Earnings Transcript for MONDY - Q4 Fiscal Year 2020

Operator: Good morning, and welcome to the Mondi 2020 Full Year Results presentation. [Operator Instructions] I must advise that this conference is being recorded today. And with that, I would now like to hand the conference over to Mondi Group's CEO, Andrew King.

Andrew King: Good morning, all, and welcome to the Mondi 2020 Full Year Results presentation. I am Andrew King, Group CEO, and I'm joined by Mike Powell, our CFO. In this most challenging of years, I'm happy to say that the group has demonstrated its resilience in a number of ways, including our financial, operational and sustainability performance. I'm going to provide you with some highlights before passing on to Mike for an overview of our financial performance. I'll then go into more detail on the business unit performance and trading environment, followed by an overview of progress on key strategic initiatives. After that, we look forward to taking your questions. It is clear that this past year has tested us like no other, the safety and health of our people is always a priority, but was brought into even sharper focus. At the same time, our customers and other stakeholders rely on us to continue supplying products and services that are essential to their supply chains. And of course, we will also continue to deliver to our shareholders. I'm delighted to report that we have delivered on all these measures, and I look forward to showing examples as we go through the presentation. In uncertain times, there's also a danger of becoming too short-term focused. Here again, I believe we have done exceptionally well to address both the short-term needs of our organization and our stakeholders. While ensuring we are positioned for long-term sustainable value-accretive growth. Finally, we recognize -- we are a recognized leader in sustainability, which is embedded in our purpose, strategy and culture. This past year has demonstrated how important sustainability is to the future of our industry and, in fact, any organization, giving us the added impetus to continue on this vital journey. If I move then to the financial highlights, I'll remind you that through 2019 and into early 2020 in a pre-pandemic world, we were seeing a downturn in the pricing cycle for many of our key products. This was, of course, exacerbated by the pandemic and associated lockdown measures, negatively impacting some markets, while in turn vesting others. Given this context, I'm very pleased by the robust financial performance we delivered. Our excellent cash generation was a particular highlight. With cash from operations down only 9% on a very strong prior year performance, evidence, once again, of the ability of our business to generate superior through the cycle cash returns. This coupled with a strong balance sheet, allows us to take a long-term view of our investing activities, and we continue to invest well above depreciation in value-accretive projects. On the strength of this performance and reflecting our strong financial position and confidence in the future, we are recommending a full year dividend of $0.60 per share, a 5% increase on the prior year. Of course, we cannot comment on the past 12 months without highlighting the magnificent response of all our people to the challenges posed by COVID-19. We took fast and decisive action at an early stage in the pandemic to protect our people and support our communities, customers and partners, something which is endured as the pandemic has played out. I can again only thank all 26,000 of our employees for the tremendous commitment and endurance they have shown in some of the most trying personal and professional circumstances. At the same time, we continue to make great progress on our sustainability journey, delivering an almost -- on almost all of our five-year commitments ending in 2020. As importantly, we have set an ambitious new sustainability framework for the next 10 years, our Mondi Action Plan 2030. The I'll say more on this later, but suffice to say, it contains a number of commitments, which we know are highly ambitious, but are imperative to our purpose of contributing to a better world. I'll now hand over to Mike to take us through the financial performance in more detail. Mike?

