Smurfit WestRock PLC (SW) 2021 Q4 法說會逐字稿

Hello, and welcome to the Smurfit Kappa Group 2021 Full Year Results. (Operator Instructions) Just to remind you, this conference call is being recorded.

Today, I am pleased to present Tony Smurfit. Please go ahead with your meeting.

Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us today. As usual, I refer to the disclaimer concerning future expectations.

I'm delighted that Ken Bowles, our CFO, joins me as usual today. Also with us today and joining us from Amsterdam is our CEO of Europe, Saverio Mayer, together with our newly appointed CEO of the Americas, Laurent Sellier, who's joining us from Miami. Both of their biographies are in the appendix.

Equally, I'm also delighted to be joined again here in the room by Paul Regan, our Group Treasurer. Paul has been with the company for 27 years and will retire later this year, and so this will be his last results presentation for Smurfit Kappa Group. Both Ken and myself have worked closely with Paul for many years, and we both like to pay tribute to the tremendous work he has done on behalf of the company and shareholders over a decade.

Today, you would have seen our results, and we'll go through them shortly, but I would like for now to focus on what makes this company truly different.

Six years ago, we set out a new vision to take this company forward in an evolved but accelerated manner. Today, that vision has evolved further to be a globally admired business dynamically and sustainably, delivering secure and superior returns for all stakeholders. This vision, which is the foundation for all that we're accomplishing through the company, is bringing the business forward and ensuring that our performance is improving on a continual basis. Accomplishing our vision means better results for all stakeholders.

To accomplish our vision, we put people at the heart of everything we do. I'm really happy with the way we have continued to develop our people, reward and motivate our people, and attract and retain our people. At the end of the day, it is our people who are innovating and the ones that are going the extra mile for customers.

Smurfit Kappa is recognized as progressive, growth-orientated, customer-centric and resilient by our stakeholders. And while our vision is a journey and not a destination, we are progressively realizing that vision by delivering secure and superior returns. We're delivering these returns because we have great people.

In this virtual room of 5, we have 160 years of experience within the sector, and I'm proud that all of us have spent the vast majority of our professional careers within Smurfit Kappa. I'm delighted to say that this kind of loyalty is embedded at all levels throughout the organization. We are far from unique in this room.

With experience like this, Smurfit Kappa has adapted quickly as our industry has changed radically over the last number of years. Our product being biodegradable, renewable, and recyclable, is now a must-have for consumers who are demanding more sustainable packaging. Governments are following suit by legislating more and more against nonrecyclable, nonrenewable and less sustainable packaging.

The pandemic has accelerated trends that were already very apparent. E-commerce is a way of life for all of us and the protection that corrugated gives as a transport medium is the preferred choice for a mobile and sustainable world. Our products have evolved also from being a selling tool for our customers due to the highly graphic-orientated packaging that we produce and shelf-ready packaging, which facilitates and drives customer sales. Further strength of our product is the versatility of corrugated, helping customers reduce their packaging and transport costs, which makes our product be a facilitator of efficiency in supply chains.

In Smurfit Kappa, we're particularly proud of being the leader. We're the #1 in kraftliner and recycled containerboard in Europe, we're also the #1 corrugated box producer in Europe, primarily being #1 and #2 in every country in which we operate. And we're also the #1 producer of the fast-growing bag and box business in the European sphere.

But it's, of course, not just about size and scale, but what it brings. It's our ability to serve our customers throughout Europe, giving them security of supply and supporting their need for resilience. The scale of the company offers unrivaled applications, which I'll touch on a little later. Increasingly, customers demand resilience, where Smurfit Kappa is uniquely positioned to provide through our scale, reach and quality.

In the Americas, our strength of positioning cannot be overstated. The vast region of over 1 billion people packaging from a relatively low base is becoming more sophisticated, needing a company like Smurfit Kappa to supply the knowledge and expertise to meet changing supply chains.

With very strong barriers to entry in many markets and leading market positions across Smurfit Kappa's unrivaled Pan American network, Smurfit Kappa offers customers the complete package. We've been present on this continent since 1986, and this has allowed us to build an experienced and strong local management team who are totally aligned with the Smurfit Kappa culture and values. We've continued to make successful acquisitions in this region and continue to develop strongly, growing a regional footprint and expanding our product offering.

Our journey of transformation with quality as our guiding principle, we are very proud of the progress in Smurfit Kappa over many years. While there will be some bumps in the road, of course, this slide demonstrates our clear progress, growing return on capital employed with a substantially increased capital base, close to our target this year of 17%, with significant benefits to come. EBITDA and margin growth show a strong upward trend over the years, and we anticipate this positive situation continuing. We're also proud of our progressive dividend stream, which Ken will allude to later.

As you can see from this slide, following the progressive delivery of our vision, together with the benefits of our initial medium-term plan, we have seen a significant level of total shareholder return. In every aspect of our business, we have so much more to do and so many more opportunities. This is rooted in Smurfit Kappa's performance-led culture, which is built on delivery. Our people, as I say, go the extra mile. Our culture allows us to develop and innovate and put the experience and expertise that exists within this company to work for our customers.

We've built 29 development centers across the world that are continuously innovating, developing new ways to package products for our customers to allow them to be winners in their industries and markets. I'm delighted that this continues to be recognized, with 69 awards last year, a considerable growth. Together with our strong sustainability credentials and investment programs over the years, this is and has proven to deliver for shareholders.

In Smurfit Kappa, a key component of our success as a company over the years has been our integrated model. This model ensures that we remain resilient and can give guarantee of supply and keep close to our customers. It ensures that we retain quality profitability in our systems. We squeeze out costs in the supply chain, and we ensure we're able to optimize our paper machines and costs through the supply chain. The integrated model of supplying ourselves has always worked for Smurfit Kappa and will always continue to work for us into the future.

2021 was really a great year of achievement for Smurfit Kappa. The new investment program which we have embarked on is establishing a foundation for durable growth. These investments will give us a distinct medium-term competitive advantage. They are guarantee to our customers of Smurfit Kappa's resilience, commitment and ability to get our customers' products to the market.

Effective acquisitions have been a part of Smurfit Kappa's DNA throughout its history and will continue when they make sense for all stakeholders. They are part of our continuing growth and development in 2021.

