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Edited Transcript of MMK.VA earnings conference call or presentation 20-Aug-19 7:30am GMT

Half Year 2019 Mayr Melnhof Karton AG Earnings Call (Q&A)

Vienna Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Mayr Melnhof Karton AG earnings conference call or presentation Tuesday, August 20, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Stephan Sweerts-Sporck

Mayr-Melnhof Karton AG - Head of IR & Corporate Communications

* Wilhelm Hörmanseder

Mayr-Melnhof Karton AG - Chairman of the Management Board & CEO

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Conference Call Participants

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* Markus Remis

Raiffeisen CENTROBANK AG, Research Division - Chief Analyst

* Matthias Pfeifenberger

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Dear, ladies and gentlemen, welcome to the Mayr-Melnhof Karton AG conference call. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to the speakers of Mayr-Melnhof Group. Please go ahead.

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Stephan Sweerts-Sporck, Mayr-Melnhof Karton AG - Head of IR & Corporate Communications [2]

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Good morning, ladies and gentlemen. On behalf of Mayr-Melnhof Group, my name is Stephan Sweerts-Sporck, Head of Investor Relations and Corporate Communications. I would like to welcome you to this Q&A conference call on our first half year results, which we released earlier this morning together with a video presentation by our CEO, all available on our website, mayrmelnof.com.

In this call now, we want to provide you with the opportunity to address questions on today's results directly to our CEO, Mr. Hörmanseder.

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Wilhelm Hörmanseder, Mayr-Melnhof Karton AG - Chairman of the Management Board & CEO [3]

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Good morning.

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Stephan Sweerts-Sporck, Mayr-Melnhof Karton AG - Head of IR & Corporate Communications [4]

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So I invite you to start with your questioning stating your name and company at the beginning. Due to the international audience, we would very much welcome and appreciate if you could bring forward your questions in English, but German still stays an option.

So please go ahead. The line is yours.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question received is from Markus Remis of RCB.

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Markus Remis, Raiffeisen CENTROBANK AG, Research Division - Chief Analyst [2]

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Markus Remis, RCB. Let me first start with a question related to the performance of the Packaging segment in the second quarter. If -- yes, if you strip out the contribution of TANN, then there is an organic decline. I would be interested to hear how much of that is actually underlying kind of market weakness. How much is maybe working-day effect? And if there is some sort of market weakness you could pinpoint it to kind of the end markets or any regions? That would be the first one.

And then secondly, also an update regarding the integration process of TANN would be very much appreciated. How far have you come so far and what are the major tasks to remain for the coming months? And also in connection with that, I would be interested to hear if you have already some comments for us how the -- how the cross-selling potential looks like, if you have made some inroads with the customers, that would be very helpful.

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Wilhelm Hörmanseder, Mayr-Melnhof Karton AG - Chairman of the Management Board & CEO [3]

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Okay. Let me start with the -- to answer the second question. The integration of the TANN GROUP with all its global factories is going very well. I would even say that the integration is successfully done. There are some -- of course, there are some items -- infrastructure items of IT, and so on, but in total, it is done and the outcome of this integration definitely meets our expectations. So this is a very positive statement about TANN.

What has to -- what will still come? Clearly, main focus, well, we are quite -- I think quite experienced from the past. Integration for MM always means increasing productivity. We have made quite interesting progress so far, better productivity. Productivity means that we will see in the near future that we may widen our footprint of tipping paper production without buying new machines. This means that we would have machines free from TANN, for example, to bring it into countries where we -- there is no tipping paper production yet, and in locations where we already have production for cigarette packaging, means rotogravure infrastructure. This could be, I would say, in the next 12 months, quite an interesting benefit without increasing fixed cost. So this is quite encouraging for us.

Other inroads are also ongoing, that we plan, as we have said before, in 1 or 2 locations of TANN to bring in our other production concept, means packaging, hinge-lids for cigarette packaging. So all this is more or less on the -- this is planned and is ongoing to be seen in the next 12 months because such projects take some time, build infrastructure, buy machines, or bring machines. So TANN is leaping expectations and expectations from my point of view, from operational point of view, in the next 12 months will definitely be even higher than in the past we had. What we see is quite encouraging for TANN.

The first question, MM -- the channel packaging. Channel packaging is definitely -- the effect you have mentioned is definitely driven by market environment because we do quite a lot in bringing down fixed costs in packaging, means as you may have seen or you may see in the next report that head count goes down significantly, but volume throughput is even increasing. So this is a clear picture which is required by the volatility of demand in our main market in Europe.

And so last year definitely was quite strong. There is no doubt about that. The overall picture of the market has slightly changed in the last 12 months, but changed to the -- in the way that we see less dynamics, and we see definitely no growth so far in this business in Europe.

