Smurfit Kappa Group (LON:SKG.I), a leading provider of paper-based packaging solutions, has reported a robust first quarter with an EBITDA of €487 million and an EBITDA margin of 18%. T
he company's performance, attributed to capital plans and improved efficiency, showed a positive trend with corrugated demand growth in both Europe and the Americas. Smurfit Kappa announced upcoming price increases and expects the WestRock (NYSE:WRK) combination to be completed by early July, subject to approvals.
The company's outlook remains unchanged, anticipating a recovery in the second half of the year with increased promotional spending and packaging demand from major events like the Olympics and football tournaments.
Key Takeaways
- Smurfit Kappa's Q1 EBITDA reached €487 million with an 18% margin.
- Corrugated volume growth was approximately 3% in Europe and 2% in the Americas.
- Price increases are planned for May and June.
- The merger with WestRock is expected to close in early July, pending approvals.
- The company is optimistic about increased promotional spending in H2, particularly for big events.
Company Outlook
- Smurfit Kappa's guidance for the year remains unchanged.
- A recovery is expected in H2, bolstered by rising paper prices and promotional events.
- The company maintains confidence in achieving a $400 million synergy from the WestRock merger.
Bearish Highlights
- Certain sectors like automotive are underperforming compared to the consumer goods sector.
- The bag-in-box business experienced a weak Q1, though improvements are seen for the subsequent months.
Bullish Highlights
- Positive signs in the industry, with demand growth and a pickup in Germany and strong performance in southern countries.
- The PPWR legislation is seen as beneficial for the industry's sustainability and circularity efforts.
Misses
- No specific guidance was provided on pricing or future performance.
- A weak Q1 for the bag-in-box business, despite recovery signs.
Q&A Highlights
- Executives discussed the ongoing M&A activities, indicating continuous consolidation in the European market.
- The company remains comfortable with its synergy target post-WestRock combination.
- Promotional spending for the second half of the year is expected to increase, particularly for big consumer brands.
During the earnings call, Smurfit Kappa executives provided insights into the company's first-quarter performance and the broader packaging industry. They highlighted the improved efficiency and capital plans as key drivers of the company's strong EBITDA figures. The company's growth in corrugated volume and the announcement of price increases mirror the actions of its industry peers.
The executives also touched upon the positive impact of the PPWR legislation on the industry, emphasizing the importance of sustainability in packaging. Despite a weak start for the bag-in-box business in Q1, there is an expectation of improvement in the coming months.
Looking forward, Smurfit Kappa anticipates a second-quarter tailwind from small price increases and remains steadfast in its yearly guidance. The company is also preparing for a surge in promotional spending related to high-profile events such as the Olympics and football events, which are expected to boost demand for their packaging solutions.
In terms of mergers and acquisitions, Smurfit Kappa conveyed a sense of business as usual, with each European market presenting different opportunities. The company's executives expressed confidence in meeting their synergy goals from the anticipated WestRock merger.
Overall, Smurfit Kappa's leadership portrayed a picture of a company that has navigated the first quarter with strong performance and is looking ahead to a promising second half of the year with strategic partnerships and industry events on the horizon.
Full transcript - None (SMFTF) Q1 2024:
Operator: Hello and welcome to the Smurfit Kappa Group Q1 Trading Update Call. I will now hand you over to Ciaran Potts, Head of Investor Relations, to begin today's conference. Please go ahead.
Ciaran Potts: Thank you, Saska [ph]. Today's discussion may contain forward-looking statements, including within the meaning of U.S. federal securities laws about Smurfit Kappa's views of future business and financial performance, including forward earnings guidance and future market conditions. Today's discussion may also contain forward-looking statements about Smurfit WestRock's proposed combination with WestRock. These statements are based on management's current beliefs and expectations that are subject to various risks and uncertainties. It is possible that actual results may differ materially from those suggested by these forward-looking statements we may make. Factors and risks that could cause actual results to differ materially from these statements may be included in our earnings release issued today and are described in more detail in Smurfit Kappa's reports available on Euronext Dublin, National Storage Mechanism at fca.org.uk and on our website, smurfitkappa.com. This call does not constitute an offer to buy or sell or the solicitation of an offer to buy or sell any securities or a solicitation of any vote or approval. In connection with the proposed combination, the entity which will ultimately own the combined group, Smurfit WestRock has filed the registration statement on Form S-4 with the U.S. Securities and Exchange Commission. This registration statement includes the prospectus relating to the offer and sale of the shares in Smurfit WestRock to WestRock's stockholders pursuant to the combination that will be registered pursuant to the U.S. Securities Act of 1933. The registration statement was declared effective by the SEC on 26th of April 2024. In addition, on 26th April 2024, WestRock filed a separate definitive proxy statement with the SEC with respect to the special meeting of WestRock stockholders in connection with the combination. WestRock commenced mailing of the proxy statement to WestRock's stockholders on or about first of May 2024. The proxy statement, prospectus and other relevant docs filed by Smurfit Kappa, Smurfit WestRock and WestRock with the SEC will be available free of charge at smurfitkappa.com or at westrock.com as applicable, or at the SEC's website, sec.gov. You should review such materials filed or to be filed with the SEC carefully because they contain or will contain important information about Smurfit Kappa, WestRock, Smurfit WestRock, the combination and related matters, including information about certain of the respective directors, executive officers and other employees who may be deemed to be participants in the solicitation of proxies in connection with the combination and about their interest in the solicitation. Please note, Tony is dialing in from Latin America this morning. Should there be any connectivity issues, Ken will take the lead. We will not be answering detailed questions in relation to the proposed combination with WestRock. And as this is a trading update, we will limit today's discussion to our results and we'll take detailed modeling questions offline. I will now hand you over to Tony Smurfit, CEO of Smurfit Kappa Group.
