Welcome, ladies and gentlemen, to this audio webcast interview on the Mayr-Melnhof Group's interim results for the Q1 of 2023, with the company CEO, Peter Oswald. Peter, could you explain the reason for the 45% decline in MM's operating profit for the Q1 of 2023?
Yeah, I mean, the decline was mainly due to weak sales volumes in our division Board & Paper, which we had already cautioned about during the presentation of our strong 2022 results. However the historically unusual 20% volume decline in Europe in the overall market during Q1 was higher than we had anticipated. The loss of the Russian market also contributed to our volume decrease. With regards to overseas exports, there was weak demand and strong competition. On top of all that MM faced major CapEx-related standstills at the Frohnleiten and Neuss mill in Q1. All this together caused a substantial decline in the Board & Paper division's volume and results compared to last year's record levels.
Could you shed some light on the reason behind the strong market decline?
Yeah. In addition to destocking in the supply chain, there has been a shift in consumer behavior due to the very high inflation of food, which is much above the general average. This led on one hand to reduced consumption of food and on the other hand, also to consumers shifting towards, let's call them budget products that typically use more plastics. Therefore, there is now a hot debate, is the trend from plastics to cartonboard, still valid? I personally think, yes, this trend will continue. However, the extent of its broad-based adoption remains to be seen, and we will only know which trends were temporary and which were sustainable in about a year or so.
We could also notice that the packaging division's operating profit was down almost 20%. Could you elaborate on this?
Yeah, I think that has a very specific reason. MM Packaging was affected by one-time costs of EUR 15.5 million for the closure of a plant in Germany. If we excluded this effect, operating profits would have been up by around 20%, which I believe is a strong development. Also, given that we've sold our highly profitable Russian operations, which are not included anymore. Sales have grown considerably, first due to the inclusion of last year's acquisition in pharma packaging, Essentra Packaging and Eson Pac, somewhat offset by the divestiture of our Russian plant. There was also, and we're very proud about this, organic growth of 2% in the Q1 . However, we've seen a decline in our order books throughout Q1.
Could you comment on how sales prices developed in Q1?
In our Board and Paper Division, our prices declined very differently for various grades. For instance, virgin fiber board prices were fairly stable, while prices for recycled cartonboard were declining as paper for recycling costs decreased. In packaging, overall prices were stable. However, the decline of cartonboard prices or part of the cartonboard prices via index clauses will likely feed into price declines in packaging going forward. However, also mitigated by inflation clauses.
This leads us to input prices for fibers and energy and generally costs. Could you provide a brief comment on the impact of current developments, especially compared to Q4 of last year?
Yeah, that's a very complex question. As already mentioned, paper for recycling costs significantly declined at the end of last year, important in February. Currently, we are seeing a slight upward trend. If we look at market pulp, that has been declining, which recently accelerated. The very important pulpwood costs are, contrary to that, more on an upward trend, since more wood is used for energy and several sawmills are facing downtime. Chemical costs have shown a very heterogeneous picture. Overall, we have seen limited cost reductions in Q1. We hope to see higher cost reductions in Q2. Energy costs have been decreasing. Hedging for 22 has mitigated this effect. Lastly, that's very important to note, is we have been seeing strong personal cost increases as well as increases for various services.
Given that 2023 is a year of significant CapEx for MM Board & Paper, with 3 major board machine modernizations taking place in the first 3 quarters, could you comment briefly on the progress of these projects?
Yeah, the rebuilding of Frohnleiten was completed on budget and on time with the successful startup of our Board Machine 3 in early March. Our team and suppliers did really here an excellent job. The Neuss rebuild began in mid-March and is expected to be completed by mid-May. The Količevo rebuild is planned for Q3. The overarching goal of these projects is to offer our customers higher qualityBetter sustainability through lower grammage, reduced energy and water consumption, and increased innovation and of course, improved productivity. Our clear aim is to be the technology and cost leader, building on the quality leadership of our leading brands. This is MCM for White Lined Chipboard, ALASKA for FBB, Absorbex and IPAC for kraft paper, and Flow for uncoated fine paper.
The integration of the ex Essentra pharma packaging business has been identified as a major priority for the packaging division in the current and next year. How do you view this project from your current perspective?
Our entry into the pharma packaging business on a large scale was a smart move because this market is a resilient, growing, and profitable business. In the current market, we have seen much more stability than in other markets, and there is significant potential to improve the historically marginally profitable Essentra Packaging results. In the past six months, we've made good progress in the turnaround, achieving some quick wins, and establishing a new and flatter organization for our entire pharma packaging business with reduced overhead costs. We've been launching a large number of projects to secure future growth opportunity with our customers, increase innovation, drive shop floor productivity, improve supply chains and OTIF, and improve pricing calculations.
Can we expect more restructuring and one-offs this year?
I mean, operating more than 70 production sites on 3 continents, after acquiring a few unprofitable sites with the former Essentra Packaging business, there is undoubtedly room for improvement and further consolidation to enhance our competitiveness. A lot also depends on how markets develop, how much our markets grow. Further one-offs cannot be predicted.
Despite your focus on CapEx and integration work, do you see any potential for further acquisitions given the current challenging market condition?
We are continually scanning the market for good add-on, add-ons. Only add-ons, not major acquisitions. Our clear priority is to improve what we already have.
Looking ahead to the Q2 and mid-year, how do you assess the chances of a market recovery?
Yeah. The visibility in our industry is limited as our order book is defined in weeks. As the issue at hand is not only destocking, but also the effects of reduced purchasing power on consumer spending, My personal opinion is rather that recovery will likely be slow and take longer. Fortunately, we have closed the small machine for recycled cartonboard in Slovenia in Q4 last year, as we have predicted a longer downturn, even though we were now a bit surprised by the severity of this downturn. Now, all short and medium term projects must focus on enhancing competitiveness. At MM, we are very well prepared for this.
Finally, how would you compare the year 2023 to the exceptional previous year 2022?
2023 will be a transitional year for MM Board & Paper and an integration year for MM Packaging. 2022 was above trend line profitability. 2023 is expected to be below trend line profitability. Overall, MM, as a matter of fact, is a strong company.
Thank you, Peter, for this interview.