Mayr-Melnhof Karton Ag

Welcome everyone to this announcement of our 23 annual results. Following a record-breaking 22, the year 23 confronted us with the most significant demand decline in the European carton board industry in the last 50 years. This downturn can be attributed to four main factors. Firstly, a prolonged reduction in supply chain inventories after an extreme buildup the year before, driven by supply shortages and the energy crisis. Secondly, high inflation has led to changes in consumer behavior and resulted in a decreased consumption of daily goods packaged in carton board. Thirdly, Russia has been a vital export market for the European carton board industry, and this business disappeared factually overnight. This has been less visible in the booming time in 22, but showed its full impact from autumn 22 on. MM was especially hard hit, given its strong exposure to exports to Russia. And last but not least, the weak and very competitive overseas export markets contributed to a drastic reduction in capacity utilization across the entire European carton board industry. Consequently, markets were down up to 20% and price pressure for both virgin and recycled carton board increased significantly throughout 2023. And these challenging conditions were particularly reflected in the week 23 volume development and financial performance of the MM board and paper division. In contrast, our packaging division managed to deliver a strong performance amid an also weak packaging market and despite exiting its highly profitable Russian assets. Here we have shifted our focus towards Western Europe and the US with our recent acquisitions in the resilient pharmaceutical packaging sector, which has been successfully integrated in 23. And we are pleased that they performed well above our high expectations. And today, approximately a quarter of our packaging sales comes from the resilient pharmaceutical sector, and we see substantial potential for further value enhancement. Despite these overall challenging markets, we've continued our strategic transformation towards enhanced competitiveness and creating a long-term perspective for MM through more efficiency, sustainability, and innovation. Above all, we've almost finalized our extensive CAPEX program of the MM Group. Having started in 2021, the focus has been on cost and energy efficiency, technological modernization, and enhancing product quality at our most competitive sites across both divisions. The packaging division has already benefited from these measures in 2023, and that is one reason for the good results. On the contrary, the board and paper division had to bear additional standstill costs on top of a weak market in 23. But from 24 on, board and paper will benefit from these investments in cutting-edge technology, product quality, improvements, and sustainability at our Fronleiten, Neuss, Kolitschewo, and Kotka mills. MM has increased its commitment to sustainability. And we are proud that we are awarded a AAA rating by the global non-profit environmental organization CDP for our leadership in transparency and performance regarding climate change, forest and water management. We are the only European paper and packaging company to receive this AAA rating. And this marks a significant progress from our CD score three years ago. Our strategic sustainability focus aims to capitalize on the growth opportunities presented by packaging from renewable resources with recycling at scale. Recyclability is not enough anymore. We are already in the next stage. Our customers want a guarantee that almost all of their packaging is indeed recycled. And with a recycling rate in Europe of more than 80%, we can give this promise and we're eager to improve further. This includes in particular replacing plastic packaging and thus plastic waste and the reduction of our carbon footprint through various projects from photovoltaic installations to adjustments in production processes. Procurement market prices for electricity and gas were significantly lower than in 22, but still above previous year's levels. Prices for paper for recycling and pulp were declining in the first half of the year, but showed an upward trend thereafter and especially now in the new year. And last but not least, inflation has notably increased personal but also other service costs. So overall, it's a quite mixed picture. In anticipation of the demand decline, we've reduced our packaging capacity by closing a production site in Germany and our paper capacity by shutting down one paper machine at AMM Gwitzen. On top, our profit and cash protection program has included significant cost and working capital reduction, as well as CapEx curtailments. This has already significantly contributed to reducing net debt in 23. And the cost benefits will mainly become visible with some delay in 24. At this point, I extend sincere thanks to all our employees for their commitment, their creativity and their loyalty during these challenging circumstances. And also sincere thanks to our shareholders for their trust in economically windy times. And now I want to hand over to our CFO, Franz Hisinger. He will present our financial results. And after that, I will return with an outlook for the current year.