Tony Smurfit: Thank you, Ciaran and thank you all for joining us today. As you may have seen from this morning's release, we reported EBITDA of €487 million for the period, with an EBITDA margin of 18%. The delivery of another excellent performance reflects, as we have said before, both the operating excellence of our people and the continuing benefits of our multiyear capital plans. Some 6 billion of capital spend over the last 8 years in our mill and corrugated systems has optimized our integrated operating model, reduce costs throughout our mill system and ensured our corrugated system has the highest quality, the highest service and the highest innovation capabilities for our customers. In parallel, we have also developed and grown our higher-margin specialty businesses. Smurfit Kappa's long-standing and proven management team has built a formidable business continuing to deliver superior performance across all market conditions. As we expected, corrugated demand growth progressively improved from Q4 of 2023, with volume growth of approximately 3% and 2% for Europe and the Americas, respectively. We are also seeing an improving pricing environment and we'll characterize current trading conditions as encouraging. Longer term, both innovation and sustainability are positive structural trends supporting our customer base and growth. After the quarter end, on April 3, we were pleased to announce the successful completion of a $2.75 billion green bonds offering, the proceeds of which will be used in part to finance the combination with WestRock announced last September. We continue to work well with the WestRock team with integration planning progressing. Subject, of course, to shareholder, regulatory approval and the satisfaction of other closing conditions, we expect the combination with WestRock to complete in early July. The quality of Smurfit Kappa's people, it's performance-led culture, its operating excellence and measured capital plans have built a business that consistently delivers. But against an improving industry backdrop with positive long-term trends and through the creation of a global leader in innovative and sustainable packaging, the combination of Smurfit and WestRock marks the next and very exciting phase of our journey. With those brief comments, I will now pass it over to you, operator and to the audience to ask any questions about the performance. Thank you.
Operator: [Operator Instructions] And our first question today comes from Cole Hathorn of Jefferies.
Cole Hathorn: Just like to follow up on the very strong Q1 EBITDA, I mean, if you think that this should be the period where you've passed on all the lower box pricing. So effectively, the trough point in the pricing cycle, the €487 million is a really strong number. I'm just wondering what supported the EBITDA in Q1. Is there something on costs we should be thinking about, is the first question?
Tony Smurfit: Cole, I think, what we said all along is that we have been strongly recovering price through the up cycle and we've been holding on to the price during the down cycle for the most part. But the real reason we continue to perform well is because we have developed a plan and a business that works very well together. So the capital that we've been putting into the business, we've told you and everybody that we intend to get those returns out of the capital we put into it. Otherwise, we shouldn't be putting it in. And the first quarter numbers demonstrate strongly that our improved efficiency -- sorry, there's a massive thunderstorm going on outside my window here. The improved efficiency of our operations, it comes through. And when those capital plans are put in place and executed as well as we have that I think it shows in the numbers and that's one reason. Equally, we continue to support our customers with innovation and development and we obviously expect to get paid for what we do and that's what we get. I think with regards to the bottom point, Q1, yes, the box demand, as you know, the way the system works is box demand as paper pricing goes down, box prices go down. And we've seen that in Q1 and we would still expect to see a little bit of a tail of that in Q2, albeit that will be changing as we go into the second half. And I would say that the -- and what's supporting the paper price increases right now is a lot of the cost increases that we're getting. We've seen wastepaper move up sharply during the last 2 months. That may have some very short-term margin compression as we go through Q2. But then that will be recovered in paper prices in Q3 and Q4 -- I'm sorry, in Q2, Q3 and that's going to reflect itself in box prices later on. So this is the same as what we've done before but from a higher base because of our investment plans and the development that we've done within the company over the last number of years. Ken, I don't know if you want to add anything?
