Revenues at Smurfit Kappa show why it resisted takeover, says CFO

The strong interim results reported by Smurfit Kappa on Wednesday show why it resisted a €9 billion takeover approach from rival International Paper, its chief financial officer said.

“We knew we had a strong first quarter and a strong second quarter coming. [the results] absolutely were part of the decision making [to reject the bid],” Ken Bowles said.

“We felt that those results showed we can deliver value. We were always very comfortable with the decision we made [to reject the IP bid], and we still are,” Mr Bowles added.

Revenues at paper and packaging group Smurfit Kappa rose by 5 per cent to €4.4 billion in the first half of the year, driven by strong growth in Europe.

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According to results published on Wednesday, in the six months to June 30th, revenues at the group advanced by 5 per cent to €4.4 billion, with revenue in Europe up 7 per cent or € 233 million, driven predominantly by underlying growth with a small contribution from acquisitions.

In the Americas, sales fell by 3 per cent, or €38 million, “reflecting the negative impact of currency in the first half”. Earnings (ebitda) jumped by 27 per cent to €724 million.

Earnings in Europe were €148 million higher, while the Americas were €11 million higher, as the group benefited from lower recovered fibre costs, although it saw higher costs in areas such as labour, distribution, wood and other raw materials.

Mr Bowles said he was pleased with some price increases for its products that management had pushed through: “We did what we said we were going to do.”

Online shopping

In Europe, where Smurfit Kappa performed particularly well in its interim results, Mr Bowles suggested that the growing influence of online shopping from eretailers such as Amazon provided further growth opportunities. Packaging for home delivery of web-bought items is among the segments targeted by the group.

“The growth of ecommerce is not as advanced in Europe as it is in some other markets,” he said.

He also said the group sees future growth opportunities in the revolt by consumers against over-use of plastic packaging. He emphasised that “not all plastic packaging is bad packaging” but said Smurfit Kappa is focused on developing paper packaging products that could replace certain elements of plastic packaging.

He gave an example of new windscreens for Scania trucks, which previously were packaged in polystyrene but this has been replaced with more environmentally-friendly paper-based materials.

“That’s an area where we see innovation and growth, although the segment is still in its infancy.”

Pretax profits rose by 70 per cent to €416 million, with the group’s operating profit before exceptional items up 48 per cent to €529 million. The group had net debt of some €2.9 billion as of June 30th, down from €2.9 billion in the same period in 2017.

The group reported exceptional items of €31 million during the year, due to costs relating to its defence from the unsolicited approach by International Paper, and a loss on the disposal of its Baden operations in Germany.

The group is set to increase its interim dividend by 10 per cent to 25.4 cent per share, which will be paid on October 26th.

Davy Stockbrokers pointed to the expectation that the group’s free cash flow will be even stronger than currently forecast at year-end.

“This will provide the company with further shareholder value-enhancing options,” the broker said, as it reiterated its “outperform” rating on the stock.