Smurfit Westrock H1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 11 speakers on the call.

Operator

And welcome to Smurfit Kappa Group 2023 Half Year Results Presentation Call. My name is Priceline. I'll be your coordinator for today's event. Please note this call is being recorded and for the duration of the call, your lines will be in listen only. However, you will have the opportunity to ask questions at the end of the call.

Operator

I will now hand you over to your host, Mr. Tony Smurfit, the CEO to begin today's conference. Please go ahead, sir. Thank you.

Speaker 1

Thank you, operator, and good morning, everyone, and thank you for joining us today. You'll see from our disclaimer in the slides, so I'll take that as read. And as you would expect, I'm joined by Ken Bowles, our Chief Financial Officer. I'm very proud of the performance we continue to deliver with our half one results, which is an excellent outcome set against the challenging environment. We delivered a ROCE of 19% And an EBITDA margin of 19.1 percent during the period.

Speaker 1

Many of you are familiar with our vision, which guides our approach in Smurfit Kappa the way we do business. We in Smurfit Kappa have continued to be delivered for our local communities and we are also doing our bit for the planet by providing our customers with innovative and sustainable packaging. And year in, year out, we have delivered excellent numbers that are superior to the vast majority of our peers. One of the key aspects to our success in Smurfit Kappa is our continued agility. This is reflected in our business model, which is dynamically delivered over many years.

Speaker 1

Investment, innovation and capital allocation, Combined with the performance led culture has allowed us to adapt and to deliver across all market conditions. In the current period, we've again outperformed our industry peer group, both in terms of volume and value. This is a reflection of the model working in action. Ken will surely take you through the detailed financials, But I would like to highlight that while the current environment is challenging from a volume perspective, during the Q2, we encouragely saw Our shipments per day improved on the previous three quarters. This would lead us to believe that the significant destocking by our customers has abated And that when confidence returns to economies, we expect stocks to normalize and demand to come back.

Speaker 1

Every company talks about its people and you've heard me say the past success is not a guarantee to future success. However, if you have experienced people who've done it before, it's a pretty good measure of future potential. I'm proud that in Smurfit Kappa, we have tremendous longevity service at all levels in the company, which shows that our culture and living our values of loyalty, integrity and respect and safety at work In return, Smurfit Kappa continues to significantly invest in its employees to advance training and development programs and ensuring strong compensation opportunities. Our disciplined capital allocation decisions are and continue to be both disciplined and effective. Cam Ken will take you through our this team's multi year track record against our established performance measures.

Speaker 1

While you've often heard me say that success is never a straight line, The trend line here has been inexorably upwards.

Speaker 2

Going back

Speaker 1

to history, since 2012, We have spent some $6,000,000,000 to optimize our integrated system. Essentially, this has meant taking cost out of our mill system and making sure That our converting operations are optimally invested to ensure that we meet our customers' expectations for quality and for innovation. While doing this, we've ensured that we continue to build balance sheet strength. In addition to optimizing our own system, We've allocated $2,000,000,000 of capital to bring acquisitions into the Smurfit Kappa family. In practically all cases, we have delivered or exceeded our expectations of these acquisitions, which have integrated seamlessly into our systems delivering the expected synergies.

Speaker 1

This is what we mean when we say our business has never been in better shape strategically, operationally and financially. We've always put forward the integrated model as the most effective operating system for our business. This has been proven by us as the most effective way of running our operations over many years. It provides security supply for our converting operations, which ensures our customers receive their products no matter what market conditions prevail. This was amply demonstrated during the COVID pandemic period.

Speaker 1

Our integrated system reduces cost in key areas such as transport and continually optimizes our stock levels. While integration is a key aspect of our success, undoubtedly this does not work unless our converting business Have at their core, the USP of innovation. Our customer led packaging business with an expanding network of some 30 experience centers or innovation Hubs, if you will, across our regions reflect this focus. With over 1,000 designers across 36 countries Developing unique packaging concepts to solve our customers' pain and to provide thousands of sales executives with a competitive advantage in the market. You will see from our press release that in most markets, we have gained market share.

Speaker 1

Our gains were not at the expense of price, We're a result of this customer led focus on delivering innovation and ideas to help our customers win in their own marketplaces. I'm also delighted to say that the number of industry awards we continue to receive is recognition of our leadership, The quality of our offering and demonstrates our unique innovation capability. Sustainability is in our very fiber We've always been committed to our sustainability journey, but have been more focused on this over the last 16 years when we published our first sustainability report. On every metric we have improved and while it is a never ending journey, we continually showcase our success by the many awards and recognitions we receive And have achieved. We continue to make significant progress on achieving our sustainability targets as outlined in our 16th Sustainability Development Report published in March of this year.

Speaker 1

Compared to the baseline in 2,005, The group has reduced its emissions intensity by 44% by the end of 2022, a 4% improvement year on year, Leaving the group well on its way to reach its 2,030 target of a 55% reduction in line with the EU Green Deal and another step forward on our journey to net 0. Since 2005, Smurfit Kappa has invested $1,200,000,000 to make our operations more sustainable. Of this approximately $1,000,000,000 has been invested in different energy efficiency and CO2 reduction projects. We and Smurfit Kappa remain very proud of our commitment to work towards an improving sustainable footprint, ensuring that our products Continues to be recognized as the product of choice in a much in a world that needs sustainable products. With that, I'll now hand you over to Ken, who'll take you through some of the financials.

Speaker 1

Ken?

Speaker 2

Thank you, Tony, and good morning, everyone. In a moment, I'll be taking through the group's financial performance for the first half of the year. But I'd also like to spend a few minutes this morning outlining how we think about capital allocation at Smurfit Kappa And what that means in terms of the delivery of our vision, which Tony has just discussed, and indeed its central role in the transformation of the business over the last number of years, We're looking in a little more detail at our financial scorecard to date. What I think you'll see is a structurally better business delivering outperformance across practically all metrics. Turning now to Slide 13 of the group's half year twenty twenty three results, which set against a challenging macroeconomic backdrop, Continue to reflect the resilience of our integrated business model, the benefits of our investment program and of course, the hard work and dedication of our people, Providing our customers with value adding sustainable packaging solutions, all of which as Tony has articulated have positioned us for current and deep future delivery.

