Smurfit Kappa Group PLC UK Regulatory Announcement: Half-year Report
DUBLIN–(BUSINESS WIRE)–
Smurfit Kappa Group plc (‘SKG’ or ‘the Group’) today announced results for the half year ending 30 June 2021.
2021 Half Year | Key Financial Performance Measures
| €m | H1 | H1 | Change |
| Revenue | €4,679 | €4,203 | 11% |
| EBITDA 1 | €781 | €735 | 6% |
| EBITDA Margin 1 | 16.7% | 17.5% |
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| Operating Profit before Exceptional Items 1 | €477 | €450 | 6% |
| Profit before Income Tax | €413 | €383 | 8% |
| Basic EPS (cent) | 119.9 | 116.9 | 3% |
| Pre-exceptional Basic EPS (cent) 1 | 119.9 | 116.9 | 3% |
| Free Cash Flow 1 | €117 | €238 | (51%) |
| Return on Capital Employed 1 | 14.8% | 14.8% |
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| Net Debt 1 | €2,549 | €3,257 |
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| Net Debt to EBITDA (LTM) 1 | 1.6x | 2.1x |
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Key Points:
- Revenue growth of 11%
- EBITDA of €781 million with an EBITDA margin of 16.7%
- Corrugated growth of over 10% and over 9% versus 2020 and 2019 respectively
- Accelerating investment plans to meet customer needs and capitalise on growth
- Agreement to acquire 600,000 tonne recycled containerboard mill
- Strong and progressive corrugated price recovery offsetting significant input cost increases
- Interim dividend increased by 5% to 29.3 cent per share
Performance Review and Outlook
Tony Smurfit, Group CEO, commented:
“I am pleased to report a strong first half performance with revenue growth of 11%, EBITDA of €781 million and an EBITDA margin of 16.7%. Growth in corrugated was over 10% against the same period in 2020 and over 9% on 2019 and we continue to see strong demand for our core products.
“As a result of our past and current capital investments in our integrated business model, we have, for the most part, been able to fulfil our customers’ needs during this period of exceptionally strong demand. It has also been a period of significant input cost pressures which we have and will continue to recover through corrugated price increases.
“Against this backdrop our European business delivered a strong performance with EBITDA of €591 million and an EBITDA margin of 16.2%. Our Americas business equally delivered a strong performance with EBITDA of €211 million and an EBITDA margin of 20.4%. These performances reflect the benefits of our integrated business model, our investment programmes, strong market positions and our performance culture which has come to the fore during these high pressured times. I would like to pay a special tribute to all our people who are going the extra mile to satisfy customer demands.
“To further strengthen the integration of the Group and the security of supply for our customers we are pleased to announce today the acquisition, subject to customary closing conditions, of a world-class recycled containerboard mill with a capacity of 600,000 tonnes. This mill is strategically well positioned in Northern Italy, it is highly complementary to our existing operational footprint and will support the acceleration of the significant investments we are making in our converting operations.
“In addition to our announced acquisition in Italy we were also delighted to complete the acquisition of two operations in our Americas region in Peru and Mexico. These two businesses further add to our geographic footprint, including a new market through Peru, and customer offering, and I am delighted to welcome a further 608 employees to Smurfit Kappa. We continue to be excited by the opportunities presented by this region.
“We are accelerating our investment plans to capitalise on the significant growth opportunities available to us. This growth is coming from the structural drivers of paper-based packaging, as the sustainable product of choice by consumers and customers alike, as well as the continued strong growth in e-commerce. I am very proud of our product development teams in SKG who have ensured our product offering in innovation and design is the best in the industry globally.
“During the first half we also published our 14th Sustainable Development Report, independently assured for over 10 years. Amongst the highlights of the 2020 report was significant action across our key metrics, such as, a further 7% reduction in our carbon intensity, an 18% reduction in waste to landfill intensity and a 29% improvement in safety performance.
“I am also happy to report that both Moody’s and Standard & Poor’s have upgraded our credit rating to Baa3 and BBB- respectively, in addition to Fitch’s BBB- rating.
“The second half has continued the trend of strong demand and corrugated price recovery. SKG remains very confident in our prospects and excited about the opportunities for our business. Our first half performance has established a platform for strong and accelerated earnings growth through the remainder of 2021.
“Reflecting this and the future prospects of the business the Board is recommending a 5% increase in the interim dividend.”
About Smurfit Kappa
Smurfit Kappa, a FTSE 100 company, is one of the leading providers of paper-based packaging solutions in the world, with approximately 46,000 employees in over 350 production sites across 36 countries and with revenue of €8.5 billion in 2020. We are located in 23 countries in Europe, and 13 in the Americas. We are the only large-scale pan-regional player in Latin America. Our products, which are 100% renewable and produced sustainably, improve the environmental footprint of our customers.
