Mondi (LSE:MNDI) Q3 2026 Earnings Call

0:00 Good morning and welcome to Mondi's Q3 Trading Update webinar. Closed captions are enabled for this session. If you'd like to use them, please turn them on in your Zoom app. Please note that this is an automated service and that transcription errors do sometimes occur. Please note that all lines are currently muted. Michael Andrew Powell, Lars Mallasch, Chris Gurney, Marita Erler, Thomas Ott, Vivien McMenamin, Kerry Crandon Cooper, Jennifer Louise Hampshire Michael Andrew Powell, Lars Mallasch, Chris Gurney, Marita Erler, Thomas Ott, Vivien McMenamin, Kerry Crandon Cooper, Jennifer Louise Hampshire Michael Andrew Powell, Lars Mallasch, Chris Gurney, Marita Erler, Thomas Ott, Vivien McMenamin, Kerry Crandon Cooper, Jennifer Louise Hampshire

0:47 I'm sure you've all seen the announcement today, so I'm just going to pick up on a few points before we go into questions. Overall, we delivered a resilient performance in the third quarter, considering the impact of planned mentioned shuts and the higher than anticipated input cost inflation. Good order books supported positive pricing momentum across much of the portfolio. Reported underlying EBITDA was $196 million for the quarter with nil forestry fair value gain compared to $167 million in the second quarter, which included a fair value loss of $43 million. Price increases implemented earlier in the year lifted average selling prices during the quarter and enabled us to offset the higher input costs experienced in the period.

1:36 That said, cost inflation remained elevated and increased and we had anticipated at the half year. Further price increases have been announced across certain paper grades although these do take time to be fully reflected in earnings. We remain focused on taking decisive action in areas we can control. Progress continues on operational excellence, cost optimization and improving the efficiency of our plant network. We are successfully transferring customer volumes from the converting plants scheduled During the quarter, we completed the sale of one solid board converting plant and agreed the sale of a second as part of our ongoing portfolio optimization efforts.

2:24 As we enter the fourth quarter, higher packaging paper prices are expected to support performance, notwithstanding the ongoing input cost pressures. With that, Mike and I are very happy to take your questions. Thank you. As a reminder, if you'd like to ask a question during today's webinar, please press the raise hand button in your Zoomer. Our first question comes from the line of Cole Hafen. Cole, your line is unmuted. Please go ahead.

2:59 Good morning. Thanks for taking my question. I'd like to focus on kind of the direction of cost inflation through the end of the year. Could you remind us or give us an update on wood cost inflation? Should we still think about the kind of 35 million wood cost inflation for the second half? And then I'd like to ask on energy cost inflation, which I imagine is particularly gas, which is what probably surprised negatively when gas prices moved up. Thank you.

3:53 Good morning, it's Mike here. Thanks for your questions. I think your first question was on wood. I think wood has worked out, you know, probably as we thought. I said at the half year that there'd be a half two on half one increase of the 35, which I think you mentioned yourself. That was the sort of, if you then go to Q on Q, as you know, some of that occurred actually in Q2 at the balance in Q3. So I think wood into Q4 is as we expected, and I don't expect sort of large deltas, Q4, Q3. So I think wood is sort of contained, but obviously at elevated levels. and as we've said in the past there is clearly less economic activity driving that as well as obviously the two wars but also latterly as you know no wood going into the middle east and therefore trees not being harvested byproducts therefore not being available pushing the price of wood in central eastern Europe in particular up but As expected, I guess, is probably the phrase there, but at high levels.

5:14 On energy, Carl, I mean, again, sounds like you track the same index that we tend to use. Energy is the increase, energy-energy related. It's not just gas, of course. But again, you will know because you look at the gas indexes. If you take the average Q3 over Q2, so sequentially, gas is up 35-40%. And that is different to when we spoke at the end of July. You've just quoted the price today for gas, but the gas when we locked our balance sheet off was 44 euros per megawatt hour. Through the quarter, it averaged 63. That's the 35-40% increase.

