London Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Smurfit Kappa Group PLC earnings conference call or presentation Wednesday, February 5, 2020 at 9:00:00am GMT
Okay. Good morning, everybody, and I would like to very much thank you for your attendance, both here and on the phone. As is custom, I will draw your attention to Slide 2. And I'm sure if we asked you to repeat this, you'd be able to repeat it verbatim, so I'll take it as read.
Today, I'm really delighted to report a set of results that once again demonstrates the strength of Smurfit Kappa Group's performance against all measures. As we've said before, Smurfit Kappa Group is a transformed, but more importantly, transforming business, which is leading, innovating and consistently delivering. We are living our vision, and this performance represents yet another step towards the realization of that vision. Our returns reflect both the quality of our people and our ever-improving asset base. And this has delivered an EBITDA growth of 7% and margin of 18.2%, with a return on capital of 17%.
During the year, and consistent with our Medium-Term Plan, we completed a large number of very significant capital projects. In 2020, we expect to complete the majority of our Medium-Term Plan European paper projects, leaving us free to continue our investment in our market-facing corrugated operations. Our leverage multiple stands at 2.1x, and our free cash flow is a strong EUR 547 million, and this is after investing EUR 730 million in our business.
As you'll have seen, the Board is recommending a final dividend increase of 12%, which reflects its belief in the unique strength of the Smurfit Kappa business model and, of course, our future profits.
In our earnings release this morning, we talked about the consistency of deliveries strategically, operationally and financially. And we set this against a longer-term context, against key performance measures on this slide. You can see here readily a structural improvement across all key performance metrics.
While success is never a straight line, our longer-term journey of transformation has delivered for Smurfit Kappa an increase of over EUR 600 million in EBITDA, a 360 basis point increase in our EBITDA margin, a 570 basis point increase in our ROCE, and this has enabled the progressive and attractive dividend stream with a CAGR of 28% since 2011. In 2020, our focus is on continued free cash flow and continuing to build a better platform for long-term performance and success.
Now at Smurfit Kappa, we are leaders in our chosen markets and segments, and this is a central tenet of all that we do and think about. Let me develop this with you. Sustainability is increasingly important for Smurfit Kappa and our customers. Our product, corrugated, is the most sustainable and environmentally friendly transport and merchandising medium that exists today. As you're all aware, our strong financial performance has not been to the exclusion of our CSR activities. You can see that, against the 2005 baseline, we have reduced our CO2 footprint on both an absolute and relative basis by over 30%, and we have plans to improve this further with our new 40% targeted reduction by 2030.
We launched our 12th sustainability report in May 2019 and having met or exceeded our previous targets ahead of the 2020 deadline. That progress has been recognized strongly by many independent third parties as Smurfit Kappa continues to progress towards and to support the UN's 2030 Sustainable Development Goal initiative.
The level of interest from our customers, which is absolutely key in our Better Planet Packaging, has really been incredible with 2 recent events, in particular, to highlight this. In May, we hosted over 350 customers, more than double, more than double the previous event from across the globe to our global Innovation Event in the Netherlands. The cornerstone of that event was Better Planet Packaging, and particularly pleasing was the level of seniority represented at the event, demonstrating the importance that this topic has with all of our customer base.
On the 21st of November, starting in St. Petersburg and ending in Los Angeles, we hosted up our Global Better Planet Packaging Day across 18 countries engaging with over 650 customers, brand owners and retailers. We used our 26 global experience centers as the platform to help our customers navigate in this new world. These 2 events illustrate that when catering for changing consumer habits, leading brands come to Smurfit Kappa Group as the leader to develop innovative, sustainable solutions. Our Better Planet Packaging initiative was launched just 1.5 years ago and has already received -- achieved a disruptive effect on the packaging market.
As a corrugated industry leader, we operate in a growth industry with many of our markets growing at or ahead of the global growth forecast of 1.5% to 2023. There are a number of structural or secular growth drivers which are not just fundamentally changing the applications of corrugated but also its long-term value. These include corrugated been increasingly used as an effective merchandising medium; e-commerce development, where corrugated is the transport medium of choice; and the growth of private label. And we will develop sustainable packaging as a structural growth story as we go through the presentation.
