Smurfit Westrock Plc (SW) Earnings Call Transcript & Summary

Ladies and gentlemen, hello, and welcome to the Smurfit Kappa First Quarter Update Call. [Operator Instructions] Just to remind you that this conference call is being recorded. Today, I'm pleased to present Mr. Tony Smurfit, Group CEO. Please go ahead with your meeting.

Thank you, Glenn, and good morning and thank you all for taking the time to join us today. I'm, as usual, joined on the call by our Group CFO, Ken Bowles. And before commencing, we would refer you to the notes on forward-looking statements set out in our trading update, which also applies to our discussion today. We have brought forward our trading update prior to going ex-dividend to provide clarity to the market. As you are all, too, familiar, we are living in unprecedented times with the impact of COVID-19. As always, our priority is the welfare of our people, their families and the communities in which we operate. Our values of safety, loyalty, integrity and respect have never been more relevant for us as an organization, and we see them being demonstrated by our colleagues right across the business at every level. The importance of our people has been a consistent feature of the Smurfit Kappa story. It is something we speak about at every reporting period and today is, of course, no different. Smurfit Kappa is closely monitoring the development of COVID-19 pandemic and its impact across our people, our operations and our broader stakeholder base. Our people are working together to protect each other and to help our communities by adapting our ways of working and by finding the best ways to succeed against this pandemic. Having learned from our colleagues in our Italian operations, we have introduced several group-wide measures to protect our employees and supported this with frequent communications to help them respond safely to the virus. During the quarter, all of our facilities were operational as a result of our employees' dedication and their commitment. Smurfit Kappa remains the partner of choice for innovative, sustainable packaging solutions, further strengthened by the scale and geographic reach of our operations. Our scale and expertise ensure our extensive and diverse customer base have been able to deliver their essential and critical supplies. We are an integral part of today's vital supply chains, helping to make sure that retailers will remain supplied with food and other necessary goods and making sure that critical pharmaceutical and medical devices reach the numerous healthcare facilities where they're require to help fight this pandemic and, of course, to save lives. The unique position of Smurfit Kappa with an integrated secure system of over 350 facilities and a global reach is a very significant strength. Equally, our unique culture embraced by over 46,000 employees continues to give me great confidence for the future. In an obviously challenging operating environment, I'm very proud of the commitment by all of my SKG colleagues in delivering an EBITDA result of EUR 380 million, with group margin of 17.3%. Volumes in Europe increased by over 3% or approximately 2% when adjusted for days and the positive impact of acquisitions. Good demand was seen across most markets with our FMCG customers showing strong demand in foods, dairy, pharma, home care and personal hygiene. Demand in the Americas grew by 3.5% year-on-year with good demand across most markets. As we look across our business today, demand continues to be good in most of our operations. Obviously, those that are geared towards industrial and noncritical supply chains have lower demand. However, those gears towards FMCG markets remain busy. The group's balance sheet, liquidity position and cash flow generation continue to give us confidence in the prospects for our business and its strategic direction. However, in light of the increased macro uncertainty due to the COVID-19 pandemic, the Board believes, at this moment in time, it is prudent to no longer recommend the previously proposed final dividend. An assessment of the quantum and timing of the dividend will be made later this year when the economic consequences of COVID-19 are better understood. As we look beyond those consequence, it is important to reaffirm our dividend policy, which is to provide shareholders with an attractive and progressive dividend stream. As you would expect during this period of uncertainty, we will naturally focus on reducing discretionary spend and will sharpen our focus on operating cost reduction. We expect also to reduce our CapEx during 2020 from the previously guided EUR 615 million to now to be in the range of EUR 500 million to EUR 550 million, and this is against EUR 730 million in 2019. The balance sheet strength and liquidity position is underpinned by the Group's inherently strong free cash flow generation. At the end of the first quarter, Smurfit Kappa has available liquidity of over EUR 1.5 billion made up of cash and committed credit facilities. SKG's debt maturity profile stands at over 5 years with no bond maturities until 2024, and we are rigorously managing our working capital. The steps we have taken in the recent past combined to strengthen Smurfit Kappa's position strategically, operationally and financially. We are the industry leader in innovation and sustainability, and we have an unrivaled geographic footprint to give our customers security of supply and access to the most advanced applications in the market. With our unique culture and the incredible dedication and efforts of each and every member of the SKG team, we are an integral part of today's vital supply chains, and their efforts have never been more relevant than during this global pandemic. Thank you, operator. Ken and I are now happy to take any questions from the people listening. I'll hand it over to you.

