Smurfit Kappa voices Venezuelan seizure fears as it posts strong 2011 results

By Rory Harrington

- Last updated on GMT

Related tags Venezuela

Smurfit Kappa voices Venezuelan seizure fears as it posts strong 2011 results
Smurfit Kappa Group (SKG) announced a big jump in its 2011 profits and two new acquisitions, as it flagged up falling demand at the end of the year and the future risk that its Venezuelan operations may be seized by the Hugo Chavez-led government.

The paper-based packaging company, which has operations in Europe and Latin America, posted a 44% leap in full year operating profits to €590m while EBITDA rose 12% to just over €1bn.

It said it had achieved these figure despite what it described as “significantly higher input costs”​ during the year.

Weakening demand, price fluctuations

SKG echoed what many companies in the packaging sector have reported as demand in Europe slackened in the second half of 2011.

The progressively weakening economic fundamentals that prevailed in Europe in the second half of 2011 clearly impacted consumption and output in the region, which led to a decline in packaging demand”,​ it said in a statement.

Its box volumes grew by 2% in the first half of the year, and 1% in Q3 but fell back 2% in the final quarter, leading to a direct downward push on its prices.

“From the peak in quarter two to the year-end, recycled containerboard prices have reduced by €115 per tonne, while old corrugated container (OCC) costs have only reduced by approximately €50 per tonne, thereby creating significant margin compression for non-integrated containerboard producers,” ​said SKG.

The lower margins led to significant market-related downtime – some 200,000 tonnes – announced for the year-end.

Stable demand at the start of 2012 and higher OCC costs have seen the company recently announcing price increases of €100 per tonne for recycled containerboard and €60 per tonne for kraftliner.

Takeovers and Venezuelan risk

SKG also revealed it had recently taken over two new packaging companies in Russia and Argentina as part of its strategy to expand in high growth markets. The Russian acquisition was a box plant in St Petersburg for €8m.

The firm said the US$15m buyout of an Argentinian bag-in-box represented an opportunity to grow its business in a “relatively high-margin product and geographic area”.

SKG highlighted the improved performance in Latin America, with Colombia and Venezuela particularly strong, as EBITDA grew 19% over the last 12 months. Argentina and Mexico posted weaker returns, it said.

However it also raised the continuing threat that parts of its large business unit in Venezuela, which accounts for 17% of its total net assets, could be confiscated by the government led by Hugo Chavez.

“The nationalisation of foreign owned companies by the Venezuelan government continues and would suggest that the risk of similar such action against the Group’s operations in Venezuela remains,”​ said SKG.

It said that Venezuelan authorities had issued precautionary measures over a further 7,253 hectares of its forestry land in July, with a view to acquiring it and converting its use to food production and related activities.

SKG said compensation for the land seizure would be negotiated but that the “amount and timing of such compensation is necessarily uncertain”.

At present, it said, the firm remains in control of its operations there.

Following the devaluation of the Venezuelan currency against the US dollar in 2010, SKG said cumulative foreign translation losses arising on its net investment in these operations amounted to €190m in 2011 versus €199m in the previous year.

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