Mondi's H1 net income down 27.8% year-over-year to €153M, net sales down 3.4% to €2.84B with lower average selling prices, sales volumes

JOHANNESBURG , August 7, 2012 (press release) – Highlights

  • Good operating performance after a challenging start to the year
  • Return on Capital Employed of 13.3%, in excess of the Group’s through-the-cycle target of 13%
  • Interim dividend of 8.9 euro cents per share, up 8%
  • Strong cash generation of €353 million
  • Significant strategic acquisitions:
    • Świecie minorities acquired for €296 million
    • €655 million acquisition of Nordenia agreed

David Hathorn, Mondi Group chief executive, said:

“We are pleased to announce good results following the anticipated pick-up in trading after a challenging start to the year. Cash generation is robust and our return on capital employed remains above our through-the-cycle target, reflecting the strength of our low-cost operating model.

We have made significant progress on a number of strategic initiatives, most notably the acquisition of the remaining minority interest in Świecie and the agreement to acquire a 93.9% interest in Nordenia. These steps build on our position as a leading international packaging and paper company with a strong platform for continued growth in emerging markets.

The macroeconomic environment remains a concern, with continued soft demand evident in certain western European markets. Encouragingly, demand in a number of the emerging markets to which the Group is exposed remains firm, and positive supply side fundamentals in various of our core grades offer price support. As such, we remain confident of delivering against our expectations for the full year.”

Group performance review

The Group’s underlying operating profit of €269 million was in line with that of the second half of 2011 and 24% below that of the comparable prior year period.
Average selling prices were lower across all grades compared to both the first and second half of the prior year.

Sales volumes were above those of the second half of the prior year, reflecting improving demand, but were still below the volumes achieved in the first half of 2011 in certain segments, most notably kraft paper and industrial bags.

Input costs provided some benefit with recovered fibre and pulp prices, on average, below 2011 levels.

Finance charges for the period were lower than those of the comparable prior year period mainly as a result of the lower average net debt.

The underlying effective tax rate of 20% is consistent with that of 2011 as the Group continued to benefit from a favourable profit mix and investment incentives, most notably in Poland.

Underlying earnings per share in the six months ended 30 June 2012 was 30.9 euro cents per share, a 26% decrease on the basic earnings per share - alternative measure applicable to the comparable prior year period and better than that achieved in the second half of 2011. An interim dividend of 8.9 euro cents per share, up 8% on the prior year interim dividend of 8.25 euro cents per share, has been declared.

The Group achieved a Return on Capital Employed (ROCE) of 13.3%, above the through-the-cycle target of 13%.

The Group remains strongly cash generative with cash generated from operations of €353 million, including the effects of the normal seasonal pick-up in working capital in the first half of the year.

Capital expenditure of €112 million represents 67% of the Group’s depreciation charge. An increase in capital expenditure is expected in the second half, partly due to investment in the previously announced energy and de-bottlenecking investment projects ramping up as well as the normal seasonal variation in capital expenditure.

On 18 April 2012, Mondi concluded an all cash public tender offer for the shares in Mondi Świecie that it did not already own increasing its holding to 93.2% from 66%. On 18 May 2012, Mondi acquired the remaining shares it did not already own. The total consideration paid by Mondi was €296 million.

On 2 May 2012 Mondi Świecie S.A. acquired Saturn Management Sp. Z o.o., the company that owns the power and heat generating plant that provides Mondi Świecie S.A. with most of its electricity requirements and all of its heat and steam needs, for a net cash consideration of €31 million and the assumption of debt of €57 million.

Net debt of €1,273 million at 30 June 2012 increased from €831 million at 31 December 2011, reflecting the impact of the Mondi Świecie acquisitions described above as well as the usual bias towards the first half of the year in respect of cash outflows from other financing activities.

The average maturity of the Group’s committed debt facilities at 30 June 2012 was 4.0 years, with unutilised committed facilities in excess of €580 million.

