Smurfit Kappa Group Plc

Thank you, operator, and 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.

And before commencing, we would refer you to the note on forward-looking statements set out in our trading update which also applies to our discussion today.

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 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 have just been -- 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 and 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 products. 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 we'll 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 1 per participant, please.

Thank you all for listening. And now operator, I will take -- myself and Ken will take any questions you may have.

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 this?

And 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, we continue to gain market share.

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.

And so despite the competition being as always intense in various markets, we continue to see market share gains according to the official statistics. And I suppose that is a testament to the fact that we do as we say and we say as we do to our customers, and we continue to deliver for them.

There's a whole bunch of new environmental laws coming out of Brussels such as void fill and how to package and CO2 reduction. And there are very few companies that are able to help our customers in that whole area.

And we are the best assets, I would say. And so we're the go-to company for all that kind of innovation that customers need.

And remember, a lot of our customers -- and you can see this every day that are -- they're slimming down their middle management. So that means sometimes packaging and technologists and things like that.

So they come to rely on companies that are able to deliver not only innovation but also regulation things that need to be covered off. So 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.

Sorry, I know keep to 1, just a brief follow-up on that point. You've made the comment you expect demand to progress more positively as the year unfolds.

Is that based on an acceleration of market share gains? Or is -- what are you seeing to give you that confidence to say that statement this early in the year?

Yes. I think when we do -- obviously, what we do is we talk to our management before these calls and to see what's very latest.

And what we see is order intakes are improving. That doesn't mean it's necessarily going to translate into shipments improving, but our order intake, for example, in our -- in a key market like Germany has very much improved in the month of April from the previous 3 months.

And in actuality, on tonnes per -- tonnes or square meters per day shipments, we have noticed a marginal uptick in the last -- over the last 3 months in April. And 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, the -- then we will see an upward trend in shipments.

And ultimately, that will translate into more demand.

I'll stick to 1 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 as the fact that you're own shares are sort of implying quite a low valuation and the potential scope for buying back your own business?

Well, Charlie, I think it's a very good question. I mean clearly, 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, with the balance sheet where we are, we can pretty well -- we have all range of options to do bolt-on or even significant acquisitions that are accretive, not only accretive but highly enhancing our profitability. And also, the Board obviously continues to view buybacks as part of the whole capital allocation decision.

We did a small 1 last year. And obviously, it's top of mind as to should we do more if the share price stays where it is.

But 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 want to comment on that?

Sure. I suppose it goes back to everything we've done for the last few years, which is, if you like, continue trying to increase the range of options we have to deliver value to shareholders.

And as Tony said, back in the last year, we kind of put the last -- that particular table around share buyback. So 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. So I suppose 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. But equally, we always kind of take a look around and see what's available or possible.

But I think the fundamental point and Tony made there last which is you probably won't get a surprise on most of these things. We tend to signal well, plan well and execute well so that everybody is fully engaged on the topic and aware of what's going on.

But -- so just with respect to the valuation of, I guess, possibly private assets, given the slightly tougher outlook, are you seeing more attractive value out there?

Not yet.

Not yet.

I mean I suppose it's been good years. And I think sellers' expectations are probably still may be elevated based on the years they're coming through, and they clearly particularly on the paper side where we don't necessarily need assets, they will 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. So sellers' expectations haven't necessarily moved much, but clearly the interest rate environment has.

So it's always going to be a balance of those as we've always done, where can we bring these -- but if we do bolt-ons like we did last year with Fustelpack in Spain and Atlas the previous year in the U.K., Argencarft in Argentina and folding carton operations in Monterrey and the Piteå before that. It's really about how do we bring them into Smurfit Kappa, how can we connect them to the network, get them integrated and deliver and drive the greatest value from them.

And so where we do it, it tends to be natural organizations who fit into the core portfolio, build at either geographic presence or product and that tends to be it. So they're always going to be around at any time, as we've always said, there's a number of those, we kind of look at, some come up, some of that go.

We've got a couple of smaller ones that we're looking at. It's 1 medium-sized 1 we're looking at.

So I'm sure the smaller ones will happen, and bigger size one we'll have to wait and see.

Just starting with -- or just sticking to the 1 question, I guess price of the cost, of course, have been quite positive for you. The resilience in box prices seem still to be pretty much the case.

So how should we think about price over costs heading into Q2 and H2? And we have, of course, seen some of your competitors have started to move on prices and trying to raise containerboard prices.

What's your take on that and the read why that is happening?

Well, I'll take the second part of it, and then I'll let Ken take the first part of your question. I think clearly, containerboard prices have fallen very quickly and very fast and now at a point where most producers will not be making any cash.

