Smurfit Westrock - Q3 2020
November 4, 2020
Transcript
Operator (participant)
Hello, and welcome to the Smurfit Kappa trading update call. Throughout the call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present Tony Smurfit. Please go ahead with your meeting.
Anthony Smurfit (CEO)
Thank you, operator, and good morning, and thank you all for taking the time to join us today. I am joined on the call today 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. We're very pleased to deliver a strong performance for the nine-month period to the thirtieth of September, with an EBITDA of EUR 1,125 million and an EBITDA margin of 17.8%. Our third quarter EBITDA of EUR 390 million is ahead of our expectations and shows the continued strength and resilience of the Group in these challenging times.
While you'll often hear me say that success is never a straight line, the objective we set ourselves and the broader management team is to deliver secure and superior returns. I believe our results today provide ample evidence that our plans and our strategies continue to work for all stakeholders. What is clearer and clearer is that Smurfit Kappa is today putting itself in the strongest position to be able to serve our over 65,000 customers with our industry-leading Smart Applications and our innovation capabilities, which are brought to life for our customers through our global network of 27 Experience Centres. Today, we're able to meet the continually changing complexities of our customers' supply chains, their sustainability challenges, and their need to address the accelerating trends of e-commerce and the consumer-led drive towards sustainable packaging solutions.
Our performance also demonstrates the benefits of the company's returns-focused capital allocation decisions, our geographically diverse operations, together with our relentless focus on operating cost reduction. As you'd all appreciate, this has been a challenging year for many, both in a broad context and within Smurfit Kappa. However, as an organization, we have been able to adapt and learn from these challenges. We have learned new ways of working, remotely where possible, and within our operations, where necessary. As a consequence, we are further increasing the operating efficiency across our system, and we're currently developing a program which is designed to ensure that we hold on to those benefits in the years ahead. These significant benefits will be shared in our year-end release.
We remain extremely proud of our 46,000 employees, who continue to embrace the values of loyalty, integrity, and respect, and whose dedication has been remarkable in ensuring that Smurfit Kappa has continued to deliver for our customers and their own vital supply chains. To acknowledge those efforts, Smurfit Kappa will be awarding all permanent employees with a unique recognition or reward in the fourth quarter. In addition, while not material, we have taken the decision to repay any specific government employment support schemes related to the COVID-19 pandemic. Senior management will be conducting over 250 virtual plant site visits during the restricted period that we're all in. This builds on the success of our employee engagement survey, where we had an over 90% approval for the company's approach to the pandemic. The value of communication and engagement in these extraordinary times cannot be overstated.
We've often talked about the transformation of our business and the ever-increasing quality of our people and our platform. Our continued transformation and the operating performance in the first nine months represents another step towards our vision of dynamically delivering secure and superior returns for all stakeholders. Equally, our significant ESG achievements are also moving our vision forward to continue to be an ever more globally admired company. With regard to current trading, October volumes in both Europe and the Americas have been strong. And while some uncertainty still exists around the evolution of the effects of COVID-19 in the weeks ahead, absent a dramatic change to working practices, we now expect to deliver EBITDA in the range of EUR 1,460 million-EUR 1,480 million.
Driven by the strong structural drivers of the consumer-led demand for sustainable packaging and the continued growth of e-commerce, we believe the medium-term outlook for Smurfit Kappa is increasingly attractive. We also believe that we are uniquely positioned to both capture and to capitalize on those opportunities. As a concluding comment, perhaps the best way to express that confidence is the board's decision to pay a second interim dividend, essentially aligning our dividend payment with prior years. Thank you, operator. We're now happy to take any questions from anybody on the call. Operator?
Operator (participant)
If you'd like to ask a question, please press zero one on your telephone keypads. If you wish to withdraw your question, please press zero two to cancel. And our first question comes from the line of Alexander Berglund of Bank of America. Please go ahead.
Alexander Berglund (L/S Equity Analyst)
Thank you very much. Good morning, everyone, and well done in the quarter. Just a question of this kind of going into Q4. I mean, you know, you're starting the quarter with strong volumes. We've seen a lot of e-retailers seeming quite positive into the holiday season. Just now I look at your range and your guidance and appreciate that, in uncertain times, it still points to Q4 being a little bit weaker than Q3. I just wonder if you could kind of give some color on kind of the moving parts here on a quarter-on-quarter basis and also kind of the key points of uncertainty.
That's my first question. I have a follow up, after that, but I'll let you answer that one first.
Anthony Smurfit (CEO)
Okay. Well, I mean, basically, good morning, Alex, and thank you for that. I mean, basically, Q4, December is always a funny month. And, you know, we were very happy with our October. You know, so far, I mean, we're only third day into November, but, so far, sorry, second day, finished second day. I think, you know, November looks reasonably okay at the moment, but, you know, there is a lot of disruption around the place. You know, we've had a number of COVID cases in our factories that are causing us, you know, disruption issues, over the last, three to four weeks as this pandemic has spread very, virulently across Europe.
And, that creates, staffing issues, it creates, risk issues, it creates, potential shutdown issues. We had one particular facility closed down, for, for 10 days. So, you know, we are, as you know, a naturally prudent company, and, you know, we don't overpromise. So therefore, we believe that's a number we're, we're comfortable hitting. And, you know, December is, is always an uncertain month. And clearly, when you look at, the, the weighting of our earnings, it's more towards corrugated, which operates a much shorter month during the month of December than our paper mills, so that also affects things.