6:05 But it's also the gas, the other related costs such as transport. You know, if wood was a, you know, half of that 35 hit in the quarter, you know, the gas and other energy related costs were, you know, a good 20, 25 million. That's the delta. And that's because of course, the indexes keep going up. If you go to your last part of your question, which I think was, you know, what happens Michael Andrew Powell, Jennifer Louise Hampshire Who knows where that goes? It can go down as well as up. But you can imagine there's therefore more costs coming through Q4 on Q3.

6:55 As I say, not in wood. But if it stays at 85, something not dissimilar. And then you have to look at what's happening with the price index, which maybe I'll pass over to Andrew. But first of all, Carl, just on cost, does that... Thank you very much. Thank you very much.

7:40 Andrew Powell, Lars Mallasch, Chris Gurney, Marita Erler,

7:56 I think the good news on that side is we are getting selling prices up. You are right in the sense that the most impacted business or most exposed purely to input gas is the unintegrated businesses that don't make pulp from wood, simply put. In our world that is isolated to two areas. Michael Andrew Powell, Jennifer Louise Hampshire The primary areas where you get that direct exposure is those unintegrated facilities. I think it's in a way encouraging that the markets, we are seeing quite material price increases in spite of the well-documented oversupply and the recycled grades, etc.

9:22 And I think it's testament to the fact that and a number of others. This cost inflation is being translated into price increases across the board on that front. Interestingly, to your point on downtimes, etc., industry stock levels are at pretty reasonable levels. It's not as if this overcapacity is producing into stock. People are clearly taking downtime, which is Thank you. Thanks, Cole. Thank you. Our next question comes from the line of Gabrielle Simos. Gabrielle, your line is unmuted. Please go ahead.

10:35 Hi, good morning. Thank you very much for taking my questions. So I just like to add a follow up on the cost front. So I understand gas prices have moved up significantly, but I just wanted to understand if you hedge any of the energy costs or have any longer term contracts and just wanted to confirm if we're already seeing the full impact of that higher energy cost if there's still to come as potentially hedges roll over. And my second question would be mainly on the pricing side as well. So given the lag that we usually see for prices on the container board side, I just wanted to understand how much pricing there is still to be passed through to boxes out of the price increases that we've seen on the paper side. And how is the demand for boxes given the higher prices? How are customers reacting to the potential increases?

11:22 Thank you.

11:24 Thanks. Let me take the first one, Andrew. Maybe you take the second. So we do not hedge. I mean, just a reminder, we probably make 80, 85 percent of our own energy, obviously, from the trees. So we're much less exposed to that. Why, therefore, are we talking about costs in answer to the first question? and the numbers because obviously you know gas has frankly doubled since even quarter two and therefore you know a doubling of an input cost even if it's relatively small has an impact noticeable in a quarter as well never mind on an annual basis but to answer your question no we don't hedge and we do not to pass those costs through Andrew Powell, Lars Mallasch,

12:31 We want our people to react, and as Mike says, it's a big cost item, but it's different exposures to others. When you look at the pricing dynamics, I think there are two elements of price pass-through that are relevant here. The one is obviously some of these price increases on the paper side are only just being implemented Q3 into Q4. Michael Andrew Powell, Jennifer Louise Hampshire Michael Andrew Powell, Jennifer Louise Hampshire I wouldn't say that increased prices are per se having an effect on and more by the macro considerations, consumer confidence and the

14:02 like, rather than call it a price sensitivity. But I think it's more of the same in the context of the overall market dynamic on underlying box demand. Northwestern Europe remains fairly muted. Southern Europe where we don't have direct box exposure is more robust. Poland price, I mean, Thank you. Thank you. Our next question comes from the line of Detlef Winkelmann.

15:00 Detlef, your line is unmuted, please go ahead.