Ken Bowles: No, I think you got it all there. I think in reality, Cole, when you look at the pluses, minuses, it really does come down to pricing and volume year-on-year. I mean there's a lot of offsetting within the kind of the headwinds you're seeing around recovered fiber and indeed, where the box price has gone but clearly, some savings on energy, some savings in [indiscernible]. I think Tony picked up there first which is -- the biggest impact here is everything we've done over the last number of years, it's not a single quarter. It's multiyear capital programs and the benefits of those.
Cole Hathorn: And then maybe as a big picture, should we be thinking that near term, we've got obviously an OCC headwind into Q2 but then recovery into the back half as those kind of box pricing comes through? And maybe on that, is it OCC prices are moving higher because there's good demand pull into the mill system, so effectively calling out demand a bit better which I'd argue is a positive. And then can you give any comments a few people are out with price increases for June? I'm just wondering if you can comment on that. I completely understand if not.
Tony Smurfit: Yes. No, we have announced to our customers increases for June and for May -- May and June, both in recycled and kraftliner. And the -- so I think that -- with regard to wastepaper, yes, wastepaper moved up sharply because demand is a bit better and there is a bit of a pull around the place. So I think, yes, that's the reason. Also there's less generation because a lot of the, let's call it, the publication papers are -- and some of the other mix grades are less because of the overall macro effects of some of the economic issues that are out there. So I think that it does look pretty good for the second half.
Operator: And our next question now comes from Charlie Muir-Sands from BNP Paribas (OTC:BNPQY) Exane.
Charlie Muir-Sands: Just 2 for me, please. Firstly, could you give us a little bit of color on any kind of standout leaders in that regards in terms of category and geography performance? And then secondly, the final draft of PPWR is now being voted through by the EU Parliament. I know there's a lot of detailed technical guidance now getting drafted in but I wondered if you had any evolved thoughts on how that's going to affect the business positively or negatively in the future?
Tony Smurfit: With regard to the grades that we're in, I would say that the -- I mean, our kraftliner market is strong, brown kraftliner is strong, recycled is good. And most of our countries, especially the southern countries are doing well. Germany still is a bit of a laggard. Although I was in Germany last week, we are seeing some pickup. I don't want to call a strong pickup there yet but it was certainly more encouraging last week than I have seen in a while. But then I did say that last April, it ended up being a bit flat. So I don't want to call anything too early in Germany. But overall, the periphery countries are doing okay, are well in certain cases, like countries like Spain. And the major industrial companies a little bit better than we've seen in the last 6 months or so. So with regard to categories, we still see, obviously areas like cars and other areas, not pulling but the consumer goods are generally okay. Ken, do you want to take the PPWR?
Ken Bowles: Sure. Charlie, on PPWR, look, I think it's fair to say that the net outcome has been very positive for our industry. I think it's -- I think in the final draft of what we saw, I think the efforts of the industry and everybody within it kind of properly reflect the sustainability and the circular aspects of corrugated predominantly had been taken into account, I think it sets us up very well. I think, particularly in areas like e-commerce and reuse, I think they're reflected much better in terms of the model that was initially put out, as you know, a couple of years ago which kind of would never worked anyway. I think we sort of have to go back to the basic principle which is corrugated packaging is quite simply the most recycled packaging in the world anyway. We hit 90%-plus recycling rates. So we were starting off of a position of strength. And it was about making sure that, that position strength was reflected in the legislation. And I think it's fair to say we got there. But probably, I think it sets up the industry from a sustainability [indiscernible] and the growth perspective quite well for the years ahead.
Operator: And up next now, we have Justin Jordan from Davy.
Justin Jordan: I've got 2 quick questions. Tony, firstly, you described current trading as encouraging. Should we infer that, that is perhaps slightly better in April, May than the 3% box volumes in Europe that reported in Q1. And secondly, just on the back of that encouraging trading, you talked about containable price increases and being communicated from Smurfit Kappa customers from May, June. I'm just wondering if you can quantify the quantum of that. Swedish peer has announced a €60 tonne virgin containable price increase for June. Is the Smurfit targeting a similar quantum of increases in May, June with customers?
