Morning, this is the conference operator. Welcome, and thank you for joining Mondi's Third Quarter 2023 Trading Update Conference Call. As a reminder, all participants are in listen only mode. After the opening remarks, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Mr. Andrew King, CEO of Mondi Group. Please go ahead, sir.
Good morning, everyone. It's Andrew King here, Group CEO, and with me is Mike Powell, our CFO. I'm sure you've all read today's announcement, so I'm just gonna pick up a few points before we go into questions. The weak macroeconomic environment continued through the third quarter, resulting in a continuation of the challenging market conditions we've seen throughout the year. Market demand has generally remained subdued, with lower average selling prices, largely mitigated in the third quarter by our lower input costs and tight fixed cost control. You'll have seen that the forestry fair value gain was EUR 14 million in the quarter, significantly lower than the EUR 72 million recorded in the second quarter of the year.
All of this then resulted in the group delivering underlying EBITDA of EUR 261 million for the quarter, compared to EUR 320 million for the second quarter of the year. We do anticipate the trends seen in the third quarter will continue through into the final quarter of the year, but without further significant cost relief, as wood and other costs are now stabilizing. We will be seeing a greater impact from maintenance and project-related shuts into the final quarter as well. Despite these short-term challenging markets, we do remain very well positioned to benefit when market conditions improve with our very low cost base, broad product offering, and fully integrated business model, which continues to provide resilience in these current, in this current environment.
With that, Mike and I are very happy to take your questions.
Excuse me, this is the conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star one one on their touchtone telephone, then pick up the receiver when asking questions. Anyone who has a question may press star one one at this time. We will pause for a moment as callers join the queue. The first question comes from the line of Cole Hathorn from Jefferies. The line is open, please ask your question.
Morning, Andrew. Morning, Mike. Can I just start off firstly with the cost relief? You know, I think expectations were hopeful that we continued to see some further kind of wood cost relief into the fourth quarter and into 2024. So I'm just hoping you can give a little bit of color on what you're seeing regionally on kind of wood costs and expectations into 2024, and if there are any other major cost buckets that are worth calling out besides the wood costs. And then secondly, on sack and kraft paper, I'd like to ask something around kind of the cyclical versus the structural side of that. I mean, focusing on the paper side, you know, Mondi, the leader in sack and kraft paper. You know, you're forward integrated into your bags.
You've got visibility on the supply chain, medium term of what customers are doing and planning. Yes, right now, it's very cyclical and there's destocking in a number of regions and markets. But, you know, have you seen any changes to your kind of medium term, kind of growth prospect of 2%-4%, given the tailwinds of plastic to paper versus potentially, you know, some reductions in demand from other items? And linking this to, you know, the supply and demand of sack paper, which is, you know, different to containerboard, it's, you know, twentieth the size. So what does this mean for supply and demand over the next few years? Thank you.
Cole, morning. Let me start with the first one and then Andrew can take the second. Yeah, I mean, cost relief into, I think your question really is Q4 on Q3, so let me answer that and let's see if it helps you. I mean, we saw wood, if I take wood first, come off as we expected in Q3. It's flattening out. It stayed high in Scandinavia and is flattening out from sort of if you like, the exit point in September. So we will see some sort of averaging effect Q4 on Q3 from wood. Difficult to call 2024, Cole.
The reason it's sort of flattening out, in our view, is 'cause, of course, the economic activity for the whole of the tree isn't being used, so the sawmills are quiet. The economic activity in the sawmills are quiet, which means that there's little chips, and people are leaving the trees in the ground right now. Of course, what we really need is economic activity, those sawmills to start, and that might give us some both economic activity and also some help on wood into next year. But I think that's a bit early to call. So I think, you know, flatlining from an exit point in Q3, sort of going sideways into Q4, maybe with a little bit of relief on the averaging on wood.
I would say on other costs, I mean, energy is public. We use a lot of biomass, as you already know. I would say still sort of it's moving sideways, mostly on most costs. I mean, some of the chemicals, some of the commodity inputs are flattening, maybe even early signs that they're starting to turn. I don't think we see that as a bad thing, 'cause if that's a sign of economic activity picking up, frankly, I think we'll take that. So, but I think the other areas are definitely stabilizing, maybe even early signs of a turn. But again, we'll have to wait and economic activity.
So sort of stabilizing to some small cost relief into Q4 on wood, other stuff, sort of sideways and flat. Does that help?
Thank you.
