Smurfit Kappa eyes further acquisitions as first half earnings decline

Smurfit Kappa is in a strong position with a number of deals in the pipeline, chief finance officer Ken Bowles has said.

He was speaking to The Irish Times after the paper packaging group announced a drop in first half earnings due to higher costs that impacted margins.

“Despite the fact that our key input costs have been heavy, as we look at our balance sheet and the demand environment for the remainder of 2017 and 2018, we’re in good shape,” Mr Bowles said.

His comments came as the company said in a note accompanying the results that it “is better positioned today than at any point in our recent history”.

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Smurfit reported a 3 per cent rise in second quarter revenues to €2.1 billion compared to the same period a year earlier. Earnings before interest, tax, depreciation and amortisation (ebitda) slipped 7 per cent to €292 million in the quarter however as against €312 million for the same three months last year and versus analysts’ consensus of €294.3 million.

The company also announced first-half results with pre-tax profit down 21 per cent to €245 million as revenues rose 5 per cent to €4.23 billion with strong demand reported in most markets. Revenue in Europe increased by €62 million year-on-year. In the Americas, revenue was up by €122 million year-on-year.

The firm’s interim dividend increased by 5 per cent to 23.1 cent in the January to June period.

Ebidta

Smurfit said ebitda in the second quarter was adversely impacted by reduced working days and increased recovered fibre costs.

Mr Bowles said recovered fibre costs, which have risen from about €141 a tonne in December to between €155 to €160 a tonne, was putting short-term pressure on the company.

Ebitda margin recovered to 13.9 per cent from 13 per cent in the first quarter, driven in part by the start of corrugated price recovery.

Smurfit and its rivals began increasing its corrugated prices in Europe and the Americas in the second quarter, and it has since indicated additional prices increases.

“In the first six months we’ve increased testliner prices by €80 a tonne and Kraftliner prices by 90 tonnes with further increases since then on both types of paper,” said Mr Bowles.

“With recovering fibre costs, a good outlook and very tight inventories, the pricing environment is very strong for container board,” he added.

Firepower

The company has been fairly quiet in terms of acquisitions of late but Mr Bowles said it had plenty of financial firepower.

“We have enough to spend whatever we want. The size of the deal wouldn’t necessarily be an inhibitor, it is about finding deals at reasonable multiples with quality assets that will fit back in with Smurfit ,” he said.

“Our pipeline remains reasonably strong both in Europe and the Americas. While we’ve been quiet over the last year there are some deals on the horizon,” Mr Bowles added.

With analysts’ consensus for full-year ebitda of around €1.27 billion, Mr Bowles said that number wasn’t out of the range for Smurfit. He stressed thought that renewed volatile recovered fibre costs could impact on this outlook.

In the first half, Smurfit Kappa invested €177million across its regions and expects to spend over €400 million by year end.