Smurfit WestRock PLC (SW) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning and good afternoon and welcome to the Smurfit Kappa 2015 half-year results conference call. (Operator Instructions). Just to remind you this conference call is being recorded. Today I'm pleased to present Smurfit Kappa CEO, Gary McGann. Please begin your meeting, sir.

Thank you very much, Operator. Good afternoon, everybody, and thank you for taking the time to join us on our first-half earnings call. I'm joined on the call by our COO and CEO designate, Tony Smurfit, and our Group Treasurer, Paul Regan. Before commencing I'd refer you to the note on forward-looking statements set out in our press release and which also applies to the discussion here today.

Turning to the first half, in this first half we delivered significant EPS growth of 38% and, as noted in our release, our strong performance during the year reflects good underlying business conditions, sharply reduced long-term funding costs and the earnings benefits of previous year's capital investments, acquisitions and efficiency programs.

We reported a revenue increase of 1% at just under EUR4b and our EBITDA margin of 14% is expected to continue to improve through the second half of the year.

Following the completion of a number of acquisitions during the quarter, our leverage multiple increased to 2.7 times net debt to EBITDA at the end of June. However, it is 2.6 times when viewed pro forma for acquisitions net of disposals and it's expected to reduce through the second half of the year due to the normally stronger free cash flow generation in that period.

I'm pleased to confirm an increase in the interim dividend to EUR0.20, bringing the total payment in 2015 to EUR0.60 per share which is an increase of 30% year on year. The significant increase reflects the Board's continued confidence in performance and prospects for the business.

In terms of our operating performance, looking at our first-half performance in more detail our strong underlying earnings reflects the strength of our business model despite some short-term volatility in European markets. Through the delivery of increasingly value-focused packaging solutions for our customers, internal and acquisition-related investment across our markets and consistent cost take-out, we've fundamentally improved our business performance and earnings growth in recent years.

Looking at Europe first, our corrugated packaging volumes have remained strong, delivering volume growth of over 4% in the first half of 2015. As a result of this growth and a balanced supply/demand outlook, the Group has sought and is realizing virgin and recycled containerboard price increases.

In Europe we delivered an improved EBITDA margin of 14.1% in the second quarter, up from 13.1% in the first quarter. Our integrated business model and diverse packaging operations across Europe provide a solid support to earnings through the cycle.

Strong positive fundamentals in Europe, our increasingly differentiated packaging offering and the expected corrugated price increases late this year should contribute to improved margins in the second half.

As mentioned, European packaging volumes increased by over 4% in the six months to June and just under 4% when you adjust for acquisitions during the period. This performance was underpinned by strong demand for our higher value packaging, which grew by over 4% year on year in the first half of the year and made up 87% of total packaging volumes.

Other than the implementation of containerboard price increases, the Group expects to implement packaging price increases subject to the usual three to six months time lag.

Recovered paper prices have continued to move upwards throughout the second quarter with a EUR20 a tonne increase reported by some market indices. This increase from an already high level has been driven by strong domestic demand levels in Europe and good overseas demand with Chinese imports from Europe up 5% in the year to May.

Our kraftliner operations have performed well in the first six months with a 6% increase in shipments in the period. This performance is set against a fundamentally good European market which has implemented a EUR40 a tonne price increase in southern Europe in April and a EUR20 a tonne price increase in northern Europe in June.

Due to the Group's net 500,000 tonne long position in the grade, these increases will provide an immediate boost to earnings through the second half of the year. And over the longer term the Group's market-leading position in kraftliner in Europe provides it with significant strategic advantage.

The European recycled containerboard market is becoming increasingly tight as a result of strong demand and a relatively stable supply environment in 2015 and as a result inventories are currently below 500,000 tonnes. These pressures further supported by EUR20 a tonne cost increase in OCC since March 2015 help position the Group to implement price increases in the third quarter, with price increases of at least EUR30 to EUR40 a tonne confirmed on recycled grades in July.

The Group is the largest producer of recycled containerboard in Europe with 3.1m tonnes of production in 2014 but due to its forward integration into corrugated packaging it maintains a net short position in the grade of approximately 500,000 tonnes. This position provides the Group with significant operational benefits through the supply chain while maintaining a reasonable level of flexibility.

Turning to the Americas, the region remains a very important area for continued development and expansion. Our operations are performing well and the integration of the recently acquired corrugated packaging businesses in the US, Central America, Colombia and the Dominican Republic is progressing as planned. We expect EBITDA margins to continue to improve through the second half as corrugated price increases are implemented, particularly in the major markets of Colombia and Mexico.

The region has reported EBITDA of EUR139m in the six months, a 10% reduction year on year, primarily as a result of the EUR30m impact in the first half due to the adoption of the Simadi rate for the consolidation of our Venezuelan earnings. Excluding Venezuela, our EBITDA increased by 20% year on year, reflecting both higher underlying growth rates and the impact of acquisitions completed in the region since 2014.

During the quarter, we completed the previously announced acquisition of CYBSA, predominantly a corrugated packaging business located in El Salvador and Costa Rica, for $105m. The business is expected to contribute a post-synergy EBITDA of $19m per annum in year one and has established the Group as a market-leading corrugated producer in Central America.

