Smurfit Kappa's Q4 net income up 66.7% year-over-year to €95M, net sales up 4% to €1.82B, influenced by positive impact of currency, hyperinflation, acquisitions; company reinstates dividend after suspending it in 2009
February 8, 2012
– Smurfit Kappa Group plc (“SKG” or the “Group”), one of the world’s largest integrated manufacturers of paper-based packaging products, with operations in Europe and Latin America, today announced results for the 3 months and 12 months ending 31 December 2011.
Full Year 2011 Highlights
– EBITDA growth of 12% to €1,015 million
– Pre-exceptional EPS growth of 69% to €1.00
– Improved EBITDA margin of 13.8% and ROCE of 12.5% reflects continued operating efficiency
– Year-end net debt of €2.75 billion, exceeding net debt reduction target. Net debt/EBITDA of 2.7x
– Launching amendment to further extend debt maturities. Cash balance of €857 million at year-end
– Strong operating performance & capital structure now provide expanded range of strategic options
– Dividend reinstatement. The Board recommends a final dividend of 15 cent (current yield of over 3%)
Performance Review & Outlook
Gary McGann, Smurfit Kappa Group CEO commented: “We are pleased to report EBITDA growth of 12% to €1,015 million and pre-exceptional EPS growth of 69% to €1.00 for the full year of 2011. Our strong free cash flow generation delivered a net debt reduction of €358 million to €2.75 billion in 2011, which exceeded our net debt reduction target. Lower net debt combined with a strong EBITDA outcome delivered a reduction of our net debt to EBITDA ratio to 2.7x at year-end.
Our strong financial performance demonstrates the benefits of our continued efficiency improvements and market-leading platform, which delivered material growth in our pan-European business. A number of significant development investments were carried out in 2011, reinforcing our position as the leading integrated business in our industry, in both Europe and Latin America. We are continuing our unrelenting focus on customer service, product innovation and operating efficiency.
Within the past 18 months, we have materially improved the financial profile and flexibility of SKG, by reducing net debt by approximately €540 million, while maintaining a strong liquidity position and diverse funding sources. The amendment request launched today, to extend the maturities of our Senior Credit Facility to 2016 and 2017 and to further increase our financial flexibility, forms part of an ongoing process of efficient balance sheet management.
The sustained strength of our operating performance together with our enhanced capital structure provide us with an expanded range of strategic and financial options. These include continued debt paydown, increased presence in higher growth markets and a progressive dividend stream. Opportunities will be prioritised to maximise shareholder returns, with a clear objective of maintaining a net debt to EBITDA ratio of below 3.0x through the cycle.
While macro-economic risks remain, in 2012 and beyond, we expect to continue delivering strong free cash flow through the cycle. As a consequence of our increased financial flexibility and sustained confidence in the long-term outlook for our business, we are satisfied that it is appropriate and timely for SKG to reinstate a sustainable dividend stream.
Consequently, the Board is recommending a final dividend of 15 cent per share for 2011, currently representing an annualised yield of over 3%.”
2011 Fourth Quarter & Full Year | Performance Overview
Despite significantly higher input costs in 2011, the Group delivered a relatively strong and improved EBITDA margin of 13.8% for the full year, leading to an enhanced return on capital employed of 12.5%. This outcome primarily highlights the benefits of SKG’s efficient integrated model, together with a continuing focus on cost efficiency and fair product pricing. At the end of 2011, the Group’s stated target of 24% box price recovery from the 2009 low point was successfully achieved.
The Group’s improved performance in 2011 also reflects the increasing contribution of its Latin American business, which delivered an EBITDA growth of 19% and a margin of 18.4% for the full year. While Colombia and Venezuela performed well in 2011, earnings in Mexico and Argentina were somewhat weaker.
SKG’s objective remains one of generating consistently strong margins and returns through the cycle, underpinned by a superior commercial offering, and disciplined capital allocation decisions. In 2011 we significantly enhanced the efficiency of our integrated system, through judicious investments in our European packaging operations, the start-up of a greenfield box plant in Mexico, a major boiler re-build in our Piteå kraftliner mill in Sweden, significant rebuilds in our Hoya and Wrexen recycled mills in Germany and the closure of our high cost recycled mill in Nanterre, France.
