Mondi Group: Interim Management Statement 1 November 2010Publication Date:
01 November 2010
This interim management statement provides an update on the financial performance and financial position of the Group since the half-year ended 30 June 2010, based on management accounts up to 30 September 2010 and estimated results for October 2010, which have not been audited or reviewed by Mondi’s external auditors.
Audited results for the year ending 31 December 2010 are expected to be announced on 21 February 2011.
The Group’s underlying operating profit in the third quarter 2010 was above that of each of the first two quarters of the year and well in excess of that achieved in the comparable period of the prior year.
Turnover for the third quarter was marginally higher than that of the second quarter. The upward momentum in selling prices continued. Order books remain strong, although sales volumes in the quarter were reduced due to maintenance shuts at various facilities and the extended shut at Syktyvkar as part of the integration of the modernisation project. Increasing raw material costs, less pronounced than in the first half of the year, were offset by ongoing cost optimisation activities. This led to a quarter on quarter improvement in the Group’s underlying operating profit.
The final phase of the modernisation of the Syktyvkar mill in Russia was successfully completed during September, following the commissioning of the recovery boiler and rebuilt containerboard machine. Construction of the project commenced in April 2008 and was completed on schedule. Total costs are expected to be within the revised €545 million budget. The estimated impact on underlying operating profit of the shut during the quarter was €15 million. The focus is now on bringing the mill up to full production during 2011.
The sale of the central European paper merchant, Europapier, to the Heinzel Group for a consideration of €60 million on a cash and debt free basis, will be concluded in early November with all regulatory approvals having been secured. The funds will be utilised to reduce Mondi’s net debt.
In August, agreement was reached with Hadera Paper Limited to sell down the Group’s 50.1% interest in Mondi Hadera Paper Limited for a consideration of €10 million, with the Group retaining a 25% minority interest. The deal is conditional upon regulatory approval.
Operating cash flows for the third quarter reflected the improved operating profit and enabled the Group to reduce its net debt position to €1,536 million at 30 September 2010 from €1,632 million as at 30 June 2010. Working capital as a percentage of turnover, at 10%, remained within forecast parameters.
The financial position of the Group at 30 September 2010 remained robust with net assets moderately up on the back of exchange impacts on translation into euro. The average maturity of Group committed debt is 3.9 years and unutilised committed borrowing facilities are approximately €1.4 billion.
Following the completion of funding of our major capital projects in 2011, the Group will enter a period of increased free cash flow generation. While focused growth clearly remains an option, the Group will allocate increasing free cash flow to debt reduction and to improving cash returns to our shareholders.
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 30 June 2010 up to the date of this statement.
Europe & International
The Uncoated Fine Paper (UFP) business continued to perform well. Underlying operating profit in the third quarter was down on the strong result achieved in the previous quarter but well above that of the comparable period in the prior year. The lower result is largely a reflection of the effect of the seasonally weaker European summer months, annual maintenance shuts at the mills in Slovakia and Austria, and the extended shut for the integration of the Syktyvkar expansion project. The business continued to benefit from strong volumes, a low-cost asset base and improving pricing which offset input cost pressures. Despite the price increases achieved, margins in the Group’s non-integrated mills came under further pressure in the quarter due to high average pulp prices (up between 1% and 2% from the previous quarter).
In the Corrugated business, underlying operating profit in the third quarter was in line with the second quarter of 2010 and well above the result of the comparable period in the prior year. Increased selling prices were offset by increasing costs and reduced volumes, mainly as a result of a planned maintenance shut at Swiecie. Average benchmark kraftliner prices increased by 12% compared to the prior quarter whilst testliner prices were up 5%. The new recycled containerboard machine in Swiecie, Poland, continued to operate well, with third quarter production of 102,000 tonnes, including the impact of the scheduled maintenance shut. Following the sale of the UK corrugated plants, sales volumes of corrugated products reduced, however, average sales prices increased over the previous quarter.
In the Bags & Coatings business, underlying operating profit for the third quarter was significantly higher than the previous quarter and above that 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 remaining particularly buoyant. The fourth quarter result will be impacted by planned maintenance shuts at the two largest kraft paper mills, Steti in the Czech Republic, and Frantschach in Austria.
Selling price increases and stronger volumes were achieved in the industrial bags business, although this was not sufficient to offset the full impact of paper input cost rises. Negotiations are underway for the closure of certain industrial bag plants related to the previously announced acquisition of eight plants from Smurfit Kappa. Two plants are being closed in Spain and Italy, with a further two closures in France still under consultation with the relevant trade unions. A restructuring provision will be recognised as a special item in this regard.
