Mondi deliver robust performance in 2020, with underlying EBITDA of €1,353 million

Revenue

Mondi plc (LON:MNDI) has announced its full year results for the year ended 31 December 2020.

Highlights

  • Robust financial performance with excellent cash generation
    • Underlying EBITDA of €1,353 million, with margin of 20.3%
    • Cash generated from operations of €1,485 million
    • Strong balance sheet at 1.3x net debt to underlying EBITDA
    • Recommended full year dividend of 60.0 euro cents per share, up 5%
  • Decisive and effective COVID-19 response
  • Investing through-the-cycle with capital investment projects delivering growth, enhanced cost competitiveness and sustainability benefits
  • Delivered against our 2020 Growing Responsibly sustainability commitments and set new ones, the Mondi Action Plan 2030 (MAP2030)
  • Leveraging long-term trends of sustainability, e-commerce and enhancing our customers’ brand value
  • Well-positioned with cost-advantaged asset base, strong balance sheet and unique portfolio of sustainable solutions

Financial summary1 

€ million, except for percentages and per share measuresYear ended 31 December 2020Year ended 31 December 2019Change %Six months ended 31 December 2020Six months ended 31 December 2019Change %
Group revenue6,6637,268(8)3,2113,497(8)
Underlying EBITDA11,3531,658(18)615764(20)
Underlying operating profit19251,223(24)401544(26)
Operating profit8681,221(29)350542(35)
Profit before tax7701,103(30)304471(35)
Basic underlying earnings per share1 (euro cents)129.3171.1(24)
Basic earnings per share (euro cents)120.0167.6(28)
Total dividend per share (euro cents)260.057.05
Cash generated from operations1,4851,635(9)
Net debt11,7912,207
Underlying EBITDA margin120.3%22.8%
Return on capital employed (ROCE)115.2%19.8%

Notes:

1      The Group presents certain measures of financial performance, position or cash flows that are not defined or specified according to International Financial Reporting Standards (IFRS). These measures, referred to as Alternative Performance Measures (APMs), are defined at the end of this document and where relevant, reconciled to IFRS measures in the notes to the condensed consolidated financial statements.

2      31 December 2019 column includes a dividend of 29.75 euro cents per share in relation to 2019 financial year paid as an interim 2020 dividend.

Andrew King, Group Chief Executive Officer, said:

“Mondi delivered a robust performance in 2020, with underlying EBITDA of €1,353 million, ROCE of 15.2% and continued excellent cash generation. This is testament to the strength of our business model in the face of significantly lower average selling prices across our key pulp and paper grades, and the challenges brought by COVID-19. We finished the year positively, with strong demand in the packaging businesses supported by the long-term growth drivers of sustainability and e-commerce.

I am extremely proud of how our teams rose to the challenges of 2020 and my sincere thanks go to my colleagues for their endurance, enterprise and ongoing commitment. We took decisive action in the early stages of the pandemic, moving quickly to safeguard our people, support our communities and customers, and protect the profitability, liquidity and cash flow of the business while seeking to ensure we remain well placed to deliver value accretive growth into the future.

We continue to make good progress on our sustainability journey. We delivered strongly against our 2020 Growing Responsibly commitments and have now launched Mondi Action Plan 2030, our sustainability roadmap for the next 10 years.

Sustainable packaging continues to be a long-term priority for our customers and wider society. As a leading producer of both paper and flexible plastic-based packaging, we continue to support our customers’ environmental goals with packaging that is sustainable by design adhering to our principle of paper where possible, plastic when useful.

Our capital investment programme to generate value accretive growth, enhance our cost competitiveness and deliver sustainability benefits is progressing well. In January 2021 we commissioned our investment in Steti (Czech Republic), dedicated to producing speciality kraft paper for e-commerce and retail shopping bags. We also started up a new 300,000 tonne kraft top white machine at Ruzomberok (Slovakia) and we are moving forward with the previously announced major capital investment projects at Syktyvkar (Russia) and Richards Bay (South Africa). Expansionary projects are also underway at a number of our converting packaging operations, enhancing our production capabilities and product offering to further support our customers. We continue to evaluate further opportunities for value accretive growth and remain excited by the possibilities offered by our platform.

Looking ahead, although the near-term macroeconomic outlook continues to be uncertain, we remain confident in the structural growth drivers in the packaging sectors in which we operate and the strength of our paper position. We are seeing strong order books supporting price increases in most packaging and pulp grades, and are encouraged by the improving uncoated fine paper demand. We are planning longer project-related maintenance shuts and are seeing input cost pressures and currency headwinds, although the benefits from our capital expenditure programme will continue to support our performance.

Underpinned by the Group’s integrated cost-advantaged asset base, culture of continuous improvement, portfolio of sustainable packaging solutions and the strategic flexibility offered by our strong cash generation and financial position, the Group remains well-placed to deliver sustainably into the future.”

Protecting our people, serving our customers and supporting our communities and partners

Our priority in 2020 was the safety and health of the Group’s employees and our communities. We took decisive action in the early stages of the pandemic, moving quickly to safeguard our people and support our communities, customers and partners. At the same time, we continued to focus on developing our business and remain well-placed for the future.

