Continuing cost pressures and negative currency impacts affecting packaging and paper multinational Mondi are expected to result in an underlying performance for the full year modestly below market expectations, despite expectations of a strong final quarter supported by generally higher average selling prices and good growth.
The JSE- and LSE-listed group, however, in a trading update for the three months ended September 30, issued on Wednesday, cited a strong project pipeline, with the group confident of continuing to grow and delivering returns.
Underlying operating profit for the third quarter of €245-million was 8% above the €227-million recorded in the comparable prior year period. The group benefited from higher average selling prices, partly offset by higher costs and negative currency effects.
Underlying operating profit was in line with the second quarter, with the positive pricing momentum seen across most product segments offset by rising costs, negative currency effects and the usual seasonal downturn in uncoated fine paper.
“Strong cash generation from operating activities more than offset the cash outflows related to our capital expenditure programme and financing activities, resulting in a reduction in net debt during the quarter to September 30,” Mondi noted.
Further, finance charges were lower than in the comparable prior year period and in line with the previous quarter primarily owing to the 5.75% 2017 Eurobond maturing in the first half of the year. During the quarter, credit ratings agency Moody’s Investors Service upgraded Mondi’s credit rating from Baa2 to Baa1 with a stable outlook.
Owing to the accelerated rate of decline in local demand, the decision has been taken to cease production of newsprint at the Merebank mill, in South Africa.
During the quarter, Mondi also restarted an idled uncoated fine paper machine, which will produce about 70 000 t/y of uncoated fine paper to serve the local market, displacing imports.
The uncoated fine paper business continues to perform strongly, although the quarterly performance was impacted by ongoing cost pressures, particularly in South Africa, planned maintenance shuts and limited pricing momentum.
Supported by steady demand and cost pressures from rising pulp prices, price increases are currently being implemented in the European, Russian and South African markets for selected products.
Meanwhile, the €335-million modernisation of the Steti mill, in the Czech Republic, was progressing well. Mondi, however, postponed the €135-million investment in a new 90 000 t/y glazed paper machine at the same site owing to concerns around a potential market imbalance following recently announced industry capacity expansions.
Further, the fibre packaging business continues to benefit from good volume growth, particularly in corrugated packaging. Recent paper price increases were partly recovered through box price increases during the quarter. In the industrial bags unit, the opportunity to recover paper price increases implemented early in the second quarter was limited owing to yearly fixed price contracts.
However, strong cost-management continues to limit the impact of cost pressures.
The consumer packaging unit delivered an improved performance in the quarter, although low growth in certain value-added product areas remains a challenge. In response, a programme has been launched to restructure the cost base and align capacity to current market requirements.
This involves various initiatives, including the closure of a plant in Poland, streamlining the UK operations and reducing the fixed-cost base across the business. As a result, a special item charge estimated at €45-million, including an asset impairment of €27-million, will be recognised during the second half of this year.
Planned mill maintenance shuts were completed during the quarter with an estimated impact on operating profit of €30-million. Based on prevailing market prices, Mondi continues to estimate that the impact of planned maintenance shuts on operating profit for the full year will be about €90-million, compared with €35-million in 2016. The expected impact on operating profit in the fourth quarter will be about €20-million.