Furthermore, consistent with its stated objective of expanding its packaging business in higher growth markets, in the fourth quarter and in January 2012 the Group concluded two bolt-on acquisitions, in Russia and Argentina respectively. In Russia we acquired a box plant in St Petersburg for €8 million (net of cash acquired), thereby further increasing its presence in the region. This action will help SKG to deepen its relationship on a wider geographic basis with its strong international customers, while also accessing attractive local business.
The Argentinian acquisition represents a further expansion and internationalisation of the Group’s growing Bag-in-box business. The consideration for the deal was US$15 million (net of cash acquired). This transaction was facilitated by SKG’s presence and experience in Argentina and represents an exciting opportunity to expand our business in this relatively high margin product and geographic area of our business.
The progressively weakening economic fundamentals that prevailed in Europe in the second half of 2011 clearly impacted consumption and output in the region, which led to a decline in packaging demand. Following a 2% underlying demand growth in the first half, SKG’s box volumes grew by 1% in quarter three, and declined by 2% in quarter four.
The somewhat softer demand environment that prevailed since the third quarter led to a rise in European recycled containerboard inventories, which combined with reducing raw material costs generated a significant decline in paper prices. From the peak in quarter two to the year-end, recycled containerboard prices have reduced by €115 per tonne, while OCC costs have only reduced by approximately €50 per tonne, thereby creating significant margin compression for non-integrated containerboard producers. Lower margins led to significant market-related downtime being announced for the year-end.
Early in 2012, a generally stable demand environment combined with renewed upward pressure on OCC costs led to widespread recycled containerboard price increases announcements for implementation in the first quarter, combined with additional downtime plans. The Group has announced price increases of €100 per tonne for recycled containerboard, and €60 per tonne for kraftliner.
The Group’s free cash flow generation of €394 million in 2011 was significantly stronger than in 2010, primarily reflecting a higher EBITDA, reduced absolute working capital levels, and lower cash interest costs year-on-year. The strong free cash flow performance delivered a €358 million reduction in net debt to €2.75 billion at year-end, thereby exceeding the Group’s stated guidance of €2.85 billion.
From a leverage perspective, the 12% reduction in net debt delivered in 2011, combined with SKG’s sustained strong operating performance, resulted in a reduction in its net debt to EBITDA ratio to 2.7x at December 2011, compared to 3.4x in the prior year. Moving forward, the Group’s objective is to maintain a net debt to EBITDA ratio of below 3.0x through the cycle.
Since the IPO in 2007, and despite significant macro-economic headwinds in the period, the Group’s net debt has reduced by approximately €800 million, thereby demonstrating SKG’s ability to generate strong free cash flow at all points in the cycle. The Group’s materially improved capital structure provides it with an expanded range of strategic and financial options to enhance shareholder value going forward.
2011 Fourth Quarter | Financial Performance
At €1,819 million for the fourth quarter of 2011, sales revenue was €70 million higher than in the same period last year. Allowing for the net positive impact of currency and hyperinflation accounting of €7 million and for the positive impact of €3 million relating to acquisitions net of disposals, revenue increased by €60 million year-on-year, the equivalent of over 3%.
Compared to the third quarter of 2011, sales revenue in the fourth quarter was 3%, or €49 million lower. Allowing for a net €10 million positive impact of acquisitions, currency and hyperinflation accounting, the underlying move was a decrease of €59 million, the equivalent of 3%.
At €245 million, EBITDA in the fourth quarter of 2011 was €12 million lower than the fourth quarter of 2010, the equivalent of a 5% reduction. Allowing for the net positive impact of currency and hyperinflation accounting of €4 million, the positive impact of €2 million relating to acquisitions and the absence of loss-making operations, EBITDA decreased by €18 million year-on-year, the equivalent of a 7% reduction. Compared to the third quarter of 2011, EBITDA showed an underlying decrease of €22 million in the fourth quarter, the equivalent of an 8% reduction.
While exceptional items charged within operating profit in the fourth quarter of 2011 were negligible, the exceptional finance income of €6 million related to the receipt of monies from the liquidator of a company in Spain that the Group had formerly invested in. Exceptional items charged within operating profit in the fourth quarter of 2010 primarily related to the disposal of the Group’s Polish paper sack plant and of its Rol Pin operation in France.