All of our sites have implemented personal protection measures and intensified social distancing and hygiene protocols that meet or exceed local and international guidelines. We remain active in our efforts to contain any potential spread of the virus in our operations and communities.

Our facilities have been in operation throughout the year, with the exception of limited closures or short production interruptions at a small number of our plants.

This has allowed us to provide essential materials and products to our customers, many of whom produce food and personal and home care products, as well as contributing to local services such as energy and waste water treatment at our larger operations. Being able to provide security of supply, respond rapidly to significant changes in demand, and where necessary provide financial support, has strengthened our relationship with our customers. Many are looking to simplify and shorten their supply chains, engaging with fewer, more reliable partners like Mondi.

We escalated our programme to support local communities, going beyond our existing initiatives. We made meaningful financial and in-kind donations to support the pandemic response and provided food, fresh water and other supplies to people in need in the communities where we operate.

Growing Responsibly and setting our action plan for the next 10 years

Sustainability lies at the centre of our purpose, culture and strategy to drive value accretive growth. We believe business has a leading role to play in helping to deliver the UN Sustainable Development Goals. Being part of the solution to global sustainability challenges will secure the long-term success of our business and benefit all our stakeholders.

Our Growing Responsibly model to 2020 was the framework through which we responded to sustainability challenges and opportunities and addressed societal issues over the past five years. It has formed part of our business strategy and has enabled us to clearly demonstrate, monitor, improve and communicate our sustainability performance across the value chain. We have a solid foundation of setting targets and reporting on our performance since 2004.  

This year we are launching the Mondi Action Plan 2030 (MAP2030) as our new sustainability framework. It builds on the strong progress we made through our Growing Responsibly model and sets out the actions we need to take over the next decade to achieve our ambitious sustainability goals. MAP2030 is aligned to the UN Sustainable Development goals and it connects our 26,000 colleagues with a shared sense of purpose to contribute to a better world by making innovative, sustainable packaging and paper solutions. We believe that by focusing our efforts on circular-driven solutions, created by empowered people, taking action on climate, we can have the most impact. Each of these action areas have three high-level commitments, which are underpinned by more detailed targets, with the overall plan grounded on a foundation of responsible business practices spanning business ethics and governance, human rights, communities, procurement and environmental impact.

We operate in diverse and complex geographies and as a business that is fully integrated throughout the supply chain we are excited by the potential to make a real difference, with these 2030 commitments touching every part of our business. Delivering on these focus areas, working with our colleagues, customers, suppliers and partners to make a positive contribution to a better world, will be a top priority for Mondi.

We are particularly proud to have met our original climate change commitment to 2020 ahead of schedule. We have reduced our total greenhouse gas (GHG) emissions (per tonne of saleable production) to 0.64, a 24% reduction against the 2014 baseline, building on our long-standing focus of becoming less carbon intensive. Our science-based GHG reduction targets were introduced in 2019. Our longstanding efforts to reduce our GHG emissions mean that we have delivered a reduction of 45% since 2004. The contribution of biomass-based renewable energy to the total fuel consumption of our mills has increased from 59% in 2014 to 67% in 2020. A number of major capital investments made us more energy efficient and less reliant on fossil fuels. Since 2015, we have invested around €500 million in energy-related projects.

We are proud to have been recognised in 2020 by CDP as one of only 10 companies worldwide with a ‘Triple A’ score on its environmental performance related to climate, forests and water security. In the next decade, we plan to build on our climate resilience, by reducing GHG emissions in line with our science-based targets, maintaining zero deforestation in our wood supply, continuing to source wood sustainably from healthy and resilient forests and safeguarding biodiversity and water resources. Our science-based GHG reduction targets approved by the Science Based Targets initiative in 2019 cover more than 95% of Mondi’s total Scope 1 and 2 emissions, including our energy sales. We have committed to reduce Scope 1 and 2 emissions 34% by 2025, and 72% by 2050 (per tonne of saleable production) against a 2014 baseline. We are now exploring a science-based GHG reduction target for our Scope 3 emissions, which takes into account the GHG emissions in our value chain.

Ensuring the safety and health of our people always comes first. Our employees and contractors work in potentially hazardous environments. We embed clearly defined methodologies, procedures and robust controls to ensure they, and other people who have reason to be on Mondi sites, stay safe. Above all we look to develop a 24-hour safety mindset across the Group. With deepest regret, we report two fatalities in 2020 in our operations. In January 2020, a contractor died during demolition activities at our Syktyvkar mill. In June 2020, a contractor died in an incident during cleaning activities of a power boiler at our Richards Bay mill. Thorough investigations are conducted after all incidents and action plans implemented to address root causes and prevent repeat incidents. In 2020, we had 217 recordable cases (2019: 239 restated for acquisitions), which equates to a Total Recordable Case Rate (TRCR) of 0.58 (2019: 0.63 restated for acquisitions) representing a 7% reduction compared to 2019 and a 23% improvement against our 2015 baseline, exceeding our 2020 commitment.

