Smurfit Westrock Q1 2023 TU Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2023

There are 10 speakers on the call.

Operator

Hello, and welcome to the Smurfit Kappa First Quarter Results Call. My name is Jess, and I will be your coordinator for today's event. Please note, this conference is being recorded and for the duration of the call, your lines will be on listen only. I will now hand over to your host, Tony Smurfit, CEO to begin today's call. Thank you.

Speaker 1

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. Jeff. You will see from our release today that we once again Right at a more fulsome level of disclosure, which underscores both the strength and quality of our performance.

Speaker 1

Smurfit Kappa has again delivered a very strong set of results for Jess. With demand broadly in line with the Q4 of 2022. EBITDA increased by 13% to $579,000,000 With a margin of 19.3%, ROCE at 21.6% and a leverage multiple of 1.2 times. 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 $2,200,000,000 of capital to strengthen the integrated model, continuously improve operating efficiencies I'm capitalized on the opportunities within our system as well as close to $600,000,000 on acquisition led growth to diversify our offering and support our customers.

Speaker 1

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 just 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.

Speaker 1

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.

Speaker 1

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 product. In Smurfit Kappa, we will continue to build a company that strives for excellence and continued development over the short, medium and long term. Our strategy and our capital plans are delivering, and 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 Jess.

Speaker 1

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

Operator

And please ensure your line is unmuted locally as you'll be advised when to ask your question. And the first question comes from the line of David O'Brien from Goodbody. Please go ahead.

Speaker 2

Good morning. Thanks guys. One question for 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?

Speaker 1

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.

Speaker 1

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 at it, I would say.

Speaker 1

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 technologies and things like that. So they come to rely on companies that are able to deliver Jess. Not only innovation, but also regulation things that need to be covered off.

Speaker 1

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.

Speaker 2

Sorry, I know you keep it 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 what are you seeing to give you that confidence to say that the statement is early in the year?

Speaker 1

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 intakes, 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 tons per tons or square meters per day shipments, we have noticed a Marginal uptick in the last over the last 3 months in April.

Speaker 1

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 And shipments and ultimately that will translate into more demand.

Speaker 3

Great. Thanks very much.

Speaker 1

Thanks David.

Operator

Your next question comes from the line of Charlie Muir Sands from BNP Paribas. Please go ahead.

Speaker 4

Yes, morning. Thank you very much. I'll just take one question. I just wondered if you could talk about what you're seeing with respect to The environment for potential bolt on acquisitions and how you are thinking about trading that off against the fact that your Oh, shares are sort of implying quite a low valuation and the potential scope for buying back your own business. Thank you.

Speaker 1

Well, hi, 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 Jess. Bolt on or even significant acquisitions that are accretive, not only accretive, but highly enhancing our profitability.

Speaker 1

And also, the Board obviously continues to view buybacks as part of the whole capital allocation A decision, we did a small one 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 Something that I think maybe Ken, you want to comment on that? Sure.

Speaker 5

Good morning, Charlie. I suppose it goes back to Everything we've done for the last few years, which is, if you like, continue to try 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 leg to that particular table around share buyback. So I suppose we're in a position where we Kind of full suite options in terms of how we see value, but it sort of goes back to our overall framework, which is always going to be returns based. So I suppose we still forecast about $1,000,000,000 EBITDA for the business this year.

Speaker 5

As Tony said, we've got a rock solid balance sheet that can Jess. 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 that Tony made Last thing, which is you probably won't get a surprise from some 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.

Speaker 4

Thank you. But so just with respect to the valuation of,

Speaker 3

Yes.

Speaker 4

I guess possibly private assets given the slightly tougher outlook, are you seeing more attractive value out there?

Speaker 5

Not yet. Not yet. I mean, I suppose it's It's been good years and I think sellers' expectations are probably still maybe 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 would have made really good money before coming into this year. On the corrugated side equally some good money Is being made and will be made as we kind of move through. So, Zetta's expectations haven't necessarily moved much, but clearly the interest rate environment has.

Speaker 5

Jeff. It's always going to be a balance of those as we've always done, where can we bring these if we do bolt on like we did last year with Pustapak in Spain and in Athens the previous year in the UK. Aragangrafton. Aragangrafton in Argentina and folding carton operation in Monterrey Andy Prude, the year 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.

Speaker 5

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

Speaker 1

Yes. We've got a couple of smaller ones that we're looking at, 1 medium sized one we're looking at. I'm sure the smaller ones will happen and the bigger size one we'll have to wait and see.

