Smurfit Kappa Group Plc

Thank you, operator and good morning ladies and gentlemen. You are all very welcome to our 2020 full year results presentation where I'm delighted to be joined by our Group CFO, Ken Bowles.

Thanks, Tony and good morning everyone. Tony has just talked about the unrivalled commercial offering we have in Smurfit Kappa and in a moment we'll see how that's translated into the delivery of strong financial results across our operations.

But first I want to look at our recently released targets across a number of categories within sustainability. Most of you who have followed Smurfit Kappa for some time now, know our commitment to sustainability.

This year will be our 14th Sustainable Development Report. That commitment is both from the product perspective and the manner in which we produced our product.

Quite simply, we make a stable product in a sustainable way. A couple of weeks ago we announced ambitious new targets as part of our Better Planet 2050 initiative.

Better Planet 2050 outlines our continued commitment to sustainability, charting environmental and social sustainability in areas where we believe we can have the greatest impact. These include delivering sustainable packaging to customers, reducing our environmental footprint in water usage, waste and carbon emissions, supporting our communities, promoting inclusion and diversity, as well as health and safety.

The targets identified are specific, measurable and provide a roadmap to deliver results in the short, medium and longer term. Our particular note is our recent announcement in relation to carbon reduction.

Having made strong progress towards a target of 40% intensity reduction by 2030, we have now revised our target upwards to 55%. In 2020 we also announced our ambition to be at least net zero on CO2 emissions by 2050.

We were in the process of having these targets confirmed by the science based target initiative as being in line with the objectives of the Paris Agreement. By committing to all of these targets, our already sustainable products will continue to be produced using less resources, less energy, and create less waste.

In providing and developing innovative paper-based banking solutions reducing the Group's impact on the planet, we can make a positive contribution to the world and help our customers to deliver on their own short and long-term sustainability goals.

Thank you, Ken. Five-years ago, Smurfit Kappa set out a new vision for our future.

I'm really excited to say that across all of the dynamic adjectives, we're moving in a very positive direction, both internally, with customers, and a multitude of other stakeholders, our company continues on its journey to be a more globally admired business. We have shown over the years through acquisitions and our strategic plan implementation that we are delivering with quality earnings that are more and more secure due to the integrated model and on top of this due to our cash flow generation, our leverage multiple has now improved significantly.

Because of our innovation that we talked about, and the megatrends in our business, and our ability to put those megatrends into action for our stakeholders, we continue to deliver better and better returns. As we enter 2021, while there will always be challenges, I can confidently say that our business today has never been in better shape.

We have a diversified, stable, and highly skilled team, who have consistently delivered for stakeholders. Our extensive geographic asset base is better and better positioned, both from an asset quality and market position to give our customers an unparalleled market offering.

As I said to you in Q3, our industry and Smurfit Kappa as the leader, is very well positioned to take advantage of the opportunities ahead of us. To use our corporate maxim, opportunity comes to pass, not to pause, and as such, our capital raise allows us to take advantage of these opportunities in the years ahead in an accelerated manner.

In terms of current trading, we've seen a continuation of the demand trends seen in the last quarter. And while there is uncertainty about the impact and duration of COVID-19, the current year has started well.

While you'll often hear me say that success is never a straight line, I believe the outlook for Smurfit Kappa has never been better. We have the asset base, we have the market offering, we have the balance sheet, and most importantly, we have the people and the culture to capitalize on the opportunities that we see ahead of us.

Operator, I'll now take any questions from the audience and we will, it’s over to you.

Yes, good morning, Tony, good morning, Ken. Well done, great performance.

Couple of questions from me. So just looking at that sort of 6% growth and demand in Europe in Q4 Tony, how are you looking out into 2021?

And I know you've talked about the structural drivers, I suppose the first half you had easy comps, but as you get into the second half it becomes a little bit more difficult. But maybe just sort of give us a bit more color in that demand environment, how much do you think is kind of cyclical and how much is structural?

And so, when we think about maybe moving beyond the pandemic, how that demand environment plays out post that? And second question is just in terms of the Rocky, and I know Ken, you mentioned that towards the end of the presentation the 17%, given that the 14.5% that you reported in 2020, is that 17% still a very valid target and ambition for the Group through the cycle?

And then just lastly on M&A, if you are thinking about M&A, can you just maybe give us some thoughts around kind of where and what, is it more on the corrugated side, is it more Europe or is it just purely opportunistic as things of interest come along? Thank you.

Okay, I’ll let Ken take the last two questions, Barry. But basically, yes, I mean obviously, the 6% demand was exceptional.

I think as you correctly stated, Q1 actually was reasonably good last year with an especially strong January. So to be ahead 6% is really a real number when we look at Q4 versus the previous year, it's basically, it's a pandemic, but also structural demand growth, I would say.