We continue to be the recognized leader by our customers and the industry for innovation, design and awards. These do not happen by accident. They happen because of our people. And our people feel proud to be part of Smurfit Kappa, not only because we invest in our business, we invest in them, and we invest in the communities in which we operate.

A key achievement for us in 2021 was to further enhance our sustainability credentials. During the year, we had 2,700 customers and attendees at our virtual Better Planet Packaging Day. And this will be followed on in May this year when we will talk about the green agenda for Europe.

I'd like to take a few seconds to focus on the Italian acquisition that we concluded in October of last year. Verzuolo has given us a pivotal platform for growth. The paper mill will generate significant profitability on its own as we evolve it into our system and bring our knowledge and learnings into the mill. With our investments that have been made in our converting operations, this now ensures that we have the paper to supply our customers. This is a key strategic advantage. If one takes the principle that our customers are demanding security, our customers are demanding resilience from suppliers and our customers are demanding certainty, then having Verzuolo in our system is a lever for growth for a conversion, especially as we're investing so much in that area.

I also want to highlight the very strategic location of this mill, which is able to serve our growing Italian, French and Spanish business and, if needed, our Americas operation due to its proximity to the Savona port.

As I say, in Smurfit Kappa, we're investing very significantly in our business in the coming years to capture growth. One should not underestimate that investing in 7 corrugators, 82 pieces of converting equipment, paper assets that are already optimized, and developing our sustainability leadership position gives Smurfit Kappa a clear competitive advantage. You're all aware that supply chains remain challenged, so having this equipment arriving as a first mover give our customers further certainty and continuity.

In Europe, we're building 4 mega plants. These are creating guaranteed added -- we're also creating guaranteed added value by installing specialist graphic equipment, developing our digital offer, developing our bag and box business and our lighter lamination areas, which are higher added-value, niche-orientated products within our sector. These are all guarantees of future profitability.

We're also focusing on automation and debottlenecking to ensure labor efficiency. And investments are also being made to reduce our carbon footprint, water discharge and waste to landfill on a continuing basis.

In the Americas, we continue to invest across the region, with new plants and new products in all areas; paper, corrugated and also in cartons and sack paper. Indeed, in the sack business, with its integration into sack paper in Colombia, it is growing rapidly due to legislation and a move away from plastics. An additional benefit remains that our multinational customers can be served across our Pan American network.

I won't dwell on the next couple of slides, but I do want to refocus you on what makes Smurfit Kappa different. The scientific and data-assembled applications that are shown here are unique to this company. They're not replicable and bring together the expertise of our total company, effectively linking our European and Americas business through the continuous transfer of best practice and innovation capabilities. This data is truly unique, offering for our 65,000 customers and one which is valued by them and which is a real competitive advantage for us.

With our innovation centers and new ideas being continually populated by our people, our big data continues to grow with the new ideas and benefits that we are getting for our customers. The vast database we have allows us to produce products that our customers need, whether it's for better packaging initiative, and here you can see a few examples where we've replaced plastic, styrofoam and unsustainable packaging products, all of this comes from our innovation strategy within the company.

Equally, innovation plays a huge part in the e-commerce development that we're doing on a day-by-day basis. You'll see from this slide just a few examples that our knowledge and our people bring something that no other company can do in the scale that we're doing in our sector.

And of course, as I said, our awards are continually being recognized by industry, customers and organizations. Here on this slide, you can see a snapshot of the 69 awards we received last year from NGOs, customers, industry and communities in which we operate. We're very proud of this, and this is something that we continue to focus on and develop.

Finally, before I hand you over to Ken, I wish to reemphasize the opportunities for plastic substitution. It is, of course, difficult to pin a number on this, and there are varying estimates from different competitors, from 1 million tonnes to 5 million tonnes to 10 million tonnes over a given period. In Smurfit Kappa, we're not in the business of forecasting this because there are so many different variables that will affect the speed and timing of this opportunity. These variables include supply chain constraints, availability of materials and the time frame involved in switching machinery around as well as the marketing and branding support that our customers need to put behind this.

All of that said, very few of our 65,000 customers are not working on or thinking about projects that require our innovation to move them away from nonsustainable packaging. The opportunity is truly immense, whether we're talking about replacing billions of plastic pallets, removing stretch wrap and plastic films, replacing styrofoam as protection or indeed for wet packaging such as fish boxes are replacing Hi-Cone plastic with recyclable corrugated.

Equally, think about all the plastic tubs in supermarkets across the world and the fact that the same job can be done effectively with sustainable packaging. Indeed, we're already working strongly on a child-safe pack for detergent pods, which is growing very quickly with a particular customer.

All of this opportunity is presenting our products with what we call a high-class problem of having sufficient resources and materials to be able to do the job.

And with that, I'll now hand you over to Ken, who will take you through the financials.

Thank you, Tony. Good morning, everybody, and thank you all for taking the time to join us.

As Tony mentioned, this has been another fantastic year of continued delivery for the group, both strategic and indeed operational. What may not be obvious, though, are the challenges we overcame to deliver those results, ensure our customers are served, and continue to grow and expand our business.

We are very proud in SKG that we remained fully operational, albeit under difficult circumstances at times, to ensure our products got to where they were needed for over 65,000 customers.

The growth we have seen in the demand for our sustainable products resulted in unprecedented tightness in the containerboard market. Our unique integrated model, the strength that brings in terms of security supply has proven itself once again to be a distinct competitive advantage.

The group absorbed significant raw material headwinds in 2021. Over EUR 670 million in recovered fiber and energy costs alone, and in the case of energy, particularly during the last few months of the year. So against that set of challenges, how have we managed to deliver that performance?

Through the integrated model, our geographic diversity, our asset base, and the investments in it to support the integrated model, expand capacity or ensure we can meet the needs of our customers through our converting business and our considered disciplined and effective allocation of capital, not just in 2021, but over a number of years.

Ultimately, though, the key to our success has always been our people, and in another year marked by COVID, it was their dedication and expertise that was a true enabler of our delivery.

Looking to those results and that delivery in a little bit more detail. This performance again illustrates the benefits of everything we do from both an investment and indeed a cultural perspective, a performance at culture, working on the foundations of a quality asset base and a focus on innovation and sustainability.

It is also important to remember that these results have been delivered against the backdrop of a continued global pandemic, a significant operational challenge that the group continues to work hard to overcome. The lessons learned and the practices implemented have been a demonstration of the best in our people who adapted and delivered for one another and, most importantly, for our customers.