Yes, and then, to call to your question on the particularly the bags and sack kraft value chain. I think the short answer is no, in terms of any change we see in terms of our medium term expectations for this market. We do still see it as a good structurally growing market. Why is that? Obviously, you've got the traditional uses of bags, and I'll come onto that, but of course, there's always cyclicality in that, because you have a lot of building materials, cement, chemicals type of exposure, and, you know, in a macroeconomic downturn, you do see pressure on those, and that's what we have seen. But outside of that, we're also seeing sort of non-traditional uses growing.
Everything from the e-commerce applications, which, you know, typically didn't exist previously, but now are a growing source of demand for bags and kraft paper. Also, the consumer applications, which are, as you mentioned, displacing the likes of non-recyclable plastic solutions for paper-based, and which are renewable, recyclable, et cetera. Of course, there is a growing demand for that now. In the short term, that also gets impacted by the cycle, because people are focused on cost of living and the ability to transfer costs on to the end consumer.
So there, I think there has been a slowdown in the rate of take-up in certain aspects, but certainly, when we talk to our customers, they remain extremely committed to driving a more sustainable packaging solutions in the products that they use. And as you well know, legislation is also pushing in this direction as well. So I think that will continue as a trend, albeit in the short term, we are clearly being affected by the cyclical pressures that one sees. You know, it is a product which we've seen extremely strong period of demand, followed by this current weaker period of demand. I'm convinced that that is a cyclical issue.
As we say, in the sort of announcement, it is slightly; it is typically a bit later cycle than the box business, in the sense that it was holding up much better into actually the beginning of this year, whereas containerboard and kraft pricing and volumes were coming under pressure back end of last year or even, even Q3 last year. So it's a bit later cycle, but it's, you know, I'm convinced it's a cyclical thing. It's certainly not a structural question here. And we remain very confident in the structural demand growth into the future. As you say, on the supply-demand side, what does it mean in the short term? Obviously, if you see a softening in demand, you see an imbalance in supply and demand. The good thing, though, on this current product is very limited new supply coming on.
As you know, as you say, it's a very well-consolidated sector, typically, both upstream and downstream, importantly. And the only real new volume of any significance coming into the market is the product that we're gonna be bringing in in 2025, with the ramp up of Štětí into 2025 and 2026 and beyond, as we ramp it up. So, you know, again, the supply side is a different dynamic to what it is in other grades. And I think, all is well for the future as and when we see a pickup in demand driven by no doubt, a macroeconomic recovery.
Andrew, thanks on the longer term, and maybe just on the short term, is there any color you can call out on the flexible paper side on demand order books? Any changes you've seen recently and thoughts into 2024, on, if you can say anything on volumes pricing?
Yes, I mean, one always looks at the downstream business, so particularly in the bags business, you know, which is the sort of lead indicator, I guess, in terms of the demand picture going forward. I mean, what I think is somewhat encouraging is if you look at Europe, in Europe, which is still the biggest market for us by some distance, you know, we've seen the first half was very difficult on the demand side. It seems to be stabilizing now. If you look at the sort of year-on-year numbers coming through, we've certainly stabilizing in Europe, but clearly off a low base than we enjoyed at the peak back end of last year or second half of last year. So you are seeing stabilizing Europe.
US was a bit later in slowing down, so it has been slowing down a bit into the third quarter now, relative to where it was. You know, other markets that we serve, which are very important for us, Middle East, North Africa, clearly volatile as always, but generally, I would say, okay. So, you know, we've seen the real decline has been in the core European markets in the first half of the year. I would say that there seems to be some stabilizing going, you know, coming back into back end of Q3 into Q4, but it's obviously early days in that. But again, you know, there, there's, like we've seen in other sectors, there's been an effect.
I mean, that doesn't last forever, and it's probably come to an end now, and that's why we're starting to see some-
... But, you know, it's still early days to call a turnaround at this stage.
Thank you.
Now we're going to take our next question. The question comes to the line of Charlie Sands from BNP Paribas Exane. Please go ahead.
Thanks very much, guys, for taking my questions. Three from me, please. The first, very short, just in terms of the maintenance shutdowns that you're flagging will impact Q4 a bit more, can you put any numbers around the impact in, you know, the third quarter of this year, the fourth quarter of this year, how you anticipate it, and also what the fourth quarter of last year, the maintenance impact was?