2011 Full Year | Financial Performance
Revenue of €7,357 million in the full year 2011 represented a 10% increase on the 2010 level. The net impact of currency, hyperinflation accounting and acquisitions net of disposals and closures, was negligible.
EBITDA of €1,015 million in 2011 was €111 million, or 12% higher than in 2010. Currency and hyperinflation accounting increased comparable EBITDA by €12 million, while acquisitions and the absence of loss-making operations added €8 million. As a result, the underlying increase in EBITDA was €91 million, or 10%.
Exceptional items charged within operating profit in 2011 amounted to €34 million and related primarily to the closure of the Nanterre mill in France in the second quarter. Exceptional items in 2010 amounted to €81 million, of which €64 million related mainly to the asset swap with Mondi and €17 million related to a currency trading loss on the devaluation of the Venezuelan Bolivar.
Operating profit after exceptional items for the year was €590 million compared to €409 million for 2010, an increase of 44%.
Net finance costs of €295 million were €13 million lower year-on-year primarily reflecting a lower average interest cost. The net finance costs include exceptional finance income of €6 million related to the receipt of monies from the liquidator of a company in Spain that the Group had formerly invested in.
Profit before income tax of €299 million compared to a profit before income tax of €103 million last year.
Adjusting for exceptional charges, pre-exceptional EPS was 100.1 cent for the full year 2011, a 69% increase on the 59.4 cent reported in 2010. The increased EPS in 2011 primarily reflects a 28% growth in pre-exceptional operating profit, and a somewhat lower net interest charge. Basic EPS was 93.0 cent for the full year 2011, compared to 22.9 cent for 2010.
2011 Fourth Quarter & Full Year | Free Cash Flow
The Group’s free cash flow performance of €394 million in 2011 clearly demonstrates its cash flow generation capability through the cycle. Compared to the €82 million delivered in 2010, SKG’s improved 2011 free cash flow performance primarily reflects a €111 million growth in EBITDA year-on-year, combined with a lower cash interest expense and a significant improvement in working capital.
In line with the Group’s stated guidance, capital expenditure for the full year 2011 equated to 89% of depreciation, the equivalent of €309 million.
The Group benefited from a strong working capital inflow in the fourth quarter, primarily highlighting lower end-market demand leading to reduced debtors, and improved creditor terms. For the full year, SKG’s free cash flow performance was supported by a working capital inflow of €43 million. At December 2011, working capital of €517 million represented 7.1% of annualised sales revenue, compared to 8.4% at the end of 2010.
Cash interest expense in 2011 of €245 million was 5% lower than in 2010, primarily reflecting a lower average interest cost year-on-year. Cash tax payments of €72 million in 2011 were €10 million lower than in 2010.
2011 Fourth Quarter & Full Year | Capital Structure
The Group’s net debt reduced by €358 million to €2,752 million in the full year 2011, mainly reflecting SKG’s strong free cash flow performance. The purchase of investments of €10 million related mainly to the acquisition of the St. Petersburg box plant in the fourth quarter. Currency negatively impacted net debt by €10 million in 2011, mainly reflecting the relative strengthening of the US dollar against the euro.
At €2,752 million at the end of 2011, the Group’s net debt is below its stated guidance of €2,850 million. From a leverage perspective, SKG’s net debt to EBITDA ratio of 2.7x at December 2011 is at its lowest level since the Smurfit Kappa merger in 2005, and well within its indicated leverage range. Moving forward, the Group intends to maintain a net debt to EBITDA ratio of below 3.0x through the cycle.
Furthermore, SKG continues to maintain a very strong liquidity position, with €857 million of cash on its balance sheet at December 2011 together with committed undrawn credit facilities of approximately €525 million. The Group’s average debt maturity profile is 4.4 years.
Senior Credit Facility Amendment Request
Notwithstanding the absence of material debt maturities until December 2013, the Group today announced that it is seeking the consent of its lenders to amend its Senior Credit Facility Agreement, in order to further extend its debt maturity profile and enhance its overall financial flexibility. A significant number of the Group’s top lenders have already confirmed their support for all of the proposed amendments and maturity extension.
The key amendment requests are to (a) extend the maturity of the Group’s Term Loans B and C to 2016 and 2017 respectively, (b) extend the maturity of the Revolving Credit Facility (‘RCF’) to 2016, and (c) seek flexibility to raise longer dated secured bonds, as and when market conditions are considered optimal, in order to refinance its existing facilities.