Speaker 2

Group revenue was over $5,800,000,000 down 9% in the first half of last year or 7% on an underlying basis. Group EBITDA was $1,130,000,000 down 5% in the first half of last year or 3% lower on an underlying basis, reflecting lower earnings in Europe and higher earnings in the Americas year on year. The group EBITDA margin improved from 18.4% in the first half of twenty twenty two 19.1% in the first half of twenty twenty three. Our margin also reflects the benefits from our investment program. Underlying box volumes of the groups were down 6% for the 1st 6 months of the year, but volume performance in the 2nd quarter improving as anticipated among the levels we've seen in the preceding two quarters.

Speaker 2

We also saw market share gains not at the expensive price across many of the countries in which we operate. Pre accession EPS was 11% lower at $197.2 per share And the group's return on capital employed was 19%, well ahead of our stated targets. Free cash flow in the first half of the year was a net inflow of 119,000,000 Compared to a net outflow of $28,000,000 in 2022, an increase of $147,000,000 The EBITDA decrease of $61,000,000 combined with higher outflows for CapEx, Tax and changes in employee benefits were more than offset by lower outflows working capital. The working capital outflow in the first half of the year was a combination of a Significant decrease in creditors along with an increase in debtors, partly offset by a decrease in inventory. The increase in debtors reflecting higher average box prices year on year And the decrease in credit is reflecting considerably lower for covered fiber, energy and other raw material prices.

Speaker 2

As a result, working capital as a percentage of sales was 11.7% at the And we do expect this to trend back down as the year progresses to within our normal guided range of 7% to 8%. It goes without saying that the management of working capital as ever is a key focus for us. And finally, reflecting the confidence both we and indeed the Board have in the group And the strength and resilience of our cash flows and future prospects, we are pleased to announce a 6% increase in the interim dividend to $0.335 per share. Looking now at Slide 14 and a reminder of our capital allocation framework. It is a framework that you are familiar with.

Speaker 2

It's also a framework that we've been consistent with over the last number of years. It is very much returns focused, flexible and agile at its core and this continues to be a key underpinned to our success. At Perfect Capital, we believe that capital allocated to internal projects has been central to that success. We're in the final years of our accelerated investment program where we've invested in our asset base to improve our environmental footprint, remove costs, improve operating efficiency and to capture the long term growth opportunities coming from the consumer The acquisitions we've made over the years are clear indicators of how we see M and A as a group. And as always, we have a number of projects in the pipeline focused on building out our strong geographic network or indeed further enhancing our product portfolio.

Speaker 2

We remain of course disciplined around M and A and as always benchmark them against all other capital allocation alternatives. The dividend is another cornerstone of our capital allocation strategy. Our dividend policy is a progressive one and aims to ensure that the allocation of cash flows to the dividend is proportionate Fundamentally, the strength of the group's investment grade balance sheet continues to secure long term strategic and financial flexibility. And the expansion of our capital allocation framework to now include other forms of shareholder returns underscores the flexibility and agility of this framework and ensures that all avenues to create return value to our shareholders are considered and benchmarked against all options. Ultimately, The framework at its simplest is about creating long term value for all stakeholders.

Speaker 2

Slide 15 shows how our integrated model and leadership in both innovation And sustainability provide SKG with a competitive advantage that drives consistent profitable growth through the cycle. As mentioned above, our capital allocation framework is both iterative And consistent, investing to improve the asset base, but that also has a direct impact on our margin and indeed its expansion. Through the integrated model, we are better able to deliver both security and quality of supply, and it makes us flexible and responsive to our customers' needs by offering a wide range of customizable packaging In a world where more and more businesses are looking back to their value chain to partner with the world's most sustainable supplier, our integrated model provides our customers We're responsible sourcing of renewable raw materials and our streamlined operations allows us to achieve economies of scale and optimize energy use and minimize waste. This means our customers get the most dependable chain of custody certified packaging solutions that leverage innovative designs that can drive revenue growth, Reduce costs and help them achieve their own sustainability goals. Ultimately, in a business such as ours, Return on capital employed is a key metric and SKG targets return of 17% through the cycle.

Speaker 2

Here on Slide 16, you'll see that our ROCE target Having been repeatedly met and reset higher over the last number of years. At 19% at the end of June, in a period of significant growth CapEx, It is by any measure an excellent outcome. I think this graph illustrates the management team's proven stewardship of capital over the years. What is central to our success here is our performance led culture. This drives an ownership approach to investment decisions, which must deliver This space is the capital into the hands of the best mill and plant managers in the industry, driving performance through teams that are committed and dedicated to our Through both our 2018 and indeed 2020 plans, we focused on investing and reinvesting in our paper mills, We're also building out our corrugated system through expansion projects and adding state of the art machinery.

Speaker 2

Today, more than ever before, we are seeing the benefits of having a world class asset base With an integrated system of mills and box fans sitting low on the cost curve, a clear competitive advantage in the current macroeconomic environment. Slide 17 is yet another example of the transformation of the group. With net debt to EBITDA of 1.4 times, Our investment grade balance sheet continues to provide us considerable optionality. This slide also demonstrates how the actions we've taken in the past have set us on a favorable path for the journey ahead. I'd remind you in September 2021, we launched our Green Finance Framework with the lowest coupon bonds ever achieved for an issuer in our rating grid With 8 12 year bonds at interest rates of 50 basis points and 1% respectively.

