Mayr-Melnhof Karton Ag

The conference is now being recorded. Good morning, ladies and gentlemen, and welcome to the Meyer-Mannhoff Cartoon Call regarding the half-year results of 2024. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Mr. Switz Spock.

Good morning and welcome on the part of MM Group. My name is Stefan Zwerg-Spork, heading investor relations and corporate communication. It's a great pleasure to have you joining this Q&A conference call on our first half year results 24, which we released this morning just two hours ago. Besides the press release and the half year report, the CEO video statement has been published on our website mm.com. In this call, we want to provide you now with a possibility to direct question on today's communication to our CEO, Peter Oswald, who is sitting next to me. Since this call addresses an international audience, we would very much appreciate your questions to be asked in English in the following Q&A. Before we go for that, Peter, may I ask you to start with a short summary of the key messages?

Yeah, thank you, Stefan. Welcome, everyone. Thanks for joining this conference call. I do not want to repeat my video message here, which you might have seen. But let me briefly summarize the main highlights. First, in this quarter, we've improved results sequentially and also compared to quarter two in 23, which is very encouraging. Our board and paper business has returned to operating profit. Our volumes in board and paper are substantially up. We are from now on reporting packaging in two divisions, because we think that the farm and healthcare business is a very distinctive business, also with a different business model. And to remind you, it's not just selling folding cartons, but also leaflets and labels. And therefore, we think it's in the interest of our shareholders to be here more transparent and show it as two separate divisions. In food and premium packaging, we've seen some profit decline, but by and large, our record results of 23 have been defended. In pharma and healthcare packaging, we are making steady progress, not as in 23 when we more than doubled our EBITDA from our newly acquired Accenture packaging business on a like-for-like basis, but it's a steady improvement. And going forward, we expect here to benefit from the GLP-1 analogs for weight reduction, where huge capacities are being built up. Looking at our balance sheet, it is stable. Looking at the cash flow statement, our operational cash flow and free cash flow have significantly improved. And going forward, our extensive CapEx program has now been finalized. And so we'll automatically enjoy a substantial free cash flow. So with this brief summary, I would suggest that we open the Q&A.

Ladies and gentlemen, if you would like to ask a question, please press nine followed by the star key on your telephone keypad. If you wish to cancel or withdraw your question, please press nine followed by the star key again. So please press nine star now to state or ask a question. And the first question is coming from Michael Marshall from Ask the Group.

Yes, good morning. Thanks for taking my questions. I would start with two questions on board and paper. Firstly, new guides for annual maintenance shutdowns in Q3. I just wanted to ask what impact on volume should we expect here? And secondly, on board and paper, as I said, it's slightly positive now, a bit positive in Q2. for the first half year still negative, minus 11 million. So with the selective price increases, I'm a question of will it be enough to turn positive year end?

Yeah, so I'm quickly calculating the numbers. So basically the standstill will be both mills two weeks, so half a month. So give me one second to calculate it. The effect should be €25,000 roughly, which we will lose due to these rebuilds. And on your second question, we are not giving any profit predictions. So, I fully understand your question, and it's a question which is internally very much on our mind. The impact of the standstill obviously is a double-digit million figure, as you can calculate from this volume loss, and therefore it will be a challenge, but we don't know where prices will be in the fourth quarter.

Understood. Thank you. Two questions on your new pharma and healthcare division. You're seeing inventory reduction of the industry. Could you give us some color how long this should take in your view? And also, could you give us some update on the central integration, if it's possible, also on the margin level that you see?

Yeah, so first, I think that the stocking should pretty much come to an end. I think we're first signs that it has come to an end. But yeah, it's more a question of is it a few more months or not. On the second question, the essential integration, so formally the integration has now been done, also the integration of our computer systems and all the work one has to do in a post-merger integration. We have made many organizational changes. We have delayed. We have hired very experienced people from our industry. So we are, and now we are on track First of all, to rebuild the customer confidence because the delivery reliability of the Formecentra packaging wasn't the best one. And now we have a path forward. So compared to when we bought it, we have on a pro forma basis improved it by well above two times, so roughly two and a half times the EBITDA. EBIT was practically not existent, so you can't make a multiple on that. And our target is until 26 to have the same profitability than in our traditional food and premium packaging business.

Okay, this means 10% EBIT.

10% is the target and finally it should be more. But it also takes time.

Okay, thanks. That's really my side. Thank you.

Thank you.

And the next question is coming from Marcus Remes from RBI.

Good morning, gentlemen. A few questions, if I may. The first one on board and paper. So is the interpretation of a bottoming out in volumes accurate, meaning that this run rate 570, 580,000 tons is also realistic than for Q3 and Q4, adjusted for seasonal fluctuations.

Sorry, could you repeat the run rate? I didn't get the number and what you meant exactly.

So Q1, Q2 run rate in terms of volumes was about 570, 500 60,000 tons in terms of sales. Is the interpretation accurate that this would also be a decent proxy for Q3 and Q4?