You know, we are, of course, prudent as a company in general, but we believe that we can hit these numbers, and we'll wait and see how they turn out.
Ken Bowles (CFO)
I think, Alex, as well, from a pure modeling perspective, keep in mind that there's 2 less operating days in the fourth quarter over the third quarter. That'll have an impact also.
Alexander Berglund (L/S Equity Analyst)
Is there anything you could quantify as the effect of those two days or?
Ken Bowles (CFO)
It's about 3% in the round.
Alexander Berglund (L/S Equity Analyst)
Okay. Okay, and my, my second question is, is on OCC, which has been quite volatile. And I, I remember, like, in the- with the first lockdown that we had, there was some collection issues and got a spike in prices. I was wondering, like, now when we're going towards kind of a second lockdown in, in some European countries, do you think that kind of the industry is better prepared this time around? Or, or, you know, is there... That there's risk now we get another spike upwards on OCC? Thanks.
Anthony Smurfit (CEO)
I think there's always risk on OCC either which way. I mean, we would have actually been expecting it to be going down in November and December, as the Chinese were stepping out of the markets. But in actuality, because of the strong demand across the piece, so to speak, you know, there is good demand for OCC across pretty well every market, and that's kept the prices stable or even edging upwards in certain markets in the last six weeks or so. I would say that I don't at this moment in time, we don't see the lockdown to the same dramatic effect as the last lockdown. So there is still, there are more businesses operating.
There is a sense of more normality this time around than last time around. You know, we don't necessarily see the supply shortages right now, but as I say, you know, December is a very funny month, and there could easily be a spike in OCC. We just, we're not calling it right now. If the spike hits, it will more likely affect the second half of December rather than the first half. But, you know, it's really an unknown situation for us, Alex. You know, you see certain markets like Brazil, it's really zoomed up. But in European markets, thus far, it's relatively stable at a higher level than we would have anticipated.
Alexander Berglund (L/S Equity Analyst)
Thank you very much.
Anthony Smurfit (CEO)
Thanks, Alex.
Operator (participant)
Our next question comes from the line of Lars Kjellberg of Credit Suisse. Please go ahead.
Lars Kjellberg (Analyst)
Thank you. Again, a very strong performance in the quarter. You mentioned, Tony, that was above your expectations. Could you share with us what surprised you and kind of if we have some sort of bridge, how we went from 355 to 390? And also your commentary now on strong demand trends. You announced, of course, a EUR 50 price hike for testliner, and we got 13 in the published price indices. Is it good enough momentum to get any more of that 50 announced in the current month? Those are my two first questions.
Anthony Smurfit (CEO)
Yeah, on the second question, I'll maybe let you take the first question on what surprises.
Lars Kjellberg (Analyst)
Sure, yeah.
Anthony Smurfit (CEO)
But on the second question, Lars, you know, the demand trends are very strong, pretty well across the world. Paper is in extremely short supply. I do believe, it is our strong belief that the second 20 of the 50 will go through in November. Certainly, all of our suppliers are indicating that to us. We believe that we would get a good portion of the kraftliner increase through in November, so it'll be effective really all of December. So the demand trends remain strong, and I would say a full implementation of the 50 EUR will happen in November. So I think that that's positive, obviously, for box business as we go into the first half of next year.
Ken Bowles (CFO)
Morning, Lars. I think firstly, you know, we talked a bit at the half year around, you know, a bit of softness in the box price coming into the third quarter and the fourth quarter. We didn't necessarily see that any or all of that in the third quarter, so a bit of positiveness there. I think the other piece, quite simply, is really on the cost line, and the way the business is handled and continues to manage that. You know, it's that kind of constant relentlessness around making sure that we focus on not just one line in the P&L, but all lines in the P&L. And I think we did that kind of...
We did that fairly healthily across the year, and indeed continued in the third quarter and continue on like that. I think one, probably the most pleasing aspect of this was maybe the performance of the Americas division. They really had a quite strong third quarter, and indeed, October, for a number of countries, has continued in the same vein. So I think it was a case of, you know, we sort of understand our how we operate internally. I think the guys have continued to deliver at an operational level, and particularly keeping that, if you like, that relentless focus we've had on serving the customer, bringing the innovation, you know, the continued kind of focus on sustainable packaging, but quite simply, doing all the things we continue to talk about.
But most pleasingly, I think for us, given the geographies, I think the Americas had quite a strong third quarter and certainly a strong October.
Lars Kjellberg (Analyst)
Got it. And just to be clear then, in your guidance, I guess, kraftliner, you're in a short position in Europe, so you've kind of included that as a moderate headwind, I suppose, then in your guidance for Q4, before we start to move that into box prices, if you can confirm that. And the second one, I appreciate it's very early days, but can you give us any sense of the benefits you're talking about in terms of the change in the working practices, et cetera?
Anthony Smurfit (CEO)
On the second point, no, we would rather wait until we get to the year end, because we're still working through certain issues. But on the first point,
Ken Bowles (CFO)
No, I think, you know, it probably builds into some of the conservatism too, Lars.
Anthony Smurfit (CEO)
Yeah.
