Hello, welcome to the Smurfit Kappa first quarter results call. My name is Jess, I'll be your coordinator for today's event. Please note this conference is being recorded, for the duration of the call, your lines will be on listen only. If you require assistance at any point, please press star zero you'll be connected to an operator. I will now hand over to your host, Tony Smurfit, CEO, to begin today's call. Thank you.
Thank you, operator. Good morning, and thank you all for taking the time to join us today. I'm joined on the call by our Group CFO, Ken Bowles. 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. Please also note that our AGM follows this call, which will limit the available time for Q&A. You will see from our release today that we've once again provided a more fulsome level of disclosure, which underscores both the strength and quality of our performance. Smurfit Kappa has again delivered a very strong set of results for the first quarter, with demand broadly in line with the fourth quarter of 2022.
EBITDA increased by 13% to EUR 579 million, with a margin of 19.3%, ROCE at 21.6%, and a leverage multiple of 1.2x. This performance continues to demonstrate the benefit of our strategy and the effectiveness of our capital spend. Over the past 3 years, we have invested over EUR 2.2 billion of capital to strengthen the integrated model, continuously improve operating efficiency, and capitalize on the opportunities within our system, as well as close to EUR 600 million on acquisition-led growth to diversify our offering and support our customers. Our delivery over many years now also demonstrates not only our performance-led culture, the commitment and dedication of our teams, but also the strength and the power of the integrated model which we operate.
That model enables us to optimize our operating platform and provides the company with significant flexibility, particularly in periods such as what we're going through. Over the last number of years, our investment program has driven structural change within our business and in the way we operate, resulting in better, stronger, and a higher quality business and asset base. We continue to demonstrate, and our customers increasingly acknowledge, our ability to solve their supply chain issues, primarily through the use of our unique applications, all of us, which makes us the partner of choice for them. Our ability to remove risk and deliver resilience in our customer supply chain is a key differentiating factor when it comes to the commercial offering of the Smurfit Kappa Group. Our integrated model guarantees quality and supply and ensures maximum trust in Smurfit Kappa from all of our customers.
I'm very proud to say we continue to lead the field when it comes to innovation and sustainable packaging. With 29 centers for innovation across our network, our clear focus and leadership in this space is highly valued by all of our customers. We are the leader at providing packaging that is renewable, recyclable, and biodegradable in a world that is demanding sustainable solutions. E-commerce also remains a long-term growth driver for our business, and our fit-for-purpose customizable packaging solutions are clearly delivering in this space also. Our first quarter performance again demonstrates that our approach to our customers and the products we offer through our unique applications is fundamental to our success.
Our people, who live by our values of loyalty, integrity, respect, and of course, safety at work, are committed to continuing our journey no matter what the external environment is, to ensure that our customers receive the most innovative and sustainable product. In Smurfit Kappa, we will continue to build a company that strives for excellence and continued development over the short, medium, and long term. Our strategy and our capital plans are delivering and will continue to deliver for all stakeholders. Before handing back to the operator, I will just remind you that we're moving to our AGM after this call, so we'll ask that you keep your questions to one per participant, please. Thank you all for listening, and now, operator, I will take myself and Ken will take any questions you may have.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. Please ensure your line is unmuted locally as you'll be advised when to ask your question. The first question comes from the line of David O'Brien from Goodbody. Please go ahead.
Morning. thanks, guys. one question from me. Tony, you made the comment customers continue to acknowledge the value you're bringing to them. How are they rewarding you for that? How is that manifesting in the results we see today?
I think, thanks, David. I think what we see is that according to all the statistics that we get from the national associations which cover the vast majority of players in the business, you know, we continue to gain market share. You know, we continue to have customers renewing their contracts with us. We have continued to have customers giving us more business lines when they need innovative packaging. Despite the competition being as always intense in various markets, we continue to see market share gains according to the official statistics.