With our proactive team, we relentlessly use our extensive experience and expertise, supported by our scale, to open up opportunities for our customers. We collaborate with forward-thinking customers by sharing superior product knowledge, market understanding and insights in packaging trends to ensure business success in their markets. We have an unrivalled portfolio of paper-based packaging solutions, which is constantly updated with our market-leading innovations. This is enhanced through the benefits of our integration, with optimal paper design, logistics, timeliness of service, and our packaging plants sourcing most of their raw materials from our own paper mills.
We have a proud tradition supporting social, environmental and community initiatives in the countries where we operate. Through these projects we support the UN Sustainable Development Goals, focusing on where we believe we can have the greatest impact.
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Forward Looking Statements
This Announcement contains certain statements that are forward-looking. Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations of the Group about future events, and involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. Although the Group believes that current expectations and assumptions with respect to these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements should therefore be construed in the light of such factors. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. Other than in accordance with legal or regulatory obligations, the Group is not under any obligation, and expressly disclaims any intention or obligation, to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
| Contacts | |
| Ciarán Potts Smurfit Kappa T: +353 1 202 71 27 | Melanie Farrell FTI Consulting T: +353 1 765 08 00 |
2021 First Half | Performance Overview
The Group reported EBITDA for the first half of €781 million, up 6% on 2020. The Group EBITDA margin was 16.7%, down from 17.5% in the first half of 2020. The result reflects the resilience of the Group’s integrated model and the benefits of our customer-focused innovation and capital spend programme, offset by higher year-on-year recovered fibre, energy and other raw material costs.
The second half has continued the trend of strong demand and corrugated price recovery.
In Europe, EBITDA increased by 3% on the first half of 2020 to €591 million. The EBITDA margin was 16.2%, down from 17.6% on the same period in 2020. Corrugated demand was up approximately 10% on 2020 and 9% on 2019. Corrugated pricing has continued to improve in line with expectations with continued progression into the second half.
European pricing for testliner and kraftliner has increased by €220 per tonne and €200 per tonne respectively from the low of September 2020 to June 2021. As we begin the second half of the year, inventories remain extremely tight and demand remains strong.
Our European business continued to strengthen its operating platform in the first half with the commencement of a number of significant projects across our paper and corrugated divisions. In our paper division we announced growth projects in Germany and a significant sustainability investment, also in Germany, which upon completion will reduce our Group CO2 emissions intensity by 2%. In our corrugated division we announced significant expansion projects in France, Czech Republic, Slovakia, Poland, and the UK. We have also recently announced the completion of an increased capacity investment in our Spanish bag-in-box plant.
In the Americas, EBITDA increased by 19% on the first half of 2020 to €211 million. The EBITDA margin increased from 19.0% in the first half of 2020 to 20.4% in the first half of 2021, delivered against a backdrop of difficult weather conditions in the Southern US in the first quarter and a challenging second quarter in Colombia due to national strikes. Colombia, Mexico and the US accounted for over 78% of the region’s earnings with strong performances in all three countries. Corrugated demand for the first half was up 11% year-on-year.
We have recently announced the acquisition of two operations in the Americas, in Peru and Mexico. We have also recently announced significant expansion and sustainability focused projects in our paper, corrugated and sack businesses in Colombia, North America and Central America.
The Group reported free cash flow of €117 million in the first half of 2021 compared to €238 million in the first half of 2020. The average maturity profile of the Group’s debt was 4.4 years at 30 June 2021 with an average interest rate of 3.17%. Net debt to EBITDA was 1.6x at the half year, in line with the year end. The Group remains strongly positioned within its BBB-/BBB-/Baa3 credit rating.
2021 First Half | Financial Performance
Revenue for the first half was €4,679 million, up 11% on the first half of 2020 or 13% on an underlying 2 basis.
EBITDA for the first half was €781 million, 6% up on the first half of 2020. On an underlying basis, Group EBITDA was up 8% year-on-year, with Europe up 3% and the Americas up 26%.
Operating profit before exceptional items for the first half of 2021 at €477 million was 6% higher than the €450 million for the same period of 2020.
There were no exceptional items charged within operating profit and no exceptional finance items in the first half of both 2021 and 2020.
Net finance costs at €64 million were €4 million lower than 2020, reflecting a decrease in both cash interest and interest cost on net pension liabilities along with the positive swing from a fair value loss on financial assets/liabilities in 2020 to a gain in 2021, partly offset by a negative swing from a foreign currency translation gain on debt in 2020 to a loss in 2021.