Mike Powell: Thank you, Andrew. It's great to meet all of you, albeit virtually. And I look forward to catching up in more normal circumstances over the coming months and years. I'm delighted to have joined the Mondi team and excited to be part of this successful company that Andrew and the team have been instrumental in shaping. And that success is evident when you look at the group's delivery through the last 12 months, a robust EBITDA performance, excellent cash generation, continued investment in the long-term drivers of the business, whilst paying dividends and reducing net debt by over €400 million. All of this in a challenging trading environment, a testament to the strong business model. With that said, let me take you through the numbers now for the 12 months ending December 31, 2020. And here, you see the key metrics of the income statement. Revenue was lower on the prior year. Strong volume growth in Corrugated Packaging, and Flexible Packaging outweighed lower volumes in Uncoated Fine Paper. These overall volume gains were more than offset by lower selling prices and currency headwinds across our businesses. The revenue changes, along with good cost control, delivered an underlying EBITDA of €1.35 billion, and we continue to generate strong margins above 20%. Pleasingly, we finished the year with strengthened order books in most of our paper grades, benefiting from the strong growth in e-commerce and the continued drive from our customers for more sustainable packaging. Looking now, the main drivers for the year-on-year underlying EBITDA movement, the usual chart on the left-hand side, last year's EBITDA. And on the right-hand side, this year's €1,353 million that I have just referred to. As previously mentioned, our packaging businesses saw strong volume growth across our broad product range, further supported by positive contribution from previously completed investment projects. These benefits were partly offset by lower Uncoated Fine Paper volumes as the widespread lockdown measures during the year impacted demand. Pricing was lower for the year compared to 2019 across all businesses as we entered the year with a lower pricing. We were, however, encouraged by the strengthening order books in the second half of the year, resulting in price increases at the end of Q4 in our unbleached containerboard grades, and we're currently in negotiations with our customers on increases across a number of pulp and paper grades, more of which Andrew will touch on later in the presentation. Input costs were generally lower year-on-year as a result of lower wood, paper for recycling, chemical, energy and resin costs. Whilst lower compared to 2019, these costs remained relatively stable in the second half of the year compared to the first half. Cash fixed costs were flat to turning marginally up in local currency terms with inflationary cost pressures largely offset by our strong cost mitigation programs. We are currently seeing input cost pressures such as higher OCC costs, higher polymer-related prices and generally a more inflationary environment related to oil prices. Currency movements had a net negative impact on our results. The benefit of a weaker South African rand to our South African export-orientated business, was more than offset by translation losses from a weaker Russian ruble and Turkish lira relative to the euro, coupled with the negative impact on certain of our export-orientated businesses of a weaker U.S. dollar, notably in the second half of the year. Moving into 2021, prevailing exchange rates are expected to continue to be a headwind for the group. And lastly, the forestry fair value gain of €27 million was €44 million lower than the prior year, with 2019 being unusually high. Based on current market conditions, we would expect a similar gain in 2021. During the year, net debt reduced by over €400 million to just under €1.8 billion, which you can see on the waterfall, where we show the net debt movement with the main cash drivers. The EBITDA, you can see is the first bar, that's the €1353 million, excellent working capital management and a strong fourth quarter trading led to an inflow of €125 million for the year. We continue to invest in the business with capital expenditure in the year of €630 million, equating to around 160% of depreciation. In 2021, a we expect capital expenditure of between €600 million to €700 million as we continue to invest through the cycle in our cost-advantaged asset base. During the year, we paid tax of €168 million and interest of €82 million, giving you the €250 million that you see. And we're also pleased to continue paying dividends in line with our cover policy, resulting in a cash outflow of €237 million for the year. As mentioned on the previous slide, the cash flow generation led to us ending the year with net debt just below €1.8 billion. This equates to net debt-to-EBITDA ratio of 1.3 times, well below our sole key financial covenant of 3.5 times. We're also pleased that our investment-grade credit metrics were reconfirmed. In April, we issued a €750 million, eight-year euro bond, and extended the maturity of our syndicated revolving credit facility by one year. Furthermore, we redeemed a €500 million eurobond on maturity in September. The group has no short-term debt maturities, and at the end of the year, has a strong liquidity position of €1.2 billion. As a reminder, and a slide which I'm sure you are all familiar with as we have used several times in the past, our cash flow priorities remain unchanged. We have a strong financial position, which has served us well during this unprecedented year. It has given us the confidence to continue investing in our cost-advantaged assets, whilst paying dividends in line with our policy. We continue to evaluate further capital investment projects for growth, leveraging our high-quality, cost-advantaged asset base. To the extent that we have capacity thereafter, M&A or increased shareholder distributions remain options. Lastly, to our technical guidance. I won't go through all of these, as I've touched on most of them in the preceding slides. From our capital expenditure projects, we expect to generate a further €50 million of EBITDA in 2021 as we ramp up our machine conversion at Steti and the new Ruzomberok kraft top white machine, both commissioned in early 2021, together with a number of projects across our converting plant network. We also expect maintenance shop costs of around €140 million in 2021. That's €40 million above the 2020 number. We expect to complete our shuts throughout the year, with about one-third of the impact in the first half and two-third in the second half mainly as a result of our extended project-related shut at Richards Bay as part of the mill's ongoing modernization. So that's it from me for now. And with that, let me hand back over to Andrew to take you through the operational and strategic review.

