Containerboard: SKG gains from Los Reyes, Forney; Americas margin rises to 15.7% from 14.4%

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Containerboard: SKG gains from Los Reyes, Forney; Americas margin rises to 15.7% from 14.4%

February 15, 2019 - 18:47

OAKLAND, CA, Feb. 15, 2019 (PPI Pulp & Paper Week) -Smurfit Kappa Group's (SKG) containerboard and corrugated business in Mexico increased sales by 3.2% in 2018 to 794 million Euros and the firm's performance in the Americas including its US business grew margin from 14.4% in 2017 to 15.7% in 2018, the company announced this week.

"We saw significant improvement on both an absolute EBITDA and EBITDA margin basis," SKG said of its business in Mexico. "The Group saw positive volume growth for the country with a strong performance in the legacy business through the year and a strong fourth quarter for the border region."

SKG in Mexico benefitted from the ramp-up of a new 100,000 tonnes/yr machine at its Los Reyes Mill north of Mexico City. The PM 6 started up in late 2017 at a $62 million cost and can produce lightweight containerboard.

The machine increases the Smurfit Kappa board-to-box integration level in Mexico, where the company runs three containerboard mills.

Smurfit Kappa also lauded the performance last year of its Forney, TX, containerboard mill near Dallas. The output from the mill is sold in the US and to Smurfit Kappa converters.

"In the US, our margins and profitability improved as we progressed through 2018 with a step up in the second half both year-on-year and sequentially," the company reported. "Further corrugated price recovery coupled with the exceptional performance of our Texas Mill were the chief contributors to this improvement. Our box volumes were lower due to some rationalization projects in our operations in California but showed some good growth in the second half."

New injection plant in Texas.Smurfit Kappa this year also will start up a new injection plant in San Antonio, TX, for its "fast-growing" Bag-in-Box business, a company leader said. The company will manufacture its patented spouts and fittings at the San Antonio facility. The Bag-in-Box product is sold to wine, motor oil, condiment, fast food, and bulk businesses, and the San Antonio plant will make product for the company's Bag-in-Box plants in Toronto, Canada, Buenos Aires, Argentina, and Tijuana, Mexico. In Europe, the SKG Bag-in-Box footprint is much larger than in the Americas.

Mexico 9% of total sales.SKG Mexico sales represented 9% of the SKG's overall 2018 revenue of 8.9 billion Euros (which was US$10.7 billion on Feb. 13). Full-year revenue for Smurfit Kappa grew 4% in 2018 compared with 2017's total.

The Americas business including the US, Mexico, and Colombia generated 22.6% of total SKG revenue. The Euro 2.24 billion revenue for the Americas was down 6.2%, mainly due to a shut business in Venezuela. The Americas EBITDA margin increased to 15.7% last year from 14.4% in 2017.

A total of 85% of the Americas region earnings from 2018 came from the US, Mexico, and Colombia. The combined EBITDA margin for the three was up by about 230 basis points as the three "grew corrugated volumes." Colombia's corrugated volume grew 7%.

New Colombia capacity?CEO Anthony Smurfit told analysts this week that Smurfit Kappa was 300,000 tonnes/yr short of linerboard or containerboard in the Americas. He suggested the company might consider new board capacity in Colombia.

Overall company margin: 17.3%.Smurfit Kappa's overall margin was 17.3% with EBITDA of 1.5 billion Euros last year. The 1.5 billion was up by 25.1% from 2017's total behind a strong overall business performance in Europe. The Americas EBITDA total was 317 million Euros, up 2%, and it represented 20% of total SKG EBITDA.

For now, Smurfit acknowledged an oversupply of export kraft linerboard in the market that caused lower pricing and noted lower old corrugated container prices mainly due to China's reduced demand.

As for new capacity planned in the European containerboard market, Smurfit said:

"Capacity is always a concern in this business. It has been a concern since God was a boy. So I mean, the reality is we've always dealt with that."

He also noted Smurfit Kappa's efficiency efforts.

SKG executives, who fought off an acquisition bid from the world's largest containerboard producer International Paper (IP) last year, said the firm was well designed with its "integrated model" strategy that calls for integration along the supply chain from raw material to linerboard to corrugated box.

In one key example, SKG Europe CEO Saverio Mayer told analysts on Feb. 13 that the company has "standardized 50 paper grades in our mill systems and, with these 50 grades, we can make limitless box designs in our box system, facilitating a differentiated offer to our end customers, but critically keeping the production complexity away from the mill system."

Mayer said Smurfit Kappa is running fewer containerboard machines today and each machine's output is now greater. He added the company can now make more than one million tonnes/yr annually of lightweight linerboard, a "key growth grade in Europe."

At the end of 2018, SKG's net debt was 3.1 billion Euros, which was only 35% of its 2018 sales. The company in January also signed on for a 1.35 billion Euro five-year revolving credit facility.

 IP, if it so desired, cannot make a second bid for acquiring the Dublin-basedSmurfit Kappauntil June 6, according to an Irish Takeover Panel ruling last year. So far, there have been no public reports to suggest IP would bid again for Smurfit Kappa, the fourth largest containerboard producer in the world behind IP,Nine Dragons Paper, andWestRock.

 Australia'sOrora, which operates a group of corrugated plants in Southern California, will continue to eye further M&A in North America, the company said this week. Orora has made 11 acquisitions the last six years, including two recent ones in Texas. "A pipeline of acquisition targets continues to be developed – subject to the opportunities meeting the hurdle rates and being strategically compelling, acquisitions will continue to be pursued and executed as appropriate. For the near term the major focus will be on integrating (the) Bronco and Pollock," packaging company acquisitions in Texas, Orora said. North America sales for the company increased 7.2% to $882 million and its EBIT dropped 1.1% to $46.5 million in the second half of 2018. The company said its margin in North America dropped 40 basis points to 5.3%. The company noted a "tough" market condition in North America, and that it commissioned a digital printer in the USA and was commissioning a new six-color printer.

--Bygrudder@fastmarkets.com