Speaker 2

The result is a strong balance sheet no significant refinancing requirements until 2026, over 95% of our near term debt fixed at an average rate of just over 3%. Again, capital structure decisions have been well timed and well executed have been a hallmark of our customer for Capital Group. And finally, our track record of commitment to a secure and growing dividend can be seen here on Slide 18. Since its reinstatement in 2011, we have returned approximately $2,400,000,000 to our shareholders. And an important reminder, did not cancel or put our dividend during COVID.

Speaker 2

As I said before, our aim is to ensure that capital allocation decisions take into account all stakeholder groups and we recognize the importance of this income stream to our investors, not least during these recent times of high inflation. Thank you for your time. And I'll now hand you back to Tony for some concluding remarks.

Speaker 1

Thank you very much, Ken. I'd like to think that our established track record of performance, as Ken has presented, It's indicative of future potential from an ever stronger base. The quality of our team today and tomorrow will continue to deliver. We see ourselves as owner operators of this business and will continue to treat capital as our own. And please recall that all senior management Our market position with either a number 1 or number 2 position in our chosen markets Together with continuing innovation allows us to provide our customer base with the most advanced packaging applications.

Speaker 1

Our core products own attributes also provide us with a competitive edge at the most sustainable, biodegradable, renewable an environmentally friendly packaging medium. Our ever expanding geographic reach and integrated operating model will continue to deliver future performance. As our track record shows, our system increases operating efficiency and lowers volatility, providing a consistent quality earnings stream. I want to take a step back to go forward. You've often heard us refer to the steps we've taken and continue to take to position Smurfit Kappa for long term growth.

Speaker 1

In this slide, we've outlined the total available capital that we've had to be been able to allocate. As you can see, we have allocated very significant capital, dollars 6,000,000,000 since 2012, to build a better business with very attractive prospects. Clearly, those capital allocation decisions are return focused and they're paying off. The return on capital employed currently above our target of 17%. We've also sustained a progressive dividend with a CAGR of 22.5% Since 2012, I'm returning close to $2,500,000,000 to our owners in dividends.

Speaker 1

And we've built the strongest balance sheet in our history. Our choice has been to build a quality business, consistently delivering superior performance and growth, and we've demonstrated we've been doing that. As we conclude this current capital cycle, our business has never been in better shape strategically, operationally and financially. And we're confident and excited about the long term prospects for our business. And as Kenneth said, the confidence is best reflected by our continued So with that operator, I think we'll conclude the formal presentation And turn it over to you and to any questions from the audience.

Speaker 1

Thank you

Operator

all. Thank We'll take our first question from Charlie Muir Sands from BNP Paribas. Please go ahead. Your line is open.

Speaker 3

Good morning, gentlemen. Thank you for taking my questions. I'll just stay with 2, please. The first is that at Q1, you were very kind to give us A few of the moving parts you envisage on your cost base for the year, year on year, such as energy and Some of the raw materials and labor and so forth. I wonder if you could update us there.

Speaker 3

And then the second one is that I see in the technical guidance, you've Increased the cash tax guidance versus 6 months ago. And I just wondered If you could explain that, is that due to a different view on underlying profitability or just a timing effect? Thanks.

Speaker 2

Good morning, Charlie. Tony has thanks for giving both those to me. You're right. I suppose what we've seen is that, As most people have seen, the cost backdrop has got progressively slightly better as you've gone through the year. And I think a lot of that's down to the work we've done internally on controlling those costs.

Speaker 2

But to give you some of those big buckets, I think at the start of the year, we probably would have seen energy something around a tailwind of 100. I think we see that close to 200 now. I think we would have seen distribution as a headwind. I think it's probably flat to a slight tailwind now. I think what equally would have been a headwind at the start of the year, I think we see that as a bit of a tailwind now, maybe in the order of 10 to 20.

Speaker 2

And I think particularly on labor, And where at the start of the year, we've seen labor as a kind of $100,000,000 to $120,000,000 headwinds. I think again, to the good work done, not through 2022, but also through 2023, we're seeing that as less of a headwind as we kind of move through the year, probably more in the 60 to 70 space. I think they're probably the bigger buckets, Charlie, in terms of the cost, I would have outlined at the start of the year. If there's any other bids, I'm sure you can catch up with Kieran and Frank direct on them. In terms of taxes, it is just a timing thing.

Speaker 2

I think when we gave the guidance at the start of the year, we remember coming off our best year of 2,400,000,000 EBITDA and the returns hadn't been finalized. And as you know, cash taxes are a combination of last year, this year and perspective next year. So It really is just a change in timing and finalization of returns over the last 6 months.

Speaker 3

Okay. Thanks.

Operator

Thank you. We'll move on with Kevin Fogerty from Numis. Please go ahead. Your line is open.

Speaker 4

Hi, there. Good morning, everyone, and thanks for the presentation and for taking the call. Just 2 if I could do. If I could just sort of pick up on working cap. Ken, you sort of flagged obviously it's going to higher in the first half of the year And perhaps it may normally be sort of historically the guidance obviously is that's kind of unwind as the second half progresses.

Speaker 4

I just wondered, could you sort

Speaker 1

of help us with the

Speaker 4

sort of building blocks of that just in terms of if you see a better kind of demand environment, clearly, that sort of implies Perhaps more investments in terms of kind of working cap. So just sort of what you see is sort of building blocks to that in the second half of the year. And I guess in terms of the second one on the balance sheet, clearly, as you flagged it, Sort of building the strongest balance sheet in the group's history. I just wondered in that environment, do share buybacks move up the agenda at all for you guys when you think about capital allocation.

Speaker 2

I'll do the first one and let you take the second one together. Kevin, good morning to you. I suppose working capital is high for the right reasons is the way I kind of characterize it. I think If we think about how we started this year, inventories are quite a high level and we've seen the inflow and working capital from Inventory is quite substantial in the 1st 6 months as we kind of manage down. I think the industry has 2 getting back to what those normal safe levels are.