I mean you see e-commerce is not going to go away, sustainability is not going to go away and so I think the first half will be strong as we're in the pandemic period, still. The second quarter has very weak comparisons, I would say.

So we should see a little bit continuation of the kind of trends we've seen in the latter part of the year. And then really Barry, it's -- your point of view on what's going to happen assuming that we do come out of the pandemic in the second half, and vaccines are given to people and people start to feel freer, my own personal view is that demand will continue to be very strong because there's a lot of pent-up demand for spending in the real world, so to speak, not at home that will happen in the second half, but that's your own personal view.

I think, overall, we'd be optimistic about the year, whether it's at 6% is probably a little bit, a little bit optimistic, but it's certainly -- we feel bullish and there's nothing we've seen in the first five weeks of the year would take them right away from that bullishness. Ken?

Good morning, Barry. On the Rocky, yes, that means the 17% still remains the target.

If you remember, we had a target of 15% for a long time. And clearly, we were asked about that most of the time, so it made sense to kind of raise the target.

I suppose that the fundamental question is, do we believe this is a Group of assets and investments that can deliver the 17%? And I think the short answer to that is yes, as we have done in the last couple of years, I mean if you sort of consider the 14.6%, A) it includes leasing, so you could argue it’s probably close to 15% in that sense, but also against the backdrop of a down year in a sense.

So still a very strong performance for the underlying business, but no, the 17% remains where we think businesses will get to in the cycle and indeed the plans are built around that as I said in the presentation. On M&A, we tend not to rule anywhere, or any it -- it tends where we see opportunities to build out, whether it's geographies or indeed the product portfolio in the first instance.

And clearly downstream, given our paper system is probably more fit at the moment. And if you think back to what happened a couple of years ago, when we bought Parenco, that was opportunistic.

But clearly, we were able to build on the success of Parenco on the paper to kind of build out for Kara Deck and through Belgrade in Serbia, and complete that kind of Balkan picture. So we tend to think about M&A not on the context of the asset itself, but as an asset fits into the overall portfolio of the Group and indeed, strategically how it fits in.

So it's no limits to geography, no limits to kind of product. It really is about how and where do we think we can take that business as part of the bigger Smurfit Kappa Group.

And so Ken did you say that you're sort of okay on paper for now, so that that may be that the focus might be more on downstream?

I think we are okay on paper right now, Barry. But with the kind of demand that we are seeing and you know our philosophy is to be balanced.

If the demand that we see goes through this year, we may have to relook at accelerating some of our plans on paper, either buying an asset or building out an asset, so we'll have to consider that later in the year or in early part of next year. But the plan that we put forward is primarily converted customer facing plan that's what we raised the money for.

Okay, thank you.

Thank you. Just a couple of questions from me as well.

Coming back to the demand trends of course Q4 was exceptional in many ways. I can understand why e-commerce gave that a real boost out of the Holiday period, but it's less clear what is driving that strong growth now, so I just want to get some color from you.

Were you seeing the continuation of those similar demand trends, against sustainable packaging you are seeing more cyclical areas or whatever it is. And then also if you can comment about any potential wins from sustainable packaging and when you would be comfortable to talk about how big a share of your business that is?

And then just moving on to pricing a bit, of course, costs are rising and of course, there has been containable price increases and I would guess there's going to be potentially incremental shots in the near-term to compensate. The flipside to that, of course, last year was the resilience in box prices that you saw, which was kind of unrivaled in history.

So how should we think about you passing on rising containerboard prices when customers didn't get the full benefit on the downside? So I just want to hear your thoughts on that.

And finally, I'd appreciate it's very difficult to give them any particular guidance in terms of absolute numbers, but can you give us any sense about how you view the cadence of earnings in this year, meaning H1 versus H2, considering the upfront cost pressures that you typically have in the cyclical recovery, and then obviously consequent box price recovery in H2? So again you're sort of 45, 55 splits or whatever, how you think about that, if you can share that with us would be helpful.

We have to remember what you said Lars, so let's start with that. Let's start with the demand trend.

I mean, I think Lars you're right, e-commerce is definitely a trend that has accentuated in Q4. But at the same time, e-commerce is here to stay, and people have learned to shop differently and go online and our customers are learning to supply online.

So it may have a bit more seasonality when the pandemic is over, but for sure there's going to be continuation of growth of e-commerce because people have learned to do it. So where we're seeing demand trends is, clearly people are spending money on their homes, which is things for TVs, kitchens, bedrooms, garden, things like that, that are -- that generally speaking tend to use a bit more corrugated and that's a positive.