Group revenue was EUR 10.1 billion for the year, 18% on 2020, and the rise represents primarily the impact of our volume growth of 8% and box pricing.

Group EBITDA was up 13% to EUR 1.7 billion. The group EBITDA margin decreased from 17.7% in 2020 to 16.8% in 2021. The margin reflects a lower margin year-on-year in both Europe and the Americas. Box prices have increased sequentially quarter-on-quarter since the second quarter of 2021, with some margin compression in the fourth quarter, largely down to a spike in energy prices. As mentioned earlier, that increase has been reflected in the paper price, and we will continue to see that pass through our box price.

Free cash flow was EUR 455 million compared to EUR 675 million in 2020.

The EBITDA growth of EUR 192 million, combined with lower outflows for cash interest and the absence of an exceptional outflow in '21 were more than offset by higher outflows for CapEx, higher tax payments, a higher outflow for the change in employee benefits and other provisions, and a negative swing in working capital from an inflow in 2020 to an outflow in 2021.

As you know, the management of working capital remains a key focus for us and the working capital as a percentage of sales is 5.7% at December '21, broadly in line with the 2020 number of 5.6%.

Our cash interest reduced year-on-year, largely as a result of lower average level of borrowing.

We were also pleased that early in 2021, both Moody's and Standard & Poor's upgraded the group's long-term issuer rating to Baa3 and BBB-, respectively.

With a strong business profile and our ability to consistently deliver substantial free cash flow, the group is aiming to maintain investment-grade credit ratings and a leverage in the 1.5 to 2x range.

And finally, reflecting the resilience of the cash flows and our future prospects, we are pleased to announce a 10% increase in the final dividend to 96.1p per share.

Turning now to our European operations and their performance in '21. EBITDA increased by 10% to EUR 1.3 billion, primarily as a result of strong volume growth and progress on box price increases I mentioned earlier. The EBITDA margin was 16.6%, down from 17.8% in 2020, but we do expect that to improve as we move through 2022. Corrugated demand was up approximately 8% on 2020. European pricing for testliner and kraftliner has increased by EUR 350 per tonne and EUR 330 per tonne, respectively, from the low of September 2020 to December '21. And as we begin 2021, demand remains strong and we remain in a sold-out position. We continue to see an acceleration in the demand for our Better Planet Packaging products as a result of changing consumer trends and our customers' desire for ever more sustainable packaging.

And finally, as Tony mentioned earlier, we continue to make progress on our European capital investment plans in '21 with the commencement of a number of significant projects across our corrugated and paper divisions. We also completed the acquisition of the Verzuolo mill in Italy, bringing 600,000 tonnes of containerboard into our integrated system, ensuring we continue to meet our customers' needs and capture future growth. The allocation of capital to both internal and external projects will enable us to not only continue to supply our customers with ever more sustainable products, but also reduce costs throughout the system and ensure that the group continues to be at the forefront of innovation in our sector with unique applications delivering sustainable packaging solutions for our customers.

Turning to the Americas. As you know, we've operated in the Americas for about 40 years. It's always been a region of high growth, strong free cash flow generation, and significant opportunity. In the Americas, EBITDA increased by 19% on 2020 to EUR 441 million. The EBITDA margin was marginally lower from 19.7% in 2020 to 19.5% in 2021, delivered though against the backdrop of, among other things, rising input costs and those well-documented supply chain issues we all know about. Colombia, Mexico and the U.S. accounted for almost 80% of the region's earnings with strong performances in all 3 countries.

Corrugated demand for the year was up 9% on 2020. The growth in Pan-American sales at 13% is again an indication of the benefits of the approach taken by us in this region.

As in Europe, the group continued to build on its operating platform with significant capacity and sustainability-related investments in the corrugated, containerboard and specialty businesses across the region.

And as Tony mentioned, in June and July, we announced the expansion of our Americas business with acquisitions in Peru and Mexico, respectively, adding to our geographic diversity and enhancing our customer offering in these high-growth regions.

Our Pan American sales offering, integrated with our experience center network, the acceleration of the adoption of e-commerce and the continued promotion and awareness around our Better Planet Packaging initiative, coupled with the benefits derived from our investment in the region in recent years, continued to deliver growth for ourselves and, more importantly, for our customers in the region.

Tony referred to some of the key operational and strategic achievements in 2021, and I want to mention some of the key financial and sustainability achievements. Achieving investment grade with all 3 agencies was an early milestone this year and recognition of the work that we've done over a number of years. The validation by the SBTi of our carbon reduction target was another endorsement of our ambition on climate. The issuance of EUR 1 billion in green bonds, the launch of the Green Finance Framework, and the issuing of the lowest coupons for corporate rating was a significant achievement by Paul and his team. And we were recently recognized as a strong performer by Sustainalytics with their award of Regional Top Rated badge.

And finally, the group has been contributing to making the UN 2030 Sustainable Development Goals a reality since 2015. This contribution was recognized by the Support the Goals movement in 2021, when the Group became the first FTSE 100 company to receive a five-star rating.

Alongside those achievements, we continue to make significant progress on achieving our other sustainability targets, a point we outlined at the half year, following the publication of our 14th sustainable development report. I don't propose to go through the slide in detail, but would remind you of the key points.

We were the first in our industry to target at least net zero by 2050. We have had our emissions reduction targets approved by the SBTi as consistent with levels required to meet the goals of the Paris Agreement and well below 2-degree centigrade. And we continue to make progress on our other key sustainability targets, water discharge and processing, waste to landfill, chain of custody certification, and indeed health and safety.

And in addition to our green bond, we have also aligned our sustainability ambitions and targets into our financing by embedding it into our existing EUR 1.35 billion RCF, creating a sustainability-linked RCF.

By committing to our sustainability targets, the group's Better Planet Packaging portfolio of sustainable products will continue to help our customers deliver on their own sustainability goals.

And finally, our usual reminder on how we see capital allocation as a framework. And while the framework has remained consistent, how we apply it, adapt it and deploy it has changed over the last number of years. There is a fundamental underpin though, which is that all capital allocated must support the group's ambition around growth, returns and value creation. Our balance sheet remains strong and with a net debt-to-EBITDA of 1.7x gives us a lot of flexibility. In recent years, the speed at which we have deployed internal capital has greatly increased as we see the opportunities that Tony talked about begin to gain real momentum. We fundamentally believe that this capital, given our expertise and implemented projects, is still the lowest-risk and highest quality allocation of capital. We are not only creating the opportunity but also, more importantly, value, as you can see through our margin and return on capital employed.

