mainly from Belarusia. So that supply source is gone, and so wood prices are structurally higher than they were before. And you can see that in our wood costs today. are still materially higher than they were pre-crisis. They're just a lot lower than they were over the 22, 23 period. And that's why you see this year on year effect. So there is a lasting impact of structural impact in terms of call it the arbitrage opportunity between the Nordics and everywhere else. Yes, there is some flow of timber that takes place. I mean, people do ship it around. But of course, it's not a product that travels very well. I mean, it's extremely expensive to move timber around. And so you always have a natural advantage being located where the timber, the cheapest timber is available. And so that will hold true. But of course, Europe more generally, wood costs are up on where they were historically. And that affects everyone. but the current dynamic is that the Nordics are seeing wood costs still going up, while having gone up very high, Central Europe is coming off, and I don't see any reason why that arbitrage should wipe up the differential. I mean, it will continue as it historically always did. Thank you.

Thank you for your question, Andrew. Our next question comes from Sean Ungerer. Sean, please type star 9 to unmute and ask your question.

In terms of corrugated box growth as you exited June, could you maybe sort of give us any insights as to how that sort of compares to the H1 growth rate? That's the first question.

Do you want to give us all your questions, Sean, and then maybe we can join up? Perfect.

Great. And then how should we sort of think about that compared to current levels, and then Thirdly, are you able to provide any sensitivity given the depreciation of the Turkish lira? That would be very helpful. And then lastly, just in terms of the fair value gain to loss moving into H2, how much does that sort of supply to this demand compared to sort of FX use? That would be very insightful. Thank you.

Thank you. Could you just repeat your question on Turkey for me, Sean, because I didn't catch it.

Sorry, the line is bad. In terms of the depreciation of the lira, can you provide any sensitivity on EBITDA or EBIT, given the drastic moves? Thanks.

Sure. So let me take the last two. The forestry fair value is really a case of, if I oversimplify it, sort of number of trees times pricing. Obviously, that pricing of the South African wood moves with markets and supply and demand. But it's a pricing effect times the trees, if that makes sense. And that's what we value it at, at the balance sheet data. In terms of Turkish lira, it's linked to inflation of course as well, so it's quite hard to call that because you've got hyperinflation accounting, you've got currency. I think the real issue in Turkey, which is how the economy pans out, and of course that's got somewhat better in the last little while, better this year than last year, it's still quite a difficult economic environment. but clearly the team there are doing a good job. We've got a great business, but we need to clearly manage in what is quite a volatile economy. But I guess my point is it's not just around lira. It's around inflation. It's around how the basic economic environment works, and that impact is much bigger, frankly, than the currency impact, which is pretty small, actually. Andrew.

Sean, I got the question on the box volume growth, which I can't really answer because, I mean, I think your question is the sort of exit run rate on box volumes versus the kind of, you know, what we saw over the course of the first half. The reason I can't answer that is because there's always huge seasonal impacts from one month to the next and the like. So it would be misleading for me to give you a kind of exit run rate. It doesn't really work like that because you have to look at it over the course of a period. But I think, you know, it is fair to say, I mean, I think the industry numbers are up 3%, 4% from the first half of the year. It feels as though, you know, there's been a fairly steady positive progression on that, but obviously there's always seasonal fluctuations. So it's has to recognize. I mean, last year was already pretty difficult from a volume perspective, but encouraging nonetheless that we are starting to see some growth in those markets. And again, I have to apologize. I couldn't get the second question properly. Could you repeat, sorry, the second question you had on pulp?

Right. Just in terms of the capacity ramp-ups in the next 12 to 18 months, How should we think about Mondi's market power for sales as they ramp up?

Market pulp sales?

Yeah, or your pulp sales. Is your net long position not going to become a lot shorter?

Yes, so firstly our long position will become shorter because, as I say, With the integration, I mean with the Steti expansion, we will be integrating 100,000 tons of pulp. The pulp that we sell into Asia, which is largely coming out of South Africa, obviously that doesn't change in terms of the overall, the net exposure. But as I said earlier, it's roughly 300,000 tons along our pulp position, probably going down to about 200,000 tons after the Steti expansion. So It's important but it's not a major profit driver for us and clearly pulp is one of the most volatile of products but our position generally is not to be an open market pulp producer. We see our strength in our integration both into paper production and also into our converted products. Clearly over time we are looking to, if anything, reduce our open market pop exposure, but it's really not particularly material.

Thanks, guys. I think that is all the questions we have time for now, so I will hand back. Thank you.

Very good. Thank you, everyone, and thanks for bearing with us with the technical difficulties. We apologise for that, but I hope you managed to get your questions Questions in? If not, I'm sure you'll follow up with Fiona and team, and we are always available. But in short, I think a decent first half performance in difficult conditions. We are seeing some pricing momentum. Clearly the world remains an unpredictable place, but I think we're well positioned within that. and most importantly, we see good, strong structural growth in the longer term, which we are investing behind, leveraging what we believe is an extremely strong platform. So with that, thank you very much, everyone, and we will no doubt be in touch. Thank you.