#IRTalk with Mayr-Melnhof (AT)

There is one Austrian stock that seems to be especially attractive as a long-term investment -  and this is Mayr-Melnhof (MM). The reason being is that the business field of packaging of several products is not only a business field of change due to more customer and political awareness but also a field of reliable and stable development. MM is the European market leader in this area. With the opportunity of recycling, Mayr-Melnhof qualifies to belong to every ESG portfolios. This circumstance as well as its product portfolio and its modest valuation raised the question if this stock should be purchased or not. So I analyzed recent company presentations and annual reports to get an impression of the company's state. But when reading through the reports, many fields of improvement were found which I wanted to discuss with the Head of Investor Relations, Stephan Sweerts-Sporck.
Below you can find our e-mail exchange as of 9 Dec, 2021:

(1) Online business has been booming for several years. Packaging, especially cardboard packaging, is the essential packaging material for online purchases, regardless of the product ordered. How can it be that MM does not benefit from it in the context of sales growth?

The packaging products from MM are not the brown transport boxes (corrugated cardboard), but primarily the primary packaging directly around the consumer goods (food, household, hygiene products, pharmaceuticals ...). This market is very solid and growing more slowly.

Comment to SSS' reply: I didn't get this in the company presentation. This explanation is very important to understand the current business conditions.

(2) From your Company Presentation in November, I gather that you intend to grow the company (a) organically and (b) through acquisitions. On what (financial) basis do you plan to make these acquisitions?

- Should be core business: cardboard, cardboard packaging, kraft papers (e.g. paper bags)

-Focus on Europe, if attractive beyond that

-No dilution EV / EBITDA (last acquisitions ~ 7.5x)

-Group net debt <2.5 x EBITDA

-After the major acquisitions in the Board & Paper area, more projects in the Packaging area are now being evaluated

Comment to SSS' reply: Honestly saying, I'm not that happy with the acquisition plans of the company. Check the next questions below highlighting the reasons for it.

Here the question arises again for me, what is behind the fact that organic growth is only 1% p. a. is accepted, although, in my interpretation, the market environment would speak massively for sales growth (corona lockdown, development of online marketplaces, food deliveries, online deliveries to supermarkets, ...)

In the outlook after Q3 2021 we write: "In view of the existing capacity restrictions, the sales volume can currently only increase slightly."

However, the expansions recently undertaken in several MM Packaging plants will gradually enable more business from the beginning of next year. At MM Board &

Paper, where the investment focus is on increasing efficiency and optimizing the product portfolio, the expansionary effects will only gradually come to bear from 2023.

In short: there will be further growth and capacities will increase. Not a big boost from online trading, however; therefore more in the direction of 3-4% organic ...

 Comment to SSS' reply: SSS brought up an essential point here: The short-term sales growth will be flat. This is not very convincing as this doesn't support the investment thesis that the company can expand or raise its prices thanks to its market position.  

(3) I can see from your fundamental data since 2014 that the (free) cash flow conversion from sales is relatively low (2014-2020: on average around 4%). What measures is MM using to improve the FCF margin, as this figure will be particularly important for the future disbursement and loan servicing policy?

Primarily through margin improvement in the course of several ongoing structural optimizations / expansions in production and sales. However, as reported in 21-23, these require even higher investment expenditure. Therefore, the FCF margin improved in the medium term.

Comment to SSS' reply: Is this a solid reason for margins to expand, to acquire other businesses? I don't like this argument. In my view, a strong company that succeeds through every crises should not endanger its financial position or rely on the acquisition of other businesses to improve its own position.

(4) MM stands for continuous dividend policy. Investors welcome that and for me it is a decisive criterion when choosing an investment. What are MM's future plans regarding dividend distribution policy? Does the company - contrary to the past - also plan to buy back shares?

As a company with a familiar core shareholder, dividends are very important to us. After 25 years of upward movement, these should continue to grow with recent acquisitions and ongoing optimizations (absolute payout is expected to increase). Due to the acquisition and investment price, share buybacks are currently less of a priority.

Comment to SSS' reply: As an investor that is willing to maximize the shareholder returns of every company, this answer is not appreciated. Certainly, the major owners of this business decide where the business should head to. Due to their long-term experience, they definitely know why this must be the best way for the company's future. But if I had to decide between two stocks, one disbursing every cent possible and the other one trying to expand with acquisitions, I'd rather take stock no 1. 

Hope this helped you. 

Sincerely / Best regards

Stephan Sweerts-Sporck

Head of Investor Relations

So what's my conclusion?
To sum up, I would say that the company is too expensive taking the future (especially short-term) plans into consideration. Flat sales growth, hardly any FCF margin improvement efforts and no interest in buying back shares to increase the adjusted dividend - this is not a package that sounds attractive to me. Let's see what happens throughout the upcoming months and years. At proper valuation, I will consider buying this stock.

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