In 2014, further acquisitions for a total consideration of EUR160m were completed in the region, in the US, Colombia and the Dominican Republic.

Following its US packaging acquisitions in 2014, Smurfit Kappa Orange County now has a more diversified exposure to the US market with corrugated facilities in California and Texas. While the underlying business in California remains pressured by a challenging competitive environment and a change of business mix, the Texan business is performing strongly, with good market conditions and a progressively seamless integration with the Group's 350,000 tonne recycled containerboard mill in Forney in Texas.

The operating environment in Colombia has been bolstered in recent months by improved international competitiveness following the depreciation of the currency during the year. However, the Group has consequently seen some EBITDA margin erosion and is now focused on increasing local prices and driving its cost efficiencies through continued delivery and cost take-out targets.

Smurfit Kappa Mexico is performing well with an improved EBITDA margin and higher corrugated volumes year on year in the first six months. The Group's operations in the country are successfully passing through higher corrugated prices to customers to offset currency pressures while also benefiting from lower energy costs.

The political and macroeconomic environment in Venezuela remains difficult in 2015 and our decision to adopt the Simadi rate for the consolidation of our Venezuelan earnings has significantly lowered its overall contribution to Group EBITDA to less than 1% of earnings. Notwithstanding these challenges, the Group's operations in the country continue to operate well.

Our operations in Argentina are performing well in a challenging environment and reported an 8% increase in corrugated volumes in the six months to June. However, EBITDA margin deteriorated slightly in spite of lower material costs and tight waste management, primarily as a result of currency movements in the quarter, and the Group will seek to offset this through higher corrugated pricing in the second half of the year.

Looking at our first-half financial performance, revenue for the half-year grew from EUR3.95b in 2014 to almost EUR4b in 2015 with higher revenue in Europe partly offset by a reduction in the Americas, reflecting the impact of adopting the Simadi exchange rate.

Allowing for net negative currency movements of EUR114m and the contribution from acquisitions net of disposals, the underlying year-on-year move in revenue is an increase of EUR89m, the equivalent of 1%.

EBITDA for the first half of 2015 decreased by EUR13m to EUR551m, with a decrease in the Americas partly offset by higher earnings in Europe. Allowing for currency movements and net acquisitions, the underlying year-on-year move in EBITDA was an increase of EUR8m with a gain of EUR10m in Europe partly offset by lower earnings in the Americas and slightly higher Group center costs.

Operating profit before exceptional items for the half-year was EUR348m compared to EUR363m for the same period in 2014, a decrease of 4%. Exceptional items charged within the operating profit in the first half of 2015 amounted to EUR46m, EUR36m of which represented the higher cost of the Venezuelan operations of discharging their non-bolivar-denominated payables following our adoption of the Simadi rate in March 2015.

The remaining EUR10m charge represented the further impairment of the solid board operations held for sale of EUR6m reported within constant sales and a loss of EUR4m booked in the second quarter on their disposal.

In 2014 the Group reported a charge of EUR9m in respect of the impact of the adoption of the Sicad 1 rate in March 2014 on non-bolivar-denominated payables.

Net finance costs of EUR70m in 2015 were EUR62m lower than the prior year, primarily as a result of cash interest savings of EUR20m complemented by a year-on-year reduction of EUR34m in non-cash net monetary loss from hyperinflation following the Group's adoption of the Simadi rate in Venezuela.

As a consequence of Venezuela's diminished relevance in the Group's overall EBITDA at less than 1% in the first six months, this hyperinflationary adjustment will have a significantly reduced impact on net finance costs going forward.

Basic EPS was EUR0.732 for the first half, an increase of 17% year on year. Pre-exceptional basic EPS was EUR0.887, an increase of 38% year on year.

When we look at our capital structure, our net debt increased by EUR170m during the quarter to EUR3.1b, primarily as a result of acquisitions and the payment of the final dividend in May. Our net debt to EBITDA at 2.7 times at the end of the period was well within our target range of 2 to 3 times. However,, strong cash generation in the second half of the year is expected to reduce our leverage position and we remain firmly committed to the preservation of our Ba1/BB+ credit rating.

During the first quarter we undertook two transactions which combined to further reduce our funding costs and extended our average maturity profile to 5.2 years. In February we issued a EUR250m 10-year bond at a coupon of 2.75%, the proceeds of which were used to prepay term debt under a senior credit facility. This successful bond financing enabled us to amend and extend our senior credit facility in March at a reduced level of EUR1.1b, extend the maturity date to March 2020 and reduce the margin by 0.65%.

In terms of our cost take-out program, we've committed to a take-out target of EUR75m in 2015 and are progressing well against this target with EUR30m achieved in the year to date. Continuous cost take-out mitigates underlying inflation and enables us to deliver consistently strong EBITDA margins through the cycle.

The Group is also continuing to invest in its Quick Win program of capital projects which is in line with expectation. The program will feature over 100 projects and a total expenditure of EUR150m over the three-year period from 2014 to 2016, by which time the assets are expected to generate an incremental EBITDA of EUR75m per annum.