Yes, I think so. I mean, I would hope that overall that it improves, but we should not forget we have to deduct the standstill in our two mills. which will have a negative impact. Yeah, okay. But apart from that, we would even hope over time that things recover more because our run rate should be above 600,000 tons if we run full capacity.

Yes, going to full capacity. That would actually be my next question. I think in the fiscal 23 conference call, you said the passage utilization was something like 75 to 80%. Can you provide us with an update where it was in the first half?

Yeah, now we are running at around 90%. Okay.

Thank you. And then on the on the price increases, so at least from calculating average prices, you could see an uptick in Q2 versus Q1. Can you share maybe some details on the magnitude and also in which product areas you will further increase the prices in the coming quarters or in the coming months, actually?

Yeah, I mean, we can't be too detailed also for competition reasons, but basically we succeeded with price increases in the second quarter in unquoted fine paper and our saturating graph paper and also in a few areas in board. We should not forget that in board there is obviously given the the fact that the market has declined and the overall market has by far not recovered as we have recovered, but a very low double-digit number. And so there is a price war going on and we have to be patient to not overreact and carry it out because some weaker players have to close their mills. But from experience, we know that it always takes time. With the same experience in saturating graph paper, there are only three main players in the global market. And we were fighting each other like hell until one of them closed their mill. And now the situation has improved. And I think we have to do the same in the board segment.

OK. Is there a difference in the price dynamics between virgin and recycled cardboard?

At the moment, not so much. So for this year, we should for both expect rather flat prices. Based after price increase, we did now for the third quarter for virgin grades.

Okay. Thank you. And then I would have a question related to the cost-cutting measures that you have implemented. And in the outlook statement, you indicate that actually the bulk of it would impact 2025. Can you shed some light on what's currently going on in terms of cost-cutting? I would have assumed that a lot has been done in 2023 already, becoming effective also this year, but there seems to be a bit of a different curve in 2025, so if you can put that into perspective.

Yes, so as you say correctly, in 23 we already had some cost reductions which benefits for us this year. But given the overall, let's say, very difficult market environment, it took some time, for instance, also in our procurement to make comprehensive tenders on a bigger scale. And these benefits are starting to flow in. But the full effect, so some of them will be, let's say, valid from the second half, etc. Then we have reduced the number of people, of employees. And obviously, as you know, if you terminate these contracts, you have to pay them for half a year, one year, et cetera. So let's say typically one year. And so the full effect, if you do actions even at the beginning, the actions we took at the beginning of 24 will only have the full impact more or less from beginning of next year on. We also have done some cost savings are linked to like mixed changes for our products where we can make savings and that needs extensive testing with customers, et cetera, to be sure that these replacements have the same quality. Or another example is some savings are the consequence of, even if they are high return CapEx projects, but the consequence of CapEx and then we have to to wait for these capex sometimes a year or so until this can be implemented and has a defective impact. So especially I'm here referring especially to the energy segment where we do a lot of things to reduce our energy consumption. But this is typically linked to some capex and the order time is anything from six months to 15 months just to get the new equipment. And then only then you have the impact. So we will see gradually, quarter by quarter, it flows through. But if you look at an annual result, it will only fully impact it by 2050.

All right, okay. You gave me a key word, which is energy. So, I mean, we've seen for many companies that have an energy-intensive business model quite a relief on the cost base. So is it fair to assume that board and paper has also seen quite some tailwinds from lower energy costs?

Yes, it's basically correct. However, we also have a policy to constantly hedge our energy. And obviously, we're a huge beneficiary in 2022 and also in 2023. But in 2024, the hedgings we have are a drag on our profitability. So to sum up, our energy costs are lower. So we are benefiting, but it might not be a benefit if you look to spot prices in electricity and gas and calculate the benefit. So we have hedged some. It's just our standard policy to hedge our bets, so to say, and hedge some part of it, and we've reduced that. But still, we have for this year hedge some gas and electricity at higher prices. Higher prices than the spot prices now.

Yes, yes. Do you have, and I'm sure you have, but can you share the estimate when unfavorable hedges are running out and you're down to spot levels?

No, I mean, until the end of the year, basically, the bulk is done. For next years, we also have some hedging in place, which are at a much more favorable level, and then it will depend where the energy costs will be if these hedges are a benefit or a disadvantage, which we will only know by then. And this year, we have the burden of hedges which we've done last year. Fortunately, we didn't do some at really high costs, but we did some at costs which we thought then were very much down when we did them, but from today's point of view, they were too high. But this is, let's say we are not speculators in a way. So we have a policy that we generally try to hedge around half of our volume some time ahead in the previous year. So we give ourselves discretion to make judgments, but we are not betting the farm and say for one year we are hedging everything and next year we're hedging nothing. So we have a consistent policy which smooths the cycle, but when prices significantly come down, hedging is a disadvantage.