[Operator Instructions] The first question we have is from the line of Barry Dixon.

Just a couple of questions. Tony, could you perhaps give or characterize what volumes have looked like, particularly, say, between the FMCG and on the industrial side, say, since the start of the crisis, really from mid-March and more particularly, I suppose, as we get into the first couple of weeks in April. Second question is really around pricing, and we've seen or heard rumors that OCC prices spiking across Europe because collection rates have been distorted because of the epidemic or pandemic. Maybe you just chat about what you are seeing on OCC prices? How your grip is -- impacts your availability of OCC? Because I presume that what's important is the availability of OCC as much as the pricing. And then maybe how you mitigate that? And we've seen one of your peers yesterday are reporting or announcing a price increase on the 1st of May. And any thoughts in terms of further price increases on containerboard, and how quickly you think you can see those through into box prices?

Yes. Well, I would say, first of all, to take your -- the discussion on box volume. Clearly, during the second half of February and towards -- in March, we did see a shift towards significant volumes in FMCG customers and away from industrial customers. And I don't think anybody should be surprised of that. I think that we've seen continued demand in -- as we've gone into April with our FMCG customers. I would say that one of the things -- the very positive things about -- there is -- sorry, there is no positive thing about the pandemic, but the positive things that the government have done have been to keep the shops well supplied with food. And I don't think with the exception of the odd stock-outs here and there in the early stages of the crisis, and we've all listened to the toilet roll issues and things like that. But aside from those panic buying in the first couple of weeks, I think everybody has been fairly comfortable and confident of how the supply chain of food has gone. So -- and we are not seeing any abatement of demand from our FMCG customers and certainly not into April. I think there is obviously a shift that people are consuming more in their homes rather than going out to restaurants. And that, in itself, will require more packaging because of the individual nature of people's buying. And of course, the additional wastage people will have due to buying at this moment. So I believe that we're not seeing any slowdown. It may well come, Barry. We can't close our eyes to the fact that probably people did buy some stuff at the beginning of this and have it. And there will be a natural -- when this pandemic fears ease up, there may be some natural destocking of the stock that people hold in their larders. But I would say that overall, we're not seeing any movements away from FMCG customers. With regard to OCC pricing, I mean, that is actually a big -- for the same reasons, we're seeing individual buying more. We're obviously not having the collections of restaurants and central points and individuals, generally speaking, are not recycling as much as those bigger institutions would, so that fiber is going missing. And that is a consequence of COVID. And with the exception perhaps of Argentina, we are still getting our product without any difficulty. As you know, we've opened up 3 new recycling facilities in Europe in the last year. We're getting it. We don't have any problem getting it, but obviously, price may move as we move forward. And as you correctly say, one of our competitors has announced a price increase on the back of that. And if that price increase were to go through, and if the industry does follow it, then you would expect the normal indexes to happen as and when pricing would be translated into paper, which would be translated into boxes. I don't think we would see anything abnormal in that regard. But it is a surprise, frankly, when we looked at February, we would -- none of us would have predicted the pricing of OCC to be going up in the first half, as my CFO coughs into his sleeves.

As per guidelines.

As per guidelines. As you would expect.

The next question we have is from Justin Jordan from Exane.

I've got 2 separate questions. Firstly, can you just remind us just what proportion of the business is food and beverage and, let's say, agricultural packaging-related? And secondly, just on the various initiatives that government have put in place, not just in Europe but globally in terms of support for industries. If Smurfit Kappa were to temporarily shut the box plants or any other plants around the world, presumably, are you already in consultations with various unions or worker groups or governments on whatever potential help in terms of potential salaries support or whatever it may be available from governments around the world?