Bearing in mind the positive outlook for our industry, Smurfit Kappa is the company that is best placed to take advantage in the short, medium and long-term of these positive structural trends. We have developed applications that are truly unique and incapable of replication by any other player in our business, whether it's the 145,000 store views in Shelf Viewer to 84,000 supply chains in Pack Expert or the greater-than-8000 bespoke machine systems owned, operated or maintained by Smurfit Kappa Group for its customers.
Our global footprint cannot be matched. Equally, over time, we continue to invest to make the most efficient, innovative and world-class asset base that is able to offer our customers the best products at the lowest possible cost. Our integrated model allows Smurfit Kappa to take full advantage of both its position, its asset base and the knowledge that we have in our business.
And on top of this all, we have our people. And of course, every company talks about their people. But I am especially proud of the culture that we have developed, whereby people embrace the values of loyalty, integrity and respect in this company. In return, Smurfit Kappa has initiated global training programs, such as with INSEAD, where all of our senior management will have completed a multi-week leadership program by the end of 2020. This program is, of course, in addition to the training we give many other thousands of up-and-coming young talent who will perpetuate Smurfit Kappa's values and culture into the future.
And finally, as previously mentioned, sustainability is a serious competitive advantage, firstly for SKG, but also for our industry, as the use of paper-based packaging is excellent in a sustainable world.
In Smurfit Kappa, innovation and sustainability are in our DNA. Between 25% and 30% of our business each year is a newly designed printed box for new or existing customers. With this amount of change, it is imperative to have knowledge and ability to innovate, to add value, to reduce costs and give customers the best solution for their business and marketplace. This underscores the importance as set out in our vision of dynamically delivering for our customers day in and day out.
As I mentioned already, to meet and define the need for packaging innovation, Smurfit Kappa over the past 10 years has developed 26 experience centers across the world. They are true innovation hubs which connect the Smurfit Kappa world for the benefit of our customers. Our global experience centers are a total differentiator as this world is connected with all of our applications, giving our customers the company's global innovation at just the click of a button. And this provides access to the depth and knowledge and the breadth of our company with the geographic reach that we have.
So what is it in these innovation hubs that makes a difference for our customers? Firstly, we take a scientific approach. With data and insights, we can demonstrate to our customers that they get optimized packaging that is fit for purpose with minimum waste. SKG through its applications is committed to reduce waste through science, including in our own product of corrugated. We do not want to see overpackaged products. Crucially, we give our brand owners assurance through our position as an established leader that their brand will be protected through the use of Smurfit Kappa products.
To ensure that we meet these critical objectives, we have over 1,000 designers every day ensuring new concepts are at our customers' disposal. These designers constantly invent new ideas that create a repository for our customers to utilize for their business. Our experience centers also demonstrate our end-to-end solutions, whether it's our machine systems capability or our sustainability credentials, being able to service whatever discipline our customers wish to utilize. Our innovation hubs provide increased access across the customers' disciplines within our customers' world, whether that is in procurement, marketing, sustainability or any other discipline that our customer wishes to visit with.
Ultimately, though, our centers provide the ability for our customers to succeed in their own marketplace. Their need is to sell more, and in SKG, we can help them do that. With over 90,000 customer insights and with the unique and irreplaceable applications that we have, we demonstrate to those customers every day that the corrugated box is a fabulous merchandising and marketing medium.
And innovation is delivering every day for Smurfit Kappa Group. Here is the evidence of how -- with just for a few of some of the largest, most sophisticated customers in the world, how we have grown strongly. Their appreciation of our offering is shown tangibly by the growth illustrated in this slide. These examples are just a few of the many thousands and thousands examples of success that we continue to have because of our innovation offering.
Today, our customers see Smurfit Kappa Group as the partner of choice because we consistently, every day, deliver the unique offering in our sector. We help them increase their sales, we help them reduce their costs and we help them mitigate risk.
Thank you, Tony, and good morning, everybody. Before I talk about the results in a little bit detail, I just want to focus on one of the key aspects and structural drivers that Tony talked about, the sustainability agenda. It's important to remember that SKG has had a focus on sustainability for a very long time. This year will be our 13th year of delivery against our objectives, and when we talk about sustainability, it is sustainability in every fiber, including human fiber.