And those that are introducing tonnage into the marketplace will certainly not be making cash and we'll be probably sending cash with all of their orders. And then the nonintegrated less efficient producers will also be doing the same.

So I would say that the attempts by people to raise prices without leading anything, I would say, are necessary. The question is when will they go up from here?

And that's anybody's guess. So 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. But there isn't any downward movement from here for sure and probably at some point in the next -- well, I don't want to even speculate a timing, but there will be movements at some point because there needs to be as Ken just mentioned a few seconds ago, paper mills have done well over the last number of years.

So therefore, they still have decent profitability to have a backup. But ultimately, nobody wants to be operating loss-making situation, so things will change.

The question is when. Ken, do you want to take the cost piece?

Sure. Lars, I suppose, look, it's still relatively early in the year, so this will clearly move as we go through.

But as we kind of sit here today, particularly on the cost side, energy will probably be a tailwind this year for us given what 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, wage and salaries, which we did some excellent work last year in terms of getting on that through just the full year run rate of that will probably be a headwind of about EUR 100 million.

Things like other raw materials in there starches, dyes, pallets, [indiscernible] all that kind of stuff, probably again in the kind of EUR 100 million, EUR 120 million space, so the headwind distribution continues to be 1 of those headwinds that we kind of eat into maybe only EUR 20 million to EUR 30 million. And then even things like wood, which clearly you can see from other people reported greatly, will cost continue to rise, so about EUR 50 million to EUR 60 million for wood.

So that's kind of the bigger buckets you can take your own view on where peak is going for OCC. And then on the price side, clearly, despite the fact that the containerboard fell by the -- fell by since September really, we have seen minimum move on the box price in the first quarter, small downward move really just around the edge and fringes, particularly considering how much the box price has moved up over the last year, 1.5 years.

As we know, as we get towards the second half of the year, there are naturally at these kind of containerboard prices, there will be some level of index reset, but it sort of goes back to, I think, David's question and Tony's answer to 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 protect that price in the way down, which we've been traditionally very, very good at in terms of retaining that box price as containerboard falls. But also clearly, Tony's last point as well is key here, which is where does containerboard go from here because that will clearly have an impact on what happens to the box prices as we move through '23.

Just a quick follow-up on that specifically, demand side, which, of course, is pivotal to this. And there seems to be quite some resemblance with 2009 when it's quite a lot of margin squeeze in the industry at that time, it wasn't -- demand wasn't strong enough and then it came back in Q3 and with some meaningful price increases.

Are you seeing any similar new stuff because I think what has surprised many of this is the degree of destocking we've seen, which, of course, by design and potentially reverse. So question is certain...

You're showing your age there, Lars talking about 2009.

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.

And it's up until, I would say, recently, it has been stable at a low level. It seems -- as I said earlier, it seems like there's a slight degree of improvement.

And that may well accelerate as we go through the rest of the year and certainly comparisons will become easier. I think destocking, to my mind, again, with our ring around with people, I think destocking is primarily finished.

There are some -- still some supply chain issues in certain markets, especially in automotive and things like that, where there still seems to be good demand but those supply chain issues that are affecting 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, and that has negated durable purchasing for a period of time. But as you know, washing machines break down and need to be replaced, televisions need to be replaced at some point.

So 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, because you remember, going back to 2021 during the pandemic, I mean, demand was just off the charts, great.

And so we're just seeing a reversal of that.

And 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.

And equally, I think if you've been to the U.K. 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.

So there's been a number of factors over the last 6, 9 months that would be abnormal, and we would see that the world will become more normal. Obviously, you can't predict the weather, but the world will become more normal as all the supply chain these, all the people get back to stocking again normally and people's consumption habits go back to normal.

That makes sense.

I hope so, Lars.

I just want to 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 the Americas across the 3 major countries that you have in Americas and whether there's any difference in different geographies relative to Europe?

Yes, I would say -- Justin, I would say that Mexico is outperforming. I really -- 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. That would be our experience also in Texas.

But again, you shouldn't really look at us as a proxy for the rest of the market because we're too small in the United States. And then Colombia, against massively strong comparisons because 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, as good as it normally is.

So therefore, that would have an effect. They've had some too much wet weather actually in Colombia.

So that affected some of their agricultural crops. So there could be some weather-related issues in Colombia that might be distorting the slight demand issues.

But 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.

Just -- it's sort of a bit like the cures 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.

Just given the sort of industry dynamics you've talked about in terms of volume and pricing. I just -- my question was around competitive behavior.