Sure. Do you wanna give us your other two, Charlie, and then we'll,
Sure. Yeah, okay. So, and then question two is, I know it's early days, but, I just wondered if you could give us any of the kind of key puts and takes you think about, or you think we should be thinking about as we look into 2024? Obviously some new, you know, the fruits of some new projects should start to deliver. But, you know, the run rate as you see it, to the limited extent, do you have any visibility and any other considerations there? And then the third question is really, obviously the, you know, the, the next draft of the EU PPWR is due to come out, I think next week. I wondered if you could sort of talk to, you know, what your hopes and fears are on that?
You know, not wanting to pre-judge how the revised draft might change from the first draft. Thanks.
Thanks, Charlie. We'll take those in the order asked, actually. Maintenance shuts, we said at the annual results, and then actually again at the half year, the number for the year is about 100. We had about 40 in the first half of the year. The delta between Q3 and Q4 is about 30. And therefore, you know, we'd probably have 10-15 in Q3. And we'll have 30 more than that in Q4. So we've got a big maintenance shut program. Some of that to introduce new projects as well. So, it's not just the normal maintenance, but we have got the shuts to introduce some of the new projects in the month of October, and all of that is going well.
The maintenance shuts, I think you asked for Q4 last year, pretty similar numbers, actually. Both Q3 and Q4. So if you want the year-on-year delta, pretty small. Projects, projects 2024, I'll, I'll guide those at the end of the year once we get a bit closer. That's what we would normally do. Fair to say, all the CapEx expansion projects, on track, on time, are being well executed, and that will bring good growth. As we've said in the past, the big upstream projects, come on 25, 26, the converters do start to come through, a little bit earlier, because, of course, the build phase on those, is a shorter time. So we will see, some effect into 2024, and I'll update that, at the year end.
Yeah, and Charlie, on the PPWR, I mean, we've published some thoughts on our positioning around PPWR, and it's available on our website. I mean, I think, as an industry, generally, we are urging the European Union to consider reuse and recycling as equivalent. Whereas I think early drafts of the PPWR were promoting reuse over recycling. And we say it has to be guided by the science, in every situation, it can be different as to which is frankly better for, from the environmental perspective, whether it's a reuse solution or a recyclable solution. So, and I think, you know, the amendments that have been tabled, the direction of travel of the drafting is positive from that respect.
I think there's been a lot of carve-outs, as you know. Corrugated has been carved out a lot of a lot of the reuse requirements. And so generally speaking, I think it's moved in a better direction. And to be very clear, we support, you know, good legislation in this regard that drives the use of sustainable packaging solutions. It's just important the legislation doesn't have unintended negative consequences for the environment. And we certainly believe that, you know, recycled product in a highly established, very efficient recycling stream is a very important contributor to the environment. And, you know, the box business in particular has a fantastically established circular economy system.
So, I think that has worked very well for it, and I think that's been recognized by the rule makers. But yes, we will adapt to whatever the circumstances dictate. And similarly, on the flexibles business, you know, we certainly see it actually as a net positive for us, the direction of travel of the regulation. As I mentioned earlier, it is driving the use of recyclable, renewable, paper-based solutions, displacing non-recyclable plastic solutions. And similarly on the plastic solutions, it's driving the use of recyclable solutions, including a recycling content. And we've got a lot of great new products that we are developing and have developed and brought into the market already, to serve those requirements. So, you know, we actually see it as a very good opportunity for us on the flexible side.
Thank you.
Great! Thanks.
Thanks, Charlie. Back to the operator.
... Nadia, we're ready for the next question.
The next question comes from the line of David O'Brien from Goodbody. Your line is open. Please ask your question.
Good morning. Thanks everyone for taking my questions. I have three as well, please. First on corrugators. I think at the half year stage, Andrew, you talked about the pressure on container board manufacturers, and particularly independent guys in Europe. Just could you give us an update on where you think these guys are positioned now, and what the potential timing around any price increases in container board may be? Is it a 2024 event, or is there any chance of pre-Christmas, people are kind of forced into price increases, just given we've seen OCC tick up and maybe other pressures in the system. And related to that, any evidence that the box price is any more stickier in this cycle than previous cycles? And what is the Mondi experience been?
That's number one. And number two, you guys have been renowned for tight cost control, and you call it out again in this morning's statement. You know, as we look at a pretty sluggish environment into 2024, do you guys have anything planned incremental in terms of cost takeout program or anything you could point us toward above and beyond, kind of your normal cost takeout? And then finally, and maybe a little bit more philosophical, there's been a lot of debate about GLP-1 diabetes drugs in the market, and the potential for reduced food consumption. And maybe I'm one of the people who should be taking them, but the question to you guys clearly on packaging consumption in the market, how it might structurally impact the Mondi business, kinda on a long-term view.
