Good day, and thank you for standing by. Welcome to the Smurfit Kappa First Quarter Trading Update Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a Question and Answer Session. As you ask a question during this session, you will need to press star one on your telephone. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, CEO Tony Smurfit. Please go ahead.
Thank you, Cass. Good morning, everybody, and thank you for taking the time to join us today. I'm joined on the call by our Group CFO, Ken Bowles, and before commencing, we would refer you to the note on forward-looking statements set out in our trading update, which also applies to our discussion today. Just a note, as we're holding our AGM this morning, we would appreciate if you could limit your questions to one per person, and any detailed modeling questions can be dealt with off-line with the investor relations team.
Before commenting on the results, I would like to express my pride and admiration for our people, not only in their dedication in delivering this set of numbers and in dealing with an exceptionally difficult operating environment to ensure our customers are supplied with packaging, but also in the work they've done to support the Ukrainian people through both financial and humanitarian contributions.
The effect of the war in Ukraine has had ramifications across the globe in the first quarter. Input costs which were already rising rose further. Supply chains already disrupted became more challenging. Smurfit Kappa, through our people, responded to deal with those challenges. Both revenue and EBITDA were up 33% on the first quarter of 2022, while the EBITDA margin was 17%. Underlying EBITDA was up over 30% in the quarter, with strong demand across our operations. Additional costs absorbed in the quarter were over EUR 300 million.
However, price recovery was strong, reflecting the significant investment Smurfit Kappa has made and continues to make to support our customers' growth, capturing the opportunity presented by the long-term demand growth drivers of e-commerce and the need for more sustainable packaging solutions. This performance also reflects our scale and geographic diversity. The recent acquisitions we've made, and importantly, a greater appreciation by our over 65,000 customers for our unique, integrated and resilient operating model, which provides security of supply and delivery of market-leading innovation and sustainable packaging solutions. The confidence our customers have of delivery, no matter the challenge, is a key differentiator for us, and we continue to win new business as customers place an even greater value on the security and sustainability of the supply chain requirements.
That commitment to our integrated, resilient operating model is illustrated in our actions on internal investment and M&A. Our current investment plan is heavily weighted towards the customer-facing part of our business, building out our corrugated operations. Acknowledging the need for paper to feed that growth, we acquired the Verzuolo mill late last year, which is a world-class containerboard mill, which has enhanced our system and built on the scale and guaranteed the supply for our corrugated product to our customers now and into the future. When customers have concerns over the supply chain, they engage with Smurfit Kappa in the knowledge that we will deliver. The use of our Smart Applications delivered through our global network of 29 Experience Centers harness the most complex complete set of data in our industry to allow our people to focus on solving customers' challenges.
It is truly an unrivaled set of applications and expertise, which is increasingly valuable in an ever more complex world. Today, consumers are demanding packaging solutions that are renewable, recyclable, and biodegradable. That fact is evident in conversations we have with our customers every day. More and more, there's a focus on the processes involved in the delivery of paper-based solutions. We recently published our fifteenth sustainable development report, illustrating clearly the benefit of the investment we've made in our operations to support a greener planet. Our ambitious goals and sustainability targets will help build a sustainable future for our communities and support good business practices. To reiterate what I said on recent calls, Smurfit Kappa today is a structurally improved business in every way, with a unique culture and an unrivaled and irreplaceable asset base.
We are operating in a business with long-term secular growth drivers, which gives us, as a company, significant scope for future growth. To meet that growth, we announced our ambition for accelerated growth when we spoke to you at the end of 2020. We had, at that point, booked slots with machinery providers, limiting delays due to supply chain issues, which have since materialized and minimizing the associated cost inflation. As I mentioned above, I'm very proud of our team, who have continued to deliver in these challenging times, ensuring security of supply to our customers while also supporting them through the use of our packaging expertise and approach to sustainability. Our first quarter performance has set a strong foundation for 2022. Demand remains good with continued customer focus on moving from plastic to more sustainable packaging materials, while corrugated pricing recovery is happening.
Our multi-year capital plans to support customer growth and to continuously improve our system have also established a strong foundation for performance in 2022 and of course beyond that. Thank you, operator. Now we're happy to take any questions from anyone on the line.
Thank you very much. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel that request, please press the hash key. So once again, that's star and one if you wish to ask a question. Your first question today comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead.
Good morning. Tony, I'll just start off where you ended. You know, the EUR 514 million is indeed a strong foundation for the year. You talk about progressive pricing, and we also have, of course, hedges rolling over. My question is really gonna be on how should we think about that EUR 514 million in the context of the balance of the year with a particular focus on demand trends? You know, it appears to have been call it 10 basis points above market in Q1. Clearly the market is concerned about macro trends, and you mentioned, of course, sustainable packaging. How should we think about, you know, sustainable packaging as an offset to potential cyclical and that pipeline that you have?
