Smurfit WestRock PLC (SW) 2013 Q2 法說會逐字稿

Welcome to the Smurfit Kappa conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

I will now turn the call over to your host, Gary McGann. Sir, you may begin.

Thank you very much, operator. Good morning, or good afternoon, ladies and gentlemen, and thank you for taking the time to participate in our first half earnings call.

I'm joined on the call today by our COO, Tony Smurfit, and our CFO, Ian Curley. Before commencing, I'd refer you to the note in our forward-looking statement set out in the press release and which also applies to the discussion today.

Turning to the first half overview; for the first half we delivered revenue growth of 6% and strong EBITDA of EUR512 million. During the period, we delivered volume growth in Europe and the Americas, with good pricing and further cost reduction. We continue to win new business and new customers, reflecting our differentiated product and service offering, and the efficiency of our integrated system.

The European containerboard industry remains in balance and we will implement a pricing increase of EUR50 a tonne effective from tomorrow. Rising input costs, low inventory levels, solid export markets, relatively high operating rates and the current uneconomic price levels, support higher recycling containerboard prices. This will drive further recovery in corrugated pricing with the usual 3 to 6 months' lag.

In the Americas, we continue to focus on expansion within these higher growth markets, and we've successfully completed the integration of Smurfit Kappa Orange County. Excluding Smurfit Kappa Orange County, volumes in the Americas have grown by 5% year to date, and EBITDA margins are recovering to their previous levels. Geographic diversity and an integrated returns-focused business are driving our strong performance, even in challenging economic conditions.

Our strong business performance and our ability to continue to reduce our net debt has enabled us to progressively reposition our entire capital structure. During the first half, we engaged in a refinancing of our senior credit facility which we completed last week. We announced a EUR1.375 billion refinancing on a lower margin, unsecured basis, which represents a major milestone in the evolution of the Group's capital structure. It repositions our debt profile from leveraged to corporate. It is immediately earnings accretive, and will reduce interest costs by approximately EUR13 million per annum.

We also completed a new trades receivable securitization program of up to EUR175 million at a margin of 1.7%. These transactions provide us with greater financial flexibility, including the potential to refinance part of our more expensive bond debt at an appropriate time.

The strong business performance, efficient cash flow generation and continued debt reduction supports our progressive dividend policy. In that context, we've announced a 37% increase in our interim dividend to EUR0.1025 per share, providing shareholders with certainty of value. The scale of the increase reflects our confidence that the business can support a progressive dividend by maintaining our focus on debt paydown and accretive acquisitions.

In terms of the first half operating performance, European box volumes increased by over 2% for the period, having adjusted for two less working days year on year. Box shipments make up almost 90% of our total corrugated volumes and are the most accurate measure of demand. Total corrugated volumes, which were negatively affected by declining shipments in the lower margin sheet business, grew by almost 2% over the same period.

Eastern European volumes continue to develop well and increased by 9% year on year in the first half. In our European containerboard business, OCC prices have remained resilient and are at a level that supports the recycled containerboard price increase. As mentioned, we've announced a price increase of EUR50 a tonne which will be effective from tomorrow.

Sales of European kraftliner, which is a key differentiator in our business and a significant source of profitability, also remains strong. Demand for the grade is good, and imports of US kraftliner have decreased by 2% year on year to April 2013.

European corrugated pricing has been sustained by containerboard price increases implemented in the first four months of the year, and was broadly unchanged in the second quarter compared to the first quarter of the year. However, the containerboard price increase, which will be effective tomorrow, will give upward momentum to corrugated prices within the usual 3 to 6 months' timeframe.

We continue to invest in our European paper system and ceased production of our 250,000 tonne recycled containerboard mill in Townsend Hook in June in order to upgrade the site to a 250,000-tonne modern lightweight machine. This investment of approximately EUR114 million will deliver increased productivity, lower costs and will ensure that we're even better positioned to respond to increasing demand from our customers for lighter weight containerboard. The rebuilt paper machine is expected to restart in quarter 4, 2014.

Our Americas segment continues to recover and move back to its previously strong margin level. Corrugated volumes have significantly recovered, given the underlying strength of the business and the absence of the one-off issues that occurred in 2012.

