Mondi Group: Interim Management Statement May 2009
This statement provides an update on the Group’s progress since the year ended 31 December 2008, based on management accounts up to end March 2009 and estimated results for April 2009, and precedes the announcement on 5 August 2009 of the half-yearly results for the six months ending 30 June 2009.
This statement provides an update on the Group’s progress since the year ended 31 December 2008, based on management accounts up to end March 2009 and estimated results for April 2009, and precedes the announcement on 5 August 2009 of the half-yearly results for the six months ending 30 June 2009.
Group Overview
The difficult trading conditions experienced in the latter part of 2008 have continued into the first quarter of this year. The Group’s underlying operating profit for the three months to the end of March was similar to that of the final quarter of 2008, with an improvement in the results from the Europe & International Division offset by a decline in the South Africa Division. Results were significantly below the comparable period for the prior year.
The Group continues to make good progress on the various initiatives taken in response to the downturn, including delivering on the €180 million cost reduction programme announced at the Full Year results in February, exiting various higher cost operations, focusing on working capital management and reducing capital expenditure. These efforts both build on Mondi’s competitive advantage in the markets in which it chooses to operate, and ensures the Group remains well positioned to benefit when market conditions improve.
The Group remains in a sound financial position, with net debt at end of March of around €1.62 billion, a decrease of around €70 million on the position at the end of December 2008, taking into consideration a further circa €100 million spent on the two major capital projects in Poland and Russia. At the end of March, the Group had just under €1.1 billion of undrawn committed debt facilities.
Divisional Overview
Europe & International
Underlying operating profit was up on a weak fourth quarter of 2008, driven by better performances from Bags & Specialities and Uncoated Fine Paper. To balance weak demand across all businesses, around 127,000 tonnes of market related downtime was taken in the first quarter, representing around 12% of capacity and similar to the downtime taken in the final quarter of 2008. While selling prices remain under pressure, decreasing input costs, notably wood, waste paper, chemicals and other variable costs, together with the restructuring actions taken in exiting higher cost capacity are helping to offset the revenue pressures.
Underlying operating profit in the Uncoated Fine Paper Business was up on the fourth quarter of 2008, although down on the comparable period in the prior year. Results from the Russian operation were particularly strong, with marginally improved domestic selling prices supported by good cost control. Combined with decreasing pulp input costs at the non-integrated facilities, this more than offset the impact of lower European selling prices (copy paper down 3 % since the year end).
In the Corrugated Business trading remains extremely challenging. Weak demand continues to put pressure on containerboard prices. Average recycled containerboard prices in the first quarter were down around 33% on the comparable period in the prior year, and by the end of the quarter prices were down around 10% on those at the year end. Similarly, virgin containerboard prices are down around 10% since the beginning of the year. Results from our Polish operations continued to be impacted by the strong Polish zloty as the business delivered into forward currency contracts taken out under the Group’s six month’s rolling hedge programme. Under this programme, the weakening of the Polish zloty seen at the end of 2008 and into early 2009 will start to benefit the business late in the second quarter.
The Bags & Specialities Business was strongly up on a very weak fourth quarter of 2008 on better volumes, strong cost control and a good performance from the consumer flexibles segment. The Business continues to be affected by weak demand in kraft paper and industrial bags with pricing now being impacted, although there has been some recent pick up in order books since the lows reached over the December 2008 - January 2009 period, when destocking appeared to be at its height. Significant market related downtime was taken in the quarter to balance inventories, albeit at lower levels than seen in the final quarter of 2008., The previously announced mothballing of two of the higher cost kraft paper machines in the Group (Stambolijski and Dynas PM5) will become effective towards the end of the second quarter, reducing the Group’s fixed cost base in the second half of 2009. Profitability in the Specialities Business unit has improved since the fourth quarter of 2008 on the back of a strong performance from the consumer flexibles segment driven by lower plastic resin input costs and stable pricing.
South Africa Division
First quarter underlying operating profit in the South African Division was marginally above the comparable period last year, but significantly down on the fourth quarter 2008, impacted by lower pulp, woodchip and uncoated fine paper export prices together with lower woodchip export volumes. The domestic prices for uncoated fine paper continue to hold up, although there are signs of softening volumes. Open market pulp prices appear to be stabilizing, albeit at low levels, with the re-emergence of buyers from China.
In April agreement was reached on the settlement of a further seven land claims in South Africa. Structured around the initial Mondi land claims model as a sale and leaseback agreement, Mondi retains ownership of the forests whilst meeting the needs of the land restitution process in South Africa.
Mondi Packaging South Africa (MPSA)
Underlying operating profit is well below the comparable period last year and the fourth quarter of 2008 as lower sales volumes and increasing input costs are only partially offset by higher selling prices and additional cost savings. The fourth quarter comparison is also impacted by seasonal variances, with the second half traditionally stronger than the first.
Merchant and Newsprint
To date Europapier is performing well below the comparable period in the prior year due to lower sales volumes and prices, exacerbated by the weakening of certain of the emerging European currencies in which it trades. Shanduka Newsprint continues to hold up well, although there is some evidence of softening demand in its domestic market, while Aylesford Newsprint has benefited from significantly improved pricing on its annual contract business (up around 19% in Sterling terms), although possible demand weakness and rising input costs remain a concern.
