Interim Management Statement

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
LSE share code: MNDI

 

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 6 May 2010

This interim management statement provides an update on the financial
performance and financial position of the Group since the year ended
31 December 2009 based on management accounts up to 31 March 2010 and estimated
results for April 2010, which were not audited or reviewed by Mondi's external
auditors.

 

Half-yearly results for the period ending 30 June 2010 are expected to be
announced on 10 August 2010.

 

Group Overview

The Group's underlying operating profit in the first quarter 2010 was
moderately above that of the fourth quarter 2009. This reflects a continued
improvement in the European trading environment, first witnessed in the fourth
quarter 2009, as well as the ongoing positive impact of the decisive actions
taken to restructure the cost base of the business during 2008 and 2009. 
Results were significantly above the comparable period in the prior year. 

 

Volumes in most areas of the business continue to recover, with first quarter
sales volumes reflecting an increase over the fourth quarter of the previous
year. Similarly, the upward momentum in selling prices in most of our key
grades seen in the fourth quarter 2009 has continued, with previously announced
price increases successfully implemented and maintained. A rising cost base due
to commodity input cost pressures has partially offset these revenue gains. 

 

The Europe & International Division continued to perform well with underlying
operating profit for the first quarter moderately above the previous quarter
performance and well above the comparable period in the prior year. The South
Africa Division increased underlying operating profit from a very low base in
the previous quarter on the back of increased export selling prices but remains
under pressure from the strength of the rand. Results were down on the
comparable period in the prior year. Mondi Packaging South Africa's operating
profit was down on the fourth quarter due to normal seasonal variations, but
above the comparable period in the prior year.

 

In line with Mondi's strategy to strengthen its leading market position in 
industrial and consumer bags in Europe, and further increase the forward 
integration of kraft paper into bags, an agreement was concluded in April with 
Smurfit Kappa Group (SKG) for the acquisition of its western European industrial 
and consumer bag operations in France, Spain and Italy.  As part of the same 
transaction, Mondi sold all three of its corrugated box plants in the UK to SKG 
thus concluding Mondi's western European corrugated packaging and recycled 
containerboard restructuring programme. The transaction was completed on 4 May 
2010. The net funds received of €51 million were used to reduce the Group's net 
debt.
 
In early May 2010, an agreement was concluded to sell the central European paper 
merchant, Europapier to the Heinzel Group for a consideration of €60 million on a 
cash and debt free basis.  The funds will be utilised to reduce Mondi's net debt.  
This disposal further enables the Group to focus on its core businesses.  The 
transaction is subject to approval by the relevant competition authorities.
 
During the period under review, Mondi successfully launched a €500 million, 
7-year Eurobond, further strengthening the Group's already robust financial 
position as evidenced by the long term corporate credit ratings received of Baa3 
from Moody's Investor Service and BB+ from Standard & Poor's, both with a stable 
outlook. The funds have been utilised to settle existing short and medium term debt.
 

As expected, operating cash flows for the first quarter were negatively
impacted by an increase in working capital on the back of increased selling
prices and volumes, but remain strong.

 

The financial position of the Group at 31 March 2010 remained robust with net
assets moderately up on the back of higher working capital and exchange impacts
on translation into euro. Following the launch of the Eurobond, the average
maturity of Group debt has increased to four years. Unutilised committed
borrowing facilities have also increased to approximately €1.4 billion.

 

Except as discussed in this interim management statement, there have been no
other significant events or transactions impacting either the financial
performance or financial position of Mondi since 31 December 2009 up to the
date of this statement.

 

Divisional Overview

Europe & International

The Uncoated Fine Paper (UFP) business continues to perform well, with
underlying operating profit moderately down on the strong result achieved in
the previous quarter, and well above that of the comparable period in the prior
year. The business continues to benefit from strong volumes, a low-cost asset
base and improving pricing which is offsetting input cost pressures. The
previously announced 5% to 8% price increases were successfully implemented
during the quarter. Combined with an improved product mix, this saw average
selling prices achieved in the quarter higher than those in the previous
quarter. This upward momentum in pricing is expected to continue into the
second quarter as the full benefits of the recent price increases are realised.
Furthermore, the Group recently announced further price increases of between 5%
and 12%, effective from 1 June 2010. The actual price increases achieved and
the timing thereof are dependent upon ongoing negotiations with customers. 
Margins in the Group's non-integrated mills (the UFP business is a net buyer of
around 350ktpa of pulp), were impacted in the quarter by the sharply rising
global pulp prices (up 26% to 30% quarter on quarter due in part to temporary
supply restrictions in Chile and Finland), although the full impact will only
be seen in the second quarter.