Andrew King: Thank you very much, Mike. And I'll now go into more detail on the performance of our four business units, starting with Corrugated Packaging. As you'll note, we continue to generate industry-leading margins and returns despite the pricing headwinds seen since the late 2018 peak. I'll provide more detail shortly, but what was particularly pleasing was the very strong volume growth achieved in both our upstream and downstream businesses. This helped mitigate the ongoing pricing pressure seen during the year, although it was good to see some price recovery in containerboard in the fourth quarter and going into early 2021. While there is new containerboard capacity coming into the market over the coming year, this is clearly being matched by very strong demand, both in the domestic European markets and from exports. At the same time, the general global recovery in demand is preventing an increase in imported volumes from the traditional exporting regions. Strong cost control and a general reduction in input costs, as Mike already referred to, further supported our strong performance. If I then come back to the volume picture, you'll see that we achieved very strong growth during the year with containerboard volumes up 3% and corrugated solutions up an excellent 7%. Market demand has been driven largely by very strong e-commerce growth and the ongoing drive for more sustainable packaging. These are trends we see continuing to strongly support demand in the medium term, albeit one should acknowledge that e-commerce demand is in a particular sweet spot at the moment. Traditional bricks-and-mortar retailers are struggling to compete due to COVID restrictions. And entertainment, travel and other forms of demand for consumers' disposable income are currently on hold in most major markets. While reopening of economies post COVID will undoubtedly have some effect on the current ramp in e commerce demand, we certainly believe that it is here to stay. And we are well placed to capture the benefits, as I'll come on to in more detail later. Pleasingly, in most of our core markets, we believe we have also made market share gains driven by a very strong innovation focus, evidenced by another six WorldStar Awards in the year comparable to or better than that achieved by companies with significantly greater scale in corrugated. Security of supply is also key. And here, our integrated model offering secure paper volumes to our corrugated system, and the strong corrugated plant networks in the regions in which we operate are key. We, of course, also continue to invest for growth we are delighted that our new machine in Ruzomberok capable of producing 300,000 tonnes of kraft top white containerboard is now in commercial production. While we continue to invest in expanding our converting network to better serve our customers. In regard to the latter, the recent signing of an agreement to acquire a 90% interest in Olmuksan in Turkey is an important step forward in serving our customers in what is a very fast-growing market. Going into Flexible Packaging. As you can see, it delivered a very strong performance with EBITDA of €519 million, only 4% down year-on-year despite the headwinds from significantly lower kraft paper prices and the knock-on effect on paper bags. Again, we were able to offset these pricing headwinds with good volume gains across our key categories of kraft paper, paper bags and consumer flexibles and strong cost control. Pleasingly, we continue to see benefits from our strategy of developing our kraft paper product mix with good growth in the specialties grades. Consumer flexibles performed particularly strongly, benefiting from strong demand from the FMCG segment, which dominates the end-use applications for these products. This was supported by our ongoing innovation initiatives focused primarily around driving use of more sustainable packaging while still providing the functionality demanded by our customers. I'll come back to some recent successful examples of this later in the presentation. With a strong order position in the third quarter of 2021, supported by good demand and capacity constraints, we are currently implementing price increases in our sack kraft grades. While this has come too late to an influence pricing for the annual contract business in both paper and bags, it is indicative of a more favorable pricing environment, which we anticipate will have an impact on contract business as it comes up for renewal over the course of the year. As mentioned, we were able to successfully grow volumes in all our key segments. The slide shows the very successful growth in volumes in kraft paper and paper bags achieved as a past year, up 6% and 5%, respectively. While we saw good demand in a number of traditional applications for paper bags, and our growth was achieved with strong share gains in a number of key markets. We've also seen an acceleration in the trend for more sustainable packaging. The boom in e-commerce, in addition to boosting our corrugated business, is also at the same time, boosting demand for our paper bag offering. On this slide, we show our MailerBAG, which is a sustainable alternative to plastic mailers and offers great protection. Similarly, our EcoWicketBag, you can see there is designed to replace plastic as the outer layer of packaging for a variety of hygiene products, including diapers and toilet roll. We believe there's plenty more to come in leveraging our unique portfolio from bags to boxes and plastic to paper, and importantly, significant exposure to and understanding of both primary and secondary packaging. Another important source of competitive advantage, which has been on display this year, is our ability to offer security of supply to our customers. With rapid changes in demand patterns, difficulties as long supply chains and operational risks. Customers are increasingly looking for local suppliers with a diverse production base and backward integration into their own paper supply. As the global leader in paper bags and kraft paper, we have been a clear beneficiary of this trend. Lastly, we continue to invest in expanding our production capabilities. Most recently, we have successfully started up the rebuilt machine in Štetí, dedicated to the production of paper for use in retail shopper bags, and e-commerce applications. We continue to expand our world-leading paper bag network with the new plant recently started up in Colombia. And have approved plans to build another plant in Morocco, building on our leading position in North and West Africa. Engineered Materials did see good demand in consumer and consumer end users, as lockdown measures in key markets drove increased home consumption and demand for cleaning and hygiene products. This was, however, more than offset by weaker demand in industrial and specialized end users, although we did see some recovery in the second half. As anticipated, we also saw ongoing volume pressures in the personal care components segment as the key customer product matures. As a result, we have taken steps to restructure the cost base, including closure of a release liner plant in the U.S. and the restructuring of our personal care components plant in Germany. At the same time, we are investing to realign the portfolio towards growing products, including investments in capacity to produce fully biodegradable wet wipes. We also continue to develop our opportunities to leverage our coating technologies to develop new sustainable packaging solutions as alternatives to plastic. Going on to Uncoated Fine Paper. As we reported at the half year, this business has been the most impacted by the effects of COVID-19. You can see in the chart on the bottom left of the page, are the first European lockdown in the second quarter and an almost immediate impact on demand. This was repeated in the other regional markets in which we operate. Remote working, school closures, and less marketing spend all contributed to the weakness. Pleasingly, we did see some recovery post the initial lockdown with order books improving significantly in the second half, albeit overall industry demand was still well below pre-crisis levels. Encouragingly, the latest lockdown measures in Europe appear to have had limited negative impact on demand and we are seeing a good order situation in our mills in the first quarter of 2021. With this demand recovery and on the back of rising input costs, notably pulp, energy and chemicals, we've announced price increases with effect from March. Very encouragingly, in the context of a lower demand faced by the industry in 2020, we secured significant market share gains in all the markets in which we operate. Our business remains strategically well positioned in the context of the current market challenges. Our portfolio is made up of a combination of highly cost competitive integrated operations and unintegrated facilities giving us geographic and product diversification. It is clear that our customers value the strength and stability of a committed long-term supplier in this market, offering a broad product range, excellent customer service, cost competitiveness and financial stability. I'll then move on to some brief comments on our strategy and the progress we've made in this regard. It is obviously imperative at times like these that we do ensure we get the right balance, as I said earlier, between focusing on the near-term challenges and ensuring we continue to drive value for the long term. We remain focused on driving value-accretive growth sustainably, and I will provide more detail shortly on how we delivered on our 2020 sustainability targets and set commitments for the next 10 years on our sustainability journey. We're clearly strategically well placed to benefit from long-term trends, including, as we mentioned, sustainability, e-commerce and enhancing customer value. I will show some great examples of the innovative products we have been working on with our customers. As a group, we have a great track record of investing on us through-the-cycle basis, delivering strong growth, enhancing our cost advantages and improving the environmental footprint of our operations. Importantly, as I'll come on to shortly, our project pipeline remains robust. This is, of course, supported by the strategic flexibility that comes from having a core business that is highly cash-generative through the cycle as has been amply evidenced this year and offers a unique platform for growth. Coming back to our progress on sustainability. Our growing responsibility model was the framework used to set priorities and targets for the five-year period ending in 2020. This followed as a series of sustainability targets starting in 2004 in a number of cases. I'm delighted to report that we have delivered very strongly against the 2020 targets. Some specific examples of which I'm particularly proud, can be seen on the slide. These include a material improvement in safety performance, ensuring we drive towards our goal of sending everybody home safely every day, a major reduction in greenhouse gas emissions, supporting our climate change commitments and a significant reduction in waste to landfill, supporting the circular economy. Our sustainability journey, of course, continues, and we have recently launched our framework for the next 10 years called our Mondi Action Plan 2030. This centers our 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, details of which can be found on our website. I'm certainly excited by how this new framework is already galvanizing our people into action as it is only by continuing to embed sustainability in all that we do, that we'll make a real difference. This next slide shows some examples of our external recognition we've already received to date on all our work on sustainability. We're, of course, very proud of our leadership in the field, and remain determined to continue to lead the way. You will have seen this slide before, but I think it is again worth highlighting the advantages of our unique platform, offering a broad range of paper paste and flexible plastic packaging allowing us to provide the most sustainable solution using paper where possible and plastic when useful. We have made great strides in driving our EcoSolutions approach, partnering with customers to achieve their sustainability goals. A great example of our sustainability-led investment is, of course, the recently completed machine at our Štetí paper mill, providing capacity for 130,000 tonnes per annum of paper used for shopping and e-commerce bags, having the potential to replace up to 2 billion plastic bags per annum, a clear example of volume growth underpinned by sustainability trends. On the next slide, we show our recently launched AegisPaper, which is an innovative, fully recyclable, functional barrier paper. And importantly, to my mind, this combines our technology, know-how and customer relationships across a number of our segments, kraft paper, barrier coatings, printing and converting a combination that is definitely unique to Mondi. You've heard me talk before about performing, but our formable paper based food trade used as an alternative to plastic. Development of high-tech products like these does take time, but once in the market, growth can be rapid. And the development journey does not stop at the initial product. The further innovation, new features can be added. In this case, we show you that the addition of a removable firm makes it even easier to recycle this product. Clearly, the mega trends of sustainability and e-commerce come together in our full range of sustainable e-commerce solutions. With our platform of packaging paper, boxes and paper bags, we are able to offer a variety of designs, security of supply and great service to our e-commerce customers. It is great to see the gains we continue to make across both our box and bag businesses in growing our volumes with key e-commerce players, supported by ongoing investment in our capabilities, which allows us to significantly outperform the estimated market growth, which you can see on the left-hand side of the slide. Particularly pleasing, in my view, is our growth in paper bags from e-commerce. While the e-commerce box business is well established, we are now seeing strong demand for our paper bags, used primarily to displace less sustainable plastic wrap solutions, clearly a win for both us and the environment. As a final example, we are looking -- we are also looking to leverage the trend of using packaging to enhance our customers' brand value. The recently commissioned 300,000 tonnes per annum kraft top white machine is a great example of an investment in a product that has great visual appeal, so it can be used for the likes of shelf-ready packaging, point-of-sale displays and e-commerce applications while at the same time, has the cost benefits of a high recycled content. As we've already mentioned on a few occasions, one of the main drivers of our strong returns and ability to drive sustainable growth has been our willingness to invest in our cost-advantaged assets through the cycle. We have a very strong record of delivery on major projects, having invested over €1.4 billion since 2014, with an average return in excess of 20%. Importantly, our project pipeline remains robust. Projects in progress were recently completed, are expected to increase our total salable pulp and paper production by around 7% per annum, while we continue to expand our converting footprint to support our customers. Beyond that, we continue to evaluate further projects to leverage our privileged asset base and serve our customers' growing demands. Finally, for me, a reminder of my opening message. We delivered strongly during the year despite the many challenges brought by the COVID pandemic. We are very well positioned for ongoing value-accretive growth, and we are a leader in sustainability with a clear action plan to retain this position. With that, Mike and I are very happy to take your questions.