15:05 Morning, everyone. Thanks for taking my question. Maybe my very first one would be, I mean, it does sound like there's a little bit of difficulty passing on some of the recycled container board price increases downstream. But just any kind of commentary on any kind of flexible packaging price increases we're seeing in the craft paper and the paper bags, if we're seeing any similar pushback in those end markets. And then my follow up question, which is a little bit of a technical one is I see your Thank you. Yes. So, so firstly on the question of the

16:02 The flexible packaging. I mean, firstly, again, you look at the upstream side in SACCraft, in an almost unprecedented way, we're on to our third price increase for the year, reflective of two things. Again, there is input cost inflation there as well. I mean, wood is obviously a major input for what is essentially a virgin product. And then you But I guess more importantly, the order situation is good. While the industrial applications for SAATcraft remain flattish, it depends on, again, the geographic exposures.

16:54 As we've spoken before, we are seeing new sources of demand there that is tightening things up. That is tightening things up and you know that's allowing us to get some further price increases. Those are effectively only being implemented now so it's really a 2027 story at this stage because you know it's too late to materially impact 26. At the same time the pass-through on the boxes you know sorry the bags it's a It is a slightly different dynamic there because you have semi-annual, annual contracts and the like. We did get the necessary increase in bag prices at the half year to reflect the paper price increases implemented to date.

17:42 There will be more to come as we implement these latest price So, one would typically be waiting. So, it's a positive momentum on the pricing side, both in the paper and the bag side. You get the full pass-through only into the new year contract business. Sorry, and forgive me, the second question.

18:12 Yeah, thanks. And I mean, the second question was just related to your long craft line of position, just a rough sense of how much of that may be semi chemical fluting, because my understanding is semi chemical fluting prices have been a little bit more muted. You know, as a price progression.

18:31 Yes. So I mean, if you take in round terms, we make between 2.8 and 3 million tons of container board in total of that 450 to 500 000 tons is semi-chem and you're right that semi-chem it typically is much more much less volatile and so it didn't come off as much but yeah the increases are more muted in some ways a bit like the white top which is also operates in a slightly different dynamic Thank you very much. Thank you. Our next question comes from the line of Brian Morgan.

19:37 Brian, your line is open. Please unmute and go ahead.

19:40 Thanks very much, guys. I appreciate the time. Can we just dive into the sack craft business a little bit deeper, if you don't mind? How much of the price increases that we've seen here today to be in sort of a restocking cycle? And then if you could just maybe chat to us a little bit about demand drivers. I'd have thought given what's happening in the Middle Eastern, demand would be pretty soft and that's always been a pretty strong growth driver for you guys. So maybe just unpack it a little bit more for us if you don't mind.

20:09 Yeah, sure. So on Sackcraft, I mean, I don't think restocking, destocking is always on the margin, you know, in a rising price environment, I guess there is a bit of restocking, but I wouldn't overplay that. No, I mean, the order books are good for a couple of reasons. One is, I mean, and so on. But it's flat to marginally growing. It's not a bad demand side environment in that context. Middle East, North Africa, you mentioned, I mean, these are always volatile markets.

20:54 It's a portfolio of very different countries, obviously, that is represented there. So yeah, there's challenges in one or two of those markets at the moment, but there are other markets doing well. So on average, and so on. Countries like Latam, these sort of markets are actually doing pretty well. Mexico is strong. North America is a bit weaker at the moment. There's a lot of agricultural exposures there and that's a bit softer. But at the same time, as I said already, we're also seeing other demand sources coming through from the non-traditional demand. E-commerce is a very important one there. You know, our extensible sack craft is being used in e-commerce applications.

21:41 So mailer bags as we call them. So these are the things which are coming to your front door in more and more numbers, I'm sure. Those are, you know, that is a strongly growing area which is tightening up that extensible sack craft market. Again, it is a bit different in what we call our speciality pulp craft papers. There, you know, which is more actually a lot more consumer orientated. So these are everything from a simple retail shopper bag to a lot of what we call our paperization opportunities where we're displacing Thank you very much. Thank you.

23:01 James Twyman, James, your line is open. Please unmute and go ahead. James, if you're speaking, we can't hear you. Okay, we shall move on. Our next question will come from the line of Sean Andrew. Sean, your line is unmuted. Please go ahead.

