Smurfit Westrock - Q1 2024

Transcript

Operator (participant)

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

Ciarán Potts (Head of Investor Relations)

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. 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 at fca.org.uk, and on our website smurfitkappa.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 a registration statement on Form S-4 with the U.S. Securities and Exchange Commission. This registration statement includes a prospectus relating to the offer and sale of the shares in Smurfit WestRockto WestRock stakeholders, stockholders pursuant to the combination that will be registered pursuant to the U.S. Securities Act of 1933. 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 1 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 smurfitkappa.com or at 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 interests in the solicitation. 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 the proposed combination with WestRock, and as this is a trading update, we will limit today's discussion to our results and will take detailed modelling questions offline. I will now hand you over to Tony Smurfit, CEO of Smurfit Kappa Group.

Tony Smurfit (CEO)

Thank you, Ciarán. Thank you all for joining us today. As you may have seen from this morning's release, we reported EBITDA of EUR 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 multi-year capital plans. Some EUR 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 have also developed and grown our higher-margin specialty businesses. Smurfit Kappa's longstanding 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, 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. Yet 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 phase of our journey. With 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 (participant)

Thank you. Thank you, sir. Ladies and gentlemen, if you would like to ask a question or make a contribution on today's call, please signal by pressing Star 1 on your telephone keypad. To withdraw your question from the queue, please press Star 2. So again, that is Star 1 for your question today. And our first question today comes from Cole Hathorn of Jefferies. Please go ahead.

Charlie Muir-Sands (Equity Research Analyst)

Morning, Ken. 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, so effectively the trough point in the pricing cycle, the EUR 487,000,000 is a really strong number. And I'm just wondering, you know, what supported the EBITDA in Q1? Is there something on costs we should be thinking about? That's the first question.

Tony Smurfit (CEO)

Cole, I think, you know, what we've said all along is that we have been strongly recovering price through the upcycle, and we've been holding onto the price during the downcycle for the most part. But you know, the real reason we continue to perform well is because we have developed a plan and a business that works very well together. So you know, 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 first quarter numbers demonstrate strongly that our improved efficiency and, sorry, there's a massive thunderstorm going on outside my window here. There, 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, you know, we obviously expect to get paid for what we do, and that's what we get. I think, you know, with regard to the bottom point, you know, Q1, yes, the box demand, as you know, the way the system works is box demand falls as paper pricing goes down, box 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.

And I would say that, you know, 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 two months. And, you know, 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, and sorry, in Q2, Q3, and that's gonna 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 our 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.

Ken Bowles (CFO)

No, I think you got it all there. I think in reality, Cole, 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 it up there first, which is the biggest impact here is everything we've done over the last number of years. It's not a single quarter. It's multi-year capital programs and the benefits of those.

Charlie Muir-Sands (Equity Research Analyst)

And then maybe as a big picture, should we be thinking that, you know, 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 demand a bit better, which I'd argue is a positive? And then, you know, 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. I completely understand if not.

Tony Smurfit (CEO)

Yeah, no, we have announced to our customers increases for May and June, both in recycled and Kraftliner. So, I think that with regard to waste paper, yes, waste paper's 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. So, you know, I think that it does look pretty good for the second half.

Charlie Muir-Sands (Equity Research Analyst)

Thank you. I'll give that again in the queue.

Tony Smurfit (CEO)

Thank you.

Operator (participant)

Thank you. Our next question now comes from Charlie Muir-Sands from Exane BNP Paribas. Please go ahead.

Charlie Muir-Sands (Equity Research Analyst)

Yes, good morning, or maybe good night, Tony. Thanks for taking the questions. Just two 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? And then secondly, you know, 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.

Tony Smurfit (CEO)

With regard to the grades that we're in, I would say that the, I mean, our Kraftliner market is strong. Kraft 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. So you know, I don't want to call anything too early in Germany. But overall, the periphery countries are doing okay or well in certain cases, like countries like Spain.

The major industrial companies a little bit better than we've seen in the last six months or so. So, with regard to categories, we still see, obviously, areas like car parts and other areas not pulling, but the consumer goods are generally okay. Ken, do you wanna take the PPWR?

Ken Bowles (CFO)

Sure. Sure. 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 it's, you know, I think in the final drafts 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, you know, taken into account. I think it's set us up very well. 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.