A - Andrew King: [Operator Instructions]

Mike Powell: Okay. Thank you. So you all have gathered here, myself and Andrew driving the technology today. So I think we have the first question over the telephone, and that's Alexander from Bank of America.

Alexander Berglund: Thank you very much. Andrew, I guess, first of all, I have to ask, given the news flow yesterday on Bloomberg on you looking at DS Smith and their assets. Is there any comment you can make on that?

Andrew King: Alex, as you know, we've don't comment on market rumors, and I won't say any more than that.

Alexander Berglund: Okay. But maybe kind of more generally, if you were to engage in any kind of larger scale M&A, what criteria or type of synergies would you be looking as a key for such a transaction? And maybe if I can ask your view on current valuation multiples out there? Is there any value out there right now?

Andrew King: Nice try, Alex. But the answer remains the same. I'm not commenting on market rumors.

Alexander Berglund: Okay. I have to try. So moving on a bit your, a quick question on pricing. So if we start about containerboard, I noticed that SCA is increasing kraftliner prices for April. So yes, your view, do you see any scope for further price increases on the containerboard side? And then also, just if you could clarify a bit your comments on the kraft paper and your overall kind of flexible portfolio, given kind of the price, potential price increases on krafts paper? But just from our perspective, if we think of your overall mix, should we think about some price increases on the overall flexibles portfolio in 2021? Or is that more of a potential 2022 story? Those were my questions.

Andrew King: Thanks, Alex. And yes. Certainly on, firstly, on the containerboard business, clearly, we've seen a strong pickup in demand. I mean, yes, last year as a whole, from an industry perspective, I think the demand was up or the deliveries were up 1% to 2%. But clearly, that strengthened as the year progressed. And certainly going into, back end of 2020 and into early 2021, we've seen very strong order books. And on the back of that, as you know, there's been a series of price increases on the containerboard grades. The markets remain very tight. Certainly, we are fully booked. And volume, frankly, is extremely hard to come by for the corrugated players at the moment. So all I can say is that the containerboard markets remain very tight. Clearly, we'll be in discussions with our customers as to what that means from a pricing perspective. But most importantly, we focused on ensuring delivery and reliable delivery to our key customers. On the kraft paper environment, as I mentioned in the commentary, and also in the announcement, clearly, we are also seeking price increases or implementing pricing increases on the kraft paper grades. I would say, and I think this alludes to your comment that on the sack kraft side, where we do have a lot of annual and semiannual contracts, as you well know. And also we have a strong integrated position. Our bags, in turn, a lot of that volume is sold on contract business. So it is, the pricing is invariably stickier on both the way up and the way down. Clearly, we are encouraged by the price increases that we are achieving in the market. But I would caution that it doesn't have a huge impact in terms of the price/mix effect until such time as we are able to reprice on the contract on the contract business. As a simple rule of thumb. We've always said that our total portfolio of kraft paper, and that's whether we sell it as the paper or is the bag, roughly, it's 1/3, floating, 1/3 fixed for a year and a 1/3 fixed for six months that a 1/3 fixed for year. That's in round terms. So clearly, the latest price increases have only really come through in the first quarter of this year, too late for the annual contract business that was set before that. But clearly, a positive indicator of a tightening market with certainly some pricing traction. But I think you alluded to it yourself, but you're right to be cautious about in the short-term assuming too much on that price/mix effect. The other aspect of that, of course, is we have the sack kraft business, where clearly, there's a lot of price discussions taking place. We also have the specialty craft that covers a number of different submarkets where the pricing effects are a bit more mixed than on the sack kraft side. But nonetheless, as a whole, it's still very encouraging in terms of the direction of travel.