Profitability in the consumer bags and coatings businesses was lower than that of the previous quarter mainly due to input cost pressures.
South Africa Division
The South Africa Division’s underlying operating profit for the third quarter was significantly better than that of the previous quarter, largely due to ongoing cost saving initiatives and increased pulp sales volumes. The previously announced mothballing of the 120,000 tonne uncoated fine paper machine at Merebank was completed during the third quarter and the benefits from this restructuring are expected to be realised from the fourth quarter onwards. The fourth quarter will however be negatively impacted by a planned maintenance shut of the Richards Bay facility.
Domestic uncoated fine paper (UFP) demand remained stable, with selling prices largely unchanged quarter on quarter.
Mondi Packaging South Africa (MPSA)
The underlying operating profit for the third quarter was above that of the second quarter and of the comparable period in 2009 mainly due to increased sales volumes and ongoing cost saving initiatives. Sales price increases are expected to take effect during the fourth quarter of the year which is also traditionally stronger due to seasonal variations. The euro result was enhanced on translation by a stronger rand versus the comparable period.
Europapier delivered underlying operating profit in the third quarter in line with that of the previous quarter. The structurally weak European newsprint market, compounded by rising input costs, resulted in a further reduction of underlying operating profit at Aylesford Newsprint. Mondi Shanduka Newsprint remained under pressure due to lower domestic demand and increasing commodity input costs.
Input Costs and Currency
Although input costs remain elevated, at or near their highs for the year, the rapid increases in raw material costs experienced in the previous two quarters are showing signs of slowing. Monthly average benchmark prices of pulp and recovered paper in the third quarter remained relatively unchanged with hardwood pulp reflecting a slight reduction in recent months. Wood prices continued to increase, although at a more moderate pace than in the first half of the year.
Following the mothballing of the 120,000 tonne uncoated fine paper machine at Merebank in South Africa and the completion of the Syktyvkar modernisation, the Group is essentially balanced in respect of its pulp production and consumption, being net short about 30,000 tonnes.
Recent currency volatility, as detailed below, impacts the profitability of the Group in the following ways:
- The weakening of the Russian rouble against the euro is supportive of paper prices in the domestic market, although there is a negative translation effect into euro.
- The Czech koruna and Polish zloty have strengthened in recent months versus the euro, with a detrimental effect on the export competitiveness of operations in those countries.
- The continued strength of the rand against the US dollar places severe pressure on export sales margins from the South Africa Division.
- The recent strengthening of the euro against the US dollar may have a negative impact on pricing in Europe for products influenced by global trade flows. The Group also has some direct transactional exposure to the US dollar, albeit relatively limited.
Excluding the major capital projects in Russia and Poland, capital expenditure as a percentage of depreciation is running at 54% year-to-date, reflecting a continued conservative investment approach. Some limited additional investments have been approved by the board and this percentage is expected to increase somewhat over the remainder of the year.
Finance charges increased in the third quarter versus the previous quarter mainly due to non-recurring foreign exchange gains recorded in the first half. Borrowing costs are broadly in line quarter on quarter with marginally lower net interest costs offset by a reduction in borrowing costs capitalised, following completion of the Syktyvkar modernisation. Approximately 70% of the Group’s net debt is at fixed rates of interest.
The business will continue to benefit from the optimisation of the major capital investment projects in Poland and Russia.
The current trend in foreign exchange rates is of concern. Notably, the continued strengthening of emerging market currencies is impacting on the relative competitiveness of the Group’s businesses located in these markets, while the recent weakness of the US dollar versus the euro may undermine pricing in Europe for a number of the Group’s products.
Overall, the price increases achieved to date in all of the Group’s key grades, together with the ongoing initiatives to contain cost increases, should see the business continue to deliver a strong performance in the final quarter of the year.
Mondi is an international paper and packaging company, with production operations across 31 countries and revenues of Euro5.3 billion in 2009. The Group's key operations are located in central 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 has a dual listed company structure, with a primary listing on the JSE Limited for Mondi Limited under the ticker code MND and a premium listing on the London Stock Exchange for Mondi plc, under the ticker code MNDI. 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.
(Incorporated in the Republic of South Africa)
(Registration number: 1967/013038/06)
JSE share code: MND ISIN: ZAE000097051
(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: 01/11/2010