Ken Bowles (CFO)
I mean, the reality is any impact on box prices is a 2021 event, so we're not there yet. But we'll sort of manage that in the round, I think, as we see it come through. So not necessarily impacting on the range.
Anthony Smurfit (CEO)
I mean, since we bought Reparenco, Lars, we're not as short as we were. We are short in certain segment, certain areas, mainly kraftliner. Sorry, we're long on kraftliner, but we're not as short as we were in recycled paper. Obviously, the more we grow the system, we're not adding a whole lot of capacity in our paper-making operation. So the more we grow in corrugated, the shorter we'll become again, and that will obviously give us, you know, a strategic advantage at some point to plug that hole. But, you know, it's not now. We're not over short, so it's a minor headwind, but nothing significant.
Lars Kjellberg (Analyst)
Very well. Thank you, and well done again. Thanks.
Anthony Smurfit (CEO)
Thanks, Lars.
Operator (participant)
Our next question comes from the line of Barry Dixon at Davy. Please go ahead.
Barry Dixon (Analyst)
Morning, gentlemen, and well done on the quarter and the year to date. A couple questions from me, and it's really a follow on from Lars' question there, Ken or Tony. The margin, if I'm not mistaken, was an all-time high at 19% EBITDA margin for the quarter. Can you give us a sense as to the sustainability of that scale of the margin? Are we now at kind of a new sort of margin environment for the group, driven by a whole host of factors, like the medium-term plan and the cost savings program, and that relentless focus on price cost management? I suppose is the first question. And if so, what...
Can you give us some sense as to what that sort of through the cycle margin might look like? The second question really is in terms of pricing, and delighted to hear that pricing is going through. At what stage do you think this will sort of feed through into box prices, if at all? And I suppose a related question on the pricing, are you seeing any impact. The market seems to be very tight, and so, and which is maybe surprising, given that there's a couple of new mills coming on stream. Are you seeing any impact in terms of those new mills coming on stream? So those two questions, please. Thank you.
Anthony Smurfit (CEO)
With regard to margin, I mean, one of the things that, you know, we're at pains to point out, Barry, and I know it's very hard to model, is that, you know, when you look at our volumes, sometimes we're reducing our volumes to our customers because we're changing the basis weight of the company's or the packaging through innovation, and we're getting higher margins, and we're giving our customers lower prices. And that's a continuing trend across the company. So the whole development of the company over the last number of years, and the focus on innovation is what is really allowing both our customers to win and ourselves to win.
Because, you know, we are redesigning packaging, we're making smarter packaging, we're making, you know, more effective cost savings through the system for our customers, as well as sustainability savings. That's allowing us to, ensure that we're, you know, giving lower prices, and ensuring that our margins are, are at an acceptable level. That trend will continue, going forward because, you know, our, our applications are far and away the best in the industry.
I mean, others will talk about their applications being good, but when you look at the way that we have collated all of the knowledge that we have through modern technology, and we're able to transfer that, and now in these current times, being able to transmit that to customers electronically and work with them electronically because, you know, of the restrictions that are out there, you know, it is really a huge competitive advantage for Smurfit Kappa. And so where the margins are through the cycle, it's really hard to say, 'cause it obviously moves with waste paper, it moves with paper, it moves with the timing of implementation of price increases or price decreases. But the only thing I can say for sure is that there is a structural movement upwards over time because of innovation and knowledge that we have.
Otherwise, we shouldn't be investing in it. We should be just a brown box commodity producer, which we're not. We are a merchandising medium for our customers, and that's where we intend to stay, and it's what our customers like. And then you add on top of that, the whole area of sustainability trends, and the replacement of plastic. You know, it does give us, you know, very big opportunities to continue to give our customers something different, and at the same time, ensure that our margins... And ensure that we get paid for it adequately for a good period of time. Ken, on the other point on pricing?
Ken Bowles (CFO)
On the success on our price increase, Barry, I suppose it's important to recognize that the EUR 50 that's going through now, you know, kind of restores the drop, if you like, that happened across the summer. So, you know, in the near term, we'd expect it to be a support to the box price rather than, say, any incremental box price increase as we go towards 2021. We'd have to see how things evolve to kind of get to that place. And then on the tightness in the markets, you know, it's interesting, we started off the year with inventories, you know, north of 800,000 tons.
I think as we sit here today with probably 4% extra production year-on-year, we're sitting in the inventories well, kind of towards that kind of tight range of, of, you know, south of 700, but north of kind of 650, 660. So inventory is definitely tight. Demand for paper high, as we know from the pull through to our corrugated division. So if you like, that's the sort of backdrop to, to, to what we're seeing on, on the, on the price increase and the success of it.
Barry Dixon (Analyst)
Okay. And just to follow on to that, I mean, it certainly sounds like we could be looking at moving into a pricing upcycle, albeit maybe a mini upcycle, but certainly a pricing upcycle, but starting from a very high margin base. Is that a fair characterization or not?
Anthony Smurfit (CEO)
I think we don't like to forecast the future in that way, Barry. We just live in the present to make sure that we deliver for our customers. And then, you know, obviously, we have been surprised at how quickly the market has tightened across the world. I mean, you know, we are shipping paper from Europe to our Americas business because of the shortages that are out there at the moment. You know, we were taking downtime in June in our Colombian paper mills because we didn't have enough orders. And now we don't have enough paper to... We just don't have enough paper in the system. So, you know, you can take your own view on that.
