Mondi Group: Interim Management Statement

Publication Date:

27 October 2009

This statement provides an update on the Group’s progress since the half-yearly report for the six months ended 30 June 2009, based on management accounts up to end September 2009 and estimated results for October 2009. Full year results for the year ending 31 December 2009 are expected to be announced on 23 February 2010.

Group Overview

In line with expectations, the Group’s underlying operating profit in the third-quarter of 2009 came in modestly below that of the second-quarter of 2009. The expected benefits of the actions taken to restructure the cost base, now largely complete, are being seen in the results. While volumes in most areas of the business continue to recover from the lows reached earlier this year, this has been offset by lower average selling prices for the majority of the Group’s products. Price increases have recently been announced in most of our key European packaging grades.

The Europe & International Division continues to perform well. Underlying operating profit for the third-quarter was similar to that of the second-quarter. Pleasingly, we have seen good post summer seasonal pick up in demand. Price increases have been announced across all the main packaging paper grades, partly driven by increasing input costs (notably pulp, waste paper and wood costs). Many of these increases have come too late to materially impact current year performance, but support our view that prices in the packaging grades have bottomed out. We continue to make good progress on restructuring and cost savings initiatives.

The South Africa Division continues to face challenges from a combination of softer volumes, cost pressures and weak export prices, exacerbated by a very strong Rand (up around 17% versus the Euro and 22% versus the Dollar since the beginning of the year). This resulted in a further deterioration in underlying operating profit from levels seen in the second-quarter. Good progress continues to be made in restructuring the cost base, which will provide some support in the face of the ongoing difficult trading conditions.

Divisional Overview

Europe & International

The Uncoated Fine Paper Business continues to perform well in the current economic climate, although underlying operating profit for the third-quarter was down versus the second-quarter due to a combination of the seasonally weaker summer months and the impact of marginally lower prices (down 2% on average versus the previous quarter) exacerbated by a weaker Russian rouble and rising pulp input costs. While pricing to date has held up well, supported by further industry capacity rationalisation announced in the quarter, it is still too soon to conclude on the full impact of the new 500,000 tonnes per annum uncoated fine paper machine from Portucel, which came on stream during the quarter.

In the Corrugated Business unit volumes continue to improve, albeit off a low base, and while average prices in the quarter were below those in the first half, there have been notable positive pricing developments in recent weeks. In recycled containerboard, while average third-quarter testliner prices were around 13% lower than those of the first-half, price increases amounting to circa 50% were announced in September and October. Similarly, while kraftliner prices were down on average 12% versus the first-half, increases of circa 25% were announced in September. The actual price increases achieved and the timing thereof is dependent on ongoing negotiations with our customers. Market related downtime in the third-quarter was negligible in comparison to that in both the first-half and comparable period. The downstream corrugated operations have seen some improvement in operating margins, benefiting from the paper price declines as box prices have largely stabilised, although the ability to retain these margins in the wake of the recently announced paper price increases is not yet clear.

In September Mondi saw the first saleable production from its new lightweight recycled containerboard paper machine in Swiecie, Poland. Start-up costs on the machine were capitalised through until the end of September. It is anticipated that the project will have a marginal effect on underlying operating profit in 2009.

In the Bags & Specialities Business third-quarter underlying operating profit was up on the previous two quarters on better volumes, strong cost control and a good performance from the specialities segment. This more than offset the lower average kraft paper prices. Underlying operating profit was down versus the strong comparable period. A sack kraft paper price increase of circa 12% was announced in September, although this is only expected to impact margins in the new year due to the extent of contracted and integrated volumes, and its implementation is again dependant on the outcome of ongoing negotiations with our customers. Order volumes for kraft paper have been firmer, with no market related downtime in the quarter compared to around 86,000 tonnes in the first-half and 117,000 tonnes in the prior year. Profitability in the Specialities Business unit has improved from the comparable period driven by resilient demand, lower plastic resin input costs and stable pricing. A €47 million investment in a new 50,000 tonnes per annum MG (machine glazed) paper machineat the Steti mill in the Czech Republic has been successfully completed on target and within budget. Production from this machine will be targeted at fast growing niche applications, including the release liner and flexible packaging markets as well as supplying customers previously served by the 20,000 tonnes per annum Ruzomberok kraft paper machine, which was closed in the period.