But there has been a shift in recent years and our consumers, governments and retailers are just a few of the stakeholders driving the awareness around sustainable packaging in a way that we have never seen before. And generally, that conversation revolves around 2 topics: the role of packaging in the climate change debate and the challenges with single-use, single-direction plastic that will trigger the debate around the impact of all packaging waste. The consumer expects product manufacturers to take the lead. So while retailers and NGOs are reacting to consumer requests, they expect producers, our customers, to take the lead. And given our long history in the area, we are uniquely positioned to help them. And as I said already, we have sustainability in every fiber.
What's also becoming clear is that paper-based packaging is becoming the preferred solution, and this is primarily as a result of recent trends, rising e-commerce, rising consumer power and, above all, sustainability in its wider sense, both product and indeed environmental impact. Every piece of research, whether it's environmental perception, likability or quality perception, confirms that moving to paper-based packaging increases the positive perception of your brand. I also believe that, in time, we'll see increased regulation and legislation in this area, and as you'll see on the next slide, Smurfit Kappa already has those solutions in place.
As Tony mentioned, in order to lead the industry and further support our customers and the end consumer, we launched Better Planet Packaging. This unique initiative gave purpose to the sustainable packaging agenda by developing and implementing end-to-end sustainable packaging concepts. It is an initiative mobilizing the entire value chain to multiple lens, to educate and inspire all stakeholders in the value chain, including the most important one, the consumer; to drive innovation into more sustainable materials and the design of more sustainable packaging solutions; and above all, to implement sustainable packaging solutions to less-sustainable packaging materials.
At Smurfit Kappa, our knowledge, experience and expertise has allowed us to develop over 7,500 innovative packaging solutions, ready to implement and address the consumers' desire to move away from less sustainable packaging. Our complete product portfolio from paper to boxes, to bag and box and honeycomb, covering the entire spectrum of consumer and transport packaging, makes us the most reliable innovation partner.
But to truly tackle the challenges of today, intensive paper know-how, especially in kraftliner, needs to be combined with world-class, award-winning design capabilities built on data and proven scientific concepts, along with unrivaled expertise in machine optimization. One fantastic example of how Smurfit Kappa innovation applies that knowledge and inspires cooperation across the value chain is TopClip. We have developed a unique solution for bundling cans, and together with one of the largest automation providers in the world in KHS, we are already making this real for our customers. This clearly has application across a large number of product categories, and most importantly, is available now globally for all our customers.
It's clear that over the last number of years, SKG has increased visibility of its product on shelves as marketing mediums appealing directly to the end consumer. And while we're at the very early stages of what might be an inevitable move towards paper-based packaging, the products we continue to innovate with will address the end consumers' concerns around sustainability.
So moving on to see how some of that translates into results and our financial performance, and turning now to the full year in a bit more detail. We are pleased to deliver another strong set of results for the full year 2019, either at or ahead of all our key metrics. Group revenue was EUR 9 billion for the year, up 1% in 2018, which is a strong result considering the backdrop of lower containerboard prices.
EBITDA was up 7% to EUR 1.65 billion, with earnings growth in both Europe and the Americas. I'll expand on the divisional split in a moment, but at a group level, EBITDA was negatively impacted by currency, while net acquisitions and the impact of IFRS 16 were positive. We also saw improvement in the EBITDA margin from 17.3% in 2018 to 18.2% in 2019. We saw improved margins in both Europe and the Americas, primarily reflecting the benefits of our customer-focused innovation, the resilience of the group's integrated model, the returns from our capital spend program and the contribution from acquisitions and indeed volume growth.
We delivered a return on capital employed of 17%, very much in line with our stated target. And as a reminder, that target was set on the basis of the full implementation of our Medium-Term Plan exiting 2021 and before the impact of IFRS 16 was taken into consideration. So on a like-for-like basis, excluding IFRS 16, our ROCE would have been close to 17.5% for 2019.
Free cash flow for the year was EUR 547 million, an 11% increase on the EUR 494 million delivered in 2018. And while EBITDA was significantly up year-on-year, so too, as Tony mentioned, was CapEx. Offsetting this was a swing in working capital from an outflow of EUR 94 million in 2018 to an inflow of EUR 45 million in 2019. And as you know, the management of working capital has always been and remains a key focus for us, and the working capital as a percentage of sales at 7.2% at December '19 is well within our stated 7% to 8% range and below the 7.5% number at December 2018.
