Mondi plc (OTCPK:MONDF) Q4 2021 Earnings Conference Call March 3, 2022 4:00 AM ET

Andrew King - Chief Executive Officer

Mike Powell - Chief Financial Officer

Lars Kjellberg - Credit Suisse

Justin Jordan - BNP Exane

Wade Napier - Avior Capital

Brian Morgan - Morgan Stanley

James Twyman - Prescient Securities

Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.

0:02 Good morning all, and welcome to the Mondi 2021 Results Presentation. I'm Andrew King, your Group CEO, and I'm joined by Mike Powell, our Group CFO. I'll be providing you some highlights for the year before passing on to Mike for an overview of both the financial and operating performance.

0:21 I'll then be coming back to update you on both our strategic positioning and, more importantly, some of the exciting growth opportunities we do see for the business going forward. After that, Mike and I will obviously be delighted to take your questions.

0:38 However, before we go into the review of the prior year, I would like to share some thoughts on what is obviously a fast escalating situation in the Ukraine. The events unfolding in the Ukraine are tragic, and the impact extends well beyond national borders. Our thoughts are obviously with those directly affected, and we're actively doing what we can for our much valued colleagues at our paper bag plant in Lviv in Western Ukraine, where production is currently suspended, as well as our regional sales team located in the capital, Kyiv. We also have a number of Ukrainian Nationals working in our plants in bordering European countries, so this humanitarian crisis is obviously deeply personal for many Mondi employees.

1:28 We are contributing to the humanitarian effort both at a group level, with financial assistance to the World Food Programme, where we have an existing relationship and also through many local initiatives. Well, we may all wish for peace and stability, attempting to predict the medium-to-long-term impact on both our business and the situation more broadly remains extremely volatile and is of course, complete guesswork.

1:58 I remind you that we have 4 operations in Russia that represent around 12% of the group's revenue by location of production and have, on average, contributed around 20% to group EBITDA over the last 3 years. This includes our high-margin, cost-competitive integrated paper mill in Syktyvkar in the Komi Republic and 3 packaging converting businesses. All are currently operational.

2:27 At present, we do continue to operate in all of these locations where it is both safe and if clearly within the law to do so. We are actively assessing the implications on our business of these -- of the Russian sanctions and, of course, the related international responses, but as I've already said, and I'm sure you'll appreciate, this is a fast-moving and very fluid complex situation. I know that you'll have many questions, but there's not much more we can say today. We'll, of course, update the market as requirements -- as required as developments unfold.

3:04 If I then look back at 2021, I think it can be summarized as a year of strong delivery, accelerating growth and ongoing progress on our sustainability journey. Our integrated position, the agility of our people and the proactive collaboration across the supply chain ensured we were able to deliver strongly for all our customers. We achieved good volume growth across all key segments of our business. I'm obviously particularly pleased with the strong gains we continue to make in our growing packaging segments and also the recovery in volumes we've seen in Uncoated Fine Paper business, aided by solid market share gains. We saw meaningful price momentum across the group, driven by significantly improved supply-demand fundamentals and positive mix effects. Importantly, as we'll cover in more detail later in the presentation, we were able to fully compensate for the significant cost inflation that we have seen and has really become a feature of the operating environment.

4:10 We also continue to invest for the future. A highlight of the year was a successful delivery on a number of our key CapEx projects, bringing increased capacity in strongly growing markets, cost improvements and of course, also sustainability benefits. Importantly, and this is a feature of what we'll discuss a bit later, the growing markets we serve and the unique positioning we have within these markets provides opportunity for further growth. Supported by our ambitious CapEx programs, we have currently a pipeline of expansionary projects already approved or under advanced evaluation amounting to about €1 billion. As I say, I'll come on to provide more detail on this later. We are confident that the cash generation of the business can support both this investment program and also supporting returns to shareholders, with the annual dividend up 8%.

5:08 Sustainability clearly remains center to our strategy. We have a great track record in this regard and are rightly recognized as a leader in the field, but clearly, there's much more to be done. In a year, we made great progress in embedding our MAP2030 program, the action plan for the next decade. Very excitingly, of course, around the sustainability agenda is we've identified significant opportunities to develop our unique portfolio of sustainable packaging solutions. I'll come back to some of the recent examples of innovation in this space later again in the presentation. We really do see great opportunity to continue growing in this area and are supporting it with meaningful investment.

5:55 I'll now hand over to Mike to take you through both the financial and operating highlights before coming back to talk to you about the strategy.

6:09 Thanks, Andrew. Good morning, everybody. Let me take you through the numbers for the year ended 31st of December 2021. I'll start with the group, and then I'll dive into the business units. We delivered a strong financial performance in 2021. All key metrics were up year-on-year. EBITDA of just over €1.5 billion, was up €150 million against 2020, with the second half up around 30%. All of this gives the Board confidence to propose a final dividend of up 10%.