We want to develop and inspire a diverse and inclusive workforce that is ready for change and embraces new ways of working. We aspire to be an employer of choice by engaging and developing our people. Our response to COVID-19 has focused on keeping our people empowered, informed, engaged and working effectively while supporting their physical and emotional well-being. During the year, we initiated several programmes across our operations to attract, retain, and develop our people and we also made progress on our diversity and inclusion journey introducing ‘conscious inclusion’ training designed to address unconscious bias and identify practical actions to create an inclusive work environment. As a member of the UN Women’s Empowerment Principles we are part of the growing community of businesses publicly demonstrating their commitment to gender equality in the workplace.

The social, economic and environmental health of local communities is important to our long-term success. We continue to support local livelihoods and businesses and aim to build strong proactive and trusting relationships with our communities to identify opportunities and mitigate risks. During the year we escalated our community support programmes, going beyond our existing initiatives to provide targeted COVID-19 related support.

We recognise the importance of working with others across the value chain and engage with suppliers and customers in initiatives such as Cepi’s 4evergreen alliance to increase the circularity and sustainability of fibre-based packaging solutions, aiming to achieve a 90% recycling rate by 2030.

For more details on MAP2030 please visit: www.mondigroup.com/MAP2030.

Innovative and sustainable packaging and paper solutions

Innovative, sustainable packaging solutions continue to be demanded by our customers and wider society. Our broad range of paper-based and flexible plastic-packaging makes us uniquely positioned to help forward-thinking brands find the most sustainable solutions, using ‘paper where possible, plastic when useful’. During the year we focused our efforts on developing paper-based packaging solutions to replace unnecessary plastic packaging, enabling our customers to achieve their own sustainability targets and reduce their environmental footprint. Paper-based packaging is renewable and easily recyclable which means it is an optimal solution for many of today’s applications. When certain functionality barriers are required, plastic-based flexible packaging can deliver many benefits when manufactured, used and disposed of appropriately, from reducing food waste to extending shelf-life and improving resource efficiency.

EcoSolutions is our customer-centric approach for partnering with customers to achieve their sustainability goals. The market response has been overwhelmingly positive. Our customers are eager to improve the sustainability of their packaging and seek guidance from us on reducing raw material use, designing for recycling and understanding the potential trade-offs. We collaborate along the value chain to eliminate unsustainable packaging, leading the transition to a circular economy.

Over recent years we have increased our focus on innovating with our customers. We are proud to be recognised for our innovation and ability to provide a wide range of sustainable solutions. In the past year we have celebrated a number of innovation awards across our business, including eight WorldStar Awards – two for our Flexible Packaging team and six for Corrugated Packaging, of which two were in partnership with a corrugated solutions customer.

Group performance review

Mondi delivered a robust performance in a challenging trading environment, having started the year with lower pricing coupled with the difficulties brought by the COVID-19 pandemic and related lockdown measures in the markets where we operate, leading to underlying EBITDA of €1,353 million, down 18% on the prior year. The packaging businesses delivered strongly and we are pleased with their strengthened order books in the second half and recent price increases being implemented in most paper grades.

Group revenue was down 8%, with strong volume growth in Corrugated Packaging and Flexible Packaging, underpinned by our strong customer proposition, being offset by a combination of lower average selling prices and negative currency effects. Uncoated fine paper volumes were impacted by lower demand for professional and office printing as a result of the widespread lockdown measures.

We saw a positive contribution from our previously completed capital investment projects. Input costs were stable in the second half of the year when compared to the first half and generally lower year-on-year, with lower average wood, paper for recycling, chemical, energy and resin costs. We are currently seeing input cost pressures in certain categories, notably paper for recycling, resins, energy and transport.

Cash fixed costs were marginally up in local currency with inflationary cost pressures largely offset by our strong cost mitigation programmes. The forestry fair value gain recognised versus the prior year was €44 million lower.

To protect our employees and suppliers and minimise execution risk, we postponed most planned maintenance shuts to the second half of the year. The annual impact of planned maintenance shuts on underlying EBITDA in 2020 was around €100 million (2019: €150 million). Based on prevailing market prices, we estimate that the impact of planned maintenance shuts on underlying EBITDA in 2021 will be around €140 million, of which the first half year effect is estimated at around €45 million (2020: €10 million). This includes an extended project related shut at Richards Bay in the second half as part of the ongoing major modernisation programme at the mill.

Currency movements had a net negative impact on underlying EBITDA versus the prior year. The benefit of a weaker South African rand to our South African export oriented business was more than offset by translation losses from a weaker Russian rouble and Turkish lira relative to the euro coupled with the negative impact on certain of our export oriented businesses of a weaker US dollar, notably in the second half of the year.

Depreciation and amortisation charges were marginally lower during the year as the effects of our capital investment programme were more than offset by currency effects. After taking the effect of special items into account, operating profit was €868 million, down 29% on 2019.

Basic underlying earnings of 129.3 euro cents per share were down 24% compared to 2019. Basic earnings of 120.0 euro cents per share were down 28% compared to 2019.

The Group remains strongly cash generative with cash generated from operations of €1,485 million (2019: €1,635 million). The impact of lower underlying EBITDA generation was mitigated by strong working capital management giving a net working capital inflow of €125 million. Net debt at 31 December 2020 was down by more than €400 million in the year to €1,791 million  (2019: €2,207 million), 1.3 times (2019: 1.3 times) net debt to underlying EBITDA. This is after capital investments of €630 million or around 160% of depreciation, as we pursue our through-the-cycle investment programme to continue delivering value accretive growth.