Input Costs and Currency
Generally there has been easing of key input costs, notably wood, recovered paper, pulp, energy and chemicals. Importantly, results continue to benefit from Mondi’s ongoing focus on cost reductions, restructuring and productivity improvements, all of which help to mitigate the impact of the weaker markets. Mondi remains on track to achieve the cost savings target set for the year of €180 million.
The weakening of the major eastern European currencies witnessed towards the end of 2008 and into early 2009, notably the Polish zloty and Czech koruna, will have a positive impact on the results of our eastern European production base, although the effect is delayed due to the Group’s rolling six month currency hedging programme. Conversely, the recent strengthening of the South African Rand will put pressure on margins on export sales from the South Africa Division.
Restructuring
The actions announced at the Group’s Full year results in February of this year taken in response to the economic downturn are on schedule. We have completed the divestment of three corrugated converting operations in France for total proceeds of approximately €20 million, while the restructuring of the Turkish corrugated business, the Coatings business in Finland and the UK, and the Consumer Flexibles business in Austria is on track. Similarly, as mentioned above, procedures are in place to mothball the Stambolijski mill and Dynas PM5 paper machine by the end of the second quarter. Once complete, these closures will have seen Mondi exit around 600,000 tonnes of higher cost paper capacity in Europe (around 14% of the Group’s European paper production capacity) over the eighteen month period since the beginning of 2008.
Additional recently initiated measures to rationalisethe Group’s western European footprint include the closure of a corrugated plant in the UK and four bag converting plants across Europe. Furthermore, in April, we reached agreement to dispose of our two remaining corrugated packaging plants in France for an enterprise value of around €45 million. The above measures will have the effect of adjusting the Group’s production capacity in light of the changing demand environment, lowering its overall cost base and streamlining its asset portfolio to focus on those businesses that provide Mondi with sustainable competitive advantage in its respective markets. Restructuring and impairment costs related to these activities and recorded as operating special items in 2009 are expected to amount to circa € 60 million.
Major Projects and Capital Expenditure
In addition to the above measures, we remain committed to completing the development of our two major projects in Poland and Russia, which will serve to further secure the Group’s position as a cost leader in its chosen markets. The project to build the new 470,000 tonne recycled containerboard machine and related box plant at Swiecie in Poland, at a total cost of €350 million, is progressing well. Mondi remains on track for completion in the second half of 2009 within the budgeted cost. We anticipate that this machine will have the lowest operating cost of its type. The project to modernisethe Russian mill (total cost of €525 million) is also making good progress and remains on track for completion within the budgeted cost in 2010. The key objectives of the project are to lower the Group’s cost base in Russia, improve efficiency, increase energy production and revenue by selling surplus energy to the grid as well as providing limited extra capacity (both pulp and paper) for the domestic market.
The previously announced initiatives to curtail capital expenditure outside of the two major projects (new capital expenditure approvals limited to 40% of depreciation) are ongoing and benefits in cash flows are already being seen.
Borrowings and Finance Charges
As at the end of March, net debt was around €1.62 billion, a decrease of €70 million on the position at the end of December 2008 despite a further circa €100 million spent on the two major projects. Working capital management continues to be a key focus of the Group, and further working capital inflows were achieved in the quarter following a strong performance over the last two years. Proceeds from asset disposals (circa €14 million) and foreign exchange adjustments have also contributed to the strong cash flow performance.
At the end of March, the Group had just under €1.1 billion of undrawn committed debt facilities and the average maturity of the Group’s committed debt facilities was 3.4 years. In accordance with Group accounting policies, interest attributed to the major capital projects is currently being capitalized to these projects. Combined with falling interest rates, this should lead to a reduction in finance charges for the full year compared to the prior year.
Summary
Despite some evidence that the rapid de-stocking, which started in the fourth quarter of 2008, is coming to an end, there remains a high level of global economic uncertainty. This will undoubtedly continue to create challenges for the remainder of 2009. In this fast changing economic environment we have acted early and decisively to reduce capacity, lower the overall cost base and optimise cash flows. These actions coupled with Mondi’s sound financial position and low cost, high quality asset base will leave us well placed to benefit when market conditions improve.
This statement is being released on the day of Mondi Group’s Annual General Meetings to be held simultaneously in Johannesburg and London, details of which can be found on the Group’s web site www.mondigroup.com .
Mondi Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1967/013038/06)
JSE share code: MND ISIN: ZAE000097051
Mondi plc
(Incorporated in England and Wales)
(Registration number: 6209386)
JSE share code: MNP ISIN: GB00B1CRLC47
LSE share code: MNDI
As part of the dual listed company structure, Mondi Limited and Mondi plc (together 'Mondi Group') notify both the JSE Limited and the London Stock Exchange of matters required to be disclosed under the JSE listings requirements and/or the Disclosure and Transparency and Listing Rules of the United Kingdom Listing Authority.
Editors’ notes:
Mondi is an international paper and packaging group and in 2008 had revenues of €6.3 billion. Its key operations and interests are in western Europe, emerging Europe, Russia and South Africa.
The Group is principally involved in the manufacture of packaging paper and converted packaging products; uncoated fine paper; and speciality products and processes, including coating, release liner and consumer flexibles.
Mondi is fully integrated across the paper and packaging process, from the growing of wood and manufacture of pulp and paper (including recycled paper) to the converting of packaging papers into corrugated packaging and industrial bags.
Mondi has production operations across 35 countries and had an average of 33,400 employees in 2008.
Last change: 07/05/2009