You know, I think we sort of have to go back to the basic principle, which is, you know, corrugated packaging is quite simply the most recycled packaging in the world anyway. You know, we intended 90%-plus recycling rates. So we were starting off in a position of strength, and it was about making sure that that position of strength was reflected in the legislation. And I think it's fair to say we got there. But probably, you know, I think it sets up the industry from a sustainability, a circular economy perspective, and a growth perspective quite well for the years ahead. Great. Right. Thanks.

Tony Smurfit (CEO)

Thanks, Charlie.

Operator (participant)

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

Charlie Muir-Sands (Equity Research Analyst)

Thank you. Good morning, gentlemen. I've got two 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 are reported in Q1? And secondly, just on the back of that encouraging trading, you know, you talked about sustainable price increases being communicated from Smurfit Kappa customers from May, June. I'm just wondering if you can quantify the quantum of that. You know, SCA has announced a EUR 60/tonne virgin containerboard price increase for June. Is the Smurfit targeting similar quantum of increases in May, June with customers? Thank you.

Tony Smurfit (CEO)

Yes. 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 regard to the encouraging remark, I mean, I don't want to say yet that it's better than the first quarter because Easter fell in March, and that has a little bit of a distorting effect when you look at April's volumes. But certainly, as I said earlier, you know, when I go around the facilities that I've been around in the last two weeks or so, there's definitely a better feel about things than before. 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 six months or so.

So, it is encouraging, but I don't want to call out it being, you know, it's a bit early to say it's a big improvement, versus Q1.

Charlie Muir-Sands (Equity Research Analyst)

Thank you, Tony.

Tony Smurfit (CEO)

Thanks, Justin.

Operator (participant)

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

Charlie Muir-Sands (Equity Research Analyst)

Thank you. I just wanna 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, you know, the bigger cost elements in the balance of the year, including energy in particular? And also if you if there's any way you can parse out the benefits from your investment program that contribute to it in Q1 and how we should think about that as the full year. And Tony, final question on the Bag-in-Box business is something that you've invested in quite a bit. Can you share with us how that's performing and if that also went through a destocking phase and now starting to see volume coming back? Thank you.

Tony Smurfit (CEO)

I'll leave the cost questions to Ken, but on the bag-in-the-box, as you know, we have probably a number two 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. Actually, the bag-in-the-box business in Q1 was as weak as I've seen it for a while, but it is encouraging that it's getting, you know, much better as we've gone through April and our order books for May and June, albeit it's slightly weather-dependent and the weather hasn't been great in Europe. But I'm much more encouraged from what I've seen in the last six weeks or so in the bag-in-the-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. But, you know, I think we'll, as I say, it's much more encouraging from an order perspective as we look forward, than the first quarter. Ken, do you wanna take the cost questions?

Ken Bowles (CFO)

Sure. Welcome back, Lars. It's, I suppose, look, it's difficult to strip out the direct impact of the investment program simply because I suppose it's a multi-year 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 and 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. So it's not necessarily that you're seeing it in either increased demand or indeed the bottom line directly. It's 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 ROIC at or above our target, which equally we do. So I think it's difficult to strip it out, but it's clearly you know, I think it's fair to say it's clearly there when you look at, you know, 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. On the cost side, it's a you know, you've been around long enough, Lars. 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, if energy was about EUR 120 for the first quarter, it's probably about EUR 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, you know, in the last six weeks or so, we've seen a spike in that. Probably at this stage, it's a headwind of, kind of, call it EUR 100-150. Labour, you know, natural inflation leaves it EUR 100. Distribution, wood, other raw mats, probably another EUR 80 or 90 in that. But you know, our cost takeout program, you know, on average a year between EUR 70,000,000-80,000,000 will take care of some of that.

Any clear demand, you know, if that stays at 2.5%-3%. But equally then, you're left with, you know, paper price increases, the spread, the compression. And to Cole's question earlier on, that, that kind of played out in Q4 2020, Q4 2024, but more importantly, I think as we go into 2025, how that begins to play out. But I suppose when, when we look at it in the pluses and minuses, really, that the, the headwinds and the tailwinds broadly wash out, and you're left with the incremental piece around demand and where box pricing, you know, kind of settles and recovers as we get through the back half of this year.

Charlie Muir-Sands (Equity Research Analyst)

Very good. Thank you.