Where we see the negatives of course are on, let's say the drinks businesses that are away from home and bars that we see a lack of some of the consumption from our customers in those areas. But, as I said to Barry a few seconds ago, I do believe that when the away from home starts getting back to normal, we'll see a large increase in that area, which will offset some of the negativity that we might see on the app home purchasing.

So I think, when you put into it, and then to the second part of your question about sustainability, I mean everywhere we look with all of our customers across the world frankly, obviously more advanced in Europe, but even in the Americas, we see more and more customers who are looking to move away from plastic waste packaging or polystyrene or EPS, expanded polystyrene I should say, where they can. And it takes a while, we have numerous, numerous, numerous examples of where we have been successful.

But you know if you take for example, the TopClip and as I say, we're still not 100% sure if that's going to work, but we do know that a major customer has ordered a major machine that is going to go to put this product into the marketplace. And the consumer likes it, it's a little bit more expensive than plastic, but it works.

And it's probably the best product on the market in that space. And once one does this, assuming we can have a reasonable assumption that another will -- another few will do it and certainly there are plenty of big customers looking at it with our partner KHS which is the supplier of choice or certainly one of two of the suppliers of choice to the drinks, beer and soft drinks industry and for high speed distilling machines I should say.

And I mean the potential for that is truly enormous. I mean, obviously we can’t put numbers on it because we don't know yet, but and that's just one, I mean there's we put in there the box that is going to replace a plastic tub.

We have a number of projects that we're working on with very, very big companies, but they take it, those kinds of things take a little while to come to fruition. But when they do, and if they do, they're talking about many, many tons of corrugated that is going to be in the system.

So, we just have a huge amount of people and what we're having, I think we expect to have 800 customers coming to our Better Planet Packaging Day in March, which will show some of these sustainability projects in action. And as I said on CNBC earlier, the world executives are moving towards this kind of thinking and it's the pandemic has taught us all anything that that we have to be good to our planet.

Being good to our planet is not throwing single use plastic in the sea. So I think it is a huge megatrend for us.

It's continuing, and there will be some very, very sizable switches in the years ahead, which obviously, I can't tell you which ones are going to be usually successful yet, but on the ground there's loads of them. Ken?

Good morning, Lars. If I understand your question correctly, it's around if you like the cost inflation pressures and how we see that fall into box prices as we kind of progress.

Clearly, the year it started off with that level of cost inflation the two biggest ones, if you like, in our system being recovered fiber and where it currently sits, and indeed energy, is kind of headwinds on last year. We are seeing general cost inflation, I think most people are, but those items may be not material for us at the moment and if they get material, we can tell you those.

And I suppose then we have recent and near experience about how we deal with those kind of costs and preparations OCC into paper into box and in the last couple of years and you see the recovery of that through our system. Generally, that lag is 3 to 6, but I think in the last round of cost recovery, we did better than that, quicker than that.

So I don't think we'd expect any difference in terms of pace and approach this time around. It’s quite clearly bottle makers in our system had a good year last year, started off in 2020 not having such a good year.

So they need to get back onto the business of price increase and indeed are actively at that we speak.

Kind of done in terms of, do you dare to guess your cadence of earnings in H1 versus H2 if you distribute full-year?

I wish I had that crystal ball, Lars at the moment. I think clearly with paper going up, we will always suffer a small margin compression before we recover that through the box price as we get into latter part of Q1 into Q2 and beyond.

At the moment, I've no clearer cadence than that. But I suppose we'll talk again fairly soon in April, May time, we will have a better view of where that's playing at.

Very good and can you confirm you're out in the market with another containable price hike, as we speak?

Yes, we announced €50 on kraftliner for February 1, which has been implemented, and we have announced €50 for recycled, which will be fully implemented, I would say by the 1st of March. And as I think is said earlier, paper market is the tightest I've seen in 34 years of business.

And obviously in that environment with rising costs of input costs, primarily in recovered fiber, but also in energy and that means a necessity to increase paper prices, and then ergo, a necessity to increase box prices. And in a paper market, where it's very, very tight across the world, in every country that we operate and I think we should be very happy that we continue to be able to deliver customers through our integrated model.

And that's something that was very, very strongly appreciated by all of our customers in Q4, where we know other people's struggles, where we were able with a lot of extra costs and a lot of chopping and changing, we were able to get to our customers their boxes on time. And I can't tell you how appreciative so many customers have been for that.

And that is because of our network and to your earlier question, or maybe it was Barry about the plan, that's one of the reasons why we may have to think a little bit quicker about paper as we go through this year is if these kinds of trends are to continue, it's something we're going to have to just scratch our head about because we want to make sure that we continue to deliver to our customers across all market conditions. And that's what they appreciate and that's what they need from their partner which is us.

Very good, thank you.

Thanks, Lars.

Thank you. Good morning, everyone.