I suppose that is a testament to the fact that, you know, we do as we say, and we say as we do to our customers and we continue to deliver for them. You know, there's a whole bunch of new environmental laws coming out of Brussels, such as void fill and how to package and CO2 reduction. You know, there are very few companies that are able to help our customers in that whole area. And we are the best at it, I would say. We're the go-to company for all that kind of innovation that customers need. Remember, you know, a lot of our customers, and you can see this every day, they're slimming down their middle management. You know, that means sometimes, you know, packaging technologists and things like that.
You know, they come to rely on companies that are able to deliver, you know, not only innovation, but also regulation, things that need to be covered off. As I say, the hard evidence is in the market share gains, and the actual reality on the ground, what we see is continued renewal of all contracts, continued delivery of new business to us, and continued good relationships because we, as I say, do as we say.
Just a brief follow-up on that point. You've made the comment you expect demand to progress and more positively as the year evolves. Is that based on an acceleration of market share gains? What are you seeing to give you that confidence to say that the statement is early in the year?
Yeah. I think when we do, you know, obviously what we do is we talk to our management before these calls and to see what's very latest. What we see is order intakes are improving. That doesn't mean it's necessarily gonna translate into shipments improving. Our order intakes, for example, in a key market like Germany, has very much improved in the month of April from the previous three months. In actuality, on tons per tons or square meters per day shipments, we have noticed a marginal uptick in the last over the last three months in April.
If that trend continues, which we would suspect that it will, because of the order intakes that we're seeing, not in every market, but in most markets, then we will see it, an upward trend in shipments and ultimately that will translate into more demand.
Great. Thanks very much.
Thanks, David.
The next question comes from the line of Charlie Muir-Sands from BNP Paribas. Please go ahead.
Yeah. Morning. Thank you very much. I'll state one question. I just wondered if you could talk about what you're seeing with respect to the environment for potential bolt-on acquisitions and how you're thinking about trading that off against the fact that your own shares are sort of implying quite a low valuation and the potential scope for, you know, buying back your own business. Thank you.
Hi, Charlie. I think it's a very good question. I mean, clearly, you know, we are as frustrated as anyone with our share price, but our job is to deliver the results which we're doing today and continue to done in the last year. At the end of the day, you know, with the balance sheet where we are, we can pretty well... You know, we have all range of options to do bolt-on or even significant acquisitions, that are accretive. Not only accretive but, you know, highly enhancing our profitability. Also, you know, the board obviously continues to view, buybacks as part of the whole capital allocation, a decision.
We did a small one last year, you know, obviously it's, it's, you know, top of mind as to should we do more if the share price stays where it is. You know, we're not really, market callers. If we did a share buyback, it would have to be on a consistent basis, and that's something that. I think maybe, Ken, you wanna comment on that?
Sure. Morning, Charlie. I suppose it goes back to everything we've done for the last few years, which is, if you like, continuing to try and increase the range of options we have to deliver value to shareholders. As Tony said, back in the last year, we kind of put the last leg to that particular table around share buyback. I suppose we're in a position where we have kind of full suite options in terms of how we see value, but it sort of goes back to the overall framework, which is always going to be returns based. I suppose, you know, we still forecast about EUR 1 billion EBITDA for the business this year.
As Tony says, we've got a rock solid balance sheet that can weather any particular storm, but we worked hard to get there. Equally, you know, we always kind of take a look around and see what's available or possible. I think the fundamental point, and Tony made it there last week, which is you probably won't get a surprise most of these things. You know, we tend to signal well, plan well, and execute well so that everybody's, you know, fully engaged on the topic and aware of what's going on.
Thank you. Just with respect to the valuation of, you know, I guess possibly private assets, given the slightly tougher outlook, are you seeing more attractive value out there?
Not, not yet, Charlie.
Not yet.