Our financial performance throughout 23 was characterized by different developments across our group. In the board and paper division, we faced challenges from unprecedented market-related and investment-related downtime with underutilization at our plants by over 20%. At the same time, we experienced strong price pressure due to market weakness, which could not be offset by lower raw material and energy costs. As a result, following a relatively strong Q1, Board and paper faced losses in the subsequent three quarters, resulting in a significant earnings shortfall compared to the record-breaking results in 2022. In contrast, MM Packaging achieved the best financial results ever, showcasing solid developments throughout the year in a weakening market. This success was driven by well-balanced core business and the encouraging performance of our pharmaceutical acquisitions in the first full year with MM. However, packaging results were not sufficient to offset the shortfall in board and paper, leading to a significant decline in both our group top-line and bottom-line performance compared to the previous year's record results. As such, group sales of €4.2 billion were down 11%. With €229 million adjusted operating profit, we achieved an operating margin of 5.5%. The operating margin in ball and paper was slightly negative with minus 1%, whereas in packaging it was 10.2%. Adjusted EBITDA of €450 50 million Euro represents an EBITDA margin of 10.8%. In light of these circumstances, ensuring a secure and solid financial foundation to navigate effectively through this challenging period became our paramount priority. This was achieved through the diligent execution of a profit and cash protection plan, which centered around three cash generating initiatives. cost-saving measures across all areas, a significant reduction in working capital and reductions in capex cash outflows. Through these initiatives, we have achieved an impressive cash flow from operating activities of about 790 million and a free cash flow of about 370 million Euro in 2023. Thanks to this strong cash generation, we managed to reduce our net debt from 1.5 billion to below 1.3 billion euro. The net debt to APTA ratio stood at 2.8 times and the equity ratio was unchanged at 40%. The escalating interest rate environment underscored the advantages of our long-term financing strategy, with more than 60% of our debt bearing favourably fixed interest rates since early 2021. By the end of the year, our cash position amounted to more than €750 million. despite an intensive investment program with capex of above €420 million and after distributing dividends of €84 million to our shareholders, which represented a payout ratio of about 24%. Since the weak market demand might not be over yet, preserving financial stability with a solid balance sheet and sufficient liquidity continues to be our top priority. So we will carry on our profit and cash protection program to secure the long-term development capabilities of MM. This includes maintaining strict control over working capital, minimizing capex cash outflows, and adhering to our long-term dividend policy, which entails distributing a third of our earnings. Consequently, we will propose a dividend for 2023 in the amount of €30 million, which is €1.5 per share at the forthcoming Annual General Meeting. The times will undoubtedly change to the better, but until then, our focus is on weathering the storm robustly, conserving resources, but also taking on opportunities that may arise. From a financial standpoint, we have taken the necessary actions in a timely manner and are well positioned for the future. Thank you.

So what is our outlook for 2024? What we have observed, and this is very positive, is a positive volume trend for our board and paper division in the first two months. However, margin pressure has continued. Even as the inventory reduction in the supply chain approaches completion, the sluggish economic overall climate in Europe, coupled with restrained consumer spending, suggests only a slow market recovery. Given the challenging conditions in non-European export markets, we anticipate therefore continued oversupply and muted capacity utilization in Europe. And as a consequence, we are intensifying our profit and cash protection program in 2024, supplemented by targeted structural adjustments. And recent cost increases will be offset by corresponding price adjustments. CapEx in 2024 are projected to be around €300 million, including carryovers from the previous year. and the focus will be very narrow and it will be on selective projects to enhance our competitive edge. Despite these short-term challenges, which we see and maybe for the whole of 24, maybe for the first half year, I stay optimistic. MM will benefit from its stable value adding and well-diversified packaging business, as well as from its competitive asset base in board and paper. We are well financed. But most important of all, we have a strong team to successfully navigate the ongoing challenging market with more sustainable and innovative packaging solutions. Thank you.

Good morning, ladies and gentlemen, and welcome to the Meyer Mellenhof Karton AG regarding annual results 2023. If you would like to ask questions, please press 9 and star on your phone. If you would like to withdraw your questions, please press 9 and star a second time. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentations. Let me now turn the floor over to your host, Mr. Svert Spork.

