Smurfit Kappa Group plc (LON:SKG) has announced results for the half year ending 30 June 2023.
2023 Half Year | Key Financial Performance Measures
| €m | H1 2023 | H1 2022 | Change |
| Revenue | €5,837 | €6,385 | (9%) |
| EBITDA 1 | €1,113 | €1,174 | (5%) |
| EBITDA Margin 1 | 19.1% | 18.4% | |
| Operating Profit before Exceptional Items 1 | €779 | €839 | (7%) |
| Profit before Income Tax | €659 | €769 | (14%) |
| Basic EPS (cent) | 184.0 | 221.9 | (17%) |
| Pre-exceptional Basic EPS (cent) 1 | 197.2 | 221.9 | (11%) |
| Free Cash Flow 1 | €119 | (€28) | – |
| Return on Capital Employed 1 | 19.0% | 19.3% | |
| Net Debt 1 | €3,175 | €3,309 | (4%) |
| Net Debt to EBITDA (LTM) 1 | 1.4x | 1.6x |
Key points:
- Revenue of €5.8 billion
- EBITDA of €1.1 billion and an EBITDA margin of 19.1%
- Return on capital employed of 19.0%
- Free Cash Flow of €119 million
- Interim dividend increased by 6% to 33.5 cent per share
Tony Smurfit, Group CEO, commented:
“We are pleased to deliver an excellent outcome against a challenging macro backdrop with a strong first half performance. In a declining volume environment this reflects both the quality and resilience of SKG’s integrated and geographically balanced business model. Although volumes declined by 6% in the first half, we saw market share gains across many of the countries in which we operate, and encouragingly, in Europe, during the second quarter, we saw our shipments per day improve on the previous three quarters.
“The steps we have taken and continue to take, have positioned SKG for long-term growth. These include expanding our geographic reach and product portfolio, our unrelenting focus on customer-led innovation and promoting our product’s natural sustainable advantage to advance new growth opportunities. Additionally, through our integrated model, customers benefit from security of supply even in the most challenging market conditions.
“As a result, SKG is the packaging partner of choice for the world’s leading companies. Our team continues to excel in supplying market-leading, innovative and sustainable packaging best reflected, within the period, by market share gains across many of the countries in which we operate. The significant number of design, innovation and sustainability awards received over the years are recognition of our customer focus and continues to demonstrate the quality and expertise of our people and the value they provide.
“In March, the Group announced that it had sold its Russian operations to local management, completing its exit from the Russian market. On a more positive note, in July of this year we expanded our geographic reach with the opening of our new integrated, state-of-the-art plant in Morocco and the acquisition of a specialty packaging operation in Spain.
“Our 16th Sustainable Development Report emphasises the Group’s progress and commitment to our 2030 targets. The Group continues to invest in sustainability, minimising both our own and our customers’ environmental impact and supporting the circular economy.
“With net debt to EBITDA at 1.4x, no significant debt maturities until 2026 and our most recent Green Bond issuance having achieved coupons of 0.50% and 1.0% for terms of 8 and 12 years respectively, our balance sheet continues to provide long-term strategic and financial flexibility.
“While the global macro backdrop continues to be uncertain, there are some encouraging signs of improvement and we are confident about our future prospects. Smurfit Kappa has never been in better shape strategically, operationally and financially. Reflecting the continued confidence in the quality of our business and our prospects, the Board has approved a 6% increase in the interim dividend.”
2023 First Half | Performance Overview
The Group reported EBITDA for the first half of €1,113 million, down 5% on 2022, with lower earnings in Europe and higher earnings in the Americas. The Group EBITDA margin was 19.1%, up from 18.4% in the first half of 2022. This result, achieved in a challenging macroeconomic environment and with strong comparators in the prior year, demonstrates the strength of the Group’s integrated model, the innovative and value-adding solutions we provide to our resilient customer base, the benefits of our capital spend programme and is testament to SKG’s culture of innovation and operational excellence.
In Europe, EBITDA decreased by 6% to €868 million and the EBITDA margin was 19.4%, up from 18.7% compared to the first half of 2022. Underlying corrugated box volumes were 5.6% lower in the first half of 2023, with year-on-year volume performance in the second quarter improving, as anticipated, upon the levels seen in the preceding two quarters.