I mean, you know, it's, I suppose it's been good years, and I think sellers' expectations are probably still maybe elevated based on the years they're coming through. They clearly, you know, particularly on the paper side where we don't necessarily need assets, you know, they would have made really good money before coming into this year. On the corrugated side, equally, some good money is being made and will be made as we kind of move through. Sellers' expectations haven't necessarily moved much, but clearly the interest rate environment has. You know, it's always gonna be a balance about, as we've always done, where can we bring these or. If we do bolt-ons like we did last year with Pusa Pack in Spain and Atlas the previous year in the U.K.-
Argencrat in Argentina.
Argencrat in Argentina and the folding carton operation in Monterrey and Peru the year before that, it's really about how do we bring them into Smurfit Kappa, how can we, you know, connect them to the network, get them integrated, and deliver and drive the greatest value from them. Where we do it tends to be natural organizations who fit into the core portfolio, build out either geographic presence or product. That tends to be it. They're always gonna be around. At any time, as we've always said, there's a number of those we kind of look at. Some come off, some we let go.
Yeah, we've got a couple of smaller ones that we're looking at. One medium-sized one we're looking at. You know, I'm sure the smaller ones will happen. Medium-sized one, we'll have to wait and see.
Great. Thank you.
Thanks, Charlie.
The next question comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead.
Thank you. Just start with commending you and your team on a terrific performance again. Just sticking to the one question, I guess. Price over cost, of course, have been quite positive for you. The resilience in box prices seems still to be pretty much the case. How should we think about price over costs heading into Q2 and H2? We have of course seen some of your competitors have started to move on prices, trying to raise containerboard prices. What's your take on that and the read why that is happening?
I'll take the second part of it, and then I'll let Ken take the first part of your question. I think, you know, clearly containerboard prices have fallen very quickly and very fast and are now at a point where most producers will not be making any cash. Those that are introducing tonnage into the marketplace will certainly not be making cash, and will be probably sending cash with all of their orders. The non-integrated, less efficient producers will also be doing the same. I would say that the attempts by people to raise prices, you know, without leading anything, I would say, are necessary. The question is when will they go up from here? That's anybody's guess.
Obviously, we are keeping a close eye on the demand situation, and we'll make our decision accordingly when we feel the time could be right. You know, there isn't any downward movement from here for sure. Probably at some point in the next... Well, I don't want to even speculate a timing, but there will be movement at some point because there needs to be. As Ken just mentioned a few seconds ago, you know, paper mills have done well over the last number of years, therefore they still have decent profitability to have as a backup. Ultimately, nobody wants to be operating a loss-making situation, so things will change. Question is when? Ken, do you want to take the cost piece?
Sure. Morning, Lars. I suppose, look, it's still relatively early in the year, so this will clearly move as we go through it. As we kind of sit here today, particularly on the cost side, energy will probably be a tailwind this year for us, given both the hedging we have in place and the way gas prices have traded naturally. That's probably in the order of about EUR 100 million. Conversely, wages and salaries, which, you know, we did some excellent work last year in terms of getting all that through. Just the full year run rate of that will probably be a headwind of about EUR 100. You know, things like other raw materials in there, you know, starches, dyes, pallets, stearates, all that kind of stuff.
Probably again in the kind of EUR 100-120 space of a headwind. Distribution continues to be, you know, one of those headwinds that kind of eats into us, maybe only EUR 20-30. Even things like wood, which clearly, you know, you can see from other people reported lately, wood cost continues to rise, so about EUR 50-60 for wood. That, that's kind of the bigger book. It's you can take your own view on where PIX is going for OCC. On the price side, clearly, despite the fact that the containerboard fell by, you know, the amount it fell by since September, really, we have seen minimal move on the box price in the first quarter.
Small downward movement really just around the edges and fringes, particularly considering how much the box price has moved up over the last year and a half. As we know, as we get towards the second half of the year, there naturally at these kind of containerboard prices, there will be some level of index reset. It sort of goes back to, I think, you know, David's question and Tony's answer at the start, which is that's really where we begin to show value to our customers around innovation and how we begin to kind of, you know, protect that price on the way down, which we've been traditionally very, very good at in terms of retaining that box price as containerboard falls.