Okay, David,
Thanks, David.
That's certainly quite left field, the last question. I must say, not particularly. I mean, clearly food and beverage is an important component of the sort of end use demands for boxes. But it's, yeah, as you know, the good thing about boxes is it touches just about every sort of industrial and consumer application at one point or the other, because it's the primary transport packaging. As I said, to be honest, I wouldn't know what the longer term consequences would be if people sort of eat less. But so it's something we'd have to consider as one of our risks going forward. But I think it would be a very long-term issue, if it was indeed an issue.
I think there are probably other issues which will impact the markets both positively and negatively, well before that becomes a major consideration, but something we'll certainly be considering. Coming back to the recycled containerboard markets and the pressures, yes, I mean, you know, I think the pressures have only continued to build, you know, while pricing has been relatively stable since, you know, we last spoke at the half-year results announcement. You know, the cost base has stabilized, and as you rightly say, I mean, you're starting to see energy prices tick up a little bit. Nothing like what we saw, you know, through the course of last year, but they are going up a bit.
PfR prices are also ticking up a bit, so of course, that means the whole cost base for the industry goes up. You know, we are relatively less affected because we've got such an integrated energy system. But if that has the effect of pushing up the cost base, of course, well, by definition, margins become even more squeezed, and the top end of the cost curve comes under even greater pressure. So yes, I mean, I think there is huge pain at the top end of the cost curve, and you're seeing it manifest to the extent of project delays, cancellations, et cetera, and also some capacity permanent closures. But of course, there's also a lot of temporary closures.
Temporary closures are extremely expensive and, you know, cannot persist for too long, because you've basically got no revenue and a fixed cost base. And so you know, one only believes that something has to give you, because the current paradigm really is not sustainable for the industry. I think clearly in the longer term, I certainly firm believer that the demand picture will improve, because again, we've seen a cyclical downturn right now, and there's nothing to my mind that is structural in this. But at the same time, there is new supply coming on, and I suspect there will be some supply side rationalization as well, which is always forgotten about in, you know, these sort of traditional supply and demand sort of calculations that you see the, you know, consultants do and the like.
As to pricing expectations, obviously I'm not gonna sort of be preempting any of that in terms of the discussions we have with our customers, but, yeah, it's fair to say that the margins right now are unsustainable for the industry as a whole. You know, we still make money because we are a low-cost producer, but it's very tough for the industry. In terms of box price stickiness, I don't think there's any real, you know, one cannot generalize that suddenly it's different this time or any other time. I mean, generally speaking, my perspective on it is when you see sharp moves in paper prices, the box prices move quicker relatively. And if it's a sort of modest moves, it takes longer for the box prices to move.
That applies up and down, frankly. It's. That's really what differentiates. It's not that the market has changed dynamics, and suddenly it takes longer, or it's either stickier or less sticky for that matter. Finally, as regards to cost takeout, I mean, the short answer is no, we don't believe in big bang, one-off, you know, headline-grabbing cost takeout programs. We believe in constantly driving costs out of our system, constantly searching for efficiencies, productivity gains, and the like. And of course, we're constantly doing that. Some of our CapEx opportunities obviously will also bring cost benefits, and that's why they, you know, they're very attractive. They not only bring sort of top line growth, they also bring cost optimization in a lot of cases.
But of course, in the short term, the impact of market standstills and things in the industry more broadly is also to, you know, play havoc with cost structures. Because as you can imagine, it's extremely inefficient to be starting and stopping machines and the like, and so that also impacts the cost curve more generally. You know, we're in the fortunate position that we can typically manage that better, because being a low-cost producer, the containerboard grades, for example, we can typically still run full, even, even in a softer market, and that also helps our cost position. But in short, it's something we, you know, it's ingrained in our culture to continue to drive that. Obviously, in a downturn like currently seeing, one, you know, one puts double the pressure on the organization to drive costs out.
But I still believe that that's the best and most sustainable way to manage your cost base as opposed to sort of one-off restructuring programs, which, you know, grab headlines, but not necessarily are that effective.
Appreciate the color. Thanks. Thanks very much.
Thanks. We're ready for the next question, Nadia.
The next question-
Yeah.