 

In the Corrugated business, underlying operating profits in the first quarter
were in line with the fourth quarter of 2009, with a combination of increased
input costs from recovered paper and adverse currency movements (Polish zloty
strength) not completely recovered in increased selling prices. These negative
margin variances were however offset by an increase in containerboard volumes,
in part from the new Åšwiecie capacity in Poland, which continues to ramp up
production ahead of its investment plan.

 

Although recycled containerboard prices were up on average in the quarter
(testliner benchmark prices were up around 7%, or €23 per tonne), margins at
the recycled containerboard mills remain under significant pressure from input
costs. Recovered paper prices were up around 23% or €17 per tonne on average
when compared to the previous quarter.  Further recycled containerboard price
increases were announced in April, however sustainable improvements in this
market are only likely to be achieved through further capacity rationalisation
from producers at the higher end of the cost curve. Mondi continues to pursue
its strategy of delivering a high-quality, low-cost asset base and during the
first quarter concluded the sale of the 170ktpa Frohnleiten recycled
containerboard mill in Austria.

 

In the Bags & Coatings business, underlying operating profits for the first
quarter of the year were significantly higher than the previous quarter and
above those of the comparable period in the prior year. In Kraft paper, higher
input costs (mainly wood and energy) were more than offset by increased volumes
and selling prices, with export markets particularly buoyant. In response to
the stronger export market environment, the decision has been taken to reopen
80ktpa of capacity at the mothballed Stambolijski pulp and paper mill in
Bulgaria towards the middle of the year. Further price increases have also been
announced.

 

The industrial bags business came under pressure from lower selling prices and
increased energy and paper costs compared to the previous quarter.  Selling
price increases were announced in April on the back of good demand, although
the impact will be limited as prices for a significant proportion of volume are
fixed for the year. Furthermore, the actual price increases achieved and the
timing thereof are dependent upon ongoing negotiations with customers.  While
encouraging, there does remain a concern that the recent pick-up in demand in
the European industrial bag segment is influenced by restocking. 

 

Profitability in the consumer bags and coatings businesses continues to reflect
the defensive qualities of these segments, driven by resilient demand in
consumer markets, although input cost pressures are evident.

 

South Africa Division

The South Africa Division's underlying operating profit for the first quarter
of 2010 was better than that of a very weak previous quarter largely due to
improved pulp export selling prices, but still well down on the comparable
period in the prior year.

 

Domestic uncoated fine paper (UFP) demand remains stable and the Division has 
successfully implemented local price increases of around 6% on office paper. 
However, export returns from the UFP operations continue to disappoint. 
Substantial cost increases, most significantly pulp, coupled with the continuing 
strength of the rand have seen the business become increasingly uncompetitive as 
an UFP exporter to Europe despite the recent increases in European prices.  
A decision has been taken to withdraw from these markets and to focus on servicing 
the domestic and African market.  Local management are engaged in discussions with 
employee representatives regarding the consequent restructuring and mothballing of 
a 120ktpa paper machine and related converting capacity within the Merebank plant.  
After the restructuring, this business will be a net seller of around 280ktpa of 
market pulp per annum and have UFP production capacity of around 250ktpa. 

 

Mondi Packaging South Africa (MPSA)

The underlying operating profit for the first quarter was below that of the
fourth quarter 2009, due mainly to seasonal variances, with the second half of
the year traditionally stronger than the first as a result of exposure to the
agricultural sector. Results were up on the comparable period in the prior
year.  The euro result was enhanced on translation by a stronger rand versus
the comparable period.