On 11 July 2012, Mondi announced that it has agreed to acquire 93.4% of the outstanding share capital of Nordenia International AG for a total cash consideration of €240 million and the assumption of debt and debt like liabilities of €398 million, implying an enterprise value of €655 million. The transaction is subject to customary completion conditions including the approval of certain competition authorities. On 23 July 2012, agreement was reached to acquire a further 0.5% interest on the same completion conditions. The acquisition is expected to be completed in the fourth quarter of 2012 and the cash consideration will be financed by means of a new, two-year €250 million committed bank debt facility obtained subsequent to 30 June 2012. Nordenia is an international supplier of innovative consumer packaging solutions and hygiene components.

Following the completion of the Nordenia acquisition, Mondi will reorganise its Europe & International Division into four businesses: Packaging Paper; Fibre Packaging; Consumer Packaging; and Uncoated Fine Paper (UFP). Nordenia will form part of the Consumer Packaging business. The Group’s restated historical segmental information, to reflect this reorganisation, is presented as an annexure to this half-yearly report.

Europe & International - Uncoated Fine Paper business

The business continued to deliver a strong operating performance with ROCE of 15.7%. Underlying operating profit of €100 million, 15% below the comparable prior year period, reflects primarily the effects of the annual planned maintenance shut at Syktyvkar, which took place during June, compared to July in the previous year, resulting in lower sales volumes and higher costs compared to the first half of 2011. Marginally lower average net selling prices, due in part to a change in sales mix, also contributed to the lower result. Average benchmark European uncoated fine paper prices were slightly lower than the comparable prior year period and approximately 2% below the average prices in the second half of 2011.

Lower pulp and chemical costs benefited the business whilst energy costs increased across all mills due to higher gas and other fuel costs. Wood costs were lower in central Europe but higher in Russia.

Planned maintenance shuts in Ružomberok and Neusiedler will take place during the third quarter of the year as European markets enter the traditional slower summer period.

Europe & International - Corrugated business

While ROCE remained above the Group’s through the cycle target at 14.1%, the underlying operating profit of €65 million was well below that of the comparable prior year period due to significantly lower average selling prices of containerboard. Sales volumes were slightly higher over the same period.

Despite price increases implemented across all grades during the period following the lows reached in the early part of the year, average benchmark kraftliner and recycled containerboard prices were both 12% lower than those of the comparable prior year period. While the virgin containerboard grades showed positive price momentum throughout the period under review, supported by capacity reductions in Europe and the stronger US dollar, recycled containerboard grades came under pressure in the second quarter due to a combination of lower recovered fibre costs, low demand growth and new production capacity. Price increases for white top, virgin and recycled containerboard were announced in July. The actual price increase achieved will be subject to individual negotiations with customers.

Average benchmark recovered fibre costs declined by approximately 6% compared to the second half of 2011 during the period, and were more than 10% lower than the comparable prior year period. Wood, pulp and energy costs were also lower during the period whilst chemical costs increased marginally.

The planned maintenance shut for Mondi Świecie took place during July.

The corrugated packaging business reflected a pleasing improvement in underlying operating profit, mainly due to increased average selling prices due to product mix improvements driven by an increased focus on customer segmentation and lower paper input costs.

Europe & International - Bags & Coatings business

Underlying operating profit of €96 million was 25% lower than the comparable prior year period but broadly in line with the second half of 2011. ROCE remained robust at 16.5%.

Commercial downtime in the kraft paper business, taken in the second half of 2011, continued at reduced levels into the first quarter of 2012. Full production resumed in the second quarter on the back of the end of destocking and improved demand in export markets. Average selling prices were approximately 7% lower than the comparable prior year period and 9% lower than the second half of 2011, reflecting the lower prices agreed on contract volumes set in the early part of the year. Price increases were announced in the latter part of the second quarter and are expected to take effect in the second half of the year. While the outlook for near-term European demand continues to be uncertain, export markets remain strong, driven by a combination of underlying demand growth and supply contraction. The business benefited from lower wood and pulp input costs whilst energy prices were higher.

