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May 07, 2008

Operating profit up, but costs worry Mondi

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Mondi Group CFO Paul Hollingworth discusses the cost-pressures experienced by the group, while CEO David Hathorn discusses the impact of the South African electricity supply on its overall operations
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© Reuse this International paper and packaging group Mondi, reported on Wednesday that its underlying operating profit improved for the four months ended April and that its expansion and upgrade projects were on track.



In an interim statement on the group's progress between December last year and April 2008, it said that its operating profit had been pushed up by a strong performance by its Europe & International division, and in particular, by higher prices for its kraft paper and converted bags.

Kraft paper and converted bag prices had risen by about 5% since the year-end, the company said.

CEO David Hathorn commented during a conference call, that the power disruptions experienced in South Africa throughout the first months of 2008 had not materially affected the overall operations of the group, despite the electricity constraints having a direct impact on some of its South African operations.

He explained that its Richard's Bay mill was completely self-sufficient concerning electricity and was not plugged into the national electricity grid, and thus remained unaffected by the power disruptions.

Also, at its Merebank mill, Mondi had voluntarily reduced its power consumption by switching off its mechanical pulp line that could be switched off for a few hours at a time, depending on capacity, in order to assist State-owned power utility Eskom in stabilising the power situation.

Its South African division, however, was negatively impacted on by the timing of planned maintenance shutdowns and lower export sales volumes, mainly in wood chips, as the division had taken a decision to pursue margin and not volume in certain markets.

The company, which diversified miner Anglo American spun off last year, said it remained confident that the measures it had taken to improve profitability were working. Mondi added that a 5% price increase had been implemented on May 1.

COST CONCERNS

The group remained concerned about input cost pressures and said the rising oil price continued to feed through into rising energy and transport bills.

External fibre cost pressures had continued to ease, but had increased in the comparable period given a steep increase in external fibre costs, which went up by about 25% in the first half of last year.

However, the group stated that its results continued to benefit from its ongoing focus on cost reductions, restructuring and productivity improvements, which all assisted in mitigating the impact of cost inflation.

MAJOR PROJECTS

The group reported that good progress on the execution of major projects had been made.

Mondi's new 470 000-t/y recycled containerboard machine and related box plant at Swiecie, in Poland, at a cost of €350-million, and the upgrade of its Russian mill, at a cost of €525-million were making good progress.

"All the equipment for Swiecie has been ordered, and the major contracts have been committed to for the containerboard machine, which is on schedule for completion during the third quarter of next year," Hathorn said.

The group said it expected the containerboard machine to have the lowest operating cost of its type.

Similarly, the upgrade of Mondi's Russian mill, which is being done to lower its cost base in Russia, improve efficiency, increase energy production and revenue, as well as providing extra pulp and paper capacity for the growing Russian market, was making good progress with all equipment contracts agreed to. Construction has started and the project is scheduled for completion in the middle of 2010.

In South Africa, the rebuild of Mondi Packaging South Africa's corrugated packaging paper machine at its Felixton operation had been commissioned on time and within budget and would increase containerboard production by 45 000 t/y to 155 000 t/y.

RESTRUCTURING

The group reported that the closure of the 140 000-t uncoated fine paper mill in Hungary has been completed, with production having ceased in March.

The group had also completed the restructuring and simplification of its European uncoated fine paper divisional structure and said it had begun to see the benefits of these actions.


Edited by: Mariaan Webb
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