Net debt-to-EBITDA at 2.1x was slightly up from the 2x we reported at December '18, but lower than the 2.2x at the half year. And the move in leverage should again be seen in the context of taking on the debt associated with IFRS 16 and, indeed, the completion of some acquisitions in the year. So again, excluding IFRS 16 on a like-for-like basis, leverage will be 2x at the end of December '19, and whether it's with or without IFRS 16, very much well within our stated range.
And finally and reflecting the confidence the Board has in both the current and, indeed, the future prospects of the group, it's approved a 12% increase in the final dividend to EUR 0.809 per share, and this gives a year-on-year increase in the total dividend of 11%.
And turning now to our European operations and their performance in 2019. And EBITDA increased by 5% to EUR 1.322 billion. The EBITDA margin was 19%, up from 18.3% in 2018. And the reason for the strong performance really, as I already outlined, is part of the overall group performance. Box price retention has been ahead of our expectations given the European pricing for testliner and kraftliner has reduced by about EUR 145 a tonne and EUR 185 a tonne, respectively, from the high of October '18 to December 2019. And as noted in the press release, we've recently announced to our customers an increase of EUR 60 a tonne on recycled containerboard effective immediately.
During 2019, we also completed acquisitions in Serbia and Bulgaria, a further step in our South Eastern European strategy. And as with previous mergers and acquisitions, the integration of these assets and, more importantly, the people into the group is progressing well, and they continue to increase both the geographic spread of the group and, indeed, deepen the bench strength for talent.
And now turning to the Americas. And in the Americas for the year, EBITDA increased by 13% to EUR 360 million. The EBITDA margin also improved from 15.7% in 2018 to 17.5% in 2019, and driven once again by the drivers noted as part of the overall group performance. For the full year, 84% of the region's earnings were delivered by Colombia, Mexico and the U.S., with strong year-on-year performances in all 3 countries driven by increased volumes, lower recovered fiber costs and continued progression in our investment program.
In Colombia, volumes were up 9% for the year, primarily driven by high-growth in the FMCG sector. And in June, we also announced the successful tender offer to acquire the minority shares in Carton de Colombia. The consideration paid there was about EUR 81 million, and it really simplifies the corporate structure in Colombia for us.
In Mexico, we saw a continued improvement on both an EBITDA and EBITDA margin basis as well as continued volume growth. And in Mexico, the continuing -- the increasing focus on sustainable packaging solutions, together with our ability to provide a unique Pan-American sales offering has continued to drive demand for our Mexican business. And in the U.S., our margins continued progressing year-on-year due to a very strong performance of our mill and the benefits of lower recovered fiber costs.
So that's the results for the year in kind of summary. And just really now I want to recap on capital allocation. This slide will be very familiar to you at this stage. It's our constant. We've always been a generator of significant free cash flow. And that continued focus on free cash flow enables us to balance our capital allocation priorities while ensuring the balance sheet stays strong. And as you can see, it's a balance sheet with considerable flexibility well within the target leverage range of 1.75x to 2.5x. And as you know, our ROCE target of 17% through the cycle, the returns profile of our business has been consistently improving over time and we remain confident in our ability to maintain that target over time.
The dividend is a key part of our allocation, and we've grown it from EUR 0.15 back in 2011 to EUR 1.088 in 2019. And I think it's a clear example of how we think about capital allocation, because the work we did on refinancing during 2019 means that the increase in the dividend will be a leverage-neutral event. In effect, we're giving our shareholders the benefits of that deleveraging. And we believe capital allocated to internal projects is key to the continued growth and performance of the business. As you expect, we take returns-based approach to all our capital allocation decisions. Equally, and as the returns show, we are effective stewards of capital, disciplined when it comes to acquiring targets and disciplined when it comes to internal investments.
And this slide is just a reminder of the evolution of the group's, both free cash flow and the effect of those capital allocation decisions over time on leverage and indeed cash interest since our full year of operation post-IPO in 2007. It also has the evolution of the dividend since 2011. As Tony has indicated, an important component of our vision is to deliver secure and superior returns for all stakeholders. Consistently delivering these levels of returns primarily reflects the strength of our free cash flow generation, which I believe, as the graph shows, we can deliver irrespective of market conditions.