Also clearly Tony's last point as well is key here, which is where does containerboard go from here? That will clearly have an impact on what happens to box prices as we move to 2023.
Just a quick follow-up on that. Specifically, you know, demand side, which of course is pivotal to this, and there seems to be quite some resemblance with 2009 when, you know, it was quite a lot of margin squeeze in the industry. You know, at that time, demand wasn't strong enough, and then it came back in Q3 and with some meaningful price increases. Are you seeing any similar moves now? Because I think what has surprised many of us is the degree of destocking we've seen, which of course by design will end and potentially reverse. Question is really what are you seeing with destocking?
You're showing your age there, Lars, talking about 2009.
Thank you. Thank you, Tony.
My pleasure. Listen, obviously we've been surprised at the level of lack of demand in the last 9 months or so. Up until I would say recently, it had been stable at a low level. It seems like. As I said earlier, it seems like there's a slight degree of improvement. You know, that may well accelerate as we go through the rest of the year, and certainly comparisons will become easier. I think destocking, you know, to my mind, again, with our ring around with people, I think destocking is primarily finished.
There are still some supply chain issues in certain markets, especially in automotive and things like that, where there still seems to be good demand, but still supply chain issues that are affecting, you know, heavy industries. I think what really has happened has been the whole move away from consuming at home, where durables were used a lot to back to, let's say, service-led economy. That has negated durable purchasing for a period of time. As you know, washing machines break down and need to be replaced, televisions need to be replaced, you know, at some point. You know, that will come back.
I just think there's been this wholesale shift back to living away from home that does affect our business more than it would have that we would have expected. 'Cause you remember going back to 2021 during the pandemic, I mean, demand was just out, off the charts, you know, great. So we're just seeing a reversal of that. Then we've had some issues in Europe, like weather-related issues and down in some of our Iberian operations. It's been incredibly dry and incredibly cold at certain points.
Equally, you know, I think if you've been to the UK during the first quarter, there was a shortage of fruits and vegetables, and that was because a lot of people, not only was it weather related, but it was because a lot of people didn't plant because of energy, and that affects corrugated consumption. There's been a number of factors over the last six, nine months that, you know, would be abnormal, and we would see that the world will become more normal. Obviously, can't predict the weather, but the world will become more normal as all the supply chain ease, all the people get back to stock, stocking again normally, and people's consumption habits go back to normal.
That makes sense. Thank you.
I hope so. I hope so, Lars.
Next question comes from the line of Justin Jordan from Davy. Please go ahead.
Thank you. Good morning, everyone. I just wanna follow up just a little bit on geographies. You've talked a lot about clearly Europe and Germany. Can you just talk a little bit about demand patterns you're seeing in Americas across the three major countries that you have in Americas, and whether there's any difference in different geographies relative to Europe? Thank you.
Yeah, I would say, Hi, Justin. I would say that Mexico is outperforming. I know you want to read across to the U.S., guys. I mean, you saw this week, 2 large producers seem to be down double digits in demand terms. You know, that would be our experience also in Texas. But again, you know, you shouldn't may look at us as a proxy for the rest of the market 'cause we're too small in the United States. Colombia, you know, against massively strong comparisons, 'cause first quarter of last year was very strong. I mean, it's doing reasonably well. Flower season wasn't very good in the first quarter, or as good as it normally is.
Therefore, you know, that would have an effect. They've had some too wet, too much wet weather actually in Colombia, so that affected some of their agricultural crops. You know, there could be some weather-related issues in Colombia that might be distorting the slight demand issues. We're not seeing anything truly negative. We're seeing improvement in Brazil, for example. We're seeing Argentina still doing well. El Salvador is a country that's not as good as we had expected it to be. You know, just... it's sort of a bit like the cured eggs. It's, sometimes it's good in some places like Mexico, I'd say, is a standout good performer, and the rest are sort of up or down, depending on the country.