The acquisitions during 2021 are clear indicators of how we see M&A as a group. As always, we have a number of projects in the pipeline focused on building out a strong geographic network or further enhancing our product portfolio. We remain, of course, disciplined around M&A, and as always benchmark them against other capital allocation alternatives.

The dividend is a key pillar of capital allocation. It is an input rather than an output. And the increase in the final dividend is yet another illustration of our belief in the future prospects and cash generation ability of SKG.

Our ability to keep our capital allocation framework flexible and agile has been a key pillar to the success that both Tony and I have spoken about so far today. The multiyear delivery and the success we have to date has given SKG the broadest strategic and financial opportunity set.

I'll now hand you back to Tony for some concluding remarks.

Thank you, Ken. When we look to our future, while always conscious of course of risk, we see nothing but opportunity in Smurfit Kappa to develop the company going forward. You all in the investment community always use the tagline that future success is not guaranteed by past successes, but I'm sure you also know that it sure helps. Our strong balance sheet and investment program, which has been endorsed by so many of our shareholders, is going to allow us, if you will, to continue to bat to our packaging strengths.

The first of those, of course, is the unique culture within Smurfit Kappa, which is a management team and organization that has a culture of operational excellence, a culture of performance and a culture that devolves profit center responsibility to the operating unit.

Our market positions and positioning with our customers is truly unique and truly irreplaceable. Over the year, Smurfit Kappa has repositioned its asset base to be amongst the lowest-cost, the most efficient and the most innovative company, both in conversion and in mills, thereby ensuring that the integrated model that we talk so much about continues to deliver for the company and its stakeholders.

We've also developed within the company a suite of specialized products that continue to grow strongly. One of those being, as an example, the fast-growing bag-in-box business.

Our capital development plan which, of course, is always returns focused, will continue to demonstrate to our customers the resilience that we have and the commitment of Smurfit Kappa to serve our customers. That commitment is giving us the growth that we need to continue to drive future returns.

I said at the beginning of this presentation that we've evolved the company significantly over the last number of years. It is our intention to continue to evolve the company, to improve, to be even more efficient, to have a larger geographic footprint, and to demonstrate our resilience to customers and, of course, to continue to innovate to be even more sustainable. Accomplishing this will meet our vision objectives of being a globally admired business, dynamically and sustainably delivering secure and superior returns for all stakeholders.

As we've always done, we will keep a strong eye on the market and we'll acquire things that make sense. We will continue to invest in and motivate our employees who are supporting our objectives as they are the key assets that differentiate us.

In Smurfit Kappa, we have a lot of drivers for growth in the years ahead. With our strong investment plans, our integrated model, our focus on quality, innovation and sustainability, this gives our customers great confidence that Smurfit Kappa will be the long-term supplier of choice and partner for their future growth. Our investment plans would inevitably lead to higher margins and higher ROCE growth as Ken has alluded to.

As I stated in the release, the year has started strongly with most of our businesses effectively sold out. And recognizing the support of our shareholders, the Board has again announced a 10% dividend hike. I would like to thank you all for your support for myself and the team, and we look forward to taking any questions that you might have as we finish up this presentation.

Operator, I will hand it over to you to take questions from the audience. And just to remind everybody that we do have Saverio, we do have Laurent, and we do have Paul with us as well to take any questions specifically in their areas.

(Operator Instructions) Our first question is from Lars Kjellberg of Credit Suisse.

Tony and Ken, you of course had a very strong track record of accretive organic CapEx. You're talking about and rightly so that this is propelling growth and higher returns. Can you share with us what you're seeing in terms of this sort of momentum, in particular, sustainable packaging is delivering? You talked about that in the press release this morning as it's the choice of customers and consumer versus less sustainable alternatives. So it would be very helpful if you can share how this is gaining traction and how this is driving your very strong growth of 18% in the current year -- in the past year, I should say.

And also, Ken, if you can talk a bit about how we should think about costs in the context of your statement on improving the margins this year? And is the target somewhere around the 18% trend? Is that really what you're telling us? And finally then, how should we think about the contribution from the investments that you've made, the close to EUR 700 million you spent last year plus the Verzuolo CapEx in '22? And finally, what did the medium-term plan deliver in '21?

I'll take all those, Lars, if I can't remember them all. If I forget, you remind me. I'll start from the bottom up maybe.

The medium-term plan probably would have delivered about 16% in 2021, if memory serves me correctly. Looking forward to '22, take into account that we also disposed of some businesses in '21, but the net contribution we see from the acquisitions in '22 would be about EUR 25 million.

And then going back to your question on costs. Clearly, costs remain particularly volatile around energy. So any number I give you now, I will update you as we go through the year. Clearly, it will move in shape as kind of winter ends and, hopefully, gas stocks get replenished, et cetera. I think OCC continues to hang out at that kind of high levels now and even high has normalized at between 190, 196. So we would still see OCC as a little bit of a headwind coming into 2022. At the moment, when we look across the year, that's probably something in the order of about EUR 50 million.

Normally, our cost takeout program would offset inflation, on labor particularly. Well, clearly, while labor may not have come through necessarily as a big driver of inflation just yet, I think we can fully expect that to happen to the back end of '22 and '23, more importantly. But I think for this year, we probably won't see the cost takeout program necessarily completely cover inflation. So we probably see slight inflationary headwinds in labor to the tune again of about EUR 50 million.

Clearly, the knock-on effect of energy into kind of the indirect cost around distribution and things like that probably also hits to the tune of about EUR 50 million.

And then look, we're seeing wood, pulp, starch, take your pick, on inflationary costs going up. I think in the round, they probably come to somewhere between, call it, EUR 100 million to EUR 120 million of a headwind.

And then the big one really, Lars, is kind of energy. And I think as we sit here today, and as you know, and Paul, Saverio and Laurent would be actively involved in how we do it, is we do hedge our energy. So at this point, as we would normally be, we're probably hedged about 50% for 2022. So we currently probably see a headwind in 2022 over '21 on energy of about $250 million.