Our view is just to make sure that we supply our customers with the boxes, you know, and have the paper available, which we've been just about managing to be able to do for the moment.
Barry Dixon (Analyst)
Okay, great. Thanks very much, guys. Well done again.
Anthony Smurfit (CEO)
Thank you.
Ken Bowles (CFO)
Thanks, Barry.
Operator (participant)
Our next question comes from the line of Justin Jordan of Exane. Please go ahead.
Justin Jordan (Analyst)
Thank you, and good morning, everyone, and well done on the stellar Q3. I just want to explore the improving volume environment a little bit, please. Can you just confirm that it seems like, you know, volumes have sequentially accelerated each month as you've gone through Q3, and you talk about a strong October. Can you just quantify what your organic volume growth has been in October, please, in Europe and Americas, firstly?
Ken Bowles (CFO)
Morning, Justin, Ken here. In terms of volumes, we saw kind of progression through the quarter. So if you remember at the half year, we probably talked about July being sort of flat to maybe down 1 in the round. August is a +1, and September, +2. So when you kind of put that all together, you probably end up with, call it a +1 for the quarter. As we move into October, for Europe, we're seeing kind of volume growth of call it a 3% as we exit October. In the Americas, that October number looks close to a 5%-6%. Again, coming off, you know, a slightly lower number as we go through the quarter for the Americas.
So certainly seeing, without any predicting what November and December will hold, given, you know, what Tony said earlier, and indeed in the script, certainly we did see acceleration through the quarter, and we've seen a strong October.
Justin Jordan (Analyst)
Fantastic. Thank you for that color. And just, just following up on that, I'm trying to understand, clearly anyone who's covering the sector is familiar with very strong e-commerce growth, and you're one of the leaders in e-commerce in, in Europe, and clearly also sustainability is a tailwind. But I'm trying to understand within, let's say, that, that 3% organic growth in November in Europe. You're probably still seeing industrial being at best flat, or I'm sure probably negative year-over-year. So where's the, the strong positive surprises? You know, is that in, in food packaging? Is that we're, I don't know, eating more from supermarkets, eating less in restaurants or something? Or what, you know, is, is this a Smurfit Kappa contract win thing, as opposed to an industry-wide thing? I'm just trying to understand what's, what's going exceptionally well for you.
Anthony Smurfit (CEO)
I think, Hi, Justin, it's Tony here. I would say that there are some very big trends moving in our favor. I don't yet subscribe to the fact that sustainability is a big trend in our numbers yet. I mean, there's a myriad of products out, projects out there that we're working on that could turn into very large numbers for us at some future date, not even next year, because by the time our customers re-engineer their packaging lines, it just takes a long time. But, you know, there is a lot of potential still on the sustainability area to come. I think what's happening is that, you know, you can just look at the savings rate in Europe for everybody.
And people are not traveling, and they're not having away holidays, and they're spending a lot of money on their homes. And they're spending a lot of money at home. And that has a lot of packaging associated with it. And that is obviously one of the factors that's driving it. I think there will obviously be some shift back if magically, you know, which we all hope for, if magically the world would come to normal again with regard to COVID. But equally, then you'd see a lot of pent-up demand, I believe, potentially for some of the more industrial products, such as cars, which have recovered over the last month or two. Car sales have recovered over the last month or two.
So you're gonna see some pent-up demand in that area that will address some of the shortfall that we've had. So I think, I think, you know, overall, you know, unless you have a very deeply negative view of the world, because of COVID, I think, you know, we're in reasonably good shape, because of some of the structural drivers, A, you've mentioned e-commerce, which is gonna continue, B, the future growth of sustainability, and then, C, I think what's happening right now with regard to being at home, and that there's a lot of, there's a lot of money available to... I mean, we see big demand for TV sets, boilers, kitchens, whatever you wanna name it, that all have boxes around them.
Justin Jordan (Analyst)
Okay. Thank you for your time.
Operator (participant)
Our next question-
Anthony Smurfit (CEO)
Thanks, Justin.
Operator (participant)
Our next question comes from the line of Dave O'Brien of Goodbody. Please go ahead.
David O' Brien (Head of Equity Research)
Morning, gents. Thanks for taking my question. Firstly, just on... Look, I guess, if we step back and look at 2020, you've served customers extremely strongly, given, notwithstanding the disruption we've seen across markets due to COVID, and by your own description, you know, you're talking about best-in-class applications within your product offering as well. Now, I know you've told us before that new customer wins take time to come to fruition, but I guess what I'm asking is, you know, could 2021 be a, you see market share gains accelerate, just given the strength of your service levels into customers in 2020?
Like, how is your business development pipeline sort of panning out at the moment, and are you gonna see any, you know, any volume benefits to such high level of service in 2020 going into 2021? And then secondly, just on capital allocation, obviously extremely encouraging to get a second interim dividend, which is the only company in the sector doing so. I guess, how do you step back now and look at your balance sheet, is clearly very strong. How do you weigh up the different options you have for capital allocation? I know you've got the efficiency plan you talked about next year, but how are you looking in terms of M&A opportunities? Is a Klabin deal back on the table in South America? And just how are you viewing the whole capital allocation piece?