In summary, we're pleased to report a strong second quarter and first half result. Our differentiated market-leading product offering, geographic diversification and integrated business model enables us to deliver consistently strong operational results through the cycle. Our outlook is good for 2015 with positive European demand and pricing fundamentals supporting corrugated price increases towards the back end of 2015 and into 2016, and an improving performance in our American operations.

Against this solid operational backdrop, our focus is on further strengthening the business through creative acquisitions and continued high return capital investment which will drive profitable growth and deliver sustainable returns for our shareholders.

I want to thank you for your attention and I'm happy to turn over to the Operator now for questions.

(Operator Instructions). James Armstrong, Vertical Research Partners.

Good morning, guys, and congrats on a good quarter.

Thank you.

The first question is on costs. Other than OCC, which obviously is hard to predict, what are you seeing in terms of cost inflation, deflation, and how does that vary between Europe and Latin America?

Well, obviously, first of all, James, in the context of the Americas, particularly Latin America, you have all kinds of everything. If you take Venezuela you've got hyperinflation; if you take Argentina you've got high inflation; if you take Mexico and Colombia you've got relatively low inflation in terms of 3%, 4%, and then US you'll be very familiar with. So it's hard to be particularly specific about the inflation levels.

But if you talk about our overall -- sorry in Europe I should say we're talking about low inflation levels. So when you look at our non-OCC cost developments, they're generally in reasonable shape (a) because of levels of inflation, (b) because of the recovery in some countries and (c) because we have a cost take-out program.

So for example, wages and salaries would be down year on year. Obviously there are currency factors impacting that as well. Distribution costs for example would tend to be variable in line with activity levels. And energy and the like we obviously hedge and so therefore would expect to have a reasonably controlled position and year on year reasonably flat to 1% type of thing.

The main pressure on wages in Europe would be the better markets, the more robust markets for example, like Germany where there's strong wage pressure. But, as I said earlier, we have strong cost take-out programs whose purpose are to basically counteract that inflationary pressure.

Perfect. And then on OCC, are you seeing any supply constraints on sourcing OCC yet and are you seeing China come into the market in any meaningful way?

I'm going to get Tony to take that.

Hi James. Look, we don't really see any particular issues other than there's an edge upwards in OCC prices, mainly due towards -- because of the demand issue that Gary's talked about in Europe where mills are running full and have need for OCC. But so far we're not seeing the Chinese pushing. They come in and out of the market from time to time but nothing dramatic at this point.

Perfect. Thank you.

Thanks, James.

(Operator Instructions). Gerard Moore, Investec.

Hi, good afternoon, gentlemen. Just one question from me please. Could you tell us a little bit more about how you actually put in place price increases in Latin America and how you deal with hyperinflation? Obviously when you have such sharp movements I imagine it's quite difficult but maybe just if you can talk us through how you convince your customers that this price increase is necessary. Thanks.

Sure. Tony, do you want to take that?

Well, I think a lot of our customers are in the same boat, Gerard. I think that the reality is -- and it depends on the different markets. I would say that if you take our Colombian market, it's more difficult because our customers have not yet benefited from the lower currency and they're gearing up to do so, but after they benefit we would expect to benefit both in volume terms and in pricing terms and we will be having those price discussions.

As we mentioned earlier, getting prices up is -- we will have to do, but you can't do it to the extent of the currency movement in a country like Colombia very quickly. So it just takes a little bit of time. In other countries such as Mexico I think that we're having to tell our customers that there's a need to compensate us for all the materials that we're buying in in higher currencies that are affecting our P&L. So it's just a question of having to do so. So I don't -- there's no magic about it; it's just we're going on a customer-by-customer basis and getting the pricing.

It's important to remember, Gerard, that in some of these -- in a number of these more successful markets, so if we talk about Colombia, Mexico and Argentina will come good as well, a lot of the customers have export international businesses and so therefore are benefiting significantly obviously from the competitiveness but are actually in receipt of dollar earnings into the country. And so therefore their capacity to pay a fair rate for suppliers that helped them get that result is not inconsequential.

That's very clear. Thanks a lot.

Thanks, Gerard.

Thank you. There appear to be no further questions so I will turn the conference back to you, sir.

Thank you very much, Operator. Ladies and gentlemen, thank you again for taking the time to be with us this afternoon or this morning, depending on where you are. We're pleased with the outcome for the second quarter and the first half with good underlying EBITDA growth of 3% and a strong EPS performance, 38% higher year on year. Our overall business is performing strongly with positive European demand and pricing fundamentals supporting corrugated price increases towards the back end of 2015 and into 2016 and an improving performance in our Americas operation.

Against this solid operational backdrop, our significantly reduced long-term funding costs and the earnings benefit of our capital investments, acquisitions and efficiency programs will support our expectations to deliver strong free cash flows and year-on-year earnings growth in 2015.

So again thank you for taking the time to be with us and have a good day.

Thank you. Ladies and gentlemen, this does conclude today's conference call. Thank you very much for attending. You may now disconnect your lines.