Speaker 2

I think the big impact you're seeing in terms of where working capital sits at the end of June is more on the payable side. You want to think about where energy was this time last year in terms of Price per kilowatt hour versus where it is now, that clearly has a significant impact on the payables, equally where recovered fiber sits. And indeed, the more work we do internally on integration and the more tons we integrate actually has a negative impact on working capital It removes 3rd party payables. So integration, particularly in the Americas, would help that. I think as we move forward, So while sequentially box prices were down actually year on year for the 1st 6 months box prices were up, which is why you're not getting that kind of unlock I think though as you kind of said before, as you move to the 2nd part of this year and as you see some kind of either index resets Or some kind of slight ball in box prices, you will begin to see working capital and wind against that backdrop.

Speaker 2

And that's The reason why when we think about where we are now versus moving down towards our normal range of 7% to 8%, it really more likely is on the debtors side. You are correct too. If demand picks up, clearly that will require some investment in working capital as demand comes back. But the If you remember too, in reality, the bigger impact on us is price rather than volume. So the impact of price will be bigger than volume in that environment anyway.

Speaker 1

Sure. That's helpful. And Kevin, on buybacks, I mean, we've never excluded buybacks. And indeed, we did a small buyback last year, which actually took us quite A very small one took us quite a considerable amount of days to do because of the rules under the London Stock Exchange. We don't exclude them.

Speaker 1

Obviously, we have a capital investment program that we're going through this year. Our debt levels are very low. It's always an option for the Board. We'll make sure that we keep an eye on that in relation to how the world is looking and the uncertainty that's out there. But We've built a great balance sheet and we intend to keep a great balance sheet.

Speaker 1

And clearly, if we have excess capital, we've always said that we would distribute To our shareholders, we feel that our best use of capital has been to put it into the business up to this point. And we've proven with our return We're able to get a good reward for our investment in the business. We still see that as being the case. I mean, Clearly, as wages has been the real only increasing cost that we have, Significant cost increase that we foresee this year and next year. I think that it makes capital investment to reduce costs That much more attractive.

Speaker 1

So we just have to think about as we go forward, what's the best use of the capital for the owners of this business. And up to this point, our view has been always to invest in the business or acquire things. And we want to make sure that we have the Keep our powder dry to be able to do all of those things. But as we have shown last year, we're not excluding buybacks And we'll keep an eye on that.

Speaker 4

Great. That's very clear and very helpful. Thanks a lot.

Speaker 2

Thank you.

Operator

Thank you. We'll move on with Justin Jordan from JV. Please go ahead. Your line is open.

Speaker 5

Thank you. Good morning. I've got 2 separate questions, if I can, please. Firstly, just on Tony, you made a statement of destocking has abated, I think it was the phrase used, in Q2 2023. I'm going to inferring that it looks like Q1 European Box went through minus 7, Q2 about minus 4.

Speaker 5

So can you give us some sense of where The exit rate in June was or any color you want to give us on July in terms of box volumes just to give us some more granular detail on that easy day stocking? And second, just kind of related to that, just on you mentioned, I think it's in Page 4 of your release about taking commercial downtime of 260,000 tons in H2 last year, lower number in H1 this year. Can you give us a sense of where Industry inventories, are they sort of now at a normal level as it were helping that sort of more balanced industry picture as we look into the second half of twenty twenty three?

Speaker 1

Yes. With regard to the inventory situation, inventories are Slightly above what we would consider normal, but only slightly where so that has Come much more towards the norm than we have seen for a considerable period of time. So, the downtime We've taken is much less than the industry downtime because of what the actions that we've taken to bring forward into our own system due to the fact We had a because of Verzolo. So we brought in tonnage into our own system instead of purchasing in the 3rd party. It's not the most efficient tons that we have.

Speaker 1

So but obviously, we'd like to be busier so that we can run all of our mills With optimum tons, but it's better to run the mills with some tons rather than no tons. I think our downtime is relatively low compared to the industry. And as I say, inventory levels are pretty well Near norm levels. They're not under norm levels, but they're just a little bit above, I'd say. So that gives us a little bit of encouragement that the downtime has worked and by the industry.

Speaker 1

But ourselves, we've been taking less because of the things I said in my release. We've taken market share. We're not being as impacted as perhaps others are. With regard to volumes as we've gone through the month, I would say that It has got better as we have gone through the month where we're down 3% or so in January or in June, Circa 4% in May 5% in April. So and we sort of see July as being a similar number to June versus last year.

Speaker 1

So I think it's better. It's not strong. I wouldn't like you to believe that it's strong, but I think It's better than it was in the Q1 and even the last quarter of last year. When we think about volumes abating, the whole level of destocking abating, I think that's the evidence that we see from our customers is you have to go back, I think, 15 months or so when there was no product around and Everybody had double stocks and was double ordering and making sure that they had goods in the warehouse where they could have. And so We think that that double ordering, of course, has stopped.

Speaker 1

And we think that our customers are keeping their stock levels because of the Generally, tepid demand out there from the consumer who has moved away from stay at home and durable purchasing towards travel Purchasing and Holiday Inn and Service Purchasing. We think that the consumer our customers are keeping their stocks at min levels. And so we would expect that when demand does return and your guess is good as mine on that, are things normalized, Then I would suggest that stocks will our customers will need to have normalized levels of stock, Which will actually create some significant demand for us at some point. But when that happens, I don't have a crystal ball for that, Justin.

Speaker 5

Thank you, Tony.

Speaker 2

Thank you.

Operator

Thank you. Thank you. We will now move on with Kohl Het Horne from Jefferies. Please go ahead. Your line is open.

Speaker 6

Morning. Thanks for taking my question. I've got 2, and I'll take them 1 at a time. The first is on Containable pricing and the related box pricing developments. I'm just wanting to understand, are you feeling a bit more comfortable around where Box pricing is going to be from here because I imagine after 3 months of testliner being stable, Most of your contract negotiations with your index business, I'm thinking kind of the big FMCGs, you must be Pretty far down the chain to understand what box pricing you're going to be giving back to those customers.