One of the features of, I suppose, Q3, Q4 last year was increasing OCC prices globally, because we've seen clearly an accelerating box demand, not just for you in Americas and Europe, but also in Asia, and pretty much any box demand region around the world. When we think about 2021 Ken, I don't know, really OCC the number the one thing it will never be as stable.

But could you quantify for us just how much of a headwind that spot prices that could be year-on-year for you? And then I suppose further for kind of that, just are you out there with box price increases right now in Q1 in Europe or can you share with us your confidence in being able to recoup that as we go through 2021 with higher box prices at the end of the day?

On the OCC question, Justin I suppose if you just do a simple mark-to-market and it seemed to stay at these levels for the remainder of the year and clearly OCC has sometimes a life of its own in terms of where it goes in terms of price, but doing a simple mark-to-market where we sit today, that that could be a headwind in the order of $200 million for the Group for full-year, example. On box prices, yes our guys are out there at the moment because that's you got to do it.

I mean, that's if you like our confidence and my confidence builds on the fact that we've done this before and only a couple of years ago to be fair and we saw the success of it at that time. I think, as Tony talked about just there, if the acceleration of the trends in the last couple of years and if you like our embeddedness with customers, the value offering we give them, the security supply we saw last year, has only strengthened those customer relationships.

So that's where we build our confidence and our ability to recover all those cost inputs through the system into the ultimate box price as we get through first part of this year and into the back half of the year.

Right, if I could just add Justin, I mean you know our business model. Every unit that we operate is a profit center.

Every manager that runs each unit is incentivized based upon his or her profits, and the cash flows and how they operate their business. Last year, the box makers did well, because as has been said, we were able to retain box prices to some extent.

And this year our box makers, as in from February will not be doing well at all. And so therefore, they have to get the prices up.

It's not a question of choice. I mean they will not make money as an individual operating unit operating by themselves.

And so that's the strength of Smurfit Kappa. We incentivize people to be Managers of their own operating units.

And when they're looking at, perhaps losses in the month of March, in particular, box plans because of the -- just the rise of paper of €100 plus a ton, they need to do something about it, and they need to do it as quickly as they possibly can. Obviously, there are some constraints because we have contracts with customers, which work well on the way down and not too well on the way up and that's fine.

We take that, because we know we believe in long-term partnerships, and we should have some degree of stability in price up and down. But there is also the big portion of the market that's free markets and we just don't have a choice.

So if you're saying, am I confident, I don't have a choice, but we are confident, because otherwise you'll be in loss in our box plants and that isn't going to happen.

Okay, thank you. Just one quick follow-up.

I appreciate demand is very unusual patterns at the moment. But I guess if we think perhaps over the last 10 years or so, in Europe, I think if you look at FrescoData, average pan-European box demand has been about 1.6 or something per annum I think over the 10-year period.

If we think forward over let's say '21 to '30, just assume that's a normal decade and that's clearly, that's the one thing it will not be, but how much of a positive tailwind over the next decade could e-commerce growth be and hopefully price to pay per switch as well as sustainability generally? Can we credibly think about how your normalized box volume growth rate for Smurfit Kappa in Europe or America is going forward over the next decade than the industry or Smurfit Kappa specifically has had in the last decade because of those tailwinds of e-commerce growth and sustainability?

Justin, hold on a second. Let me just rub this crystal ball on the desk here.

Listen, what we say, what we know for sure is that e-commerce is going to be a positive. What we know for sure is that sustainability is going to be a positive.

We are investing behind that. We wouldn't be putting the amount of capital as quickly as we would be into our business if we didn't see the opportunities that exist for this company.

I mean, to be honest with you, Justin, when we go forward and we've just literally last week at the Board meeting released the first wave of capital that will be only implemented at a very back end of this year for our business. I'm already seeing our businesses across the world saying that's not enough, because we got more opportunities and but at the same time, we want to do things in a prudent manner and not over face ourselves, either.

So, we do see the opportunities, whether it's for new factories in certain locations or whether it's for building out megaplans or for specific areas such as following some customers growth in the Americas or Europe or specific product areas such as agricultural out of wood or out of plastic into corrugated. I mean it just, I mean honestly, you could just say, there's just so many.

And the reason why I'm very confident about it for us, is because when you look at Smurfit Kappa’s applications, and the way I mean I'd try and say it, I know these are words, but when you look at how we're using data to help our customers get to market quicker, to help them personalize, to help them digitally print, these are all really big innovations that only Smurfit Kappa has to the extent we have. Some of our competitors have smaller bits of this, but they can't do it across 34, 35 countries.

They can't do it, a network of 1,000 designers. They can't have the library that we have, so all of that is sort of playing to our future growth.