But as was the net point there is, you bundle all that together and it's a lot of headwinds. But clearly, we've made a lot of progress. Indeed, the guys have made a lot of progress in '21 on their box price recovery. And clearly, that will continue into '22, and we'll see the full effect of full year run rate. So that's why we sort of feel confident around that statement around recovery and build back on the margin to where we were.

But hopefully, that gives you enough for your bridge there. I think that was enough.

That was a lot. Let me just comment on Verzuolo. I mean, Verzuolo was bought, as you know, in October and effectively didn't contribute anything in Q4 because it was an unhedged energy situation. But everything that we've seen in Verzuolo, we remain incredibly excited about. It's a mill with vast potential into our system, not only as a profit center, Lars, but as a feeder of paper into our system, which we urgently need. And that really helped us in Q4 with our customer base. So we foresee Verzuolo going up to 600,000 tonnes in a couple of years. It's currently doing right around 500,000 tonnes. And as I say, everything that we've seen thus far, we really remain very excited about its profitability potential when energy would be normalized a little bit. I'm going to ask Saverio, and Laurent you can jump in as well, but more specifically, Saverio to address your plastics questions and what you've seen with customers with regard to plastic substitution. And Laurent, if you can jump in, if you want, after Saverio has finished.

Yes. So thank you, Tony. I think, well, this is a clear, clear trend on the market, and as we are exposed to all of the major brands, we are seeing this accelerating. We proudly launched, in 2017, our Better Planet Packaging initiative. And since then, we have been, let's say, starting to work in all aspects with all the major brands in order to help them to achieve the reduction targets that they have publicly declared. So if possible, the pandemic has highlighted even more the need for this evolution. And we are supporting with all different kinds of solutions in this green transformation.

I think each of our customer is trying to reach in the time they have declared their targets. And we have specifically developed several lines of product portfolio in order to satisfy. And then you go into the specific of each of their production, be it EPS replacement for buffering and protection of products or be it new sustainable packaging for detergent pods, there are all kinds of solutions, or clips to keep the drinks, the beers together as we are producing them, or the punnets for fresh fruit or berries, this is all the things that you already see on the market and it's coming and accelerating more and more. So we are adapting our solution and trying our network of design centers to everyday propose new solution, including the machinery, which goes together with that in order to fix the line in the production of our customers.

And Laurent, do you want to just give a sense of what you're seeing in the Americas now? Just bear in mind, Laurent has been there for less than 6 months. But maybe just in the Americas, what you're seeing?

Yes. Good morning, everyone. Pretty much the same situation because many of the customers that we're serving on this side of the Atlantic are similar to the ones we have in Europe. And for those, the trends tend to be very similar to what Saverio has described.

There is also, which is very interesting, more or less across the geography, a growing interest for sustainable packaging and the same big building blocks that have been referred to, whether it's single-use plastic that our customers are trying to replace or whether it's EPS for large appliance manufacturers, in particular on the border side of the U.S., where massive industrial platform is being utilized to service the U.S. market. In all those areas, EPS is also looked at, and we are trying to offer alternative solution and typically with the honeycomb solutions and molded pulp together, we offer very convincing solutions.

Same for many other aspects, like looking at the dimensioning of packaging, reducing logistics, reducing the amount of CO2 produced by transportation, and all those dimensions that are extremely valuable to our customers and help us position ourselves. But there is a great deal of similarity just on local customers, the sustainability agenda is still something that is growing. But for sure, a very similar situation to the one Saverio just referred to.

Okay. That gets you your answer, Lars?

Pretty much. I appreciate it's difficult to give a quantum on what this is contributing, but I guess we'll take that another day.

Our next question is from David O'Brien of Goodbody Stockbrokers.

First one is just on demand. You're talking about, I suppose, still remaining an effectively sold-out position. What does that mean for the outlook for volume growth for 2022 for Smurfit Kappa? And generally, what do you see for market net growth in Europe specifically?

And if I turn to the Americas, I'm just trying to look at the margin performance. First half margin is up nicely. I know we've got energy costs kicking in, in the second half, but it doesn't seem like the Americas margin was quite as resilient as maybe it was in Europe. What is driving that? And what should we expect into 2022 there?

And then finally, just in terms of -- you've talked about the corrugators, 7 corrugators, 80 converters, can you give us some context on what that means in terms of adding to your existing system in terms of volume capabilities? Or what it means in reality?

And finally, congratulations to Paul, an exceptional contribution, and the tight spreads around the green financing is probably a testament to all that work as well. So all the very best.

Thank you for that, David. Let me just take the demand, and then I'll ask Ken to talk about the other points. Sorry, I'll take the corrugators.

Basically, what we would say when we say we're sold out, I mean we have put in investments in the last year and they are effectively every -- our customers are demanding more from us, because as I said in the discourse that I had that they see Smurfit Kappa as being extremely resilient and a strong supplier. So we can basically do the business that we want to do at the moment.

So as we are putting in all of this investment, corrugators, converting machines, we effectively expect to sell that out relatively quickly as those investments come in. There is some degree of delay on those investments because our suppliers are suffering with the same issues that you'll have read about with regard to chips, labor, issues like that.

But overall, I would say that that's going to put us in a very, very strong position to meet customers' needs and grow our volume. And we're sort of effectively saying that this year we will grow somewhere between 3% and 4%, assuming there's nothing bad happen in the world, and that would be sort of our target for the year across both regions.

With regard to the Americas and the margin contraction in Q4, it's certainly not any worse, but let me ask Ken about that.

I suppose it was my initial comment, Dave, we're talking about the resilience of a margin at 19.5%. So let's put that in context.

Actually, energy is not a key feature of our Americas business in the sense of the volatility that you see in Europe. So energy in the Americas will be broadly flat year-on-year. It's that volatility is clearly a European feature.

I think what you're seeing, though, is more a function of what you see because we're short paper. The reality is that as paper prices increased in the Americas, it just takes a little bit of a different kind of pace and cadence to get those kind of box price increases back into the system. I suppose it's just the inevitability by calendar year-end versus if we took this over slightly longer term, I think margins will clearly get back to where they were. And indeed, the investments that Laurent is making into the region in terms of building more paper capabilities brings more of that profitability and margin resilience inside the group rather than kind of the third parties.

So I think it's just a natural path back to where they were. It's just a bit of timing. There's nothing fundamental within that. But I think the key point just to keep in your head is that when we talk about volatility in the energy market, that's actually a European phenomenon, we don't see that in the Americas.

