Paper and packaging group Mondi CEO David Hathorn on Thursday warned that despite there being encouraging signs of a gradual improvement in many of its European order books, the high levels of global economic uncertainty would continue to create challenges for the remainder of the year.
He noted in a conference call that the difficult trading conditions experienced in the last quarter of 2008, had continued into the first quarter of this year, although there were some signs that rapid destocking was starting to stabilise.
Since the end of the December quarter, Mondi had seen improved results for its European and International businesses.
The group reported in an interim management statement that the Europe & International division’s underlying operating profit had increased on the weak 2008 fourth-quarter results, owing to improved performances in the Bags & Specialities and the Uncoated Fine Paper businesses.
The Bags & Specialities business had improved its performance as a result of better volumes, strong cost control and a good performance from the consumer flexibles segment, stated Mondi.
However, weak demand in kraft paper and industrial bags continued, with pricing also having been impacted on.
Meanwhile, the mothballing of two of its higher-cost kraft paper machines in Europe would be effective towards the end of the second quarter, it stated.
The group had already exited about 600 000 t, or 14% of its high-cost European capacity, positioning the group in a more competitive position, Hathorn said.
Trading in the Corrugated business, meanwhile, remained challenging, with weak demand continuing to put pressure on containerboard prices, which had dropped.
Mondi had, during the first quarter of the year, taken about 127 000 t of market-related downtime across all the division’s businesses to balance the weak demand.
Meanwhile, Hathorn commented that sales in the domestic South African market had held up reasonably well, but that the South African businesses were negatively impacted on by reduced export benefits.
The underlying operating profit for the South African division had been marginally higher than for the first quarter of 2008, but was lower than for the 2008 fourth quarter.
Lower pulp, woodchip and uncoated fine paper export prices, as well as lower woodchip export volumes, had led to the decline, Mondi highlighted in its statement.
Mondi Packaging South Africa’s operating profit had also declined year-on-year and quarter-on-quarter, owing to lower sales volumes and higher input costs, which were only partially offset by higher selling prices and cost savings.
Hathorn, meanwhile, said that the fact that four of its major peers in South Africa and in Europe had reported substantial operating losses for the first quarter, suggested that there was still a lot of capacity that was not viable at the current market levels.
He noted that the majority of its own operating base was now low-cost high-quality capacity, making it more profitable.
However, capacity reductions across the global uncoated fine paper and testliner markets was needed, said Hathorn.
About 5% of the world’s uncoated fine paper capacity had already been shut down, but a further 5% was needed, he said.
Further, the testliner market, where about one-million tons or 5% of world capacity had already been closed, could also benefit from the further closure of another one-million tons or more capacity.
Mondi remained financially healthy, Hathorn stated, saying that the group had reduced its net debt by €17-million to €1,62-billion since the end of the fourth quarter of 2008, despite the €100-million it was spending at its two major capital expenditure (capex) projects in Poland and Russia.
Further, it had €1,1-billion in undrawn committed banking facilities with an average maturity of 3,4 years.
The group was also still on track to achieve €180-million in cost savings, as a result of its restructuring programme, exiting its high-cost operations, focusing on its working capital and reducing its capex, said Hathorn.
He believed that the group was well placed to benefit when market conditions improved.