Trading update: Strong Q3 performance
Underlying EBITDA from continuing operations (Group excluding the Russian operations) for the third quarter was €450 million, up 55% compared to the prior year period (Q3 2021: €290 million). Higher average selling prices and overall volume growth more than offset significant cost pressures.
Mondi delivered strongly in the third quarter. My sincere thanks go to all of my colleagues for their ongoing agility and commitment in challenging times. We continue to partner with our customers, helping to lead the way towards a circular economy with our unique portfolio of innovative and sustainable packaging and paper solutions. We also remain focused on operational efficiency and cost control.
Our ambitious expansionary capital investment programme is progressing well, as we continue to invest in our cost advantaged asset base to capture opportunities in our structurally growing packaging markets, enhance our competitiveness and deliver sustainably into the future.
Andrew King, Chief Executive Officer.
Business unit overview
Corrugated Packaging benefitted from higher average selling prices compared to the prior year period, leveraging our innovative product portfolio and strong customer proposition. Corrugated Solutions box volumes were lower in the quarter driven by generally softer demand when compared with the strong volume growth delivered in the prior year.
Flexible Packaging performed well, with resilient demand during the period. Price increases across our range of kraft papers and packaging products were implemented during the quarter, where not fixed by annual or semi-annual contracts.
Uncoated Fine Paper achieved higher average selling prices and grew pulp volumes in the quarter while uncoated fine paper volumes were lower. The non-cash forestry fair value gain was higher.
Input costs were significantly higher in the quarter, both year-on-year and sequentially, largely due to higher wood and energy costs. Increased demand and tight market conditions for wood continue to impact availability and pricing. We were able to mitigate the impact of significantly higher European gas and electricity costs as most of our pulp and paper mills generate the majority of their energy needs internally, with around 80% of the fuels used in this process from biomass sources, and only around 10% of our fuel sourced from natural gas. We look to mitigate the effect of inflationary pressures on the cost base through our cost control initiatives.
Investing for growth
Our €1 billion expansionary capital investment programme is progressing well, and we expect these projects to deliver mid-teen returns when in full operation. As part of this programme, we are pleased to have recently approved the investment in a new 210,000 tonne per annum kraft paper machine at our flagship Štětí mill (Czech Republic) for €400 million. This cost advantaged machine will meet the growing demand for sustainable paper-based flexible packaging to better serve our customers. Start-up is expected in 2025 with full production ramp up by 2027.
Adding to our pipeline of growth projects, in August 2022 we agreed to acquire the Duino mill near Trieste (Italy). We plan to convert the existing lightweight coated mechanical paper machine into a high-quality, cost-competitive recycled containerboard machine with an annual capacity of around 420,000 tonnes. The total acquisition and capital investment cost is estimated at around €240 million. The mill is ideally located to source paper for recycling, supply the Group’s Corrugated Solutions plants in Central Europe and Turkey as well as to serve the growing local Italian market. This project provides an opportunity to grow our packaging business, build on our integrated platform and broaden our geographic reach. The acquisition is subject to competition clearance and other closing conditions with completion expected in the fourth quarter of 2022. The converted machine is expected to start-up in 2025 and deliver mid-teen returns when in full operation. We continue to actively consider further investment opportunities to serve our customers’ growing demand for sustainable packaging solutions, improve our environmental footprint and further improve our cost competitiveness.
Summary and outlook
While significant geopolitical and macroeconomic uncertainties remain and we anticipate continued inflationary pressures on our cost base as we enter the fourth quarter, we are confident that the Group will continue to demonstrate its resilience and deliver a year of good progress. The Group remains well-placed to deliver sustainably into the future, underpinned by our integrated cost advantaged asset base, culture of continuous improvement, portfolio of sustainable packaging solutions and the strategic flexibility offered by our unique platform for growth, strong cash generation and financial position.