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MND / MNP - Mondi / Mondi plc - Mondi Group: Interim Management Statement 6
May 2010
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.
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.
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 Euro51 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 Euro60
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 Euro500
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 Euro1.4
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 Owiecie 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 Euro23 per tonne), margins
at the recycled containerboard mills remain under significant pressure from
input costs. Recovered paper prices were up around 23% or Euro17 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 & Coatings business, 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 Owiecie 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 Euro545 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 Euro500 million,
7-year Eurobond, which has been used to pay down existing bank debt, leaving
approximately Euro1.4bn 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.
End
6 May 2010
Date: 06/05/2010 08:00:03 Produced by the JSE SENS Department.
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