Good morning and welcome on the part of MM Group. My name is Stefan Zwerzbock, heading investor relations and corporate communication. It's a great pleasure to have you joining this Q&A conference and our 23 annual results, which we released this morning. Besides the press release, a video statement from our management board has been published on our website, mm.group. In this call now, we want to provide with the possibility to direct question on today's communication to our CEO, Peter Oswald, and our CFO, Franz Hiesinger. Since this call addresses an international audience, we would very much appreciate your questions to be asked in English in the following Q&A session. Before we go for that, Peter, may I ask you to start off with a short summary of our key messages.

Yeah, thank you, Stefan. Good morning, everyone, also from my side. I'm not going to repeat our announcement, but let me just try to get to the main point. And the main point was that in 2023, MM experienced two very contrasting developments. For MM packaging, it was a record year with a strong performance. Our operating margin cracked the 10% hurdle. Despite the slow market, we strongly improved results, thanks to our innovative products, our superb sales team, our superior logistics network, and last but not least, our great cost position. And we've improved costs recently very much. Our organization focusing on distinct market segments has been crucial, as well as our CapEx program in 2021 and 2022, which improved mainly our operating costs. Our acquisitions of Asom Park and Accentra have developed beyond expectations. And while pharma, coming from a very low profitability, is still below our average operating margin, we are confident about our progress in the coming years. And whilst we expect headwinds in 2014 packaging, first from increasing carton port prices, secondly from rather low volumes, our market leadership gives us a very strong position. and we have a lot of possibilities for self-help. Now, this stands in contrast to M&B and paper, where we had to take significant market downtimes because of the very weak market, which was roughly 18%, 19% down last year. And on top, we shouldn't forget that we were rebuilding three machines, which were requesting significant downtimes of three of our mills. Now, looking where we stand now, I think we have to face the fact that the industry has significant overcapacities also after rebounding volume. We have done our homework by selling two mills and closing three less competitive machines. And on top of taking out higher-cost machines, which is one way to improve your results, our response has been reducing costs mainly energy and personal costs via CapEx and also organizational changes, and to improve product quality via innovation and our CapEx as well. And while it will take some time until our new and improved products go through the approval process with our customers, our pipeline makes us very confident that we will get additional business and can therefore improve our results faster. in the course of 24. Yeah, I want to leave it with this, and now our CFO, Franz Hiefinger, and I are happy to take your questions.

Ladies and gentlemen, if you would like to ask questions, please press 9 and star on your phone. If you would like to withdraw your questions, please press 9 and star a second time. Now press 9 and star to register your questions. There are currently no questions. If you would like to ask a question, please press nine and star on your phone.

It seems that I've been so confusing that there are no questions anymore.

Ah, here comes the first questions from Michael Marschlinger from AIRS, the group. Mr. Marschlinger.

Good morning. Now it works. Yeah, thank you for taking my questions. I would have three on the board and paper division. First one, in the output you mentioned that you expect the capacity utilization in Europe to remain dampened. Can you maybe give us a hint now where was the capacity utilization on the fourth board and paper division? And you said in the first two months that the volumes are picking up now where it is now at the moment.

Should I take them one by one? Yeah, please. Okay. Okay. Yeah. So, I mean, it's always very confusing, so to say, what different people mean by capacity utilization. But Let's say compared to if we ran full speed, our capacity utilization was somewhere around 80%, and that was more or less 75% to 80% throughout the year, so the same or no improvement in Q4. What we have seen now, we don't have significant industry data only for January, and therefore we have to see how this develops, but For our group, it has improved to about 90%.

Okay. Okay, also in disrespect, my second question, because in the fourth quarter your sales were up slightly in comparison to the first quarter, however your results adjusted EBIT was down 60. Now with volumes picking up, capacity utilization above 90, as you said, so can we expect EBIT to go to the positive region again?