Mike Powell: Thanks, Alex. Okay. We have our next question from Cole at Jefferies, please.

Cole Hathorn: Just a follow up on your strong bag performance. I mean plus 5% bag volumes through the year. Could you just give a little bit of color what end markets was driving that volume growth, your traditional building materials? Or was it more kind of growth in consumer areas, please?

Andrew King: Thanks, Cole. Yes. I mean I'm certainly delighted by the performance of our Bags business. When it comes to the end markets, I think, I mean, clearly, a significant end market remains the building materials and cement markets, and those remain important. I think they've proved surprisingly resilient in, and when I say that, I mean, because normally, there's an assumption that they have a sort of pro-cyclical demand tendency. But that really, they've proved very resilient through this period. I think with the benefit of hindsight, clearly, in Europe, people are probably spending more time at their home, doing their home extensions and home improvements and the like, and that's probably been one of the causes to support demand in that segment, which we otherwise thought would, could have expected to be a bit softer. And then on top of that, as you referred to, clearly, we are starting to see the gains that bags or paper bags are making driven by the sustainability trends. And I think that's only beginning. And also, as I've mentioned very clearly in my presentation, we're also now seeing traction on e-commerce applications for paper bags, which I think is a great opportunity. Because, obviously, tapping into both the e-commerce trend, which is very, very clear, but also sustainability because you are essentially displacing plastic wrap for e-commerce applications with strong, but fully renewable, recyclable paper bag offering. So it's really a combination of those, from a market perspective. Clearly, on top of that, we have gained share. Now in certain markets, I think we've certainly achieved significant gains. In other markets where we are still very big, we still managed to, I believe, outperform the market. And that's also a function clearly of being able to offer security of supply. I think one of the themes of the last year is people have been looking to shorten their supply chains, but also get more reliable supply, clearly having a major plant network and being a local producer, offers us big opportunity versus, for example, importers or people who have got a smaller plant network without the backup capacity that if one plant had a COVID-related issue. So for example, you couldn't supply from, and recognizing also that this was a year where you saw great volatility in demand, depending on which country was in lock down or out of lockdown, et cetera, at any one time. And I think we showed great agility in being able to flex our production and our supply to our customers to meet this very quite volatile demand picture from their perspective by adjusting our supply from different sites and the like. And that is, I mean, a testament to the fantastic effort of our team, but also, obviously, the very strong network we have.

Cole Hathorn: And then just a second question on cost inflation. I imagine wood costs are broadly stable, and that's one of your bigger cost items. But could you just run through where the cost inflation and where you're seeing it is at kind of energy, logistics, waste paper and polymer, just kind of the order of magnitude of where you're seeing the cost inflation in 2021?

Mike Powell: Thanks, Cole. Now let me start with that, and then Andrew can build. Yes. Now if you go through our cost base and just picking out the areas that you've touched on, if I take resins first because that's particular to the consumer flexibles and engineered materials. There are large increases in resin prices. You can see that from market data. And they are clearly across all of the supplier base. So it's a market phenomenon driven really, we think, by supply in the short term. But it's with us, we think, for at least a couple of quarters. Of course, that will get passed through over time, but it will take a couple of quarters for that to go through. But it's a sort of a market-wide issue contained within those two areas. And OCC. Again, we consume about 1.5 million tonnes of that. Again, you've got the indexes for that. But that's clearly moved significantly upwards since last year. And then energy transport is all taking inflationary increases. I'd say inflation across the sort of remainder of that cost base, therefore, is sort of 2% to 3%. So it definitely is coming through. And I think Andrew has always said in the past, when you get costs don't exist on their own, where you get price increases on the way up and down, you get some mitigation with the costs. And we're certainly seeing that. As our prices are pushing into the market, we are certainly seeing some cost input pressures too across those categories. So that answer what you needed, Cole?

Cole Hathorn: Yes. So overall, higher demand and pricing, but not all of that falls through to the bottom line because there is some cost inflation

Mike Powell: Got it. Thanks, Cole. Next question is from Justin at Exane.

Justin Jordan: Firstly, I guess a question for Andrew. If we look at perhaps Slide 12, your cash flow priorities slide that clearly anyone who has followed Mondi for a few years, will be very familiar with. I guess, if we take a step back and sort of think about from memory, since 2012, I think you've been investing, on average, probably 150% of depreciation, strong investments through good and bad times, frankly, above the cycle -- sorry, above depreciation to grow the privileged asset base that you've got. And the inference I draw from today's presentation is that you clearly have, you believe, a strong slate of capital investment projects potentially ahead of you as well. Would the inference to that be that, that creates a very high hurdle for the Board for any M&A transactions, whether there's this transaction you just announced in Turkey or frankly, any other transaction that the market may link you with?