Given our strong financial position and confidence in the future of the business, the Board has recommended a final 2020 dividend of 41.0 euro cents per share. The final dividend, together with the interim dividend, amount to a total dividend for the year of 60.0 euro cents per share, an increase of 5% on the 2019 total dividend.

Corrugated Packaging

€ millionYear ended 31 December 2020Year ended 31 December 2019Change %Six months ended 31 December 2020Six months ended 31 December 2019Change %
Segment revenue1,8792,014(7)910969(6)
Underlying EBITDA518583(11)251286(12)
Underlying EBITDA margin27.6%28.9%27.6%29.5%
Underlying operating profit397459(14)190224(15)
Capital expenditure cash payments249257125164
Operating segment net assets2,0872,166
ROCE22.5%24.9%

Corrugated Packaging’s margins and returns remained strong. Underlying EBITDA of €518 million was down 11% on the prior year. Strong volume growth, lower input costs and shorter planned maintenance shuts were more than offset by lower selling prices. The benefits of an integrated value chain and ongoing continuous improvement initiatives continue to contribute to our strong performance.

Containerboard sales volumes were up on the prior year supported by our broad product portfolio and global distribution network. Demand strengthened throughout the second half in Europe and internationally, with strong import demand from China. Pleasingly, Corrugated Solutions achieved overall volume growth of 7% year-on-year, with a particularly strong second half performance across our markets, benefiting from ongoing investment in the business and testament to our innovative product portfolio and strong customer service offering. We saw significant volume growth in e-commerce and fast moving consumer goods applications throughout the year, while industrial end-uses came under pressure, most notably in the second quarter, with some recovery in the second half.

Selling prices were lower than the prior year. Average benchmark European selling prices for unbleached kraftliner and recycled containerboard were 11% and 13% lower respectively, while semi-chemical fluting and white top kraftliner prices were down 6% to 8%. On the back of strong demand and tight market conditions globally, we implemented price increases during the fourth quarter  and early 2021 across our unbleached kraftliner and recycled containerboard grades. We also implemented price increases in semi-chemical fluting and white top kraftliner grades in early 2021.

Input costs were lower year-on-year, with lower wood, paper for recycling, energy and chemical costs. Average benchmark European paper for recycling costs were 14% lower than the prior year. However, prices increased from the low levels seen in the first quarter over the course of the year and into early 2021, and are today significantly higher than the average for 2020. We expect to consume approximately 1.5 million tonnes of paper for recycling in 2021. Cash fixed costs were marginally up in local currency terms with higher personnel costs largely offset by our cost control initiatives.

Planned maintenance shuts were successfully completed during the second half of the year at all Corrugated Packaging mills. In 2021, our Syktyvkar and Kuopio (Finland) shuts are planned for the first half of the year while the remaining shuts are largely scheduled for the second half.

In January 2021, the Group agreed to acquire 90.38% of the outstanding shares in Olmuksan International Paper Ambalaj Sanayi ve Ticaret A.S from International Paper for a total consideration of €66 million, which implies an enterprise value on a 100% basis of €88 million. As a leading and well-established corrugated packaging player in Turkey, Olmuksan’s network of five plants provides an exciting opportunity to significantly strengthen our position in the fast-growing Turkish corrugated market and expand our offering to existing and new customers in the region. The transaction remains subject to competition clearance and other closing conditions and is expected to complete in the first half of 2021.

Flexible Packaging

€ millionYear ended 31 December 2020Year ended 31 December 2019Change %Six months ended 31 December 2020Six months ended 31 December 2019Change %
Segment revenue2,6672,708(2)1,2901,314(2)
Underlying EBITDA519543(4)239239
Underlying EBITDA margin19.5%20.1%18.5%18.2%
Underlying operating profit362389(7)160160
Special items(8)(4)(2)(4)
Capital expenditure cash payments16224876117
Operating segment net assets2,4752,603
ROCE14.5%15.7%

Flexible Packaging delivered a strong performance with underlying EBITDA of €519 million, down 4% on the prior year. Strong volume growth, the benefits of our integrated value chain, lower input costs and cost control initiatives were offset by lower average selling prices.

Kraft paper and paper bag demand remained resilient in Europe and North America during the period, finishing the year strongly across our markets. Overall, we saw good demand in building materials, consumer and agricultural end-uses and weaker demand in industrial applications. Kraft paper sales volumes were up on the prior year with an improved product mix, as we continue to develop our speciality offerings, benefiting from our product development initiatives and the increasing demand from customers for more sustainable packaging. Paper bags sales volumes were up 5% on the prior year, reflecting a strong performance across the business. We continue to support our customers’ demands for paper-based packaging alternatives to replace plastics for consumer, e-commerce and other applications with our portfolio of kraft paper and paper bags solutions.

Pricing across the paper value chain was down compared to the prior year, as a result of reductions that took place as we entered 2020 and some price erosion during the year. Price increases are currently being implemented for sack kraft paper grades supported by strong order books.

