Smurfit Kappa’s Q2 earnings increase after it raised prices and cut costs

PACKAGING groupSmurfit Kappa’s second- quarter earnings rose by a better-than-expected 20% after it offset higher input costs by raising prices and cutting costs elsewhere, and as demand for its products increased.

Like its peers, Smurfit has been recovering from low prices reached in a recession that hit demand for consumer products, but has been put under fresh pressure by the rising cost of raw materials such as fresh fibre, wood and recycled paper.

Europe’s leading containerboard and corrugated packaging producer, which slashed costs when demand for its products started falling, responded to the higher input costs by introducing a new €150 million cost-cutting plan earlier this year.

It said yesterday that cost savings of €22m in the quarter to end-June helped push adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) up to €264m, ahead of an analyst forecast for €260m.

However, shares in the Dublin-headquartered group were broadly flat at €5.2, under-performing a 1.2% higher Irish market, after it was unable to give profit guidance for the year.

Its chief financial officer told Reuters that, although Smurfit was able to increase corrugated prices by around another 1% in July, the outlook for the rest of the year remained uncertain given risks to the global economy were increasing.

“For the half year, business has been good and volumes remain good in July . . . I don’t think anybody could give you any accuracy of what is going to happen from September onwards with any confidence,” said Ian Curley.

Smurfit’s shares are down from a three-year high of €9.5 in April and have tumbled by over 35% since mid-July after declining containerboard prices in Europe put the group’s ability to pass further price increases on in doubt.

Swedish rival SCA said last week that it expects to be able to continue to pass on high raw material costs.

While it didn’t give any comment on expected volume trends, Smurfit reiterated its commitment to reduce debt levels and set a target of €2.85 billion net debt by year-end, implying a further paydown of €150m on top of the €107m reduction in the first half of 2011.

Barry Dixon, an analyst at Davy Stockbrokers, said the debt reduction forecasts seemed to be based on achieving further corrugated price increases this year. However, he said, given the fact that underlying volume growth appeared to have slowed from 4% in the first quarter to flat-to-modestly-positive in the second, the group’s ability to push through further price rises was far from certain.