Selling prices in industrial bags were broadly in line with the comparable prior year period but demand was weaker, particularly in southern Europe. The business benefited from lower paper input costs and an ongoing focus on fixed costs savings.

Coatings was negatively impacted by lower sales prices and volumes versus the comparable prior year period, although sales volumes have improved from the weaker demand seen during the second half of 2011. Furthermore, the start-up of a new facility in the US, coupled with the related closure of an old site and relocation of activities negatively impacted results. Consumer packaging benefited from stable demand. Higher resin prices were successfully passed on to customers and the business also benefited from an improved product mix.

South Africa Division

The underlying operating profit of €29 million was marginally higher than the comparable prior year period. The business benefited from both the weaker South African rand and an increase in sales volumes and lower operating costs, primarily due to the shift in the planned annual maintenance shut at the key Richards Bay operations from the first half in the prior year to the third quarter in the current year. This was partially offset by lower average selling prices, particularly for hardwood pulp and white top containerboard. A continued focus on the domestic market and improved operating performance at Richards Bay has benefited the business through improved margins.

In June 2012 a further 8 forestry land settlement agreements were reached. To date Mondi has signed a total of 19 land settlements involving about 35,000 hectares of its forestry land. The settlements were reached using a sale and lease back framework developed by Mondi and the South African Government which ensures that title to the land is transferred to the various claimant communities, that Mondi is paid a fair price for the land and which secures a continued fibre supply for its mills.

Newsprint

The Newsprint business made an operating loss of €3 million. Mondi Shanduka Newsprint benefited from price increases during the period, which were sufficient to return the business to a modest level of profitability in the second quarter and address electricity price increases for the year. Aylesford Newsprint was negatively impacted by lower average selling prices as well as higher chemical and energy costs, offset by cost reduction initiatives and a lower depreciation charge.

Financial review

Input costs

Lower input costs provided some offset to lower selling prices during the period. Lower wood costs were experienced in general across central Europe, although this was offset by higher costs in Russia and South Africa. Benchmark recovered fibre costs were approximately 10% lower on average than the comparable prior year period. Prices were volatile throughout the period, increasing significantly off the lows at the end of 2011 through the first quarter, and subsequently weakening in the latter part of the period under review. Average benchmark pulp prices were approximately 7% lower in euro terms (14% lower in US dollar terms) than the comparable prior year period benefiting the European businesses in the Group that are net consumers of pulp. Overall, the Group is around 95,000 tonnes long in pulp, resulting in a small negative impact on overall Group profitability.

Higher energy costs impacted margins across the business. The coatings & consumer packaging business benefited from lower average resin prices and other chemical input costs versus the comparable prior year period, although prices did increase during the period under review.

Currency exposure

Currency effects were muted during the period with most production currencies at similar average levels versus the euro to those of the second half of 2011 and weaker than levels of the comparable prior year period. The stronger US dollar versus the euro has however had a positive impact across the Group, both on dollar denominated exports, and due to the support offered to European pricing levels.

Non-controlling interests

Lower profitability in the Świecie and Ružomberok mills, particularly in the first quarter of 2012, resulted in a reduction in earnings attributable to holders of non-controlling interests in those entities. The acquisition of the non-controlling interests in April and May in Mondi Świecie S.A. further contributed to the reduction in earnings attributable to holders of non-controlling interests. The full effect of this acquisition will be seen in the second half of the year.

Special items

There were no significant special items during the period. A gain of €6 million was realised on the sale of land in the South Africa Division and Mondi Shanduka Newsprint as part of their ongoing settlement of land claims.

