Smurfit Westrock Q1 2024 TU Earnings Call Transcript

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May 2, 2024

There are 9 speakers on the call.

Operator

Hello, and welcome to the Smurfit Kappa Group Q1 Trading Update Call. I will now hand you over to Kieran Potts, Head of Investor Relations, to begin today's conference. Please go ahead.

Speaker 1

Thank you, Saskia. Today's discussion may contain forward looking statements, including within the meaning of U. S. Federal securities laws about Smurfit Kappa's views of future business and financial performance, including forward earnings guidance and future market conditions. Today's discussion may also contain forward looking statements about Smurfit WestRock's proposed combination with WestRock.

Speaker 1

These statements are based on management's current beliefs and expectations that are subject to various risks and uncertainties. It is possible that actual results may differ materially from those suggested by these forward looking statements we may make. Factors and risks that could cause actual results to differ materially from these statements may be included in our earnings release issued today and are described in more detail in Smurfit Kappa's reports available on Euronext Dublin, the national storage mechanism fca.org.uk and on our website smurfitcapa.com. This call does not constitute an offer to buy or sell or the solicitation of an offer to buy or sell any securities or a solicitation of any vote or approval. In connection with the proposed combination, the entity which will ultimately own the combined group, Smurfit WestRock, has filed the registration statement on Form S-four with the U.

Speaker 1

S. Securities and Exchange Commission. This registration statement includes the prospectus relating to the offer and sale of the shares in Smurfit WestRock to WestRock's stakeholders, stockholders pursuant to the combination that will be registered pursuant to the U. S. Securities Act of 1933.

Speaker 1

The registration statement was declared effective by the SEC on 26 April, 2024. In addition, on 26 April, 2024, WestRock filed a separate definitive proxy statement with the SEC with respect to the special meeting of WestRock stockholders in connection with the combination. WestRock commenced mailing of the proxy statement to WestRock stockholders on or about 1st May, 2024. The proxy statement, prospectus and other relevant docs filed by Smurfit Kappa, Smurfit WestRock and WestRock with the SEC will be available free of charge at smurfitcapital.comor@westrock.com as applicable or at the SEC's website sec.gov. You should review such materials filed or to be filed with the SEC carefully because they contain or will contain important information about Smurfit Kappa, WestRock, Smurfit WestRock, the combination and related matters, including information about certain of the respective directors, executive officers and other employees who may be deemed to be participants in the solicitation of proxies in connection with the combination and about their interest in the solicitation.

Speaker 1

Please note, Tony is dialing in from Latin America this morning. Should there be any connectivity issues, Ken will take the lead. We will not be answering detailed questions in relation to proposed combination with WestRock. And as this is a trading update, we will limit today's discussion to our results and will take detailed modeling questions offline. I will now hand you over to Tony Smurfit, CEO of Smurfit Capital Group.

Speaker 2

Thank you, Kieran, and thank you all for joining us today. As you may have seen from this morning's release, we reported EBITDA of $487,000,000 for the period with an EBITDA margin of 18%. The delivery of another excellent performance reflects, as we have said before, both the operating excellence of our people and the continuing benefits of our multiyear capital plans. Some $6,000,000,000 of capital spend over the last 8 years in our mill and corrugated systems has optimized our integrated operating model, reduced costs throughout our mill system and ensured our corrugated system has the highest quality, the highest service and the highest innovation capabilities for our customers. In parallel, we've also developed and grown our higher margin specialty businesses.

Speaker 2

Preferred Capa's long standing and proven management team has built a formidable business continuing to deliver superior performance across all market conditions. As we expected, corrugated demand growth progressively improved from Q4 2023 with volume growth of approximately 3% and 2% for Europe and the Americas, respectively. We are also seeing an improving pricing environment and will characterize current trading conditions as encouraging. Longer term, both innovation and sustainability are positive structural trends supporting our customer base and growth. After the quarter end, on April 3, we were pleased to announce the successful completion of a $2,750,000,000 green bond offering.

Speaker 2

The proceeds of which will be used in part to finance the combination with WestRock announced last September. We continue to work well with the WestRock team with integration planning progressing. Subject of course to shareholder, regulatory approval and the satisfaction of other closing conditions, we expect the combination with WestRock to complete in early July. The quality of Smurfit Kappa's people, its performance led culture, its operating excellence and measured capital plans have built a business that consistently delivers. Set against an improving industry backdrop with positive long term trends and through the creation of a global leader in innovative and sustainable packaging, the combination of Smurfit and WestRock marks the next and very exciting stage of our journey.