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Markus Remis, Raiffeisen CENTROBANK AG, Research Division - Chief Analyst [4]

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Can I follow-up shortly on the cost cutting and on the programs? You also mentioned that in the report to improve the efficiencies. Did I get it right that cost savings will be mostly centered around head count reduction? Or do you have any other adjustment eventually also kind of adjusting capacities at one or the other site as an option or...

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Wilhelm Hörmanseder, Mayr-Melnhof Karton AG - Chairman of the Management Board & CEO [5]

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No, no. I think what we see for the moment and this is valid for same time, the footprint is quite -- the footprint is fine. The footprint is okay. It is a footprint that we think we should and can keep for our customers in the market. So closing what I mentioned is not the agenda at the moment and bringing down fixed cost is the issue. Evidently, we are quite well equipped in all factories. So capacity is there. Depreciation is not killing us. And so the main thing is increased throughput and parallel reduce fixed cost means labor cost.

Of course, there is always a waste program, there's transport cost and so on. But the main issue for the moment is labor cost because the labor cost per capita from Eastern Turkey to Romania, Poland, Germany, U.K., France, Austria, the specific cost per capita is -- goes in the total opposite direction than the market development. We see -- as you all know, we see unions asking for 3%. In Poland, they are asking for 8%. In Turkey, they are asking 15%.

So the only reaction we can, so far, apply to keep the margins healthy so far is reduction in head count to balance the increase of labor cost per capita. And what means that clearly, this is not a simple game. This is all based on quite a sophisticated automation concept all over the group and the rationalization concept in administration in the factories. This is why -- that is the reason why I see, and I would make a statement that the development, that such a tendency for head count development will go further, will not stop here at that level because quite strong and thorough programs are just applied at the moment to continue this development.

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Markus Remis, Raiffeisen CENTROBANK AG, Research Division - Chief Analyst [6]

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Okay. Very clear. Can I then just ask you specifically -- you already gave me the keyword Turkey, how is your business developing there? I think in the past, it was quite kind of a split picture between the Eastern part of the country, where, I think you have 2 factories and the other 2 factories. So how's business progressing there? And also on Iran, in the past, I think the business was quite [miserable] despite the economic sanctions and so on. Is that still the case? And can you still repatriate cash from the country?

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Wilhelm Hörmanseder, Mayr-Melnhof Karton AG - Chairman of the Management Board & CEO [7]

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First point, Turkey. Turkey, I think is a clear success story regarding reducing fixed cost, regarding strengthening the operating margin in all our factories, Eastern Anatolia, Central and Western Turkey. We have suffered last year, yes, during the currency crisis when we have seen some EUR 8 for the -- TRY 8 for the euro. We are out of this thrust, this is for sure. And we are back to a level where -- which is quite encouraging for the future. Capacity utilization and margin are healthier. And I think here, we have developed clear, in the Turkey, competitive advantage against all of the other family-owned businesses by automation, by rationalization. So it is not a head count -- it is not a headache at the moment. Clearly, we have 6.2, 6.3. Nobody -- I would not know what happens if it comes down to 8 again. But we are well prepared for any headwinds to come in Turkey.

So next point, Iran. You are well aware that in Iran, we are more or less the only and so the biggest producer for cigarette packaging with our factory in Tehran. Market is very strong. There are more or less all main big inter-global cigarette producer have their factories in Iran. I think this is quite important to know. You name them, they are all there. They do their business there. And they pay their bills, this is very important. So the volume is still growing. It is -- on the business model, it's absolutely okay. The topics you have mentioned, the sanctions, the product, no product, no machine is subject -- and no procedure is subject to any sanction. So that is why we are calm and we are totally -- we are absolutely free to operate. There's no obstacle to operate there. Repatriating is -- goes in a way that it goes step-by-step and it goes.

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Markus Remis, Raiffeisen CENTROBANK AG, Research Division - Chief Analyst [8]

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Okay. Very good. Last question from my side on M&A. Also, kind of referring to recent statement that you would still be looking for further consolidation in the market. Can you provide us an update on your efforts on this front?

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Wilhelm Hörmanseder, Mayr-Melnhof Karton AG - Chairman of the Management Board & CEO [9]

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Yes, the effort is ongoing. And we have, of course, some quite interesting cases on our table, and we are working on them quite, I would say, intensively, but also quite disciplined, yes. And the discipline is, I think, quite important because when I look at the multiple you give us, the multiple MM has got now on the market from the investors, from yours, I have to respect that. And so I have to respect that in a way that I cannot offer multiples far beyond the one you value us. So this is, to some extent, a barrier for me, yes? If I go out and pay 9, I have plentiful of opportunities, which we all know I should not. So the last -- I would say, the last barrier for me was around 7. So -- but the barrier gets -- is shifted lower now by the overall capital market development. I think we have to respect that. The overall expectation and the overall outlook has to be well reflected in valuations. But there are definitely opportunities on the table.