Consumer flexibles delivered strongly during the year, benefiting from increased demand in fast moving consumer goods applications driven by at home consumption, an improved product mix and pricing discipline. We continued to drive innovation to support our customers’ transition to more sustainable packaging, and to partner along the value chain to create products fit for a circular economy, incorporating paper where possible, developing recyclable flexible plastic-based packaging solutions and increasing recycled content in our packaging.

Input costs were down year-on-year, with lower wood, energy, chemicals and plastic resin costs. While cash fixed costs were slightly higher due to increased costs to service our customers’ incremental volumes and inflationary effects, this was mitigated by our strong cost control initiatives. We drove ongoing operational excellence initiatives to increase productivity and efficiency and reduce conversion costs. During the year we closed two consumer flexibles plants in the UK and announced the closure of another plant in South Korea.

All planned maintenance shuts at our Flexible Packaging mills were completed in the second half of the year. In 2021, the majority of planned maintenance shuts are scheduled for the second half.

Engineered Materials

€ millionYear ended 31 December 2020Year ended 31 December 2019Change %Six months ended 31 December 2020Six months ended 31 December 2019Change %
Segment revenue801979(18)377461(18)
Underlying EBITDA80122(34)3566(47)
Underlying EBITDA margin10.0%12.5%9.3%14.3%
Underlying operating profit4486(49)1748(65)
Special items(49)(49)
Capital expenditure cash payments74322820
Operating segment net assets589612
ROCE7.5%13.8%

Underlying EBITDA of €80 million was down 34% on the prior year, in which a one-off gain on disposal of a profitable plant in Belgium of €9 million was recognised.

Demand was good in consumer end-uses, in particular food, hygiene and home care applications as lockdown measures drove increased use of cleaning products and at home consumption. Demand in industrial and specialised end-uses was generally weaker, although the release liner business saw an improvement as we progressed through the second half. Volumes in personal care components were lower, as anticipated, driven by a key product maturing and the implementation of technology changes.

Prices were lower on average, reflecting generally lower input costs, mainly resin and speciality kraft paper. Cost control was strong and the business benefited from ongoing cost reduction programmes.

We are investing to support the realignment of this product portfolio. We are also implementing further measures to reduce the cost base and stabilise the business, including the closure of a functional paper and films plant in Pleasant Prairie (Wisconsin, US) and restructuring our personal care components focused operations in Gronau (Germany). Related special item charges of €49 million (including €27 million of non-cash asset impairment charges) were recorded. In combination, these measures are expected to stabilise performance in 2021 and return the business to growth thereafter. 

We are excited by the opportunity to develop innovative sustainable packaging solutions by combining Engineered Materials’ coating technologies and know-how with Flexible Packaging’s speciality kraft paper portfolio, customer relationships and converting capabilities.

Uncoated Fine Paper

€ millionYear ended 31 December 2020Year ended 31 December 2019Change %Six months ended 31 December 2020Six months ended 31 December 2019Change %
Segment revenue1,4851,758(16)711845(16)
Underlying EBITDA266444(40)102190(46)
Underlying EBITDA margin17.9%25.3%14.3%22.5%
Underlying operating profit153324(53)47130(64)
Special items22
Capital expenditure cash payments14522065117
Operating segment net assets1,5821,758
ROCE11.3%25.1%

Underlying EBITDA was down 40% to €266 million with lower average selling prices, lower uncoated fine paper volumes and a significantly lower forestry fair value gain more than offsetting lower input costs and the benefit of shorter maintenance shuts.

Uncoated fine paper volumes were lower year-on-year as the effects of the various lockdown measures impacted demand for professional and office printing papers. Order books improved throughout the third quarter and were stable in the fourth quarter, albeit they remained below pre-pandemic levels. We estimate the European market declined by around 15% year-on-year while our sales volumes declined by 8% overall and 2% in Europe. We increased our market share in all the key markets where we operate as our customers valued the stability of a long-term supplier, recognising we remain strategically well positioned in the context of the current market challenges given our broad product diversification, excellent customer service, geographic positioning and cost competitiveness.

Average benchmark European uncoated fine paper selling prices were down 7% on the prior year following price erosion during 2019 which continued into 2020. On the back of recovering demand and increasing costs, we have announced price increases from March 2021 across our key markets.

Average benchmark European bleached hardwood pulp prices were down 22% compared with the prior year. On the back of tight global markets, pulp prices are increasing in the first quarter of 2021. Including the pulp sales in our packaging businesses, the Group’s pulp net long position in 2020 was around 450,000 tonnes, expected to reduce to around 350,000 tonnes in 2021 as the new containerboard machine in Ruzomberok ramps up and Richards Bay’s production is affected by the prolonged maintenance shut.

Input costs reduced due to lower wood, energy and chemicals costs. Fixed costs were marginally lower, with strong cost control offsetting domestic inflationary cost pressures.

The forestry assets’ fair value is dependent on a variety of external factors over which we have limited control, the most significant being the export price of timber, the exchange rate and domestic input costs. Stable export prices and net volume increases during the period resulted in a forestry fair value gain of €27 million, down €44 million year-on-year. Based on current market conditions, we would expect a similar level of forestry fair value gain in 2021.

We completed planned maintenance shuts at all uncoated fine paper mills in the second half of the year. In 2021, our Syktyvkar shut is planned for the first half of the year while most of the remaining shuts are scheduled for the second half. 