6:50 I'll take you through the key components of 2021's EBITDA growth, which you can see is mainly driven by higher selling prices outpacing costs alongside some good volume increases. We drove volume growth in Corrugated Packaging and Flexible Packaging on the back of our portfolio of innovative and sustainable packaging solutions. Our attention to quality and service for our customers and the reliability of our integrated value chain continues to win through. Uncoated Fine Paper volumes also increased, with our customers recognizing the stability of a long-term supplier and the sustained quality of our products alongside consistent service as others exit this market. Selling prices were up across the entire business, most significantly in Corrugated Packaging.

7:44 I'll talk a little bit more about selling prices in more detail as I come to the business units. However, let me deal with costs generically on this slide as it's pretty widespread and saves me repeating it 4 times in each business unit. We saw large cost increases, in particular energy, resins, paper for recycling and transport costs. On energy, our pulp and paper mills generate most of their energy needs internally from biomass, accounting for around 65% of our fuel sources. This mitigates the impact of significant surge in external fuel costs.

8:30 Energy costs gradually increased during the first half from the very low levels in 2020 before rising sharply at the end of Q3 as a result of the significant European gas and electricity price increases. The year-on-year increase in energy was about €160 million. Resin and paper for recycling costs increased sharply in the first half and have remained stable at those high levels. The year-on-year increases were around €160 million and €120 million, respectively.

9:04 We're currently seeing cost pressures continuing to rise, particularly wood, chemicals and, of course, energy costs. That said, we do expect to be able to pass these into the markets. The rest of the cost base was well managed, though that was subject to higher maintenance costs due to the longer planned shuts, additional resources to service the extra demand for our products and general inflation applying to most of the costs. Currency movements had a net negative impact, mainly already reported in the first half of the year, as a result of the weaker US dollar, coupled with losses on translation from a weaker Russian ruble and Turkish lira relative to the euro.

9:48 Turning to the strong cash characteristics of the business now. On the left-hand side, you see last year's closing net debt, followed in green by the EBITDA of €1.5 billion that we delivered in FY21. Working capital increased on the back of strong revenue growth in the year and some inflow timing of Q4 in the prior year. Absolute working capital as a percentage of revenue was 12.8%, in line with our expected range and guidance of 12% to 14%. We have leading market positions in good markets, and we continue to consistently invest behind their potential to deliver value-accretive growth.

10:33 Our capital expenditure for the period was €573 million. That equates to about 140% of depreciation. And as you know, we completed the acquisition of Olmuksan, which is delivering well. With net debt of €1,673 million, that leaves us 1.2x levered at the end of the year with good strength for us to continue to have optionality, and Andrew will cover some of that later in the presentation.

11:06 In June 2021, we entered into a €750 million revolving credit facility. This is a sustainability-linked loan, matching funding strategy with the core business strategy. And at the end of the year, the group had a strong liquidity position of around €1.3 billion. Credit ratings remain unchanged, and debt maturity is in good shape with nothing material due in the short-term.

11:33 So to wrap up the group part: good numbers, continued opportunities and a strong financial position. After the year in mid-February, we agreed to sell our Personal Care Components business to Nitto Denko for an enterprise value of €615 million. This simplifies our portfolio and enables us to focus on core packaging and paper businesses and pursue our strategic priority to grow in sustainable packaging. We expect completion of this in the second half of 2022. A decision regarding the use of the net cash proceeds from the sale of PCC will be taken upon completion. The remaining portion of Engineered Materials, Functional Paper and Films will be merged into our Flexible Packaging business units, and this will strengthen integration along the kraft paper value chain, fostering innovation in functional papers.

12:34 I just wanted to also take this opportunity to remind you about our disciplined approach to capital allocation. This remains unchanged. Organically, we're focused on our growing in packaging through selective capital investment opportunities. Our track record of execution here speaks for itself. We have a strong pipeline of capital investment projects to further capture that growth. Again, Andrew will cover those later. Supporting payments of dividends to shareholders remains important to us, and we're pleased to recommend an increase in the final dividend up 10%, and we continue to evaluate growth opportunities through selective M&A.

13:18 So to summarize, we can invest organically, deliver dividends and seize appropriate opportunities in M&A as well as repatriate cash, if surplus. All these decisions on free cash flow are made within the core premise of maintaining our strong and stable financial position and solid investment-grade credit metrics and you've seen we've got a strong balance sheet.

13:47 So let me dive quickly a little deeper business by business, starting with Corrugated Packaging. This business continues to deliver industry-leading margins and returns. Sales volumes were up in the year, and selling prices were significantly higher, with the effect coming through strongly in the second half. Our capital investment program and acquisitions completed in the year further contributed to Corrugated Packaging's performance. Whilst 2020 was very much a story of e-commerce demand, in 2021, we saw strong demand across all end users, particularly e-commerce and FMCG.

14:29 Pleasingly, containerboard sales volumes were up on the prior year, supported by our broad high-quality product portfolio. Corrugated solution volumes grew 13% organically. This was made possible by our backward integration to paper at a time of paper shortages, ongoing investments in our converting network and our sharp focus on innovative products and services of the highest quality. We implemented price increases across all containerboard grades, leading to higher average selling prices year-on-year, and we were successful in passing on higher input costs through to box prices.