Our European business continued to build on its strong operating platform in the first half of the year with a number of projects across our paper and corrugated divisions. In our paper division, we have approved investments in our Herzberg, Hoya, Nettingsdorf, Piteå and Verzuolo mills, which will reduce costs, increase efficiencies and improve the Group’s overall sustainability footprint. In our corrugated division, we are investing across the region in ultra-modern and energy efficient equipment, including upgrades to corrugators and printers and expanding capacity in our bag-in-box division. These investments will allow the Group to increase production, reduce our environmental footprint and expand our portfolio of high-value, innovative, sustainable packaging solutions. In May, the Group announced the completion of a €40 million investment in state-of-the-art technology as part of our strategic expansion in Poland. Our Pruszków corrugated plant now becomes Smurfit Kappa’s largest in Poland and one of the most advanced packaging plants in Europe.
Pricing for European containerboard in the first half of the year was lower compared to the peak levels seen in the first half of 2022 as recovered fibre and energy prices were also lower year-on-year and demand was lower from corrugated box producers. On average, testliner prices were €200 per tonne lower in the first six months of 2023 compared to the same period of last year, while kraftliner was down €172 per tonne. Given the flexibility of our integrated mill system in a period of subdued demand, the total commercial downtime taken by our European mills was approximately 144,000 tonnes in the first half of 2023. This is down significantly from the 260,000 tonnes taken in the second half of 2022.
In the Americas, EBITDA increased by 1% on the first half of 2022 to €274 million. The EBITDA margin was 20.3%, compared to 18.8% in the first half of 2022 with Colombia, Mexico and the US accounting for almost 80% of the region’s earnings. Box volumes in the Americas for the first half of 2023, excluding acquisitions, were down 7.8% against a strong prior year comparative.
SKG continued to invest in its Americas business during the first half of the year, with growth and sustainability related investments primarily focused in our corrugated, forestry and speciality businesses in Argentina, Colombia, Mexico and Brazil. In our corrugated division, we are investing in state-of-the-art converting equipment right across the region and in our specialties business, we are expanding our portfolio in paper sacks.
On 20 March, the Group announced that it had sold its Russian operations to local management thereby completing its exit from the Russian market.
On 12 July, the Group opened a new integrated corrugated plant in Morocco, making this SKG’s first operation in the attractive growth market of North Africa. Also in July, the Group acquired a specialty packaging operation in Spain.
Free cash flow for the first six months was a net inflow of €119 million compared to a net outflow of €28 million in the first half of 2022. The average maturity profile of the Group’s debt was 4.4 years at 30 June 2023 with an average interest rate of 3.06%. Net debt to EBITDA was 1.4x at the end of June 2023 versus 1.3x at the end of December 2022 and 1.6x at the end of June 2022. SKG maintains investment grade credit ratings with Moody’s Investors Service (Baa3/Stable), S&P Global Ratings (BBB-/Stable) and Fitch Ratings (BBB-/Stable).
2023 First Half | Financial Performance
Revenue for the first half was €5,837 million, down 9% on the first half of 2022 or 7% lower on an underlying2 basis.
EBITDA for the first half was €1,113 million, down 5% on the first half of 2022. On an underlying basis, Group EBITDA was down 3% year-on-year, with Europe down 4% and the Americas up 3%.
Operating profit before exceptional items for the first half of 2023 at €779 million was 7% lower than the €839 million for the same period of 2022.
Exceptional items charged within operating profit in the first half of 2023 amounted to €34 million due to the recycling of currency, an impairment loss on assets and other costs relating to the sale of our Russian operations.
There were no exceptional items charged within operating profit in the same period of 2022.
There were no exceptional finance items in the first half of either 2023 and 2022.
Net finance costs at €87 million were €16 million higher than 2022 primarily due to a higher net foreign currency translation loss on debt, a higher interest cost on net pension liabilities along with higher cash interest.
After exceptional items of €34 million, the profit before tax for the first half of 2023 was €659 million compared to a profit before tax of €769 million for the first half of 2022. The income tax expense was €183 million compared to €195 million in 2022, resulting in a profit of €476 million for the half year compared to €574 million in 2022.
Basic EPS for the first half of 2023 was 184.0 cent, compared to 221.9 cent in 2022.
2023 First Half | Free Cash Flow
Free cash flow in the first half of 2023 was a net inflow of €119 million compared to a net outflow of €28 million for 2022, an increase of €147 million. The increase is primarily as a result of a lower working capital outflow partly offset by a lower EBITDA and a higher outflow for the change in employee benefits and other provisions.