I'm quite shy regarding goodwill and all this intangible assets, so that's been a good recipe in the past. And if one is to be paid like TANN, it has to be a very sound and profound value for it, yes?

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Markus Remis, Raiffeisen CENTROBANK AG, Research Division - Chief Analyst [10]

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And I think that market appreciates your market pricing discipline on M&A, so...

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Wilhelm Hörmanseder, Mayr-Melnhof Karton AG - Chairman of the Management Board & CEO [11]

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I think so. In the long run, I think it pays off, yes.

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Operator [12]

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(Operator Instructions) The next question received is from Matthias Pfeifenberger of Deutsche Bank.

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Matthias Pfeifenberger, Deutsche Bank AG, Research Division - Research Analyst [13]

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I don’t know if this has been asked. Maybe Dr. Hörmanseder, do you want to comment on recycled prices? You mentioned more price pressure and also what you are seeing specifically on the demand side? Is it weakening a bit? But how much do we have to give in, in terms of the prices? And have they really started to fall on a product basis in Europe?

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Wilhelm Hörmanseder, Mayr-Melnhof Karton AG - Chairman of the Management Board & CEO [14]

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You are asking regarding cartonboard prices, cartonboard division or...

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Matthias Pfeifenberger, Deutsche Bank AG, Research Division - Research Analyst [15]

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Yes.

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Wilhelm Hörmanseder, Mayr-Melnhof Karton AG - Chairman of the Management Board & CEO [16]

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Okay. First point, recycled fiber prices are flat. There's no specific situation. Maybe there are some fluctuations, but this maybe EUR 1, EUR 2, maximum EUR 3 per ton from month-to-month, but we definitely -- I think we have found a rock-bottom now for recycling fiber prices, yes? You all know that on the upper end, virgin fiber prices as pulp prices -- pulp related still are on the downward trend, which is a benefit, but not a huge benefit for us because we are not a biggie, we are not a big consumer of pulp. The only fresh fiber we need and we convert, we do our own in our grinding mills and groundwood mills. So fiber prices, I would say I would not expect any major influence on -- impact on earnings the next -- until end of the year so far. Availability is quite okay. So this is not a headache, so to say, for the moment.

On the other side, demand, demand is quite volatile. This is one thing, quite volatile. But as we have mentioned, the product portfolio we offer now is giving us quite a robust market position. This is the reason why price decreased in a way that we would name it as a significant change is not happening. And even, let's say, in months like August when there are many holidays and many -- and some of the countries are shut down, we have no intention at all to sacrifice our quite attractive price pattern we -- for our products we have at the moment.

So we -- as always, we would first cope with lower order backlogs, but still, at this moment, the machines are running. The order backlog maybe -- is definitely a little bit smaller than last year when it has been quite, quite high, but machines are running and I would say so from month-to-month, we see what's coming, no price adjustments for the moment.

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Matthias Pfeifenberger, Deutsche Bank AG, Research Division - Research Analyst [17]

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And maybe one question to the backlash on plastics. Are you getting increased requests from your existing customers or even new customers in terms of you mentioned in the past some reinforcements for yogurt containers out of cartonboard. What's happening there? Do you see this as a volume factor in the future? Or is it negligible?

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Wilhelm Hörmanseder, Mayr-Melnhof Karton AG - Chairman of the Management Board & CEO [18]

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There is an enormous flurry. There are so, so many activities from more or less all multinational, the big boys, the big names. Customers try to reduce the plastic weight they have, try to replace it to any other such activities. A lot of activities. And there is something coming, but -- there's something now in the order books, but we have an order book of 1.7 million tons a year. So based on the 1.7 million tons, it is not yet something which I would budget for next year as a very big number of tonnage.

But the trend is clear. Most of the customers we have or most of the customers who use plastic, definitely they sit down and have quite intense discussion how to deal with this pressure they face, which come at the end of the day, decision which makes an inroad for us for cartonboard. But not only for cartonboard, we should not forget that specialty paper, which we don't use, we don't produce, may be also a beneficiary. This is not a -- it is not a one-way direction that reduction of plastic means replaced by cartonboard. Some will be replaced by cartonboard, some will be replaced by specialized paper. It will come but I would assume that in the budget '22 -- in the budget '21, we should -- we would -- if it continues as it looks like, we should see a number which we could then -- that we can disclose. Not for the moment.

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Operator [19]

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(Operator Instructions) Actually, we have no further questions. I hand back to the speaker.

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Stephan Sweerts-Sporck, Mayr-Melnhof Karton AG - Head of IR & Corporate Communications [20]

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So since there are no more questions, which are waiting, I want to thank you very much for participating in this call. Our next results release will be on the third quarter on November 14 of this year. And so we thank you, and say goodbye.

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Operator [21]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.