Smurfit Kappa plans to spend extra €1.6bn on expansion

Packaging maker Smurfit Kappa plans to spend an extra €1.6 billion on expanding its operations and buying rivals over the next four years.

Interest payments and once-off charges cut the group’s pre-tax profits by 12 per cent to €576 million last year from €654 million in 2016, its annual results show.

Smurfit pledged to spend €1.6 billion on its business, which spans 375 factories in 35 countries, through 2018 to the end of 2021. The group will spend around €600 million of the total this year.

In a presentation shortly after the results were published on Wednesday, chief executive Tony Smurfit indicated that the group would spend this cash on expanding existing factories and acquisitions.

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He did not pinpoint which plants were likely to benefit or any likely acquisition targets, but said that the group wanted to capitalise on growth and cost-cutting opportunities across its business.

Smurfit intends to spend the money to boost returns to investors. The €1.6 billion earmarked is separate to the €320 million a year that the group spends on such things as the upkeep of its factories.

California

The FTSE 100 company, which employs 46,000 workers making cardboard and paper packaging, reported that 2017 revenue grew 5 per cent to €8.5 billion.

Group chief financial officer Ken Bowles put the fall in profits down to finance costs and exceptional charges.

Smurfit Kappa issued a €500 million bond at 2.375 per cent interest, its lowest ever rate, last year. Mr Bowles pointed out that this would be used to refinance existing debt in 2018, cutting finance costs, and the impact would be seen in 2019.

The group also closed a factory in California in a restructuring of its US business. "Those charges were once-off and will not recur," Mr Bowles said.

He noted that strong trade in Europe in the final three months of 2017 continued into this year, while business in the Americas was improving.

Mr Bowles said demand for both boxes and paper remained strong. Smurfit Kappa announced two price rises in January which the industry expects the group to implement this month.

“In terms of box prices, that will continue to be strong in the first quarter. In terms of paper prices, we see where the price lands and go from there,” he said.

Smurfit sells packaging to the likes of Heineken, Mars, Kellogg's and Coca-Cola.

In addition, Mr Bowles said that the increasing popularity of online shopping and discounters such as Aldi and Lidl was aiding growth.

Revenue in Europe rose €258 million or 4 per cent. Sales in the Americas increased 7 per cent or €145 million.

Positive outlook

Earnings before interest, taxes, depreciation and amortisation (Ebidta), a measure of the cash the group generated, was €1.2 billion, €4 million ahead of 2016.

Mr Smurfit said the the full-year result was delivered against generally higher raw-material costs and adverse currency movements.

“Our European business showed very strong progression for the quarter, growing its margin to 16.5 per cent,” he said.

“This strong performance came as a result of high levels of demand across most product lines and input cost recovery. Security of supply for our customers is key for us and we have been investing accordingly.”

Barry Dixon, analyst with stockbrokers Davy, described Smurfit's outlook as "positive".

“We will review our full-year forecasts following the results presentation. At this point, we do not expect to change our current full year 2018 Ebitda forecast of €1.3 billion,” he said.

Mr Bowles said that the group was taking a “wait-and-see” approach to the volatility that hit stock markets this week.

He suggested that it was partly a result of the inflationary impact of cash being returned to the US in the wake of tax cuts agreed by Congress last year.