Yes. As we've got Laurent and Saverio here, maybe just very briefly, Laurent, just comment on, with the exception of Brazil, as we said, we're sold-out, maybe give us just a flavor of the markets and then Saverio will follow that.

Yes, Tony, with pleasure. I mean, the term you just used, which is sold-out, it's pretty much what defines the situation today. And I've been visiting most of the facilities and this is what comes out every time we talk. And this is truly generally across the geography.

And if you talk about the 2 main markets where we operate, being Mexico and Colombia, in different ways, but very strong ways, a combination of excellent outstanding domestic demand, but also inpatriation of U.S. demand, which particularly affects the border area of Mexico serving the U.S., where we're clearly seeing, at enormous pace, the intensity of capital reallocation back to the U.S. area, even if it's located in Mexico.

But then all across the region, it's pretty much the story. Brazil, as you rightly indicated, has somewhat of a slower pace, let's call it like this, albeit in a place where we can use our knowledge and transfer also the knowledge from Europe to offer to our customers a different approach, where despite a volume situation, we're capable of aggregating very significant value in this company. But pretty much to me the impression and the feeling that we get from the plants at this moment in time is just sold-out.

Saverio?

I basically can just report the same situation for what concerns Europe. We are sold-out. We are sold-out in Germany, who is the largest European market. We are sold-out in Italy, which is the second largest, in France, in Spain, and there is even an additional acceleration in the Eastern Europe which is experienced, where we have very good assets and where we are investing to even take additional growth over there. So this is the situation as it is at the start of the year and as it is normally follows what is the forecasted growth for the European economy, which is above 4.3% in general.

So the situation looks exactly as or even in a clear way like the Americas. So we are pushing as much as we can with our effective productivity and supporting our customers' need and getting, if you want, some competitive advantage from our integrated system, which is providing the security of supplies to our customers. And in our customers' mind, security of supplies now is priority #1. And our resilience has proved to be a key subject to achieve our growth.

Thank you, Saverio. Thanks, Dave.

Our next question is from Allan Smylie of Davy.

It's Allan of Davy. Congrats on an excellent set of results. I have two questions, please. Saverio just referenced how the resilience of your integrated model is really resonating with customers, and I think we clearly get that. But do you have any sense how the smaller nonintegrated players are coping? It was clearly a very tight paper market and an increasing input cost environment. And not to get into the realm of forecasting, but do you think that acts as a constraint on the European industry's ability to add containerboard capacity over the near term?

And then just as a follow-on question, given the strength of volume growth in the market last year, but also the addition of Verzuolo, it would be helpful to get an updated number on your current level of integration in the European system. And then on the forward-look basis, how are you thinking about future paper requirements, including timing around the Reparenco white paper machine conversion.

Let me take the second one first, and then I'll hand it over to Saverio. I mean with regard to integration, when we bought Verzuolo, we were buying a small amount of tonnes from them. We obviously increased that in Q4, and we will increase that in Q1. But I would say that we're pretty balanced, maybe a small amount that we're selling outside on a European basis. I haven't done the exact numbers and obviously we'll look at it as we go through the year. But we intend to keep some outside customers around the mill in Verzuolo. We intend to continue to buy some product in other parts of Europe that suit us, whether it's different grades or different widths. But you could effectively say, Allan, that, let's say, back end of next year, we will be fully integrated again, if you put everything against each other.

I'd say that with regard to the Reparenco switchover, that's something that we will decide at the appropriate time. It may not ever happen and we may get other opportunities to buy something. Because while Reparenco mill last year was a big loser for us, we don't expect it to be a big loser this year because the price of white papers has risen substantially because of closures and increased demand. So we'll keep an eye on that. We are going to go ahead anyway with the permitting process, which will take a good 18 months to get in the Netherlands. But once we get there, we're not sure that we'll do it. We'll just keep an eye on what the market looks like, and it may make more sense for us to buy somebody else rather than convert that. But that's minimum 18 months away before we announce, which will be another 18 months after that. And so best scenario, I would say that 2.5, 3 years would be when we would convert over. But there's, again, no certainty on that. Saverio, do you want to take the first question?

Yes, with pleasure. I think the question was referring to pressure on smaller competitors or new integrated companies. And yes, this is the case. And this proves to be a big opportunity for us, which we are trying to exploit at best because we are dealing with customers and potentially gaining market share with them in certain case.

So for 2022, there is no substantial capacity increase forecasted in the paper production, which, assuming the growth, will remain as forecasted, and the forecast is a much more normalized growth than what we experienced last year. This will mean that the market will remain under tension and that still we will have even more interesting opportunities to enter into certain market segments that we are targeting.

As long as we have the capacity, Allan, which obviously we are as well delayed with some machines that we've ordered, but not too much, but some, we're talking 1 month to 4 months. And clearly, we would love to have those machines in. But as I mentioned in my script, having those machines coming at least gives us real first-mover advantage because a lot of our suppliers of machinery are also in a sold-out manner. So I think the fact that we've booked the slots, that we've got them coming in, that we are such a big buyer and an important customer to these equipment suppliers, and there are not that many of them, gives us a massive competitive advantage when we get those machines in against some of the people who haven't made that leap.

Our next question is from Justin Jordan of Exane.

I've got, I suppose, two separate questions. Firstly, Ken, you've talked a lot about cost inflation. I suppose, can we speak a little bit about the other side of that, which is price increases. From memory, when you last updated us at the Q3 results in October, you were speaking about, I think it was 12% book price increases by the end of September. Can you update us where that is at the end of December '21 in Europe? And then clearly, when you speak about your confidence in margins improving as we progress through 2022, are there any sort of early indications you can give us on current volumes in the early days of 2022? And clearly, your hopes and aspirations for the box price increases in 2022?

And second question, I suppose, is just around the big theme of supply chain disruption, and we've heard this in many industrial companies not just in Europe but globally. Can you give us some sort of anecdotal stories on this, Tony, just in terms of just the real challenges in the real world that the business is encountering and really dealing with on a day-to-day basis in terms of serving customers and how the integrated model is helping that.

And thirdly, I just want to echo a real, real note of appreciation on behalf of all analysts to Paul Regan, who has been incredibly patient and very helpful to the analysts with lots of extra disclosure and information over the years. So I wish you all the very best for the next stage.

Thank you very much, Justin. Much appreciated.