Speaker 6

And just as a reminder, could you Call out, it's not just about the paper price, but also the non paper clauses. So just trying to understand, as you look into 4Q and 2024, are you feeling a little bit more comfortable that

Speaker 1

We have gone for inflationary price increases with many of our customers to offset a lot of the inflation costs we had in the Earlier part of this year and latter part of last year. So we have implemented those into our customer mix, But we do have we are seeing some price falls based upon what's going to happen to prices based upon our index. As is always the case, we tend to have those tend to happen in 3 months, 6 months, 1 year, depending on the customer. Sometimes they're averages, sometimes they're point to point. Every customer is different and we treat them differently.

Speaker 1

So we have a good sense of where Box pricing will go and clearly our opportunity is to continue to innovate for our customers to make sure that we Are able to mitigate some of those effects as we go forward into the years ahead. With regard to next year, I think it's a little bit early to see what's It's going to happen with regard to paper pricing. But I think from the point of view of where is paper pricing today and Where do we think it can go? We don't see unless there's a very large cost movement downwards, we don't see any real downside movements Going forward in paper, recycled paper certainly. And at some point, when demand does pick up, I think there There's scope for increases, but it's a little bit early to say that, and that will obviously start that whole movement again in a different direction.

Speaker 1

In the meantime, Cole, as you'll know, our whole emphasis has been to reduce our costs, As mentioned by Ken and myself in the script is to really reduce our cost base on our mill side and really To strengthen our innovation offering for customers on the box side and that has paid dividends and is paying dividends for us as we go forward both in market share gains And in absolute margin terms.

Speaker 6

And then I've got a bit of a longer question on CapEx, and I want to link it to your Slide 9, which I really like of keeping your kind of mill rates high and kind of integrating into your box business. But if we go back to 2019, 2020, when you kind of called out a kind of step up in CapEx, you were Probably ahead of the markets, getting in and locking in kind of better rates on machineries, etcetera, before kind of costs went up. And you've been very clear in targeting not only kind of cost savings, CapEx, which I think everyone agrees you do throughout the cycle, but also select growth In plastics replacement machinery where you thought there would be growth. But from here, I'm just wondering, Have there been any nuance changes to your kind of CapEx plans? Are you emphasizing or deemphasizing certain CapEx spending into 2024.

Speaker 6

So for example, focusing more on kind of the cost savings, which are clearer to you and maybe taking a bit of the foot off the gas on some of the growth projects and maybe you'd reallocate that into M and A if that is looking more attractive versus kind of the CapEx. I'm just trying to Understand if you're emphasizing or deemphasizing certain areas on the CapEx side. Thank you.

Speaker 1

Thanks, Cole. Yes, absolutely. I mean, Clearly, when we were investing in the last couple of years for growth, we needed we were completely sold out. So we needed to make sure that Our factories and our businesses had or were able to capture the growth that was there. We did an amazing job of supplying all of our customers During the pandemic when growth was, as we said at the time, way above the norm and was unsustainable, We now have plenty of capacity in most of our markets to meet whatever growth comes to us, and that gives us a real strong view about How we'll be able to efficiently and effectively deal with any growth that comes in the future.

Speaker 1

There are many pockets of growth still, Call that we will still invest in. I mean, for example, I was in a factory in a particular country where we are a smaller part of that particular region, and we are completely sold out, and we have tons of demand, which we will need to build another factory for to meet that demand. Equally, we're starting up a new factory in Fortaleza in Northern Brazil next month. That's where we have almost no market share in that region and we believe we're going to take a lot of market share as we go forward in that particular region. So we do see pockets of growth.

Speaker 1

The unfortunate thing is that the general market has despite taking market share, the general market has taken a leg down for all the reasons that you're familiar with. So therefore, we have the capacity to meet that general market when it comes back. With regard to our priorities, We've always said that we're going to be agile. And so while a lot of the bigger projects, the big paper mill projects do take a long time, The box projects are less they're much quicker. So clearly, we can decide where on the box side of things we want to emphasize our capital.

Speaker 1

And with wages going up, it makes it much more attractive for us to invest in cost reduction projects next year and the year after With regard to labor savings that we will attain, so and Again, for the Agility point of view, we are spending $1,000,000,000 this year. We'll spend close to $1,000,000,000 we would have spent close to $1,000,000,000 last year. Our current plan is to continue to keep ourselves as open as possible to be sure that our balance sheet remains strong, that we continue to generate cash flow and continue to be able to continue to take the opportunities that are presented to us, whether they be acquisitions or share buybacks or whatever.

Speaker 6

Thank you.

Speaker 1

Thanks, Carl.

Operator

Thank you. We'll move on with Akram Ravi from Citigroup. Please go ahead. Your line is

Speaker 7

Thank you. Two questions. Firstly, you mentioned that you are taking share, and that's clearly visible from your volumes Being better than your competitors, can you give us a sense whether these are on average higher margin tons or higher margin boxes Compared to your current mix, I. E. Kind of and this follow on is, are these more kind of opportunistic tons or is there more longer term Sort of sticky tons as a result of this, I.

Speaker 7

E. Kind of how can these share gains be To sustain for 2024 and 2025. And related to that, in terms of price cost spread, obviously, with Tesla Enterprise is kind of stabilizing. Okay, second half price are going to be lower, but your costs are also going to be lower. And arguably, those costs are probably going to be lower further in 2024 if energy prices remain where they are.

Speaker 7

So should Should we look at price cost spreads improving into 2024 as it stands, if assuming testliner prices remain stable?

Speaker 1

Okay, Efrain. I'll take the first one and I'll let Ken take the second one. Our business model is built on selling innovation and Trying to solve what our customers' pain is. Now I don't want to be too pure about it and say that all of our business is like that. That's not true.

