Smurfit Kappa’s Q1 profits hit by big cost increases

By Guy Montague-Jones

- Last updated on GMT

Related tags Smurfit kappa Cost

Paper packaging giant Smurfit Kappa has revealed that first quarter raw material costs jumped 10 per cent compared to the last three months of 2010.

The increase, which was accompanied by a 5 per cent hike in energy costs, put a squeeze on profits at the Irish packaging giant.

EBITDA was up 32 per cent year-on-year to €243m but the profit figure fell below market expectations, prompting a more than 4 per cent dip in the company share price.

Sharper than expected

Gary McGann, Smurfit Kappa CEO, admitted that cost increases had been higher than anticipated.

“The increase in raw materials, energy and other costs has proven sharper and more sustained than previously expected, thereby causing some near-time margin pressure.”

Two rounds of price increases have already been introduced this year but it takes some time for these to be fully implemented. Nevertheless, McGann is confident that the company can pass on higher prices and warned that more increases could be in the pipeline.

He said: “Entering the second quarter, while demand remains good, input costs have risen further, which if sustained will require additional price increases.”

Since 2009, when market demand and pricing collapsed, the company has been able to increase its prices substantially and recover lost volume.

Price and volume recovery

Its European corrugated prices were 19 per cent higher at the end of March 2011 than they were at the lowest point in 2009. And even in the latest quarter volumes have grown.

Excluding the acquisition of Mondi’s UK corrugated volumes, Smurfit Kappa said Q1 volumes were 4 per cent higher than in the equivalent period last year and 1 per cent above volumes in the last quarter of 2010.

But the company is not just relying on higher prices and volumes to secure future margin growth and mitigate against higher input costs. Having completed a €306m cost saving programme, it has this year introduced a two year initiative with a target of generating €150m in savings by the end of 2012.

Smurfit Kappa makes a wide range of paper-based packaging products for the food and drink industry including wine boxes, pizza cartons and dry food packs.

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