I can only hold to myself and Tony have the same thing on the way...

It's better when you save your questions, Ken.

This is true, too. I suppose sequential box pricing, you're right, we kind of said Q2 over Q1 was 5% and Q3 over Q2 was 7%. Q4 over Q3 was another 6%. So that's kind of where we end up the year. I think broad strokes, quarter 4 to quarter 4 look like about 19% in total. So I think that gives you enough of an impetus into where you think '22 might go.

Early indications are from Tony's statement really, that we remain in the sold-out position. Demand remains strong. I don't think anybody is necessarily forecasting, and Saverio touched on it there, another year of 8%, but who knows. Clearly, demand remains in decent shape. You think about the paper capacity is coming on, it's only about 800,000 tonnes. So clearly, even reasonable levels of demand to keep the tension in that particular market. So all is kind of set fair for 2022.

And clearly, the paper prices that went up in, say, late November, early December, are in the process of being recovered as we work through the early part of the year. And indeed, as you know, January tends to be one of those months where we tend to get resets where they're applicable on index contracts. So certainly, as we start off the year, everything is kind of set fair.

Yes. With regard to supply chain disruptions, Justin, I think we've managed pretty well. Obviously, last quarter of 2020 was horrendous for us because we were short of paper and couldn't get it. This year was better because we did have Verzuolo. So we were able to service our customers. And again, as I continually said through this process that the resilience that we've shown has been really appreciated.

We have had many, many different issues through the year. I mean we've got one right now on bag-in-box where we have a film supplier who has just said that they're cutting our allocation.

We have issues with starch during the year, that's where we had to -- because of our network, we were able to find solutions. But if we didn't have the network we had, we would have run out of starch in our paper mills and we're having to use much more expensive potato starch instead of wheat starch because the demand levels were such.

So we've been able to manage through the supply chain disruptions. Our expert in transportation did a fabulous job ensuring that we got all of our product to the market despite lack of trucking. So I mean, we've managed through it. It continues to be an issue. And obviously, with that is cost inflation. But at the same time, because of the main potential disruptor being paper, I think we've pretty well solved due to the acquisition of Verzuolo, at least in the short term.

Our next question is from Cole Hathorn of Jefferies.

I'd just like to go back on your capital deployment over the years. I mean if you go back to end of 2020, the acceleration of capital deployment seems to be very well timed. And if I think about your view on where growth was going and I think about Smurfit Kappa getting your corrugated investments in for the machine orders, et cetera, do you think that puts you in a good spot versus some of your competitors that are probably going to have to place those same machine orders to meet that growth and there are going to be extra lead times to get those machines back and probably higher costs. I'm just wanting to know how you're feeling and any color around that corrugated CapEx spend that you've done.

And then linking on to this question on the paper capacity, do you have any feel around lead times for that paper capacity? Are you seeing kind of a push out of when supply may come into the market, because there's been a history of kind of supply delays in the market. I'd just like your thoughts, firstly, on that CapEx spend and how you see the supply chain?

Okay. I think, Cole, as I was saying earlier, I do think actually, we do have a bit of a first mover on this. When we did the capital raise, we identified the opportunity. We didn't quite identify that the growth would be at 8% or 9%, frankly. I mean, we were expecting growth, but we didn't for the reasons you would know about, which is, of course, sustainability, e-commerce, all of that was in our minds, but I think we've really taken 3 years growth in 1 -- or 2.5 years growth in 1 year. And that's sort of -- thankfully, we've accelerated our conversion plans as well to have that first-mover advantage with our suppliers who are delayed and who are having issues.

So yes, I think it's fair to say that if you come to the party now and you're looking for equipment, you're going to wait longer. And again, it goes back to the resilience points that we talk about with our customers and the customers talk to us about, is that they want to see companies that are able to supply them and meet their growth across all the regions in which we operate. So that's what we're doing. And it's key for us to make sure we get a return on those investments. And so just because we've got the demand, we just want to make sure we get paid for it, too. So that's obviously something that is -- any capital that comes through must have the correct financials behind it. So clearly, we haven't lost our focus in that area.

With regard to the paper side, is that the second question?

Yes. I think, Cole, as with where we sit in 2022, it's kind of continued ramp-up of existing machinery. We haven't seen that a new machine is supposed to start this year. I think in general, you still end up from an announcement to a point where you may get a machine starting is at least 3 years, so that from the supply side, if taken, there's always kind of efficiency creep and everything else that comes into with that allows to turn to the system. But there's no big announcements beyond those that are currently in the market. And certainly, I'd kind of call it 800,000 tonnes for Europe coming in, in 2022, that should leave the market in terms of supply/demand still fairly well balanced as we kind of move forward.

Perfect. And then bag-in-box, I mean it's a strong proposition for Smurfit Kappa. And Tony, if I remember correctly, that used to be the one you led for quite a while before you took on the CEO mantle. But could you give a little bit of color there with one of the competitors, Scholle, being acquired by SIG Combibloc. How is that environment? Does that acquisition change any dynamics for you? Just any color there would be helpful.

Well, it was one of the businesses I led, Cole. It was a business which we developed within Smurfit Kappa to be this substantial business it is today. It's obviously never substantial enough when we continue to drive growth. We've now operations in Mexico, Canada, Argentina, Russia, and a number of selling agents, and of course, Spain, Italy and France. And we have a number of operations selling offices around the world.

So it's a fast-growing business. It didn't have a great year last year, frankly, because we got caught out by massive raw material price increases that we didn't expect. And so therefore, we have to absorb those costs as we work through the contracts. We expect a much better year this year. It's fast growing. It's very sustainable. It fits well in our business. We're continuing to develop box business alongside our bag business. And so we just see this as part of the total offering of Smurfit Kappa, whether that's lighter lamination or digital prints, this is another specialist product that continues to have longevity and very decent returns.

And with regard to somebody else paying 16x, so maybe if you want, you can put the Smurfit Kappa group on 16x multiple as well, that's okay for us. But I think that's up to SIG to decide whether or not that makes value for them. And Scholle was the originator of bag-in-box solutions, so they're well established in many markets. And they are certainly a good company. We would say that we're as good or better than them. But clearly, that will be -- we continue to grow. And I don't know if you want to add anything, Saverio?

