Earnings Call: H1 2021

Aug 19, 2021

Welcome to the conference call of Meyer Manhos Capital IG. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After short statements, there will be an opportunity to ask questions. May I now hand you over to Stephan Swed Spork of Meyer Mellenorff. Please go ahead. Hello, and welcome on the My name is Stephan Sverdzborg, Head of Investor Relations and Corporate Communications. It's a great pleasure to have you joining this and A conference call on our 2021 first half year results, which we released just this morning. Besides the press release and the report, CEO video statement has been published on our website, which is a new website www.mm.group. In this call, we want to provide you now with the possibility to direct Questions on today's communication to Peter Oswald, our CEO, who is sitting next to me. Since this call addresses an international audience, We shall very much appreciate your questions to be asked in English in the following Q and A session. Before we go for that, Peter, may I ask you To start with a short summary of our key messages. Thank you, Stefan. Welcome, everyone. So most importantly, Wizz management are really excited about our 2 acquisitions. Our post merger integration manager and 2 technical consulting companies have for several months worked on a GLP basing to prepare the closing and our due diligence assumptions were confirmed or even surpassed. This is a transformation for MN and will put us on a growth path for the next decade. Now operationally, Input costs rise extremely strongly even though this has slowed down since July. Given that we have quarterly, Half year or in some cases, yearly fixed prices, which helps our margin, and this is the main reason why operating profit is down by a quarter. The good news, however, is that we can increase prices, so the customers understand and accept the price increase whenever it is necessary and unfortunately, with this delay. And I think This is the main message, and I'm looking forward now to your questions. Thank you. And we will now begin the question and answer session. It is from Johannes Kontilius, Kepler Cheuvreux. Your line is now open. Please go ahead. Hi, good morning. It's Johannes It's Gonzalo Serkol from Stockholm. Kepler Cheuvreux. I have 2 initial questions, but one is On the packaging division, because there is a comment in the report about Higher cost for packaging when carton price, carton board and paperboard prices are moving up. Can you elaborate a little bit on what you're And perhaps some magnitude. Thank you. Yes. Thank you. So The Packaging division has typically long term contracts of, in many cases, 3 years We have typically half year price adjustments clauses, and these clauses were triggered in July Because prices in and it's mainly based on April, has moved up at this point in time. So the good news is That we could increase prices beginning of Q3. However, bad news is that this was based on carbon board prices in April, and Prices have since increased further, and this will mean that there will be a certain decrease in margins in the second half year, Which because, yes, carbon core prices have increased in July and they will increase again in October, and this is then not fully covered. On top of that, there These price clauses typically yield only cast on board, whereas we have also seen strong price inflation for chemicals, inks, Packaging, you name it, and these price increases are also not covered. However, there is also Some business, let's say, 20%, 30%, which is negotiated on a short term basis, and there we could increase prices. So it's a mixed picture. Okay. But when thinking about margin compression, I mean, we're talking about relatively mild margin I can assume for the second half and then more back to normal? Or how should we think about the compression here in the Yes. It will be, let's say, much less than it was in carbon Yes, yes. Got you. Yes. And for next year, obviously, the target is to fully recover the margin. And we also have to be very thoughtful about secondary inflation effects. So these input cost price increases May lead to a generally high inflation, especially with regards to salaries and wages. And therefore, we have to be very vigilant how we address this issue, especially if we conclude new contracts. Okay. Okay. When you now will report the second half, I mean, you're saying in the report that the positive M and A From the WIGA acquisition is coming 2022, and I understand that. But you will report volumes, right, For these divisions, so that's my first question. And I was also wondering because you previously highlighted a pretty Sizable synergy potential of 5% on the incremental sales. Is this still valid? And what can you say about these assets Now when you're a little bit more familiar with them in terms of synergies. Yes. So I'm sorry, I cannot remember that we said 5 Because that sounds a bit high. I think we said in the case of Kotka, It's a low digit low double digit number in €1,000,000 and increasing we said something. It is also Same. It's obviously a bit higher because it's