Cash flow

Cash flow from operations of €353 million was negatively impacted by the lower profitability compared to the prior year period as well as a net outflow due to increased working capital. Working capital as a percentage of turnover increased during the period to 12.6%, due to normal seasonal effects as well as a build up of inventory in anticipation of a number of planned maintenance shuts to take place in the second half of the year.

Capital expenditure

Good progress is being made on the energy related investments in Syktyvkar, Stambolijski, Richards Bay and Frantschach. The pulp dryer approved for Syktyvkar has been put on hold pending clarification of various technical and financial parameters.

Capital expenditure in the period under review was at 67% of the Group’s depreciation charge. This is expected to increase in the second half of the year, and in subsequent years, to approximate the Group’s depreciation charge as expenditure on the various energy related investments ramps up.

Treasury and borrowings

Net debt of €1,273 million was €442 million higher than at 31 December 2011. This was impacted by the acquisitions of both the non-controlling interest in Mondi Świecie S.A., and of Saturn Management Sp. Z o.o. (together €384 million). The net debt to trailing 12 month EBITDA ratio was 1.5 times and gearing was 31% at 30 June 2012. The Group’s long-term investment grade credit ratings of Baa3 (Moody’s Investor Services) and BBB- (Standard and Poor’s) were reaffirmed during the period.

In July 2012, Mondi secured a new two-year €250 million committed bank debt facility in order to fund the proposed acquisition of Nordenia International AG.

Principal risks and uncertainties

It is in the nature of Mondi’s business that the Group is exposed to risks and uncertainties which may have an impact on future performance and financial results, as well as on its ability to meet certain social and environmental objectives.

On an annual basis, the DLC executive committee and Boards conduct a formal systematic review of the most significant risks and uncertainties and the Group’s responses to those risks. These risks are assessed against pre-determined risk tolerance limits, established by the Boards. Additional risk reviews are undertaken on an ad-hoc basis for significant investment decisions and when changing business conditions dictate. The key risks have been reviewed as part of the half-yearly results and remain consistent with those presented on pages 24 and 25 of the 2011 integrated report and financial statements.

The Group believes that it has effective systems and controls in place to manage the key risks identified below within the risk tolerance levels established by the Boards.
  • Mondi operates in a highly competitive environment The markets for paper and packaging products are highly competitive. Prices of Mondi’s key products have experienced substantial fluctuations in the past. Furthermore, product substitution and declining demand in certain markets, coupled with new capacity being introduced, may have an impact on market prices. A downturn in trading conditions in the future may have an impact on the carrying value of goodwill and tangible assets and may result in further restructuring activities.

Mondi is flexible and responsive to changing market and operating conditions and the Group’s geographical and product diversification provide some measure of protection.

  • Cost and availability of a sustainable supply of fibre Fibre (wood, pulp, recovered paper) is Mondi’s most important raw material, comprising approximately one-third of total input costs. Increases in the costs of any of these raw materials, or any difficulties in procuring a sustainable supply of wood, pulp or recovered paper in certain countries, could have an adverse effect on Mondi’s business, operational performance or financial position.

The Group’s focus on operational performance, relatively high levels of integration and access to its own FSCTM certified virgin fibre in Russia and South Africa, serve to mitigate these risks. It is the Group’s objective to acquire fibre (wood and pulp) from sustainable sources with internationally credible certification and to avoid any illegal or controversial supply.

  • Foreign currency exposure and exchange rate volatility The location of a number of the Group’s significant operations in a range of different countries results in foreign currency exposure. Adverse currency movements and high degrees of volatility may impact on the financial performance and position of the Group. The most significant currency exposures are to the US dollar, South African rand, Russian rouble, Czech koruna, Polish zloty, Swedish krona and Turkish lira.

The Group’s policy is to hedge balance sheet exposures against short-term currency volatility. Furthermore, the Group’s geographic diversification provides some level of protection.