Speaker 4

Great. Thank you.

Speaker 1

Thanks, Charlie.

Operator

Your next question comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead.

Speaker 3

Thank you. And to start with commanding you and your team on the terrific performance again. Just starting with or sticking to the one question, I guess, Price over cost, of course, have been quite positive for you. The resilience in box prices seems to be pretty much the case. So how should we think about price over costs heading into Q2 and H2?

Speaker 3

And We have of course seen some of your competitors have started to move on prices, trying to raise containerboard prices. What's your take on that and the read why that is happening?

Speaker 1

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 are 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 will be probably sending cash with all of their orders. And then the non integrated 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.

Speaker 1

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 movement 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.

Speaker 1

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. Question is when. Ken, do you want to take the cost piece? Sure.

Speaker 5

Good morning, Lars. I suppose, Look, 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 both the hedging have in place and the way gas prices have traded naturally. That's probably in the order of about 100,000,000 Conversely, wage and salaries, which we did some excellent work last year in terms of getting all that through just the full year run rate of that will probably be a headwind of about 100.

Speaker 5

Things like other raw materials in their started dies, pallets, stereo, all that kind of stuff, probably again in the 100, 120 space is a headwind. Distribution continues to be one of those headwinds that we kind of eat interest, maybe only 20 to 30. And even things like wood, which clearly you can see from other people reported daily, Wood cost continues to rise, so about $50,000,000 to $60,000,000 for wood. So that's kind of the bigger buckets. You can take your own view on where Pyx is going for OCC.

Speaker 5

And then on the price side, Clearly, despite the fact that the containerboard fell by the amount of fell by since September really, we have seen minimal move on the box prices in the 1st quarter small downward movement really just around the edges and fringes, particularly considering how much the box price has moved up over the last year, 1.5 years. As we know, as we get towards the second half of the year, there naturally kind of container 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 at the start, which is that's really where we begin to show value to our customers around innovation and how we begin to kind of Protect that price on the way down, which we've been traditionally very, very good at in terms of retaining that box price as potential falls. But also clearly, Tony's last point as well is key here, which is where this container will go from here, because that will clearly have an impact on what happens to box prices as we move to 23.

Speaker 3

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 2,009 when there was quite a lot of margins increase in the industry. At that time, there 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 moves now? Because I think what has surprised many of us is the degree of destocking we've seen, which of course by design will end and potentially Reverse.

Speaker 3

So question

Speaker 1

is You're showing your age there, Lars, talking about 2,009.

Speaker 3

Thank you. Thank you, Tony.

Speaker 1

My pleasure. Listen, obviously, we've been surprised at the level Of lack of demand in the last 9 months or so. And it up until, I would say, Recently, it has been stable at a low level. It seems like 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.

Speaker 1

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 Good demand about 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 Jess. Back to, let's say, service led economy, and that has negated durable purchasing for a period of time. But as you know, Jess.

Speaker 1

Machine breakdown 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.

Speaker 1

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 Q1, 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.

Speaker 1

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, we can't predict the weather, But the world will become more normal as the all the supply chain fees, all the people get back to stocking again normally And people's consumption habits go back to normal.

Speaker 3

That makes sense. Thank you.

Speaker 1

I hope so, Lars.

Operator

Next question comes from the line of Justin Jordan from Davy. Please go ahead.

Speaker 6

Thank you. Good morning, everyone. 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?

Speaker 6

Whether there's any difference in different geographies relative to Europe? Thank you.

Speaker 1

Yes, I would say hi, Justin. I would say that Mexico is outperforming.

Speaker 6

I really I know you want

Speaker 1

to read across to the U. S. Guys. I mean you saw this week the 2 large producers seem to be Down double digits in demand terms. That would be our experience also in Texas.

Speaker 1

But again, You shouldn't 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 Q1 of last year was very strong. I mean, it's doing Reasonably well. Flower season wasn't very good in the Q1 or as good as it normally is. So therefore, that would have an effect.

Speaker 1

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.

Speaker 1

It's just it's sort of a bit like the cured eggs. It's sometimes It's good in some places like Mexico, I'd say, is a standout good performer and the rest are sort of up or down depending on country. Thank you. Thanks, Justin.

Operator

The next question comes from the line of Kevin Fogarty from Numis. Please go ahead.

Speaker 7

Hi, good morning

Speaker 2

all. Hi, Kevin.

Speaker 7

Thanks for the call. Just given the So the 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?

Speaker 7

Or has there been any sort of material change In competitive behavior in the last 3 to 6 months?

