Earnings Transcript for MONDY - Q2 Fiscal Year 2021

Michael Powell: Good morning, and welcome to Mondi's Half Year 2021 Results Presentation. I'm Mike Powell, the Group CFO, and I'm joined today by Andrew King, the Group CEO. [Operator Instructions] So with that, without further ado, I'll hand over to Andrew.

Andrew King: Thanks, Mike, and good morning to all of you, and thank you for joining us. Against the backdrop of a patchy economic recovery, we continue to deliver strongly as a business and, importantly, position ourselves for sustainable growth well into the future. I'm going to provide you some of the highlights of the first half before passing back to Mike for an overview of the financial performance. I'll then go into some more detail on the business unit performance and our trading environment before finishing with a short overview of progress on our various key strategic initiatives. After that, of course, Mike and I will look forward to taking your questions. As I said, last year was characterized by significant volatility in the markets that we serve, from panic buying of some of our products to significant declines in others as whole end-use segments were shut down at the height of the national lockdowns. By contrast, in the first half of this year, we've seen a general recovery in demand across most of our segments, some cases to such an extent that it has caused significant tightness in supply chains. This has also resulted in strong cost inflation, which has affected a number of our key inputs. Against this backdrop, I'm very pleased by the performance we delivered in the first half. We've got strong sales volume growth across most key markets, rising prices and effective cost control. This, I believe, has established real momentum in the business from the lows of the second half of last year, which, of course, is reflected in the strong sequential progression. Importantly, through all this volatility, we haven't lost sight of the future. Our philosophy of investing through the cycle continues to hold us in good stead. In the period, we made good progress with the completion of the Olmuksan acquisition in Turkey, delivering on our capital investment program and approving further expansion investments in our fast-growing corrugated business. Similarly, sustainability remains at the center of our strategy, and I'm delighted by the progress we have made in embedding our Mondi Action Plan 2030 since its launch earlier this year. I'm particularly pleased with the progress we have made in developing our new innovative, sustainable products for our customers by leveraging that unique platform of ours based on our principle of paper where possible and plastic when useful. I'll come back to highlight a few of these examples later. As I said, I'll now hand over to Mike to take us through the financial performance in a bit more detail. Mike, over to you.

Michael Powell: Thanks, Andrew. So let me take you through the numbers for the first half of the year. On Slide 7, you can see the key metrics of the income statement and return on capital employed. We delivered a strong performance in the half year, up sequentially on all key profitability metrics. Revenue was up 5% on the prior year, with strong volume growth in Packaging and Uncoated Fine Paper, all underpinned by our broad range of innovative, sustainable packaging solutions. Average prices were higher year-on-year and sequentially, and Andrew will cover this in a bit more detail later. As you can see, underlying EBITDA of €709 million was up 15% sequentially, and there is good momentum as we go into the second half. Looking now at the main drivers for the year-on-year underlying EBITDA movement on Slide 8. And here, you can see, as I previously mentioned, we saw strong volume growth in our Packaging and Paper businesses, further supported by a positive contribution from previously completed investment projects. Selling prices were higher across the business and, in particular, in the corrugated packaging value chain. I'm also encouraged that pricing at the end of the first half was higher than the average in the period, with further price increases being implemented in the third quarter. Input costs were up, with significantly higher paper for recycling, resins, energy and transport costs. It's worth noting paper for recycling and resin costs, which made up a large part of the movement that you see, stabilized towards the end of the first half but at those elevated levels. Fixed cost inflationary pressures were mitigated by our ongoing cost-reduction initiatives. Currency movements had a net negative effect on our results, most notably due to the negative impact on certain of our export-orientated businesses of a weaker U.S. dollar, coupled with the translation losses from a weaker Russian ruble and Turkish lira relative to the euro. If currencies stay where they are today, for the rest of the year, we would expect a limited impact in the second half. Additionally, the noncash forestry fair value gain was €11 million lower than the prior year. Based on current market conditions, we expect it to be lower in the second half than in the first. So overall, we ended the period with underlying EBITDA of €709 million, which included an impact of planned maintenance shut costs, €40 million higher than the prior period, which, as you know, is partly captured in volumes and partly in costs on the waterfall chart that you see. So turning to the movement in net debt. You can see the continued strong cash characteristics of the business. On the left-hand side, you can see the EBITDA that I've just talked to and then the seasonal investment in working capital. We continue to invest in the business through the cycle, supporting value-accretive growth. And our capital expenditure for the period was nearly €300 million. That equates to about 140% of depreciation. We expect capital expenditure for the full year of between €600 million to €700 million, and we continue to further evaluate capital investment projects for growth in the packaging markets where we operate. During the period, we also completed the acquisition of a 90% interest in Olmuksan, strengthening our position in the fast-growing Turkish corrugated market. We paid tax of €80 million and interest of €60 million, giving rise to the €140 million that you see. We're also pleased to have paid the 2020 final dividend, resulting in cash repatriated to shareholders of just over €200 million. We ended the period with net debt of €2 billion, retaining financial strength in the balance sheet, which you can see on Slide 10, with a net debt-to-EBITDA ratio of 1.5x at the end of the period. In June, we entered into a new €750 million, 5-year revolving multicurrency credit facility agreement to refinance the existing €750 million facility that was due to mature in July 2022. The new RCF incorporates key sustainability targets linked to our MAP2030 framework, aligning our funding with our sustainability goals. The facility has no financial covenant, which I believe further reflects external stakeholder views of the strength of our business through cycle. At the end of the period, the group had a strong liquidity position, providing strategic flexibility, of around €1 billion. Lastly, to our technical guidance. I won't go through all of these as I've already touched on many of them in the preceding slides and they're largely unchanged. Our capital expenditure projects continue to deliver, and we continue to expect a €50 million incremental EBITDA contribution in 2021 as we ramp up our machine conversion at Štetí and the new Ružomberok kraft top white machine, together with a number of projects across our converting plant network. We now expect the impact of planned maintenance shuts to be around €150 million for the year, with around 1/3 already incurred in the first half and 2/3 expected in the second half, mainly the result of extended project-related shut at Richards Bay as part of the mill's ongoing modernization. So with that, let me hand back over to Andrew to take you through the operational and strategic review. Thank you.