Tony Smurfit: Yes, to the second question, it's broadly similar. A little bit more, a little bit less, depending on the grade but basically, it's similar. With regard to the encouraging remarks, I mean, I don't want to say yet that it's better than the first quarter because Easter sell in March and that has a little bit of a distorting effect when you look at April's volume. But certainly, as I said earlier, when I go around the facilities that I've been around in the last 2 weeks or so, there's definitely a better feel about things than before. And certainly, other grades that we do some of the specialty products that we make are more busy than they have been in the last 6 months or so. So it is encouraging but I don't want to call out in -- it's a bit early to say. It's a big improvement versus Q1.
Operator: And from Stifel, we have Lars Kjellberg with our next question.
Lars Kjellberg: I just want to come back a bit to the cost equation. You called out energy as a tailwind, of course, OCC as a headwind, looking ahead. Could you share with us how you think about the bigger cost elements in the balance of the year, including energy in particular? And also, if there's any way you can parse out the benefits from your investment program that contributed in Q1? And how we should think about that as the full year. And Tony, the final question on the bag-in-box business is something that you've invested quite a bit. Can you share with us how that's performing? And if that also went through a destocking phase now starting to see volume coming back.
Tony Smurfit: I'll take -- I'll leave the cost question to Ken but on the bag-in-box, as you know, we -- we have probably a number 2 position in the world in that business and we intend to continue to develop that business and we've been investing accordingly to do that. Actually, the bag-in-box business in Q1 was as weak as I've seen for a while. But it is encouraging that it's getting much better as we've gone through April and our order books for May and June, albeit that it's a slightly weather-dependent and weather hasn't been great in Europe. So -- but I'm much more encouraged from what I've seen in the last 6 weeks or so in the bag-in-box business versus Q1, still performing very well, still an excellent business for us. And still worth investing a lot of money behind to continue to develop to be probably the number 1 player in the world in that business in the years ahead. But I think we'll -- as I say, it's much more encouraging from an order perspective as we look forward than the first quarter. Ken, do you want to take the cost questions?
Ken Bowles: Sure. Welcome back, Lars. It's -- look, it's difficult to strip out the direct impact of the investment program simply because I suppose it's a multiyear program. But within that, if you think about where it's targeted, you're talking about a lot of kind of efficiency from the starting point. So whether it's around quality or uptime or on time in full or delivery or energy, you're kind of attacking the cost base at all aspects of it to kind of get in the right shape. So it's not necessary that you're seeing it in either increased demand or indeed the bottom line directly. It's coming across that equally some cost takeout programs, indeed headcount reductions. So it's throughout the business. I think the overall objective of those has always been to ultimately deliver a more stable to increasing margin which we've done and indeed a rocky attributable target which equally we do. So I think it's difficult to strip it out but it's clearly -- I think it's fair to say it's clearly there. When you look at what Tony talked about earlier on around the stability of the margins and where we are as you kind of begin this next turn of paper price increases in that part of the cycle. On the cost side, it's -- you've been around long enough, Lars. There's a lot of plus minuses but it comes down to price and volume in the end. I suppose, look, if we think about energy for -- if energy was about 120 for the first quarter, it's probably about 150 for the year. We're probably about 60% hedged for the year as we are now. Still a bit to do there with but nothing to worry about, given where energy is kind of setting at the moment. Recovered fiber, as Tony said, the last 6 weeks or so, we've seen a spike in that. Probably at this stage, it's a headwind in the kind of, call it, €100 million to €150 million. Labor, natural inflation leaves you at €100 million. Distribution wood or the raw mats, probably another €80 million or €90 million in that. But our cost takeout program on average a year between €70 million to €80 million will take care of some of that. Energy clearly demand that stays at kind of 2.5%, 3%. But equally, then you're left with paper price increases the small part of compression and to Cole's question earlier on, that kind of part of quarter 4, '24. But more importantly, I think as we go into '25, how that begins to play out. But when we look at it in the pluses and minuses, really the headwinds and tailwinds broadly match out and you're left with your incremental piece around demand where box pricing kind of settles to recover as we get through the back half of this year.
Operator: And our next question comes from Gaurav Jain from Barclays (LON:BARC).
Gaurav Jain: A couple of questions from me. So first is just on clearly a very strong result -- set of results in Q1, €487 million EBITDA. And then based on the comments you're making, clearly, it seems, 2 it be much stronger. So the full year consensus number is €2 billion. Wouldn't it be fair to assume that there is upside to that? That's one. And the second question is just on M&A in the sector, we are seeing another consolidation and then one of the bidders is no longer there but maybe they are also thinking of something. So with this more consolidated industry, how do you think in the bags, Smurfit going forward?
