International packaging and paper group Mondi has reported strong performance in its South Africa division, which achieved an underlying operating profit of €44-million in the six months ended June, a 52% increase on the comparable prior year period, boosted by higher domestic selling prices, good domestic containerboard volume growth and improved export margins.

Mondi group CEO David Hathorn told Engineering News Online that the company had been successful in its push for export pulp and containerboard price increases to compensate for cost inflation. “On the export side, the effect of the weaker rand has also been helpful in improving export margins.”

The focus on cost containment in the local business continued, in particular on reducing forestry costs through increased mechanisation.

“In the forestry area, we continue to mechanise to try and simplify and reduce the cost base. The Richards Bay mill is very stable and at Merebank, we are now down to a two-machine mill site, which simplifies that mill and provides us with a stable platform to work with for some time to come,” Hathorn said.

However, comparison with the previous six months was distorted by a large fair value gain on the revaluation of forestry assets of €27-million recognised in the six months to the end of 2012. The comparable amount for the first half of 2013 was €10-million.

In May, Mondi announced the proposed closure of one of the two newsprint machines at Merebank. The machine stopped production with effect from July 1, but the business would continue to operate the remaining 120 000 t/y newsprint machine. Further restructuring activities at Merebank, as a result of the closure of the newsprint machine, were also implemented. In total, a special item charge of €18-million was recognised.

Meanwhile, from a group perspective, the positive momentum from the end of the previous year, with good sales volumes and reasonable price levels in Europe, continued into the first half of 2013.

Mondi achieved a record underlying operating profit of €366-million, 21% above that of the second half of 2012 and 35% above that of the comparable prior year period. This reflected the strong operating performance and reasonable trading environment, particularly in packaging paper and the South African division, as well as the benefit of the group's strategic acquisitions completed in the latter part of the previous year.

These acquisitions included Mondi Świecie’s May 2012 purchase of the entire share capital of Saturn Management from Polish Energy Partners for €31-million in cash and the assumption of debt of €57-million. In October, Mondi acquired 99.93% of the outstanding share capital of Nordenia from Oaktree Capital Management and certain other minority shareholders for a cash consideration of €259-million.

In November, the group bought two corrugated box plants in Germany and the Czech Republic, as well as a 105 000 t recycled containerboard mill in the Czech Republic from Duropack Group for €133-million.

Mondi’s focus over the past six months had been on integrating and optimising the acquisitions and executing the key expansion projects initiated over the past 18 months.

“The group's major expansion projects are progressing according to plan and remain within budget. Some of the synergies identified at the time of the acquisitions have already been achieved, and we remain on track to meet the previously announced synergy targets,” Hathorn said.

He highlighted that the integration of Nordenia had gone particularly well, with the expected synergies having increased by 30% by the time of the year-end results, despite a soft macro environment in Europe.

“We are very pleased with the acquisition, it is materially earnings enhancing,” Hathorn noted.

Compared with the first half of 2012, sales volumes grew across all major paper grades. While European demand remained generally sluggish, this was compensated by market share gains. A reasonable industry supply/demand dynamic, supported by some supply side rationalisation, enabled the group to maintain or increase selling prices in most key paper grades during the period.

Mondi remained strongly cash generative with cash generated from operations of €431-million. Working capital as a percentage of turnover was 13%, reflecting the normal seasonal pick-up in the first half of the year, as well as the changing business mix following the acquisition of Nordenia in the fourth quarter of 2012.

Capital expenditure (capex) of €167-million represented 89% of the group's depreciation charge. Mondi reported good progress on its major strategic projects, which it said should see the rate of capex increase in the second half as planned.

Net debt of €1.84-billion at June 30 decreased from €1.87-billion at the end of December, while an interim dividend of 9.55c a share, up 7% on the prior year interim dividend of 8.90c a share, was declared.

OUTLOOK

Mondi stated that new industry capacity in the uncoated fine paper segment, coupled with prevailing demand softness in Europe, could impact on the supply/demand balance in the short term.

Further, the second half would be impacted by the group’s regular mill maintenance programmes, the impact of which was estimated to be between €50-million and €60-million on underlying operating profit when compared to the first half of the year.

However, Mondi was confident that the momentum from the strong first half performance and the expected continuation of a good pricing environment in the packaging grades would enable the group to deliver results in line with expectations.

“There are some big capital projects that are ongoing, our spent capex of €370-million and depreciation will be higher than usual for this year and next year. As these projects are all on track and within capital costs, we are optimistic and need to keep the focus on delivering those over the next 18 months,” Hathorn stated.