Andrew King: Thanks, Mike. As I said, I will now look in more detail at the four business units, starting with our Corrugated Packaging. We delivered another strong performance in Corrugated and are seeing ongoing good momentum in the business, supported, as we've always said, by the strong structural demand drivers of e-commerce and sustainability. Well, as you'll see, EBITDA was flat year-on-year. If you do adjust for the timing of the maintenance shuts, we are seeing an upturn in the underlying profitability. Particularly pleasing is the ongoing very strong demand we are seeing across our product range. In containerboards, we are capacity-constrained, with this demand typically benefiting us more through price in the short term, while in corrugated solutions, we achieved significant 15% growth in volumes. Last year was very much a story of e-commerce-led growth, offsetting the weakness in industrial and other applications. This year, by contrast, while e-commerce does continue to grow, we are also seeing significant recovery in other end-use segments. This growth is, of course, further supported by our backward integration at the time of paper shortages, together with the ongoing investment program in our converting network and the focus on delivering innovative products and services of the highest quality. You'll know that containerboard prices rose sharply through the period. And on the back of the very tight ongoing market situation, we are currently implementing further price increases in the third quarter. We, of course, at the same time, have seen a rise in input costs, most notably in paper for recycling, energy and transport. We look to mitigate these cost pressures wherever possible through our tight cost control. Finally, we're obviously delighted to welcome the Olmuksan team to Mondi in May, significantly strengthening our position in the fast-growing Turkish corrugated market. Moving then on to our flexibles, which continues to deliver strongly. As you can see, year-on-year underlying EBITDA was down, but again, saw a strong sequential improvement as pricing and volumes recovered from the lows seen towards the back end of last year. Encouragingly, we are seeing a very strong demand picture across our product range, again, driven by consumer, building materials and e-commerce applications. In paper bags, this translated into an 11% growth in volumes, with all regions seeing good growth. Consumer flexibles was working against a very strong comparable period, highly impacted by significant stocking of consumer goods at the time of the initial COVID lockdowns. It nevertheless delivered another good performance, illustrating again the resilience of this business to changes in the business cycle. High demand, coupled with supply constraints, is continuing to drive sharp increases in spot kraft paper prices. As we have previously noted, though, the impact on our profitability is somewhat delayed due to the annual contract nature of much of our business in both sack kraft and paper bags. We'd expect to see the full effect of these increases come through next year as contract business is repriced to fully reflect the prevailing spot prices. In Engineered Materials, it was pleasing to see the strong demand recovery in functional papers and films across a range of industrial and specialized end users. Similarly, we have made good progress in stabilizing and realigning the portfolio of personal care components in response to what is a declining volumes in a mature product. We also continue to develop opportunities to leverage our coating technologies to develop new sustainable packaging alternatives to replace plastics. I'll come back to a few examples of some of these great products we have developed by leveraging this knowledge. In Uncoated Fine Paper, we see it's been very encouraging to see a very strong recovery in demand for most of our fine paper products following a very weak second quarter of 2020. While overall industry demand is not back to precrisis levels and we certainly subscribe to the view that there has been some permanent decline in demand, our business is currently seeing a good order situation across all operations, supported by clear market share gains. If I look at this by way of example, in Europe, we estimate that overall demand was down around 6%, while our volumes were up around 20%. These market share gains reflect the fact that our customers value the strength and stability of a committed long-term supplier offering a broad product range, excellent customer service, cost competitiveness and financial stability. Again, I'll come back later in the presentation to recap on some of the strategic positioning of our fine paper business. On the back of demand recovery and the ongoing squeeze on nonintegrated producers from rising pulp prices, we are now starting to see upward momentum in uncoated fine paper prices following the price erosion seen over the course of the last year. We've implemented price increases in the second quarter, with further to come in the third quarter. EBITDA comparability with the first half of the last year is impacted by the €11 million lower forestry fair value gain noted by Mike and the timing of the maintenance shuts. Stripping out these effects, we would be up year-on-year. If I look into H2, while we are encouraged by the upward momentum in pricing and demand, you should, of course, note the long extended shut at our Richards Bay operations as part of that comprehensive mill modernization program. As you all know, we also suspended operations in South Africa in July during a period of civil unrest in order to protect our people and assets. I'm very pleased to report that we are back in full operation with no damage done to our production sites. If I move then on to our strategy, and I'll take you first to our strategic framework, which you'll all be familiar with. I believe we have made good progress during the period on all aspects of our framework. But in the time available, I'd like to just provide some detail on 3, namely, sustainability, investing in assets with cost advantage and partnering with customers for innovation. Earlier this year, we launched our MAP Action -- Mondi Action Plan 2030, centering our sustainability efforts on circular-driven solutions created by empowered people taking action on climate. Each of these focus areas is underpinned by clear commitments and targets. I'm excited by the progress we are making in embedding this action plan into the organization. We are well underway in developing detailed road maps to ensure delivery on our commitments, while clearly in a number of areas, we are showing tangible progress off on a really strong track record. Coming on to this, this slide clearly evidences that track record. We highlight here the progress made over many years, including in safety, greenhouse gas emissions, fiber sourcing and waste to landfill, all achievements we as a group can be rightly proud of. And of course, this provides a great platform for further progress over the next 10 years. Coming into another important facet of our strategy, what we call investing in cost-advantaged assets to support the structurally attractive markets that we operate in. I want to first remind you of how we think about growth in our respective business units. We continue to see excellent growth opportunities across our range of packaging businesses, which currently contributes around 75% of group earnings. We've supported this growth with meaningful investment, over €1.7 billion above depreciation invested in these businesses over the past five years. But importantly, we continue to progress further growth projects in all our packaging segments, and we certainly see plenty more opportunities