Ken Bowles: I think on the first one, look, I think consensus is you can talk to Ciaran and Frank offline but any aspects of your model you want but I don't think we're going to deal with consensus on this. It is what it is. On the second one, I think -- and Tony and I have a view here, too. In reality, it's an industry that people have been pushing for consolidation to be a good thing for a number of years. I think we've seen more of that over the last few years. I think, look, all we can do, we run our own race. We're not looking at what anybody else is doing. Clearly, our combination with WestRock is very exciting for us, given the cultural alignment, the commercial aspects and the innovation assets of both businesses. So irrespective of the broader consolidation, I think we just focus on our own game in that sense. And we're looking forward to that piece. I don't know, Tony, if you have anything to go forward around consolidation.
Tony Smurfit: No. I think consolidation has always been happening. There's been always deals happening in the sector. Equally, there's been start-ups and new investments by people. Europe depending on the market is either very fragmented or not fragmented at all. And each market is very different in Europe. The Italian market is different to the U.K. market which is different to the Spanish market which is different to the Swedish market. So overall, generally speaking, M&A in the sector is always happening and will always happen. Sometimes it's small and sometimes it's bigger. It just so happens as our combination with WestRock has probably precipitated the other large M&A transaction out in the marketplace and we wish them well and we'll follow with the interest.
Operator: And up next, we have Andrew Jones from UBS.
Andrew Jones: Just around the 2Q bridge. Can you just give us some sense of like how much should that sort of small pricing tailwind will have an impact into 2Q? What sort of percentage decline you have in mind? And then just on some of the other aspects about technical guidance and things like that. Have any -- has your thinking changed in any way with regard to any of the parameters you set out at the 4Q stage?
Ken Bowles: No, is the short answer to the second one. I mean the guidance for the year kind of remains as it is. On the first one, we don't really do forward guidance. We've never done forward guidance in terms of box pricing, I think it's fair to say what we saw at the year-end. We kind of guided 2% to 2.5% of the box price decline in the first quarter. We've seen that come through with the uptick in paper prices. We're not necessarily seeing any more in that sense. And then we move on to recovery as that kind of paper price feeds through in the back half of this year.
Operator: [Operator Instructions] And we now take a follow-up from Cole Hathorn.
Cole Hathorn: I've actually had 2 more from my side. The first one is on promotional spending. I mean you should see good benefits when the big consumer brands come back and start their promotional activities. And I'm just wondering how those negotiations are progressing? Are you seeing anything for the Olympics, anything for the football into the summer? Just how you're feeling on kind of the promotional side into the back half of the year? And then the second one, if you can answer it is, obviously, IP and DS Smith have got a $500 million synergy number versus your $400 million for WestRock. You've got good overlap in Mexico. You've got good overlap in Latin America as well as general other synergies. I'm just wondering how comfortable you are with that $400 million number if -- or if there's potential room to the upside?
Tony Smurfit: Well, I'll let Ken be the Solomon guy on the synergy number other than to say that we're very comfortable with the number we put into the marketplace and we'll leave it at that. But Ken, I don't know if you want to...
Ken Bowles: No, I think that's it. Look, I think you know Smurfit Kappa well. The number we put on the door was the number we were eminently happy with and remain so, Cole.
Tony Smurfit: With regard to promotional spending, yes, I mean, obviously, a lot of our customers are talking about the second half of the year. I mean, being stronger for them in regard to promoting their brands. A lot of the big brands were putting price over volume and there has been some backlash against that, as you will have seen in some of the supermarket chains. And so there is likely to be more promotional spending in the second half of the year for the big brands. It's a bit early for us to start calling that out as a big tailwind but we'll wait and see if that actually materializes. With regard to the big events over the summer, they absolutely do use a lot more packaging. So we would be expecting or hoping that, that will be better for the second quarter and into the third quarter with regards to things like the Olympics and the football. We are actually making all the beds for all the athletes in -- not all but all the corrugated beds both in Special Olympics and for the Olympics. So that's an innovation that we -- with a partner we have done. So yes, that's helping a small factory of ours in France. But yes, so it's positive for us but how much those to be seen.
Operator: And I would now like to hand the call back over to you, Mr. Smurfit for any additional or closing remarks.
Tony Smurfit: Yes. Well, thank you very much, operator and thank you all for joining us today. As always, it's great to talk with you and we're very encouraged by our first quarter. The steps we've taken in Smurfit Kappa and will continue to take, as you'll have seen, built a very good business that consistently delivers over many years. And I would say that the quality and the consistency of that performance gives us increasingly excitement for the future for all of our stakeholders. So with that, I would say thank you again for being with us and we look forward to updating you on progress with the combination with WestRock as we go forward into the next couple of months. And thanks for your support. Thank you, all.
Operator: Thank you for joining today's call. Ladies and gentlemen, you may now disconnect.
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