South Africa Division

The South Africa Division has seen a continuation of the first-half’s disappointing performance, which in the third-quarter was exacerbated by further strengthening of the South African Rand. Underlying operating profit was sharply down on a strong comparable period a year ago, and down on the first-half run rate. Significant Dollar market price increases since the first-half in both pulp and African paper sales (excluding South Africa) were offset by the strengthening Rand, resulting in lower Rand prices achieved across all exported products. The domestic prices for uncoated fine paper cut-size continue to hold up, with some indications of increased demand since the first-half. White-top kraftliner price increases of circa 10% have been announced in the European export markets, with the benefits expected to impact only later in the year and into the new year.

Mondi Packaging South Africa (MPSA)

Underlying operating profit was above the comparable period last year and the second-quarter of 2009, as lower corrugated sales volumes and increasing input costs were offset by higher selling prices, additional cost savings and the stronger South African Rand.

Merchant and Newsprint

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. Mondi Shanduka Newsprint has been under pressure due to lower domestic demand and pricing pressures. Aylesford Newsprint has benefited from improved pricing on its annual contract business, although rising input costs and the structurally weak European newsprint market remain a concern for the future.

Input Costs and Currency

There has been easing of input costs versus the comparable period in the prior year. However, some key input costs are now rising. Benchmark European recovered paper prices, while down around 34% on average in the third-quarter versus the comparable period last year, have risen around 28% since the end of the first-half of this year. Similarly, wood costs are also starting to increase. 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 well 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, is now benefitting the results of our eastern European production base due to the impact of the Group’s rolling six-month currency hedging programme. Conversely, the continued strengthening of the South African rand is putting pressure on margins on export sales from the South Africa Division. In addition the ongoing weakness of the dollar is a concern in that it erodes the competitiveness of European exporters whilst encouraging imports into Europe.

Major Projects and Capital Expenditure

We have made good progress in 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.

September saw the first saleable production from the new 470,000-tonne recycled containerboard machine at Swiecie in Poland (total cost of €305 million). We anticipate that this machine will have the lowest operating cost of its type. Up to around 50% of its off take will be secured by physical integration with the surrounding box plant network. Start-up of the machine is ahead of schedule and the project will come in within budget.

The project to modernise the Russian mill at a total cost of €525 million is also making good progress and remains on track for completion within the budgeted cost in the second-half of 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 (with new capital expenditure approvals limited to 40% of depreciation) are ongoing with benefits in cash flows clearly evident.

Borrowings and Finance Charges

Group borrowings have decreased since the end of June 2009, with trading profits and working capital inflows partially offset by capital expenditure primarily on the two major strategic expansion projects in Russia and Poland. As at the end of September, net debt stood at circa €1.6bn, a decrease of circa €50m since June. The Group has in excess of €1.0bn of undrawn committed debt facilities, €0.8bn of which is available under a €1.55bn facility expiring on 22 June 2012.

Finance charges are expected to decline marginally in the second-half of 2009 due to the impact of lower interest rates, particularly in South Africa and Russia (where abnormally high rates of interest were experienced in the first-half of 2009).


Order inflows continue to improve in most of our key product areas, albeit off a low base. Similarly, prices are improving in certain key product segments. However, the impact of new uncoated fine paper capacity expected to come onto the market later this year is still unclear. Furthermore, the extent of any recovery is largely dependent on the pace and extent of the global economic recovery, which remains uncertain.

We believe the decisive actions taken to reduce capacity, lower the overall cost base and optimise cash flows, coupled with our high-quality, low-cost asset base leave us well positioned to benefit as market conditions improve.

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: 27/10/2009