Mondi Group: Trading update 11 October 2017

This trading update provides an overview of our financial performance and financial position since the half year ended 30 June 2017, based on management information up to 30 September 2017. These results have not been audited or reviewed by Mondi’s external auditors.

Except as discussed in this update, there have been no significant events or transactions impacting either the financial performance or financial position of the Group since 30 June 2017 up to the date of this statement.

Group performance overview
Underlying operating profit for the third quarter of 2017 of €245 million was 8% above the comparable prior year period (€227 million). The Group benefited from higher average selling prices partly offset by higher costs and negative currency effects. Underlying operating profit was in line with the second quarter of 2017, with the positive pricing momentum seen across most product segments offset by rising costs, negative currency effects and the usual seasonal downturn in Uncoated Fine Paper.

Like-for-like sales volumes were above the comparable prior year period, driven by good growth in containerboard and Fibre Packaging. Selling prices for the Group’s key paper grades were above those of both the comparable prior year period and the previous quarter as the upward momentum in pricing witnessed over the first half continued.

Costs were generally higher than the comparable prior year period and the previous quarter. Wood, energy and chemical costs were higher than the comparable prior year period while benchmark paper for recycling prices were up 15% compared to the third quarter of 2016, and 6% higher sequentially. Cash fixed costs were higher as a result of inflationary cost pressures and the impact of maintenance shuts, while depreciation and amortisation charges were up due to the impact of the Group’s ongoing capital investment programme. Our recently completed projects in Packaging Paper and Fibre Packaging are making good contributions.

Currency movements had a net negative impact on operating profit versus the comparable prior year period driven mainly by a weaker US dollar and sharply weaker Turkish Lira. On a sequential basis, the weakening Russian rouble and US dollar contributed to a net negative impact.

Planned mill maintenance shuts were completed during the quarter with an estimated impact on operating profit of €30 million (2016: €20 million). Based on prevailing market prices, we continue to estimate that the impact of planned maintenance shuts on operating profit for 2017 will be around €90 million, with an expected impact in the fourth quarter of around €20 million (2016: €35 million).

Business unit overview
In Packaging Paper, containerboard markets remain strong with healthy demand and limited industry capacity additions continuing to support pricing, albeit with the level of price increases achieved varying by grade. Average benchmark European unbleached kraftliner prices were up 20% on the prior year comparable period, and up 8% sequentially. By contrast, benchmark European white-top kraftliner prices were up by a more moderate 4% on the prior year comparable period, and up 1% sequentially. Average benchmark European recycled containerboard prices were up 18% on the prior year, and up 5% sequentially. Price increases in recycled containerboard (€30/tonne) and unbleached kraftliner (€50/tonne) were implemented in July and August respectively.

The sack kraft paper market remains tight, supported by good demand growth in our export markets, stable core European markets, and constrained supply growth. Sales volumes for sack kraft paper remained at similar levels to the comparable prior year period and selling prices were higher following the implementation of previously announced price increases. On a sequential basis, prices were marginally up on average as most external volume is sold on fixed price annual contracts.

Our Fibre Packaging business continues to benefit from good volume growth, particularly in Corrugated Packaging. Recent paper price increases were partly recovered through box price increases during the quarter. In Industrial Bags the opportunity to recover paper price increases implemented early in the second quarter was limited due to annual fixed price contracts. Strong cost management continues to limit the impact of cost pressures.

Consumer Packaging delivered an improved performance in the quarter although low growth in certain value added product areas remains a challenge. In response, a programme has been launched to restructure the cost base and align capacity to current market requirements. This involves various initiatives, including the closure of a plant in Poland, streamlining the UK operations and reducing the fixed cost base across the business. As a result, a special item charge estimated at €45 million, including an asset impairment of €27 million, will be recognised during the second half of 2017.

The Uncoated Fine Paper business continues to perform strongly, although the quarterly performance was impacted by ongoing cost pressures, particularly in South Africa, planned maintenance shuts and limited pricing momentum. Average benchmark European uncoated fine paper prices were flat on the comparable prior year period and up 1% on the second quarter of 2017. Pricing in the domestic Russian and South African markets remained stable over the period. Supported by steady demand and cost pressures from rising pulp prices, price increases are currently in the process of implementation in the European, Russian and South African markets for selected products.

Due to the accelerated rate of local demand decline, the decision has been taken to cease production of newsprint at our Merebank mill (South Africa). A special item charge of around €15 million will be recognised during the second half of 2017. During the quarter, we restarted an idled uncoated fine paper machine which will produce annually around 70,000 tonnes of uncoated fine paper to serve the local market, displacing imports.
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