  • Investments in certain countries may be adversely affected by political, economic and legal developments in those countries The Group operates in a number of countries with differing political, economic and legal systems. In some countries, such systems are less predictable than in countries with more developed institutional structures. Significant changes in the political, economic or legal landscape of any country in which the Group is invested may have a material effect on the Group’s operations in that country.

The Group has invested in a number of countries thereby diversifying its exposure to any single jurisdiction. The Group’s diversified management structure ensures that business managers are able to closely monitor and adapt to changes in the environment in which they operate.

  • Employee attraction, retention and safety The complexity of operations and geographic diversity of the Group demands high quality, experienced employees in all operations.

Appropriate reward and retention strategies are in place to attract and retain talent at all levels of the organisation. Mondi has a policy of working towards zero-harm. Incidents are fully investigated, remedial actions taken and early warning indicators used to direct preventative work. Mondi adopts internationally recognised safety and health management systems across all its operations.

  • Capital intensive operations Mondi operates large facilities, often in remote locations. The ongoing safety and sustainable operation of such sites is critical to the success of the Group.

Mondi’s management system ensures ongoing monitoring of all operations to ensure they meet the requisite standards and performance requirements. A structured maintenance programme is in place under the auspices of the Group technical director. Emergency preparedness and response procedures are in place and subject to periodic drills. Mondi has adequate insurance in place to cover material property damage, business interruption and liability risks.


Going concern

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out above. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the financial statements.

Mondi’s geographical spread, product diversity and large customer base mitigate potential risks of customer or supplier liquidity issues. Ongoing initiatives by management in implementing profit improvement initiatives which include plant optimisation, cost-cutting, and restructuring and rationalisation activities have consolidated the Group’s leading cost position in its chosen markets. Working capital levels and capital expenditure programmes are strictly monitored and controlled.

The Group meets its funding requirements from a variety of sources. The availability of some of these facilities is dependent on the Group meeting certain financial covenants all of which have been complied with. Mondi had €584 million of undrawn committed debt facilities as at 30 June 2012 which should provide sufficient liquidity in the medium term. In addition, subsequent to 30 June 2012, the Group has obtained a new, two-year €250 million committed bank debt facility to fund the cash consideration of the purchase of Nordenia International AG.

The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, including an assessment of the current macroeconomic environment, particularly in Europe, indicate that the Group should be able to operate well within the level of its current facilities and related covenants.

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the going concern basis continues to be adopted in preparing the half-yearly financial statements.

Dividend

An interim dividend of 8.9 euro cents per share has been declared by the directors and will be paid on 18 September 2012 to those shareholders on the register of Mondi plc on 24 August 2012. An equivalent South African rand interim dividend will be paid on 18 September 2012 to shareholders on the register of Mondi Limited on 24 August 2012. The dividend will be paid from distributable reserves of Mondi Limited and of Mondi plc, as presented in the respective company annual financial statements for the year ended 31 December 2011.

Outlook

The macroeconomic environment remains a concern, with continued soft demand evident in certain western European markets. Encouragingly, demand in a number of the emerging markets to which the Group is exposed remains firm, and positive supply side fundamentals in various of our core grades offer price support. As such, we remain confident of delivering against our expectations for the full year.

Directors’ responsibility statement

The directors confirm that to the best of their knowledge:
  • the condensed set of combined and consolidated financial statements has been prepared in accordance with International Financial Reporting Standards and in particular with International Accounting Standard 34, ‘Interim Financial Reporting’;
  • the half-yearly report includes a fair review of the important events during the six months ended 30 June 2012 and a description of the principal risks and uncertainties for the remaining six months of the year ending 31 December 2012; and
  • there have been no significant individual related party transactions during the first six months of the financial year and nor have there been any significant changes in the Group’s related party relationships from those reported in the Group’s annual financial statements for the year ended 31 December 2011.
Industry Intelligence editor's note: In an omitted table, Mondi reported H1 net income of €153 million and net sales of €2.84 billion. For the same period a year ago, the company recorded net income of €212 million and net sales of €2.94 billion.

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