Thank you.
Thanks, Justin.
The next question comes from the line of Kevin Fogarty from Numis. Please go ahead.
Hi. Good morning, all.
Hi, Kevin.
Thanks for, thanks for the call. Just given the sort of industry dynamics you've talked about in terms of volume and pricing, My question was around competitor behavior. I just wondered, you know, what does that mean from the sort of competition standpoint? Are people sort of more or less aggressive in this environment, or has there been any sort of material change in competitor behavior in the last three to six months?
I wouldn't say there's been massive change, Kevin. I think, you know, there has been new capacity coming into the paper market, and that has been introduced as it is normally introduced. I think, I suppose the positive, if you wanted to look at it as positive, there's been very significant downtime taken by the industry, but I suppose they have to because they have nowhere to put their paper. You know, with demand down somewhere between 5% and 10%, depending on the market. You know, a lot of paper producers just doesn't have the space to store the paper rolls. Therefore, there's been a lot of downtime taken, and I think that's very positive. We've taken 80,000 tons of downtime.
The industry seems to have taken around 1 million would be our guess of downtime. Obviously at prices where they are, and you're selling, giving away dollars with your or euros with your paper. I think that will continue. That downtime will continue until the market improves. We have seen signs of spot purchases moving slightly up now in the last couple of weeks. That's a more encouraging sign. You know, like one swallow doesn't make a summer or spring or whatever. Therefore, I think that we just continue to keep a watching brief on things, Kevin. Competitive behavior, it's always difficult. It's never been easy.
You know, the only way you can succeed versus your competitors is by doing good and by being innovative, and I think that's what we are.
Right. That's helpful. Thanks for the color.
Thank you, Kevin.
The next question comes from the line of Cole Hathorn from Jefferies. Please go ahead.
Morning. Thanks for taking my question. just like to expand on the benefit you get being integrated and in a more challenging containerboard of market, be able to kind of pull back purchases from the market and keep your mill system operating well. How you kind of managing your mill costs to kind of protect profitability is the first question. The second one, just on your cross line of business. I mean, you're a leading player, and we've seen wood costs move up quite a lot in the Nordics. I'd just like some color 'cause wood diverges between the markets. You know, what are you seeing at your France and your Austria wood cost buckets just to understand how that business is performing? Thank you.
Just on wood. you know, obviously, as you correctly state, Nordic wood is has moved up. It's not as quite as dramatic in our Spanish, French or Austrian mills. We've had, I would say, a slight windfall gain in our French mill because of the very hot summer. It was last summer, there's a lot of burnt wood that needed to be collected and used. Therefore, that's been broadly a little bit positive for wood cost there, offsetting some of the very high wood costs we've had in Nordics. Austria hasn't been as bad as we anticipated so far. It's reasonable.
I would say it's up a little bit, but not significantly like the Nordics and Spain is again, up a little bit, but again, not like the Nordics at this time. With regard to the first question was?
Integration. How.
Well, I mean, why does it work is because most of the time we're able to keep our mills running full. Obviously, even we, because we bought Verzuolo, we're now a little bit long of recycled. Therefore, it's not necessarily geographically always in the right place. You know, we've had to take Verzuolo down, for example, mill down for periods because, you know, the cost of shipping from paper from Italy to Northern Germany doesn't make any sense when you're able to do a carousel between your own German mills and Dutch mills and UK mills.
I mean, the obvious benefit of integration is that basically you optimize your mill system most of the time to the grades that suit it, and you reduce transportation costs forever. You have a customer, which is our own integration. We don't transfer at spot. We don't sell very much to the export market, and we don't sell to ourselves at spot prices. At the end of the day, our mills are always going to be more profitable, more efficient, and better positioned than any non-integrated mill system because of that, and we've proven that over time.
