Mondi H1 2011 results: operating profit up 74% from year ago to Euro 354m

The Group's underlying operating profit from continuing operations of €354 million was up 74% on the comparable prior year period and up 39% on the second half of the previous year.

Sales volumes continued to improve and average selling prices for the period were higher across all key paper grades compared to the second half of the previous year. Rising commodity input costs partially offset the benefit from revenue gains.

The demerger of Mpact was approved by shareholders on 30 June 2011 and was effected on 18 July 2011, with Mpact having commenced trading as an independent listed entity on 11 July 2011. The related consolidation of MondiLimited shares will be effected on 8 August 2011, with the new Mondi Limited shares commencing trading on 1 August 2011. Mondi Limited's shares in issue will reduce from 147 million shares to 118 million shares, bringing the total number of shares in issue for the Mondi Group down from 514 million to 486 million.

At 30 June 2011, the results of Mpact are presented as a discontinued operation and comparative information has been re-presented accordingly. In order to reflect the continuing business of the Mondi Group, the Group has elected to present an additional alternative measure of earnings per share as if the recapitalisation and demerger of Mpact and Mondi Limited share consolidation had taken place at the beginning of each period presented. This is more fully detailed in note 11 of the financial statements. Set out in the table following the principal risks and uncertainties, are the illustrative effects on the Mondi Group as if the Mpact recapitalisation, subsequent demerger and Mondi Limited share consolidation had taken place at the beginning of each period presented. Basic earnings per share - alternative measure was 41.7 cents, an increase of 106%.

An interim dividend of 8.25 euro cents will be paid.

Net debt at 30 June 2011 decreased from 31 December 2010 by €164 million to € 1.20 billion, excluding the net external debt of Mpact (€111 million). Robust EBITDA generation and the benefits of an exchange rate gain were offset primarily by an increase in working capital (in line with growth in revenue), the annual interest payment on the Eurobond, payable in April of each year and a significantly increased final dividend payment.

The average maturity of the Group's committed debt facilities is 4.1 years with unutilised committed borrowing facilities of €781 million.

Europe & International Division, Corrugated

The Corrugated business achieved a significant improvement in underlying operating profit to €105 million, delivering a ROCE of 20.1%. The business benefited from significant increases in selling prices, increased volumes from the Świecie mill as the recycled containerboard machine commissioned in late 2009 continues to ramp-up to full production and a significantly increased contribution from the rebuilt containerboard machine at Syktyvkar, completed in the second half of 2010.

Average benchmark selling price increases were recorded for recycled containerboard (28% up on the first half of 2010 and in excess of 10% up on the second half of 2010), kraftliner (31% up on the first half of 2010 and 6% up on the second half of 2010) and white top containerboard (18% up on the first half of 2010 and 7% up on the second half of 2010). Input cost pressures remain with average benchmark recovered paper prices having increased by 23% in the period compared to the second half of the previous year and wood and chemical prices also continuing to increase.

Price increases achieved in the corrugated box plants more than offset the increased paper input costs, leading to some margin expansion.

Planned maintenance shuts at both Świecie and Syktyvkar, the two largest and most profitable operations in this business unit, will impact the second half.

Input costs and currency exposure

Average fibre input costs have increased during the first half of the year.

Procured wood prices in central Europe continue to increase, albeit at a slower pace than in the comparable prior year period. Average costs have increased by approximately 12% compared to the second half of the previous year.

Average pulp prices have increased by 2% for softwood whilst prices have reduced by 2% for hardwood during the period when compared to the second half of the prior year. Closing benchmark prices at 30 June 2011 were 8% up for softwood and 3% up for hardwood compared to 31 December 2010 prices.

The average benchmark price of recovered paper increased by 23%, when compared to the second half of the previous year.

Energy and chemical prices also increased during the period under review.

Mondi benefits from its structural position in South Africa and Russia due to integration into wood supply. Similarly, the Group's integrated pulp and paper mills negate the impact of pulp price escalations. The Group, on an annualised basis, is now marginally long on pulp following the completion of the Syktyvkar modernisation and other restructuring activities. Restructuring initiatives and an on-going focus on cost reduction and productivity improvement further mitigate the impact of input cost pressures.