Capital investments

Our disciplined approach to investigating, approving and executing capital projects is one of our key strengths and plays an important role in successfully delivering strong returns through-the-cycle.

Our capital investments focus on driving organic growth, strengthening our cost competitiveness, enhancing our product offering, quality and service to customers and improving our environmental footprint. This ongoing investment in our cost-advantaged asset base enables us to continue to capture opportunities in our growing packaging markets, supported by strong structural growth trends, including e-commerce and the trend to transition to more sustainable packaging solutions. 

Since 2014, we have successfully commissioned and ramped up a number of projects totalling €1.4 billion across our global network. These projects have generated average returns above 20% and added around 600,000 tonnes per annum of cost advantaged capacity. They have strengthened our customer offering, improved operational efficiency, reduced costs, improved our environmental footprint and unlocked options for future growth.

During the year, we benefited from the full ramp-up of the Steti mill modernisation completed in late 2018, the rebuild of the pulp mill at Ruzomberok completed in 2019, and other smaller investments in our mills and packaging converting plants. We estimate the underlying EBITDA contribution of these projects in 2020 was around €50 million. We expect to generate a further €50 million incremental contribution from projects in 2021.

Our focused capital expenditure project pipeline secures organic growth in our upstream cost-advantaged asset base:

  • The investment in a new 300,000 tonne per annum kraft top white machine at Ruzomberok started up at the end of January 2021 and is making good progress ramping up (capital expenditure of €370 million including the pulp mill upgrade commissioned in the second half of 2019). Our customers are excited by this innovative containerboard grade, combining excellent printability, fantastic strength and a high recycled fibre content.
  • Early in January 2021, we commissioned the €67 million project to convert a containerboard machine at Steti to be fully dedicated to the production of speciality kraft paper with a mix of recycled and virgin fibre content for shopping bag applications. This project will further support our retail customers’ efforts to replace unnecessary plastic as they transition to more sustainable packaging solutions that contribute to the circular economy. Once ramped up, the project will result in an additional 75,000 tonnes per annum of speciality kraft paper capacity while our containerboard capacity will be reduced by 30,000 tonnes per annum.
  • The investment programme at Syktyvkar to debottleneck production and maintain competitiveness, including various enhancements of the mill infrastructure, a new evaporation plant and a pulp dryer upgrade is progressing well.
  • The modernisation of our Richards Bay mill, including upgrading the energy and chemical plants to improve reliability, avoid unplanned shutdowns and improve our environmental performance, is ongoing with a prolonged mill shut planned for later this year as part of the project implementation process.

Our current major upstream projects are expected to increase our saleable pulp and paper production by around 7% when in full operation.

We continue to invest in our downstream converting businesses, including our Corrugated Packaging, Flexible Packaging and Engineered Materials plants to grow with our customers, enhance our product and service offering, improve efficiency and reduce conversion costs. For example, we are upgrading and expanding a key e-commerce plant in Bupak (Czech Republic) and investing in e-commerce paper-based mailerbags production at various sites in Europe. We have started up a new greenfield paper bag plant in Cartagena (Colombia) to serve our customers in the region and we have recently approved plans to expand our North African footprint, with a new paper bag plant in Tangier (Morocco). To meet our customers’ demand for sustainable biodegradable wipes, we are investing in a new line at our plant in Ascania (Germany), which is scheduled to start up in the first quarter of 2021.

Given the approved project pipeline, our capital expenditure is expected to be around €600-700 million in 2021 (around 150-175% of depreciation). We continue to evaluate further capital investment projects for growth, leveraging our high-quality, cost-advantaged asset base.

Special items

The net special item charge before tax of €57 million (2019: €16 million) is mainly due to €30 million of restructuring and closure costs and €26 million of net impairment charges relating to the following by business unit:

  • Flexible Packaging
  • Closure of two consumer flexibles plants in the UK, with an initial charge recognised as a special item in the prior year
  • Engineered Materials
  • Closure of a functional paper and films plant in the US
  • Restructuring of a personal care components plant in Germany

The operating special items resulted in a cash outflow of €28 million for the year ended 31 December 2020 (2019: €22 million).

Tax

Our underlying tax charge for the year was €180 million (2019: €257 million) giving an effective tax rate of 22% (2019: 23%), broadly in line with our expectations. Tax relief on special items was €12 million (2019: €0 million).

Assuming a similar geographic profit mix and stable statutory tax rates, we expect our effective tax rate in 2021 to remain around the same level.

Cash flow

Cash generated from operations of €1,485 million (2019: €1,635 million), reflects the continued strong cash generating capability of the Group.

Excellent focus on working capital management and strong trading in the fourth quarter resulted in lower working capital as a percentage of revenue of 11.1% (2019: 13.1%), below our expected range of 12% to 14%. The net cash inflow from movements in working capital during the year was €125 million (2019: €35 million inflow).

Capital expenditure was €630 million (2019: €757 million), or around 160% of depreciation. Tax paid of €168 million (2019: €248 million) was lower than the prior year.

Further outflows from financing activities included the payment of dividends of €237 million (2019: €396 million) and interest of €82 million (2019: €96 million).