Since 2007, our cash generation has allowed us to significantly transform the balance sheet of the group, reduce leverage and take advantage of multiple opportunities to refinance our debts. We are at a point now where our average interest rate is a little over 3%, our cash interest bill has reduced significantly, and as I've already mentioned, we've given some of those benefits back to shareholders.
Dividends form an integral part of our capital allocation decision-making process and provides certainty of value for shareholders. We've always described it as a progressive dividend policy and has delivered a CAGR of around 28% since 2011. This iterative process of investment in the business with value-enhancing M&A, delivering superior returns, facilitates the further strengthening of the balance sheet and in turn ever-greater returns for our shareholders.
And finally, just turning to some technical guidance for 2020. As usual, if there's very detailed modeling questions, probably more effectively and efficiently dealt with off-line. What's clear though, as Tony mentioned, is that given this backdrop of cash flows, we're going to have another year of strong free cash flow delivery.
Thank you, Ken. In 2016, we set out a new and shared vision for Smurfit Kappa Group. And this is something that in the company we strive for every day, as it defines our approach to business and our performance-led culture. This is not an aspirational state. Smurfit Kappa has dynamically and consistently delivered strategically, operationally and financially.
As Ken has said, our balance sheet is within our stated range and our returns have exceeded the target set out in the Medium-Term Plan. I believe our recent performance and recognitions show significant progress towards this vision, and I hope it's apparent to all of you today.
With regard to be globally admired, I am satisfied that we are making good progress towards this objective. Our awards in both the areas of CSR and for innovation make all of us in Smurfit Kappa Group feel that we are on the right track. This, of course, is a never-ending journey with our culture. However, I'm sure our commitment and motivation of the people are going to accelerate in both innovation and CSR activities.
Global recognition enhances the company's position as the partner of choice for our customers and, of course, as an employer of choice for our people, providing us with the ability to attract, retain and motivate the very best talent available.
With regard to dynamically delivering, I hope you can see, we're doing this strongly in Smurfit Kappa Group. With our experience centers and people, we continue to innovate for our customers who are growing and developing with us. Our operations continue to improve in all aspects, be that safety, quality and efficiency. Our company has been dynamically delivering also through acquisition, and we've been able to find opportunities and new businesses that enter our company that give value for our stakeholders.
Our Medium-Term Plan has demonstrably delivered. The heavy lifting in the European mill system will be behind us by 2020 year-end. There still exists very significant potential to invest in our market-facing business to either take advantage of expansion opportunities due to the markets we're in; or long-term trends, such as sustainability; or to take out costs due to rising labor costs.
With regard to sustainability, the consumer and the population are demanding a better planet for all of our future. The Smurfit Kappa approach is a significant differentiator in delivering for us and our stakeholders in this area. And again, as Ken has just demonstrated and as our longer-term performance measures clearly show, we continue to deliver secure and progressively superior returns over the long term, moving from 11.3% in -- when we went public in 2007 to 17% in 2019 on return on capital employed, which is in line with our medium-term target. This business has truly been transformed and is delivering on our vision.
And turning to a summary of what we said and an outlook. Let's revisit what we said at this venue just 2 years ago in February '18 at the launch of the Medium-Term Plan that Smurfit Kappa in 5 years would have an optimized model, it would have increased geographic diversity, it would have increased balance sheet strength and would have secure and superior returns.
Just 2 years later, we are well ahead of our expectations. The delivery of our European containerboard requirements via the acquisition of Reparenco; progress on many kraftliner projects in our French mill, Austrian mill, Swedish mill; along with continued developments in Colombia and Mexico in the mill systems. We've entered into new geographies, Serbia and Bulgaria. We have an increasingly strong balance sheet, with a longer-term maturity and lower average interest rate well executed by Paul, Brendan and the teams. And we've delivered progressively superior returns in line with or above our stated medium-term target.
We committed to a range of strategic and operational and financial objectives, and I hope we've shown we have delivered, and in many instances exceeded these commitments. In Smurfit Kappa Group, we say as we do and we do as we say.