 

Merchant and Newsprint

Europapier delivered underlying operating profits marginally below those of the
previous quarter, while the structurally weak European newsprint market,
compounded by rising input costs, has resulted in a reduction in underlying
operating profit of Aylesford Newsprint. Mondi Shanduka Newsprint remains under
pressure due to lower domestic demand. 

 

Input Costs and Currency

All fibre inputs have shown significant increases through the final quarter
2009 and first quarter 2010. Procured wood in central Europe is up
significantly versus the comparable period in the prior year. Upward pulp price
momentum has been exacerbated by the supply shock arising from the earthquake
in Chile, while strong Chinese demand has driven rapid price escalations in
European recovered paper markets. Mondi benefits from its structural
positioning, with the Syktyvkar and South African pulp mills enjoying
significant wood cost advantage through their backward integration,
complemented by the integrated pulp and paper mills, which significantly reduce
the Group's exposure to pulp price escalations. Following the restructuring in
South Africa and based on current production rates, the Group will be a net
buyer of around 135ktpa of pulp, making it  93% self-sufficient in pulp. The
new containerboard machine at Åšwiecie in Poland offers significant cost
advantages in recycled containerboard production. Clearly, the restructuring
initiatives already implemented and Mondi's ongoing focus on cost reductions
and productivity improvements, all continue to mitigate the impact of input
cost pressures.

 

The continued strength of the rand places severe pressure on export sales
margins from the South Africa Division. Similarly the weakness of the euro in
recent months is placing increasing cost pressure on the export focussed
operations in Poland and the Czech Republic in particular.  However, the
weakness of the euro relative to the US dollar is proving supportive of euro
pricing of products exposed to international trade flows.

 

Capital Expenditure

The project to modernise Mondi's mill in Syktyvkar is progressing well despite
severe weather conditions in December 2009 / January 2010. Management remains
confident of completing the project within the revised budget level of €545
million.

 

The previously announced initiatives to curtail capital expenditure outside of
the major project in Russia are ongoing with benefits in cash flows clearly
evident.

 

Borrowings and Finance Charges

During the period under review Mondi successfully launched a €500 million,
7-year Eurobond, which has been used to pay down existing bank debt, leaving
approximately €1.4bn of committed undrawn facilities. The bond has a coupon of
5.75%, which will result in a moderate increase in the effective financing
charge for the Group relative to the second half of 2009.

 

Summary

The current improvement in the trading environment is evident. Order inflows
are strong across all key grades, while selling prices continue to improve from
the lows seen in the third quarter 2009.  However, costs are increasing,
including currency impacts, and demand in certain products may be benefitting
from some restocking. 

 

The decisive actions taken to reduce costs and exit higher-cost capacity,
coupled with a high-quality, expanding low-cost asset base and strong financial
position, ensure Mondi is benefitting from these improving trading conditions.

 
End

 
Contact details:

Mondi Group                                                                   
David Hathorn                    [phone]                           
Andrew King                      [phone]                           
Lora Rossler                     [phone] / [phone]      
                                                                              
Financial Dynamics                                                            
Richard Mountain                 [phone] / [phone]       
Chloe Webb                       [phone]                           
                                                                              

Editors' notes:

Mondi is an international paper and packaging company, with production
operations across 31 countries and revenues of €5.3 billion in 2009. The
Group's key operations are located in western and emerging Europe, Russia and
South Africa and employed 31,000 people on average in 2009.

 

Mondi is fully integrated across the paper and packaging process, from the
growing of wood and the manufacture of pulp and paper (including recycled
paper), to the conversion of packaging papers into corrugated packaging and
industrial bags.

 

The Group is principally involved in the manufacture of uncoated fine paper
(UFP), packaging paper and converted packaging products, as well as speciality
products.

 

Mondi is a dual listed company, with primary listings on the Johannesburg and
London stock exchanges under the ticker codes MND (JSE) and MNDI (LSE)
respectively. The Group has been recognised for its sustainability performance
through its inclusion in the FTSE4Good UK, Europe and Global indices in 2008
and 2009 and the JSE's Socially Responsible Investment (SRI) Index in 2007,
2008 and 2009.