Subject to the approval of at least 66.66% of its lenders to the requested amendments, the Group will pay each consenting and extending Term Loan B and C lender an upfront fee of 50 basis points (‘bps’), and a margin increase of 50bps at current leverage levels. Extending lenders are also offered a 20% cash prepayment to be funded from existing cash balances.
Consenting and extending RCF lenders will receive an upfront fee of 65bps, an increased commitment fee, and a margin increase on drawn amounts.
For further details on the amendment request, please refer to the Group’s related press release and amendment request letter, available for download from SKG’s website at www.smurfitkappa.com.
Board of Directors
On February 2, 2012, Irial Finan was co-opted to the Board as an independent, non‐executive Director. Irial is currently Executive Vice President of The Coca-Cola Company and President of the Bottling Investments Group. His extensive experience across international markets with one of the world’s leading companies will meaningfully contribute to the Board and the continued development of SKG.
Early in 2009, SKG took a number of pre-emptive actions to maximise its debt paydown capacity and underpin the financial strength of the Group in the increasingly challenging economic climate that prevailed at that time. Those actions included increased cost take-out initiatives and a temporary reduction in capital expenditure. The Group also deemed it prudent to suspend dividend payments in the circumstances.
Entering 2012, as a consequence of our increased financial flexibility and sustained confidence in the long-term outlook for our business, the Board is satisfied that it is appropriate and timely for SKG to reinstate a sustainable dividend stream.
In that context, the Board is recommending a final dividend of 15 cent per share for 2011. It is proposed to pay the final dividend on 11 May, 2012 to all ordinary shareholders on the share register at the close of business on 13 April, 2012.
The Directors intention is that interim and final dividends will be paid in October and May in each year in the approximate proportions of one third and two thirds.
2011 Fourth Quarter & Full Year | Operating Efficiency
Commercial offering and innovation
In 2011, SKG secured significant incremental business from key pan-European customers. Overall, from 2006 to 2011, the Group’s pan-European business has grown by approximately 20% in a broadly stable market, thereby clearly demonstrating the adequacy of its offering with the needs of a globalising customer world. With approximately 80% of its pan-European business contracted from 1 to 6 years, SKG is clearly building long-term sustainable partnerships with its customers.
Using the skills and experience acquired in servicing the most demanding of international customers, we have continued to pay special attention to the recruitment and retention of local customers who benefit from best international standards from our businesses.
The Group’s strong commercial success is underpinned by its unique “one-stop-shop” offering, characterised by a broad and expanding geographic footprint, a diversified product range, and unrivalled design and innovation capabilities. On the design side, in 2011 SKG launched an improved version of its “paper to box” tool, a major breakthrough in the industry, allowing the definition of fit-for-purpose packaging at an optimised cost for our customers. The tool is based on in depth studies and is calibrated using a benchmark of over fifteen billion packages across all market segments.
On the innovation side, in 2011 SKG introduced a new range of “hybrid packages”, mixing corrugated and solidboard. These unique SKG packaging solutions offer the superior supply chain performance of corrugated combined with the attractive shelf appearance of solid board. Various FMCG projects have already shown the growth potential of this innovation.
Furthermore, using our extensive expertise in the retail sector, we have developed a patented box perforation called “Sharkline”, which optimizes retail ready packaging solutions. This innovation guarantees optimal protection in the supply chain while significantly lowering material costs, thereby offering better value to our customers.
Another of SKG’s unique competitive advantages is its strong drive to support our customers to meet their sustainability agenda, underpinned by an objective to be the first European company able to guarantee that all of its packaging solutions are coming from sustainable sources. As of today, approximately 50% of SKG’s corrugated operations are already “Chain of Custody” certified under PEFC or FSC, with a target to get to 90% by 2015.
The Group’s efforts to enhance its innovation and service offering are being recognised by a number of stakeholders. For example, in September 2011 SKG won two awards from the German print association, in a competition that included over 300 packaging designs from 90 different companies. During 2011, SKG also received sustainability-related awards from both Unilever and Coca-Cola Enterprises.