Speaker 2

Those brief comments, I'll now pass it over to you, operator, and to the audience to ask any questions about the performance. Thank you.

Operator

Thank you. Thank you, sir. And our first question today comes from Cole Hathorn of Jefferies. Please go ahead.

Speaker 3

Good morning, Ken. Good morning, Tony. Thanks for taking my question. Just like to follow-up on the very strong Q1 EBITDA. I mean, if you think that this should be the period where you've passed on all the lower box pricing.

Speaker 3

So effectively the trough point in the pricing cycle. The $487,000,000 is a really strong number. And I'm just wondering what supported the EBITDA in Q1? Is there something on costs we should be thinking about is the first question?

Speaker 2

Cole, I think what we said all along is that we have been strongly recovering price through the down the up cycle and we've been holding on to the price during the down cycle for the most part. But the real reason we continue to perform well is because we have developed a plan and a business that works very well together. So the capital that we've been putting into the business, we've told you and everybody that we intend to get those returns out of the capital we put into it. Otherwise, we shouldn't be putting it in. And the Q1 numbers demonstrate strongly that our improved efficiency well, our improved efficiency sorry, there's a massive thunderstorm going on outside my window here.

Speaker 2

The improved efficiency of our operations, it comes through. And when those capital plans are put in place and executed as well as we have, that I think it shows in the numbers and that's one reason. Equally, we continue to support our customers with innovation and development and we obviously expect to get paid for what we do, and that's what we get. I think with regard to the bottom point, Q1, yes, the bus demand, as you know, the way the system works is bus demand as paper pricing goes down, bus prices go down. And we've seen that in Q1, and we would still expect to see a little bit of a tail of that in Q2, albeit that will be changing as we go into the second half.

Speaker 2

And I would say that the and what's supporting the paper price increases right now is a lot of the cost increases that we're getting. We've seen waste paper move up sharply during the last 2 months. And that may have some very short term margin compression as we go through Q2, but then that will be recovered in paper prices in Q3 and Q4 and I'm sorry, in Q2, Q3, and that's going to reflect itself in box prices later on. So this is the same as what we've done before, but from a higher base because of our investment plans and the development that we've done within the company over the last number of years. Ken, I don't know if you want to add anything.

Speaker 4

No. I think you got it all there. I think in reality, Co, when you look at the pluses, minuses, it really does come down to pricing and volume year on year. I mean, there's a lot of offsetting within the kind of the headwinds you're seeing around recovered fiber and indeed where the box price has gone, but clearly some savings on energy, some savings on other costs. I think Tony picked up there at first, which is the biggest impact here is everything we've done over the last number of years.

Speaker 4

It's not a single quarter. It's multiyear capital programs and the benefits of those.

Speaker 3

And then maybe as a big picture, should we be thinking that near term we've got obviously an OCC headwind into Q2, but then recovery into the back half as those kind of box pricing comes through. And maybe on that, is it OCC prices are moving higher because there's good demand pull into the mill system, so effectively calling out demands a bit better, which I'd argue is a positive? And then can you give any comments? A few people are out with price increases for June. I'm just wondering if you can comment on that.

Speaker 3

I completely understand if not.

Speaker 2

Yes. No, we have announced to our customers increases for June and for May June, both in recycled and kraftliner. So I think that with regard to waste paper, yes, waste papers moved up sharply because demand is a bit better and there is a bit of a pull around the place. So I think, yes, that's what the reason. Also, there's less generation because a lot of the let's call it, the publication papers are and some of the other mix grades are less because of the overall macro effects of some of the economic issues that are out there.

Speaker 2

So I think that it does look pretty good for the second half.

Speaker 3

Thank you. I'll get that in the queue.

Speaker 2

Thank you.

Operator

Thank you. And our next question now comes from Charlie Morrisons from BNP Paribas Exane. Please go ahead.

Speaker 5

Yes. Good morning or maybe good night, Tony. Thanks for taking the questions. Just 2 for me, please. Firstly, could you give us a little bit of color on any kind of standout leaders and laggards in terms of category and geography performance?

Speaker 5

And then secondly, the final draft of PPWR has now been voted through by the EU Parliament. I know there's a lot of detailed technical guidance now getting drafted in, but I wondered if you had any evolved thoughts on how that's going to affect the business positively or negatively in the future?