We see the Americas as an important region for future investment, given its growth potential. The Orange County acquisition is indicative of our ability to acquire and integrate businesses in the region.

In addition to continuing to invest in higher growth markets and sectors, we also continue to identify and deliver material cost savings to support our strong EBITDA margins. We've a proven track record of driving efficiencies and process innovations across our business. We've achieved cost savings of EUR46 million in the first half, and remain on track to deliver our stated EUR100 million cost take-out objective for the full year.

On achieving this target, cumulative cost savings of approximately EUR600 million will have been delivered since 2007, offsetting higher OCC costs and general cost inflation.

Looking at our financial performance in greater detail, our revenue for the first half-year grew 6% to EUR3.9 billion, primarily driven by strong growth in the Americas.

EBITDA of EUR512 million was 3% higher than the same period in 2012, and 13% higher than quarter 1, 2013. This is primarily driven by higher earnings in the Americas, partly offset by lower earnings in Europe, resulting in a marginally lower year-on-year EBITDA margin of 13.1% for the half-year.

Operating profit before exceptional items increased 1% to EUR307 million. There were a number of exceptional items in the first half. Exceptional charges of EUR32 million, including EUR15 million related to the closure of the Townsend Hook mill, and EUR15 million relating to a currency loss from the devaluation of the Venezuelan bolivar.

In 2012, exceptional gains of EUR28 million comprised EUR10 million from the sale of land at our former Valladolid mill in Spain, and EUR18 million related to the disposal of a mill site in Slovakia.

Free cash flow of EUR72 million in the first half increased by EUR25 million, or 55%, on the prior year. This was driven by higher EBITDA, lower cash interest costs, capital outflows and cash taxes, partly offset by higher working capital requirements and an exceptional outflow of EUR17 million primarily related to the Venezuelan devaluation.

Working capital amounted to EUR719 million at June 2013, representing 8.9% of annualized revenue, in line with the June 2012 levels.

Capital expenditure was EUR137 million in the first half, representing 75% of depreciation. For the full year, capital expenditure is expected to amount to 100% of depreciation and incorporates expenditure on customer-oriented and efficiency driven investments.

Turning to the capital structure, as mentioned at the outset, we have recently completed the refinancing of our senior secured credit facility with a new, unsecured relationship bank facility. The transaction was initially launched at EUR1.1 billion and was increased to EUR1.375 billion on the back of strong demand.

The new facility comprises EUR750 million term loan, with a margin of 2.25%, and a EUR625 million revolving credit facility, with a margin of 2%, reducing from margins of 3.75% and 3.25% respectively.

As a consequence, the Group expects annual cash interest savings from the refinancing to be approximately EUR13 million per annum, and the transaction will be immediately earnings accretive.

In addition to the new senior facility, we have also put in place up to EUR175 million of a five-year trade receivable securitization program at a margin of 1.7%, which will complement our existing EUR250 million program.

The new facilities will lower our overall cost of capital, materially reduce debt servicing costs, enhance earnings and provide greater financial flexibility, including the potential to refinance part of our more expense bond debt at an appropriate time.

This refinancing marks the completion of the Group's evolution from a secured leveraged structure to an unsecured corporate profile, with a commitment to maintaining leverage below 3 times through the cycle.

In terms of our balance sheet, net debt decreased quarter on quarter by EUR54 million to EUR2.8 billion at June 2013, resulting in a reduction in net debt to EBITDA to 2.7 times.

Our focus, as a management, remains on cash generation, and our integrated business model drives strong positive cash flow at all points in the cycle.

We have substantially reduced cash interest costs through a number of refinancing events since the beginning of 2012, and will continue to focus on initiatives which will reduce the cost of debt and increase our financial flexibility.

In summary, we're pleased to report another strong quarter and first half-year. The Group is in a fundamentally different position today than it was just 24 months ago, with a net debt to EBITDA of 2.7 times, and a business profile which has moved from leveraged to corporate.

This repositioning, together with the successful completion of our first major acquisition in recent years, is due to the strong fundamentals and continued consistent operating performance of our business. The available range of options for the Group will be focused on continuing to deliver and sustain value creation.

So I want to thank you again for your attendance on the call today and Tony, Ian, and myself are now happy to take questions.