23:48 Good morning, Andrew. Yemi? Yes. Excellent. Great. And just in terms of maybe hopping on this, if I just look at the underlying Iwiro Bridge X forestry adjustments for Q2 to Q3, so sort of FX looks maybe a little bit positive. You've got a delta and maintenance of about 10. You're calling out, if I understand correctly, about 35 million for wood costs in Q3 and another 20 to 25 for gas. That sort of implies a sort of price or revenue delta of about 31 million odd between price and volume. Is that correct or are there any other elements that are missing?

24:26 I wouldn't want my boss to be bridging quarters. The one thing you should have a look in there is the wood. The wood was a half 2V, half 135. The quarter on quarter is about half of that. Okay,

24:43 cool. And then just in terms of other cost buckets, anything major there? I mean, I think I've covered the costs off already here. Okay, cool. And then just going to the sort of output statement, is it fair to assume that one is comfortable that price increases are going to outweigh sort of cost inflation in Q4, assuming spot prices hold for pretty much everything?

25:06 Yeah, I mean, Sean, as you can appreciate, the one big variable in that is the energy inputs, because of course, you know, it's extremely volatile. So, you know, you can only say as it stands today, yeah, and with spot prices where they are spot Michael Andrew Powell, Chris Gurney, Marita Erler, Thomas Ott, Vivien McMenamin, Kerry Crandon Cooper

26:09 And then just a comment around competition with the corrugated side. I think you sort of did flag it again. I think you said mainly in Poland. Is there anything else you can potentially expand on that?

26:21 No, I think it's across the piece. I mean, I said, I think my comment was Poland has continued to see decent overall demand side growth, as I say, in the industry. and many others. Michael Andrew Powell, Chris Gurney, Marita Erler, Thomas Ott, Vivien McMenamin,

27:48 Okay perfect and then just last one Andrew in terms of the asset sales I'm assuming they're quite negligible in terms of the funds expected to clear in that but just in terms of those actual assets themselves are those part of the Schumacher acquisition or was that the original money sort of plants?

28:08 No there was a so when we bought the Schumacher business there was a small sort of solid board business Some parts of that business which are highly complementary to what we do, particularly around the e-commerce side, but there are obviously some parts of it which really have very little bearing with what we do on the corrugated side, and it's those businesses that we are looking to make sure we focus in on our core activities.

28:43 Okay, perfect. Thanks, Andrew. Thank you. Our next question comes from the line of Lewis Roxburgh. Lewis, your line is open. Please unmute and go ahead.

28:55 Hi, Andrew, Mike. Good callers so far. Just a couple of questions for me, please. Just how should we think about normal seasonality into Q4 this year, just given the current demand backdrop? And secondly, just if you've seen an increase in demand for mailer bags, I know that you've got a decent market share there. Just wondered if the customers are substituting away from corrugated and Thirdly, just more generally, just, you know, on pricing power, is it sort of better or worse than you expected or just compared to your competitors? I think in the release, you mentioned mostly most divisions offset cost inflation with pricing. I think that's a good achievement, but just to see your views there. Thank you.

29:35 Sure. So a few questions in that seasonality Yeah, I mean the one consistent in this world is we do still have seasons and typically Q3 seasonally is weak for fine paper because everyone's on holiday and not and so it picks up into Q4 typically in some ways the industrial bag utilization is slightly the other way around because because through construction season is Europe is more more or the northern hemisphere is more through the summer months and then it's and then it slows down a bit into the winter months But August is always a bit strange because then you've got the summer holidays to confuse it. But typically Q2, Q3 is stronger than Q1, Q4 in very broad terms on those applications.

30:36 But increasingly that is being muted, that seasonal effect, because of your other question. You know, things like the e-commerce applications in bags, which is those mailer bags, is almost the other way around. Michael Andrew Powell, Jennifer Louise Hampshire Michael Andrew Powell, Jennifer Louise Hampshire So, you know, it differs across the piece. So it does have any seasonality, has an impact at a divisional level, but overall for the group, it kind of washes out. So it's not a huge driver.