a bigger company. So 5% would seem too high. So we are more in it Yes. I think you mentioned maybe it was the industry standard 5%, and then I thought It's an indication, but okay, slightly less than 5% and that Yes. It is less. So I think we should think about in the range of 2.5% to 3%. And there we feel So far, I mean, we still have very limited insight, obviously, because all the work streams only start now. But We feel, from what we see so far, very confident about it. And hopefully, we can Be more precise than in our full year statement and move in the direction of your 5%, But I think 5% won't be reached. It always depends also how you calculate these things, and we do it on a very conservative basis. But in P and L, it's not much positive effect, I assume, for the second half, but you will report The new volumes, right. So I'm guessing we should see a mathematical effect of sort of lower EBITDA, EBIT per ton, But that's just, yes, that comes Yes, yes. We will be fairly detailed on all the acquisition effects Mainly, then in the full year report when we have all the effects Yes, clarified. Okay. Thank you very much. Thank you. Thank you. The next question is from Ants Vipulis, Free Journalist. Your line is now open. Please go ahead. And then, the transmission failure in Yes. So the start was The most important that we as a management are excited about our 2 acquisitions And that we have had the chance via a clean team to do some pre work. And this has confirmed our assumptions So I'll even be more positive and that we see these two acquisitions as really transformational for And, Luis, we see especially Gritsen, but also Kotka as a platform for the next several years. You're speaking from the last two acquisitions. Yes, acquisitions of Cristin and Krotkowitz. I do not have the names could you repeat it, The names of the company. Yes. The companies are Kritzin in Poland and Kostka is weak. How to explain it? Yes. I would kindly ask you to go to our homepage where you have the full text. Well, I can't go back to this because I'm on my computer, I have year invitation And my PIN code and all the numbers you want to know. Okay. I'll tell it in Chairman. Yes. It is about a volume of €1,000,000,000 Sales will be close to €1,000,000,000 Further acquisitions are planned. Yes. No, for the time being, I mean, we are prepared to do small acquisitions in packaging. But obviously, our task is now To make these 2 big acquisitions work for us. That is the absolute priority. Okay. Thank you. Thank you. The next question is from Marcos Ramesh, RBI, your line is now open. Please go ahead. Yes, good morning, gents. Couple of questions, please. Firstly, with Packaging. Can you quantify the capacity additions you're mentioning in your video statement, maybe also with some Granularity on the sites where you're modeling plants and what would be the net Yes. Do you refer now to our divestments where we said it's a capital gain of EUR 45,000,000 to EUR 55,000,000 And there might be all I'd say. From a volume perspective, so apparently, the shutdown of Bielefeld kind of stands against capacity additions elsewhere. So I would kind of be Interested in the massive segment and at which plants you're in modeling expansions. Okay. We will transfer these volumes of the plant in Bielefeld to other plants In Germany, Russia and Ukraine, the production loss should be absolutely marginal because We deal with international customers, and basically, they do not care where we produce. The capacity reduction It's not a difficult question, depending if it's based for all our packaging, it's something like 2%. But the important thing is because it's that it's we are specialized there mainly on And for our local product packaging, it's probably in the range of 10%. I think Markus, it relates also your statement in the video versus where we have these CapEx projects underway. Exactly. Okay. So that is the overall packaging capacity looking forward. Okay. So these Expansions will expand our capacity, so our CapEx by around 10% To 12%, and this is offset by the cost, if you want, so by about 2% in rough terms. And now we have different printing technologies, so to say, into one number. Okay. And this new capacity should be available as of next year already or Part of this is available. So let's say half of this increase is available as of Q1 next year And pass will be only available a year later. So starting 2023. Okay. And on the general pricing environment, you mentioned price hikes on both packaging And on carton board, I mean, where would you see yourself against your competitors? Would you So you're among the price leaders. Can you maybe shed some light on the general pricing Disciplined in the market? Yes. I mean, as we've just acquired 2 competitors, We have seen that it's a pretty similar picture with also so the issue today is Well, the topic is it's easy to increase prices. When it is contractually possible, But equally, we have taken the decision, which is a bit of deviation from the past, to stick to our contracts which we have. So if someone has a fixed price for the full Yes. Then we will