If you can put that into context and ultimately how we should think about is 514 representative of what you believe is a good number to annualize.
I mean, obviously, we're very happy with the number, Lars, but we faced unprecedented costs in the first quarter. You know, we had said last year, if you remember, that we would progressively recovering pricing through corrugated during the year as contracts rolled off. Clearly everyone has been surprised by the amount of cost that has happened in the first quarter, which we've been able to mitigate with some hedging, as you've said, but on the energy side. But it's not just energy, it's all other items are going up, starch, transport, wages. You know, practically every line item of cost is moving upwards.
To mitigate that, we, the industry and ourselves have announced price increases, which we are, you know, recovering those costs through price increases very, very quickly, frankly, because we need it very quickly. We have set ourselves up to not be in the same position we were in last year, when nobody expected inflation. We had more, let's say, longer term contracts that we have contracts that are slightly shorter this time around. We are, you know, pushing pricing quicker than we would have historically. I think we are moving in a very proactive way that is working well for us, as we sit here at the end of April for the last increase.
When you look at the context of the first quarter, while there might be some, you know, second quarter slight, I won't say downward, that's the wrong word, but let's say some mitigation to cost in the second quarter, we would expect to see that quickly recover in third and fourth quarter.
I think, Lars, to your kind of longer term trend point, I think what we've kind of pointed to over the last number of years is, you know, the reality is that the demand backdrop and supply chains being as stretched and tight as they are, people haven't really had the space and time to start thinking about those longer term structural shifts towards paper over plastic. I think, you know, if we saw demand coming back even a slight bit, and that allowed space and time for projects to kick off in a meaningful way, I think you get natural offsets through that too.
You have to remember, Lars, we are spending a lot of money investing in our business behind the growth. As I've said before, in practically every market, we see opportunities to either take or win market share or follow customer growth or follow new opportunities. You know, it's not just our corrugated business that's doing well, it's all the other areas of our business that are doing well, like bag and box, like, you know, our cartonboard companies, our sack paper business, our MG business. They're all really doing exceptionally well and have exceptionally strong order books at the moment.
You know, the only, t o your point about growth, which obviously the market is worried about, and of course, we don't have a crystal ball as to what's gonna happen with regard to the supply chain and what's gonna happen with inflation. But I think the only thing that we see that's somewhat different is a lot of our customers are having supply chain problems, and that, you know, is causing them to have less demand, which is causing us to have less demand with specific customers. But remember that 70%+ of our business is FMCG related. You know, whether you shop in one store or another, you're still gonna be buying food, and that's still gonna be good for our growth.
Got it. Thank you.
Thank you.
Thank you. Your next question comes from the line of Allan Smylie from Davy. Please go ahead.
Yeah. Morning, Tony. Morning, Ken. Just one question for me. Look, I think there's a notable difference between how your business is navigating a broader market characterized by supply chain disruptions and bottlenecks, given the volume growth you've delivered and what we're seeing, for example, in the U.S. market. I wanna appreciate there are specific regional differences. It'd be great if you could give more color on the extent to which your integrated model and secure suppliers resonated with customers. Then as a kind of a follow-on to that and follow-on to Lars' question, like, do you think that, you know, market share gains, as market tightness starts to ease, could act as an offset to potential demand softness, given your secure supply and how that's potentially resonating with people?
Yeah. Well, on the second point, you know, for sure, you know, what our customers have seen during the last couple of years is, and we had problems, let's say eighteen months ago, but to deliver Christmas of not last year or the year before. But we solved those problems last year with our Verzuolo acquisition. And what our customers have seen is that, you know, the most expensive box that you will ever have is the one you don't have when your customers are needing the boxes. So, you know, clearly having a reliable supplier like Smurfit Kappa is a big positive for every customer, and that is gonna stick around a long, long time. Given what we see in all the other areas of problems, and we do have our problems too.
I mean, we have very big logistics issues. We have very big supply issues in many of our different substrates. But we're able to manage through it because we've been fortunate enough to be planning ahead. You know, you take machinery, for example, which I mentioned in the script there a few seconds ago. You know, we've ordered these machines, and we've started building some of our mega plants 18 months ago and over the last 18 months. You know, nowadays, the lead times for these type of things is much longer.
While we have some delays of, let's say, somewhere between one and six months, depending on the machinery supplier, you know, they're nothing like having to start thinking about placing an order today for a machine which would take you much longer than it ever would have in the past. I think we have a big advantage in that scenario. With regard to demand, I think, you know, we've performed well because frankly speaking, we've done well, and we've positioned ourselves well with customers. You know, there are many different companies that you'll see that some have done better, that you referred to the United States. Some have done better, and some have done worse, and we'd like to put ourselves in the better category in that scenario. I think that is standing to us.