15:10 Now turning to Flexible Packaging. The business achieved good volume growth, successfully implemented price increases to recover significantly higher input cost prices. We saw strong volume growth in end users, in particular, paper-based shopping and e-commerce bags as well as consumer applications, such as food and pet food, where we have leading market positions. There was also good demand from building materials and the construction sector during the period.

15:43 Kraft paper sales volumes were significantly up on the prior year, notably in our range of specialty kraft papers, where sales volumes have almost doubled over the last 3 years, benefiting from increasing customer demand for paper-based sustainable packaging. Paper bag sales volumes were up 9%, growth across all regions supported by growing demand in new applications. For example, our recyclable, lightweight and flexible mailer bag for e-commerce now accounts for 3% of our total paper bag volumes.

16:19 Prices in the kraft paper value chain were modestly up year-on-year. On the back of continued strong order books and tight market conditions, we have implemented price increases across our range of kraft papers and paper bags at the start of 2022 that reflect prevailing spot prices. Prices today are some 20% to 25% higher than the average for that of 2021.

16:49 Engineered Materials. Just to remind you, this is less than 5% of the group's revenues. Its performance stabilized in 2021. We saw a good recovery in industrial and specialized end uses in Functional Paper and Films, and we completed the restructuring work in Personal Care Components that we initiated at the end of 2020. This business also implemented significant price increases.

17:16 Uncoated Fine Paper's underlying trading performance improved significantly over the course of the year, higher volumes and prices offsetting input costs, particularly energy and transport. EBITDA comparability with 2020 is impacted by a €34 million lower forestry fair value movement in the year and the impact of longer planned maintenance shuts in 2021 with a €30 million effect. If you add those numbers together, the €64 million effect was mainly a second half effect, and therefore, you can see clearly from the chart the underlying progress that was made in this business.

17:55 Our sales volumes grew 11% in the period. Customers do value us as a supplier of choice whilst capacity leaves the market due to our excellent customer service, superior cost competitiveness and our financial stability. We've increased our market share in all the key markets where we operate. In Europe, we estimate market demand increased 6% to 7% in the year, showing a good recovery, whilst our sales volumes in this region grew some 14%. On the back of improving demand and increasing costs, we implemented a series of price increases, most notably in the second half of the year and also earlier in this current year. European benchmark prices today are 20% to 22% higher than the 2021 average.

18:48 So let me summarize. We're really pleased with our strong financial performance. Our results have been driven by growing volumes, implementing price increases which more than offset higher costs. We have successfully executed strategic investments, and the agreed PCC disposal gives us further focus. The group has a robust balance sheet, providing strategic flexibility to invest and grow in our expanding packaging markets where we have leadership positions.

19:24 With that, let me hand you back to Andrew, and he'll talk about the longer-term strategic view. Thank you.

19:36 Thanks very much, Mike. As I said earlier, I'd like to come back now to the strategic positioning of the group and, most importantly, the growth opportunities we see for the business going forward. I'll remind you of our track record, how we see the markets developing going forward and why we have the ability to keep winning in these markets and, in turn, how that supports our accelerated investment program.

20:19 If I step back first, I remind you of the credentials we have for profitable long-term value-accretive growth. I think you can see from this slide, we have a great track record of delivery. Over the past decade, we have successfully grown the business on all key profit metrics while, at the same time, driving improved returns on capital. We have done this by systematically investing in our cost-advantaged assets and seizing acquisition opportunities at the right value, balancing investment for growth with supporting returns to our shareholders.

20:49 This has, of course, been facilitated by the very strong cash generation of the business, allowing us to grow without recourse to external funds. As a consequence of this disciplined capital allocation, coupled with our relentless -- our rigorous and relentless -- apologies, didn't change. As a consequence of this disciplined capital allocation, coupled with our rigorous and relentless focus on driving operational performance, we have built an industry-leading, integrated, cost-advantaged platform.

21:28 Importantly also, our early embrace of sustainability has guided and focused our product development and operations over many years. This has ensured that as demand for sustainable solutions has increased, our ability to anticipate and respond to customers and the end user needs has kept us ahead of the game.

21:55 Our leadership in sustainability, I think, is widely recognized and valued by our customers. Here, you can see I highlight a selection of external benchmarks. I believe I can safely say that no other group in our sector ranks consistently so highly across all of these well-regarded rating systems.

22:16 And of course, as mentioned earlier, we are far from done on our sustainability journey. We are taking the necessary action for the future, guided by our Mondi Action Plan 2030, which is now very much embedded in the business. More recently, you would have seen this includes a commitment to net zero by 2050 with science-based targets to limit global warming below the 1.5-degree threshold. Clearly, the urgency around climate change has not diminished as a consequence of the recent crisis in Ukraine.