The next question comes from the line of Sean Ungerer from Chronux Research. Your line is open. Please ask your question.
Good morning, everyone. Thanks for the time. Just a quick one from my end, thanks. Just in terms of the flexibles business, specifically focusing on the sack kraft side, if you may just... I know you have already given it color, but perhaps can you give it a little bit more just the cadence of the sack kraft cluster clump that have been coming through, and sort of on the volume end as well, that would be appreciated. Thanks.
When you say cadence of the. As we say in the literature, we said it a half year, we've seen from really what happened was, unlike containerboard, which started to price erode, price erosion started happening really Q3 into Q4 last year. Sack kraft was going, it was still going up through the whole of last year. It really peaked sort of at the end of the year into Q1, it was fairly stable. Then you started to see some price erosion as a consequence of the softer demand and the destocking and all of these things into Q2, and that's continued into Q3, as we suggest. So it is really, but sort of call it later cycle, as I said, than the containerboard pricing.
But it's followed a similar pattern, but off a obviously different bases, but slightly delayed relative to where, how we saw the containerboard moves take place. But I think what's also important to note, and the supplies across the piece, I mean, it's really since the middle of last year that you've seen volumes starting to come under pressure. Industry volumes, I'm talking about more generally, and that's both in containerboard and kraft paper and, of course, the box and bags, respectively. And so we now, what are we? 15 months into a sort of a down cycle, as it were. I mean, that's normally quite a long down cycle.
I'm not suggesting that history always tells you exactly what's gonna happen in the future, but it feels like it's been a pretty long down cycle, which I think people tend to forget. Sometimes the commentary is that it's only just been happening. I mean, it's, you know, the volume side has been under pressure from an industry perspective, since really the middle of last year.
Right. And maybe just a follow-up. I mean, if you go back to page one, I think I stand corrected there, but it looks like paper bag volumes were down about 8% year-on-year. It's going sort of Q3, Q4. What sort of run rate are we looking at there?
I didn't get the paper volumes. What? I didn't get-
In the flexible—Sorry, I, I've lost my voice. Within the flexible packaging business, the paper bag volumes sold or produced in H1, I think were down about 8% year-on-year, if I understand in the correction. And I was just asking for a bit of color as to the sort of movements that we've seen in Q3 and potentially Q4.
Yeah, I mean, this is a trading ... we don't, we don't give all the volumes and things like that on a, that level of detail. But it's, yeah, it's continued a similar trend, I think is what we suggested. And, you know, that's-
Okay.
Seems appropriate.
Okay.
But as I was saying earlier, you know, it's, you know, things are having... If you look at the industry trends, first half of this year, Europe was in particular, you know, under pressure. That seems to have stabilized into Q3 and going into Q4. Americas was a bit later, sort of to the party. I mean, it held up for longer. It's come off a bit now. That's been a sort of big game contributor as you go into Q4. So it's, you know, we, we obviously sell bags on a global basis. It's not ... you have to look at the whole bigger picture, but in totality, yes, a trend of softer price, softer volumes have continued.
Excellent. Thanks, Andy. Appreciate the time.
Thanks, Sean. Nadia, we're ready for the next question.
Yes, of course. Now we're going to take our next question. The next question comes from the line of James Twyman from Prescient. The line is open, please ask your question.
Yes, thank you. Thank you very much. The first one is, we're seeing closures going on in the industry in fine paper and certain containers. Although you're a low-cost business, are closures that you're looking at or is it something you're looking at in general, in addition to Neusiedler? And secondly, just in terms of the Canadian acquisition, it's been going for a few months now, is the pulp mill there still in line with your expectations in terms of its abilities? And could you talk around the reasons for that acquisition?
Thanks, thanks, James. Just on the closures, as you say, we shut our PM6 in Neusiedler and have restructured that business accordingly earlier this year. I mean, as you would expect from a responsible industry, we're always looking at what makes sense to us in terms of our production portfolio. But as you also say, we are in the position of having cost competitive, well invested, and, you know, that can do well even in the most difficult of times. But of course, we're always looking at what most makes sense. But certainly we believe we're well positioned in that regard. As regard the Canadian acquisition, firstly, we haven't completed on it, so it's not ours yet. Run for the benefit of the seller.