Andrew King: Justin, as you rightly say, I think we've got a great track record of investment in our projects. As I've said in my presentation, over 1.5 -- or €1.4 billion over the last five years, invested in our major projects. And I think they've stood us in good stead. We can -- what is, to my mind, exciting, is that we continue to see ongoing opportunities in our business. We clearly, in the short term, are very focused on ramping up our projects, which are now commissioned. Delighted that the new containerboard machine in Slovakia is now in full -- in production as, frankly, are our customers because coming back to the first question, the containerboard demand is extremely strong at the moment, and we're delighted to be bringing in some new capacity into a very strong markets. And so nice also when you get the timing right, albeit we can't take all the credit for that. But and similarly, we've got a ramping-up machine in the Czech Republic, which is fantastically timed for this real push for sustainability. So, I think there's all these opportunities. And not forgetting the fact that in the converting businesses, we continue to invest there. It's sometimes forgotten about, but I think it's very important to remind people of the fact that we continue to invest. It's not the same level of absolute investment because clearly it's a little more CapEx-light, the upstream. But very importantly, we continue to expand our capabilities in that converting businesses. And I think there's, again, more opportunity to come on that, and we'll continue to support the growth in the businesses that we certainly see is inherent. So, fantastic opportunities on that front. And we'll always be weighing that up against the other opportunities that might be out there like Olmuksan, which we think adds, as I've said in my presentation, to our offering in what is clearly a fast-growing market in Turkey.

Justin Jordan: Okay. Just one follow up on Slide 44, you give your updated integrated value chain. When I think about your Uncoated Fine Paper business, where you have 1.4 million tonnes of uncoated fine capacity, and I think about 200 tonnes of newsprint capacity for memory. And clearly, you've got a mix of integrated mixed-use mills and then partly integrated mills. If there were capacity rationalization required, clearly, it's an uncertain world with COVID, where demand may settle out as it were. But if there were capacity rationalization required, is that something that we should be thinking about within the partly integrated mills rather than the mixed-use mills?

Andrew King: I think -- I'm not sure I fully understand the question, Justin. But if I look at -- if the question is around the Uncoated Fine Paper market and capacity adjustments, et cetera. As I've said before, I mean our asset, we are lucky in the sense that we have very low-cost, highly cost competitive, integrated operations, which also happened to be mixed-use in nature, so they also produce other products. Clearly, in terms of the expansion capabilities and opportunity to invest to grow our offering, it is very much centered around the structurally growing fast packaging offering. But that said, our fine paper offering remains highly competitive. I believe the share gains we've achieved this year clearly will, in our view, continue because there's opportunity as weaker players will be in due course for start of this market because I'm not sure how they can continue in certain cases. We have opportunity to continue to drive very strong performance in that fine paper business. But clearly, the big growth opportunities are on the packaging side, and we'll continue to invest for those.

Justin Jordan: Okay. thank you. And just one final question for Mike. Firstly, Michael, welcome to Mondi. Welcome to the tenacity you come with a very strong competition from your time at Ferguson and Signature. And clearly, I think your history is dealing with perhaps more financially challenged corporate structures than you've inherited at Mondi. But do you have any initial thoughts or views on the financial structure or -- the corporate structure of Mondi? And any sort of thoughts or initial impressions of changes you'd like to make, whether they're evolution or revolution, frankly, going forward.

Mike Powell: No. Thanks, Justin. No. Listen, I mean, I'm delighted to be part of the team. I go back other than the first four months have been slightly different to that, which we probably all expected, given that I've physically met probably about 20 people so far, and none of the assets. But why did I join Justin? I joined because I met a lot of people prior to joining, I like the people. You've got to be able to work with the people and vice versa. I like the industry and the growth characteristics of the industry. I think they are interesting, and I clearly like manufacturing. And I think Mondi's position within that from its -- both its asset base and its sustainability, that it's frankly had for years, stands in great shape, really. And then lastly, I always look at cash generation of the business that I like to work with. It generates very good cash. We've covered that off today. You saw that through last year. That is good through good times and bad times, and clearly creates flexibility for the business and the opportunities that Andrew has described. And I haven't been disappointed in the four months. All those things have been big techs. So hopefully, that gives you a flavor, Justin. Next question is from Lars, Credit Suisse.

Lars Kjellberg: Thank you. I just want to come back a bit to Olmuksan, of course, one of these bolt-on acquisitions. Can you share any more sort of financial details, you, of course, mentioned paper integration as an important aspect of the deal, synergies, et cetera. And on the day of announcing it, you talked about, I think, about 250,000 tonnes or thereabouts or corrugated produced. Is that indeed the right number? And where would you long position being containerboard post this deal? That's the first question.

Andrew King: Thanks, Lars. I'll take that. Yes, I think you've got the right sort of numbers. So clearly, it's a corrugated system. It's a converter. So it doesn't come with any of it on paper. So in rough terms, obviously, that corrugated is, extends our actual, we're now, if you, assuming it completes, obviously, it will be, we will be net short of recycled. Obviously, we take our whole containerboard system, we are still net long containerboard, but short recycled along the virgin products.

Lars Kjellberg: And the net integration was indeed that, roughly speaking, 250,000 tonnes you can supply yourself or...

Andrew King: Yes.

Lars Kjellberg: Okay. So in terms of when you talk about investing in your downstream business, do you have any view where you want to be, i.e., in terms of integration, we've discussed that in the past, but you highlighted that is clearly a part of your strategy going forward. And geographically, I suppose, does it make sense to be concentrating where you are, meaning west, sort of East Central Europe. Because that's where you have your paper assets? Or should we think about that differently?

Andrew King: Lars, I think as we've always said, we look for good businesses. I think in terms of the actual level of integration at any one time, that is less important. Clearly, at the moment, the big issue for the corrugator is availability of containerboard because of the very strong demand we're seeing at the moment from the corrugated side. So we're obviously very happy to be backward integrated into our own paper supply, and that gives us security of supply. But the most important is, obviously, the quality of the business, both upstream and downstream rather than the exact level of integration at any one point in time.