22:52 Our leading market positions that focus on sustainability, the cost-advantaged assets that we enjoy and, of course, our culture of continuous improvement have allowed us to consistently deliver strong growth in our key packaging segments, as illustrated on the slide. You'll see that this growth has accelerated in the past year, driven in large parts by the rapid increase in demand for new sustainable packaging solutions. At the same time, as Mike already talked to you about, the demand for the more traditional products has also recovered following the slowdown during the height of the COVID pandemic. The security of supply we can offer given our wide production footprint and our vertical integration, coupled with our focus on innovation, service and quality, has driven growth ahead of the markets in all key segments.

23:48 And very importantly, the packaging markets we serve do continue to grow. While estimates obviously vary significantly, we do expect to see good strong structural growth in our 2 core packaging markets of corrugated and flexibles, underpinned by those key growth drivers of sustainability and e-commerce.

24:10 Going to those briefly. Looking at the e-commerce-led growth, we do see the rate of growth in demand for e-commerce packaging slowing relative to the very high levels seen in the last few years mainly as COVID restrictions are lifted and consumers are tending to spend more money on services. However, we still expect to see a clear positive trend, and absolute demand growth will still be material particularly now that e-commerce is working off a much higher base.

24:43 On sustainability, it is very clear that the trend for more sustainable packaging is here to stay. All key stakeholders, from end customers through FMCG and other customers to NGOs and regulators, are demanding change. We are seeing a clear acceleration of this trend and are very well placed to capitalize it -- on it with our unique platform, offering paper where possible and plastic where useful. I'll come back again to some of the latest innovation we're seeing in this area in the presentation.

25:20 Supporting all of this, we have an ambitious expansionary capital investment program. We have a pipeline of projects already approved or under advanced evaluation amounting to around €1 billion, which we expect will deliver mid-teen returns when in full operation. On the slide, you'll see we detail a number of these key projects. Very compelling to me is that the investments are spread across our range of packaging businesses both in terms of product and geography and upstream and downstream, meaning we are not placing undue reliance on any single market or asset. In round terms, we are investing around 50% in each of corrugated and flexibles while the upstream downstream split is around 60-40.

26:08 In corrugated, we are building on our containerboard capacity by investing in brownfields expansion in our Kuopio and Swiecie mills while we have underway around €185 million in expansionary projects across our network of corrugated plants, serving the fast-growing markets of Central and Eastern Europe and Turkey.

26:31 In Flexible Packaging, we are currently in advanced evaluation of a new 200,000-tonne-per-annum kraft paper machine at one of our cost-advantaged locations to serve the growing kraft paper market. Here, we have a clear market leadership position with very strong vertical integration with our paper bags business. Similarly, many of the new applications we are seeing for paper-based solutions to displace other forms of less sustainable packaging solutions are using kraft paper packaging -- paper products as their base.

27:05 Linked to this, we see exciting opportunities to grow our functional papers, offering to meet -- our functional papers offering to meet our customers' growing demand for innovative, sustainable packaging with the necessary barrier properties, again, using kraft paper as the base. In our flexibles converting businesses, we continue to expand our leading global paper bag network while also investing to expand our capacity and cement our leading position in the fast-growing European pet food packaging market.

27:40 With this pipeline of expansionary projects, coupled with our ongoing stay-in business needs, we would expect capital expenditure to be in the region of €700 million to €800 million in 2022, rising to €900 million to €1 billion in 2023. As you can see, this represents a manageable acceleration of our ongoing capital investment program, supporting the growth opportunities we continue to see in our packaging businesses.

28:09 Coming back now then to our innovation focus. I would like to take you through a few recent examples of innovation in sustainable packaging and our 3Rs principle of replace, reduce or recycle, using paper where possible and plastic when useful.

28:25 Here, you'll see 2 fantastic examples of how we are leveraging our unique platform and our capabilities in papermaking, coating and converting to replace unnecessary plastics with recyclable, paper-based packaging for Iceland and Les Crudettes. We have developed these solutions to running our customers' existing packaging lines, avoiding, as a consequence, additional costs. As important, they provide the same shelf life, preventing food waste, which is also critical for sustainable societies and in taking action against climate change.

29:03 We continue to innovate with customers to develop e-commerce solutions that are easy for the consumer to recycle and enable our consumers businesses to grow. You'll see there our fantastically named [Indiscernible] is on the left-hand side of the slide. It is especially designed internal insulating panels, keeping meals refrigerated for over 24 years -- 24 hours. That would be extreme. I'd encourage you then to try TYME Food, who has ability to expand deliveries beyond the city centers with standard transport, of course, now without the need for expensive refrigerated trucks. Our customers insert -- customized insert for the ship-in-own container solution on the right-hand side, as you'll see on the slide, eliminates the need for additional packaging, fits through a letter box while protecting the product, and it is Amazon Certified Frustration-Free Packaging.

30:07 And clearly, if our paper-based solutions cannot do the job, we believe recyclable, flexible packaging is the most resource-efficient alternative due to both its barrier properties and high material efficiency. We help our customers reach their recyclability targets by developing mono-material packaging solutions that are, again, fit for a circular economy. You'll see the pouch on the left for Henkel uses 70% less plastic than a rigid bottle and can be a refill for the dispensing container at home, supporting a consumer reuse model. On the right-hand side of the slide, you can see our lightweight, high-barrier solution for a German consumer brand. WalletPack replaces nonrecyclable, multi-material packaging while reducing plastic by 40%. It is easy to open and reclose and again, very importantly prevents food wastage.