Speaker 1

Sometimes We get opportunities because our customers need us to take over simple boxes because our competitors have let them down or something like that or sometimes we are opportunistic ourselves. But in the round, Smurfit Kappa sells on Innovation and as I say, solving our customers' pain, whatever that is, that is the skill set of making sure that we get rewarded for that. And that's why we've built all these innovation centers. They are a cost. Our designers are a cost.

Speaker 1

And if we don't get well remunerated for that, we should definitely not do it. But evidence is that we have done it And are getting well remunerated for us. And if evidence is that we're gaining market share not at the expense of price, As I say, I don't want to be completely pure because there's sometimes that we do gain a piece of business that is basically, Call it a commodity piece of business, but by and large, this company is selling on value for our customers and solving their pain. And that's the mission that we've been on for many years. So when we talk about innovation, we live and breathe this.

Speaker 1

When we talk about sustainability and solving our We live and breathe that. And that's what allows us to gain market share because we're good at what we do.

Speaker 2

Yes. From the second point, probably need to get up my crystal ball a bit for 2024 at this point, kind of maybe getting slightly ahead of ourselves. But I think you referenced energy there being down. But remember, I think it's important to realize that it's

Speaker 1

not that long ago that energy was

Speaker 2

kind of €15 a megawatt hour and now we're looking at rates And kind of 40 to 50. So I think structurally the kind of cost base of the industry has changed. So it's yes, some costs are going down and we've seen that through 2023 and some of that may But as Tony referenced earlier, areas like labor are not. So we continue to invest to kind of reduce costs. That area is going to be important.

Speaker 2

Energy will probably remain structurally higher than it has in the past, while kind of normalizing around these levels. Eco recovered fiber is probably higher than it has been in the past. When you look at some of the capacity that that place to come on, I think there are quite different backdrops in terms of cost, market and price than it might have been when those Projects were first anticipated or announced. So I think it might be a bit early to get into whether spreads will increase or expand into 2024 just yet. But I think it's important Just kind of reflect on the backdrop as we move towards that in terms of change around either the underlying cost base and the inputs into it.

Speaker 2

The cost of running projects and rebuilding and building mills also has changed. So it's a kind of different it's a different phase moving into 2024, Structurally higher. But as Tony said, for us, really, it's about the integration and how we do on the bot side and what we do for our customers. We'll decide whether or not Overall, we do better.

Speaker 7

Thank you.

Speaker 1

Thanks, Alfred.

Operator

Thank you. We'll now move on with Lars Schallberg from Credit Suisse. Please go ahead. Your line is open.

Speaker 8

Thank you. Just a couple of questions left. Just to be clear, on Q2, you commented about sequential decline in box prices. Can you call that out for us, please, albeit being up year on year? But also in slightly longer term, as Kat, you alluded to, you've spent quite a lot of money and you clearly had demonstrably very high operating leverage As volumes were good, as and when volumes do recover, what sort of So should we think about it in terms of operating leverage on the back of the current CapEx programs and what you've done in the past?

Speaker 8

I think in the past you called out maybe €15,000,000 €20,000,000 €25,000,000 per percent in volume. How should we think about that number going forward? And also this year, you did comment about the benefit of prior year spend in terms of removing costs. Any chance you can give us some help on how to quantify that in absolute EBITDA and similar number for 2024 based on what you're doing in 2023?

Speaker 1

I'm delighted to give all those questions to Ken, Lars. Thank you.

Speaker 2

Thanks, Lars. I think in terms of box pricing sequentially Q2 over Q1 was about 3.7% down. Year on year Q2 over Q2 last year was about 2.5% down. They're the key numbers there. In terms of the price volume dynamic, you're right.

Speaker 2

In the old days, 1% of volume would have been about 15%. I think that's probably more like In the kind of 20 space now given where we've seen things move, equally I think that 1% on the price is equally moved up more towards 55 to 60 rather than the kind of 40 Then on the second part, which is how should we see things coming through. I think in the past, like we've always said that When we look at our capital investment program and our total CapEx of call it around $1,000,000,000 $500,000,000 $550,000,000 is generally designed for maintenance CapEx and the rest is We'll have some amount of growth and efficiency in it. But traditionally, the bit above is the growth piece or certainly the fit that's targeted in terms We're thinking about the overall return. So and January is designed to meet and beat that kind of 70% rocky through the cycle.

Speaker 2

And I think then it's about On average, it takes on the box side, 12 to 18 months to see those projects come through. Some of the build projects might be longer. So it's hard to give you a kind of Fine. No, we're large what we're seeing coming through. But clearly, I think when we look through the margin performance and the resilience, you're seeing a lot of that good work In the previous years coming through, particularly I think on the mill side and cost efficiency and the kind of ever increasing move towards more renewable sources in terms of energy and kind of You've been able to kind of offset that kind of volatility in energy price you might have seen.

Speaker 2

I think on the box side, I think it goes back to the answer Tony just gave, which is Really, it's about sticking it to customers and what we give to them. And I think what we're seeing come through is not just the innovation and sustainability aspects of it, But also that CapEx that was put in, in kind of 2019 2020, which during those years is very high demand, our customers got served. Think we're seeing the benefits of that as we come into this environment around that strength and relationship and how if you like very simply they were not let down by Smurfit Kappa. I think you see the benefits that come through too. But difficult in this kind of environment to kind of say to you, X percent of that CapEx would deliver Y, it's I think you see it more when you look through the margin build and performance, if you think about where we are and still delivering margins of 2019 and a return on capital employed of 2019 With the free cash flow we've generated positive in the 1st 6 months and leverage 1.4 times, I think you can see that the capital is going in and working.

Speaker 8

Sure. Just one more question if I may. On the sustainable side, given the economic headwinds most companies would have at this stage, Are you seeing any change in interest in investing in that? Or does that momentum continue to build and providing a pipeline as we head into Better times ahead, Oak. How should we think about sustainable packaging as a growth engine?