not change that and only increase in January, by example. Okay. And this is a significant burden for our profitability. It's the short run, but we think It's the right way long term. Okay. But what would be kind of the benefit? I guess you have long term relations with customers anyway. So, and if the industry overall is disciplined, so You might give in some profits, I would argue. Yes, that's obviously, our target is to use a strong market also to reestablish a decent profit margin with customers where this was not the case in the past, to say it in careful words. But overall, you're right. We want to marginally expand our margin Okay. Would you say that in cartonboard, Q2 was the trough in terms of operating profitability? The rise of Q2, yes, a bit of that. Yes. It's a clear yes unless there is tomorrow a huge increase in Recycling paper or pulp, which we do not foresee, but one always has to use this caveat Because if tomorrow, recycling paper goes from 170 to 240, then We would have so they've moved so far and 40 to 170, and this was not expected. So maybe they move to 220 tomorrow and then my statement would not be correct. But if one excludes this rather unlikely event, Then we will we have seen the trough in Q2. Okay. Clear. And then final question. I mean, it's Maybe a bit of crystal ball, but on the price development for waste papers, we all know that the drivers For the increase, I mean, do you see any of those issues like Asian demand or lower collecting volumes Kind of debating on a more sustainable basis? Or what would be like your Working assumption for wastepaper prices, is that the leveling of a plateauing at current levels? Or any hope that it we have also towards our customers is that we do not believe in the reduction in white paper prices. Is it a possibility? Yes. Of course, it could be. But you see there are I think the structural issues Speak against it. And these are, 1st of all, there is less consumption of graphic paper, and this means less waste. So those rates which produce which are made out of virgin fiber are declining. And this means that there is a shortage of waste paper in the system. And then the second effect is probably that more Historically, containerboard, which is the main driver of demand For waste paper, the containerboard the recycling rates of containerboards go down Because B2C grows more than B2B and B2B, so if containerboard is delivered to retail, The REIT collection is extremely high because they have all professional systems in place, whereas if you get your Amazon Delivered to your home in the B2C market. Some of the carbon bought ends in the general Collection, collection, and therefore, it's not recovered. So we see a trend That pre collection goes a bit down because B2C grows more than B2B. And these structural effects Speak against a structural big decline in waste paper. However, then you have effects of the business And of course, it can go down tomorrow as well. I mean, it's like predicting Where the dollar will be in half a year is really impossible. Yes. That's why I said crystal ball. But I think we should, as an industry, Do not fall into the wrong belief that these high prices will anyhow come back, and therefore, we don't believe full price increases. I think the working assumption has to be that these high prices are going to stay, that there will be even secondary inflationary effects And this has to be the basis for any price negotiations for the next year. Okay. But there is no structural reason why you shouldn't kind of reclaim the I mean the historical margin levels between 7% to 8 I fully agree. I mean, we have to restore our 10% plus EBIT margin. Okay. All right. Thank you very much. Thank you. Thank you. At the moment, there are no further questions. The next question we have received is from Michael Mollinger of Instigroup. Your line is now open. Please go ahead. Yes, good morning gentlemen. Thanks for taking my question. I have 2 first one clarification On the Air Board and Paper division. And the follow-up to Markus' question, given there are no major Raw material price changes for recycled paper. Do you believe in the Q1 you will return to Q1 margins or still below the 7:30. Yes, that's a difficult question. I think we should It's basically 5%, 7% Q1. 7%, yes, it's achievable, but it's not clear whether we will It really depends on what our product mix, etcetera, will be Also with regards to overseas and if recycled paper prices, I mean, we are now mid August, so there are 6 weeks left in this quarter. They can move €10 up or €20 down, and that will influence it at the end of the day. Okay, understood. And second question, Can you give us some indication of the integration costs for the 2 acquisition cost committees and Okay. It seems just for understanding when will this majority of this quarter be booked in the first quarter, Q4 or also some of this cost next year. Yes. I think we have two thoughts, of course. One of the acquisition costs, so investment bank, lawyers, etcetera, aimed and especially transaction taxes, Which are fairly high in Poland especially. And this will be