With the €27 million increase in operating profit together with the €4 million decrease in net finance costs, partly offset by a €1 million move in share of associates’ profit, the profit before income tax was €413 million, €30 million higher than in 2020.The income tax expense of €105 million was in line with 2020, resulting in a profit of €308 million for 2021 compared to a profit of €278 million in 2020.
Basic EPS for the first half of 2021 was 119.9 cent, compared to 116.9 cent in 2020.
2021 First Half | Free Cash Flow
Free cash flow in the first half of 2021 was €117 million compared to €238 million for 2020, a decrease of €121 million. An EBITDA increase of €46 million and lower capital outflows of €26 million was more than offset by higher outflows for working capital and tax payments of €163 million and €24 million respectively.
Working capital increased by €280 million in the half year mainly due to the significant increase in debtors and to a lesser extent, stock, partly offset by the increase in creditors. Working capital amounted to €781 million at June 2021, representing 8.1% of annualised revenue compared to 8.4% at June 2020 and 5.6% at December 2020.
Capital expenditure in 2021 amounted to €175 million (equating to 63% of depreciation) compared to €230 million (equating to 84% of depreciation) in 2020.
Cash interest amounted to €54 million in 2021 compared to €61 million in 2020, with the decrease primarily relating to a lower average level of borrowing.
Tax payments of €122 million in 2021 were €24 million higher than in 2020.
2021 First Half | Capital Structure
Net debt was €2,549 million at the end of June, resulting in a net debt to EBITDA ratio of 1.6x compared to 1.6x at the end of December 2020 and 2.1x at the end of June 2020. The Group’s balance sheet continues to provide considerable financial strategic flexibility, subject to the stated leverage range of 1.5x to 2.0x through the cycle and SKG’s BBB-/BBB-/Baa3 credit rating.
At 30 June 2021, the Group’s average interest rate was 3.17% compared to 3.13% at 31 December 2020. 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 €637 million at the end of June, which were further supplemented by available commitments of €1.34 billion under its Sustainability Linked Revolving Credit Facility (‘RCF’) and €312 million under its securitisation programmes.
Dividends
The Board has decided to pay an interim dividend of 29.3 cent per share (approximately €76 million). It is proposed to pay this dividend on 22 October 2021 to all ordinary shareholders on the share register at the close of business on 24 September 2021.
2021 First Half | Sustainability
Smurfit Kappa continues to make significant and tangible progress on achieving its sustainability targets as outlined in its 14th Sustainable Development Report (‘SDR’). It highlights the Group’s long-standing objective to drive change and nurture a greener planet through the three key pillars of Planet, People and Impactful Business. Furthermore, Smurfit Kappa’s end-to-end approach to sustainability is evident in its innovative products and processes that support customers and positively impact the entire value chain.
In our 2020 SDR Smurfit Kappa reported significant progress in reducing its fossil CO2 emission intensity. The Group is the first in its industry to have announced targeting at least net zero emissions by 2050 and, compared to its baseline year 2005, it reduced its emissions intensity by 37.3% by the end of 2020. The reduction in 2020 versus 2019 was 7% which is an acceleration compared with the previous year. The Group is well on its way to reach its intermediate 2030 target of 55% reduction, in line with the EU Green Deal objectives.
Compared with 2019, the Group also made continued progress during 2020 on a number of its other key sustainability targets:
- Water discharge quality improved by 5%
- Waste to landfill intensity decreased by 18%
- Chain of Custody certified packaging deliveries to customers increased by 2%
- Safety performance improved by 29%
- Social projects received €7.7 million in donations, including €3 million in various COVID-related projects during the financial year
While the SDR has been independently assured since 2009, the 2020 SDR is the Group’s first to report in line with recommendations of the Taskforce for Climate related Financial Disclosures (‘TCFD’) and the Sustainable Accounting Standards Board (‘SASB’) criteria.
Smurfit Kappa also aligned its sustainability ambitions and targets into its financing by embedding its sustainability targets via Key Performance Indicators (‘KPIs’) into its existing €1.35 billion RCF, creating a Sustainability Linked RCF, at the end of 2020.
Smurfit Kappa has been contributing to making the UN 2030 Sustainable Development Goals (‘SDGs’) a reality since 2015. This contribution was recognised by the Support the Goals movement in 2021 when the Group became the first FTSE 100 company to receive a five-star rating.
By committing to these sustainability targets, the Group’s Better Planet Packaging portfolio of sustainable products will continue to help its customers to deliver on their own short and long-term sustainability goals.
SKG 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, Ethibel’s sustainable investment register, CDP, SEDEX and EcoVadis. SKG also performs strongly across a number of third party certification bodies, including MSCI, ISS ESG and Sustainalytics.