Sure. And my last question would be related to your investment budget. If you can provide us with an updated figure for 2024 and maybe also outline a bit of a direction for 2025.

Yeah, I mean, as you see, we feel very comfortable. We guide it for 300 million and we feel very comfortable that we will undercut it. It's always a bit tricky because the cash flows are not exactly as the machine starts up. You have prepayments, you sometimes have delayed payments, but we will be comfortable below 300 million. And for next year, we don't want yet to give final figures as we are considering a few capex, but for sure we can say it will be down, significantly down on 300 million.

Significantly down, okay.

All right, thank you very much. Thank you, yeah. Maybe if I may add to the capex policy. So generally speaking, The CapEx, let's say, decisions which have been done in 20 and 21 have now come to an end, including then the CapEx we've done in essential packaging after we bought it. So we enter generally now years of low CapEx. However, of course, first it's not no CapEx because we see still selective CapEx. opportunity especially in the energy sector to lower our energy and also move to more renewables. That's one aspect and the other aspect is we have some attractive growth businesses like for instance in pharma and some of our CapEx have been for growth and as we win contracts obviously we will invest in order to participate in that growth. But it's not a sort of standard CapEx program where we say we want to bring ourselves to the next level of technological standards, but it's more a very selective investment with high return projects.

Mm-hmm. What would be like a normal run rate expressed as a percentage of sales? Maybe something like maintenance plus minor growth projects?

I think our target overall, excluding any growth prospects, would be the range of our depreciation or somewhat below, which is, let's say, roughly 200 million, a bit above 200 million. So normal capex should be below 200 million.

All right. And the very last question, sorry, on factoring, because that has been quite on the upward path towards the end of last year. Can you remind us of the factoring level by the end of the first half?

It was on a similar level.

Okay. Thank you.

Thank you.

Ladies and gentlemen, if you have any additional questions, please press 9 followed by the Starkey Now. Thank you. And the next question is coming from Cole Hathorne from Jefferies.

Good morning, Peter. Thanks for taking my questions. The first is just around the input cost trends that you're seeing in your business. I'd just like some color on what are you seeing for your wood costs for your virgin cotton board and fine paper in Poland and then as well as what you're seeing in Finland and then separately on the waste paper for your recycled side on the board, you know, how do you see those waste paper markets developing?

Yeah, thank you, Cole. So wood is generally on the way up. Fortunately, in Poland, things have stabilized again, where we were for some time last year, well ahead of the European level. But it's still on a relatively high level, but stable. In Finland, it has stabilized now as well. I think there are some other countries where wood costs go up. With regard to waste paper, we've seen a steady increase this year. And obviously, therefore, we should have increased our product prices much more. But due to this market share fight, it was not possible. And I don't expect that to change quickly. And now we see the first signs of a softening. And some people believe now that we will see a rather quick decline in waste paper prices. But yeah, that's anyone's guess how it will develop. So, so far, let's see, the peak was in July. And now we'll see if the decline, the slight decline in August, goes over to a free fall or whether they stabilize again.

Thank you. And then could you just remind me of when we will start to see the full benefits from the investments that you've made in kind of the recycled side of your business? I mean, I know you've done a number of CapEx projects. You've done a number of energy investments. I'd just like some context around how much of a saving can some of those energy investments do i mean maybe not a dollar number but you know an efficiency versus the mill or something you can give us context to understand how you're trying to shift your position down on the cost curve yeah if we if if we think about that we've done a

let's say CapEx program depends now what you include, exclude, but in recycled container, a carton board of 250 million, you can assume that we wanted a decent return on these 250 million. And I leave it on your guess what we would consider as a reasonable IRR. What is interesting in this market is that the complexity of the rebuilds requires, so to say, gives you a longer startup curve than what one is used to in container board because the products are much more difficult to produce. and you need more qualifications from your customers. And therefore, indeed, we have in 24, so to say, the benefit that we don't have the standstills, but we are still in the ramp up in terms of we produce almost full, but still not the optimal products and still with some qualifications being outstanding. So again, the benefit will come in terms Basically in 25, of course, a lot will come in, mostly already in the second quarter, and there will be more in the third, et cetera, so it's gradually building up. But the real benefit is only coming next year, so more or less a year after these CAPEX were formally completed and started up.

Thank you.

You're welcome.

Ladies and gentlemen, if you have any additional questions, please press 9, followed by the star key now. Thank you. There are no further questions.

Okay, then if there are no questions, thanks for the questions you've asked and for your participation. And just to summarize, we are cautious about the challenging trading environment in the next future. But overall, we've become a leaner and much stronger company with regards to asset-based management, sustainability, innovation in our product portfolio. And therefore, we are convinced that we have a solid basis to benefit from the upturn in our markets whenever they will come. And in this sense, yeah, thank you very much for the participation and have a good day.

Just want to remind you that our Q3 results will be released on November 7th. So, my man says goodbye and wishes you a good day. Bye-bye.