Within our paper operations, we continue to make significant investments in improving our substrates, optimising our raw materials and improving the basic product which assists our packaging innovation and sustainability efforts. Amongst the new outputs this year have been our “Royal 2000” kraftliner white paper offering from our French and Swedish mills. In addition, we commenced production of higher margin Recycled White Top liners in our Wrexen mill (Germany).
Our objective is to have the best integrated paper and board system in Europe. Significant investments in 2011 in our Piteå, Hoya, Wrexen, Nervión and other mill systems have improved the quality of our products and the efficiency of our production, and have moved us closer to achieving our sustainability targets which continue to differentiate our products in the end market.
Similar programmes are in progress in our Latin American operations with the objective to achieve international best in class standards in our products, service and systems. In that context, as well as continuing to upgrade our Latin American packaging plants, we invested in a greenfield box plant in Mexico in response to strong market opportunities. The investment in our Cerro Gordo mill in Mexico City in 2012 will further enhance the quality of our paper in the country.
As in Europe, we also continued our programme of progressing our sustainability and efficiency performance with significant investments in our mill systems in Cali, Colombia and in our Buenos Aires mill.
Our efforts to enhance our mills system in Europe and Latin America resulted in SKG being one of only two companies to win two of the awards at the 2011 PPI (“Pulp & Paper Industry”) Global awards.
Cost take-out programme
In 2011, SKG commenced a new 2-year cost take-out initiative, with a target to generate €150 million of savings by the end of 2012. This programme is based on a detailed bottom-up approach and is subject to a formal reporting system.
SKG generated €100 million of cost take-out benefits in 2011 (including €25 million in quarter four). This strong outcome partially mitigated the impact of materially higher input costs year-on-year, and contributed to the delivery of the Group’s relatively strong EBITDA margin of 13.8% in 2011.
Having exceeded its first year target, SKG is confident that it can improve on its two year target of €150 million, and is now engaged in re-assessing its areas of opportunity on a bottom-up basis.
Reorganisation of Specialties segment
With effect from 1 September, 2011 the Group transferred its Specialties businesses into its existing European Packaging segment. This reorganisation is increasing the focus of the Group’s commercial offering, and creates a platform for SKG to become a “one-stop-shop” for paper-based packaging solutions.
This initiative will also enhance the Group’s overall cost efficiency, and should contribute to improving the margins of its solid, graphic and carton board businesses.
From quarter three 2011 onwards, the segmental reporting for the Group reflects the new organisational structure. Comparative periods have been restated to reflect the new structure.
Corporate social responsibility
In its fourth annual sustainability report, released during the third quarter of 2011, SKG highlighted its continued progress and commitment to social and environmental best practices and cited tangible evidence of this.
2011 Fourth Quarter & Full Year | Performance Review
When including the volumes from acquired operations, the Group’s total corrugated volumes in the full year 2011 were 2% higher than in 2010. On a like-for-like basis however, following the 2% demand growth in the first half, demand for SKG’s corrugated packaging solutions grew by 1% in quarter three, and declined by 2% in quarter four.
As is usual within the Group’s business, it takes three to six months to fully pass through higher paper prices to box prices. As a result, SKG’s box prices were on average 2% higher in the third quarter compared with the second quarter, and remained generally stable through the fourth quarter. For the full year 2011, SKG’s European box prices were on average 11% higher than in 2010.
Higher box prices, together with the Group’s strong focus on cost efficiency contributed to deliver a European EBITDA margin of 13.4% in the full year 2011, slightly higher than 2010 levels despite a much tougher operating environment. In 2011 SKG’s European raw material and energy costs were approximately €350 million higher than in 2010.
At industry level, recycled containerboard inventories rose in the third quarter, as most paper producers continued to run at full capacity despite softening demand, in both domestic and export markets. Higher inventory levels led to a €115 per tonne reduction in European recycled containerboard prices during the second half of the year, reaching an absolute level of approximately €380 per tonne in January 2012.
On the raw materials side, downward pressure from European buyers combined with lower Chinese demand, led to a €50 per tonne reduction in OCC prices during the second half of 2011. Although somewhat mitigating the impact of lower paper prices, the reduction in OCC costs was not sufficient to avoid significant margin reduction for non-integrated recycled containerboard producers.
However, in the case of SKG, following the permanent closure of 10 less efficient containerboard mills since 2005, together with significant investments in its “champion” mills, the Group is equipped with an efficient and fully integrated recycled containerboard system. As indicated by its strong EBITDA margins, SKG’s integrated system should allow it to outperform in any operating environment.
