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| Smurfit Kappa's Townsend Hook facility in UK |
Smurfit Kappa, the international paper and packaging group, today reported an 18% drop in revenues for the first three months of 2009. Operating profits before exceptional items were down 47% to €82m from €156m the same time last year.
Smurfit Kappa said its first quarter performance reflected another strong showing from its Latin American operations and its progressively lower cost base. A further reduction in costs, especially for energy and wood, are also expected to benefit the company in the coming months.
Smurfit Kappa said that in light of the challenging economic outlook, it will not be paying out dividends in 2009. It also said that the ongoing uncertainty in the global economy makes its difficult to provide guidance in any meaningful manner.
Gary McGann, Smurfit Kappa Group CEO, commented: "In a difficult operating environment, we are pleased to report resilient EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) margins and continued strong cash flow management. As a result of the impact of the weak macro environment on both volumes and price, revenue was down compared to quarter one 2008. While down two percentage points year-on-year, EBITDA margins remained stable compared to quarter four 2008.
Bearing in mind reduced earnings, the relatively good cash flow outcome in a seasonally weak quarter primarily reflects lower debt servicing costs and continued working capital control. Due to phasing of certain projects initiated in 2008, capital expenditure equated to 71% of depreciation in the first quarter. SKG is on target to achieve its full year objective of reducing capital expenditure towards 60% of depreciation.
SKG continues to maintain a strong liquidity position with in excess of €700 million of cash on its balance sheet, unused committed credit facilities of €600 million and no material debt maturity until 2012.
The Group’s performance for the first quarter reflects another strong performance from its Latin American operations, the continuing benefits of the Group’s integrated business model, and a progressively lower cost base, supported by €30 million of cost take-out delivered over the period.
The ongoing uncertainty in the global economy makes it difficult to provide guidance in any meaningful manner. While demand and pricing remain under pressure, we are now seeing signs of increasing capacity rationalisation. From SKG’s perspective, the Group will continue to proactively adapt its production to its sustainable level of demand, and will continue to rationalise its system to maximise cost efficiency, while maintaining superior customer service.
Reduced capital expenditure and further input cost relief, especially for energy and wood, are expected to deliver their full benefit in the latter part of 2009. The Group has also increased its full year formal cost takeout target to €130 million for 2009. These factors should contribute to maintaining SKG’s industry-leading margins, and to maximising cash flow generation and net debt reduction in 2009 and beyond.”
Results detail
Goodbody analyst Robert Eason commented: Q1 results in line but forecasts at risk - - "Smurfit Kappa has reported Q1 EBITDA of €180m for the three months to the end of March. This represents a yoy decline of 30% and was broadly in line with our forecast (€178m) and consensus (€180m - range €160-€195m). Consistent with the other major players in the sector, Smurfit Kappa has reported further deterioration in underlying market conditions in Q1. This is reflected in a 12% decline in European corrugated volumes (versus -3% in FY08) and -11% in Latin America (versus -5% in FY08). As expected, weak underlying demand has resulted in continued pressure on corrugated pricing in Europe.
However, the outstanding performance for us is the 21% increase in underlying EBITDA in its Latin American operations (25% of group EBITDA), which helped to offset weakness in the European packaging and specialties businesses. Smurfit Kappa has reported net debt of €3,187m, broadly unchanged from Dec-08. This was slightly behind our forecast of €3,162m, the variance reflecting cashflow outflows in relation to provisions made and higher than expected change in capital creditors.
Net debt to EBITDA at 3.7x remains below covenant levels of 4.5x at end FY09 and 4.25x at end FY10. Given the challenging market backdrop, management remains focused on generating cash and paying down debt. This is demonstrated by an increase in its three year cost take-out target from €200m to €250m, an additional focus on curtailing all discretionary expenditure, which yielded €30m of savings in Q1, capex being on target to be 60% of depreciation by year end and the purchase of €43m of debt at a 24% discount. Overall, the “ongoing uncertainty in the global economy makes it difficult to provide guidance in any meaningful way”. At first glance, and subject to talking to management, we see some downside risk to our FY09 EBITDA forecast of €745m."