The working capital outflow in 2023 was €262 million compared to €501 million in 2022. The outflow in 2023 was a combination of a significant decrease in creditors along with an increase in debtors, partly offset by a decrease in stock. The increase in debtors reflects higher box prices. The decrease in creditors reflects considerably lower recovered fibre, energy and other raw material costs. Working capital amounted to €1,326 million at 30 June 2023 and represented 11.7% of annualised revenue compared to 9.7% at 30 June 2022.
Capital expenditure in 2023 amounted to €429 million (equating to 142% of depreciation) compared to €349 million (equating to 115% of depreciation) in 2022.
Cash interest amounted to €66 million in 2023 compared to €61 million in 2022. The increase in cash interest in the six months to June 2023 compared to 2022 is primarily due to an increased interest cost in certain of our higher interest environments, which has more than offset increased interest income.
Tax payments of €173 million in 2023 were €15 million higher than in 2022 with higher payments in Europe.
2023 First Half | Capital Structure
Net debt was €3,175 million at the end of June 2023, resulting in a net debt to EBITDA ratio of 1.4x compared to 1.3x at the end of December 2022 and 1.6x at the end of June 2022. The Group’s balance sheet continues to provide considerable long-term strategic and financial flexibility.
At 30 June 2023, the Group’s average interest rate was 3.06% compared to 2.89% at 31 December 2022. The Group’s diversified funding base and long-dated maturity profile of 4.4 years provide a stable funding outlook. In terms of liquidity, the Group held cash balances of €615 million at the end of June 2023, which were further supplemented by undrawn available committed facilities of €1,346 million on our sustainability‑linked Revolving Credit Facility (‘RCF’) and €312 million on our sustainability-linked securitisation programmes.
Dividends
The Board has decided to pay an interim dividend of 33.5 cent per share, which represents an increase of 6% on the prior year. It is proposed to pay this dividend on 27 October 2023 to all ordinary shareholders on the share register at the close of business on 29 September 2023.
2023 First Half | Sustainability
Smurfit Kappa continues to make significant progress towards achieving its sustainability goals as outlined in its 16th Sustainable Development Report (‘SDR’) published in March. The report highlights the progress made towards our long‑standing goal of driving change and nurturing a greener and bluer planet through the three key pillars of Planet, People and Impactful Business. It shows that the Group’s actions are delivering today, and together with its ongoing investments and continuous improvement, it is well positioned to deliver on its long-term ambition to have at least net zero emissions by 2050.
The Group delivered several landmark achievements including:
- A world first in successfully trialling hydrogen in its Saillat paper mill in France.
- Completion of a multi-fuel boiler in our Zülpich paper mill in Germany which reduces the mill’s CO2 emissions by 55,000 tonnes, or 2% for the Group.
- The announcement of an almost US$100 million investment in a sustainable biomass boiler in our mill in Cali, Colombia, our largest single decarbonisation project to date, which will reduce the Group’s emissions by approximately 6%.
- Commencement of a district heating project in Austria to benefit 20,000 homes across three communities.
In the SDR, the Group reported further progress in reducing its fossil CO2 emissions intensity having reduced emissions by 43.9% by the end of 2022, compared to the baseline year of 2005. This marked a 4% improvement year-on-year, leaving the Group well on its way to reach its 2030 target of a 55% reduction, in line with the EU Green deal and another step forward on our journey to net zero.
Since 2005, SKG has invested €1.2 billion to make our operations more sustainable. Of this, approximately €1 billion has been invested in different energy efficiency and CO2 reduction projects. These investments have improved overall energy efficiency in our paper mill system by 20.6%.
The report also highlights our commitment to sustainable water stewardship and how our efforts focus on continuing to decrease water in-take and further improve the quality of the water discharged from our mills. Since 2005, Smurfit Kappa has invested €129 million in best practice water treatment systems, leading to a reduction in Chemical Oxygen Demand of 36.9%.
Compared to a 2013 baseline, SKG’s waste to landfill decreased by 24% in 2022 and our Chain of Custody certified packaging deliveries to customers reached a level of 94.3%, a record level for the Group.
Other highlights include a 13.6% global reduction in the Total Recordable Injury Rate compared to 2021 and the donation of €18.4 million to support various social, environmental and community initiatives since 2020.