How the market is going to go, I think you can say megatrends will definitely add more than in the past, but how much I have to say I'll have to consult my crystal ball here.

Thank you, Tony.

I’ll tell you.

Look forward to it.

Thank you very much and good morning, Tony and Ken, hope you're doing well. Yes, I just have a follow-up on the cost inflation part and usually you can give some guidance also on other components.

So you mentioned that energy might be a bit of a headwind as well. The first question is yes if you could quantify energy, net labor inflation, and then if there's anything else that we should think about at this point?

Hey, Alex. Yes, I suppose typical headings we would give you energy, I think we would see as a headwind something in the order of call it $35 million as we sit here today, for '21 over '20.

Among most of the categories, certainly for labor demand might be a net increase, but not a material amount, given we generate targeted costs care program to offset the inflationary aspects of labor. Plus, equally, the reorg and restructuring program we put in place at the back end of last year will deliver half those savings into 2021, which will equally help to offset some of those labor increases.

OCC, we've kind of we've talked about, and across all other categories, well that's going to pull some starches and dyes. On general logistics and distributions, while we are seeing some pressures around those things, we're not seeing them as material necessarily in the '21 over '20 numbers.

So that's sort of broadly how we see the picture as we sit here at the moment.

Thanks and then on Tony, if I think about the 200 on OCC that you talked about, if those assist us at this level and the 35 and then potentially something on labor, et cetera, you've been very clear that you need to push up box prices, and that you have a track record of doing it, but you also have to think about kind of the timing here. Do you think that you have the tools in place to kind of to offset those current cost headwinds already in '21 or do we need to be a bit more patient here and then think about '22?

I think as I said a few seconds ago Alex, I mean our box businesses are profit centers, and the managers are incentivized on the basis of their own profitability. It's the strength of Smurfit Kappa, while we act as an integrated system we are acting as single profit centers and so therefore as quickly as possible we will be pushing up prices.

As I said two seconds ago, we are contractually obliged correctly and needing to be with many of our customers to do this over a three-month or six-month period or sometimes even a year period. And that works up and down for us, and gives our customers some degree of stability and gives us some degree of stability.

But with regard to a lot of the free market, we are actively out there now and you will see some recovery sooner rather than later. But it is obviously something that we work hard on and is a focus of not just a daily conversation, but I would say nearly an hourly conversation with our executives and we're very focused on it.

Thanks, makes sense. And yes the final one is a bit different question and it's about sustainability in e-commerce, with the kind of e-commerce trends likely kind of continuing, what issues or what kind of challenges that puts on box collection and recycling and of OCC in the medium term and what are you doing?

And what can you do with other stakeholders to kind of continue to maintain that good circular system that we have in boxes?

It's an excellent question. I think one of the downsides of products going into people's homes is that there is less collection than there would be at the centers.

So obviously, that is going to be, that is an issue for the collection of OCC in many of the markets in which we operate, especially now. So we have set up our own recovered paper system in Germany, which we probably rode out a little bit as we go across Europe during the year, I'm happy to say that's a long conversation about what we're doing.

And, but there's very little that we can do to encourage households to recycle more. Obviously, it's up to the consumer to do that.

But it inevitably the trends are meaning less fiber is collected at source these big Ks or super stores when it's delivered home. So that is an issue and it’s part of the reason why there are such tightness in Europe at this moment in time.

Thank you very much.

Thanks.

Good morning, guys. Thanks for taking my question.

Just a couple from me, please. Given all the things that you've outlined in the last couple of minutes Tony, in terms of complexity impacting your ability to serve customers through the first surge in pharmaceutical end markets in March, April, May, then e-commerce into December, like clearly that's going to underpin market share gains over the next 12 to 36 months.

But I guess it's going to be adding other benefits in terms of longer contract, is there a premium pricing associated with the value you're clearly delivering to customers? Is there potential for any of those benefits to come true?

Secondly, just in terms of your sustainability targets which seem very ambitious, I'm just trying to gauge what the cost is of all of that reaching those targets going to be, like there's $150 million to $200 million applied in your CapEx plan? How should we think about such kind of capital outlays when they cover their cost of capital or their cost of business?

How should we think about that, not just in the next one to two years, but much longer-term? And finally, I'll just try and ask Lars’s question again, you've called it the Better Planet Packaging, what kind of proportion of volumes, whatever the business is the Better Planet Packaging offering, is it still very low single digits or has it gains and material traction, that's clear in that pipeline?

I can't really expand a lot of the questions, Lars. I mean, we would say it's an impossible question, because it's people switching all over the place in every aspect of our business.

So we don't measure that yet. I mean, it is something that myself and the team here just do talk about is how can we get a better measurement on that, but it is I mean, it is probably not in double-digits, but it's probably in the 5% to 10% range type of number.