By way of conclusion, I'd like to comment that over the last few years, the quality of the Smurfit Kappa business has improved immeasurably. This is the result of our investments through the Medium-Term Plan, the acquisitions that we've made and added to our business, our effective capital allocation framework and perhaps, most of all, the culture and people within our business who have customers and performance at the very heart. And equally, we ask our managers to treat capital as if it's their own as an owner-operator culture. And as you all know, our interests are aligned with our shareholders. As a result of this, we are improving in all that we do. Our balance sheet is secure and with strong free cash flow generation. And as we've said today, future performance depends on what you're made of. Corrugated and containerboard is a business for the present and the future, both for our planet and for our customers who can use our product for their business benefit.
As for the current year, from a demand perspective, the year started well. And while macro and economic risks obviously remain, we expect another year of strong free cash flow and consistent progress against our strategic objectives.
So with that, I will finish the presentation and start taking questions from the floor. And then after that, we'll take questions from the above.
Lars Kjellberg, Credit Suisse. Three questions from me. Tony, if you could elaborate a bit when you talk throughout disruptive effect in the market from what you're doing, Better Planet Packaging, et cetera, and also the Medium-Term Plan, as you said, demonstrably delivering? Can you give us a sense of what you actually delivered from that in 2019, how we should think about that and the opportunity in 2020? And finally, you talked about box price retention, which is pretty clear. Can you give us any hint sort of where we ended the year in terms of box price where they -- relative to where they started?
Just on the last point, I mean, we tend not to break that out because, obviously, that's a commercial issue for us, Lars. But I think where we've headed over the years is to offer our customers value. And so that might mean lower box prices for them and higher margin for us because we're able to innovate the box differently. And so price is an indicator, but obviously margin is another indicator. And part of the objective of having the kind of investment that we have in innovation is that we are able to get a win-win with our customers. And that can be across different spectrums, whether that's across the logistical savings and helping them from the start.
And one of the big positives for us, as we are seeing this whole trend develop, is that customers come to us at the very start. And that's where they get the biggest savings because they can actually utilize less product themselves in their inner packaging and have maybe a stronger box, or have a lighter box so that we can actually get more product inside. I mean, there's all sorts of different ways, once the customer starts to work with us, that we can reduce significant cost for them. So I think we don't really -- I mean, there are formulas that go down for the standard business, but clearly, we're trying to innovate as much as possible for customers.
With regard to your first question, what's the disruptive effect of Better Planet Packaging. I mean the only evidence that I can really say to that is how many events that we run for customers on sustainability and how to change things. And I mean, there is a time lag to it. Because for example, Ken is talking about this TopClip. I mean we're not 1,000% sure it's going to work. But we can tell you that a very large machinery supplier is working with us and our customers to make these machines to fill these cans at the speeds they need to be filled at which will take a number of years to come out. But when it does happen and if it does happen, you're talking many billions of tops instead of shrink film which -- and I have my son here and his friends, and they're sort of saying they hate the particular plastic thing that goes around the top. So that's the consumer of today that is thinking that.
And that's a big advantage to us. Whether it's our system that ends up being the working system, I don't know. But it's patented worldwide. We have massive interest in it. And that's just one product. I mean we talk about Styrofoam, we talk about all other plastics. So it is a game changer. And I just -- another illustration to that was, when I was on CMD this morning, one of the questions was all around the fact that we are in the right space by one of the presenters. And that does illustrate the fact that our business, not just Smurfit Kappa business but the business of corrugated packaging, is a very exciting business for the future as we sit here. But Ken, do you want to take the Medium-Term?
Lars, in terms of the Medium-Term Plan, keep it simple, about EUR 35 million for 2019 and about EUR 50 million for 2020.
David O'Brien from Goodbody. Probably following up on Lars' question. On Slide 13, you kind of highlight the success you've had in some of the FMCG players. What kind of softer changes in the behaviors of those customers have you seen over that 5-year period in terms of contract length, contract stickiness, which I'm sure is culminated in a better margin performance? Has it been a significantly better margin performance than the rest of the business? And then on sustainability particularly and successes you've had to date, what type of premium are customers willing to pay for sustainable solution? And when we think about that premium, who's swallowing the costs? Is it the consumer at the end or is it your customer? And finally, just on your comments, Tony, around a good demand start to the year, could you maybe quantify where that's gone to versus the plus 1% in Q4, and what areas of the market or region seem to be better sequentially?