31:08 Let me then finish by reminding you of the key takeaways. We continue to deliver strongly, evidenced by that strong performance in 2021 across all key financial and sustainability metrics. The strong growth we see in our markets, coupled with our proven ability to win in these markets, opens up further growth opportunities for the business, and we are putting more money behind it with our accelerated investment program, including that pipeline of €1 billion in projects, delivering strong growth in packaging, which is sustainable by design. While we are fully aware of the recent significantly heightened geopolitical and macroeconomic risks, we have the capacity to both manage and finance this investment program, and we are convinced it is the right thing for the long-term benefit of our stakeholders.

32:05 So with that, I thank you very much and happy to turn over to questions that Mike will facilitate.

32:10 So I have [Indiscernible] facilitating, we're back live in the room, which is great. It means we don't have a camera 3 feet in front of our nose. It's a little bit further away. We've got 3 streams. Just we have people on the phone. We have the text box on the webcast, and we have people in the room. So I will try to navigate between those 3 audiences. I'll take the first question from the room if I could.

32:41 It's Cole Hathorn from Jefferies. Andrew, I'd like to focus on the longer-term strategic investments first of all. I mean you talked about 2% to 4% packaging growth. If I went back to 2015 levels, am I right in assuming that this is better growth into the future than in the past due to your -- the structural drivers you talk about and, particularly, Flexible Packaging? I'd like to focus on that. I mean you talk about a potential kraft paper machine. And then on the converting side, how would you frame your position in kind of sack and kraft paper and how you're winning in that converting? Because I think you're the market leader with kind of more than 30% capacity on sack kraft. And then on the converting side as well, is this investment so that you get more than your share of paper growth and then the converting side more than your fair share of converting growth as well? Thank you.

33:35 Yes. Thanks very much, Cole. Yes, I think the short answer is yes. We do see an acceleration in the growth in these markets, particularly as you say, in the flexible space. I think historically, particularly, in the sack kraft business, you would have seen this was a very low growth industry with the -- focused around traditional industrial applications, cement, building materials and the like. Clearly, we've seen a change in that dynamic over the last few years. As I highlighted in the presentation, a lot of the kraft paper offering goes into a number of these flexible solutions, which are increasingly being used to displace less sustainable packaging solutions. We cite a couple of examples there, but there are numerous such examples from the stretch wrap that's replacing a plastic alternative to, obviously, for example, things like the mailer bag, which is now being used in e-commerce applications, so displacing plastic wrap in e-commerce, similarly using kraft paper directly in wrapping e-commerce solutions. I can go on in things like that. [Indiscernible] a simple example like that, packaging solution for salad and things like that simply didn't exist 2 or 3 years ago.

34:55 And I think what's important here is one can often talk about anecdotal evidence of sort of innovation and things. These are really making a big difference now. We highlight, for example, the mailer bag being 3% of our volume now in paper bags. It was nothing 2 years ago. So it just illustrates that it is starting to really move the needle. And we are really seeing a huge number of different applications coming for those specialty kraft paper applications as we see but also the traditional sack kraft.

35:24 So I think with all of that in mind, we are looking -- the market is extremely tight. I believe it will continue to be. Obviously, there's the normal -- always normal ebbs and flows, but these strong structural drivers are not going away. So yes, we are very confident when referring to that market growth of 2% to 4%. I mean we think that's the market. We still think we can do more than our fair share of that. How do we do that? Certainly, on the converting businesses, we continue to invest behind the growth of those businesses. As you would have seen, we've highlighted, for example, our new plant in Colombia. We're doing a new one -- another one in Morocco as well.

36:04 We're investing also behind increased capacity in our existing facilities. And we have the biggest global network of paper bag plants of anyone by some distance. So I think that, in itself, puts us in a very strong position. But again, I come back to the unique platform we have. And again, I know this is an easy statement to make, but I think it is demonstrably the case. We have the deep knowledge on the kraft papermaking. We are the biggest producer of kraft paper grades in the world. We have deep knowledge in what we call the coating applications, making functional barrier properties for that paper where you need additional functionality, and we have the deep knowledge and customer intimacy on the converting both from our consumer flexibles and our traditional bags businesses. And really, it's about bringing that to bear and giving that opportunity offering to our customers. And we are very excited by a lot of these opportunities, and again, we're putting money behind it to make sure we stay ahead of the market on this.

37:09 Okay. I'm going to take the next question from the phone line. [Operator Instructions] But we'll move to the phones. Next question is from Lars at Credit Suisse. Good morning, Lars.