Yeah, I think we have two things. So the good news is that volumes are materially up. The other thing is that prices are down. So we had the constant slide of prices throughout last year. And this has unfortunately continued in Q1. So without making a concrete prediction, you should not expect it because prices are at the low level. We are out now with price increases for the second quarter. And if they go through, then we can see an improvement in the results. But let's say compared to... So Q1 compared to this year to last year will be, yes, higher volumes, lower prices, significantly lower prices. And the costs, some costs obviously have come down, wood costs, for instance, but the number of costs, for instance, paper for recycling is up, and also personal costs are up due to the high inflation.

So you said price increase the second quarter. Then on top, you said in your video statement, you see the benefits from strategic transformation. Is that already also in the second quarter or later? And what does it mean for the full year and for the second half? Do you think this will be these two effects, price increases and strategic transformation, will bring margins in the second half? back to normalized levels what we've seen in the past from 7%, 8% or is that too early? If you could give some comment on that, please.

Yeah, I don't have this crystal ball. I mean, what we see very clearly is thanks to our CapEx that we've improved cost structure. Secondly, we have better products, so higher quality products, stiffness products, surfaces, et cetera, and that is very, very well taken up by our customers, so this is encouraging. However, we should also not forget what I highlighted in my introduction, that in our industry, a customer cannot just switch from one minute to the other, but we have to go through these quality approval processes and qualifications of products, the homologation process, and that takes some time. So I think it will be very back-loaded towards the second half. To see the benefits flow through, overall, we'll be mainly in the second half. For some cost items, obviously, it's already the first half, but the main effect will be in the second half.

Okay, understood.

Thank you very much.

The next question comes from Markus Remins from Leif Eisenbank International.

Yeah, good morning, Chance. Although I had a few issues with getting through, but here I am. First question relates to the cash flow development in the final quarter, which was absolutely stellar. So I'm struggling a bit to reconcile the drivers. Apparently it was working capital, but I mean, doing the math, I don't think that this was an operational improvement only. So can you outline what has happened in Q4 with the working capital?

Yes, I think you're absolutely right. So first of all, we did indeed do a lot operationally, and we shouldn't forget that the result is not as fantastic as I would like it because we built up working capital strongly the year before, so it was a natural reaction. and it was also carried by two things. One is obviously that our, let's say, inventory came down by volume in a significant way, but we shouldn't forget that prices play a huge role, and because prices declined throughout the year, obviously it also means that the valuation of both receivables and our stocks were much lower. But on top of that, we used what is quite common, more factoring.

Okay. Can you give us a figure for the factoring level at year end and where it was at the end of 2022? Yeah. Maybe I hand over here to Franz. Yes. Hello. Good morning. So we have basically increased our factoring volume by around 200 million. 200 million, okay. Yes, and overall we had a working capital improvement in this year of 470 million, including this 200 million. Okay, thank you. That's very helpful. Is that now a level that you consider kind of sustainable or stable going forward?

Yes, generally yes. It will obviously depend. So to say, I think in terms of volume reduction, we can do a bit of more work. However, depending on the price development, it might well be that our working capital is likely going up if prices go up. And obviously, that's something we would hope for.

Okay. And the factoring in absolute levels, how much is it? It's about 260 million euros. 260 million. Okay, thank you. That's very helpful. Staying with the cash flow, you've invested or CapEx was 425 in 23. I think the most recent guidance was a bit below 400. Now you're guiding for 300 million in the current year. including carryovers. So I was wondering, now that actually you've invested a bit more than you got in 2023, what the carryover would actually be.

The carryover is out of the open project, which is still ongoing, but it's not to a huge extent. And as you correctly said, we are guiding now to 300 million CapEx payments in 2024.

And that is all thanks to our profit and cash protection plan, which should help us in this regard. Okay. Thank you. And maybe coming to operational topics, I mean, what I found particularly striking in the fourth quarter was the performance of packaging, earnings-wise. I mean, the margin was 11%. That's very strong. That's kind of the result of the cost-cutting measures and the all the restructuring that is done in this segment, meaning this is a level that also can be sustainable at least for the next quarters, or whether some special effects, I mean, I guess a good product mix, but anything else that we should consider?