Thank you. We will now begin the question and answer session. (Operator Instructions). James Armstrong, Vertical Research.

Just had a few questions. First, as you look into the remainder of the year, what are you seeing in terms of cost inflation?

Also, what do you think OCC prices will likely, in your forecast, do for the remainder of the year?

In terms of cost inflation, I think the general sense would be that there's no dramatics. The type of level we've seen year on year in the first half is likely to continue to prevail. We're not expecting any dramatics.

Obviously, the key numbers you need to be mindful of, as you know, are materials, labor and energy and, in the case of energy, we're substantially hedged to about 77%, 78%. In terms of materials, I'm going to ask Tony to give you a view on OCC in a moment. And in terms of labor, by and large, the labor inflationary factors are already embedded in the numbers and the trend, so there's no likelihood of any dramatic changes there.

In terms of OCC, Tony?

Yes, James, what we've seen is relative stability year to date at a relatively high level, around EUR120 per tonne. We don't see, at this moment in time -- stocks seem to be in reasonable shape. We don't see any upward movement, but that could change at really any moment.

The Chinese have effectively stepped out of the market here in Europe and they're not present, due to the green fence situation that happened at the earlier part of the year and higher freight rates. But as I say, that could change really on a weekly basis.

But at the moment, our forecast is for a slight upward movement towards the second half of the year out of Europe. And in the United States, we've seen a slight upward movement last month and we probably could see a continuation of that as we move forward in the year.

But we certainly don't expect any dramatics or any of these substantial spikes. There's no underlying evidence from China, who are the key drivers of that type of behavior that there's likely to be a dramatic change in the economic profile there. If anything, it's a slower profile that's underpinning the general behavior.

Great color. Thank you. And then switching to box pricing, especially in Latin America, do you expect to see any more margin improvement in the LatAm region as just off the US price increase that was implemented earlier this year?

As you know, James, there isn't a direct correlation between US pricing and LatAm pricing, particularly Mexico. There is a clear correlation between the [Laredo] pricing, which is the export price, which doesn't tend to travel at the same pace as the domestic prices.

So directionally, we're seeing an increase in Laredo pricing, and consequently, for example, the most proximate market is Mexico. We're seeing some upward opportunities there.

So directionally, we still have the same trend, but with a gap. This gap probably is wider than has been the medium-term norm by about $40, $50 a tonne, and logic would suggest that it should close. Whether it closes in the second half is anybody's guess, quite frankly, because it's a function of the US operators, and not the Latin American operators.

We see no particular logic as to why it shouldn't, but it hasn't so far. If it does, we'll see more pricing momentum in Mexico, and potentially in the rest of Latin America.

Very good. Thank you very much.

Mark Wilde, Deutsche Bank.

Tony, I wondered if you could just help us in thinking about the European box pricing, as we move through the second half of the year here. I assume that, just given normal lags, that the impact on box pricing from these August initiatives would be much more in the fourth quarter, and even carrying into the first quarter next year. Maybe you can help put a little color around that?

Yes, Mark, hi. I think exactly what you say is true. I think the increase that's gone in, in the first half of the year, really stabilized the price that we'd held so well during the back half of last year. We saw margin compression in Q1, stability in Q2. And this increase will certainly force most box makers to go for increases as the increase is now too big for them to eat without getting increases.

So I think your analysis has seen some progression; a little bit of progression in Q3 and into Q4, and early next year, is the right one. Obviously, our contracts would indicate some lags somewhere between three months and six months, depending on the customer mix that we have. And that will be implemented in the stages that the contract says.

But this increase will certainly be we'll push through as quickly as possible, and we'd expect to see the majority of it in Q4 and Q1.

And Tony, on the demand side in Europe, I notice that your box volumes were up a bit. I wondered what the overall market appears to be doing, in your view. And also, just what your read is from selling boxes across Europe, in terms of just European economic throughput.

I think we'd say that the general box volume, taken across all of Europe, looks like being up about 1%. That's taking into account, Mark, we had a very poor first five months of the year, from a weather perspective. And we did see a significant pickup -- not a significant, let's say a nice pickup in July volumes.