31:29 And just to be clear, you know, we take those maintenance shuts, you know, we try and time those to coincide with the quality Michael Andrew Powell, Jennifer Louise Hampshire But just to your question on the mailer bags, it's very encouraging the demand we see on the mailer bag market more broadly. And I guess most more importantly, in a way, it's also a very good demand source, as I have said already, for the SAGcraft product that we make. I mean, it's not just boxes it's displacing.

32:25 In the first instance, it displaces plastic wrap, which is a clear win for us, obviously, as a group. To some extent it is obviously also displacing boxes. Clearly it's still beneficial for us as a group. But yeah, it's a big area of growth for the e-commerce producers. And then finally on the pricing power. No, I mean, it is encouraging, as I said, that in spite of, for example, the oversupply and recycled in other markets, obviously it's much more balanced, but we are still seeing quite meaningful prices There's no margin to play within the industry, but also supported certainly in the Virgin grades by strong order books off the back of good demand. And also in particularly things like the Virgin Craftliner, the supply side has been more constrained because of, for example, reduced imports from North America and the like, which has obviously tightened those markets up in spite of what remains of Thank you.

33:46 Our next question comes from the line of James Twyman. James please unmute and go ahead.

33:56 James, I can see you're still on mute. Yep, can you hear me now? Yep, got you. Yep, so apologies everybody. Yes, so my two questions would be, firstly, you mentioned about downtime earlier on the call. My assumption is that you must be running flat out at the moment, given seasonal strength, order books are good, and there should inevitably be some restocking. So just trying to understand that. And then secondly, In terms of wood cost increase, could you give us some idea about how much of your costs are wood in craft liner and stack paper, just to give us some sort of idea of scale there. And then just briefly, the board sales, you do mention it.

34:41 So I just wondered whether that is at least some sort of significant number.

34:49 I'm not sure if I've fully understood the final question on quantum of board sales.

34:55 You're selling the operations. Just as you mentioned it, it's presumably something.

35:03 No, I mean, it's, it's, you know, it's, we are, we are optimizing the portfolio, it's, but they're not material. Okay. That's your question. So just coming back to the first question on downtime. I mean, we always, we always looking, as I say, at what the, what the value of that marginal time is, that's how you determine whether you should be taking downtime or not. But you're right that The vast bulk of our business, we are running full. Obviously, as I said already, seasonality-wise, one has to consider that when it comes to, for example, fine paper, but then we've been taking the planned shots around that to coincide with that. So yeah, we are largely running full at the moment. And it's very encouraging in those virgin grades that we have good order books That has obviously put the pressure on the margins in the short term.

36:15 The question on the wood cost was, I think, how big wood is in our input cost mix?

36:26 Exactly, yes. So in terms of overall... I mean, overall, we probably spend, yeah, 25% of our direct materials is on wood. Michael Andrew Powell, Chris Gurney, Marita Erler, Thomas Ott, Vivien McMenamin, Kerry Crandon Cooper, Jennifer Louise Hampshire

36:59 Thank you very much. There's been a lot of news about attempts to raise tariffs on South African products coming into South Africa. That seems to have been rejected. What's your outlook on that and does that affect the ability of these operations to be viable?

37:20 We remain in discussions with the relevant bodies on that, so it'd be premature for me to comment on any of that.

37:30 Thank you for your time today.

37:31 Thank you. We do believe it's appropriate to offer some protection to the domestic business, particularly in the face of a very strong brand environment, which we know can change. Yeah. Thank you. Thank you. Our next question comes from the line of Demba Onde. Demba, your line is unmuted. Please go ahead.

37:55 Hi, Andrew. Hi, Mike. Two questions from my side. Can we get a sense of sort of what's the effective price that you've been or the average price that you've been able to sort of get through with the renewal of your contracts with your customers throughout sort of throughout the grades? And in terms of Schumacher, I mean, can you get a sense of what the operating rates are looking like at those mills?