to come in the future. In Uncoated Fine Paper, our strategy is to invest at a level that retains our highly competitive positioning in our chosen regional markets. While in Engineered Materials, we look to develop specific niche positions where we believe we have a competitive advantage. In total, we've invested around €1.9 billion above depreciation over the past five years, of which around 90% has been directed to that fast-growing packaging segments. The key element of the group's success over the many years has been the ability to leverage that cost-advantaged pulp and paper production footprint. This, of course, continues to be a core part of our strategy. We currently have projects totaling more than €750 million in various phases of development, from recently approved for development through to full ramp-up. These projects will bring highly cost-competitive new capacity, efficiency gains and environmental benefits. We'll continue to investigate further such opportunities where we see that confluence of customer requirements and the right asset configuration and other technical parameters in the mills. As already mentioned, we are seeing strong structural growth in all the packaging markets that we serve. This gives us great optionality to invest behind this growth where we believe we have strong competitive advantage. We've been systematically investing in our converting platform for a number of years now with the aim of enhancing our product and service offering, expanding our geographic reach and improving efficiencies and costs. As you all know, we recently approved further investments on our European corrugated and bags network to support the rapid growth in e-commerce business while we continue to develop our geographic reach in bags, consolidating what is our global leading position. Again, I believe we have further exciting options for growth in these segments both on the organic and inorganic side. As mentioned earlier, I just want to come back briefly to our positioning in Uncoated Fine Paper, which is our main nonpackaging exposure. I mentioned earlier that our strategy is to maintain our competitive positioning in our chosen markets. I'll remind you that we are market leader with cost-advantaged production in our three core markets of Europe, which is -- with clearly a strong bias towards Central and Eastern Europe, CIS and Southern Africa. We continue to gain share in each of these regions as customers value that security of supply, product range and superior customer service that we are able to offer. We also have the option to leverage our integrated asset base to grow in packaging. As you know, our Uncoated Fine Paper production is largely centered around our highly cost-advantaged operations in Slovakia, Russia and South Africa, all of which already produce a combination of products and where we have further options to produce more packaging products. This will result in a very strongly cash-generative business with a privileged asset base and that optionality to grow our packaging offering. Finally then, I just want to touch on another key value driver, which is partnering with customers for innovation. Mondi does indeed have a unique platform, offering paper where possible and plastic when useful. This, I certainly believe, allows us to be a real single source of truth for our customers in their journey towards more sustainable packaging. We bring this together in what we call our EcoSolutions approach, where we seek to drive sustainable packaging through our 3Rs of replace, reduce and recycle. I'm very pleased to report that the momentum really is picking up, and we have seen some great examples of recent product developments spanning our range of capabilities that are really gaining significant traction with our customers. Coming on to a few of those, I'll start with Advantage StretchWrap, which is a great example of how Mondi can partner along the value chain, contributing its deep paper knowledge to deliver sustainable packaging solutions. This brown kraft paper, which we make in our mill in Dynäs in Sweden, has outstanding stretch, puncture resistance and high-tensile strength, which makes it ideally suited to replace plastic shrink film in pallet wrapping. It's made of renewable, responsibly sourced fiber and is recyclable almost anywhere in the world. One customer has already installed this packaging solution. We have more than 10 trials ongoing and a fantastic level of interest across the market. If you think about it, the majority of European pallets are wrapped in shrink film. We estimate that for every 1% of pallets in Europe where Advantage StretchWrap replaces shrink film, we could save more than 10,000 tons of plastic. I've spoken to you about MailerBAG before, which is a highly recyclable, high-quality kraft paper bag designed for e-commerce, which complements our portfolio of innovative corrugated-based solutions. It's easy to open and reclose for product returns, and due to its flexible nature, offers protection without transporting excess air. As a consequence, it saves space in storage and in transit. We are investing to upscale production across six countries. And by the end of 2021, we'll be able to produce around 350 million bags per annum. Moving on then to a corrugated example. And here, we've got a fantastic example of innovation and the versatility of our corrugated packaging developed by our team in Turkey. This 100% corrugated solution eliminates the need for protective polystyrene while packing and transporting boilers, which each way is around 34 kilograms. It's a fully recyclable solution, which also delivers transport optimization benefits. We're, of course, excited by the multiple applications this solution could be used for. Moving on then. Here, I've got an example of a functional barrier paper structure, which can replace complex and recyclable packaging. This product eliminates aluminum and reduces the amount of plastic required. It is 85% paper-based and recyclable in its home market. Additionally, it can be used in our existing -- customers' existing packing lines, which is very important from an efficiency perspective. Our team collaborated with Unilever for more than 18 months to develop this solution. Of course, we are working today on similar projects with FMCGs and retailers in food, pet food and home care applications. Last but no means least, our fit-for-purpose recyclable flexible plastic packaging. Flexible plastic packaging extends shelf life and prevents food waste. The efficiency of this material relative to other substrates you can see is illustrated on the slide. What we are now working towards is making that flexible plastic packaging fully recyclable. We've developed in the last few years a number of mono-material recyclable structures. And here, I include a couple of recent innovations, being our BarrierPack or Flexibox recyclable for pet food packaging, envelope -- for pet food packaging and numerous other food applications. And then you look at the EnvelopeForm, which is a high-barrier film solution, in this case, for cheese packaging. Finally then, just to round off, a reminder of our first half highlights. I firmly believe we delivered a strong performance in the first half. And importantly, we see good momentum going into the second half with strong demand and rising prices across our product grades. Importantly, we continue to invest through the cycle to leverage our platform. And sustainability has always been and remains central to our strategy as we pursue our purpose of contributing to a better world by making innovative, sustainable packaging and paper solutions. Thanks very much. And with that summary, I'll hand you back over to Mike, and we can take your Q&As. Thank you.