Speaker 1

I think, Lars, I haven't seen any customers changing their view on what they have to do. And the reality is that The European Union is not taking its foot off the gas, so to speak, and they're continuing to move forward with New rules in relation to different types of packaging and we are very happy so far that Corrugated packaging and fiber based packaging is considered an environmentally positive thing rather than other forms of packaging and that is going to be pushed through legislation as we go forward. So a lot of customers You know, are actively working with us and obviously with others as well, but to remove Plastics where possible, polystyrene is getting outlawed in many countries and plastic punnets are moving away from plastic into paper based. So There's no real change. I mean, sometimes the legislation is slower than We would like to see, but that's, I suppose, historical.

Speaker 1

But the move away from fossil based packaging towards Renewable based packaging or reuse based packaging is very much there and alive and we're well positioned.

Speaker 8

Final question for me. America's performance looks comparatively very strong, both versus the European performance, of course, but also Piers, in that region, can you share with us what you're seeing on the ground? There's been quite a lot of talk about Onshore and nearshoring activity, in particular in Mexico, etcetera, is that a meaningful component of that or what is going on in that business versus a year ago?

Speaker 1

Well, we have as you know, we have a very strong businesses in the Latin American region. And Those businesses operate differently in different countries and each have their own different dynamic. Sometimes, for example, 2 years ago, Brazil was very poor for us. This last year wasn't so bad. This year is actually growing for us.

Speaker 1

And we have a lot of projects in the country that we are implementing to take advantage. As I mentioned about a new In Portoleta, Mexico is benefiting from onshoring and that is going to but it has been also hurt by the durable move that I talked about in Europe. So there's pluses and minuses in every country. I think what I would say is that we are very happy with our Americas business, but they didn't go up as quickly as the European business did. And So their performance last year was very solid, very good.

Speaker 1

As it is this year, very solid, very good and probably improving. So I think it's from a less explosive base upwards versus last year. And we're taking advantage some of the projects that we've done in the country. And we have a very large mill project that will come on stream Mid next year that will benefit us in 2025 very significantly in Mexico. So I think The future is looking very interesting and positive for Americas business, but It just didn't go up as much last year as Europe and it's not feeling the same negative effects that we've seen in certain Countries over Europe.

Speaker 8

Very good. Thank you.

Speaker 1

Thanks, Lars.

Operator

Thank you. We'll move on with David O'Brien from Goodbody. Please go ahead. Your line is open.

Speaker 9

Good morning. Thanks guys for taking my questions. Firstly, if I could start on corrugated pricing. Has there been any irrational behavior from a pricing perspective from the non integrated box makers out there? Or What's the backdrop been like?

Speaker 9

And secondly, the freely negotiated contracts and customers that you're talking You know, usually a little quicker to come back to you on price. What have those negotiations been like? Are they rewarding the value add? Excuse me. And the reliability that you brought them over the last 12, 24 months and beyond, but how has that experience been?

Speaker 9

Switching to CapEx, it's clear that balance sheet is very strong. You're saying there's a lot of opportunity out there. Are you guiding us that the CapEx number is It's going to be $1,000,000,000 into 2024 as well. Or how should we think about that going forward? And then finally, last one for me, Interested to see the entry into North Africa during the period.

Speaker 9

Maybe you could talk to us about the ambitions or prospects For growth in North Africa overall or any other regions you could maybe enter?

Speaker 2

I'll take the first and

Speaker 1

the last one and then Ken, you can think about the middle one. So basically, with regard to Morocco, we see that as an opportunity. We've been exporting to Morocco from Spain For a number of years, I'm building up our base there, but obviously, there's a significant transport cost to do that from Spain to Morocco. And we've built enough of a base business to justify our factory. And given the fact that the market is Very dynamic and growing and strong and agriculture and other things are very good in that market and As I say, growing, so we see that as an opportunity.

Speaker 1

I don't say that we're going to go into many other countries in Africa at But if there's an opportunity, we'll obviously look at it. There's nothing on the agenda right now. Morocco was just a specific Case in point where we built up a pool of business that we could load a factory with initially and then build from there, but with our own sales force and our own management team. And so we decided to take that opportunity. With regard to corrugated pricing, there is always sometimes behavior in the corrugated business when business goes out for tender.

Speaker 1

That said, most of the time, you're able to retain the business because the business is kind of sticky. So I think overall, as we said, we've been gaining market share and corrugated pricing, Tenders are reflecting some of the paper markets that are out there, but with a plus, I would say. With regard to the normalized customers, yes, we are getting rewarded for our service to them and our innovation and our design and our Security supply from both contractual customers and Let's call it free market customers. And so clearly, that's something that we intend to maintain as best as possible.

Speaker 2

Good morning, Dave. On CapEx, not guiding specifically on 24 at this stage as you can imagine, but I think it's fair to say that This is the 3rd year of our 2020 CapEx from over the $1,000,000,000 There's clearly capital in the 1 year cycle. A lot of projects kind of continue in 2, 3, 4 years. And as we look out, as we sit here today, clearly less committed capital for 2024, even less so for 2025. I suppose we go back to The framework we put in place, which is one of flexible and agile at its heart.

Speaker 2

So there are certain projects that will continue through. If we think about some of the big projects like the machine that Tony talked about in Mexico or indeed the Cali boiler for ESG or indeed some of the projects around Europe In the mill system, we'll retain a lot more flexibility on the box side. So while not specifically guiding on 24 yet, I think you know us well enough to know that We take a look ahead. Flexible and Agile is where we see that and can flex up and down as the market demands.

Speaker 9

Great. Cheers. Thanks very much.

Speaker 1

Thanks, David.

Operator

Thank you. We'll move on with Our next participant, Andrew Jones from UBS. Please go ahead. Your line is open.

