Mondi Group: Interim Management Statement 5 May 2011
Mondi Group - May 5th 2011, 09:44
This interim management statement provides an update on the financial performance and financial position of the Group since the year ended 31 December 2010, based on management accounts up to 31 March 2011 and estimated results for April 2011, which have not been audited or reviewed by Mondi’s external auditors.
Reviewed half-yearly results for the six months ending 30 June 2011 will be published on or around 28 July 2011
The Group’s underlying operating profit in the first quarter 2011 of €187 million was above that of each of the last two quarters of the prior year and well in excess of that achieved in the comparable period of the prior year. This reflects both the positive trading environment and a very strong operating performance.
Price increases have been realised across all major products in the first quarter of 2011. Coupled with sales volume increases across all businesses on a like for like basis, this has more than offset the ongoing cost pressures being experienced across most business segments. Furthermore, there were no major plant maintenance shuts during the first quarter.
Cash flow from operations remains strong despite an increase in working capital, largely attributable to increased revenue and seasonal effects. Following the conclusion of the major capital projects in Swiecie and Syktyvkar, capital expenditure was markedly reduced when compared to the first quarter of 2010.
The financial position of the Group at 31 March 2011 remained robust with net assets largely unchanged from the position at 31 December 2010.
In April 2011, Mondi announced its intention to separate its interest in Mondi Packaging South Africa (MPSA) via a demerger whereby all the ordinary shares in MPSA held by Mondi Limited will be distributed to Mondi Limited shareholders and MPSA listed under a new name on the JSE. This will be coupled with a matching action, in terms of the dual listed structure, in the form of a share consolidation of Mondi Limited shares. Full details of the proposed transaction will be provided in a separate circular to be issued to shareholders during May 2011. Should the transaction be approved by shareholders, MPSA will be classified as a discontinued operation and underlying operating profit restated to exclude the results of MPSA.
On 14 April 2011, Mondi signed a new €750 million 5 year syndicated revolving credit facility with 10 banks 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 4.2 years from 2.6 years as at December 2010, with unutilised committed borrowing facilities of €760 million.
Except as discussed in this interim management statement, there have been no other significant events or transactions impacting either the financial performance or financial position of Mondi since 31 December 2010 up to the date of this statement.
Europe & International
The Uncoated Fine Paper (UFP) business continued to perform very strongly. Underlying operating profit was well above that of the comparable period of the prior year and the final quarter of 2010, which was largely attributable to a strong operating performance at the Group’s integrated Syktyvkar and Ruzomberok mills, with the former now benefiting from the recently completed mill modernisation programme. The unintegrated operations also benefited from lower average input pulp prices.
In the Corrugated business, underlying operating profit was well above the first quarter of 2010 and above that achieved in the fourth quarter of last year on the back of increased volumes from the Swiecie plant. Average benchmark containerboard prices increased marginally when compared to the fourth quarter of 2010. These gains were however largely offset by ongoing input fibre cost pressures. Notably, benchmark recovered fibre prices were up 18% between 31 December 2010 and 31 March 2011, while wood costs were up on average in excess of 10% in central Europe when compared to the fourth quarter of 2010. In response to rising recycled fibre costs, further price increases of around €60 per tonne for European recycled containerboard have been announced.
In the Bags & Coatings business, underlying operating profit was up significantly on both the comparable period in the prior year and the fourth quarter of 2010 primarily due to an improved performance in the kraft paper business. When compared to the fourth quarter 2010 performance, results were also positively impacted by a recovery in the profitability of the industrial bags business with price increases having been successfully implemented on annual contract volumes. Kraft paper prices were up in the first quarter, with further price increases of 7-12% announced to take effect during April 2011, on the back of rising input costs and continued good demand. The coatings & consumer packaging business continues to deliver good results with price and volume improvements over the prior year.
South Africa Division
The South Africa Division’s underlying operating profit was up significantly on the comparable period in the prior year, and broadly in line with the fourth quarter of 2010. Benchmark hardwood pulp prices were marginally lower in the first quarter of 2011 compared to average price levels achieved in the fourth quarter of 2010, although this was offset by stronger export containerboard prices. The continued strength of the local currency remains a challenge for the business, while a maintenance shut in Richards Bay will impact the results for the second quarter.
Mondi Packaging South Africa (MPSA)
The business continues to perform well with operating profit in the first quarter exceeding that of the comparable prior year period. Profitability is impacted by seasonal effects with results in the second half of the year typically higher than those of the first half.
The Newsprint business continues to deliver below expectation with price increases achieved at Aylesford insufficient to restore this business to profitability. The Mondi Shanduka Newsprint joint venture is impacted by rising electricity prices resulting in underlying operating profit below that of the prior year.
Input costs remain elevated, at or near the highs of 2010. Recovered fibre costs continue to increase with benchmark recovered fibre costs having increased 18% by 31 March 2011 compared to levels at 31 December 2010. Similarly, wood costs remain under pressure, with average central European wood prices increasing in excess of 10% when compared to the fourth quarter 2010. Energy and other raw material input costs have also increased during the first quarter, mainly on the back of rising crude oil prices. The Group remains largely balanced with respect to pulp production and consumption and thus the impact of the slightly lower pulp prices, although impacting the various divisional results, is largely neutral for the Group.
The emerging market currencies remain relatively strong against the euro, placing pressure on the Group’s cost base. The weakening of the US dollar against the euro seen over the reporting period is of concern to the extent it may undermine support for product pricing in the Group’s key European markets.
Capital expenditure remains within the targeted range of around 80% of depreciation. Spending on the mill modernisation in Syktyvkar is expected to be completed by the middle of the year.
Finance charges remain at similar levels to the second half of the previous year although the amount capitalised has reduced significantly following the completion of the Syktyvkar investment.
Rising input costs are impacting on margins, and the recent weakening of the US dollar is a concern to the extent it may inhibit the ability to pass on further cost increases. However, fundamentals generally remain strong in the Group’s key paper grades, with the upward pricing momentum witnessed in 2010 continuing into the first quarter of 2011. Given the Group’s favourable product and geographic exposures, coupled with its integrated low cost position and focus on performance, we are confident of making further progress in 2011.
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