Operator:

A - Michael Powell: Thank you, Andrew. [Operator Instructions] Okay. I see we have the first question. The first question over to Cole at Jefferies.

Cole Hathorn: The first one is on the growth opportunities here. You're calling out very attractive paper bag growth over the years and box growth ahead of the years. Could you just give a little bit more on how you're expanding and investing in your converting facilities? I know you've been doing it over the years, but it just hasn't come out on those big CapEx announcements like your paper machines. It's the first question. And then the second question is following up on the StretchWrap that Andrew called out. I mean that opportunity there seems very big. I mean even if you get, say, 5% of the market, I imagine the demand for paper would be even more than the plastic considering it's higher waste. I mean that's over 100,000 tonnes, just 5% of the market. That's almost a new machine for you guys. How are you thinking about the market? And when would we start to see that actively being used?

Michael Powell: Thanks, Cole. Andrew?

Andrew King: Yes. Thanks, Cole. I mean as you rightly say, typically, when we talk about CapEx, the focus is invariably on the big upstream CapEx projects, simply because that is the more capital-intensive side of the business. So the big new paper machine investments and the like and clearly are where the majority of the CapEx will continue to be attracted. But as you rightly say, we are seeing extremely strong growth in our converting operations. And of course, that follows ability to serve those markets through the investment projects we've been doing over a number of years. We've been investing above depreciation consistently for a few years now in the corrugated business and in the bag side, and obviously, also supplementing that on occasion with inorganic investments. Most recently, we obviously bought -- expanded our offering in Egypt with an acquisition in bags. More recently, obviously, we've done greenfield investments in Colombia, which we started up successfully earlier this year. And we're looking at further investments in North Africa on the bag side. So it's an ongoing journey. Individually, each CapEx doesn't -- isn't huge in the greater scheme of things. But of course, collectively, it does add up. So we will continue to invest in that. Clearly, you have more flexibility on your capacity in converting. It is easier to add new capacity, but it's very much dependent on the market development. And we are always cognizant of investing behind the market, making sure we're serving the markets that we want to serve and we are best able to serve given our attributes and, clearly, what our customers are looking for. So yes, we've certainly seen further opportunity for expansion there. We mentioned in the literature how we've been approved further investment in our corrugated network recently to continue the ability to expand, particularly with our e-commerce customers. But of course, there are other customers which are growing strongly as well. So it's an ongoing journey, and we'll continue to look for those expansion and investment opportunities. Just on the StretchWrap, yes, I agree with you, it's a big opportunity. As you -- we try to illustrate there, 1% of that pallet StretchWrap market could be 10,000 tons of plastic. That is more like 15 to -- or probably 20,000 tons of paper because it is a heavier basis weight, obviously, on the paper side. It's always difficult to extrapolate these things because, clearly, there's also a function of being capacity constrained in the near term in terms of the ability to serve that market. We are already serving it through the production in Dynäs. Does it provide opportunity? In the first place, it obviously provides a better mix effect into our business, which is immediately beneficial for us. Can we look to invest further behind it? Clearly, there must be expansion potential across our kraft paper network, not only because of StretchWrap but because of a number of other applications that we are finding for our speciality kraft papers. And we see a very exciting future for that, and we are certainly looking at investment opportunities behind that growth.

Michael Powell: Does that answer your questions, Cole?

Cole Hathorn: Yes. Just one follow-up on that. I mean the opportunities in the kraft paper segments and sack kraft are clearly encouraging. But what does your position as kind of the #1 paper producer and, I suppose, converting network provide you versus competitors to kind of take advantage of these opportunities that arise?

Andrew King: Yes. I mean, clearly, it's a very powerful position. I mean, as the -- I mean, for one thing, given our geographic reach in bags, no one can match that. I think last year was a classic example where there was a real push towards shortening people's supply chain. So people didn't want to rely on big, long supply chains because it's -- the risks were very clear. And so those of us who have the geographic reach to be able to produce locally is an extremely powerful position. And I think what's also critical is that real deep know-how in terms of both papermaking and bagmaking, which we can really bring to bear in those propositions to our customers so we can really inform them on the journey that they are taking towards those sustainable products in terms of what we can do from a technical perspective both in papermaking and the converting. And I think that is an extremely powerful position. And of course, we have that established asset base on the upstream side, which allows us the opportunity to look for further expansions of a brownfield nature, which I think are invariably more value accretive than if you're looking at a potential greenfield sort of investment.

Michael Powell: Thanks, Cole. So on to the next question. Mikael from UBS.

Mikael Doepel: I have two questions, if I may. Firstly, on the Uncoated Fine Paper business. Now as you point to, we see quite a nice recovery in the volumes there and you continue to outperform the market. And the pricing is starting to improve as well. Still, if we look at this business from a historical perspective, if you look at average EBITDA, for example, for 2018 to '19, you did generate around €475 million for a margin of 26%. And last year, we're down to €266 million for a margin of around 18%. Now it is, of course, a recovery from that maybe towards €300 million or so, but it is still quite far away from the levels you generated a few years back. So I guess my question is, what would it take to get back to those levels? Is it realistic to assume that you can get back to those levels? Or is it, as Andrew said previously, an element of permanent demand destruction that kind of keeps you from getting back there? That would be my first question, if you could talk a bit about the path towards recovering in the earnings in that business. The second question would be on the sack kraft paper market, and in particular, the pricing in there. And if you could just shed some light on how we should think about the flow-through on your volumes on the price increase that we have seen for -- I mean, if you look at the [REIT] statistics, for example, there's been quite meaningful increase, especially on the brown sack kraft papers with 2% to 10% increases. So pricing up about 20% now year-over-year on a spot basis there. So I was just wondering if you could talk a bit about how that's going to flow through to your numbers in the second half of this year into 2022.

