Performance Review and Outlook
Gary McGann, Smurfit Kappa CEO, commented: “Following our strong performance in 2014, we are pleased to report a good start to 2015 with underlying earnings growth. While EBITDA was 1% down year-on-year this was particularly impacted by the Group’s decision to consolidate the results of its Venezuelan operations at the variable Sistema Marginal de Divisas (‘SIMADI’) rate. The effect of this change was a reduction in EBITDA of €14 million for the first quarter, with Venezuela now expected to be less than 1% of the Group’s EBITDA for 2015. EBITDA margins in the rest of the business were somewhat impacted in the short-term by
some specific issues, with significant weakening in some currencies in Latin America without any compensating price increases, a number of operational issues now resolved and some temporary pricing pressure in Europe. Notwithstanding this, we delivered a good underlying EBITDA margin and a second consecutive year of positive free cash flow in the first quarter, reflecting the structural improvement in the business underpinned by our lower cost capital structure and consistent focus on operational efficiencies.
“Looking to our European performance, corrugated packaging volumes increased by 4% with good growth throughout most of Europe and particularly strong volumes in the Southern European countries. As guided in our full year 2014 results, average corrugated pricing has remained sequentially flat compared to the fourth quarter of 2014, which is 1% lower when compared to the first quarter of 2014. The conditions for price increases are progressively positive with the kraftliner price increase (€40 per tonne) in Southern Europe effectively implemented and positive expectations for a similar increase in Northern Europe in May. With increasingly tighter inventory levels, the recycled containerboard price increase announced for April is expected to be partially implemented in May, with the balance anticipated mid-year. This will support corrugated price progress in the latter part of the year.
“In April, SKG held a highly successful Innovation Conference in Amsterdam, attended by over 200 customers as well as a sizeable number of investors and analysts. A key output of the event was the launch of the Shelf Smart packaging solution, which is a unique six step process that has been developed with the Smurfit Kappa Innovation team as part of the overall ‘Open The Future’ brand initiative. The process combines and channels the Group’s packaging expertise, consumer insights, proprietary technologies and key partnerships to drive real value for our customers through increased sales as a result of a competitive advantage at the point of purchase, and through cost reductions by optimising their supply chains from source to end markets.
“As a result of a number of acquisitions in the region since last year, volumes in our Americas business have grown by almost 16% year-on-year. The segment’s EBITDA margin has also recovered to 16.2% in the first quarter from lower levels in the second half of 2014. In Venezuela, despite the increasingly difficult economic circumstances and the adoption of the SIMADI rate, we have good operations with a strong team and market position which we expect to contribute to the Group over the longer term.
“In February, the Group issued a €250 million ten-year bond at a coupon of 2.75%, the lowest bond coupon achieved to date. The proceeds were used to prepay term debt under our senior credit facility. Following the success of the bond financing, in March we completed a transaction to amend and extend our reduced senior credit facility to March 2020, as well as achieving a reduction in margin. The combination of these two transactions firmly underscores the strength of the Group’s capital structure and standing in the debt markets and locks in cost efficient borrowing and a healthy maturity profile. At the end of the period leverage was 2.5 times net debt to EBITDA with the increase in the quarter predominantly attributable to the currency impacts of a strengthening US dollar and the translation of the Group’s Venezuelan operations at the SIMADI rate.
“Supported by our strengthened capital structure, the Group has accelerated its delivery of accretive acquisitions in its target markets. In 2015 to date, we have announced four transactions totalling over €180 million. Within this, there have been two sizeable acquisitions; the US$105 million acquisition of CYBSA, a corrugated packaging business in Costa Rica and El Salvador and; the STG£44 million acquisition of the Inspirepac corrugated and high-end display business in Northern England. In addition, the Group completed two smaller bolt-on acquisitions, the European and Mexican operations of Hexacomb, a protective packaging business, and Beacon Packaging in the UK.
“In April, the Group completed the sale of our Solidboard and Graphicboard business in the Netherlands, Belgium and the UK. The business was sold with net assets amounting to approximately €42 million and will be a margin enhancing event for the Group.
“Against the backdrop of a more positive European business environment, and improvements in our operational performance in the Americas, we expect to deliver earnings growth year-on-year. As we build the business through our differentiated offering and new investments, we remain committed to our core financial and operational disciplines. Our focus continues to be one of driving strong returns through superior operating performance, a progressive dividend stream, targeted high-return internal investments and accretive acquisitions.”
Q1 2015 Results - Press Release