The fact that we have invested, whether it's in Mexico or in Sweden or in Spain or whatever country, gives our customers real security of supply, happiness, I suppose, and that's really, you know, standing to us.
It's very clear, Tony. Thank you.
Thank you, Allan.
Thank you. Your next question comes from the line of David O'Brien from Goodbody. Please go ahead.
Morning, gents. Thanks for taking my call. Just two short ones from me, please. Look, the pricing you've got through is pretty stellar, by all accounts. I guess, trying to think about what is the risk to demand with such pricing coming in, nearly 30% off trough. I guess linked to that as well, what impact do you think that could have on the conversion from plastics to paper in a more medium-term view? Second question, just on Verzuolo. What type of run rate are you at in terms of internalizing the level of paper that they have into the Smurfit Kappa group?
I'll let Ken take the first question. On the second question, Verzuolo is about 60% integrated now. You know, we're choosing to keep additional customers around the mill and strategic customers that we want to keep for a period of time. It makes sense from a transportation point of view for those customers that are, you know, less than 60 km away or 100 km away. You know, helps our whole returns out of the mill. You know, that mill was not hedged at all, so you can see the effect of the returns on that mill that are hence necessitating the need for the price increase that happened in April.
You can see that that's, you know, a mill like that should be making one of our best mills and frankly isn't because it's not hedged. With the new increase that goes in, it'll show the power of the mill in the second, third and fourth quarter, unless energy continues to spike upwards, in which case we'll have to look again at what we do. That mill is working fantastic. It's a fantastic acquisition and will be one of our best mills in the system going forward. About 60% is a long way of answering your question.
Thanks, Tony.
Morning, Dave. On kind of pricing power and as you look forward in plastic to paper in the round, I suppose there's a few things to say here. You know, it sort of goes back to something Tony just said, which is the most expensive box is the one you'll never get. In reality, you know, that's the market that's been out there for a while now, given the time backdrop and our ability to kind of work through that. Remember, it's not just 2022 or 2021. It goes back to pre-COVID in reality. I think people really saw the resilience of the model and the strength of it, and our customers really value that model and the strength of it during not only COVID and post-COVID, but where we are now.
I think as you kind of move that forward, I think there's a keener sense then of what can happen in times of stress and in times of tight supply chains, and our position and place within that has clearly been seen to be very strong at a kind of probably almost understating the position. Within that too, you know, the reality is that when people get on and back onto proper kind of ESG paths and targets there to 2030 and 2050, clearly paper-based packaging and the shift away from plastic too could play a big part in that. Whether that's waste reduction or CO2 reduction in terms of the context of the box itself or the production of it or the delivery of it, clearly we have a strong part to play in that too.
I think pricing power will also play a part in that, because what's gonna be clear between, if you like, 2025 and 2030, as kind of companies move towards that kind of timeframe, is the ability to not only deliver financial benefits, but non-financial benefits in the context of the product are going to be equally valued, I think, as we look forward. I'm not sure if that gets the nub of the question, Dave.
No, that's great. Thanks very much.
Thanks, Dave.
Thank you. Your next question comes from the line of Kevin Fogarty from Numis. Please go ahead.
Morning, guys. Just a quick one on pricing and obviously, you know, great price recovery during the period. I just wondered if you could share any sort of color on your sort of non-contracted customers, just in terms of kind of price negotiations that have gone on there. Are there any sort of pockets where it's a bit more challenging to sort of pass those prices on or any sort of sectors or pockets where, you know, it's not as straightforward as with contracted or indexed customers? Well, the simple answer is no, Kevin. I mean, you know, at the end of the day, there's an absolute need for us to recover our costs.
We have been talking to our customers in the fourth quarter and in the early part of the first quarter, this is pre-Ukraine, that there was a new situation that is an inflation situation that we haven't seen in decades. We are dealing with that with all customers, contracted and non-contracted customers. You know, there's not any specific area that I would say that we are meeting any particular challenges. I mean, clearly, you know, at this moment in time, security of supply and ensuring that they have their product is the most important situation for our customers. You know, we're able to give that to them, and that means a heck of a lot. You know, it's not unreasonable for us to pass our costs through.
Remember this, Kevin, we're investing EUR billions in this business to support our customers and, obviously, make ourselves more efficient at the same time, but supporting our customers' growth and their development. You know, we need to make sure that when we invest those billions, that we get a return on that, and that's what we intend to do, and that's what we are doing. You know, clearly if we have customers that are, you know, not giving us an adequate return, we have to reflect that in our negotiations with them. You know, for the most part, I would say that we have fantastic relationships with all of our customers, and we're working well with them.
Great. No, that's very clear. Thanks for that. Thank you.