Speaker 2

With regard to the grades that we're in, I would say that the I mean, our kraftliner market is strong, brown kraftliner is strong, recycled is good. And most of our countries, especially the southern countries are doing well. Germany still is a bit of a laggard, although I was in Germany last week and we are seeing some pickup. I don't want to call a strong pickup there yet, but it was certainly more encouraging last week than I have seen in a while. But then I did say that last April, and it ended up being a bit flat.

Speaker 2

So I don't want to call anything too early in Germany. But overall, the periphery countries are doing okay, are well in certain cases like countries like Spain. And the major industrial companies a little bit better than we've seen in the last 6 months or so. So with regard to categories, we still see obviously areas like cars and other areas not pulling, but the consumer goods are generally okay.

Speaker 6

Ken, do you

Speaker 2

want to take the PPWR?

Speaker 4

Sure. Good morning, Charlie. On PPWR, look, I think it's fair to say that the net outcome has been very positive for our industry. I think in the final draft of what we saw, I think the efforts of the industry and everybody within it to kind of properly reflect the sustainability and the circular aspects of corrugated predominantly had been taken into account. I think it sets us up very well.

Speaker 4

I think particularly in areas like e commerce and reuse, I think they're reflected much better in terms of the model that was initially put out, as you know, a couple of years ago, which kind of would never have worked anyway. I think we sort of have to go back to the basic principle, which is corrugated packaging is quite simply the most recycled packaging in the world anyway. We hit 10 to 90% plus recycling rates. So we were starting off with a position of strength. And as we're making sure that, that position of strength was reflected in the legislation.

Speaker 4

And I think it's fair to say we got there. But probably, I think it sets up the industry from a sustainability and the growth perspective quite well for the years ahead.

Speaker 5

Great. Thanks.

Speaker 2

Thanks, Charlie.

Operator

Thank you. And up next now, we have Justin Jordan from Davy. Please go ahead.

Speaker 2

Thank you. Good morning, Ivan.

Speaker 7

I've got 2 quick questions. Tony, firstly, you described current trading as encouraging. Should we infer that that is perhaps slightly better in April, May than the 3% box volumes in Europe that reported in Q1? And secondly, just on the back of that encouraging trading, you talked about containerboard price increases in being committed from some of the capital customers from May, June. I'm just wondering if you can quantify the quantum of that.

Speaker 7

Swedish peer has announced a €60 ton virgin exchangeable price increase for June. Is this method targeting similar quantum of increases in May, June with customers? Thank you.

Speaker 2

Yes. To the second question, it's broadly similar. A little bit more, a little bit less depending on the grade, but basically it's similar. With regards to the encouraging remarks, I mean, I don't want to say yet that it's better than the Q1 because Easter fell in March and that has a little bit of a distorting effect when you look at April's volume. But certainly, as I said earlier, when I go around the facilities that I've been around in the last 2 weeks or so, there's definitely a better feel about things than before.

Speaker 2

And certainly, other grades that we do, some of the specialty products that we make are more busy than they have been in the last 6 months or so. So it is encouraging, but I don't want to call out as being it's a bit early to say it's a big improvement versus Q1. Thank you, Tony. Thanks, Justin.

Operator

Thank you. And from Stifel, we have Lars Kjellberg with our next question. Please go ahead.

Speaker 8

Thank you. I just want to come back a bit to the cost equation. You call that energy as a tailwind, of course, OCC is a headwind Looking ahead, could you share with us how you think about the bigger cost elements in the balance of the year, including energy in particular? And also if there's any way you can parse out the benefits from your investment program that contributed in Q1 and how we should think about that as the full year? And Tommy, final question on the bag in the box business is something that you've invested in quite a bit.

Speaker 8

Can you share with us how that's performing and if that also went through destocking phase now starting to see volume coming back? Thank you.

Speaker 2

I'll take I'll leave the cost questions to Ken. But on the bag and box, as you know, we have a probably a number 2 position in the world in that business, and we intend to continue to develop that business, and we've been investing accordingly to do that. And actually, the bagging box business in Q1 was as weak as I've seen it for a while, but it is encouraging that it's getting much better as we've gone through April and our order books for May June, albeit that it is slightly weather dependent and weather hasn't been great in Europe. And so but I'm much more encouraged from what I've seen in the last 6 weeks or so in the bag and box business versus Q1. Still performing very well, still excellent business for us and still worth investing a lot of money behind to continue to develop it to be probably the number one player in the world in that business in the years ahead.

Speaker 2

But I think we'll as I say, it's much more encouraging from an order perspective as we look forward than in the Q1. Ken, do you want to take the cost questions?

