Smurfit WestRock PLC (SW) 2016 Q2 法說會逐字稿

Hello and welcome to the Smurfit Kappa Q2 2016 half-year results call. Throughout the call, all participants will be in a listen only mode and afterwards there will be a question and answer session. Just to remind you the conference call is being recorded. Today, I am pleased to present Tony Smurfit. Please begin your meeting.

Thank you, Operator, and good afternoon everybody and thank you for taking the time to join our 2016 first half earnings call. I'm joined on the call today by our Group CFO, Ken Bowles and our Group Treasurer, Paul Regan. Before commencing, I would refer you as normal to the note on forward looking statements set out in the press release which also applies to our discussion today.

I expect at this stage in the day you'll have had the opportunity to review the detail in the release, so rather than go through the detail line by line and our performance, I will provide an overview looking at the medium term prospects and then go directly to Q&A.

Our EBITDA growth of 8% year-on-year underscores the quality of our team, our portfolio of geographically diverse operations and the strength of our integrated model. For the period, we delivered an improved performance across key measures despite a number of headwinds. This performance continues a six-year trend of consecutive EBITDA growth and we expect 2016 to be the seventh. Reflecting a continued and unrelenting focus by the Company on operating efficiency, our EBITDA margin increased to 14.6% in the first half compared to 13.8% last year.

In addition to margin strength, our return on capital employed continues to improve and at 15.4% in the first half, we've exceeded our stated target of a ROCE of 15%. In broad terms, we are happy with the performance of the Group in the first half and after the unforeseen circumstances, the outlook for full year 2016 is positive.

Turning to capital allocation and as you've heard us say before, we'll continue to evaluate all major capital allocation decisions in the best long-term interest of all stakeholders. Dividends are an important component of our capital allocation process. Our confidence in the performance of and prospects for our business is evident in the 10% increase in our interim dividend, EUR0.22 per share. The strength of our capital structure together with our free cash flow generation supports a progressive dividend stream.

On CapEx, we've entered the third and final year of our quick-win capital program and are confident of delivering on our stated EUR75 million incremental EBITDA target. Following this, we expect to return to normal levels of CapEx of 100% of depreciation in 2017, while we evaluate a new program of high return investment in support of our Group return on capital target of 15% for 2018 and beyond.

On M&A, we have an annual capacity for acquisitions of over EUR300 million from free cash flow. We have invested over EUR850 million since 2012 adding operations in 10 countries, which have all been integrated successfully and seamlessly. We are, and have always been in Smurfit Kappa, a disciplined acquirer and will participate in logical M&A opportunities if it represents the best long-term use of capital.

On our capital structure, at 2.5 times leverage, we remain well within our stated leverage range and we expect our leverage multiple and net debt to reduce further as we go through the more cash generative second half of the year.

We continue to build balance sheet strength to expand the range of strategic and financial options open to us. By way of conclusion, let me outline our medium-term value drivers. The factors which have sustained us on our journey over the past seven years will deliver future performance. From 2012 to 2015, in what we have described as average market conditions, our unique business model and most importantly our team and our culture have delivered a 23% compound annual growth rate in EPS, free cash flow of EUR1.4 billion, net debt reduction of EUR500 million, while investing EUR850 million in acquisitions and EUR2 billion in continuously improving Smurfit Kappa's asset quality.

We in the Company know that we have built a compelling operating platform and a unique franchise, which will sustain improved performance in the future.

Thanks Operator and now we are going to take any questions from the listeners.

Thank you. (Operator Instructions). Our first question comes from the line of James Armstrong from Vertical Research Partners. Please go ahead your line is now open.

Good morning and congrats on a good quarter.

Thanks James.

First question, on a previous call there was a lot of talk about OCC. Have you had -- just to dig into that little, are you seeing any trouble sourcing OCC yet? Or are you seeing any export pressures in OCC in any of your markets in particular?

We're not having any trouble sourcing it. Obviously, we're having to source it at price. I think probably Brazil has been an area where it has been quite difficult to get OCC because of the lack of generation in the country. In Colombia, we also had some -- we didn't have problems, but we know of certain competitors that had to shut down only for a day or two because of lack of OCC. We've not heard of that in Europe, but we have heard that some of our competition has been low on stocks of OCC. So, it is -- shortage is the wrong word. There is not a shortage of OCC, but there is certainly a tightness in the market and that's hence the reason why prices have been rising higher than we anticipated.

The export market has in Europe been going up. China are buying about -- Ken, I believe the number is about 8% more year-on-year?

Yes, I think generally thought it's -- it's 8% to 9% higher than it was this time last year.

So, there is a greater pull from the export market than there has been and that's a function, James, of, as I mentioned earlier, some of the lack of generation in some of the economies such as Brazil -- such as China, which haven't the same level of generation that they've had before, so therefore they're coming to the export markets to fill their needs.

Perfect, that's helpful. Then switching gears, because of the plant closures in Germany that you talked about, do you expect volumes for the remainder of the year to be slightly below the European market in general, or do you think that you'll catch back up and go back to your outperformance of the overall market?

I would say that we'd probably -- this year I think we'd probably be trending to the same sort of level, a slight underperformance relative to some of the others. As I say, it's really we closed three facilities in Germany and when you're closing facilities you always bank on losing some volume during those closures. It probably lasted a little bit more than we anticipated, not significant, but it does skew the numbers by 0.5% or something like that and that's probably the reason why we're slightly less than we would have anticipated.

Germany still remains a good market. It's a good market for us. We're investing a lot of money in the market with strong market positions, with strong customer wins in the market. But when you close plants, you tend to drip away some volume and that's certainly what happened to us and hence the reason why we'll see that as an opportunity to go back next year and get that volume back if we so choose to and the price is right.

Perfect. Thank you very much.

Thanks James.

Thank you. (Operator Instructions). As there appear to be no further questions, I return the conference to you.

Thank you, Operator, and as you'll all have known we did do a conference call this morning. For those that have participated in both, thank you very much, and thank you for taking the time to participate in today's call.

As I've said already, our market-leading product offering, a real strength is our geographic diversification and of course our integrated model will enable Smurfit Kappa to continue to deliver a strong operating performance, quality earnings and build balance sheet strength. I think we remain very confident for the future and I'd like to thank you for your support and wish you all a good day. Thank you very much, Operator.

Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.