Speaker 1

I wouldn't say there's been 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% 10% depending on the market, A lot of paper producers just don't have the space to store the paper rolls.

Speaker 1

So therefore, there's been a lot of downtime taken, and I think that's Very positive. We've taken 80,000 tons of downtime. The industry seems to have taken Around €1,000,000 would be our guess of downtime. And obviously, at prices where they are and you're Selling, giving away dollars with our 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.

Speaker 1

So therefore, I think that we just continue to keep watching brief on things, Kevin. Competitor behavior, it's always difficult. It's never been easy. And the only way you can succeed Versus your competitors has been doing good and by being innovative, and I think that's what we are.

Speaker 8

Right. That's helpful. Thanks for the color.

Speaker 1

Thank you, Kevin.

Operator

The next question comes from the line of Cole Hathorn from Jefferies. Please go ahead.

Speaker 8

Morning. Thanks for taking my question. Just like to expand on the benefits you get Being integrated and in a more challenging containerboarder 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 carfiner 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.

Speaker 8

What are you seeing at your France and your Austria wood cost buckets? Just to understand How that business is performing? Thank you.

Speaker 1

Yes. Just on wood, Obviously, as you correctly state, Nordic Wood has moved up. It's not as quite as dramatic in our Spanish, French or Austrian mills. We've had, I would say a slight windfall gain in our French mill because of the very hot summer. It was last summer and there's a lot of burnt wood That needed to be collected and used.

Speaker 1

So therefore, that's been broadly a little bit positive for wood cost there, Offsetting some of the very high wood costs we've had in Nordics. 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.

Speaker 1

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 we bought Verzolo, we're now a little bit long of recycled. So therefore and it's not necessarily geographically always in the right place.

Speaker 1

So we've had to take Verzolo 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're able to do a carousel between your own German Mills and Dutch Mills and UK Mills. 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 suit us 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.

Speaker 8

And then maybe just following up on that. We've already started to see some delays in new Jess. Contain aboard capacity coming on the market with Stora Enzo postponing their investment decision for conversion. Are you seeing anything else out there in the market? Because I do imagine your ramping up now will be quite challenging.

Speaker 1

I think, I mean, Cole, it would not 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 non integrated start up in this marketplace.

Speaker 4

Thank you.

Operator

Next question comes from the line of Andrew Jones from UBS. Please go ahead.

Speaker 9

Just a bit of clarification on one of the earlier points. You said you thought the industry I've taken about 1,000,000 tons of downtime. I was just wondering over what period? And if we look at it today, I mean, what proportion of capacity do you think Is currently sitting idle. And yes, a broader question, I mean, you just talked about Obviously, some new start up capacity potentially being delayed and so forth.

Speaker 9

But to compensate some of that additional capacity 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 European market.

Speaker 1

I think inevitably, there will be some older mills Close, we have a couple 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 Iberian Peninsula, You are way, way under your cash cost of production for the prices you're getting.

Speaker 1

So that doesn't make any sense For any length of period of time. So inevitably, the 1,000,000 tons refers to the 1st 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.

Speaker 1

If they want to lose a lot of money with their tonnage, then Jess. That's their choice to do that. We decide to run our system optimally and that necessitates us taking because of the demand environment Some downtime, but if demand picks up, we will obviously run our mills full. Ken, do you want to add anything?

Speaker 5

Yes. Just to clarify, Andy, the $1,000,000 was quarter and I suppose you guess Our best guess will be somewhere between 10% to 15% kind of either take downtime as we kind of move.

Speaker 1

I think people take weekends, they take holidays, they take recycled mills are easier to take downtime on, Andrew, then 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 suspected some English mills will be taking holidays in a couple of weeks.

Speaker 9

Yes, that's my pleasure. All right, thanks a lot.

Speaker 1

Thanks, Andrew.

Operator

There are no further questions in the queue. So I'll now turn the call back over to your host for some closing remarks.

Speaker 1

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, Merfah Capa continues to go from strength to strength. I think we set out in our Commentary and in our discussions today, the factors which have contributed to today's performance and will continue to drive tomorrow's prospects, Whether it's managing threats or capitalizing on the opportunities that are ahead of us, our objectives in Smurfit Kappa throughout the management team is to continue Deliver for all stakeholders.

Speaker 1

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, all, 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.

Operator

Thank you for joining today's call. You may now disconnect your lines.

Powered by Quartr
Earnings Conference Call
Smurfit Westrock Q1 2023 TU
00:00 / 00:00