So I think that weather was probably something to do with it, but nonetheless, I think that there has been an improvement in July. And that's pretty broad based across the piece. I would say that we would expect that to continue. There's nothing magic. I don't think we're going to see big growth, but at least the kind of volume that we've seen so far should be there, as we go through the rest of the year.

Mark, it's Gary here. A number of people earlier today, in Europe, in fact, have asked us the same view. And as you know, as a long-term viewer of this industry, we don't have medium-term visibility. Our order books are a couple of weeks.

So the perception that we have a forward-looking view on the market is obviously not true. But our general working thesis, based on continued political and macroeconomic uncertainty, albeit current reasonable stability, our working assumption is that there will be no material improvement in demand in Europe, in the short to medium term. And it'll take some substantial settlement of the fiscal and political landscape to get confidence back into consumers, and unemployment levels down before we're going to see that.

So our outlook is more driven by industry specific and company specific activities, rather than the general macroeconomic environment.

Okay. Gary, if you could, could you and Ian perhaps talk a little bit about just the M&A environment as you see in both Europe and Latin America. And particularly in light of the success that you've had with that Orange County deal, how you're thinking about more growth in Latin America.

Yes. Ian, do you want to say something?

Yes, hi, Mark. I suppose when we step back and we look into 2011 and 2012, back in '11, our focus was very much on the whole debt pay-down, which I think successfully we did during '11. Then into '12, we gave ourselves options with a variety of things. And we used 2012's cash flow effectively, and I think successfully, to buy Orange County.

As we look forward, we see the dividend at [EUR17 million], CapEx at around the 100% mark, the debt levels getting down to where we said we will be, they will be flat, they will be positive; leverage down to 2.7 times. So we look around the market and see what's available.

Orange County had some specific positives, but we've done somewhat similar in Russia. So we look at the multiples that we trade at, and our multiple is improving all the time. We look at the multiples of target companies.

So we see a reasonable amount of pipeline out there, which we are looking at this moment in time. But we look at it very much in the balance of where we see the best interest from the shareholder perspective. So we have a lot more options now than we did have before, Mark.

I think it's true to say, Mark, that from IPO time, we've been consistent that we want to be a growth company with a dividend underpinned. But I think we've also consistently said, and this isn't post the crisis, that we would be a disciplined investor, whether investing in projects within our own organization [to expand] our earnings organically, or whether it's acquisitions, that we would be very, very judicial in terms of our use of funds, so as to ensure that we're getting the returns to the extent you can always be sure of doing these things in advance.

So it's very much on the agenda, but it has to fight for capital allocation, as Ian has said.

Okay. And then just finally, Ian, the unallocated corporate line has bounced around quite a bit, first couple of quarters of this year. Could you give us just some guidance on that, as we think about the last two quarters of the year, and then going into 2014?

Sure. No problem, Mark. When you look back at the cost there, if you look back in '09 EUR28 million, 2010 EUR27 million, 2011 EUR33 million, 2012 EUR35 million, and year to date about EUR20 million, so they average around the EUR30 million mark. But it isn't a linear; they can be quite lumpy, as you rightly say.

So when you look for the first half of this year, they were EUR20 million, versus the first half of last year which was about EUR14 million, EUR15 million. And the difference there, in this particular case, maybe you probably wouldn't have seen in the US, but there was a fire here in the UK in [SSK], and that would have cost us about EUR3 million, which we wouldn't have had any issue in the first quarter.

And that's what causes the lumpiness around the place. But on average, from a guidance point of view, it averages about EUR30 million or low EUR30 million for the year.

So if we were to use a number of, say EUR6 million to EUR8 million for each of the last two quarters of the year, that would be a pretty good ballpark?

Yes, that'd be good enough, yes.

Okay. All right, sounds good, guys. Good luck in the second half of the year.

(Operator Instructions). We have no further questions.

Okay, operator. Can I thank everybody for taking the time to be with us today. Just to summarize, we're obviously pleased to report another strong quarter and first half.

The Group is fundamentally in better shape now than at any point since the IPO in 2007, with a return to growth by acquisition with Orange County, and the evolution of the capital structure to an unsecured corporate structure.

We'll continue to deliver quality EBITDA and strong free cash flow through the cycle, driven by the underlying operational performance of the business.

Again, thank you for your time, and indeed, your support, and have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, you may now disconnect.