Treasury and borrowings

The Group has a strong balance sheet. Net debt at 31 December 2020 was down by more than €400 million in the year to €1,791 million, from €2,207 million at 31 December 2019, reflecting the strong through-the-cycle cash generating capacity of our business. Gearing at the same date was 29% and our net debt to underlying EBITDA ratio was 1.3 times, well within our key financial covenant requirement of 3.5 times.

In April 2020, we successfully issued a 2.375% €750 million 8-year Eurobond and extended the maturity of €675 million of the €750 million Syndicated Revolving Credit Facility by one year to July 2022. In September 2020, we redeemed a €500 million Eurobond on maturity. There are no significant short-term debt maturities.

At 31 December 2020, the Group had a strong liquidity position of around €1.2 billion, comprising €869 million of undrawn committed debt facilities and net cash of €348 million. The weighted average maturity of our committed debt facilities is 5.7 years.

Underlying net finance costs of €95 million were €9 million lower than the previous year. Average net debt of €2,012 million was lower (2019: €2,243 million) while the effective interest rate was slightly higher at 4.5% (2019: 4.2%), as a result of higher cash balances.

The Group’s investment grade credit metrics were reconfirmed during the course of the year, at BBB+ and Baa1 for Standard & Poor’s and Moody’s Investors Service, respectively.

Dividend

The Board aims to offer shareholders long-term ordinary dividend growth within a targeted dividend cover range of two to three times on average over the cycle, although the payout ratio in each year may vary in accordance with the business cycle.

In April, at the height of the first wave of the pandemic, the Board took the difficult but prudent decision to withdraw the recommendation to pay the 2019 final dividend, with a commitment to re-evaluate later in the year when the impact of the pandemic became clearer. In August, having delivered a robust trading performance in the first half of the year and given our resilient business model and strong financial position, the Board was pleased to resume the payment of dividends. The Board declared a dividend of 29.75 euro cents per share relating to the 2019 financial year, bringing the total dividends paid relating to 2019 to 57.03 euro cents per share, in addition to a 2020 interim dividend of 19.00 euro cents per share.

Given our strong financial position and confidence in the future of the business, the Board has recommended a final 2020 dividend of 41.00 euro cents per share. The final dividend, together with the interim dividend, amount to a total dividend for the year of 60.00 euro cents per share, an increase of 5% on the 2019 total dividend.

The final dividend is subject to the approval of the shareholders of Mondi plc at the Annual General Meeting scheduled for 6 May 2021 and, if approved, is payable on 13 May 2021 to shareholders on the register on 9 April 2021.

Outlook

Looking ahead, although the near-term macroeconomic outlook continues to be uncertain, we remain confident in the structural growth drivers in the packaging sectors in which we operate and the strength of our paper position. We are seeing strong order books supporting price increases in most packaging and pulp grades, and are encouraged by the improving uncoated fine paper demand. We are planning longer project-related maintenance shuts and are seeing input cost pressures and currency headwinds, although the benefits from our capital expenditure programme will continue to support our performance.

Underpinned by the Group’s integrated cost-advantaged asset base, culture of continuous improvement, portfolio of sustainable packaging solutions and the strategic flexibility offered by our strong cash generation and financial position, the Group remains well-placed to deliver sustainably into the future.

Principal risks

The Board is responsible for the effectiveness of the Group’s risk management activities and internal control processes. It has put procedures in place for identifying, evaluating, and managing the significant risks that the Group faces. In combination with the audit committee, the Board has conducted a robust assessment of the principal risks to which Mondi is exposed and has reviewed emerging risks during the year. The Board is satisfied that the Group has effective systems and controls in place to manage its key risks within the risk tolerance levels established.

Risk management is by nature a dynamic and ongoing process. Our approach is regularly reviewed to ensure that it remains relevant at all levels of the business, and dynamic to ensure we can be responsive to changing business conditions. This is particularly important given the diversity of the Group’s locations, markets and production processes. Our internal control environment is designed to safeguard the assets of the Group and to provide reasonable assurance that the Group’s business objectives will be achieved.

Key changes in the year

The Group’s most significant risks are long term in nature and in general do not change materially in the short term. The assessment of the principal risks is updated annually to reflect the developments in our strategic priorities and Board discussions on emerging risks. The key significant changes identified during 2020 are set out below.

As previously indicated, the Board has closely monitored the COVID-19 outbreak and its impact on our business, global trade and the macroeconomic outlook. During 2020 the Board identified the implications of a pandemic as a new principal risk.

Based on our increasing reliance on IT systems and the increased prevalence of remote working, the related cyber security risks have been decoupled from our information technology risk and presented on a stand-alone basis.

Our understanding of the risks and implications related to climate change continued to develop throughout the year enhanced by the work performed towards meeting the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), following which the anticipated impact of the climate change related risk has been increased.

We continue to monitor the risks and implications of events related to the UK’s exit from the European Union.

Emerging risks

The Board has highlighted the execution of major capital expenditure projects as a notable emerging risk in the current year. This emerging risk is not new to the Group but was elevated in 2020 due to COVID-19. The emerging risk is managed through mitigating activities such that the residual risk exposure is not considered significant. All capital expenditure projects are planned in detail with contingency plans in place in order to avoid cost overruns, design and building defects and to ensure employee and contractor safety. In addition, COVID-19 impacted our ability to plan and execute some of our major capital expenditure projects in the year as we minimised the number of contractors and other non-operating people on our sites and adapted to local restrictions. We will continue to monitor potential risks relating to executing on major capital expenditure projects in the year ahead including, but not limited to, the effects of COVID-19.