37:27 Good morning. Thanks for taking my question. I just need to still ask about Russia. Of course, we're seeing quite a few companies simply pulling down trade lines, exiting Russia for all sorts of reasons. Where do you -- kind of how do you think about Russia in the context of what's going on? I know this is an incredibly maybe unfair and difficult question to respond to. But if you can provide some color on that. And a slightly simpler one, I suppose. You, of course, had a very strong price over cost and very strong pricing momentum, I should say, at exceeding cost in '21. How should you make us think about that relationship in '22, especially then considering the big step-up you see in kraft paper as you -- the annual contracts, of course, uncoated fine, you're seeing strong momentum? And if you could share some thoughts specifically on that business in terms of the competitive environment, considering your cost base is really outstanding versus some of your peers. Those would be my questions.

38:36 Thanks very much, Lars. As I said in my opening remarks, I mean the situation in Russia is clearly rapidly evolving, highly complex and extremely fluid. We are addressing that on an active basis, actively monitoring the situation, actively reacting to the situation. But as I said, if we have any further updates to provide, we will provide them as the situation unfolds. On the issue of price versus cost, it's the perennial debate. I mean, clearly, the -- and the cost base is rising, and I think that's not new news to anyone. Everyone who's talking in the industry will be telling you that and not just our industry, across industries. But I think very importantly, as you rightly point out, we have seen good pricing momentum. Why is that? I mean, clearly, the supply demand balances in -- across our paper offerings has been very strong – or very supportive, should I say, of late. We've seen good price momentum on the containerboard grades coming into the start of this year. Clearly, pricing is well above where it was on average for last year.

39:46 Similarly on the kraft paper side, as you rightly point out, because we have some more contractual business in kraft paper, it takes a bit more time for the pricing to come through, but that has come through as we expected on the annual business going into 2022. And we highlight that the pricing right now is well above the averages for 2021.

40:10 So certainly, as we start the new year, we have seen good pricing, and price levels are well elevated from what they were in 2021. Albeit the cost base, clearly, it continues to rise. The most -- the biggest intangible on the cost base right now, as everyone would testify to, is the energy situation. We can talk more about that, but obviously, it's highly volatile. The good news for us is, as you well know, even though it is an important input cost and it will continue to be so and, of course, you've seen prices rise fivefold, for example, for gas in Europe and even beyond that now, it will always impact.

40:47 But we're also structurally well positioned because we have a lot of own energy production because, by definition, if you're more virgin paper producer -- more of a virgin paper producer, you produce more of your own energy. And as you know, we've been investing heavily for that energy efficiency over a number of years now. And I think that places us in good stead as well. So the cost base, although clearly impacted by the input cost pressures we see, is possibly less so than you might see if we wouldn't -- weren't so backward-integrated to own energy production. So I think, yes, as we sit today, pricing is strong, albeit there's still a lot of pressure on the cost base.

41:35 Good morning. I'm Justin Jordan from BNP Exane. I've got 3 separate questions. Firstly, sorry, I need to ask you a little bit more on Russia. Can you just remind us, firstly, geographically, where are you in Syktyvkar? From memory, you've been there for several decades through periods of economic and political uncertainty. And thirdly, what are the actual products that you make and sell in Russia?

41:59 Secondly, back to, I suppose, the core business as it were, can you talk us through the increased CapEx guidance that you're giving on Slide 13 and 14? Are you within the guidance of 2023 CapEx? Does that explicitly include a decision on the sack kraft additional mill? Is that baked into the guidance? Or is that an additional potential beyond that?

42:23 And then thirdly, clearly you just -- well, you're in the process of realizing €615 million from the PCC disposal, which is a fantastic result. Can you talk us through how the Board can think about allocating that proceeds? It gives, clearly, a very, very strong position to the group. Just refresh our thinking on how we should be capital allocation going forward.

42:47 Sure. Thanks, Justin. Let me take questions 2 and 3 first, and then Andrew can come back. In terms of the capital, the cash CapEx flows that Andrew talked about, that does assume that we deploy that expansionary €1 billion of capital to help how that sort of flows out, and these are sort of rough numbers because it will change. But I would think of that €1 billion flowing out in cash terms is about €250 million in 2022, about €450 million in '23 and then the balance flowing out in the years thereafter if that helps. Okay.

43:28 In terms of -- you mentioned the sale of the PCC business. I'd quite like to complete the deal and get the cash in. You'd expect me to say that. Listen, you know how we think of capital. I've been through it again this morning. That hasn't changed. We'll continue to look at that, and we'll clearly look at that once the deal is complete.

43:48 Yes. Justin, on the Russian situation. And Syktyvkar is 1,200-odd kilometers northeast of Moscow, if my geography is correct. It's high and cold. The products out of Syktyvkar, in particular, it's obviously about 550,000 tonnes of uncoated fine paper, 330,000-odd tonnes of white top products, so white top containerboard, a couple of hundred thousand tons of newsprint and some pulp, which is sold into the outside market dry pulp. So that's around the product mix there.

44:34 Okay. I'll take one more from the room, and then we'll go to Brian of Morgan Stanley on the phone. But one more from the room first.