Operator (participant)

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

Charlie Muir-Sands (Equity Research Analyst)

A couple of questions from me. Good morning. First is just on, you know, clearly a very strong set of results in Q1, EUR 487,000,000 EBITDA. And then based on the comments you're making, clearly, it seems 2H will be much stronger. The full-year consensus number is EUR 2,000,000,000. Wouldn't it be fair to assume that there is upside to that? That's one. And the second question is just on M&A in the sector. You know, we are seeing another consolidation, and then one of the bidders is no longer there, but maybe they are also thinking of something. With this more consolidated industry, how do you think it impacts Smurfit going forward?

Ken Bowles (CFO)

I think on the first one, look, I think consensus is you can talk to, you know, Ciarán and Frank offline about any aspects of your model you want to, but I don't think we're gonna do a consensus on this. You know, it's. It is where it is. On the second one, I think, you know, and Tony, I have a view here too. In reality, you know, it's an industry that people have been pushing for consolidation to be a good thing for a number of years. I think, look, all we can do, you know, we run our own race, and we're not looking at what anybody else is doing.

Clearly, our combination with WestRock is very exciting for us given the cultural alignment, the commercial aspects, and the innovation aspects of both businesses. So as 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. But, Tony, if you have anything to go forward around consolidation.

Tony Smurfit (CEO)

No, I think, you know, consolidation has always been happening. You know, there's been always deals happening in the sector. Equally, there's been startups and new investments by people. You know, Europe, it depending on the market, is either very fragmented or not fragmented at all. Each market is very different in Europe. The Italian market is different to the U.K. market, which is different to the Spanish market, which is different to the Swedish market. So, overall, you know, generally speaking, M&A in the sector is always happening and will always happen. Sometimes it's small and sometimes it's big. It just so happens that, you know, our combination with WestRock has probably precipitated the other large M&A transaction out in the marketplace. And we wish them well, and we will follow with interest.

Charlie Muir-Sands (Equity Research Analyst)

Great. Thank you so much.

Operator (participant)

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

Charlie Muir-Sands (Equity Research Analyst)

Hi, Jens. 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, the technical guidance and things like that, has any of your thinking changed in any way with regard to any of the parameters you set out at the 4Q stage?

Ken Bowles (CFO)

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 really do forward guidance. We've never done forward guidance in terms of box pricing. I think it's fair to say, you know, what we saw at the year-end, we kind of guided, you know, 2%-2.5% of the box price declined in the first quarter. 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.

Charlie Muir-Sands (Equity Research Analyst)

Okay. Fair enough. Thank you.

Operator (participant)

Thank you. And as a brief reminder, that is star one for your questions today. And we now take a follow-up from Cole Hathorn. Please go ahead.

Charlie Muir-Sands (Equity Research Analyst)

Morning. Thanks for taking the follow-up. I've actually got two 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. And I'm just wondering, you know, how those negotiations are progressing. Are you seeing anything for the Olympics, you know, anything for the football into the summer? You know, just how are you 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, you know, 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. You've got good overlap in Latin America as well as, you know, general other synergies.

I'm just wondering how comfortable you are with that EUR 400,000,000 number, you know, if there's potential room to the upside. Thank you.

Tony Smurfit (CEO)

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

Ken Bowles (CFO)

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

Charlie Muir-Sands (Equity Research Analyst)

With the try.

Tony Smurfit (CEO)

With regard to promotional spending, yeah. 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, you know, there has been some backlash against that as you've seen in some of the supermarket chains. And so there is likely to be more promotional spending in the second half of the year, for the big brands. You know, it's a bit early for us to start calling that out as a big tailwind, but, you know, we'll wait and see if that actually materializes. You know, 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 second quarter and into the third quarter with regard to things like the Olympics and the football. We are actually making all the beds for all the athletes, so not all, but all the corrugated beds for both the Special Olympics and the Olympics. So that's an innovation that we with a partner have done. So yes, that's helping our a small factory of ours in France. But yeah, so it's positive for us, but how much to be seen.

Charlie Muir-Sands (Equity Research Analyst)

Thank you very much.

Ken Bowles (CFO)

Thanks, Cole.

Tony Smurfit (CEO)

Thanks, Cole.

Operator (participant)

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

Tony Smurfit (CEO)

Yeah. 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 first quarter. The steps we've taken in Smurfit Kappa and we'll continue to take have, as you'll have seen, built a very good business that consistently delivers over many years. I would say that the quality and consistency of that performance gives us an increasingly excitement for the future, for all of our stakeholders. With that, I would say thank you again for being with us, and we look forward to updating you on progress with the combination with WestRock as we go forward into the next couple of months. Thanks for your support. Thank you all.

Operator (participant)

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