But I mean again, I don't really have a good fix on that. With regard to margin, I think it's fair to say that our system is delivering very good margins and you see that the margins in the Americas were 20% in the second half.

You see in Europe we're close to 18%. So, overall I think our margins, we've proven over time that by offering innovation and by offering the kind of service that we do, we do actually attract better margins.

And it's interesting. That doesn't mean that we don't give our customers better costs, we do actually, because we're able to engineer products differently for them they get better cost and we get better margins.

So it's a kind of win-win situation. And that's where a partnership with customers works so well, because together we can actually win through the system.

And whether it's saving transportation cost or whether it's saving supply chain cost of in whatever area, or even material reduction, because sometimes we forget the fact that we continue to go lighter and lighter, we continue to reduce the weight of our boxes. All of this stuff is all a real positive for our customers, because it means less cost for them, but at the same time, it doesn't necessarily mean less margin for us.

So yes, the answer partnering with customers does mean higher margins as a win-win for both sets of people. Ken?

Good morning, David. Just thinking about the CapEx in kind of a broader sense, if you think about that plan, we tend to see it as a kind of portfolio of spend.

So when we talk about that, it's like that plan is itself supporting the 17% kind of return on capital employed, it's clear that if you like within that kind of downstream activity focus, then those projects will generally deliver over and above the cost of capital is already well over above the 17% to 20%. It's clear also that the optimization projects in the lower bucket will deliver those returns quite quickly and probably again better than the average.

For the sustainability projects, they may not hit those kind of returns in terms of clearing a 17% Rocky, but they will still deliver decent returns, double-digits at least. But also what we tend to find is that we do better over time with those projects in terms of what they will give us, whether it's better energy consumption, which leads to better EBITDA and contribution.

But clearly, those projects are aimed at doing something else, and that that's having a greater impact in terms of the footprint of the business and the footprint on the planet. But typically, just to break it down as a portfolio of cash flows that we think about delivering towards that kind of 17%.

But clearly within that, bucket one, bucket three, if you like above those targets, sustainability focus still strong performer potential to over deliver depending on the environment given how they perform.

I’m sorry, Dave, just when we talk about -- to go back to your earlier question, when we talk about sustainable packaging moving from plastic to corrugated, we say at this moment that's in its infancy. It is about 1%, but the actual opportunity is probably up to 10%, I’d say.

Great. Thanks very much.

Yes. Hi, everyone.

So, most of my questions have been answered now, but I can ask you something here on your backward integration, perhaps. Could you just remind us about your backward integration on cost line and test line?

I guess overall, on containable, you're fully backward integrated, I’m sort of after what kind of impact do you foresee on your OpEx baton because of higher containerboard prices and how do you think this will impact the industry? Thanks.

Good morning, Johannes. You’re right, we tend to like that kind of balance of integration.

Generally, we tend to be long graph on a short on test, so achieve the balance, if you like 100% integration that way. It kind of goes back to what Tony talked about earlier.

When we talk about paper price increases, while they come through the system and for a period of time it's kind of one pocket to the other, that doesn't necessarily mean that we don't treat it as an external cost going into the box system to be recovered. So we treat it in the same way, boxes into the profit center.

It doesn't matter who they buy their paper off, it just matters the price they buy their paper at and that's the market price. So that recovery has to be delivered through the system which you're right, it is balanced, it is balanced and 100% integrated is what we charge out.

Okay, thank you for clarifying. Can I also, do you have any idea of the converters or the corrugated manufacturers, how much of the capacity in Europe would you say is backward integrated and how much is non-integrated?

Is it possible to give an indication there?

It is possible, I don't have the finger in my head Johannes, but you can safely assume there's a very, very good percentage of independent paper makers and there's a very good percentage of independent box makers that will face the same challenges that our integrated systems face. So I mean, I can't -- it varies by country, but I, in the year, I'd sort of say 60%, 40%, 60% is integrated in some way and 40% is non-integrated, but I mean I could be wrong by some percent on that.

But, so you can assume that there's plenty of non-integrated players that will be in the corrugated box business that will need to get paper price increases up very sharply. And even if they were even, I think most people have slowly moved to our model.

That means that you have to have your own profit centers, because at the end of the day you've got two streams of businesses that are looking for capital and if you only make one profit, then you are going to fail. So you have to have, you just have to take the benefit of integration, but not necessarily treat it as one profit center, because obviously two sets of needs of capital and only one return would be a very bad result.

Okay, okay. Very clear, understood.

Thank you very much.

Thanks, Johannes.

Good morning, thanks for taking my question. Just a follow-up on the containerboards and kraftliner markets.

Could you give a little bit of color, what the U.S. producers lower exports to Europe are having on the European market at the moment?