The Group estimates that over 200,000 tonnes of market-related downtime was taken towards the year-end, which allowed for industry inventories to remain broadly stable in the seasonally weaker holiday period. Furthermore, renewed upward pressure on OCC costs and generally stable demand early in 2012 created a platform for the Group to announce a €100 per tonne recycled containerboard price increase.
On the kraftliner side, in the first eleven months of 2011, US imports into Europe were 15% higher than in the prior year, although this was somewhat offset by a 9% reduction in imports from other regions. Overall, net kraftliner imports into Europe increased by approximately 100,000 tonnes in the period. Lower priced US tonnage created downward pressure on domestic kraftliner prices, which have declined by approximately €100 per tonne since the beginning of 2011, to a level of approximately €540 per tonne in January 2012.
Reduced European kraftliner prices combined with the strengthening of the US dollar against the euro makes Europe a less attractive market for overseas exporters, which resulted in lower US imports into Europe in the fourth quarter. In that context, at the end of January 2012 the Group announced a kraftliner price increase of €60 per tonne.
Our Bag-in-box business continued to deliver strong growth in 2011, with bag volumes increasing by approximately 15% year-on-year. In January 2012, the Group acquired a bag-in-box operation in Argentina which together with our European, Russian and Canadian operations further enhances our global footprint. This business has significant growth opportunities globally and SKG is very well positioned to be a world leader in the years ahead.
In the full year 2011, Latin American EBITDA of €237 million represented 23% of the Group’s total, and an 18.4% margin on revenue (compared to 17.8% in 2010). The 19% growth in EBITDA delivered in 2011 primarily reflects an improved performance in US dollar terms in Colombia and Venezuela, somewhat offset by a lower result in Mexico and Argentina.
SKG’s corrugated volumes in Colombia experienced relatively strong year-on-year growth of 5% in 2011, although the pace of demand growth was somewhat softer in the fourth quarter. Corrugated pricing in the fourth quarter increased by 1% compared to the third quarter, which together with continuing cost efficiency efforts supported the delivery of an enhanced EBITDA margin in the period.
SKG’s corrugated volumes in Venezuela were flat year-on-year in 2011. Continuing high inflation in the country was more than offset by the Group’s operating efficiency actions, as well as necessary price recovery. In July, the Venezuelan authorities issued precautionary measures over a further 7,253 hectares of the Group’s forestry land, with a view to acquiring it and converting its use to food production and related activities. Since the announcement from the authorities the Venezuelan team is working hard at local and regional level to find an accommodation that will ensure an optimal outcome for SKG, its customers, its employees and the communities.
Despite a 5% increase in box prices and a continuing focus on operating efficiency, in 2011 SKG’s Mexican EBITDA in US dollar terms was lower than in 2010. This primarily reflected significant inflationary pressure and a 1% box volume decline year-on-year. To further improve the efficiency of its Mexican integrated system, SKG is planning a re-build of its main Mexican containerboard machine in quarter one 2012.
High inflation continues to prevail in Argentina. As a result, and despite a material increase in SKG’s corrugated prices in 2011, EBITDA margins in the country contracted compared to 2010 levels. Consumer spending power was also affected by rising inflation, as outlined through the 2% reduction in the Group’s corrugated volumes in 2011, a trend that was sustained in the fourth quarter.
Despite some country-specific challenges from time to time, the Group believes that the geographic diversity of its business in the Latin American region, together with the proven ability of its local management to drive the business, will continue to deliver a strong performance through the cycle. Latin America remains SKG’s core target region for future growth.
About Smurfit Kappa Group
Smurfit Kappa Group is a world leader in paper-based packaging with operations in Europe and Latin America. Smurfit Kappa Group operates in 21 countries in Europe and is the European leader in containerboard, solidboard, corrugated and solidboard packaging and has a key position in several other packaging and paper segments. Smurfit Kappa Group also has a growing base in Eastern Europe and operates in 9 countries in Latin America where it is the only pan-regional operator.
Industry Intelligence Editor's Note: In an omitted table, Smurfit Kappa reported Q4 net income of €95 million. For the same period a year ago, the company recorded net income of €57 million and net sales of €1.75 billion.