Andrew King: Yes. Thanks very much, Mikael. And firstly, on the Uncoated Fine Paper side, I mean, as I said in the presentation, I firmly believe what's happened over the last 18 months is that there has been some acceleration in that so-called structural decline in demand. I mean we always typically planned previously for, call it, 1% to 2% per annum structural decline. And of course, that will ebb and flow depending on economic cycles and the like. Clearly, what we saw last year was a much more profound drop, but a lot of that was temporary in nature when people will just sort of close down. And we have seen a strong recovery of that, but we still remain at levels well below -- in terms of the industry dynamic, well below precrisis levels. And I'm certainly a believer that we're not going to see a recovery in overall demand to precrisis levels. Clearly, for us, we do benefit from the fact that, as I said, as the long-term stable supplier in this, and we will continue to be that long-term stable supplier, we are seeing customers coming to us because they value that. And we will continue to be that supplier into the market, and that is benefiting us in terms of market share gains. And hence, the volume recovery we've seen this last year. But if I look at the industry structure more broadly and, call it, industry margins, one has to assume that if you've got that type of structural decline in demand, you have to see a supply side response. Now the good news is we are seeing that supply side response. I mean you would all know that -- about the announcement from Stora Enso a few months ago. That capacity hasn't yet gone out of the market, but we understand they will be closing in Q3, Q4, I believe. So that will have an impact. But we have to see the supply side fully respond to the structural decline in demand before I believe you can get a material structural change, should I say, in the overall margins. But notwithstanding that, we're seeing good volume growth in our business. We're seeing a recovery in profitability. I mean recognizing that profitability is still good, but certainly, it can continue to get better. When can I get back to, call it, precrisis levels? I think you have to see more capacity closures. And I certainly believe that, that is not just to wish without foundation. There is still a lot of capacity even with the modest price increases we're seeing at the market who are under deep pressure, as you know, with pulp prices having gone up. The unintegrated players, in particular, are feeling squeezed. And I suspect there probably will be more closures. But I think you have to see that happen before you can see that sort of structural change in the margins in our business. But notwithstanding that, we're seeing good recovery. Sorry. And then on the sack kraft on the pricing side, yes, it's always complicated this because clearly, unlike, for example, on the containerboard side, we do have a lot of fixed price contract business both in the paper side and also in the bag side. Our rough rule of thumb on that is 1/3, 1/3, 1/3. In other words, 1/3 of our business is annual contract business, 1/3 of it is what we call semiannual contract business and 1/3 of it is floating price. And that's whether you sell a ton of kraft paper as a bag or into the market directly. So what happened this year was we saw pricing come off through the course of last year, the spot price that is. And then the annual contract business was priced off that relatively low spot pricing. There's only subsequent to that into the back end of Q1 this year that we started to see a rise in the spot pricing. That, as you rightly say, has moved up quite sharply now. But now we -- it will take some time to feed through in terms of our pricing dynamics because of that lag effect created by the annual contract business. So that's clear.

Michael Powell: Okay, Mikael? Thanks for your questions. On to -- the next question comes from Lars at Crédit Suisse.

Lars Kjellberg: I just want to focus a bit on cost inflation. Clearly, you broadly matched your sales price increases in H1. Just some clarity on -- I suppose part of that is actually a function of higher maintenance costs on a year-on-year basis. But how should we think about the underlying cost inflation as we're heading to H2? And the sales price component, of course, you're talking about higher exit rates and incremental price movements essentially across your portfolio. Is it fair to assume you're going to see prices outpacing costs? And certainly, on the back of your comment you made, the stabilized inflation towards the end of the first half. I also want to talk a bit about your Flexible Packaging offering, especially the resin side. Andrew, you talked about reducing where possible and that sustainability debate. Is that one that -- where you see equally strong sort of momentum in that sustainability trade in comparison to your, I guess, in a way, easier wins on the fiber-based packaging?

Michael Powell: Thank you, Lars. So let me start just with the input costs. If I split the input costs down, Lars, at Q1, I said if I take OCC at Q1, the OCC costs were rapidly escalating at that point, and we saw that continue through the period. So OCC costs were about €100 a ton higher through the period, and we use about 1.5 million tons on an annualized basis. That differential of 100 tons actually plays into the second half as well. So I think that 100 tons is a good number for the year. And therefore, you will still see -- whilst they have stabilized at some point, you will still see the half two on half two impact. And indeed, you will because the exit rate of it was higher than the average for the first half. You'll see some of that inflation still play through half two on half one. On resins, which was the other call-out at Q1, that has played out. You've seen the indexes for resins up some 50% at times from the low point. And again, we saw resin inflation. Again, those have stabilized as we exit the period. And therefore, into half 2, you'll get the same averaging effect. The one thing I would remind you on resins, of course, is that does get passed through. There's a delay as we pass that through in some cases, but there is a pass-through mechanism in a large part of the business on the resin side. Energy and transport, I think, is well documented, so those have increased. And energy costs and transport continue to increase. And then I think on the rest of our cost base, Lars, I would probably couch it at -- we're probably 3% to 5% second half over first half on other inflationary costs. And then wage inflation, again, whilst it's a large topic, clearly, in the Americas, unavailability of labor, we're not yet seeing that in the large part of our business at this point. But clearly, we keep an eye on that, on wage inflation.

Andrew King: Yes. And just on that question of the -- call it, the sustainability trends in the resin-based flexibles, as you referred to them, I think -- I mean the answer is the momentum is strong across the piece. And I think in the context of the consumer flexibles area is probably where the greatest level of innovation opportunity sits. Some of those examples we presented is really taking our substrate knowledge in paper, combining it with our substrate knowledge in coating applications and the like, and then in turn, leveraging our understanding knowledge of the customer that we have in our consumer flexibles areas to really develop all of these sustainable solutions, be it the functional paper side of things and/or the fully recyclable plastics opportunities. And this is a huge discussion, as you could imagine, with all our customers, those primary retail -- or primary packaging customers of ours in consumer flexibles. And yes, I think there's a huge amount of opportunity there. We're putting a lot of effort behind it. And we have a natural advantage over others, simply because we know all about both paper and the resin opportunities and what they're capable of, and we're bringing those together. So yes, I must say I'm very excited by this. And it's something that a year or two ago was talked about and understood that it was coming. But now we really feel it, and it's got a lot of momentum. And I'm sure, if you go to the supermarket these days, you will notice, if you buy your -- everything from snack bars to smarties in their packets and things like that, you will find them in paper-based solutions and -- but it's paper-based solutions made by our Consumer Packaging business. It's not made by our -- the traditional paper bag producers. So yes, I think there's a lot of opportunity there, and that momentum is only just starting.