Pandemic risk

The rapid spread of COVID-19 has resulted in unprecedented health, social and economic measures implemented by authorities around the world which have materially impacted the Group’s business. Since the start of the COVID-19 pandemic, the health, safety and welfare of the Group’s employees and our communities have remained our top priority.

The Executive Committee and Board continue to monitor our exposure and the impact of COVID-19 on the Group and evaluate actions to mitigate the risk, and where possible, identify opportunities that have arisen. In future, these actions and other monitoring techniques which we have developed, will enable the Group to be dynamic in its reaction to the risk of a pandemic as it develops.

Strategic risks

The industries and geographies in which we operate expose us to specific long-term risks which are accepted by the Board as a consequence of the Group’s chosen strategy and operating footprint.

We continue to monitor recent capacity announcements and demand developments, how consumers are demanding more sustainable packaging, the developments after the UK ended its membership of the European Union, the stability of the Eurozone and the increasing prevalence of trade tariffs and economic sanctions. Furthermore, while we continue to increase our understanding of climate change related risks and the impacts become clearer, we will continue to improve our disclosures and develop our responses.

The Executive Committee and Board monitor our exposure to these risks and evaluate investment decisions against our overall exposures so that our strategic capital allocation takes advantage of the opportunities arising from our deliberate exposure to such risks.

Our principal strategic risks relate to the following:

  • Industry productive capacity
  • Product substitution
  • Fluctuations and variability in selling prices or gross margins
  • Country risk
  • Climate change related risk

Financial risks

We aim to maintain an appropriate capital structure and to manage our financial risk exposures in compliance with all laws and regulations.

Despite ongoing short-term currency volatility and increased scrutiny of the tax affairs of multinational companies, our overall residual risk exposure remains similar to previous years, reflecting our attentive approach to financial risk management.

Our principal financial risks relate to the following:

  • Capital structure
  • Currency risk
  • Tax risk

Operational risks

As a Group we focus on operational excellence and investment in our people and are committed to the responsible use of resources.

Our investments to improve our energy efficiency, engineer out our most significant safety risks, improve operating efficiencies, and renew our equipment continue to reduce the likelihood of operational risk events. However, the potential impact of any such event remains unchanged.

Our principal operational risks relate to the following:

  • Cost and availability of raw materials
  • Energy security and related input costs
  • Technical integrity of our operating assets
  • Environmental impact
  • Employee and contractor health and safety
  • Attraction and retention of key skills and talent
  • Cyber security risk

Compliance risks

We have a zero tolerance approach to compliance risks. Our strong culture and values, emphasised in every part of our business, with a focus on integrity, honesty, and transparency, underpin our approach.

Our principal compliance risks relate to the following:

  • Reputational risk
  • Information technology risk

A more detailed description of our principal risks can be found in the Group’s 2020 Integrated Report, which is planned to be published at the end of March 2021.

Going concern

The directors have reviewed the Group’s budget, considered the assumptions contained in the budget, including consideration of the plausible future impact of the COVID-19 pandemic and the other principal risks which may impact the Group’s performance in the near term.

The Group’s financial position, cash flows, liquidity position and borrowing facilities are described in the condensed consolidated financial statements. At 31 December 2020, Mondi had €869 million (2019: €660 million) of undrawn, committed debt facilities. The Group’s debt facilities have maturity dates of between less than 1 and 8 years, with a weighted average maturity of 5.7 years. The principal loan arrangements are disclosed in note 11 of the condensed consolidated financial statements. In addition, the Group has €348 million of cash and cash equivalents available to fund its short-term needs.

The Group’s sole bank debt covenant requires that its net debt to underlying EBITDA ratio must not exceed 3.5 times. The ratio at 31 December 2020 was substantially below the maximum covenant level at 1.3 times.

The current and plausible future impact of COVID-19 and related macroeconomic environment on the Group’s activities and performance has been considered by the Board in preparing its going concern assessment. The base case forecasts were sensitised to reflect a severe but plausible downside scenario including possible impacts of the COVID-19 pandemic on Group performance. In the severe but plausible downside scenario, the Group remains within its sole bank debt covenant and has sufficient liquidity headroom. 

In addition to its modelled downside going concern scenario, the Board has reverse stress tested the model to determine the extent of downturn which would result in a breach of its sole bank debt covenant. A decline of 48% to the budgeted 2021 underlying EBITDA, which is well in excess of that contemplated in the plausible downside scenario would need to persist throughout the period to 30 June 2022 for a covenant breach to occur, which is considered very unlikely. This stress test also does not incorporate mitigating actions like reductions and deferrals of capital and operational expenditure or cash preservation responses, which the Group would implement in the event of a severe and extended revenue decline.

Following its assessment, the directors have formed a judgement, at the time of approving the condensed consolidated financial statements, that there are no material uncertainties that cast doubt on the Group’s going concern status and that it is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Mondi continues to adopt the going concern basis in preparing the condensed consolidated financial statements 2020.

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