Yeah, so let's go back to what drove it. I think there were some self-help issues. So, for instance, I mean, we had some product innovations, and so a number of customers allocated additional volumes to us because of our product quality, by the way, also because of our improved board qualities, which we have. That was one thing. Then we had the number of cost measures. One thing, and this will more or less continue, and this is absolutely sustainable, the additional tailwind which we benefited from in 23 and also in the first quarter of 24 is obviously a decrease in carton board prices. And once this cycle reverses and And we see it now reversing, so we will have increasing cart and board prices. Obviously, there is some delay. Now, unlike in the past when the delay was really very much delayed by up to a year or so, we have now contracts in place which allow for a quicker adjustment to new prices. But still, there will be some lack of three, four months typically. And this will be a sort of headwind. On the other hand, a headwind which we like because it will be reflected then in better board and paper results.

Sure. Okay. That's already the prelude for one question because you are flagging some price increases as of the second quarter in board and paper. I mean, given... trend that we see now on the pricing side, I mean, how confident are you that this goes through? And related to that, is that across the board or is it for specific product areas?

So we have already increased prices for uncoated fine paper. I'm very confident on on recycled carton board, so WAC, that we will get a price increase. There is – there were also the market leader in FPP, so in virgin carton board. We are the number three in the market, and therefore we are not taking any initiatives there, and there seems to be no movement in prices for the second quarter. So it's a mixed picture.

Okay, so paper and recycled carton boards, but not for virgin fiber? Yes. Okay. Okay. The final question would be on the restructuring and potential plant closures. I mean, of course, you can't or you won't give us – concrete details, but can you just outline your general plans? Is this more of a, how should I say, of a small-scale plant closure that you're targeting, or is it more of a comprehensive program?

So I think over the years we have done time and again the structural adjustments and and they might happen again this year. But let's say the focus is not on taking plants out simply because almost all our plants and all our paper mills are very competitive, and therefore there is generally – it wouldn't make sense to take them out. So we are not hesitating. With a very simple philosophy, we invest. well and structure companies well to be strongly positioned. And if we believe that we will not achieve a strong competitive position, then we close it. And at the moment, there is very little need. We do have some companies which are loss-making, which are mainly from the Accenture sector, for my central business, but there we have made good progress. So one should never exclude anything because the year has still 10 months to do, but it will not be a major lever, so to say. It's more on maybe taking some shifts out and other cost reduction programs.

Okay. Thank you very much.

It was a pleasure. Welcome.

There are no further questions at the moment, so if you would like to state the questions, please press 9 on your phone. Next questions come from from Home Port Family Services. The floor is yours.

Yes, hello. Good morning. Thank you for taking my question. I was wondering if you could comment on your hedging of the energy and the potential impact it might have had on volume declines and potential market share losses in board and paper. How is your hedging at the moment? Did you lose market share because of higher hedges than competitors, for example, and how do you see this going forward? Thank you.

Yeah, so first of all, we haven't lost any market share. I think we are gaining everywhere market share. In hedging, we always have a continuous policy of hedging a part of our products. That also depends how efficient the respective markets are. And if we talk about hedging, I also have to add it doesn't necessarily mean that we use financial instruments. It's just that we agree with the seller on a fixed price for a certain percentage. So we do have some... some hedgings, if you call it, or fixed prices in place. And naturally, if market prices move up, you benefit from the hedging part. And if prices become cheaper, then you obviously lose out on it.

Okay, thank you. You're very confident you didn't lose market shares. That's good to hear.

Yeah, not that I know. I mean, we have now to go through all. I can't say for every small part of ADP, but overall, we either held it or increased it.

For the questions, please press 9 and star on your phones. There are no further questions at the moment.

So, since there are no more questions, it seems that everything seems to be quite clear as foreseeable, let's say so. We thank you very much for your participation, questions, and interest in the company. Our next results will be Q1 results on the 23rd of April. And having said this, we wish you a great day, and say goodbye to you. Bye-bye.

Goodbye.