Speaker 4

Sure. Welcome back, Lars. It's so look, it's difficult to strip out the direct impact of the investment program simply because I suppose it's a multiyear program. But within that, if you think about where it's targeted, you're talking about a lot of kind of efficiency from the starting point. So whether it's around quality or uptime or on time in full or delivery or energy, you're kind of attacking the cost base at all aspects of it to kind of get into the right shape.

Speaker 4

So it's not necessarily that you're seeing it in either increased demand or indeed bottom line directly is coming across that equally some cost takeout programs, indeed headcount reductions. So it's throughout the business. I think the overall objective of those programs has always been to ultimately deliver more stable and through increasing margin, which we've done and indeed a rocky at above our target, which would equally we do. So I think it's difficult to strip it out, but it's clearly I think it's fair to say it's clearly there. When you look at what Tony talked about earlier on around the stability of the margins and where we are as you kind of begin this next turn of paper price increases in that part of the cycle.

Speaker 4

On the cost side, it's a you've been around long enough, there's a lot of plus minuses, but it comes down to price and volume in the end. I suppose, look, if you think about energy for if energy was about 120 for the Q1, it's probably about 150 for the year. We're probably about 60% hedged for the year as we are now. Still a bit to do there, but nothing to worry about given where energy is kind of setting at the moment. Recovered Fiber, as Tony said, in the last 6 weeks or so, we've seen a spike in that.

Speaker 4

Probably at this stage, it's a headwind of in the kind of, call it, 100 to 150. Labor, natural inflation leaves at 100. Distribution, wood, other raw mats, probably another €80,000,000 or €90,000,000 in that. But our cost takeout program, on average a year between €70,000,000 €80,000,000 will take care of some of that. Energy, clearly, demand, that stays at kind of 2.5%, 3%.

Speaker 4

But equally then you're left with paper price increases, the small part of compression. And to Cole's question earlier on, that kind of part of quarter 4, 2024. But more importantly, I think, as we go into 2025, how that begins to play out. But when we look at it in the pluses and minuses, really the headwinds and tailwinds broadly match out and you're left with your incremental piece around demand where box pricing kind of settles to recover as we get through the back half of this year.

Speaker 8

Very good. Thank you.

Operator

Thank you. And our next question comes from Gaurav Jain from Barclays. Please go ahead.

Speaker 6

So a couple of questions from me. Good morning. So first is just on clearly a very strong result set of results in Q1, dollars 487,000,000 EBITDA. And then based on the comments you are making, clearly, it seems 2x will be much stronger. So the full year consensus number is $2,000,000,000 Wouldn't it be fair to assume that there is upside to that?

Speaker 6

That's one. And the second question is just on M and A in the sector. We are seeing another consolidation and then one of the bidders is no longer there, but maybe they are also thinking of something. So with this more consolidated industry, do you think it impacts the small side going forward?

Speaker 4

I think on the first one, I think consensus is you can talk to Kieran and Frank offline about any aspects of your model you want, but I don't think we're going to deal with consensus on this. It is where it is. On the second one, I think, Tony, I have a view here too. In reality, it's an industry that people have been pushing for consolidation to be a good thing for a number of years. I think we've seen more of that over the last few years.

Speaker 4

I think, look, all we can do, we run our own race. We're not looking at what anybody else is doing. Clearly, our combination of WestRock is very exciting for us given the cultural alignment, commercial aspects and the innovation aspects of both businesses. So irrespective of the broader consolidation piece, I think we just focus on our own game in that sense. And we're really looking forward to that piece.

Speaker 4

I don't know, Tony, if you have anything to go further on consolidation?

Speaker 2

No. I think consolidation has always been happening. There's been always deals happening in the sector. Equally, there's been start ups and new investments by people. Europe, depending on the market, is either very fragmented or not fragmented at all.

Speaker 2

And each market is very different in Europe. The Italian market is different to the UK market, which is different to the Spanish market, which is different to the Swedish market. So overall, generally speaking, M and A in the sector is always happening and will always happen. Sometimes it's small and sometimes it's bigger. It just so happens that our combination with WestRock has probably precipitated the other large M and A transaction out in the marketplace and we wish them well and we will follow with interest.

Speaker 6

Great. Thank you so much.

Operator

Thank you. And up next, we have Andrew Jones from UBS. Please go ahead.

Speaker 7

Hi, gents. Just around the 2Q bridge. Can you just give us some sense of like how much of that sort of small pricing tailwind will have an impact into 2Q? What sort of percentage decline do you have in mind? And then just on some of the other aspects of like technical guidance, things like that.