2021 First Half | Commercial Offering and Innovation
SKG continues to lead the industry in its market offering, helping our customers win in their marketplace. Our unique insights and capabilities allow our customers to increase sales, reduce costs and mitigate risk in an ever more complex world where reputation is key.
The Group continued to deliver innovation for our customers through the pandemic, adapting ways of working and moving most of our activity onto virtual platforms. This was best captured by our first virtual Better Planet Packaging event held in March which hosted over 2,700 attendees.
During the first half the Group launched a world first, a pre-certified, Frustration Free Packaging (‘FFP’) compliant packaging for Amazon supply-chains. This means customers can access one of the world’s leading trading platforms quicker and in confidence of meeting Amazon’s strict packaging requirements, a significant advantage as global e-commerce sales continue to grow.
In April the Group’s Brazilian business won a prestigious Red Dot Award in the area of product design. The packaging challenge came from Wine & Bite Box to secure and protect bottles of wine and food for a growing trend of tasting boxes being delivered to customers for an at home gourmet experience. The award recognises this packaging as one of the most innovative design projects in the world.
The Group continues to experience intense levels of pipeline development across our business as customers strive for more sustainable packaging solutions. This structural trend towards more sustainable solutions is expected to be a multi-year trend given the need in many cases for changes to our customers’ manufacturing halls to accommodate a move to paper-based packaging. Some examples are outlined below.
The unique TopClip product that was launched last year continues to grow with the first fully automated packing line being commissioned at a customer’s site in the second quarter. This provides an exciting proof of concept for other prospective customers as they look for more sustainable packaging solutions.
The launch of our Safe & Closed product, a sustainable corrugated alternative to rigid plastic tubs has also generated significant interest through the first half and we expect to deliver proof of concept to the market by the end of the year.
| Summary Cash Flow |
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| Summary cash flows for the first half are set out in the following table. |
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| 6 months to | 6 months to |
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| 30-Jun-21 | 30-Jun-20 |
|
| €m | €m |
| EBITDA | 781 | 735 |
| Cash interest expense | (54) | (61) |
| Working capital change | (195) | (32) |
| Capital expenditure | (175) | (230) |
| Change in capital creditors | (80) | (51) |
| Tax paid | (122) | (98) |
| Change in employee benefits and other provisions | (43) | (26) |
| Other | 5 | 1 |
| Free cash flow | 117 | 238 |
|
|
|
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| Purchase of own shares (net) | (22) | (16) |
| Sale of businesses and investments | 37 | – |
| Purchase of businesses, investments and NCI* | (55) | (21) |
| Dividends | (226) | – |
| Derivative termination receipts | 10 | 9 |
| Net cash (outflow)/inflow | (139) | 210 |
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|
|
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| Acquired net (debt)/cash | (13) | (1) |
| Disposed net (cash)/debt | (1) | – |
| Deferred debt issue costs amortised | (4) | (4) |
| Currency translation adjustment | (17) | 21 |
| (Increase)/decrease in net debt | (174) | 226 |
* ‘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 30 to 36.
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.
Borrowings under the RCF are available to fund the Group’s working capital requirements, capital expenditure and other general corporate purposes.
At 30 June 2021, the Group had outstanding, €500 million 2.375% senior notes due 2024, €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 and €750 million 1.5% senior notes due 2027.
At 30 June 2021, the Group had outstanding €12.6 million variable funding notes issued under the €230 million trade receivables securitisation programme maturing in June 2023 and €5 million variable funding notes issued under the €100 million trade receivables securitisation programme maturing in January 2026.
In April 2021, the Group amended and extended its €200 million 2022 trade receivables securitisation programme, which utilises the Group’s receivables in Austria, Belgium, Italy and the Netherlands. The programme was extended to January 2026 at a reduced facility size of €100 million and with a margin reduction from 1.375% to 1.1%.
Funding and Liquidity (continued)
As part of the amendment process, the Group further aligned its sustainability ambitions and targets into its financing by embedding its sustainability targets via KPIs into the amended and extended trade receivables programme. The 2026 trade receivables securitisation programme 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 programme.
The Group also has a €1,350 million Sustainability Linked RCF with a maturity date of 28 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. At 30 June 2021, the Group’s drawings on this facility were US$8 million, at an interest rate of 0.732%.
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. As at 30 June 2021, the Group had fixed an average of 97% of its interest cost on borrowings over the following 12 months.
The Group’s fixed rate debt comprised €500 million 2.375% senior notes due 2024, €250 million 2.75% senior notes due 2025, US$292.
Contacts
Smurfit Kappa Group PLC