Michael Powell: Okay, Lars?

Lars Kjellberg: A quick one, just on Olmuksan. Can you say anything about your financial contribution of that business? And can I get thoughts on any potential synergies and integration efforts that you -- or benefits that you talked about when you announced the deal?

Andrew King: Yes. I think just on that, I mean, it's certainly going very much according to our plans on the acquisition side. We're delighted with the team at Olmuksan. Obviously, we're happy to have acquired it at a time when the market is also conducive. Sometimes you get lucky on that side of things, but it's -- and the team has joined us, and we are in the throes of, obviously, the integration process, respecting the fact that it's obviously also a listed company. And you can see the numbers as reported. But yes, delighted with the acquisition, and it really gives us a very strong position in what is a fast-growing corrugated market in Turkey.

Michael Powell: Thank you, Lars. Next question comes from Wade at Avior Capital.

Wade Napier: A couple of questions from me. I just want to sort of understand the strategy with regards to the Corrugated Packaging and the converting side of things. There seems to be more emphasis on it now relative to the larger upstream projects. And in this business, as I understand, it's largely a regional corrugated player. And so I'm just trying to understand what is Mondi's competitive advantage in this business relative to your other converting business, i.e., the paper bags business where you've got a global footprint. So I mean Andrew did speak about how the group benefits from that global footprint. How is this now different to corrugated where you're really a regional player? And I mean, further to the corrugated growth that you are seeing, I mean, 15% in the first half, what sort of cadence should we expect in the second half considering that the benefits of a recovering industrial package -- the industrial packaging side of things is probably going to start exiting the base? So can you give us a little bit of a flavor of what you're seeing so far in the second half of the year?

Andrew King: Yes. Thanks, Wade. I think as regards to the corrugated strategy, I mean, firstly, I mean we've always had a good corrugated business, and it continues to get better. And maybe we're just talking about it a bit more. But we're delighted with the performance of that business, as you can see from the volume growth and the underlying profitability growth that, that underpins. Clearly, we are a regional player in corrugated but an extremely strong regional player. So we really operate in three key regions. Poland, which is -- as you could imagine, is a fast-growing market inherently, and we are a leading player in that market, clearly backed up also by our extremely strong backward integration position. Central Eastern Europe, which is really comprises Southern Germany, into Czech Republic and Austria, also a very strong regional presence there. We have quite a lot of what we call heavy-duty business there, selling into automotive and the like, extremely strong position what is effectively a niche market within corrugated. And then we have our Turkish presence, which, as I just said, with Olmuksan has cemented our position as a clear leader in that market. And we're delighted with what is a high-growth market. So I think there's no sort of mutually exclusive strategy in regards to corrugated. We certainly believe being a very strong player in our selected regions doesn't give us any disadvantage relative to other players who might have a broader regional or broader global or pan-European strategy because there's a lot of very strong regional business that you can go after in corrugated. It is a very different dynamic, the corrugated market, to the bags market. Bags on a global basis is a relatively small niche market. I mean sack kraft global market is probably a 4 million, 5 million ton market. As you well know, corrugated or containerboard Europe is 30-odd million ton market. So it's a very different dynamic, so I don't think one can equate the 2. But clearly, we have good scale in the markets that we serve in corrugated. And I think that's manifested in that very strong growth that we see in that market and, more importantly, the very strong returns we're getting out of that business. So we're delighted with that business. We'll continue to grow it. We certainly see opportunity for further growth, both organically and, hopefully, inorganically if the opportunities arise. And of course, we also have opportunity to backfill that with containerboard if the circumstances allow, but always on the basis that the containerboard itself needs to be very strong, low-cost production because we firmly believe that, that is always going to be a key value driver. And sorry, on the H2 growth rates, I mean, we're only early into H2. But the simple message is the markets remain very strong here and we continue to grow. I think the simple problem that everyone has, frankly, is access to paper. Even as an integrated player, our corrugated guys are crying out for more paper right now. And if anything, the market as a whole is capacity constrained, but we continue to see very good growth rates in corrugated. As I mentioned, e-commerce continues to be, obviously, a very important driver, but we've also seen a recovery in what I'd call the traditional uses of corrugated as well. And those two factors combined mean that the market continues to be very strong.

Michael Powell: Does that answer your questions, Wade?

Wade Napier: Thanks, Andrew. Thanks, Mike.

Michael Powell: Thanks, Wade. So I'll take one more from the telephone and then move on to a question we have on the webcast. So next caller is David, David from Goodbody.

David O'Brien: Just a couple for me, please. Firstly, on sustainability. And as that team has evolved over the last number of years, can you share with us what you think the proportion of your packaging business in total is now directed specifically into sustainable products? Like what is the penetration being within your own business? And as part of that evolution, how have the pricing discussions with those type of products different from more traditional packaging solutions? And is there any difference between fiber-based or coated applications? And then secondly, you've just talked about the tightness we're still seeing in containerboard across Europe. Do you guys still see upward pressure on pricing there? Or how should we think about that kind of nearer term?