And then on the test liner side, what are you seeing kind of wider industry trends relating to exports to China? And then a segment of your business that I suppose you haven't mentioned as much as in the past was the bag-in-box and I see you bringing it up again today.

And I still remember Ken talking about the Tide bag-in-box, which is seeing good growth this year. Could you give a little bit more color on to the scale of that bag-in-box business for Smurfit Kappa and outlook in that segment?

Thank you.

Okay, with regard to the two paper questions, you asked there, Cole hi, U.S. exports, I mean basically you just have to think about paper as being extremely short at the moment.

I mean, you're hearing everywhere about shortages of containers, you're hearing shortage, you’re hearing about shortages of chips and for the microchips, semiconductors. There is a shortage of paper in the world, on brown papers, whether it's kraftliners or recycled at this moment, it's very, very hard to get.

And we are looking for 160 tons which is nothing, I think it's four trucks in Texas, and we do not -- we're not able to find it anywhere across our network, so that that gives you the kind of indication. I mean we will find it, but it gives you kind of the indication of how tight the paper market is right now.

And so, I wouldn't even characterize an issue between kraftliner exports to Europe or not, they're just, they're just drying up a little bit. So and with regard to recycled, I mean I don't have the figures at hand about exports to China, but I can tell you that the export price to China, when you add it to the container price, which you have seen talking about much higher prices for containers is an extremely expensive product, much more so than the price in Europe right now.

So, containerboard is just, it's just really tight and we expect that to continue at least for the foreseeable future that we can unless something negative happens in the world's growth outlook then there's no reason why that would change in the short-term. With regard to bag-in-box, bag-in-box has been a very good business for us.

We are highlighting it because it grew so strongly and we see opportunities to continue to grow very strongly at some of the areas of sustainability, actually played very well to the bag-in-box. Obviously there's a box involved and but there's also less plastic involved than the current solutions, whether they're in Jiffy cans or whatever and we see whether it's paint in bag-in-box or whether it's water in bag-in-box or whether it's wine or whether it's oil, there's massive opportunities for growth in this area.

And we're the number two producer in the world, by far the number one in Europe with the most state-of-the-art facilities and we just want our investors to know that we have this beautiful business within our business that continues to grow very strongly.

Thank you.

Thanks.

Thank you. Good morning, everybody.

Just a couple of questions here, a bit different ones. If we start with the sustainability theme, now that's obviously quite front and center for you.

But in terms of the plastics to paper substitution potential overall, what is your take on that? I mean, I would assume you have done quite extensive research on the topic ahead of the decision to make quite big investments in this theme in a way.

So how big is the overall potential in your view for example in Europe? I mean, are we talking a $1 billion or $5 billion or $10 billion and how much do you think corrugated could as a material gain from that?

That would be my first question. And then secondly, on your overall end-use split now, I mean given the strength in the e-commerce that we saw last year, I would assume that that e-commerce share of your end-use has grown from let's call it about 10% I think you mentioned for 2019, this year or actually last year then, so how does the overall end-use split look like today?

Thank you.

Hi, Mikael. On your first question, I think it's a day for ever increasing the size of crystal balls.

It's kind of hard to tell, because the reality is, when we think about corrugated packaging, or folding cartons replacing single use plastic, we tend to think about that as the kind of tertiary factories. While they're small footprint, the corrugated clearly, the more you apply it in the growth, the bigger it gets, the more replacements you can do.

So it's very simple replacement. Think where you get the big impact in terms of plastic replacement is where you can move into either the secondary pack or the primary pack for corrugated to replaced plastics.

So clearly, plastic still has a place in our lives and still does the job for certain things. But I think we have a philosophy around sustainability is where corrugated can replace that we will certainly do that.

And what we're finding is our customers, ever more whether it's through bag-in-box, or through corrugated, or indeed through folding carton, where we have that in our operations are more coming to us looking for that sustainable alternatives to their current set. As Tony talked about earlier, and we've spoken before, it just takes some time for those projects to change because you are talking about changing supply chains and packing lines.

And producers need to ensure that they can get the same speed and performance volumes that they are currently getting. But now that those products like TopClip are in production, people can go and see them in action.

And that gives them a greater comfort about the effect of replacement and the substitution for their current packaging. So while we haven't done any specific studies on the size of the market, because it tends to vary depending on how far you go down, because there's certain things we can't replace.

And that's some of those things are big parts of single use plastic where that’s going to balloons and footballs and everything else. But certainly our philosophy is, where we can, we certainly will.

And the second question…

We’re able to replace people though in the Super Bowl. Our cardboards people instead of the crowd.

So the ultimate replacement of corrugated is replacing people with corrugated. And Mikael, your second question then was on e-commerce.