Thank you.
Thank you. Your next question comes from the line of Cole Hathorn from Jefferies. Please go ahead.
Morning. Thank you for my question. The first question is just on earnings resilience. I mean, you've done very well to get out ahead of the cost inflation, pushing through the pricing in the fourth quarter. Is there any quantification you can give on the quarter-over-quarter box pricing you've realized? And then focusing on earnings resilience through this cycle, how do you think about this business? You know, ultimately once, hopefully cost inflation moderates, how will Smurfit Kappa be positioned? I mean, should we be thinking that your security of supply that you've talked about, you've ultimately taken some share, hopefully grown some volumes. Even if it's a challenging market, you've still taken share, and you hold onto that box pricing longer because everyone will still be worried about cost inflation even when it continues to moderate. Thank you.
I suppose on the first point, Cole, to kind of keep it simple, if you remember at the end of 2021, we'd got to about kind of call it 19% box price increase. If you take the 33% increase in revenue year-on-year and growth within that being, you know, around that kind of 3% mark, a little bit of acquisitions, I think the box price sequential quarter four to the end of quarter one is in the kind of 8%-10% space broadly.
On resilience, Cole, I think we've said this before, that you know, when you are engaged with customers who are looking for sustainable packaging and innovation, you know, because of the experience we've developed over decades, but really put through on the last number of years into our Experience Centers and when we talk about our applications, and I think you've seen some of those, you can appreciate that customers want to work with companies that I think are really good at what they do. I don't mean to sound in any way arrogant, but I think we are good at what we do in regard to helping them with their various different needs.
Some, you know, we call it the, where the customer's pain is, and we try and solve that pain for them, whether it can be sustainability, it can be innovation, it can be design from the get-go, or it can be just, you know, being more efficient across their own logistics supply chain. Or it could be machinery and how they pack quicker. Smurfit Kappa is a continuing leader in that whole area. In a sense, we're the go-to guy, and you don't throw that away very quickly. Are we gonna be resilient? The answer is absolutely yes. I mean, we wouldn't be investing all the money we're investing in our business without actually seeing the opportunities that our customers are giving us and trying to take those opportunities. You know, there'll be ups and downs.
We always say that success is never a straight line, but you know, we've been doing pretty good in fulfilling our customers' expectations and making sure that they need us as much as we need them. I think that will stand the test of time. I think we prove that you know, over and over and over again, where customers sometimes leave us. We never lose customers. We might lose lines of customers. I'm talking about larger ones. We might lose lines of customers, but historically, they come back to us very quickly because they can't get the same sort of quality and service and ideas and knowledge that from other companies. That's something that we've built up. You know, I call it you know, irreplaceable because it is irreplaceable.
You can't replace that. As long as we keep our people motivated and we keep our, you know, good talent coming into the company, the company will be resilient and strong going forward.
Thank you.
Thank you.
Thank you. Your next question comes on the line of James Twyman from Prescient. Please go ahead.
Yes. Thank you very much for the call. I'm sure it's a bit early, but Russia's a significant exporter of containerboard, and I'm just interested to know what your understanding of their importance in the European market and whether you've seen any impact in the last month from maybe reduced exports.
Thanks, James. Russia, I think it's around 250,000 tons of kraftliner that they export to Europe. Clearly, that's not coming in anymore, so that's gonna have to be replaced going forward. You know, the whole Russian situation is obviously in a massive state of flux. They themselves would probably plan to send that containerboard to other parts of the world. Of course, that's not easy because a lot of the ports are either there isn't enough transportation or there's not enough logistics to get to various different ports. I would say the Russian containerboard will take some downtime because they just don't have the demand, and demand in that country has dipped very significantly. I think, you know, there will be some demand.
It's not really that significant, 250,000 tons. It's something. You know, that'll be replaced in the European market by either recycled or kraft liner from some of the newer capacity that's coming on stream. I don't envisage it being massively disruptive.
Okay. Thank you.
Thanks.
Thank you. We have no further questions at this time. I'll now hand back to Tony for closing remarks. Thank you.
Well, thank you very much, operator, and thank you all for being on the call. Also very much appreciate you finishing up early. We'll give you much longer at the half year. As Ken and I know, we have to get to the AGM now. We really appreciate you being on the call, and thank you for your continued support for Smurfit Kappa. We are investing in the company to support customers' growth and reduce and making sure that our environmental impact is reduced. We are taking all advantage of the long-term secular growth drivers of e-commerce and sustainable packaging. That gives us in Smurfit Kappa massive confidence in the future of the business and our future prospects.
Thank you all for being on the call, and good luck with the rest of the day, and we hope you have a good weekend. Thank you all.
Thank you. That does conclude our conference for today. Thank you all for participating, and you may now disconnect.