Lars Kjellberg: Got it. And then if you look forward, you're talking about quite significant spending again. Do you have any specific projects that you're pursuing now, €600 million, €700 million you're talking about? And how should we think about that as delivery of incremental EBITDA in 2022?

Andrew King: Yes. I think it's difficult to give that sort of guidance at this stage. Because, clearly, we try and give a number that is relevant at the time given the current pricing dynamic and the like. So clearly, we've indicated to €50 million incremental EBITDA contribution in 2021. 2022 is still a long way out. But as I said, if you tot up all the growth in our, just our upstream businesses. We're talking about a 7% increase in capacity on our upstream over, which starts to come in, in 2021, continues into 2022 and beyond. Clearly, the big contributors to that at the moment is ramping up of the two machines I mentioned in, the 130,000 tonne machine in the Czech Republic. And obviously, the 300,000 tonne machine in Slovakia. So those are key to ramp up. And of course, what is exciting about those is they're also specialty product. They're not, which we think really adds to our portfolio. Clearly, we, at the same time, continue to also invest in the debottlenecking and efficiency improvements in our core high-quality assets. At the back end of this year, we are doing a, I mean guided to a higher maintenance shut. That's a lot of that's driven by the fact that in South Africa, we will be commissioning the new chemical plant and other modernization upgrades in South Africa, which will contribute to a much more efficient and reliable production out of our Richards Bay facility, which is clearly very valuable to us. We continue to do up debottlenecking steps in Russia, in particular, which is exciting. And then we have some, a number of other projects, which we continue to evaluate, as you would always expect, both in terms of efficiency gains, sustainability improvements and obviously, also top line growth opportunities. So I think there's certainly a lot more to come in that, and we continue to look very closely at it, supported by, as I keep emphasizing, good growth markets that we have great exposure to.

Mike Powell: [Operator Instructions] But I'll take the next call on the telephone, and that's from James at Prescient Securities. James, over to you.

James Twyman: Yes, I've got two questions. The first one is, you had very strong growth in corrugated 7%. Could you just talk around the regions where that was and just how you managed to achieve such a large increase? And give us some idea of the importance of that division, that part of the division because obviously, 7% is great, but how big a part of the group is that either in terms of sales contribution or profit contribution? And then also, you mentioned sack paper prices are rising. Could you just give us some idea of scale of what sort of price increase either has been attempted or has been achieved? And that's, those are my two questions.

Andrew King: Very good. Just coming to the corrugated. Yes, we're delighted with that performance. We think it's a fantastic performance. Clearly, our corrugated business is focused around Central Eastern Europe. We've really seen growth across the regions in which we operate. Clearly, I think the more potent question is probably where the end-use growth is coming from. Clearly, we've seen a significant growth, as we've alluded to already, from the e-commerce applications, which is great, and we've continued to support that. Similarly, the other FMCG customers have clearly been very resilient through this period. And where you've seen a softer markets is clearly in the more industrial applications, which are more exposed to the manufacturing output and the like, which has clearly been impacted through the pandemic, albeit, again, I think we've seen some, that's starting to recover, while we still see the good demand coming from the other applications. But regionally, it's across the piece. On the sack kraft paper side, you asked the question about the order of magnitude. It's mid-single digits type of percentage increases we're looking at for the sack kraft grades, which we're looking at. We talk to our customers having, and making good progress there.

James Twyman: And on the Ruzomberok machine, could you just say what percentage of what you're making is actually recycled sort of in total? And when you think you will reach an efficient level of production or whether you're there already?

Andrew King: You mean, I assume you mean in terms of the furnish, how much is comes from a recycled content. And as, I mean the product itself is fully recyclable. In terms of the furnish, you make the white outer layer with virgin pulp from the production, and you make the brown underlayer from, effectively from recycled containerboard. So it depends on the exact product specification. But as you could imagine, it's going to range from 50-50 up to a higher recycled content depending on the nature of the product.

James Twyman: And in terms of when the machine is starting up?

Andrew King: It has already started up. It's in production. I would have loved to have shown you the video of the first paper on the reel, but unfortunately, Mike and I's technical skills didn't stretch to that. So we thought we'd keep it simple this time. But -- and even -- we'd be even more delighted to show you it in person, but that in itself is a challenge at the moment. But we are in production, and the team has done a great job as you could imagine, in the face of all the challenges related to coverage restrictions, et cetera. But it is up and running and ramping up really nicely. But as always, with the new machine, it does take time to ramp up. And also, we will evolve the product mix because we also want to be producing a product for our customer that has all the right quality specifications and service so that it is a reliable quality offering, which we have every confidence it will be in very short order.

Mike Powell: Thanks, James. Okay. I'm changing tech to webcast currently. We have Wade from Avior Capital Markets. Wade has three questions. Let's take them individually. The first question is, how sustainable are the improvements in working capital? Let me take that one. I think, Wade, we've always said, and there's no change to our guidance that we have our working capital at about 12% to 14%. It is a great feature, as I said, of the cash flow characteristics that we were able to have an inflow of EUR 125 million last year. We did get some benefit in Q4. There was strong trading towards the end of the year, and therefore, we're a touch under that at year-end. But there's no change to that guidance. But clearly, it is a good feature of the business both on the way down and on the way back up. The second question for Andrew is how do you think about the recovery trajectory of the Engineered Materials division?