Anthony Smurfit (CEO)
I'll let Ken take the second question, Dave. You know, how's the business pipeline? I think, you know, as we came into this year, we had a very, very strong business pipeline and really no particular customer losses to be feared. You know, that a lot of that was put on hold during the first half, you know, for the reasons we all know. We've developed that out as we go into the second half. You know, I think the pipeline is strong. You know, we don't expect to have any major losses. We are in negotiation with a number of, you know, larger customers, but as you know, there is no customer that has more than 2% of our overall business.
So, you know, I mean, in general, you know, we've secured the vast majority of our business going forward, and we have a number of large potential developments with many large customers to either convert from plastic to corrugated, or indeed to take some share. But you know, those in COVID times take a little bit longer to actually action, which is a positive if you're under threat in a particular business, but it's a negative if you're winning business, and that's what we certainly saw during the first half of this year, that it took longer for us to implement.
But, you know, one of the great strengths of Smurfit Kappa is that we have people in every territory, so where we need to actually do trials and work with the customers, we can have local people on the ground, boots on the ground, so to speak, to work with the local facilities of our pan-European or global customers... to be able to implement new volume, whereas, you know, if you're a single operator or a smaller operator, that's very difficult in these times; it's incredibly difficult to do. So I think, again, another slight strategic advantage to us.
Ken Bowles (CFO)
Morning, Dave. On capital allocation, I suppose if we sit back and think about it, you know, on average, this group delivers, call it circa EUR 1 billion of allocable cash flow on an annual basis. So, you know, free cash flow and cash flow beneath that has always been a kind of strong strength of the group. So then when we think about that, we've always, you know, internal investment in our business has always been a priority, and we've done that fairly consistently and used that to kind of either drive efficiency or incremental returns, and you can see that in the return on capital employed over time. You know, once you get beyond that, then you're kind of into how do you allocate your free cash flow? And really, that comes down to three things for us.
That's, that's about M&A. It's, it's about attending to the balance sheet to make sure that stays in good shape, and we've done a lot of work in that space, as you know. And, and then the dividend, and the dividend is very much a, a key part of our investment thesis. You know, it's very much input rather than output of our capital allocation, discussion and decision. And I think, I think that's what you see in relation to, to the second interim today. You know, when we sit back and look at the strength of the business, the prospects going forward, where we sit in terms of cash flow for 2020, and how we feel about the balance sheet, there really is no reason not to pay that second interim dividend. I think that's, you know...
So we always do things from a position where we believe we're strong, and that's what we've done again today. So for us, it was important to recognize that all our stakeholders are stakeholders, and while we-- internal investment for 2020 has been quite strong in the business, also important to recognize that our shareholders have a part to play in that too. So we're delighted to be able to kind of, you know, pay the, if you like, the deferred final, and ever more pleased to pay the second interim too.
David O' Brien (Head of Equity Research)
Great stuff. Thanks very much, guys.
Anthony Smurfit (CEO)
Thanks, David.
Operator (participant)
Our next question comes from the line of Kevin Fogarty of Numis Securities. Please go ahead.
Kevin Fogarty (Director and Equity Research)
Morning, gents. Well done on the quarter. Just two quick questions, if I could. Just in terms of the input cost environment, I guess here, just to confirm, is OCC the sort of biggest sort of swing factor for Q4, you know, which might sort of make you a little bit more sort of cautious for Q4, in particular, presumably, the rest of the environment has remained pretty benign? And just secondly, I just wondered if there's any commentary on cash generation during the second half of the year. Obviously, given the sort of guidance you've put out today, is there any reason to sort of assume that doesn't kind of flow through to cash beyond the normal kind of seasonality of cash generation in H2?
Anthony Smurfit (CEO)
I'll let Ken take... Hi, Kevin. I'll let Ken take part two of that question. On the input cost, yeah, obviously, OCC is always the largest swing factor in our input costs. I mean, you know, we do have other significant input costs, such as energy, which has strengthened over the last three months or so. But, you know, OCC is by far the swing factor for us, and as I say, it's higher than we would have anticipated. As we entered October, we were expecting, you know, a weakness in OCC as we moved into November and December, but that has not happened for all sorts of different reasons, but I would say the main one is decent demand.
So, I think that's the thing that—you know, as I say, there are other costs, such as energy and things like that, but they're all pretty well under control. And, you know, one of the things that we have done remarkably well, and not giving any credit to Ken or myself or anyone in this room, but it's really down in the operations, is really to drive out the cost of the business, to make sure that we don't have any excess cost during these times, and to make sure that, you know, we work more efficiently. And that's going back to what we said in the statement.
We've figured out a lot of different ways of doing things, you know, that, you know, will stand to the company going forward, you know, and that's obviously something that we intend to brief you about in February. Ken?
Ken Bowles (CFO)
Hey, morning, Kevin. You're right. I mean, there's no reason to believe why the guidance range won't flow through directly to the bottom line, with the only exception that I think at the half year, we probably guided CapEx in the kind of EUR 550 million-EUR 560 million space. I think we probably see that probably more like EUR 570 million-EUR 580 million now, given we've seen some opportunities to accelerate some CapEx as we get towards the back end of the year. And can kind of easily accommodate that within where we want to be on the rest of the capital allocation piece.
Kevin Fogarty (Director and Equity Research)
Great. Okay, thanks very much. That's really helpful.
Ken Bowles (CFO)
Thanks.
Anthony Smurfit (CEO)
Thank you.
