JSE- and LSE-listed packaging and paper group Mondi recorded a 35% year-on-year increase in underlying operating profit to €162-million during the first quarter of 2013, in line with its expectations, despite the effects of a one-off write-down in the value of green energy credits of €11-million.

On par with the previous quarter’s underlying profit of €163-million, the significant increase over the 2012 comparable period was attributable to improved market conditions in the packaging paper and South African businesses, as well as the benefits incurred from the acquisitions of Nordenia International and the corrugated packaging plants in Germany and the Czech Republic, which was completed towards the end of last year.

However, CEO David Hathorn highlighted that benefits incurred as a result of the acquisitions in the first quarter of this year, were, to some degree, offset by the green energy credits write-down.

Despite the normal seasonal increase in working capital and higher-than-average capital expenditure as a result of the group’s investment in its energy-related projects, net debt was €1.83-billion at the end of the quarter, marking a reduction of €27-million from the end of December last year.

Sales volumes were, on average, above those achieved in the previous quarter, while average benchmark selling prices across all grades in the European businesses were largely unchanged. Selling price increases were realised in recycled containerboard during the quarter and price increases for virgin and white-top containerboard have been announced for the second quarter of 2013.

“Prices and volumes softened in the first quarter of last year and improved as the year progressed.The trading environment has been improving since the beginning of last year and continued into this year.

“We had signficicant volume loss in the fourth quarter of 2011, owing to the European [economic] crisis. Consequently, we started 2012 off at a softer point in terms of demand. Demand recovered to some degree during the year, but it is still not great,” Hathorn noted.

Meanwhile, underlying operating profit in the group’s South African division was above that of the prior quarter. Mondi indicated that the business continued to benefit from a positive domestic trading environment in uncoated fine paper and the weaker South African rand. Average selling prices increased during the period on marginally lower volumes.

Owing to the ongoing decline in domestic newsprint demand and reorganisation within the publishing sector, the decision had been taken to close one of the two newsprint machines in Merebank, KwaZulu-Natal.

Closure and associated mill restructuring costs were estimated to be about €20-million, of which around €15-million is noncash. These costs will be recorded as a special item in the second quarter.

The underlying operating profit in Mondi’s packaging paper division was in line with that of the previous quarter. The business benefited from increased sales volumes and generally stable pricing.

The consumer packaging division delivered stable returns during the quarter. Underlying operating profit was above that of the previous quarter’s underlying result, on the back of an increase in sales volumes, particularly in diaper components.

During the quarter, a decision was taken to close the Lindlar operation, in Germany, and redirect production to existing plants in Germany, Hungary and the Czech Republic. Restructuring and closure costs ammounting to €9-million were recognised as a special item.

Underlying operating profit for uncoated fine paper was below that of the previous quarter and the comparable prior-year period, mainly owing to lower average selling prices.

GOING FORWARD

Looking ahead, the company highlighted that the effects of expected capacity increases in recycled containerboard and uncoated fine paper, coupled with prevailing demand softness across the European businesses, remained a concern.

“In a fairly unexciting demand environment, we are seeing a bit of capacity growth and want to cuation that it may not be advantageous to prices.

“But the real issue is how the demand scenario holds together. Europe remains fragile, still under pressure. But, given the environment we are operating in, the business is running well,” Hathorn said.