More recently there has been evidence of some weakness in certain key input costs, most notably recovered paper.

The Group continues to experience the effects of significant exchange rate volatility. The Group's hedging programme is intended to curb the impact of short-term fluctuations in exchange rates by hedging its on-balance sheet exposure. Over the period under review, strong emerging market currencies, coupled with on-going relatively high levels of inflation in these jurisdictions, served to increase the underlying cost base of operations in those countries, thus eroding their relative competitiveness. This is particularly the case in South Africa, and to a lesser extent in the emerging European markets of Poland, Czech Republic, Turkey and Russia. The on-going weakness of the US$ relative to the euro continues to pose challenges, weakening the ability to achieve price increases in Europe.

Cash flow

Cash generated from operations amounted to €403 million, an increase of 50% on the comparable prior year period primarily due to the significant increase in EBITDA generation. As expected, cash flow generated from operating activities was negatively impacted by an increase in working capital on increased trading activity and seasonal fluctuations, although working capital levels remain well within the target range of 10-12% of turnover.

Capital expenditure

Capital expenditure of €126 million, including €16 million on the major project in Russia, was incurred. Outside of this major project, capital expenditure for the period, excluding Mpact, is at 53% of depreciation.

The Group is exploring various opportunities in respect of energy efficiencies in its European mills. The previously announced process for the intended exercise of the option by Mondi Świecie to acquire the power and heat generating plant owned by Saturn Management is unlikely to be concluded before the end of the current year.

Treasury and borrowings

Net debt at 30 June 2011 was €1.20 billion, a decrease of €164 million from 31 December 2010. Positive exchange rate movements of €46 million and the classification of the Mpact external debt of €111 million as held for sale positively impacted this figure. The settlement of intercompany loans from Mpact, following its recapitalisation and subsequent listing, will be reflected in the second half of the year.

The net debt to trailing 12 month EBITDA ratio was 1.3 times. On 14 April 2011, Mondi signed a new €750 million five year syndicated revolving credit facility to refinance its existing €1.55 billion revolving facility that was due to mature in June 2012. Following this refinancing the average maturity of the Group's committed debt facilities is extended to 4.1 years from 2.6 years as at December 2010, with unutilised committed borrowing facilities of €781 million.

The long-term corporate credit ratings received of Baa3 (stable outlook) from Moody's Investor Service and BB+ (positive outlook) from Standard & Poor's were confirmed during the period.

Outlook

In the Europe & International Division, following a period of strong demand order books remain good but are somewhat softer, having returned to more normalised levels. As previously indicated, maintenance shuts planned at a number of the large and strongly profitable European mills will impact second half performance. The South Africa Division should benefit from improved output following the extended maintenance shut taken in the first half.

Looking further ahead, while the uncertainties in the broader macroeconomic environment continue to be a concern for demand, supply-side fundamentals in our core grades remain good. Overall, we believe Mondi remains well-positioned to continue adding value for shareholders.

David Hathorn, Chief executive officer, said:

"The good result achieved in positive market conditions confirms the validity of our strategy. All operations are running well and our recent major investments have made a meaningful contribution to the Group's profits.

The successful completion of the Mpact demerger endorses the strategies of both Mondi and Mpact, allowing both businesses to pursue their increasingly divergent strategic priorities and focus on their respective growth opportunities.

In the Europe & International Division, following a period of strong demand order books remain good but are somewhat softer, having returned to more normalised levels. As previously indicated, maintenance shuts planned at a number of the large and strongly profitable European mills will impact second half performance. The South Africa Division should benefit from improved output following the extended maintenance shut taken in the first half.

Looking further ahead, while the uncertainties in the broader macroeconomic environment continue to be a concern for demand, supply-side fundamentals in our core grades remain good. Overall, we believe Mondi remains well-positioned to continue adding value for shareholders."

Posted Date: 29th Jul 2011