Mondi Group: Interim Management Statement 6 May 2010

This interim management statement provides an update on the financial performance and financial position of the Group since the year ended 31 December 2009 based on management accounts up to 31 March 2010 and estimated results for April 2010, which were not audited or reviewed by Mondi’s external auditors. Half-yearly results for the period ending 30 June 2010 are expected to be announced on 10 August 2010.

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Group Overview

The Group’s underlying operating profit in the first quarter 2010 was moderately above that of the fourth quarter 2009. This reflects a continued improvement in the European trading environment, first witnessed in the fourth quarter 2009, as well as the ongoing positive impact of the decisive actions taken to restructure the cost base of the business during 2008 and 2009. Results were significantly above the comparable period in the prior year.

Volumes in most areas of the business continue to recover, with first quarter sales volumes reflecting an increase over the fourth quarter of the previous year. Similarly, the upward momentum in selling prices in most of our key grades seen in the fourth quarter 2009 has continued, with previously announced price increases successfully implemented and maintained. A rising cost base due to commodity input cost pressures has partially offset these revenue gains.

The Europe & International Division continued to perform well with underlying operating profit for the first quarter moderately above the previous quarter performance and well above the comparable period in the prior year. The South Africa Division increased underlying operating profit from a very low base in the previous quarter on the back of increased export selling prices but remains under pressure from the strength of the rand. Results were down on the comparable period in the prior year. Mondi Packaging South Africa’s operating profit was down on the fourth quarter due to normal seasonal variations, but above the comparable period in the prior year.

In line with Mondi’s strategy to strengthen its leading market position in industrial and consumer bags in Europe, and further increase the forward integration of kraft paper into bags, an agreement was concluded in April with Smurfit Kappa Group (SKG) for the acquisition of its western European industrial and consumer bag operations in France, Spain and Italy. As part of the same transaction, Mondi sold all three of its corrugated box plants in the UK to SKG thus concluding Mondi’s western European corrugated packaging and recycled containerboard restructuring programme. The transaction was completed on 4 May 2010. The net funds received of €51 million were used to reduce the Group’s net debt.

In early May 2010, an agreement was concluded to sell the central European paper merchant, Europapier to the Heinzel Group for a consideration of €60 million on a cash and debt free basis. The funds will be utilised to reduce Mondi’s net debt. This disposal further enables the Group to focus on its core businesses. The transaction is subject to approval by the relevant competition authorities.

During the period under review, Mondi successfully launched a €500 million, 7-year Eurobond, further strengthening the Group’s already robust financial position as evidenced by the long term corporate credit ratings received of Baa3 from Moody's Investor Service and BB+ from Standard & Poor's, both with a stable outlook. The funds have been utilised to settle existing short and medium term debt.

As expected, operating cash flows for the first quarter were negatively impacted by an increase in working capital on the back of increased selling prices and volumes, but remain strong.

The financial position of the Group at 31 March 2010 remained robust with net assets moderately up on the back of higher working capital and exchange impacts on translation into euro. Following the launch of the Eurobond, the average maturity of Group debt has increased to four years. Unutilised committed borrowing facilities have also increased to approximately €1.4 billion.

Except as discussed in this interim management statement, there have been no other significant events or transactions impacting either the financial performance or financial position of Mondi since 31 December 2009 up to the date of this statement.

Divisional Overview

Europe & International

The Uncoated Fine Paper (UFP) business continues to perform well, with underlying operating profit moderately down on the strong result achieved in the previous quarter, and well above that of the comparable period in the prior year. The business continues to benefit from strong volumes, a low-cost asset base and improving pricing which is offsetting input cost pressures. The previously announced 5% to 8% price increases were successfully implemented during the quarter. Combined with an improved product mix, this saw average selling prices achieved in the quarter higher than those in the previous quarter. This upward momentum in pricing is expected to continue into the second quarter as the full benefits of the recent price increases are realised. Furthermore, the Group recently announced further price increases of between 5% and 12%, effective from 1 June 2010. The actual price increases achieved and the timing thereof are dependent upon ongoing negotiations with customers. Margins in the Group’s non-integrated mills (the UFP business is a net buyer of around 350ktpa of pulp), were impacted in the quarter by the sharply rising global pulp prices (up 26% to 30% quarter on quarter due in part to temporary supply restrictions in Chile and Finland), although the full impact will only be seen in the second quarter.

In the Corrugated business, underlying operating profits in the first quarter were in line with the fourth quarter of 2009, with a combination of increased input costs from recovered paper and adverse currency movements (Polish zloty strength) not completely recovered in increased selling prices. These negative margin variances were however offset by an increase in containerboard volumes, in part from the new Świecie capacity in Poland, which continues to ramp up production ahead of its investment plan.

Although recycled containerboard prices were up on average in the quarter (testliner benchmark prices were up around 7%, or €23 per tonne), margins at the recycled containerboard mills remain under significant pressure from input costs. Recovered paper prices were up around 23% or €17 per tonne on average when compared to the previous quarter. Further recycled containerboard price increases were announced in April, however sustainable improvements in this market are only likely to be achieved through further capacity rationalisation from producers at the higher end of the cost curve. Mondi continues to pursue its strategy of delivering a high-quality, low-cost asset base and during the first quarter concluded the sale of the 170ktpa Frohnleiten recycled containerboard mill in Austria.

In the Bags & Coatingsbusiness, underlying operating profits for the first quarter of the year were significantly higher than the previous quarter and above those of the comparable period in the prior year. In Kraft paper, higher input costs (mainly wood and energy) were more than offset by increased volumes and selling prices, with export markets particularly buoyant. In response to the stronger export market environment, the decision has been taken to reopen 80ktpa of capacity at the mothballed Stambolijski pulp and paper mill in Bulgaria towards the middle of the year. Further price increases have also been announced.