And we're hoping to complete back into this year, into early next year. So it's only then that it becomes under our ownership, so it'd be wrong for me to really comment on, you know, the operating environment for an asset that we don't yet own. But again, we are extremely confident that it is an asset which provides a very compelling cost structure for the type of pulp we need to be making kraft paper. The logic behind the acquisition is it's, you know, it's very cost competitive wood delivered into a pulp mill that makes this type of unbleached kraft pulp, which we need to make the high-end sack kraft paper that we need in turn for integration into our Americas business. We are the number two converter of bags in America, number one in Mexico.
When the machine comes into operation, which is only in 2025-2027, if all goes well, you know, at least half of the volumes from the machine will be immediately into our own system. And we know it's also highly cost competitive, delivered into global markets. So, you know, we see it as a very compelling opportunity to continue to cement our position as the cost market leader in both the kraft paper production and obviously the downstream bag converting. And as I said earlier, in the earlier question, yes, there's some short-term cyclical headwinds on the demand side, but, you know, I'm convinced that those are very much cyclical, as opposed to the structural growth that we've been seeing on a basis. And I'm confirming your timeline's machine on in 2027, if it's-
Thank you very much.
Thanks, Nadia. We're ready for the next question.
The question from Brian Morgan, Morgan Stanley, is open. Please ask your question.
Hi, guys. Thanks very much for the call. Just on the Russian business conduct, on shareholder distributions, et cetera.
Brian, it's Mike. No, I think we've been very clear that once we have got all the cash, we will move forward. I think the focus right now has been getting the transaction over the line, and getting the cash into our bank account and converted into euros, which, as you know, we're well on with and we've announced. But, no change to any previous announcements, which is, we'll return the net proceeds to shareholders, and we'll announce how to do that at the time where we've got the transaction actually finalized.
Okay. That's it. Thank you.
Thanks, Brian.
Thanks, Nadia. We're ready for the next question.
Now we're going to take our next question. Just give us a moment. The question comes from the line of Pallav Mittal from Barclays. Your line is open. Please ask your question.
Thank you. Thank you for taking my questions. I have three questions. So, firstly, Q1 and Q2 saw a significant impact from destocking, and the trends started improving in Q2, as you have highlighted. Can you please talk about the volume trajectory over the last three months, and what are your expectations going forward? So any color on that would be great. Secondly, the capacity utilization in the industry is very low currently, where it used to be versus two years ago. In this weak demand environment, are you planning to then pull back on some CapEx going... And lastly, what is the discount rate that you use to value the forestry assets? Because as discount rates have gone up, I'm just trying to understand, does the value of these assets go down? Thank you.
Very good. Yes, in terms of the volumes, I mean, I think we've discussed that to some degree in various other questions. So as we said on the corrugated value chain, we've seen the volumes come off quite sharply, and this is the industry volumes. This is from the middle of last year through the back end of that year into the first half of this year; it started to stabilize going into the Q3 and certainly our order situation. And when you look at the industry delivery stats on a like-for-like basis, it would appear to be stabilizing, albeit obviously we now have easier comps because it was into the Q3 last year that you started to see the volume softness.
Similarly, in flexibles, as I said earlier, it's a bit later cycle. We started to see the volume pressures start into the second half of last year, but really the pricing started to weaken into Q2 this year. And on a sequential basis, we have seen volumes come under pressure. As I stressed earlier, certainly in Europe, it would appear as though, you know, the order situation is stabilizing, albeit at lower bases. So yeah, a mixed picture that, you know, I refer also to the previous questions we were dealing with. On the CapEx front, short answer is no. I mean, we certainly... What, where we are putting our money on the CapEx front is where we believe we will make money on a through-cycle basis.
We see we are putting money behind these structurally growing packaging markets, where we know there is products that people will need more of going forward, where we also can produce it in a highly cost-effective way, and we can make sure as a consequence, you know, we will make good returns, you know, irrespective of the market conditions. Obviously, always nice to bring new capacity into an upcycle. We typically, these big projects are, you know, 3-4-year lead times. I remind you, the next big incremental volume expansion is only coming on in 2025, which would be in Štětí. And then again, you know, we've also got the Duino operation in containerboard coming in at a similar time.
You know, frankly, two years is a lifetime in the current, current world. Because we've seen a shift from, you know, this time last year, where everyone was crying out for volume, to a more difficult environment because of the cyclical downturn, and I'm convinced that that will return. More importantly, you know, with the investments... As a consequence, we, you know, we are very confident we'll make good returns. Obviously, outside of that, we always are optimizing our CapEx spend and making sure we spend it in those areas that make most sense, and frankly, don't spend it where we don't see good future opportunities. And finally, the WACC on the forestry. I don't know what it is or found it.