In January, the Group outlined its plan to install 12,000 solar panels at our Sanguesa paper mill in Spain. This solar energy project is the latest for Smurfit Kappa which has launched similar green energy initiatives at plants in Spain, Colombia, Mexico and most recently, in our new facility in Morocco.
In February, Smurfit Kappa announced a €27 million investment in a new waste management and recovery facility at its Nervión paper mill in Iurreta, Spain. The investment will see the mill adopt a fully circular production process involving the biggest landfill reduction project that SKG has undertaken to date.
Also in February, SKG was further recognised for its strong ESG credentials and continued improvement by the leading research and analytics company, Sustainalytics. Following an analysis of more than 15,000 companies globally, SKG was named as an Industry Top Rated company where it ranked in the top percentile out of 99 companies, in addition to being awarded the Regional Top Rated.
Smurfit Kappa continues to be listed on various environmental, social and governance indices and disclosure programmes, such as FTSE4Good, the Green Economy Mark from the London Stock Exchange, Euronext Vigeo Europe 120, STOXX Global ESG Leaders, ISS Solactive and Ethibel’s sustainable investment register. SKG also performs strongly across a number of third party certification bodies, including MSCI, ISS ESG and Sustainalytics.
2023 First Half | Commercial Offering and Innovation
SKG’s leadership in innovation and unrivalled market offering is a defining characteristic of our business. With over 1,000 designers across the Group, supported by a network of laboratories, design facilities and unique applications, we continued to deliver the most innovative and sustainable packaging solutions for our customers. Our unique packaging solutions help our customers to increase sales, reduce cost, eliminate plastics and other less sustainable substrates, mitigate risk in an essential element of their supply chain and lower their carbon footprint.
Demonstrating this leadership in innovation, in the first half of the year SKG won 21 awards across a host of categories including design, safety, sustainability, community engagement and as a top employer. Most recently, the Group was further recognised for its technical innovation and creativity by winning 14 awards at the Flexographic Industry Association UK awards.
The Group continues to invest in research and development to push the boundaries of paper-based packaging and our design teams work closely with our customers to understand their specific requirements to develop bespoke solutions which optimise functionality, cost-effectiveness, and consumer appeal.
In February, the Group launched its patented Vitop Uno tap which is the first tap in the bag-in-box market to have attached tamper protection. Vitop is the leading provider of bag-in-box closure solutions with over six billion taps sold worldwide and the Uno tap is now patented in Europe, the USA and a number of other countries.
The Group continues to experience strong levels of pipeline development across our business as customers strive for more sustainable packaging solutions.
| Summary Cash Flow | ||
| Summary cash flowsfor the first half are set out in the following table. | ||
| 6 months to30-Jun-23€m | 6 months to30-Jun-22€m | |
| EBITDA | 1,113 | 1,174 |
| Cash interest expense | (66) | (61) |
| Working capital change | (262) | (501) |
| Capital expenditure | (429) | (349) |
| Change in capital creditors | (35) | (108) |
| Tax paid | (173) | (158) |
| Change in employee benefits and other provisions | (46) | (22) |
| Other | 17 | (3) |
| Free cash flow | 119 | (28) |
| Disposal of Russian operations | 1 | – |
| Purchase of own shares (net) | (28) | (27) |
| Purchase of businesses, investments and NCI* | (4) | (48) |
| Dividends | (280) | (250) |
| Net cash outflow | (192) | (353) |
| Acquired net debt | – | (5) |
| Deferred debt issue costs amortised | (3) | (4) |
| Currency translation adjustment | 12 | (62) |
| Increase in net debt | (183) | (424) |
*‘NCI’ refers to non-controlling interests
A reconciliation of the Summary Cash Flow to the Condensed Consolidated Statement of Cash Flows and a reconciliation of Free Cash Flow to Cash Generated from Operations are included in sections K and L in Alternative Performance Measures in the Supplementary Financial Information on pages 33 to 35.
Funding and Liquidity
The Group’s primary sources of liquidity are cash flow from operations and borrowings under the RCF. The Group’s primary uses of cash are for funding day to day operations, capital expenditure, debt service, dividends and other investment activity including acquisitions.