Andrew King: Yes. So firstly, David, on the question of, call it, how much of the portfolio is with sustainable products, it's always extremely difficult thing to measure because just to define what is sustainable is very difficult. I always think also with sustainability more generally is you have to have a combination of solutions and not any one solution. But if you define it as simply fully recyclable products, for example, in -- something around 80% of our portfolio is fully recyclable. The component that isn't is, of course, things like the engineered materials space, those personal care component areas and some of the multi-laminate flexibles offerings. But of course, in themselves, for example, that flexibles offering uses a whole lot less raw material than the alternative solutions, be it metal cans or glass or the like. So they still offer a big sustainability advantage. What we are obviously pushing from an innovation perspective is making sure all of those things can then be fully recyclable as well, and that's where a lot of the development is taking place. And we're making very good strides in that regard, which is in itself exciting. I think on the pricing side of things, clearly, a lot of the solutions that are, call it, incumbent solutions are there for a reason in that they offer functionality at a very attractive price point. A lot of this, call it, sustainable solutions have typically been more expensive than the existing solution. But frankly, that's no longer really a discussion with our customers. They are seeking those sustainable solutions. As you know, they've made a lot of commitments themselves. You can see the big FMCG customers, in particular, around pushing the sustainability agenda. And clearly, they need our help in that regard. And even if these products are costing more than the -- call it, as I say, the incumbent product, they are certainly wanting them because I think they see them as a competitive advantage. Now you can sell that as a value proposition to their customers in turn. So we're not seeing that as an inhibitor at all. And clearly, where we can get ahead of the game in terms of our innovation and I think, as I say, I can't reiterate it enough, I think with the platform we have, we have that ability to get ahead of others in terms of our ability to innovate with those combining the different substrates or combining the paper technology with the know-how in our primary retail packaging. I think there's -- there are great opportunities, and we're seeing that. Hopefully, some of those examples I illustrated in the presentation bear that out. And I apologize I didn't get the last question. If you could maybe just repeat that, David.

David O'Brien: Yes. Just in terms of -- you've commented on how tight containerboard markets remain. I guess, do we still see upward pressure on pricing there?

Andrew King: Yes. I mean markets -- as I say, I can't stress enough, I mean, markets remain very tight. I think there's some price increase initiatives at the moment in the market. I have every confidence that they will go through. I think the market is sufficiently tight. The problem challenge, frankly, is availability of paper. I think everyone's maxed out on paper production, all the producers, and there is a scramble for volume. And this is not a stocking thing or anything like that. There's no stock in the system. It's underlying demand which is driving this.

Michael Powell: Does that help, David?

David O'Brien: Thanks very much guys.

Michael Powell: Thank you. So if I move to a question from the webcast, the -- it is from James Twyman at Prescient. And Andrew, James is asking if you could talk around whether you're seeing the same positive developments in terms of demand in Russia as you are seeing in Europe.

Andrew King: Yes. Thanks for the question, James. I think in Russia, clearly, our main exposure is on the uncoated fine paper side, and we do obviously also sell some containerboard and newsprint into Russia. And the short answer is, yes, we're seeing a strong pickup in volumes in our Russian business, if you look at the year-on-year comparator. So yes, the short answer is yes.

Michael Powell: And James has a second question as well, Andrew, around the idea of CapEx for 2022. And let me take that one. I think it's a bit early to call 2022. I think you can assume, James, we invest through cycle. Clearly, we'll take note of where markets are, but I think we'll need to get a little closer to 2022 and understand the world, but you should assume that our strategy remains unchanged. Andrew has outlined it very nicely today. We'll come back to that guidance for 2022 later. I've got another telephone call from [Sean] at [Chronics]. Sean , over to you on the telephone. Thank you.

Unidentified Analyst: Just in terms of -- going back to your sack kraft pricing. So just -- is it fair to assume that H2 should have a sort of base load of 67% of the price increase filtering through and then by Q1 next year the full amount? And then just my second question. If I look at Slide 24, just interpretation of the -- I guess the potential upside into packaging. Is that a shift from uncoated wood-free? Or is that in addition to the sort of capacity that could potentially be added down the line? And then third question, in terms of your net long pulp position. I think that's been reduced from 350,000 tons to 250,000. Is that on the back of a much stronger uncoated wood-free performance than expected? And then I guess just last question. In terms of corrugated, sort of your commentary on kraft paper, when do you see this sort of scenario easing up?

Andrew King: [Sean], you're too quick for us. Just on the sack kraft, so the first question, and I'll take the questions I caught there. But the sack kraft question, I mean, in rough terms, yes, I mean, I say in rough terms because we always have to be -- caveat that sort of guidance -- well, heavily caveat that guidance because it is a rough rule of thumb. But yes, I mean, we should start to -- we will certainly see into the second half some positive effect of the price increases we're seeing in the spot markets now. And then the full effect will come through in next year. And it's of that order of magnitude. Yes, it's maybe even slightly understating how much would -- one would expect to come through the new year. All, of course, predicated on the fact that the current market conditions prevail at the time of those key price negotiations into the new year, which is obviously still, what is it, six months away. I didn't quite get the second question. On the issue of the pulp positioning at 250,000 versus 350,000. Yes, it's a function of a couple of things, I mean, the most important being -- one of the reasons why our pulp long position is reducing is because if you recall, the new paper machine in Slovakia utilizes some of the pulp that we were putting on a pulp dryer. And so that forward integrates the pulp. The good news on that front is that, a, we're ramping up faster than we had anticipated at the time of estimating that 350,000 ton long position. And secondly, we're using more of the pulp. In other words, we're selling the higher-grade product than we thought when we took a more cautious view in our planning around the mix effect of the new machine, i.e., we thought we'd produce more of the more recycled product and less of the product using the virgin pulp. The fact is the market is wanting the higher-grade product, and we're delighted to serve that because, obviously, it's a better margin for us. And so we are producing more of that. So both from a technical perspective and a market perspective, we are driving more usage of that pulp for making our kraft paper. And then on the other side of things, we've obviously got some production disruptions. You would have known we had a fire in our Frantschach mill. And fortunately, we're able to get back to full production of the kraft paper, which, as you can imagine, we are prioritizing. There is a pulp dryer there which we're not able to fully utilize until such time as we fix that production issue or fully repair the damage done by the fire, which will be in the third quarter of this year. And for those reasons, we adjusted the expectation for the full pulp outlook.

Michael Powell: So [Sean], I know you had a fourth question, which neither of us captured and whether we've answered your first 3. So back to you. Just remind us of your fourth question and anything we haven't covered.