The industrial bags business came under pressure from lower selling prices and increased energy and paper costs compared to the previous quarter. Selling price increases were announced in April on the back of good demand, although the impact will be limited as prices for a significant proportion of volume are fixed for the year. Furthermore, the actual price increases achieved and the timing thereof are dependent upon ongoing negotiations with customers. While encouraging, there does remain a concern that the recent pick-up in demand in the European industrial bag segment is influenced by restocking.

Profitability in the consumer bags and coatings businesses continues to reflect the defensive qualities of these segments, driven by resilient demand in consumer markets, although input cost pressures are evident.

South Africa Division

The South Africa Division’s underlying operating profit for the first quarter of 2010 was better than that of a very weak previous quarter largely due to improved pulp export selling prices, but still well down on the comparable period in the prior year.

Domestic uncoated fine paper (UFP) demand remains stable and the Division has successfully implemented local price increases of around 6% on office paper. However, export returns from the UFP operations continue to disappoint. Substantial cost increases, most significantly pulp, coupled with the continuing strength of the rand have seen the business become increasingly uncompetitive as an UFP exporter to Europe despite the recent increases in European prices. A decision has been taken to withdraw from these markets and to focus on servicing the domestic and African market. Local management are engaged in discussions with employee representatives regarding the consequent restructuring and mothballing of a 120ktpa paper machine and related converting capacity within the Merebank plant. After the restructuring, this business will be a net seller of around 280ktpa of market pulp per annum and have UFP production capacity of around 250ktpa.

Mondi Packaging South Africa (MPSA)

The underlying operating profit for the first quarter was below that of the fourth quarter 2009, due mainly to seasonal variances, with the second half of the year traditionally stronger than the first as a result of exposure to the agricultural sector. Results were up on the comparable period in the prior year. The euro result was enhanced on translation by a stronger rand versus the comparable period.

Merchant and Newsprint

Europapier delivered underlying operating profits marginally below those of the previous quarter, while the structurally weak European newsprint market, compounded by rising input costs, has resulted in a reduction in underlying operating profit of Aylesford Newsprint. Mondi Shanduka Newsprint remains under pressure due to lower domestic demand.

Input Costs and Currency

All fibre inputs have shown significant increases through the final quarter 2009 and first quarter 2010. Procured wood in central Europe is up significantly versus the comparable period in the prior year. Upward pulp price momentum has been exacerbated by the supply shock arising from the earthquake in Chile, while strong Chinese demand has driven rapid price escalations in European recovered paper markets. Mondi benefits from its structural positioning, with the Syktyvkar and South African pulp mills enjoying significant wood cost advantage through their backward integration, complemented by the integrated pulp and paper mills, which significantly reduce the Group’s exposure to pulp price escalations. Following the restructuring in South Africa and based on current production rates, the Group will be a net buyer of around 135ktpa of pulp, making it 93% self-sufficient in pulp. The new containerboard machine at Świecie in Poland offers significant cost advantages in recycled containerboard production. Clearly, the restructuring initiatives already implemented and Mondi’s ongoing focus on cost reductions and productivity improvements, all continue to mitigate the impact of input cost pressures.

The continued strength of the rand places severe pressure on export sales margins from the South Africa Division. Similarly the weakness of the euro in recent months is placing increasing cost pressure on the export focussed operations in Poland and the Czech Republic in particular. However, the weakness of the euro relative to the US dollar is proving supportive of euro pricing of products exposed to international trade flows.

Capital Expenditure

The project to modernise Mondi’s mill in Syktyvkar is progressing well despite severe weather conditions in December 2009 / January 2010. Management remains confident of completing the project within the revised budget level of €545 million.

The previously announced initiatives to curtail capital expenditure outside of the major project in Russia are ongoing with benefits in cash flows clearly evident.

Borrowings and Finance Charges

During the period under review Mondi successfully launched a €500 million, 7-year Eurobond, which has been used to pay down existing bank debt, leaving approximately €1.4bn of committed undrawn facilities. The bond has a coupon of 5.75%, which will result in a moderate increase in the effective financing charge for the Group relative to the second half of 2009.

Summary

The current improvement in the trading environment is evident. Order inflows are strong across all key grades, while selling prices continue to improve from the lows seen in the third quarter 2009. However, costs are increasing, including currency impacts, and demand in certain products may be benefitting from some restocking.

The decisive actions taken to reduce costs and exit higher-cost capacity, coupled with a high-quality, expanding low-cost asset base and strong financial position, ensure Mondi is benefitting from these improving trading conditions.

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Editors’ notes:

Mondi is an international paper and packaging company, with production operations across 31 countries and revenues of €5.3 billion in 2009. The Group’s key operations are located in western and emerging Europe, Russia and South Africa and employed 31,000 people on average in 2009.

Mondi is fully integrated across the paper and packaging process, from the growing of wood and the manufacture of pulp and paper (including recycled paper), to the conversion of packaging papers into corrugated packaging and industrial bags.

The Group is principally involved in the manufacture of uncoated fine paper (UFP), packaging paper and converted packaging products, as well as speciality products.

Mondi is a dual listed company, with primary listings on the Johannesburg and London stock exchanges under the ticker codes MND (JSE) and MNDI (LSE) respectively. The Group has been recognised for its sustainability performance through its inclusion in the FTSE4Good UK, Europe and Global indices in 2008 and 2009 and the JSE’s Socially Responsible Investment (SRI) Index in 2007, 2008 and 2009.

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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.

Last change: 06/05/2010