Speaker 10

Hi all. Thanks for the Just on the Q3, could you just talk through the moving parts for that? Because obviously pricing is coming down. Are you seeing that kind of accelerating or Decelerating versus the 3.7% down sequentially we saw in 2Q. On the volume side, it seems like you've seen an improving trend in July.

Speaker 10

But if we take into account seasonality and your belief that volumes do seem to be sort of Improving from the weak levels we've seen in recent times, are we seeing a quarter on quarter volume improvement? And if so, How much do you think? And then just on the cost elements, I guess OCC is coming down, energy Coming down, like, can you give us some sort of guide for how much cost relief potentially we could see in the Q3? And just for some clarification, I heard those full year cost bridge numbers you gave earlier. I heard the labor energy number.

Speaker 10

Can you just remind us what were you saying on distribution, wood and overall materials? Thank you.

Speaker 1

I mean, well, we never had

Speaker 2

to forecast the quarter. Andrew,

Speaker 1

It's not something that we try I mean, what we said in July is that it's similar trend to June. And honestly, I'm not going to forecast August September right now because I don't I just don't have a sense of We think it feels like it's going to be the same in August September, but we're not 100% sure. It could be better, it could be worse, it could be the same, frankly. So I think we I mean, we're trying to build a long term business here, and we're putting in place all the planks to Take advantage of business opportunities in various different markets. And While we need to think about every quarter and make sure that we report as best as possible every quarter, We're more of a long term business than that, Andrew.

Speaker 1

So what I guess, We have put in place a lot of capital that will take advantage of opportunities when they're there and we have people in the business that are Dedicated towards making sure that we provide the best service for our customers and that is leading to market share gains And that's what we're going to continue to do.

Speaker 2

On the cost items, Andy, I mean, I think you picked up on your labor. On distribution, I think we said it was about initially at the start of the year, we talked about a $20,000,000 headwind, probably 20,000,000 10 to 15 tailwind now would clearly start the year probably about a 50,000,000 headwind, I'd be slightly positive now, maybe 10%, 20%. On all the other cost categories, we would have seen a lot of those as a headwind as we started the year and they kind of maybe Yes, yes, they're probably trending now to about between 75 100 as a kind of tailwind. But look, Kieran and Frank can take you through that More detail than that if you need it. But I think it's fair to say that a lot of that work is done around our ability to control our own costs and the good work we've done around things Energy where we're 76% hedged for the year, so very little open position irrespective of what happens in those markets as we move through the back For the year.

Speaker 10

Okay, cool. And just one follow-up on the industry. I mean given the fact that obviously volumes are Clearly a lot weaker than people are thinking when they're adding a lot of the capacity that's been coming through in recent times. Do you think the industry has done enough So far to sort of balance market in the medium term and as a leader in that, I mean, in your view, How much capacity do you think needs to come out on the testliner side in the next sort of couple of years given capacity additions?

Speaker 1

I think the industry is I mean, as I think I mentioned earlier, the price levels that exist today for non integrated Players are extremely challenging and you've already seen a number of key market sellers Closing or shutting or announcing shuts of their mills, and that's obviously going to be positive. If pricing stays where it is for much longer, you're going to see more and that's going to be positive. You also see Very significant players who have announced increases of capacity, hold those capacity increases for either cost reasons or market reasons. And then you've seen other players delay the installation of capacity by upwards of 18 months at this juncture. I think there's if you're not integrated right now, it's a very challenging market and that's going to come at Come to the form of people who are trying to sell their paper in this kind of market.

Speaker 1

And I think that's going to be Just going to set the plan for a new upward movement at some stage in the future. The question is when, not if.

Speaker 10

Okay. Thanks a

Speaker 2

lot. Thank you.

Operator

Thank you. We have reached to the end of the Q and A session. I'd like turn the conference back to Mr. Tony for any additional or closing remarks. Thank you.

Speaker 1

Yes. Thank you, operator, and I'd like to thank you all for taking the I think Smerta Kappa, as I mentioned, has really put itself in a fantastic position for the future. While we don't like to have down results, it is still the 2nd best first half in our history. And we've shown the resilience of our business model Through the years and of course through the Q1 where our performance has been better than practically any Of our peers that we've seen reporting thus far. So we feel pretty proud about that.

Speaker 1

We feel good that our business is in very good shape to take advantage of any of the opportunities that are going to be presented to us as we go forward. And so that's what we intend to do. And I think that The team is stable. The team is strong. The team is committed and the team are aligned to our shareholders and that's what We'll eventually make sure that this company continues to develop forward in the years ahead.

Speaker 1

So I'd like to thank you all for your Your time and your questions and most especially your support both all through the years and hopefully into the future. Thank you all and have a very nice day.

Operator

Thank you for joining today's call. You may now disconnect. Have a nice day everyone.

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Key Takeaways

  • Smurfit Kappa delivered a 19.1% EBITDA margin and 19% ROCE in H1 2023 despite a challenging market, with group revenue of $5.8 bn (–7% underlying) and positive free cash flow of $119 m versus a $28 m outflow in H1 2022.
  • Its integrated model and disciplined capital allocation have underpinned growth, with $6 bn invested in its system and $2 bn on acquisitions since 2012, driving market share gains without sacrificing price.
  • Innovation is a core focus, supported by 30 experience centres and over 1,000 designers across 36 countries, which has helped Smurfit Kappa win industry awards and secure superior packaging solutions for customers.
  • Sustainability efforts are advancing, with a 44% reduction in emissions intensity since 2005 and $1 bn invested in energy efficiency and CO₂ projects, positioning the group on track for its 2030 targets.
  • Management notes that customer destocking has abated with sequential volume improvements in Q2, and the company maintains a strong balance sheet (net debt/EBITDA 1.4x) alongside a 6% interim dividend increase.
A.I. generated. May contain errors.
Earnings Conference Call
Smurfit Westrock H1 2023
00:00 / 00:00