You'd read about it in the integrated report, but I'm sure Mike can give you details.
Yes. Well, the integrated report gives you a lot of detail. I mean, it's quite a complicated calculation, these are long-term assets. The risk premium, if I remember rightly, for the immature forest, is about 12.5%. For the mature ones, it's 4%. And then we give a sensitivity note that Andrew's referred to. But it's in the detailed note for 2022 calculation. But those are the risk premiums. We have to value the trees differently depending on the stage of life.
Great. Thank you.
Thank you.
I think we've got a few more questions on the line. So, Nadia, if you could, take the question from Andy, and then we'll take the question from Cole.
Yes, of course. Thank you so much for confirming. And our next question comes to line of Andrew Jones from UBS. Your line is open. Please ask your question.
Hi, thanks, gents. Just a quick reminder on contract structure, in flexibles particularly. Can you just remind us on how much of your bag and, you know, and sack kraft pricing, resets at the year end? And how much is semi-annual or quarterly, quarterly? Can you just give us a breakdown of how those contracts work? And, and also just on the, containerboard side, given prices have been flat for a while, I'm just curious, if, if prices stay flat from here, when do you expect the box prices to actually stop falling? And what... Can you give us any sort of sense as to what the potential delta is on box pricing from the levels we saw in the third quarter, if, if containerboard doesn't move? Thank you.
Yeah, thanks, Andy. I mean, we, you talk about, flexibles, and then, and then the bags and kraft as sort of synonymous. Obviously, our flexibles offering is broader than that. And, and particularly our consumer flexibles and our specialty kraft, you know, has a different dynamic. Consumer flexibles, is extremely defensive on a through-cycle basis because obviously a lot of it is to food and beverage that you, you know, primary packaging that you see on the supermarket shelf and the like, and albeit that there's there will be a mixed effect in a downturn with people buying down per se, you know, the, the quantum of, of food and drink that they, it's just, it's, it's not necessarily hugely affected. So, you know, that, that remains pretty resilient on a through-cycle basis.
In terms of the contract business, you're referring specifically then to the paper-based kraft paper and bags. On that score, you know, when you look at it on a whether you're selling a ton of paper or the paper in the form of a bag, rough terms, around 10% of our volumes are well, contracted out for a year. Probably 20-ish% is for six months, and then the rest is floating. Which is a change from historic sort of ratios, because of the volatility we've seen in this market over the last number of years, you know, no one wants to be caught with too long of dated contracts.
And also the nature of the customer base has evolved, because obviously, as I said earlier, we've seen new demand sources for the likes of e-commerce customers, consumer FMCG customers, and the like, which simply didn't exist. It used to be dominated only by the industrial customers, mainly cement and building material and the like. So that combination event, call it annual price negotiations are typically, I mean, they really start now, but they will only conclude into the new year, are important, but not quite as relevant as they used to be. As you've seen, frankly, this year with price erosion taking... It has come through in the numbers, which it wouldn't otherwise do, obviously, if you had much more annual contract business and vice versa.
When prices are going up, it feeds through quicker than it would have historically. And then your question on the box prices. Yeah, I mean, you know, our rule of thumb is always it takes three to six months for the box prices to sort of move relative to the movements in the containerboard prices. As to, you know, that question was raised earlier about the relative stickiness. I don't think there's, you know, that rule of thumb per se, has changed other than, you know, when you see sharp moves in containerboard, it moves quicker than that. If you see, you know, if it's slower, more predictable moves, then it moves a bit slower than that.
So, that, you know, containerboard price started to really stabilize going into Q3, in sort of, I suppose, three-ish months of that. So that's the way I'd look at it.
Yeah. No, that makes sense. It sounds like 2024, you know, start of 2024, we stop any decline in box prices, given containerboard's been stable for quite a while now. But, is that fair?
Sorry, I couldn't pick that up.
Sorry, just saying, so if basically pricing has been stable through Q3 and, you know, then through Q4, you'd imagine with that six-month lag, that box pricing wouldn't be declining anymore, for your start of one Q this year.
Yes, I think all being equal, but, obviously, these are, these are fluid markets. You know, that if you, if you use that rule of thumb, you're normally not far off.
Okay, that's great. Thank you.
Thanks, Nadia, we're ready for the last question from Cole. Thank you.
Yes, of course. Just give us a moment. Cole Hathorn from Jefferies, your line is open. Please ask your question.