The Group has a €1,350 million RCF with a maturity of January 2026, which incorporates five KPIs spanning the Group’s sustainability objectives regarding climate change, forests, water, waste and people, with the level of KPI achievement linked to the pricing on the facility. Borrowings under the RCF are available to fund the Group’s working capital requirements, capital expenditure and other general corporate purposes. At 30 June 2023, the Group’s drawings on this facility were €4 million, at an interest rate of 4.058%.
At 30 June 2023, the Group had outstanding €250 million 2.75% senior notes due 2025, US$292.3 million 7.50% senior debentures due 2025, €1,000 million 2.875% senior notes due 2026, €750 million 1.5% senior notes due 2027, €500 million 0.5% senior green notes due 2029 and €500 million 1.0% senior green notes due 2033.
Funding and Liquidity (continued)
At 30 June 2023, the Group had outstanding €13 million variable funding notes (‘VFNs’) issued under the €230 million trade receivables securitisation programme maturing in November 2026 and €5 million VFNs issued under the €100 million trade receivables securitisation programme maturing in January 2026.
Both these securitisation programmes incorporate five KPIs spanning the Group’s sustainability objectives regarding climate change, forests, water, waste and people, with the level of KPI achievement linked to the pricing on the programme.
Market Risk and Risk Management Policies
The Group is exposed to the impact of interest rate changes and foreign currency fluctuations due to its investing and funding activities and its operations in different foreign currencies. Interest rate risk exposure is managed by achieving an appropriate balance of fixed and variable rate funding. At 30 June 2023, the Group had fixed an average of 96% of its interest cost on borrowings over the following 12 months.
The Group’s fixed rate debt comprised €250 million 2.75% senior notes due 2025, US$292.3 million 7.50% senior debentures due 2025, €1,000 million 2.875% senior notes due 2026, €750 million 1.5% senior notes due 2027, €500 million 0.5% senior green notes due 2029 and €500 million 1.0% senior green notes due 2033.
The Group’s earnings are affected by changes in short-term interest rates on its floating rate borrowings and cash balances. If interest rates for these borrowings increased by one percent, the Group’s interest expense would increase, and income before taxes would decrease, by approximately €2 million over the following 12 months. Interest income on the Group’s cash balances would increase by approximately €6 million assuming a one percent increase in interest rates earned on such balances over the following 12 months.
The Group uses foreign currency borrowings, currency swaps and forward contracts in the management of its foreign currency exposures.
Principal Risks and Uncertainties
Risk assessment and evaluation is an integral part of the management process throughout the Group. Risks are identified, evaluated and appropriate risk management strategies are implemented at each level in the organisation.
The Board in conjunction with senior management identifies major business risks faced by the Group and determines the appropriate course of action to manage these risks.
The Board regularly monitors all of the Group’s risks and appropriate actions are taken to mitigate those risks or address their potential adverse consequences. In addition, emerging risks and the current global uncertainties were also considered as part of the half year assessment.
The principal risks and uncertainties facing the Group for the remaining six months of the financial year are summarised below.
- If the current economic climate were to deteriorate, for example as a result of geopolitical uncertainty, trade tensions and/or a pandemic, it could result in an increased economic slowdown which if sustained over any significant length of time, could adversely affect the Group’s financial position and results of operations.
- The cyclical nature of the packaging industry could result in overcapacity and consequently threaten the Group’s pricing structure.
- If operations at any of the Group’s facilities (in particular its key mills) were interrupted for any significant length of time, it could adversely affect the Group’s financial position and results of operations.
- Price fluctuations in energy and raw material costs could adversely affect the Group’s manufacturing costs.
- The Group is exposed to currency exchange rate fluctuations.
- The Group may not be able to attract, develop and retain suitably qualified employees as required for its business.
- Failure to maintain good health, safety and employee wellbeing practices may have an adverse effect on the Group’s business.
- The Group is subject to a growing number of environmental and climate change laws and regulations, and the cost of compliance or the failure to comply with current and future laws and regulations may negatively affect the Group’s business.
- The Group is subject to anti-trust and similar legislation in the jurisdictions in which it operates.
- The Group, similar to other large global companies, is susceptible to cyber-attacks with the threat to the confidentiality, integrity and availability of data in its systems.
- The global impact of climate change in the long-term could adversely affect the Group’s business and results of operations.
The principal risks and uncertainties faced by the Group, were outlined in our 2022 Annual Report on pages 34 to 36. The Annual Report is available on our website; smurfitkappa.com.