On the contract length piece, I think we do have a lot more stickiness in general. I mean, I think as a company, we tend not to lose that many customers. We do lose the odd one. But generally speaking, we tend not to lose them. And it's part of the whole offering that we do. I mean, I think as our customers face the same pressures that we do, which is to reduce their costs, they are obviously making changes in their organization and they require much more expertise from their supplier than heretofore to help them in their marketplace. And so that's a big positive.
Another big positive is as they take out costs in their facilities and they automate and they have more high speed, it works both ways. When we win business, it takes longer to get it. But when they have put in high-speed lines, the height of our corrugated box fluting differs from company to company. And you have to do machine trials and you have to do market trials, and you need somebody to do that. And oftentimes they don't have that. And machine time is very important to those customers. So therefore, you don't -- it tends to get difficult to get machine time to put your product on. So as I say, it works both ways when you're winning business.
And then when you talk about customers, one of the things that's not really thought about in the room, when you talk about a particular customer, you think it's one customer with one product, that's the natural inclination. But that one customer might have 40 different lines going to 50 different countries with different prints, and he needs somebody to manage that for him. So the complexity of change is very difficult when you have a business that is high-speed, automated, with very strong quality requirements, with very strong OTIF, with very strong PPM. So I think we have very sticky customers. I mean we don't take it for granted, of course. But we tend not to lose customers and we tend to win customers because of our innovation. And as I sit here today, we're very happy with the outlook going forward. But again, we can never rest on our laurels in that regard. With regard to the last question, which was...
I think the way we look at Q4, October and November were very strong and very much in line with the 2% that we would have always guided. I think where Christmas fell, it's on a Wednesday, just meant that outside the working days, you're out to do some kind of printing days, which has meant more holidays in December really, so less shipping. So I think when you strip all that back out, you sort of end up back out that broadly 1.5% to 2% that we would have guided.
I think in terms of regions and where we saw that, I think Iberian Peninsula is quite strong, Italy was quite strong, and Russia and Turkey was quite strong. I think Germany of course was flat, which actually considering the backdrop of Germany is a good result for us. And France continues to do a little bit well. I think -- well, the U.K., as you can imagine, kind of slight drag there given Brexit in, Brexit out and all that. But I think while Germany is where it is, I don't need to see Europe take off necessarily. Whatever takes off, then we're well paced to that, but we're still doing better than the market generally. And I think it's fair to say that when they came back in January, those markets have continued to perform well. So when we think about the outlook ahead and we talk about demand for the year, are you in the kind of target range of 2 [in the biz], doesn't seem unnatural at this point in time.
It's Barry Dixon from Davy. A couple of questions. Just you mentioned on -- in the thing that you have -- your price retention was better than expected in Europe in 2019. Do you think that's just a timing issue? Or is there something structural happening here that you're better able to retain given all of the value-add and sustainability issues that you've talked about? And then the second question, Ken, maybe just in terms of the Medium-Term Plan, just going back to that, maybe give us a sense as to -- of the EUR 1.6 billion, how much of that has actually been spent at this stage to deliver that EUR 35 million and EUR 50 million in 2020? And you indicated in the statement that you're going to look at expanding, I think, or extending the plan. Could you maybe give us some color around that, either in terms of -- is it in terms of timing? Or is it in terms of the amount of money that you're planning to spend? And then just one last add on in terms of your thoughts around OCC costs and OCC pricing.
Okay. I'll take the first one on price retention and then Ken you take the rest. I think that it is fair to say that because of what we're bringing our customers, there is -- there has been better retention heretofore. Obviously, we're not going to forecast that that's going to continue, but we certainly have strong belief that should continue. And certainly, all of our people are working very hard to ensure that it does have better retention. But I'm not going to stand up here and say absolutely it's going to happen. But we are working very hard to make sure that we will retain.
And obviously, the price increase announcement in the marketplace helps that agenda in the sense that if prices are going down, they will go back up again. And so as we have 65,000-plus customers, everyone is different and we have different discussions with every single one of those customers. And so -- but I would say, in general, yes. But again, not resting on our laurels on that.
And Barry, in terms of Medium-Term Plan, I suppose, first, that's kind of rebased to EUR 1.6 billion because, obviously, it changed a bit as we went through it. So the EUR 1.6 billion, as you remember, was broadly over 4 years with kind of somewhere between EUR 330 million, EUR 350 million as kind of the base number. In fact, probably EUR 330 million at the start, but then we've done a lot of acquisitions to increase the base CapEx: Serbia, Bulgaria, et cetera.