E-commerce, it’s a bit like a sustainability question, which is it's kind of ubiquitous and everywhere. So we tend to think about e-commerce in terms of pure e-tailers and certainly that's seen a lot of growth.

And Tony talked about the growth in certainly Mexico 150%, in Brazil, in Russia, 80% in Brazil, similar numbers. So certainly where those markets have been in their infancy, we've seen really strong growth across 2020.

But clearly, we also have customers that have gone online or already online, and we've seen growth within that portfolio. So I think it's fair to say, it has seen a shift, probably a larger shift in 2020 than the year before and some of that will be retained as we move forward.

And some of those bricks and mortar retailers come back to the streets and people retain those purchases online. But certainly through the pure e-commerce play we've seen through the U.K.

as well, really strong growth across the year.

One of the trends which is going to emerge is going to be the whole personalization aspect of things and obviously that lends itself very nicely to corrugated and printing and digital, and as people as our customers, big or small want to personalize things. We are developing and have developed and are continuing to develop digital print opportunities for customers to really go directly to their customer and that means to go directly to their door with our corrugated packaging personalized or as a marketing medium.

So, we have a lot of space on our boxes that can be used for marketing. So, a lot of things are ahead of us, that are just really we’re just scratching the surface on and we saw a little bit of that, we showed the thing about the Advent calendar.

But there's -- e-commerce really does allow you to really go target it and our customers, as they get more and more sophisticated and doing that, it will require them to deliver directly and will require personalization. And that's whether it's for expensive drinks or for cheap chocolates, it doesn't really matter.

And I think you're going to see a huge growth in that over the years ahead as things develop.

Okay, and just finally, a follow-up on the e-commerce. So if you think about the overall end-use split, where you sit today how much of that is e-commerce, how much is something else, just wondering about the overall end user split there?

It's really hard to tell, because if you take FMCG, which as you know 75% plus for business that probably contains a large element of e-commerce in there. But if you're putting a number on with a small margin of error, either size, Mikael, I think you'd probably say it's early, early teens at the moment in terms of volume.

Okay, well, that's helpful. Thank you very much.

Thank you.

Good morning, gents. Thanks for taking my questions.

Just two if I could, one like I guess if you think about the guidance you gave us in November, the key areas of surprises in terms of demand strength, clearly e-commerce seems to be sort of one of those areas, but I just wondered that was some amount industrial market of exposure and customers there, where they’ve been kind of surprising in the upside, and if that sort of carried through to this current year? And just separately in terms of wealth and capital movement, seems to be much stronger inflow possible and anticipated.

I just wondered if there's any element of that sort of exceptional in 2020, that are lows in the early part of this year?

Kevin, to be honest with you, whenever I listen to the song, I can never hear a single word in it, and I couldn't actually hear what you said.

I think I got both of them, Kevin. I'll give it a shot.

On your first question, which I think was a positive surprise as the fourth quarter in terms of where we gave guidance, and how that might have broke down to an e-commerce and maybe some industrial. I think certainly e-commerce was a part of that and coming into Christmas was certainly that trend has continued into ‘21.

I think equally industrials and then Tony talked a bit about it earlier, I mean, that kind of move where people are not going on vacation and focusing on home improvements and things of that certainly feed straight into the industrial markets and certainly we would have seen that comeback in the latter part of the year, have been slightly slowed down in the earlier part of lockdown. So I think there was a generally better picture for demand in the latter part of the fourth quarter than we might have expected and that demand picture, as we've said has continued into 2021.

On the working capital question, it's a function of a few things. It's a function of, we talked about the tight paper market, so inventory has been tight and also paper pricing going up which has a positive impact on our net working capital, because we buy test liner on the outside, equally OCC trending back up and obviously pressure out, so positive impact in working capital.

And then if you like the unlock of the debtor side of the house, from the fall in the box price year-on-year, so you could logically expect as we move through 2021 that we would see an investment in working capital as we begin to see those costs pricing back through the working capital, but nothing necessarily exceptional in the performance, very strong performance by our teams given the external environment, which you should reasonably expect it when we go back to that kind of target range, we have 7% to 8% of working capital, certainly as stock prices come through with reinvestment on the better side.

Got it, that’s helpful. Thanks very much guys, thank you.

Thank you.

Yes, well thank you all for being with us today. We really appreciate all the questions and the attendance of so many people on the call.

Clearly, last year was an excellent year for Smurfit Kappa, given the environment in which we operated, the trends out in the fourth quarter have continued and we feel confident and very confident about the future of this business. And we thank you for your support to the company and all the employees in it.

I just hope that you all stay safe and look after yourselves during this difficult time and let's hope that at some point in the near future that we can all meet up again and do this in-person. So thanks very much, good luck and stay safe.