No. I think the appreciation of SIG that is an expert in liquid packaging, it's one additional proof of how successful is the bag-in-box. In Europe, they are not so big players as we lead the market strongly. They are basically in U.K. and the Netherlands. And we believe that a good competition will enhance the values of our products. So there we are -- I think with our system, we are ready to compete with anybody.

Our next question is from Mikael Doepel from UBS.

Two questions here. Firstly, on e-commerce, we've seen quite significant growth there in 2020, 2021 also, of course, reported corrugated volumes growth. Are you able to quantify the level of growth you saw in 2021 and also how big of a share of your volumes goes towards this segment today. And also what you expect in terms of growth going forward in e-commerce? That would be my first question.

Then secondly, could you talk a bit about the current containerboard market dynamics? I mean I see that you mentioned in the report that you see tight markets for the next couple of months. But if you could give a bit of more color on how you see the inventory situation, for example, the containerboard producers currently as well as the downstream converters. We have seen a U.S. price increase going out there. But also on the other hand, OCC prices coming down. What does that mean for the European market? What do you see in terms of export import dynamics? And so I guess the punch line is pretty much, do you see scope for further price increase in Europe as well?

Okay. Well, with regard to the containerboard markets, I mean, containerboard markets remain strong. I think that obviously, January and February are generally the slower months of the year. So there's a little bit more stock than there was at the end of last year. So I would say that the increases that we got in November and December are well implemented. Whether or not we'd see further increases, I think, will depend -- I mean they're sold out, it will depend on what the producers feel about cost inflation and energy costs especially and OCC costs, I mean, because actually, OCC has moved down a little bit in the Americas, but it's not moving down at all in Europe. In fact, quite the contrary, I'd say that as the markets are picking up, the export market is picking up, there's probably more OCC pressure than we've seen in the last 6 months in Europe.

So it will depend, I think, Mikael, about what happens on the whole area of cost inflation and market tightness in the next 2 to 3, 4 weeks. But is there scope? Yes, of course, there is, but we'll wait and see. And yes, the U.S. markets have gone up for their own reasons. And we will ourselves in the United States then be following suit there. So clearly, the markets are strong and there's high cost inflation in America that's driving that.

Ken, do you want to take the first question?

Sure. Mikael, I suppose on the supply side, too, just like I was saying to Cole there, really the supply side remains fairly tight in what's coming in this year. So with the level of growth we're forecasting, there should be no change in terms of the supply/demand balance on containerboard.

On the segmentation piece, it's ever more increasingly difficult to kind of carve out e-commerce and everything we do, but I suppose we've always said it's high single digits in the context of all the volumes we do, but clearly growing quite strongly, particularly across the last 2 years as kind of people adapted to new ways of working and new ways of buying.

And look, that's going to continue. I don't think anybody is necessarily going to go back to a pure bricks-and-mortar retail-type shopping experience. I think they're going to make their choices and kind of pick the best of what they want to do, be it e-commerce or not. And I suppose the other side of that equation is we've had a lot of customers who probably didn't have an e-commerce offering before 2020 and found during the early course of the pandemic that they had to build them fairly quickly at cost, and they're not going to give up that particular channel once the economy has kind of reopened.

And as well the fundamental point there too is e-commerce just isn't as mature a market as it would be, say, in North America. So clearly, through Latin America and through Europe, there still is a lot of room for e-commerce to become a much bigger part of everybody's portfolio, I think. So clearly, a source of growth alongside as Tony has mentioned in the guide, too, that move towards more sustainable packaging away from less sustainable packaging alternate.

Our last question is from Kevin Fogarty of Numis.

Two, please. One was really on capacity as we look forward. You've obviously provided a bit of a guide as to what that might look like this year. But I just wondered, is there any change in the timing for the ramp-up of Verzuolo, i.e., sort of could you possibly bring that forward at all? Or is there sort of constraints around that?

And then just secondly, given the sort of tight markets, supply and demand dynamics, I just wondered if there's been any change in customer behavior, if they're responding to these dynamics? Or does it give you any greater visibility over volumes? Or are they happy to kind of deal with the dynamics of a tighter market, please?

I'll ask Saverio to deal with the second question there. But with regard to Verzuolo, Kevin, I think we've got a lot of little projects to do to really reduce a lot of costs, frankly. So our timing on adding the 100,000 tonnes will probably be sometime 2024, '25, probably '24. But because we've got a lot of things that we can reduce cost in energy, we can reduce costs in warehousing and transport, that as it comes into our system, it makes more sense for us to put that capital to that aspect of the business in the short term to get all the levers working well.

But irrespective anyway, if we were to bring it up to an extra 100,000 tonnes, and actually, we think it might be even a little bit more than 100,000 tonnes, I think what I would say is that we want to put all the house in order so it's totally efficient and ready to move up, having all the things that are under our control in our control. And so I think it's a huge opportunity for cost reduction on the small stuff as well as bringing extra tonnes into the business. Saverio, do you want to take the other question?

Yes. I think you are referring to the consumer behaviors, how is this impacting. I think, again, here we go into an opportunity area because consumer behavior, apart from the clear trend that we just mentioned several times of e-commerce, the Z and X generation, I mean they are all, and whatever analysis you look at and market report you look at, I mean, this is going to push more and more towards the sustainable packaging. And once again, we are very well positioned by nature in terms of achieving the target and the choice that they are going to make in terms of selecting products which are appearing on the market and entering the market in a sustainable way.

So once again, I see big opportunities there from the new generation who will drive this in a more aggressive way, which is going to oblige our brand owners to go for packaging, which is going to disappear from the planet or not on the planet at the end of use. And this is what corrugated is about.

Well, thank you very much, Kevin. And again, to everyone that's been on this call, thank you very much for your attendance on the call, of course, but also for your support during the year and for your understanding about what Smurfit Kappa has been doing during the last number of years, but also what we're going to do in the future. We remain very, very excited about it. 2021 was a great year for us, but we anticipate a much better year in the years ahead, assuming the world stays round.

I would say that a special thanks to my colleagues, Ken, of course, for his leadership in the whole financial area, which is giving a tremendous stability to the company; to Saverio in Europe, which is running a huge company in its own right; and to Laurent who has just taken over our Americas business, good luck to him. And of course, especially to Paul on his retirement in a few months' time. Ken and myself wish him well.

But again, thank you all for your attendance, and thanks for your support. We look forward to talking to you during the year. And hopefully, we will continue to see a good performance going forward. So thank you all, and have a nice day.