Thanks for taking the follow-up. Just a clarification. You talked about order books improving in corrugated packaging. I'm just trying to understand if that's your kind of more regional, Central Eastern European box business, or kind of your wider containerboard portfolio?
Yeah, so I think when we talk about corrugated solutions, particularly, it's obviously our box business, which, as you say, is more regional in nature. But I do think there's a sense that there is a general pickup. I mean, if you look, I know the industry data is always a bit delayed, but typically speaking, you're starting to see that feed through on a more industry-wide basis. Again, you know, I stress our containerboard order books maybe look a bit different to the overall industry because of our, you know, our very strong cost position and the like.
But I think if you look again at the more general industry stats, there is a sense that now you're starting to get into a position where certainly it's not getting worse in terms of the overall volume picture, and it feels as though it's getting a bit better. As I say, the year-on-year comps start to look better as well, because the comp is easier. But it's generally speaking, I think the order books are improving, I would say.
Andrew, then you gave some good color around, you know, the high costs. Recycled producers in the industry remain under pressure. And I mean, the market is always guilty of when times are good, extrapolating better demand into the future, and when times are bad, extrapolating kind of more negative demand. But, you know, with Packaging and Packaging Waste Directives , you know, those comments around GLP-1, now, are we in a position where we're probably gonna maybe trim our longer term containerboard growth outlooks? And what does that mean for, you know, supply and demand? Do you think we're in a period where we're gonna start seeing the industry rationalize like we're seeing in the U.S.?
I would be cautious about sort of taking a view on longer-term dynamics, given sort of the current sort of cyclical issues. I mean, as always, it's always the case in packaging more generally, I mean, one's longer-term view in the first place is impacted by one's longer-term view of the macroeconomic outlook, and what that might be. I think it's fair to say we're in a macroeconomic downturn right now, and one would expect a recovery in due course. But in terms of the, call it, structural dynamics relative to, call it, overall economic growth, et cetera, I still think they remain very positive for both our key packaging areas of corrugated and flexibles.
This PPWR, I know there's a lot of talk about it, but, I do believe ultimately, you know, there are no real obvious substitute products for a good corrugated box. Clearly, the industry, ever since I've been involved, has been working to lightweight, to use less raw material when it makes economic sense, and as well as obviously environmental sense, and of course, driving recyclability. And it is a highly developed recycling, recycled, infrastructure that one enjoys in boxes. And simply put, I firmly believe there are no better solutions out there from a sustainability perspective. And I believe the science, and, you know, we do a lot of work on life cycle analysis, and the like, when you compare the different solutions. Of course, in very specific cases, you might see an example where a reused option is better.
But if you think about sending, you know, plastic crates around Europe, for example, and the logistics involved in that, all the chemicals involved in cleaning them, and then, of course, you've got to dispose of them eventually, 'cause nothing's reusable forever. You know, the dynamics just don't support that from a sustainability perspective. So I think, you know, boxes have an incredibly attractive proposition from a sustainability perspective, from a cost perspective and efficiency perspective. And, you know, it doesn't, there are not a lot of things that, that can substitute it from a negative perspective, and in fact, you know, it's called positive substitution. Similarly, on the flexible side, you know, we, we have a bags business, which is, as I say, we've seen all sorts of new demand sources come through.
Similarly, on the kraft paper, all these applications, I note David's concern about maybe fast foods and things into the future, but, you know, we have a big fast food component there, or food component, because we, you know, kraft paper is used to wrap various foods and things like that. These are growing markets. And again, I think that, you know, the legislation is going to support further development of these type of applications, in addition to simply consumer preferences going forward. So, you know, we see it as all very exciting. So yeah, I think it's extremely dangerous to extrapolate near term from a clearly cyclical shift into, you know, longer term growth dynamics.
Thank you. That was helpful.
But I think we are coming close to the hour, so I think it is time to wrap it up. But again, thank you very much everyone for your interest. We make no bones about the fact that, you know, it is a current challenging trading environment in the short term, but as I've just emphasized, I think the rest of this is very much in a sort of short-term cyclical nature. We know that markets do turn. We think we're in an extremely strong position from a, in terms of our, the fundamentals of our asset base and also the markets that we serve. So again, thank you very much for your attention today, and obviously, if you've got any further questions to please follow up with us, and you've got all our details. So thank you very much.
Now back to the operator.
Thank you, ladies and gentlemen. Thank you for joining. The conference is now over. You may disconnect your telephones.