Unidentified Analyst: Okay. Excellent. So there were actually two more. So the first one that we skipped was in terms of the uncoated wood-free asset base. I think in Slide 24, you obviously allude further optionality in terms of packaging. Now is that sort of switched out to sort of uncoated wood-free capacity down the line? Or is that an addition of paper packaging or unless -- or maybe I've missed the boat, if you could just let me know on that. And then just lastly, obviously, the containerboard story is very tight at the moment. I mean stocks across the supply chain are pretty tight. And that doesn't seem to be easing anytime soon, especially on the kraftliner side. I mean we -- when do you think this sort of -- as Andrew [indiscernible] before paper is going to stop. I mean is that like a H1 story next year? Or are you able to give any color on that?

Andrew King: Sure. So firstly, on the, call it, optionality around that uncoated fine paper production base, yes, I mean, I remind you of the fact that -- I mean when I talk about our uncoated fine paper production base, the key assets there is Richards Bay in South Africa, which makes market pulp and containerboard. It's not even a fine paper assets, to be honest. Clearly, some of that pulp goes into making fine paper down the road in Merebank largely for the domestic market, and that's a very profitable business for us. Clearly, that does provide optionality in due course. The focus right now is we've got this extended shuts later this year, and we're modernizing that mill, and we will stabilize that operation and make sure that it reaches its full production potential, which gives us additional output. In Slovakia, we've already, as you know, invested in PM19, the new containerboard machine. And certainly, in the near term, the focus is optimizing that and ramping that up to full capacity, which gives us more output there. In Russia, which is the other big contributor to our Uncoated Fine Paper profitability, clearly, we see -- I mean it's already a multifaceted mill producing uncoated fine paper, producing white top containerboard and producing pulp, a lot of softwood pulp also for softwood applications. Clearly, that gives us a lot of levers to pull. I believe there's opportunity on both sides, if you -- of that -- both in terms of expanding these operations for more packaging, not necessarily converting uncoated fine paper. At the same time, there's also optionality to convert some of the uncoated fine paper if the markets don't require that fine paper. But the simple message right now is they do require it, and we're selling it very profitability -- profitably into their home market. So the options are both conversions and/or expansions, but we continue to assess both and, obviously, also a function of how the market looks. The issue of when does this current tightness in containerboard alleviate, I don't think anyone can really answer that. I think the only thing I can say is we can't see it at the moment. Clearly, our order situation is extremely strong. We simply can't fulfill everyone's needs. And we're not seeing any softness or insight at the moment. So I think one gets into the realms of prophesying if anyone really knew when that might happen. All I would say is we certainly believe in the strong structural growth in this market. I mean, clearly, it's been exacerbated in the short term by the, call it, rebound effect of -- following the COVID unlock. But I think that the e-commerce effect is not going to go away, and the underlying structural drivers of both e-commerce and sustainability are very much intact, and they're not -- so that continues. I can't see that's alleviating at all. On the supply side, there is some new supply coming on over time. I mean there's new supply has been coming on this year, but it's been very quickly absorbed into the market with limited effect on the, call it -- just how tight these markets are. So it's not -- certainly, I don't see it anytime soon.

Michael Powell: Okay, [Sean]? Thanks very much. And conscious of time, I'll move to the last question, which is a webcast question. It's another one for you, Andrew, I'm afraid. So it's from Ross at JPMorgan. And it's really, Andrew, around, can you give some comments and color around the downstream volume growth by segment? So what are the drivers, for example, e-commerce, consumer, industrial? And how has that evolved sequentially?

Andrew King: Yes. Sure, Ross. I think the main message here is if I look at the box business, last year, it was very much a story of very strong e-commerce growth for all the obvious reasons. I mean everyone was locked away at home. So firstly, you couldn't go and buy things from bricks-and-mortar shops. And secondly, there was -- your discretionary income couldn't be spent on services and holidays and the like. And that undoubtedly had a big impact on the e-commerce side from a positive perspective. But from a negative perspective, clearly, a lot of industrial applications, other forms of retail, et cetera, were negatively impacted. So net-net, I think the industry as a whole is probably up 2%, 3% or something like that in Europe last year, which is actually a very strong performance when you consider the economic backdrop at the time. This year, you've seen a continuous -- a continuation of that strong e-commerce demand, not quite as rampant, should I say, as it was last year, but nonetheless, still very good, but -- and off a higher base than it was last year simply because of the rapid growth over the last couple of years. On top of that, you've seen a recovery. And as I said earlier, the more traditional uses, everything from the industrial, so things to the consumer durables and the like, and these have all come back quite strongly. And that's -- collectively has led to very strong overall market growth. And as I say, I'm delighted that we're taking more than our share of that because of our very strong offering and being able to grow faster. So it's really -- as I said, it's a combination of now e-commerce plus all these other things coming through. That's particularly on the box side. On the bag side, again, we are seeing the traditional uses, be it cement. I'm sure those of you who maybe follow the cement industry will have seen the cement producers are coming back very strongly. And clearly, as customers of -- or as a supplier to them, we are seeing the benefits of that. So across -- particularly in the Middle East, North Africa, these sort of regions which are very cement-exposed from our perspective, you're seeing that recovery there. In Europe, it's all about people building their houses and things, and there's a lot of that going on. I'm sure when people have followed the house builders and things, they're doing extremely well at the moment, and we are suppliers to that. So those traditional uses are coming through. But what's also very exciting for me is the fact that you are seeing new demand sources. I mean I mentioned in the presentation the e-commerce bags, those are growing very strongly, and we're seeing real volume coming through there. And all those other consumer applications as well. When you see bag, it was -- for a while, you just saw sugar and flour and these sort of things in paper bags. But more and more, other applications are going back to paper, and you're starting to see that reflected in our bag volumes as well. So I think it's an exciting story both in terms of, call it, a cyclical recovery of the traditional uses plus a lot of these additional new uses driven by the sustainability agenda.

Michael Powell: Okay. Thanks, Andrew. So we have no more questions. I'd just like to thank you all for your time, your interest and, obviously, your questions this morning. Thanks very much.