Interim Management Statement
14 November 2007
Mondi Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1967/013038/06)
JSE share code: MND ISIN: ZAE000097051
Mondi plc
(Incorporated in England and Wales)
(Registration number: 6209386)
JSE share code: MNP ISIN: GB00B1CRLC47
As part of the dual listed company structure, Mondi Limited and Mondi plc
(together 'Mondi Group') notify both the JSE Limited and the London Stock
Exchange of matters required to be disclosed under the JSE listings
requirements and/or the Disclosure and Transparency and Listing Rules of the
United Kingdom Listing Authority.
Mondi Group: Interim Management Statement
This statement provides an update on the Group's progress since the half year,
based on trading up to 14th November and precedes the announcement on 28th
February 2008 of full year results for the year ending 31st December 2007.
Group Overview
The positive trends and trading momentum of the first half have continued into
the second half particularly in Mondi Packaging and price increases have been
achieved in Mondi Business Paper in line with expectations.
Divisional Overview
Mondi Packaging
Mondi Packaging has continued to benefit from an improved trading environment.
Packaging paper volumes and prices have continued to increase and trade above
prior year in all major paper grades. As expected, while paper prices have
continued to increase, there are signs that prices are now leveling off, albeit
at good levels. The paper supply demand balance remains favourable with ongoing
growth in demand (particularly in emerging markets) and only limited new
capacity expected until 2009. Although price increases in downstream converting
have kept pace with input cost pressures (mainly paper), we continue to seek
further price increases.
Mondi Business Paper
Sales volumes in the second half are likely to be lower than the comparable
period as Mondi took additional downtime due to softness in order intake over
the summer period (as a result of de-stocking across the distribution channels)
resulting in a production reduction of circa 75,000 tonnes versus 35,000 tonnes
as previously indicated. However, order intake has now picked up and selling
prices have continued to rise with an October price increase of circa 3-4%
realised. Following the recent capacity closures in the industry, the supply
demand balance in Europe continues to improve with reasonable demand growth
(particularly in emerging markets) and no significant new capacity is expected
until 2009/10. The headbox of the PM31 paper machine (located at Merebank,
South Africa) was successfully modified. The recent forest fires in South
Africa, the worst in recent history, saw around 13,000 hectares of Mondi forest
affected for which the likely cost to the group is expected to be circa €5m.
Mondi Packaging South Africa (MPSA)
The second half is the seasonally stronger period for MPSA and this, coupled
with the consolidation of the Lenco acquisition from 4th July 2007 should see
results in the second half in local currency well up on the first half.
Merchant and Newsprint
At Europapier, the favourable demand and pricing environment in the first half
have continued into the second half. At Aylesford Newsprint results have
benefited from lower input costs and at Shanduka Newsprint volumes and pricing
remain firm.
Input Costs and Currency
Following the sharp increase in external fibre costs (wood, pulp and recycled
fibre) in the first half, fibre costs are now more stable. However, given
Mondi's Russian and South African wood resources, we are better able to
mitigate the impact of wood cost inflation on the Group.
The continued weakness of the US dollar has led to an increase in imports and a
reduction in exports for most paper grades. However the lower net export
dependency of UCWF and Containerboard (circa 5% versus 20% for most coated and
graphic paper grades) will limit the impact of the weak dollar.
Importantly, our results continue to benefit from Mondi's ongoing focus on cost
reductions, productivity improvements and our emerging market focus which
provides higher growth at a competitive cost. As at 30th June 2007 circa 61% of
Mondi's asset base was in emerging markets.
Restructuring
In line with Mondi's continued programme of reviewing and rationalizing its
operating base, Mondi Packaging will book a circa €25m restructuring charge (of
which €20m will be a cash cost) in the second half (to be taken against
underlying operating profits) which will see 6 converting plants in Western
Europe closed or downsized and around 350 jobs cut. The payback on the
restructuring charge should be within two years.
On 18th October 2007 Mondi announced an organisational change, the effect of
which will be improved effectiveness and efficiency by eliminating duplication
across the Group. The main change with effect from 1st January 2008, will be to
replace the current Mondi Packaging and Mondi Business Paper Business Units
with a Europe and International Division and a South African Division. The
costs of this restructuring, which will see a reduction in overhead costs, have
not yet been finalised but are not expected to be significant in 2007, with
further costs in 2008 being offset by reduced overheads in the same year.
Major Projects
Good progress continues to be made on the new 470,000 tonne recycled
containerboard machine and related Box plant (likely to be located at Swiecie
in Poland) at a total estimated cost of €350m. The main machine orders have now
been placed and we remain on track for completion in the second half of 2009.
We anticipate this machine will have the lowest operating cost of its type.
The project to modernise our Russian mill at an estimated cost of €525m is also
making good progress and remains on schedule for completion during 2010. Key
value drivers of this project are to lower our cost base in Russia, improve
efficiency, increase energy production and revenue by selling surplus energy to
the grid as well as providing some extra capacity (both pulp and paper) for the
strongly growing domestic market.
These projects will further strengthen Mondi's exposure to emerging markets and
will be financed from internal cash generation. Both provide exciting growth
prospects for the group.
Acquisitions
A key part of Mondi's strategy is to grow by acquisition. To this end, several
acquisitions have been completed this year, Lenco, Unterland and Tire Kutsan
(which resulted in Mondi becoming the leading corrugated player in emerging
Europe).
The impact of recent acquisitions in the second half is likely to be marginally
earnings dilutive (post tax) as the initial profit contribution is more than
offset by the related finance charges. We anticipate that these businesses will
be earning accretive in 2008 as they are integrated into Mondi and deliver on
their potential.
Borrowings and Finance Charges
Group borrowings, as expected, will increase in the second half as the rate of
capital expenditure picks up (several capital projects were completed during
scheduled summer maintenance shuts at the major paper mills) and the Group has
completed several acquisitions (primarily Tire Kutsan, Unterland and Lenco)
with a combined debt free enterprise value of €364m.
Interest rates have also risen, particularly in South Africa where the Reserve
Bank bench mark repurchase base rate has increased by 150 basis points from
9.0% in May to 10.5% currently.
The net result of higher borrowings and interest rates is that finance charges
in the second half will be significantly up on the first half.
Summary
Mondi's performance continues to improve reflecting our favourable product mix,
emerging market exposure and competitive cost position. Overall, despite
booking a circa €25m second half restructuring charge, Mondi anticipates good
progress for the year as a whole with earnings in line with management
expectations.
Contact details:
Mondi Group
David Hathorn +27 11 638 2231
Paul Hollingworth 01932 826 326
Financial Dynamics
Richard Mountain 020 7269 7186 / 07909 684466
Louise Brugman +27 11 214 2415 / +27 83 504 1186
A conference call with David Hathorn and Paul Hollingworth will take place on
14 November 2007 at 9.00am GMT. To obtain dial-in details please call Elaine
Ryman at Financial Dynamics on 020 7269 7121. The call will be recorded and a
replay service will be available later on 14 November 2007.