Maybe just following up on that. We've really started to see some delays in new containerboard capacity, coming on the market with Stora Enso postponing their investment position for conversion. You know, are you seeing anything else out there in the market? 'Cause I do imagine you're ramping up now, will be quite challenging.
I think, I mean, Cole, I would not envy anybody starting up a mill, a non-integrated mill in this business, right now. I mean, you know, people who've got out of white papers and thinking that containerboard is the Nirvana place to go. If you don't have customers, you're gonna lose a tremendous amount of money for a tremendous period of time. You know, inevitably there will be casualties in that regard, as if prices stay low long enough. As I said, I would not want to be a non-integrated startup in this marketplace.
Thank you.
Next question comes from the line of Andrew Jones from UBS. Please go ahead.
Hi, just a bit of clarification on one of the earlier points. You said, you thought the industry had taken about 1 million tons of downtime. I was just wondering over what period, and if we look at it today, I mean, what proportion of capacity do you think is currently sitting idle? As a broader question, I mean, you just talked about obviously some new startup capacity potentially being delayed and so forth. To compensate some of that additional capacity that's supposed to be coming in this year and next. I mean, do you see much scope for all the mills to be permanently idled or any of these mills that might be going offline now to not come back? I mean, how do you see that shaping up in the European market?
I think, inevitably, there will be some older mills closed. We have a couple ourselves. We obviously keep under scrutiny. Inevitably in this environment, sooner or later, the people will close down. As I say, starting up new mills doesn't necessarily mean you may be slightly more cost efficient than the old ones, but if you don't have customers and you're having to ship from France or Italy or Germany to Iberian Peninsula, you are way under your cash cost of production for the prices you're getting. That doesn't make any sense for any length or period of time. Inevitably, the 1 million tons refers to the first quarter. There will continue to be downtime taken.
We will continue to take some downtime where appropriate. I believe, I have no reason to know this because I don't know, but I assume that the industry will continue to take downtime going forward. You know, that's up to them to decide to do that. If they want to lose a lot of money with their tonnage, then that's their choice to do that. We decide to run our system optimally, and that necessitates us taking, because of the demand environment, some downtime. If demand picks up, we will obviously run our mills full. Ken, do you wanna add anything?
Yeah, just the EUR 1 million, just to clarify, Andy, the EUR 1 million was quarter.
Yes.
Yes. Our best guess would be somewhere between 10% and 15% on either taking downtime as we kind of move.
I think that people take weekends, they take holidays. You know, recycled mills are easier to take downtime on, Andrew, than kraftliner mills. You know, you can stop on a Friday and start on a Monday, maybe not in deep winter, but certainly in spring and summer and autumn, you can. It's not a big deal to take a weekend off or, you know, if there's a major holiday sea-period, you can take that off and give your workers the holidays. I suspect that some English mills will be taking holidays in 2 weeks.
Yeah, that's what I hear. All right. Thanks a lot.
Thanks, Andrew.
There are no further questions in the queue. I'll now turn the call back over to your host for some closing remarks.
Well, thank you, operator. Thank you all for joining us today. As we said to you in February, I hope you recognize from our release today that Smurfit Kappa has never been in better shape strategically, financially and operationally. As I've said many times, the quality of our people is key. Our platform is unbeatable. Our position of financial strength shaped that view. The events of the past three years have proven that success is indeed a never a straight line, nonetheless, Smurfit Kappa continues to go from strength to strength. I think we set out in our commentary and in our discussions today the factors which have contributed to today's performance and will continue to drive tomorrow's prospects.
Whether it's managing threats or capitalizing on the opportunities that are ahead of us, our objective in Smurfit Kappa throughout the management team is to continue to deliver for all stakeholders. As I said, we've never been better positioned, and we thank you for your support, and we look forward to continuing to deliver in the future. I'll thank you again for joining us, and we look forward to meeting some of you later at the AGM, and we look forward to continuing to talk to you about the strength and performance of Smurfit Kappa going forward. Thank you all.
Thank you for joining today's call. You may now disconnect your lines.