booked in the Q3. And we will either in the Q3 or in the annual statement, we will also be explicit about these costs. And then we have integration costs in terms of one off costs like setting up, changing computer systems, etcetera. And that's too early to give precise data because it will we have to look at the cost benefit analysis. And if things make sense, because returns are very good, then we will change things and have more upfront costs, But higher returns going forward. And obviously, some of these benefits Will depend on capital expenditures, and that will is And these can be quite significant numbers, but then we also get significant returns. But we can't give one figure, which would include everything. Okay, understood. Thank you. Thank you. The next question is from Sven Boohar, Julichai Kantonalbank. Your line is now open. Please go ahead. Yes, good morning. I have two questions, if I may. The first one, what was the average Price increase you had in the 2nd quarter and what is it in the 3rd and 4th quarter? And the next question is, You mentioned that you have some input costs which you cannot pass on contractually to your customers. Could you share the amount of these Costs which you cannot pass on. Yes. These are fairly detailed questions. So we For competition reasons, we are not allowed to give you precise numbers here because a competitor might listen in And would then know how much we have increased prices, and the commission might see that there's an implicit collusion. But we are, I mean, in recycled paper has increased roughly, let's say, from the start of or over a 1 year period by about €120. And so with the price increases, We have done and have already implemented 1st October. This is, so to Say, reflected plus a bit more because other prices have increased. And on your second question on what are, so to say, other costs, I think they are in the range of 10% to 15% of our overall cost structure. So it's instant loose and Which are also inflated and are typically not reflected in any Index mechanism for customers. Meaning that you cannot pass them over to your customer then? No. Sorry, that's not what I meant. If so in board and paper, we renegotiate prices On a whatever quarterly half year, yearly basis, and then we can pass on everything. I mean, it's a free negotiation. So We can also increase our margins if we can do so. But in the cases where we have 3 year contracts for folding carbons And have fixed mechanisms there. We can't pass it on because it's typically not included in the contract. And what I was referring to is that going forward, when we signed new, for instance, 3 year contracts with customers, We will build in more clauses, which do not just reflect the fiber input, but other costs as well, like potentially seller increases, etcetera. So I think that 10 years ago, it was very usual in the multiyear contracts to include general inflation clauses. And then this went because inflation became so low that customers typically said you have to improve your cost structure at least in the same amount as inflation. And therefore, typically, fixed prices meant they were fixed for 3 years. And going forward, this looks very dangerous to me because we do not know how inflation will develop over the next 3 years. Okay. Thank you very much. Thank you. We now receive the follow-up question of Johannes Sidious, Kepler Cheuvreux. Your line is now open. Yes. It's Johannes again. I just have a question on the 2 divestments that you announced during the summer. They are, of course, highlighted in The first half report, how should we think about the earnings impact from the divestment from a modeling Perspective, I mean, you're giving us the volume. Is it about the same profit in this unit as in cartonboard as overall, for example? Or Could you give us some help there how to think about the negative effect from it? Yes. Can we say this roughly? Roughly, yes. So we talk typically about, let's say, Yes. EBITDA, in this case, of EUR 25,000,000 to EUR 30,000,000. So I would like to hand back to you. Yes. Thank you very much For attending this Q and A session, again, if you look at our numbers, It looks a bit frustrating at the moment. However, we are convinced that this is a temporary effect Because we are confident and we see it actually that we can pass on these prices. So if I look at my Daily pricing report, I can see that the order intake prices are significantly higher than the prices Which we charge to our customers for what we sell. And overall, yes, as As I said, we are very excited. We think that these two transformational acquisitions give us a lot of It will be lots of work, but it will give us a lot of benefits going forward. And our offering to our customers in In terms of sustainability of innovation, it's something which will be shown over the next year. And probably more short term, we will see some positive cost effects because they are both 2 very competitive moves. And in this way, thank you very much for your participation. Ladies and gentlemen, thank you for your attendance. This call has been completed. You may disconnect.