Andrew King: Yes. Thank you, Wade. As we clearly highlighted in the announcement, we certainly see this year as a year of consolidation. We've taken a number of steps, as we referred to in the literature to improve the performance of that business. We knew about the structural decline in the components segment, and we've had to adjust to that. And I think we've done a great job in adjusting to that. The we've restructured the cost base in our grow or facility, as I mentioned, and the team has done a great job there. Similarly, we've also adjusted the operating footprint in our release liners segment. And I think that puts us in good stead going forward. And importantly, as well, we also invested in certain selected areas where we are realigning that portfolio. I mentioned, for example, that biodegradable wet wipes business. This is an investment we were making some -- which is now coming to fruition. As you can imagine, wet wipes themselves is a great business. And now we've got a truly sustainable offering with a fully biodegradable product, which we think is very exciting for that business and will make a contribution into the future. But this year is very much one of stabilizing it, executing successfully on all of those projects, and we certainly believe that will contribute very positively going forward.

Mike Powell: Thanks, Andrew. And Wade's third question is what percentage of corrugated volumes are used in e-commerce? I'm trying to reconcile what e-commerce growth of 8% per annum means for growth on a consolidated basis.

Andrew King: Wade, I'm not sure where the 8% e-commerce growth comes from. I mean, typically, we would say that in a corrugated business. Historically, e-commerce has represented around 10% to 15% of demand. Clearly, that is going up as a proportion because the e-commerce was the biggest contributor by some distance to the 7% growth in our overall volumes this year. So, I think you can do the math and figure out that the e-commerce growth was significantly higher than 8% to which you referred to in your question.

Mike Powell: Thanks, Wade, for your questions. Sean is on the webcast from Chronic Research too. Sean's question is, please, could you share any insights into non-integrated UWF supply in Europe at the moment? In terms of price increases announced, is this mainly cost recovery or improving supply demand dynamics? And how do you see UWF demand evolving to the end of 2021?

Andrew King: Yes. Thanks, Sean. I mean, clearly, in terms of the fine paper market in Europe, un-integrated capacity, I think, still represents about 1/3 of installed capacity. But it clearly also dominates the high end of the cost curve, and that was pre the recent pulp price moves. Clearly, with the pulp price increases taking place now, that cost curve is steepening. And those un-integrated producers are being squeezed. So, that is clearly one of the dynamics that are taking place. In terms of these price increases, clearly, there is some cost push, as I've just alluded to, particularly with the un-integrated players and the pulp price, but there are also some other cost items, which are going up at the moment, which is putting pressure on that market. But pleasingly, also, we're also seeing a pickup in demand. Certainly, as I say, our order situation is a lot better than it has been, which is very encouraging. I would suggest possibly not reflective as the whole industry because we are the stable long-term player. You can offer those customers that security of supply, which I think is valued. But nonetheless, I think we're seeing a better order situation, both us and potentially the industry as a whole going into the new year. So that, combined with that cost push is clearly what is driving these price increases at the moment.

Mike Powell: Thanks, Andrew, and thanks, Sean, for your question. I think we have one last question. And that is on the telephone, and it's Mikael from UBS. Mikael, over to you.

Mikael Doepel: Just briefly on the OCC pricing and dynamics in that market and how things have developed there. What would you expect going forward there? I mean would you see that the fact that the lockdown is going to come to an end at some point? Will that puts some downward pressure on pricing? Or do you see that these levels where we are today are sustainable going forward as well? I would say that we are on fairly high levels. That's the first question. And the second question would be on FX. And just given the current spot rates you see out there, how big of a headwind should we expect in 2021?

Mike Powell: Thanks, Mikael. Given that, I don't want to end on the morning's good results on FX. Let me take the FX question first, and then I'll pass to Andrew. No. I mean the FX, if you talk the prevailing rates today versus the average of last year, clearly, the dollar is weaker and the ruble. We've always guided, and there's no change to the guidance that a 1% in the euro on an EBIT basis against the U.S. dollar is about €3 million to €4 million. So you can do the math on that. And the ruble is about half of that number. So again, you can run the maths on the FX. But if those rates prevail, there is clearly headwind for the business. That, of course, doesn't stand-alone. Because it stands alongside pricing and cost dynamics, too. But if you're just specific about the FX, that would be the answer to that question, Mikael. Andrew, do you want to take the OCC question?

Andrew King: I think worse than ending with FX is worse -- ending with a question you don't know the answer to. I think Mikael, predicting OCC prices, I think, is a fool's game. I mean, as you rightly say, prices have been going up quite materially over the last number of months, clearly driven by both the demand side pickup, as containerboard demand has picked up very clearly, but also these collection challenges with the fact that, particularly the e-commerce deliveries going to people houses is just more difficult to get back into the system than your traditional sort of end-use or places where the boxes ended up. But -- and probably exacerbated by, as you say, the lockdown restrictions and the like. Similarly, of course, the other side of the argument, the whole China story, and China continuing to reduce, which is now very clearly in place and one anticipated. That would lead to some less -- or certainly less demand for European and OCC. And of course, that played out to some extent, particularly last year. So these are all competing forces. We've obviously got new capacity coming in this year, which will also need more supply, which is an argument to go for prices to hold up. I -- as I say, it's a dangerous game of speculating on what might happen. I certainly felt that the lower price levels that we were seeing for OCC over the course of the last year or so didn't feel sustainable. So I did think structurally that it should be higher. Is this the right sort of level, and can it overshoots, et cetera, is always extremely difficult to predict. But it certainly doesn't feel like structurally, there's going to be a significant reduction in OCC prices anytime soon. Good. No, well, thank you, everyone, for your attention. Do apologize again that we can't do this either in person or at least visually, but I'm sure you appreciate all the constraints we are working under with the COVID restrictions. But again, I just remind you, as I think we've demonstrated today, we are an inherently strong business. We delivered a robust performance in the year. And most importantly, I think we are very well placed to continue delivering sustainably into the future. So with that, I thank you again for your attention, and look forward to being in touch in due course. Thank you.

Mike Powell: Thank you.