Smurfit Kappa sees 2023 earnings topping estimates amid improving box demand

Smurfit Kappa has signalled its full-year earnings will come in slightly better than market expectations amid signs that the recent downturn in cardboard box demand and pricing is nearing an end.

The paper packaging giant, which is currently seeking to merge with US rival WestRock, said in a trading update that box demand in the third quarter was 2 per cent behind 2022 levels. That compares with drops of 7 per cent and 5 per cent in the first and second quarters, respectively, it said.

“We expect this trend to continue, with Germany in particular, which has been a true laggard this year, showing improved order books in the last month or so,” chief executive Tony Smurfit said on a call with analysts.

Goodbody analyst David O’Brien said he estimates that box prices are now 11 per cent lower than a year ago. “The pricing cycle appears close to trough in Europe and the US, while demand also looks to be at a positive inflection point.”

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Smurfit Kappa sees its full-year earnings before interest, tax, depreciation and amortisation (Ebitda) coming to €2.05 billion. While that would mark a decline from the group’s €2.36 billion out-turn for 2022, it is 1 per cent to 2 per cent ahead of consensus expectations, according to Mr O’Brien.

Shares in Smurfit Kappa closed 1.1 per cent higher at €31.09, though it remains down almost 10 per cent so far this year.

The Irish group announced in September that it plans to merge with Atlanta-based WestRock to form the world’s biggest packaging group with $34 billion (€32.2bn) of annual revenues. It is essentially a takeover by Smurfit Kappa that will see the group headquartered in Dublin, but will result in its Irish stock market quotation being dropped as it moves its main listing from London to Wall Street.

The deal was struck against the background of a sharp drop-off in demand since the second half of last year for cardboard boxes, which reached unprecedented levels globally during the Covid pandemic when demand for physical goods – from giant TVs to patio furniture – spiked amid lockdowns.

The timing of this agreement seeks to take advantage of depressed valuations in the cyclical downturn, as the long-term growth stories surrounding ecommerce and sustainable packaging products remain intact, according to industry observers.

“We’ve never seen these kind of falls in corrugated box consumption as we never saw the kind of growth that we saw in 2021 and 2022,” said Mr Smurfit, adding that he expects box prices to rally “as soon as volume growth starts to come into the market”.

Mr Smurfit said the planned tie-up with WestRock “represents a unique point in time, value-creation opportunity for both companies”.