Smurfit Kappa results top expectations despite €675m inflation bill

Cardboard box-making giant Smurfit Kappa’s earnings grew more than expected last year amid soaring demand for paper packaging, even as it stomached €657 million of extra costs for recycled cardboard and energy, due to inflation sweeping through the global economy.

The Dublin-based company's earnings before interest, tax, depreciation and amortisation (ebitda) rose 13 per cent to €1.7 billion, as revenue advanced 18 per cent to €10.1 billion, it said on Wednesday. Davy analyst Allan Smylie said the earnings figure was 8 per cent ahead of what the stock market had been expecting. Shares in Smurfit Kappa closed 1.7 per cent higher at €47.71 in Dublin.

"This was particularly pleasing as the year was characterised by unprecedented cost inflation," said chief executive Tony Smurfit. "These costs, particularly in energy, recovered fibre and other categories of raw materials, remain at elevated levels. We expect to continue to recover these costs, with margin improvement, as we progress through 2022."

The company has been benefiting in recent times from a surge in ecommerce and a shift across the consumer goods industry towards sustainable packaging, with both major trends having accelerated during the Covid-19 pandemic.

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Demand for Smurfit Kappa’s corrugated cardboard jumped 8 per cent last year, “illustrating the robust demand backdrop for our innovative and sustainable product offering”, it said. The company said its corrugated pricing has continued to improve “in line” with its expectations. The growth rate compared a typical annual rate of 2 to 2½ per cent over the past decade.

Chief financial officer Ken Bowles told The Irish Times that growth will moderate to 3-4 per cent this year, though still above the long-term trend.

Current trading

“As we begin the year, current trading is strong and our integrated paper and packaging system remains effectively sold out,” said Mr Smurfit. “We continue to see significant opportunities across our geographic footprint and as such, we are investing to build a platform for durable growth to meet customer demand.”

Goodbody Stockbrokers analyst David O'Brien said Smurfit Kappa's target-beating earnings were driven by a combination of better pricing and cost efficiency in its markets in Europe and the Americas.

“Demand remains strong across the group while there is clear momentum in box pricing,” he said. “Management notes that it expects to continue to recover costs in [2022] thereby improving margins.”

Still, a lag in passing on rising costs resulted in Smurfit Kappa’s ebitda margin contracting to 17.7 per cent last year from 18.2 per cent in 2020. The company’s bill for recycled cardboard, which is used to make most of its boxes, rose by €440 million last year, while volatile energy markets, particularly in the final three months of 2021, resulted in €235 million of additional fuel and power costs.

Mr Bowles said the group expects the company will be able to continue to increase box prices to fully pass on its higher costs – and expected further input inflation this year – to customers by the end of 2022.

Integrated model

The company said its integrated model – spanning forestry to the production of container board and making of its final product, boxes – allowed it to ensure security of supply to its 65,000-plus customers even with manufacturing internationally affected by supply chain issues as economies emerged from lockdown.

The company had to deal with its own supply challenges. These included a plastics supplier for its bag-in-a-box product, used by wine producers to motor oil suppliers, reducing allocations to customers and a global shortage of wheat starch forcing Smurfit Kappa to resort to more expensive potato starch, Mr Smurfit said on a call with analysts. Starch is used to give cardboard boxes strength.