Kevin Fogarty (Director and Equity Research)
Thank you.
Operator (participant)
Our next question comes from the line of Cole Hathorn of Jefferies. Please go ahead.
Cole Hathorn (SVP and Equity Research)
Morning, Tony, morning, Ken. I have three questions. I'll take them in turn.
Anthony Smurfit (CEO)
Thanks, Cole.
Cole Hathorn (SVP and Equity Research)
Firstly, on inventory levels into year-end, you've always talked about the box business taking some downtime over that last week of kind of Christmas and the paper mills. Last year, the paper mills took some downtime across the industry to kind of manage inventory levels. The first question is really: How does Smurfit, as a business, manage your inventory levels in containerboard, which is tight at the moment? And then how do you see the industry managing inventory levels through December so that you start 2021 at a healthy inventory level? That's the first question.
Anthony Smurfit (CEO)
Okay, well, I'll take that. I think, actually, again, going to some of the things that actually we did during April, May, June, during the teeth of the pandemic, we were actually able to continue most of our maintenance downtimes and our capital investment decisions in Facture and Nettingsdorf. I won't say somewhat, let's say somewhat uninterrupted. I mean, there was a little bit of disruption, but nothing dramatic. And so we haven't had to do anything out of the ordinary with regard to our maintenance schedule during this current year. I mean, there was a – I think, Piteå may be delayed it by three months or something, but, you know, there's nothing really dramatic that we've done across our organization.
So what you're seeing, you know, we do read that a number of our competitors did actually delay their downtimes till the second half of the year, which obviously is exacerbating the current situation of the marketplace. You know, we, with the current integration that we have, with the current demand we have, you know, if anything, if we were planning to take some downtime, we would be looking to the December area to rebuild our own internal stocks, which are at critically low levels. So we would, you know... But around the edges, that would be, Cole. We weren't planning any major downtime during the Christmas period, and we certainly are not planning it now.
Cole Hathorn (SVP and Equity Research)
And then-
Anthony Smurfit (CEO)
Next question.
Cole Hathorn (SVP and Equity Research)
And then I suppose on kraftliner, you've given some good color on testliner and hopefully getting a further 20 EUR a ton. Is there anything you can give on the kraftliner side? I know you're targeting 50 EUR a ton from November. Any color there? Because I know the U.S. players are calling out a good produce season in Europe, and export prices are moving higher in kraftliner.
Anthony Smurfit (CEO)
Yeah, I mean, I would, I mean, remember the gap differential between kraftliner and testliner had become very, very large as the testliner price fell. So I'm not sure how much of the EUR 50 we'll get. You know, we see export prices from the U.S. into Europe going up very steeply and very sharply. And we also see, you know, substitution-based papers for kraftliner are going up in Europe. So therefore, I would be pretty confident that we'll get at least EUR 30. You know, whether we push or whether we get the whole EUR 50 initially, will depend on, I suppose, the level of demand, over the next, let's say, three weeks. But I would be, I would say, more than hopeful we'll get the vast majority of the EUR 50.
Cole Hathorn (SVP and Equity Research)
Sure. And then finally-
Anthony Smurfit (CEO)
That's on brown kraftliner, Cole. Sorry, that's on brown kraftliner. I don't envisage much increases on white kraftliner.
Cole Hathorn (SVP and Equity Research)
Okay, thanks. And then just following up on, on David's question a little bit earlier, relating to the market share gains. Can you give us some color on, more on your scale and the investments you've done in your box business over the last number of years, that's put you in a better place versus the smaller box players? Be it investing in digital printing or easier ordering systems that you have with your customers to get that volumes and to win new business. And I suppose that kind of plays into a longer question, which is, you know, why do you think Smurfit Kappa is gonna be a better business versus the smaller guys over the next 3-5 years? Thank you.
Anthony Smurfit (CEO)
Oh, that's a really difficult question. I'll let Ken take that.
Ken Bowles (CFO)
I'll give it a go, Cole Hathorn. I think quite simply because I don't think anybody has invested in the underlying technology and infrastructure that we've done over the last number of years. And for anybody to try and play catch up at this point would require an investment plan and a skill level build that I don't think anybody can actually do. I mean, Tony Smurfit spoke earlier about our Smart Applications. I mean, you know, while people see the front end of that particular piece, that's built on the background of, you know, 27 Experience Centers, where our customers are brought in and brought to life in terms of their product needs. Nobody has that.
Equally, we've invested in, you know, foundation systems, whether it's ERP systems, production planning systems, order to cash systems, which are all kind of integrated and seamless across the organization. So our efficiency at that end of the business is also clear. So I think it's not one single thing, Cole. I think it's kind of a continuous investment program around not only the machine park, if you like, in terms of whether that's digital printing or multipoint gluers or anything else, but also understanding that the underlying architecture and infrastructure also needs to be attended to, to make sure that as we move, we like to an ever more digital world, we're also well-placed to kind of trap that. So I think that's really, you know, the one of the key strengths of the group also in this space.
Anthony Smurfit (CEO)
Yeah, just to make... I mean, we have more opportunities than we know what to do with, frankly, because there's so many opportunities for growth within our business that we are seeing in different, different areas. I mean, you have to think of our business, every single, every single one of our operating units, Cole, is an operating profit center, and the management are responsible for their operating profit, their cash flow, their health and safety, everything in their own units. So they're running their own business, and they fight for capital within our system. And, you know, all of them have got, you know, very significant... across our world, very significant opportunities. And the question for us is figuring out how we can allocate that appropriately and responsibly to meet everyone's needs.