Speaker 7

Have any of has your thinking changed in any way with regard to any of the parameters you set out at the 4Q stage?

Speaker 4

No is the short answer to the second one. I mean, the guidance for the year kind of remains as it is. On the first one, we don't do forward guidance. We've never done forward guidance in terms of box pricing. I think it's fair to say what we saw at the year end, we kind of guided 2.5p to 2.5 percent of the box price decline in the Q1.

Speaker 4

We've seen that come through with the uptick in paper prices. We're not necessarily seeing any more in that sense. And then we move on to recovery as that kind of paper price feeds through in the back half of this year.

Speaker 7

Okay. Fair enough. Thank you.

Operator

Thank you. And we now take a follow-up from Cole Hathorn. Please go ahead.

Speaker 3

Good morning. Thanks for taking the follow-up. I've actually got 2 more from my side. The first one is on promotional spending. I mean, you should see good benefits when the big consumer brands come back and start their promotional activities.

Speaker 3

And I'm just wondering how those negotiations are progressing? Are you seeing anything for the Olympics, anything for the football into the summer? Just how you're feeling on kind of the promotional side into the back half of the year? And then the second one, if you can answer it is, obviously, IP and DS Smith have got a $500,000,000 synergy number versus your $400,000,000,000 for WestRock. You've got good overlap in Mexico.

Speaker 3

You've good overlap in Latin America as well as general other synergies. I'm just wondering how comfortable you are with that $400,000,000 number or if there's potential room to the upside? Thank you.

Speaker 2

Well, I'll let Ken be the Solomon guy on the synergy number other than to say that we're very comfortable with the number we put into the marketplace and we'll leave it at that. But Ken, I don't know if you want to.

Speaker 4

No, I think that's it. Look, I think you know Smurfit Kappa well. The number we put on the door was the number we were eminently happy with and remain so close.

Speaker 2

With the tracking? With regard to promotional spending, yes, I mean, obviously, a lot of our customers are talking about the second half of the year. I mean, being much stronger for them in regard to promoting their brands, a lot of the big brands were putting price over volume. And there has been some backlash against that as you have seen in some of these supermarket chains. And so there is likely to be more promotional spending in the second half of the year for the big brands.

Speaker 2

It's a bit early for us to start calling that out as a big tailwind, but we'll wait and see if that actually materializes. With regard to the big events over the summer, they absolutely do use a lot more packaging. So we would be expecting or hoping that, that will be better for the Q2 and into the Q3 with regard to things like the Olympics and the football. We are actually making all the beds for all the athletes in some not all, but all the corrugated beds for both the Special Olympics and for the Olympics. So that's an innovation that we with a partner we have done.

Speaker 2

So yes, that's helping a small factory of ours in France. But yes, so it's positive for us, but how much those to be

Speaker 3

seen? Thank you very much.

Speaker 2

Thanks, Cole. Thanks, Cole.

Operator

Thank you. And I would now like to hand the call back over to you, Mr. Smurfit, for any additional or closing remarks.

Speaker 2

Yes. Well, thank you very much, operator, and thank you all for joining us today. As always, it's great to talk with you, and we're very encouraged by our Q1. The steps we've taken in Square Foot Kappa and we'll continue to take have, as you'll have seen, built a very good business that consistently delivers over many years. And I would say that the quality and consistency of that performance gives us increasingly excitement for the future for all of our stakeholders.

Speaker 2

So with that, I would say thank you again for being with and we look forward to updating you on progress with the combination with WestRock as we go forward into the next couple of months. And thanks for your support. Thank you all.

Operator

Thank you for joining today's call. Ladies and gentlemen, you may now disconnect.

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Key Takeaways

  • Reported Q1 EBITDA of $487 million with an 18% margin, driven by operating excellence and multiyear $6 billion capital investments in mills and corrugated systems.
  • Corrugated demand volumes rose ~3% in Europe and ~2% in the Americas, and management describes current trading conditions as “encouraging” with containerboard price increases announced for May and June.
  • Completed a $2.75 billion green bond offering on April 3 to partly finance the proposed merger with WestRock, with integration planning on track and closing expected in early July pending approvals.
  • The EU’s final Packaging and Packaging Waste Regulation (PPWR) was approved in a form that underlines corrugated packaging’s sustainability and circularity, supporting long-term structural growth.
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Smurfit Westrock Q1 2024 TU
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