While Mondi’s revenue for the year ended December 31, at €6.4-billion, remained largely unchanged year-on-year, the international paper and packaging group succeeded in lifting overall profit 10% to €767-million for the 12 months, leveraging strongly off acquisitions and a solid showing by the group’s packaging paper division.

Cash generated from operations of €1.03-billion was broadly in line with 2013, despite an increase in working capital of €87-million.

Excluding the impact of acquisitions, working capital accounted for 12.3% of revenue, marginally above the group’s targeted 10% to 12% range.

Underlying earnings of €1.07 a share were up 13% compared with the prior year, while shareholders would likely see a final dividend of €0.28 apiece – lifting the year’s total dividend 17% to €0.42 a share.

Reacting to the results, the company’s share price climbed to an all-time high since its JSE listing, peaking at R235.36 on Tuesday.

CEO David Hathorn told Engineering News Online that the company’s financial performance validated its emerging market- and packaging-focused strategy.

“Clearly packaging [paper] is the right space to be in in terms of the product mix that we have. We continue to enjoy structural growth for those products and [will continue to] focus on emerging markets, particularly in Central and Eastern Europe, which continue to enjoy higher growth rates than mature markets.

“I do believe that the 2014 [results are] a verification that the strategy has been correct in terms of where we deployed capital and how we’ve deployed capital – both from a product and geographic perspective,” he commented.

PACKAGING PAPER DIVISION
Building on the “strong” performance of 2013, the company outlined in a result statement that the packaging paper division’s underlying operating profit increased 11% to €342-million for the year, with a return on capital employed (ROCE) of 23.7%. 

As a net exporter from Russia, the Czech Republic and Sweden, the devaluation of these currencies relative to the euro provided a net benefit to this business.

“This was achieved on modest volume growth, lower costs and foreign exchange gains, offset in part by lower average selling prices,” Mondi outlined on Tuesday.

FIBRE PACKAGING
The fibre packaging business benefited from lower paper input costs and good volume growth over the 12 months, while consumer packaging saw a strong improvement in trading in the second half of the year.

Underlying operating profit improved 19% year-on-year to €102-million, while ROCE was up 13.4%. 

“The business benefited from gross margin expansion and good cost control,” stated Mondi.

Meanwhile, the corrugated packaging business saw “strong” improvement on higher average selling prices across all geographic regions, stable input costs and good fixed-cost management.

Sales volumes were broadly in line with the previous year despite the negative impact of the rationalisation activities in Turkey, completed in the previous year. 

The business was, however, negatively impacted by currency translation losses as a result of the weaker Turkish lira.

CONSUMER PACKAGING
Underlying operating profit for the consumer packaging business increased 22% to €96-million, with a “particularly encouraging” second-half showing as the business benefited from improved volumes, input cost reductions and successful implementation of various sales and margin improvement initiatives.

“Management sought to proactively phase out a number of lower value-added mature products during the year, although the weak trading conditions, particularly in the first half, made it difficult to adequately replace these volumes by sales into higher value-added segments,” Mondi said.

A number of steps were taken during the year to improve the operating performance of the business, including increasing investments in innovation activities and the business’ sales and application engineering infrastructure, as well as further optimisation and specialisation of production facilities. 

“[For example] the acquisition of a plant for €17-million provides additional production capacity and, importantly, expands the [company’s] production technology base through the addition of flexographic printing technology in Poland,” Mondi noted.

UNCOATED FINE PAPER
The company’s uncoated fine paper business came under pressure from weaker pricing and negative currency effects in 2014 but continued to deliver “strongly”, while the South Africa division benefited from higher average selling prices and the weak rand. 

The business delivered operating profit of €148-million, down on the prior year as a result of lower average selling prices in Europe and the impact of a significantly weaker Russian rouble. 

“Contributing to these results were the benefits from recently completed capital investments, primarily around energy efficiencies and other cost optimisation in the pulp and paper operations, and continued strong cost management across the group,” Mondi advised.

Demand for uncoated fine paper increased by around 1% in Europe, while Russian demand was estimated to have declined by about 3% compared with the previous year.

ACQUISITIONS
While acquisition-led growth remained a key component of the group’s strategy, and opportunities continued to be evaluated as they arose, management outlined that it currently saw greater opportunity for value-enhancing growth through capital investments in existing operations. 

A number of key capital projects were completed during the year, including a €70-million, 155 000 t/y bleached kraft paper machine, in the Czech Republic, a €128-million recovery boiler in Slovakia and a €30-million, 100 000 t/y softwood pulp dryer in Russia. 

Mondi also extended its global leadership position in industrial bags with the acquisition of Graphic Packaging’s bags business in the US, in June, while the group acquired a modern converting plant in Poland for its consumer packaging business in July.

Further major projects were approved for 2015 and 2016, amounting to a total capital commitment of about €420-million.

In 2015, the group would invest €166-million in a Poland-based recovery boiler, turbine and biomass boiler, €106-million in its packaging paper division and €24-million in its fibre packaging business.

In the following financial year, Mondi planned to invest €94-million on the second phase of the Polish recovery boiler, turbine and biomass boiler project as well as €30-million to upgrade a wood yard in South Africa.

“The current deployment of capital is [possible] because we have these long-life, low-cost assets in the right places making the right types of products,” said Hathorn.

PRODUCTION COSTS
Mondi noted that it had benefited from a general reduction in variable costs compared with the prior year, with European wood costs lower as a result of reduced demand and currency effects. 

Paper for recycling costs were down 3% on the previous year, while chemical input costs, particularly starch, also declined.

The packaging converting operations benefited from lower average paper input costs, while benchmark polyethylene prices were broadly in line with the previous year but declined sharply towards the end of the year, owing to lower oil prices.

Mondi also benefited from lower energy costs, largely as a result of the energy investments it had completed over the last few years, which had “significantly” improved the efficiency and self-sufficiency of the larger, more energy-intensive, pulp and paper operations. 

“Lower average oil and gas prices also contributed to the lower energy costs, in addition to supporting a reduction in transport and logistics costs.  Green energy sales prices and volumes were higher than the previous year, providing further cost offset,” Mondi outlined.

Fixed costs were lower than the previous year, driven by foreign exchange benefits and the company’s continued strategic focus on operating performance and efficiencies.

PROSPECTS
Looking to the future, Hathorn said economic growth was expected to remain below historical averages in the regions in which Mondi operated. 

“We expect this slow economic growth to continue to impact on demand for our products in the short term, although underlying industry fundamentals remain generally sound, with supply/demand balance supported by supply-side constraint,” he commented.

Recent exchange rate movements provide a mixed impact, although with a “clearly positive” bias when considered for the group as a whole. 

“Furthermore, the recently completed capital investments and ongoing projects should contribute meaningfully to Mondi’s future performance.  As such, management is confident that the company will make further progress in the year ahead,” he concluded.