Justin, I'll take the first one, and I'll ask Ken to take the second one. We're actually doing really a deep dive into this whole FMCG question, really trying to separate who is essential -- pure FMCG and who is FMCG for, let's call it, restaurants, food for restaurants and things like that. So we're probably a little -- we're probably -- because we brought forward this call, we're probably a week away from really getting into accurate details on exactly where we are. But as a broad number, you would say that about 65% of our business is pure FMCG, and about another 10%, say 10% or -- say 15% will be somewhere between paper products and agriculture business. And then about another 20% on top of that will be things like furniture, wood-based sheet plants. So about 80% of our business would be, let's call it, food-related, household-related stuff. Now within that, I mean, some of that is going to be effective. For example, when we talk about customers that supply restaurants that would be food and food related, but they don't have any business right now. So from that perspective, an element of our food business will be affected negatively. Equally, if you take paper products, if you take some paper products, as you will know, hygiene will be doing very well, and others such as office papers may not be doing very well. So there'll be balancing out within the various subsections of our business. But I think if you took a broad rule of thumb, somewhere around 70% will be purely insulated and then probably around 10% of the 80% would be about -- would be affected. And then the balance of 20% will be affected by -- obviously, people are not buying a lot of furniture right now, things like that. So we're, I'd say, 70% purely insulated, and then the balance will be somewhat hurt or a lot hurt. Ken, you want to take this?

Justin, on the government support question, I suppose there's 2 bits to this really. I think it's important to remember that a lot of the schemes that people talk about now have been around forever. So where the short working schemes in Germany and the U.K. or Italy, they've always been programs that have been open to businesses to take account of periods of slack and companies have always accessed those. So they're -- people are using those to kind of get through the short-term impact of this. And we haven't really seen a lot of that yet, if any, to be honest. Simply because, as Tony talked about the quarter, quarter has been good and continues to be good, so our factories are running full and well with only very, very small parts of the business that would be impacted at this stage. And again, in those very discrete areas that have been directly impacted by demand as a result of pandemic. I think when you move on that question to what might happen in the future on government schemes and grants, I think that's a kind of a wait-and-see question. I think a lot of schemes will come in. I think that is a case of analyzing and seeing what effect they have, a, whether we can access them because of -- they're going to be linked to a drop of revenue or drop of earnings and something like that. So that has to be the impact that kind of the threshold membership of the scheme like that. And also whether that imposes any limitations on your ability to lending in the future around capital allocation. So I think as the schemes kind of develop and come to fruition, I think we look at all those things. I think it's -- the reality is these schemes have been put in place to ensure that employers like us continue to employ people. So they're employer-friendly to a certain extent, but I think you do need to analyze them to the fullest extent to make sure you don't -- short-term gain for long-term restriction is not really how you want this to play out. So I think at the moment, not a lot of access, the normal access that we would have because of periods where you go into some level of demand slowdown. But new schemes that are, if you like, COVID-19 related, I think we take those away, we analyze those in the greatest sense possible, then see whether they're for purpose for Smurfit Kappa or not.

The next question we have is from Lars Kjellberg from Crédit Suisse.

Just a couple of follow-up questions. I mean again, coming back to the business mix, to your point earlier, many stores are, of course, closed. Are you seeing any pickup in e-commerce or any issues with e-commerce customers in terms of logistics, et cetera? And also, when you're looking at the CapEx, you're, of course, scaling that back in line when you really stated out some flexibility in the medium-term plan spend. But is there anything particular that you're scaling back at this moment?

On the e-commerce side, to be honest, I can't really point to anything massively changing. I mean, obviously, from our own experience, you would expect it because we're all ordering more online. But from my side, I haven't seen any particular big pickup yet in e-commerce activity. I can't say that it isn't happening, Lars. It's just not come to my attention too much. But as I said, we're a little bit ahead of ourselves in the sense of the reason why we're -- as I mentioned, we're doing this call now is because we want to provide clarity prior to ex-dividend date. So we're a little bit ahead of our normal review process. But I would say that it's not really -- it's not something that people are saying, jumping up and down saying, God, we've got hell of a lot more e-commerce boxes at this stage because I just haven't heard that. And remember, during Q1, it is the low season, generally speaking, for e-commerce. I don't think there's a lot of people buying a lot of gifts, per se, at the moment, but it's more essential stuff that's been bought. So I just don't see it as being a massive pickup. But as I say, I don't have a whole visibility on it. But on the second point, the CapEx point, Ken?

