Earnings Call: Q1 2021

May 18, 2021

Welcome, ladies and gentlemen, to this audio webcast interview on Meyer Manhof Group Interim Results for the Q1 of 2021 with the company's CEO, Peter Oswald. Peter, having just reported the Q1, what is your summary on the Group start into the current year? Since the beginning of this year and even the last month of 2020, we've been facing a two sided situation. On the one hand, we see an ongoing growth in demand for cartonboard and cartonboard packaging and our order books continue to be well or even abundantly filled. On the other hand, we currently face an extraordinary strong cost inflation after last year's cost deflation. It is an extraordinary situation, which we haven't seen in this extent during the last 10 years. Prices for recovered paper have risen sharply, but also prices for energy, pulp, chemicals, logistics and so on. And they are all significantly up. In the Q1, this has severely affected our Carbon Board division's results. Prices for recovered paper mix quality were at the level of around €120 per ton, 3 times the level of around €40 per ton in Q1 last year. Due to price validities, The cost pass on for recycled cardboard becomes effective partly in the Q2 and partly by the middle of the year. And for our virgin fiber based cardboard grades, we will have higher prices only by the middle of the year. However, since our packaging division saw an overall positive performance and was still only marginally affected by the cost Increase in Q1, the group's operating profit and margin came in just slightly below the previous year's level. What does this mean for Q2 results? Since the cost inflation has gained momentum, Gross margins in Q2 will be even more affected by strongly increasing variable costs. So let's take Again, the example of recovered paper, we expect to recover paper prices in Q2 at the level of around €170 per tonne compared to €60 per ton in Q2 last year, so an increase of €110 per ton or almost tripling of prices. Sequentially, prices increased from €115 in February when we determined the carbon port selling prices for Q2 €265 in April, so more than 40% in just 2 months. Also, Higher chemical prices will impact on Q2 results in FBP. That's why we expect EBIT of the Cartonboard division in Q2 to be down on Q1. Since the Packaging division stabilized Q1 results, the question arises if this can be prolonged into Q2 with packaging input costs such as cardboard, paper, inks, varnages also being on the rise. In the Packaging division, we can typically adjust costs as per January July of each year. It also depends on the scope of the cost increase. And since the overall cost increase has been substantial in these days, The cost pass through in packaging shall be affected. That's the good news. But this will only happen from the middle of the year onwards for most of the business. And given that we face now cost increases, As you said for coated recycling board and other materials like ink, glue, pallets, etcetera, margins in the second quarter will be negatively impacted. Could you please shed some light on the causes for the price spike in recovered paper? The reasons for these price hikes are in my opinion threefold. With regards to demand for recovered paper, It's the strong demand from the corrugated industry and from Asia. With regards to supply, It is the significant decline of recovered paper from magazine papers and newsprint. So less supply and more demand are driving up prices for recovered paper at an unprecedented speed and to record levels. Facing current strong cost headwinds, how do you assess the group's timing for a recovery? In our outlook statement, We post that it is our goal to return to Q1 earnings levels for the group's current business in the second half of this year. This assumes that cost inflation stops now. Therefore, there is a high level of uncertainty because of the high cost volatility. Apart from essential price increases, you're addressing necessary further structural adjustments in your release As a part of your strategic course for growth and improved competitiveness, could you shortly explain the reasons for the planned closure of Graf Grappielefeld and the transfer of this packaging business to other sites of the group. Yes. We've entered negotiations with employee representatives on the From Germany to Russia, Ukraine and Asia are concerned, our customers demand to source locally. So we will move to our local folding carbon plants in Russia, Ukraine and Vietnam. This step was overdue for a long time and will save a lot of money and CO2 emissions. 2nd, with regards to sales volume in Europe, we have Had several plants in Germany with too low capacity utilization for a number of years, and so part of the production will be moved to other German plants. Given the market demand for lower prices for top quality, we need to increase our efficiency through economies of scale and specialization. I think it is very important to underline at this point that management has initiated the envisaged structural adjustments at the Graphier Bielefeld after all other measures have been tried and all other options exhausted. Is committed to handle this measure in a socially responsible way. From this internal consolidation, we expect one off costs of €25,000,000 to €30,000,000 in the Q2. In the previous statements, you highlighted intensified future investments and growth projects for several sites of Carton and Packaging. Consequentially, annual CapEx should rise to €250,000,000 to €300,000,000 in 2021 2022. How are these projects Proceeding and will you be able to keep the time frame and costs despite current legs, for instance, in building capacities and the price hikes? We are overall well on track. Due to COVID, we have some delays. And due to cost inflations, we have some cost increases, but both are not material. From a cash out perspective, some of the spending might be delayed to 2023. And finally, could you please give an update on the closing of your recent acquisitions of the Cardboard division? Yes. The update here is a quick and good one, unchanged. We expect the acquisition of Kotka Mills in Finland to be closed by midyear In Quincy, Poland during the Q3 of this year. And we have started to prepare the post merger integration. Peter, thank you very much for this interview.