And I just wondered 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 competitive behavior in the last 3 to 6 months?

I wouldn't say there's been a massive change, Kevin. I think, 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 know where to put their paper with demand down somewhere between 5% and 10% depending on the market.

A lot of paper producers just doesn't have the space to store the paper rolls. So therefore, there's been a lot of downtime taken and I think that's very positive.

We've taken 80,000 tonnes of downtime, the industry seems to have taken around 1 million would be our guess of downtime. And obviously, at prices where they are and your selling, giving away dollars with euros with your paper, I think that, 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. So that's a more encouraging sign.

But like one swallow doesn't make a summer or spring or whatever. So 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.

And the only way you can succeed versus your competitors is going good and by being innovative and I think that's what we are.

Just like to expand on the benefits you get being integrated and in a more challenging containerboard or market be able to kind of pull back purchases from the market and keep your mill system operating well and how you're kind of managing your mill costs to kind of protect profitability is the first question. And then the second one, just on your kraftliner 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 because wood diverges between the markets?

What are you seeing at your France and your Austria wood cost buckets, just to understand how that business is performing.

Yes. Just on wood, obviously, as you correctly state, Nordic wood has moved up.

It's not 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, and there's a lot of burn wood that needed to be collected and used.

So therefore, that's been broadly a little bit positive for wood costs there, offsetting some of the very high wood costs we've had in Nordics. And Austria hasn't been as bad as we anticipated so far.

So 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.

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 when we bought Verzuolo.

We're now a little bit long of recycled. So therefore -- and it's not necessarily geographically always in the right place.

So we've had to take Verzuolo down, for example -- mill down for periods because the cost of shipping from paper from Italy to Northern Germany doesn't make any sense when you've got -- when you are able to do a carousel between your own German mills and Dutch mills and U.K. mill.

So I mean the obvious benefit of integration is that basically, you can -- you optimize your mill system most of the time to the grades that's suited and you reduce transportation costs forever, plus you have a customer, which is our own integration. And so therefore -- and we don't transfer at spot.

So we don't sell very much to the export market, and we don't sell to ourselves at spot prices. So at the end of the day, our mills are always going to be more profitable, more efficient and better positioned than anyone -- any non-integrated mill system because of that, and we've proven that over time.

And then 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 decision for conversion.

Are you seeing anything else out there in the market? Because I do imagine you're ramping up now will be quite challenging.

I think, I mean, Cole, it -- I would not envy anybody starting up a mill, a non-integrated mill in this business right now. I mean 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 going to lose a tremendous amount of money for a tremendous period of time. And inevitably, there will be casualties in that regard as if prices stay low long enough.

And as I said, I would not want to be a nonintegrated startup in this marketplace.

Just a bit of clarification on one of the earlier points. You said that you thought the industry have taken about tonnes of downtime.

I was just wondering over what period. And if we look at it, for that, I mean what proportion of capacity do you think is currently sitting idle?

And sort of broader question, I mean you just talked about obviously, some new start-up, the capacity potentially being delayed and so forth. But to compensate some of our additional capacity that's supposed to be coming in this year and next, I mean, do you see much scope for the older mills to be permanently idled or any of these mills might be going offline now to not come back?

I mean how do you see that shaping up in the market.

I think inevitably, there will be some older mills closed. We have a couple of ourselves.

We obviously keep under scrutiny. And 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 more -- 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 Iberia and Peninsula, you are way, way under your cash cost of production for the prices you're getting. So that doesn't make any sense for any length of period of time.

So inevitably, the million tonnes refers to the first quarter, there will continue to be downtime taken. We will continue to take some downtime where appropriate.

And 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. But 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 and some downtime. But if demand picks up, we will obviously run our mills full.

Ken, do you want to add anything?

Yes, just to clarify, Andy, the 1 million was for the quarter and I suppose you yes. Our best guess will be somewhere between 10% and 15% is kind of either take downtime as we kind of move.

I think that people take weekends, they take holidays, they take -- recycled mills are easier to take downtime on, Andrew, than kraftliner mills. So 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.

So it's not a big deal to take a weekend offer if there's a major holiday period, you can take that off and give your workers the holidays. And so I suspect that some English mills will be taking holidays in a couple of weeks.

Thank you, operator, and thank you all for joining us today. As we said to you in February, and 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, and our position of financial strength shape that view.

The events of the past 3 years have proven that success is indeed never a straight line, but 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 we'll continue to drive tomorrow's prospects, whether it's managing threats are capitalizing on the opportunities that are ahead of us.

Our objectives 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.

So 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.