On CapEx, Lars, it's probably a combination of a few factors. I think given social distancing and the requirements around, I think you'll see a natural falloff in some of the CapEx simply because people can't come to our facilities to do the CapEx that will be a chunk of it. I think the second piece then is when you sit back and look at the projects that you might have implemented across the balance of 2020, that's actually in hindsight, given where we are in our capital cycle and all the work we've done to date, we can probably afford to leave and wait until 2021. Because, as you know, we did a lot of capital in 2019, which meant that we were able to step down anyway into 2020. And indeed, we can phase some of that across 2021, as we see the -- if you like to visit, it's here before us. But I think it's a combination of looking at some projects that maybe don't need to be done now, and we can afford to wait and projects that just simply practically can't be completed because you can't get people on site to complete those projects, so it's a combination of both. But I think, again, I think with all these kind of areas of capital allocation, as we get to the half year, we'll be able to have much greater clarity on what's happening in the second half and into 2021, even at that point, I'd say.

And just to add to that, Lars, just we have put ourselves in a position with a very low forward planning for 2021. I mean we have basically completed or will have completed at least 80% of the large projects that we have in place in our paper division in Europe and to an extent in the Americas. So we don't have any large capital commitments going into 2021, so as to give ourselves maximum flexibility as we look forward in 2021.

Just one final question for me. The Americas performance continues to look really strong and you had a strong comeback in that business last year, also margin expansion. Slightly curious given the weakness we're seeing in the -- generally, in the Americas economies, what are you seeing that is driving that 3.5% organic growth? And where is it happening?

I mean I think you're seeing the recovery in markets such as -- that have been negative, such as Brazil and Argentina during the first quarter. Mexico continues to do well and Colombia did very well in the first quarter, although, I will caution in Colombia in April, we're seeing a slowdown because of the type of economy they have there in that country. And then additionally, flowers is a big number in the Colombian economy and Mother's Day didn't happen this year. So in April, you're seeing the flower industry get affected quite significantly, which has a -- I won't say material, would be the wrong word, but has a significant impact on volumes. I think overall, we just have very well-positioned businesses. We've always said that we've had well-positioned businesses there. Structurally, we've been investing. Our customers are growing with us the same -- there's a lot more FMCG there -- down there. So if you were to say where the FMCG business is probably higher percentage in the Americas than it is in Europe. And we -- as I say, we have strong businesses with good barriers to entry. And as you say, it's probably -- it is the best quarter we've had there in 3 or 4 years, and it's welcome to see it. Albeit, we are going to see -- remember, they had really no effect in the first quarter of the COVID because they're lagging. And so we just need to wait and see what happens in the second and third quarter as, unfortunately, this virus starts to spread its ugly wings in that part of the world.

So then are you in support of the price increase for testliner?

You'll know at the same time as everyone else will know when we announce something.

The next question we have is from Cole Hathorn from Jefferies.

Ken, first one for you on costs through the year. Could you give us an update of how you're thinking about the key cost buckets? I imagine logistics going higher, employment costs probably going a little bit higher due to overtime payments, but probably lower energy, et cetera. And then Tony, I was wondering if you could elaborate a little bit more on the benefits of your scale and having your integrated system when it comes to higher OCC prices. And how you're going to ride the situation out better than some of your smaller competitors that may just be a paper mill or just a box plant?

On cost, generally, I think it's probably too early to say whether or not some of those incremental cost increases we've had either for increased volume or for order delays on logistics or things like that will have a material impact on the year because I think other cost buckets, if you like, have appeared, which would probably offset those to a certain extent. Energy, as you point out, will certainly be a tailwind as we go through the year, both probably in quantum and a little bit in terms of operating effectiveness. Equally, you expect to see savings around repairs and maintenance as some of those capital projects are not getting done, don't have the associated operational costs with them. So I think it's -- I don't think we'd necessarily change our view on how we saw the cost dynamics for 2020 changing just yet. I think, again, a bit of clarity around the half year will be where that will appear. But I think you are seeing where there's some cost take in. I think you naturally see whether it's travel and entertainment, for example, where none of us are traveling. You see those kind of things begin to fall off. You see natural attritions around other bits and pieces of the business. So I think at this point, I'd say to you, in the balance of some of those cost intake have probably now offset by cost takeouts because of other factors, whether that's a bit of energy, a bit of third-party contractor not coming to sites, those areas. So for the moment, I'd probably say it's in the round, not material upside downside. But again, I think as we go towards the second part of the year, I think we'll have better clarity on the impact of that on the full 2020.