You know, you know, whether it's digital print, whether it's litho-lamination, whether it could be Bag-in-Box, whether it could be, you know, paper mills, there's just a very strong opportunity set ahead for this company as we look forward. Thank you.
Operator (participant)
Thank you. Our next question-
Anthony Smurfit (CEO)
Hi.
Operator (participant)
Comes from the line of Johannes Grunselius of Kepler Cheuvreux. Please go ahead.
Johannes Grunselius (Head of Forestry, Paper and Packaging)
Yes. Hello, everyone. This is Johannes Grunselius, Kepler Cheuvreux. So I have a question on pricing. We talked about it a lot, but would it be possible for you to kind of give a magnitude of the price decline on box prices in the third quarter, let's say, quarter-over-quarter or year-over-year? And also how we should think about, you know, the magnitude of price pressure for boxes in the fourth quarter?
Ken Bowles (CFO)
Hi, Johannes, it's Ken here. I mean, sequential quarter is probably not relevant, but if you like, 2020 Q3 over 2019 Q3-
Johannes Grunselius (Head of Forestry, Paper and Packaging)
Yeah
Ken Bowles (CFO)
... is probably a 5% box price decline.
Johannes Grunselius (Head of Forestry, Paper and Packaging)
Okay.
Ken Bowles (CFO)
If you take, if you take the year-over-year for the nine months, that probably places you somewhere into a kind of a 5%-6% space in terms of box decline year-over-year. And as I said earlier on, I think at the half year, we probably indicated that there, you know, that the second half of the year could exhibit, you know, anywhere between kind of a 0.5-1, maybe a further box price decline. We didn't see anything like that in the third quarter, but there is still a chance that you might see some of that coming through.
Because even though, you know, as you said earlier, even though the paper price is going through, you know, that still, some of that still may feed into the box price before that kind of settles properly in the early part of 2021.
Johannes Grunselius (Head of Forestry, Paper and Packaging)
Hmm. So if you could help me with the year-over-year change in box prices for the fourth quarter. I know it's very early and so forth because we're only one month in the quarter, but-
Ken Bowles (CFO)
That, that-
Johannes Grunselius (Head of Forestry, Paper and Packaging)
Um.
Ken Bowles (CFO)
That's the question, I think, for February, Johannes, to be fair, because we're... I wouldn't have a, you know, we won't know where our own box pricing is at this stage, but that stage. But I'll- The simple reality is, A, we don't forecast on box prices and-
Johannes Grunselius (Head of Forestry, Paper and Packaging)
Okay, okay.
Ken Bowles (CFO)
And B, we don't-
Johannes Grunselius (Head of Forestry, Paper and Packaging)
Fair enough, yeah.
Ken Bowles (CFO)
We don't plan on box price decreases.
So I think, you know, in essence, you know, our starting position is where we are now, and that's what we kind of fight to hold.
Anthony Smurfit (CEO)
And I would just-
Johannes Grunselius (Head of Forestry, Paper and Packaging)
Okay
Anthony Smurfit (CEO)
... make the point, Johannes, that I made earlier, that sometimes box price decreases are actually better for us from a margin perspective, because we're able to help our customers-
... with lower box prices and higher margins for us.
Johannes Grunselius (Head of Forestry, Paper and Packaging)
Yeah, yeah. Yeah, thank you. And also, if you, I mean, you were very happy. You did very well on your operation here, although you had a COVID-19 issues. But you mentioned that you had a few weeks off in some mills that you needed to take, you know, downtime. What about, you know, your competitors and, and there's a lot of, you know, new supply coming on stream? Do you think that COVID-19 has had an impact on the supply side here, more than it would, it affected you because your effect was only minor?
Anthony Smurfit (CEO)
Johannes, I think I actually don't know what happened with our competitors, to be honest. I do know that during the first wave of COVID, through March through May, we had very little forced downtime, mainly in the Latin American countries where we had to shut down. But we didn't really have anything in Europe. This time around, we are actually getting many more known infections, and I use the word known infections, because obviously the amount of testing that is going on is huge. And who knows how many COVID cases we had during March and April that weren't discovered? I mean, you know, I was... I had COVID, and I didn't know I had it until I got the antibody test.
So, I have no idea how many other people had COVID during that period-
Johannes Grunselius (Head of Forestry, Paper and Packaging)
Sure
Anthony Smurfit (CEO)
... that we just didn't detect. And so nowadays, if you have a lot of COVID or a lot of suspected COVID, then you know, you have to take that person out of the factory very quickly. Equally, the worry that I have as we go into the next six weeks or longer even, is that if a person gets a cold, they automatically think that they've got COVID, so they go out and their colleagues go out, and so that creates another level of absenteeism that is potentially problematic. So, you know, it's the uncertainty and the unknown situations right now that are bothering us. It's not our business. Our business is strong. Our business is in good shape. Our customers are in good shape.
You know, there are positive trends, but, you know, there is a huge uncertainty with regard to, and that's why we've put it in our statements, you know, if our working practices change because we've been shut down, our customers are shut down, then, you know, that may have a somewhat of an impact or a big impact as we go into the fourth quarter and even into the first quarter. We'll just have to wait and see.