44:44 Hi, good morning, everyone. It's Wade Napier from Avior Capital. Just a couple of questions for me, specifically on the kraft investment, the 200,000-tonne mill that you're sort of assessing there. Could you just give us a little bit of color what the sort of size of the market is within Europe or globally? I just want to sort of understand what 200,000-relative looks like and then maybe, post investment, what your sort of split between sort of, I guess, call it, commoditized industrial bags versus specialty paper would look like. And then what sort of -- which mills are you actually specifically looking at making that investment? I'm just trying to think where you have excess pulp capacity to accommodate that. I assume you're going to remain integrated vertically post that investment. And then secondly, just on FX, maybe. You sort of recorded a sort of impact of about €60 million this year. Obviously, the ruble has blown out. But what's you're sort of at-spot prices? How should we think about that impacting the group in 2022? Thanks very much.

45:52 Thanks, Wade. So just to cover off the FX. If you sat here today and just work the ruble out and other currencies, we're probably looking at something around a €70 million hit out here today. Most of that is clearly ruble-denominated. That's fairly volatile, as you've seen.

46:14 Yes. And then just coming back on to the kraft paper machine that we are looking at. In terms of -- just to put it in context, we produce about 1,000 million tonnes – 1.2 million tonnes of kraft paper grades. In round terms, it's about 900,000 tonnes of sack kraft, 300,000 tonnes of what we call specialties, with the specialties growing rapidly. Now in certain of your facilities, we have the capability to move between specialty and the sack kraft. So as the different markets develop, we are able to maneuver between them. And that is a real strength of ours because we have a portfolio of assets within that kraft paper, which, again, makes us unique in the market.

47:03 What we'd be looking at is -- so this is -- the concept here is about 200,000 tonnes of incremental sack kraft capacity, but that does allow us inside of our other facilities then to look at increasing the specialty component. So I would think in rough terms, we would look at about, on a full incremental basis, probably half of it being sack kraft and the other half being essentially specialties as we develop into those specialty markets. And that's because, as I said earlier, a lot of the specialties -- specialty kraft papers are what are being used in these consumer applications. And that is obviously where we see a lot of growth.

47:44 But we are seeing a lot of growth also in the traditional sack kraft applications. We have an extremely strong downstream presence, as you well know. That is growing rapidly. You saw the growth rates of the last year, and we continue to see growth. So we can forward integrate, frankly, most of this tonnage, but we also have an outside market that we see big opportunities for selling into. So -- we see it as -- yes, it's a strongly growing segment for us. We are the best positioned to deliver into that segment.

48:15 In terms of overall market size, the addressable global market is hard to always define because there are a number of kraft paper grades which are separately defined. But I would say it's an 8-million-tonne global market if you take the total kraft paper segment. So we're certainly quite confident this is paper that is much needed in this growing market and can be easily absorbed. In terms of mills, just finally, I mean, we're looking across our mill network. We have, again, the luxury of a lot of low-cost operations which have low-cost pulp production and also the capability for expansion. So we're assessing that. But the good news is we've got options around that, and we're refining all of that. And as soon as we have that refined, we will be making a final decision on.

49:05 Thanks, Wade. So on to the phone lines. Brian, Morgan Stanley. Over to you, sir.

49:10 Thanks very much, guys. Sorry, I'm just going to beat this one a little bit more on the kraft paper. Would you expect it to be a virgin or recycled feedstock or a combination of both? And then also if you can just chat to us on the margins. I mean, obviously, you don't give us numbers, which you won't. But just help us to frame our thoughts between -- is the specialties materially higher margin than the commodity sack kraft side of things? That's one question on kraft side. And then the second one is on energy costs. Can you give us a number for 2021? I can't see it in the release anyway on total energy costs and what you'd expect that to be in 2022 if you were to, say, mark spot for the rest of the year.

50:04 Yes, sure. Brian, again, let me take the energy question first. The energy costs in '21 were around €500 million. I think if you -- it depends what hour you look at the forward spot. But to try to be helpful, I think you could probably add on €250 million, €300 million to that. Again, I would just balance that with what we've also said, which is, of course, the selling price environment. So of course, if that passes through, we still remain confident of passing those costs through, either through price increases already established. Or if the market takes further cost increases, then I'm sure the market prices will also move across the industry to adjust.

50:52 Yes, Brian. And on the kraft paper, the feedstock. Again, I mean we have the luxury as a business of having a great portfolio here. So we do have some kraft paper grades which do have some recycled content. So for example, our EcoVantage product, which I remind you is the product we invested in at the beginning of this year with that expansion in our Štetí machine to be producing a product for particularly the paper bag. The retail bag markets, that is sold out because, clearly, a huge demand for that both driven by regulation and, of course, consumer preferences. That does have some recycled content.

51:32 But typically, with kraft papers, our real strength is in the strength of our paper, which is driven by virgin pulp utilization. So the high-strength kraft paper offerings typically are largely virgin pulp-based, and that was where we see our real strength. So where you see a lot of these applications, for example, that stretch wrap product and things, what you really need is high-strength properties, and that is what the market is looking for, for these type of applications, and we think we are extremely well positioned. So long and the short of it is this new capacity would be virgin-based, but we also have some capacity across the group, which does have some recycled content as required for different applications.