And Cole, if I can take your question in 2 parts. I mean one of the things that really has come very apparent to all of our people internally is how appreciative our customers are of the security of supply that we're giving them, both from an increased demand perspective that we've been able to meet and also from the security of supply that we've been able to keep our facilities running. And at times like this, the value that we show to our customers is immense. And I think the amount of credits that we've been getting from all of our customer base, I would say, especially some of the larger ones, in helping them manage their own surges in this demand has been really quite a great thing for me to see and then certainly for my fellow executives to see. I think, obviously, having the scale that we have, having the paper that we have behind our box plants, having the system that we have, gives those customers a tremendous amount of confidence that they're not dealing with a single plant or dual-plant operator that is able to deliver them in all factors, and that is going to count for something. And as we come out of this crisis, I think that Smurfit Kappa will be even better positioned than it was before, and notably see it so by everybody. So I think from that side, the integrated model, the benefit of the scale that we have, the -- leaving aside the innovation, leaving aside the sustainability, but taking the security of supply again is a real positive. With regard to OCC, as you know, as I mentioned this earlier, I think that we've added 3 additional recycling facilities. When we bought Parenco, we bought -- we had additional -- they had an additional collection facility. We are pretty well self-sufficient in the sense of either through contract or through direct access to our OCC. And so I don't think we'll have a problem with supply, and then we've never felt we will have a problem with supply. Obviously, the price is the issue that we would always be concerned about. And that's something, we don't ride it all the way down because for the same reasons that we're able to secure supply, we're not in the -- to any great extent in the spot market. And so we would say that our relationships, our ability to secure supply, our contracts, our depots, our own OCC that we generate ourselves from our waste in our facilities is all giving us pretty well -- I'm not saying we can't have the odd day here and there where we're short, but basically, we won't run out of OCC.

Great. And just one follow-up on that. I mean you talked about security of supply and the positive feedback from the customers, how do you think share trends are going to be developing this year across the market? Do you think yourself -- Smurfit Kappa is a lot better placed to take more market share this year from your competitors?

I would say, in the normal course of events, the answer to that is absolutely yes. It's a combination of things, Cole. It's obviously the offering that we have. Our -- we talked about this, obviously, many times, our sustainability agenda, the applications we have, the way we're able to help our customers reduce cost. In the short term, while this pandemic is going on, a lot of the business that we won last year still hasn't transferred to us because the fact is you have to have machine time to do trials. I mean it is not easy to move corrugated box business around without making sure that it works on the customers' line first to go through the whole supply chain. We continue to talk about how sticky our business is. And the more customers become automated, the more sticky this becomes -- our business becomes. And clearly, when you win business as we won a lot of business last year to be implemented this year, that's slower coming in than we would have ideally liked it because we just don't -- we can't get the people into the factories to do the tests to make sure that it runs on their lines okay. So there's a delay on that. But when this whole thing ends, we will definitely be better positioned than anyone else to take advantage of the megatrends that are out there. Any more questions? Hello? I understand that we're still on the line and apologies for those that are coming to ask questions. But as all of you who will have known when you go on conference calls these days, there seems to be a lot of interference with regard to calls being dropped. And certainly myself and Ken, who've host 2 or 3 calls a day with our executives will have many of these calls dropped during the call, so I think that's what's happened here. So apologies to those that have questions waiting. And if you'd like, Ken and myself will take them off-line. But I would say that to thank you all for taking the time, if you can still hear me to participate in the call. As I said, Smurfit Kappa is extremely well positioned, both financially and operationally to be able to continue to deliver for all of our stakeholders. As you all know, the work that we've done through investments over the last number of years and the innovations that we have to give to our customers and the innovations that we're able to offer has put Smurfit Kappa in an extremely strong position to be able to demonstrate the strength of our business and the results of today -- of the first quarter should show everybody that, and I hope that, that's well seen by everybody. I would like to thank, finally, on behalf of the Board, especially like to thank our employees, our customers and, of course, not forgetting our suppliers for continuing to work with Smurfit Kappa to ultimately make a vital contribution in the fight against this terrible pandemic and this terrible time that we're all living through. We're in very good shape, and we appreciate the support of all of our stakeholders, and we thank you for your attention. And of course, myself and Ken wish you all the best health and keep safe during this difficult and challenging time. So thank you all for joining us, and have a good morning and afternoon.