38:32 Sure. So I think it's very difficult for me to generalize on the, you know, the sort of price increases. I think the best indicator I can give is there are the most external indices which give an indication of the benchmark prices Michael Andrew Powell, Jennifer Louise Hampshire In terms of utilization on our corrugated business in Germany, which incorporates what were the shoe market businesses, just to be clear, these are converting operations, so it's a bit different to measure utilization relative to, for example, a paper mill where you have a very defined, well, a much more defined capacity.

39:37 But suffice to say, as we said at the time when we bought I think there is an underutilized capacity there. That remains the case because clearly we are cautious about being overly aggressive in driving volume to fill those in the context of what remains a challenging German demand side environment as I referred to earlier. But encouragingly, we are getting volume growth in that business more generally in spite of, as I say, a fairly In Q3 and we'll look to accelerate that as we go forward.

40:28 Thank you. Our next question comes from the line of Joe Brent. Joe, your line is open. Please unmute and go ahead. Joe, if you're speaking, we cannot hear you. Okay. Our next question comes from the line of Cole Hafen. Cole, your line is open, please go ahead.

41:01 Morning, thanks for taking my follow-up. Just a few clarifications. Just on the forest fair value, I know you've given commentary that it's going to be nil for 4Q as well, but just thinking about 2027, so we get things in the right place, assuming No changes from there. We should still get some positive growth as the trees grow. So we should still see kind of a positive, let's say 30 million forest fair value into 2027. Just looking to confirm that. And then on wood costs into 2027, are there any kind of positives that you could talk about or effectively kind of a peaking in the wood costs in Central East and Europe? that you can point to or how you're thinking about it considering Poland's increasing some harvesting, so that should hopefully be helpful.

41:53 Yeah, the first question on forestry is correct. The trees continue to grow even this year, and they will next year. So your numbers good for growth. The unknown, of course, is both the selling price and the harvesting price. But yeah, I mean, it's a decent number to plug in as best as we know today, coal. And then on wood,

42:19 and I'll just add all the good news is because of the quirks of accounting the lower the fair value this year the higher the or the lower the cost of fillings next year yeah but in a normal world our trees grow and that adds value on a net basis the vagaries of I think we've spoken about this before, but there are two reasons why I say that. One is, as Mike's already mentioned, The Middle East is a very important outlet for sawn timber. That has obviously been severely curtailed given the war in the Middle East, and that in turn has meant the sawmills in Central Europe haven't been running full, which in turn means the forest owners don't harvest The other impact of course is wood is a source of energy, so we are suddenly competing more against people burning timber

43:50 for energy purposes and that increases the I think that is the thing to watch in the main. As you rightly say, there's also initiatives being taken place to increase supply in the short term in the face of this heightened demand environment. And of course, there's nothing that stimulates supply more than higher prices. I think it's hard to assume a lot of relief on the wood cost side, but things can change quite quickly if you do see relief on that front.

44:39 That's beyond me to contemplate the political issues.

44:59 Thanks for the call and then maybe just push you last one on a commercial decision from here. I mean gas prices are elevated. You made some comments that the industry is taking down time, inventory levels are low. If you're struggling at some of your mills on the margins, there are players that are out there that are wondering when do you prefer the Thank you very much. Thank you very much.

45:58 Thank you very much as always for your interest and participation in this call as always. The team's available for any follow-up questions. But just in summary, as you've heard, we have encouragingly been getting very positive momentum on the pricing side. Of course, in the short term, we are seeing huge volatility on the input cost driven by this energy story.

46:44 Undoubtedly, Q3 was right at the higher end of expectations in terms of energy input. and all the related effects that's had and that has an impact in the short term but clearly we remain very positive in terms of the longer term fundamentals and encouraging that we are seeing good pricing momentum of good order books and also a reasonable volume position so with that really thank you for your interest and and All that remains for me to say, have a good day. Thank you very much. Thank you. This concludes the meeting. You may now disconnect.