52:29 In terms of the margins, I mean it's a gross generalization to say specialty is better than sack kraft because a lot depends on the configuration of the assets that you're using, the markets that you serve. We believe all our kraft paper offering is nicely profitable.

52:50 Okay. Thank you. We move next to James Twyman on the telephone line. Over to you, James.

52:58 Yes. Hi, thank you very much. So yes, I've got 3 questions. The first one is just on wood costs. It sounds as though it was sort of low single-digit increases last year. Could you give us some idea about whether that's similar again or, in terms of the presentation, it sounds like it may be picking up a little bit? Secondly, the engineered plastic products business. Can you talk about what you've actually got left there, still quite a decent-sized business, and why you think that those businesses are going to be core to the group in future when they obviously weren't part of the flexibles business when you did change the divisional structure before?

53:37 And a final one, just -- if you don't mind, just on Russia. There are some companies that have said that they're going to stop supplying paper chemicals and other products to Russia. Just based on the facts as we see them now in terms of what companies have said, going forward, to you, can you continue operating under that scenario? Obviously, things will change in the future just based on what we've seen so far. Thank you.

54:10 Thanks, James. Yes, let me comment on wood. Wood prices were fairly benign last year. They were fairly flattish. They have increased through very back end of last year and into early this year. So we would expect wood to increase, particularly around the sort of Central Europe and Eastern Europe area. So we are expecting increased wood prices there. I think the scale of that time will tell. But I don't think they'll be low single digit. They'll be higher than that. Clearly, forecasting that forward becomes quite difficult. But again, in terms of our ability to pass those through [Indiscernible] pretty confident on that. But we will see increased wood prices, we believe.

54:56 Yes, James. And on the issue of what's left after the disposal of PCC, what's left is a very important business for us, which is our Functional Paper and Films business. It was in a different business unit to flexibles, but that doesn't mean that there's not significant interaction and integration benefits between the 2. And frankly, it fits more logically as part of the flexibles value chain because effectively, what they do is they use a lot of the kraft paper grades, which they then coat with different applications to provide additional barrier protection properties, which then, in turn, can be used either in our consumer packaging applications or a number of other industrial applications and the like. So what -- when we talk about leveraging that unique platform, I see this as a core part of that because this is really the interlinkage, should I say, between the paper businesses and the converting businesses, providing that extra barrier functionality, which allows us to make a number of those products that we showed earlier.

56:01 And I think there's a lot of exciting opportunities around us because where you see the need to replace plastic by paper solutions, invariably, you need to add barrier properties to that paper, and that's exactly what this business does, and we are looking to put more money behind it. I mentioned in the presentation that we're looking to invest further in that Functional Paper and Films area to deliver more of these functional barrier papers. So I think there's a lot of exciting opportunities that, that business brings for us and it fits very well in our flexibles offering, and we are looking to increase the integration of that business into our overall flexibles offering.

56:44 And then finally, on Russia, I mean, we are operational as we sit today. We're not unaware of all the complexities around all of that. But as of today, we are fully operational.

56:58 Okay. Thank you. Thanks, James. We have time for one last question, and I'm going to take it from Sean on the phone. Over to you, Sean.

57:10 Good morning, guys. Thanks for the time. I've got a couple of questions, and please excuse me, first one, perhaps is a bit silly. But just in terms of the PCC disposal, barring sort of formalities, can we confirm that, that is pretty much going to 100% take place in H2 and, hence, receive the proceeds on that basis?

57:32 And then my second question is around the -- I mean it's quite a nice hefty CapEx and obviously quite encouraging in terms of your plans for the next sort of 2 years. But in your assumptions for the uptick in the CapEx, what are your assumptions being around Russia and formulating that [Indiscernible] I mean, obviously, the balance sheet, at the moment, has been strong. If you get the proceeds, it's going to be even stronger. And you can pretty much assume if you can continue [Indiscernible] out of Russia, the balance sheet would be fine. So I'd be interested to see if you can give us any insights on that.

58:02 And then just -- sorry, going back to Russia. Just from an operational sense obviously, at the moment, you've got enough raw materials, et cetera, et cetera. But in terms of actually making cash payments and receiving cash and export payments, could you comment around that? That's it from my side. Thanks.

58:20 Sure. Thanks, Sean. On PCC, the deal is subject to normal customary closing conditions. We'll work through those and as I say, we expect to close that in the second half of 2022.

58:34 Yes. And on the question around CapEx and the Russian assumptions. I mean, firstly, obviously, this €1 billion of CapEx pipeline, as you'll see, is spread geographically. None of it incorporates our Russian position. But in terms of funding requirements, we believe we are well funded as a group and we have the capacity and it's the right thing to be doing to continue to support the long-term growth of the business. And in terms of the Russian exports, again, I can only reiterate what I said earlier. It's a fluid situation. We continue to operate as of today.

59:15 Okay. Listen, thank you very much. It's great to be physically back with everybody and meet people. If we haven't been able to get to your question, apologies for that. But Clara, myself and Andrew are available, as ever, to take your questions. Thanks very much this morning and your support.