Johannes Grunselius (Head of Forestry, Paper and Packaging)
Yeah. Okay, thank you for, for helping me with my question. Have a good day.
Anthony Smurfit (CEO)
Thank you, Johannes. Thank you, you also.
Operator (participant)
Our next question comes from the line of Mikael Doepel of UBS. Please go ahead.
Mikael Doepel (Executive Director)
Thank you. I can just continue. I have two questions here. I think I'll take them one at a time, but I could just continue a bit on the pricing front. We always talk about the containerboard pricing being the one moving box pricing. But I was just wondering, you know, looking into next year and further out, is there anything else that could actually support the box pricing? If I look at the corrugated markets as such, I think that the supply-demand looks actually quite okay. So this containerboard issue is mainly a problem for containerboard market, especially on the supply side of the equation.
So the question would be: Is there anything beyond containerboard pricing that you see could be supportive for box pricing going into next year and perhaps also further out, be it the supply-demand in that market or perhaps a strong demand pool or something else?
Ken Bowles (CFO)
Hi, Mikael, it's Ken here. I suppose without making this specifically about 2021, I think you probably have to round it out in what supports the box price generally, you know, beyond the paper price. I think that kind of goes back to, you know, what we've done over a long number of years is be more than just the supplier of paper to our customers. I think, you know, if you're bringing a proposition that's balanced around supply chain partner or vendor managed inventory. You know, the growth and sustainability and the need for customers to move in that direction. You know, to continue driving e-commerce and being able to fulfill those kind of supply chains. I think, you know, it's about how you fulfill the proposition to your customer, which kind of builds that price.
So I think it's everything we've done through investment in technology, through investment in our customer, around building that proposition beyond being the simple supplier of paper. So I think when you do that, and that's something we specifically do, and I think you've seen that across the first nine months of this year, too, in, you know, providing our customers with a security of supply to make sure that their products made the supermarket shelves where necessary, or indeed, got to their pharma and healthcare customers, for example. So I think we've done that. I think our customers value that. So I think, you know, it's not necessarily a 21 question. I think it's a how does Smurfit Kappa do that generally? And I think that, that's probably how we kind of approach it.
Mikael Doepel (Executive Director)
Okay. That's helpful. Then, secondly, on the containerboard markets and China in particular, and how the dynamics are playing out there. Now, we have seen exports out of Europe increasing now, probably reflecting the upcoming import ban in China and overall reduced imports of recycled paper into that country. Would you say that this has had any meaningful impact on the European markets? And would you expect that to become more pronounced going into next year when China goes for a full-blown ban?
Anthony Smurfit (CEO)
Hi, Mikael. It's Tony here. I would say that's the bull case. That's a very strong bull case for the industry. If you believe that China is gonna be a big importer of paper from Europe, or the world is gonna be a big importer from paper from Europe, then clearly that is very bullish for our sector, as it will, you know, easily absorb the additional capacity that's coming on stream. You know, you have to take your own view on that. I mean, what's for sure happening is that there is more exports going out from Europe to China and to the rest of the world. As I alluded to earlier, we are also sending some paper ourselves to our American cousins.
You know, I think that's a trend that I think will continue as long as the demand is there, because I think you can see that the Chinese market is good. I think you can see that it's growing, and as you say, there is no waste paper exports going out of Europe to China, and they... I've not seen anything that says they're gonna change their mind on that. So that is the bull case for the industry for with regard to paper capacity. Obviously, you can take a different view if you want, but I mean, you know, it's we're sort of...
We don't really play in the market, maybe with a few side reels and a few job lots, but we don't really play in the export market, 'cause as I said earlier, we're fully integrated. And if anything, we buy on the outside rather than sell on the outside.
Mikael Doepel (Executive Director)
Okay, good. Thank you very much.
Anthony Smurfit (CEO)
Thanks, Mikael.
Operator (participant)
Our last question comes from the line of Lars Kjellberg of Credit Suisse. Please go ahead.
Lars Kjellberg (Analyst)
Yeah, just a very quick follow-up. Ken, could you tell us what your leverage was at the end of September?
Anthony Smurfit (CEO)
We don't close the balance sheet Lars, as you know, but it's in that kind of 2.1-2.2 times, so very much in line with the half year last year.
Lars Kjellberg (Analyst)
No meaningful change then. Okay, very good. Thank you.
Anthony Smurfit (CEO)
No, exactly. No, no meaningful change.
Operator (participant)
As there are no further questions, I'll hand back to our speakers for closing comments. Please go ahead.
Anthony Smurfit (CEO)
Thank you, operator. Everyone, thank you for joining us today and participating in this call. As I said earlier in the call, we are increasingly excited about our future prospects and Smurfit Kappa's unparalleled ability to capitalize on the structural growth drivers in our industry. I'd like to take again this opportunity, on behalf of our board, to reiterate my thanks to all of our customers, employees, customers, and suppliers for their efforts so far in this most difficult and in many respects, tragic year. I thank you for your support and your interest in Smurfit Kappa. So thank you all for your attention, and we hope and pray that you all stay safe and look after yourselves and your families in the months ahead. Thank you, operator, and we'll sign off.
Operator (participant)
This now concludes our conference call. Thank you all for attending. Participants, you may disconnect your lines.