So -- but EUR 1.6 billion had 2 fundamental paper projects in there and that was paper machine in Europe and the paper machine in the Americas. The paper machine in Europe was not done because we bought Reparenco. And the paper machine in the Americas, we won't do as part of this plan currently. I suppose we don't need to do it given market conditions and where we sit in terms of pricing and demand. Our supply of containerboard in the Americas were -- as you know, were 300,000 tonnes short. So in essence, you could probably rebase that plan down from EUR 1.6 billion towards, call it, EUR 1 billion over the life of the plan that would be spent.
And if you look at last year's EUR 733 million and the year before, and indeed the guidance for this year of EUR 615 million, you could probably see that just about all of that Medium-Term Plan money, if you like, in the initial plan will be spent at the back end of '21 -- or '20 into '21. And even with EUR 350 million of base CapEx, you still have a growth CapEx in that EUR 615 million number, albeit EUR 60 million mean leases.
And I think when we think about the next iteration or change in the Medium-Term Plan, it's really just -- if you think about what we spoke about 2 years ago and the way the world has pushed on either the things we've spoken about this morning around sustainability or the continued growth in other regions and areas, and indeed how the group has evolved, we didn't have Reparenco, no Serbia, Bulgaria, more plants in France, it kind of caused us to sit back and think about that model going forward and to kind of rebase, retarget, reshape what we might need in terms of the structural drivers we see ahead of us. So it's not really pause or change or move, it's just a natural place given the amount of work we've done to date to kind of say, actually, where will we now target our focus for the next 4 years.
So -- and we're still going to spend EUR 615 million this year, so it's not really exactly a pause in that sense. I think it's more an indication that, at some point, you're going to hear us stand up again and talk about where we see the next 4 years for Smurfit Kappa in terms of outlook and spend. And we've -- we're already beginning to think about it, so there's no even guidance on numbers on what that might mean. But I think, fundamentally, it's about traffic and attracting some of the structural drivers we see ahead of us. And the OCC costs Barry, what was the actual question?
They might stay the same. I suppose you -- okay. Is that your idea? Look, I think we know -- and Tony has the idea, too, I think it's a case of -- we spoke about floors and OCC for a long, long time, and we see that continues to go down. I think as we sit here today, you could argue maybe it can't go down much more, but it can certainly go back up. So I think if the direction of travel is not asymmetric anymore, I think it's maybe slightly the downside. But certainly, you could definitely see it go back up depending on -- now introduce what might coronavirus 2 weeks into that particular problem or issue bring in terms of demand generally. But I think we -- our thesis would be long-term pricing for OCC is better higher for both paper prices and box prices. But we've been -- as I think I said last year, I was wrong in OCC prices 12 months in a row. So -- but I think, yes, it can stay the same, up or down, I think, is my considered answer, Barry.
Cole Hathorn from Jefferies. I just wanted to follow-up on your recycled containerboard price increase. And I was just wondering on virgin, you've got some downtime in the Finland mills. And is this a situation where you need the recycled hike to go through before you can push through a virgin hike? And then secondly, back in May at your Innovation Event, you showed some of your packaging machinery doing boxes for strawberry packaging and things like that. You already talk about your actual underlying box machines, could you just give a little bit of color of how that helps with your customer base and some of the paper volumes you're seeing through -- going through your own machines?
On the virgin side, Cole, there is a very large gap between the pricing of virgin and recycled. And obviously, that's something we keep an eye on. But they are slightly -- they're used for different applications. But there's a crossover piece that we always have to keep an eye on. And the gap, because of the fall of the recycled paper plus the cost of recycled paper due to its main input costs going down, has meant that the gap has been pretty big than -- more big than historically. And we don't have the same drivers on wood. Wood is not going down to the same extent as recycled paper. So as Ken just alluded to, higher wastepaper price ultimately is good for Smurfit Kappa. But we'll have to go -- if the wastepaper goes up, we'll have to go through some pain as we go through the cycle again. But that's -- we don't see that in the -- certainly in the short term.
So with regard to the market, it's extremely tight for virgin. I mean we ran terribly in our Swedish mill during the month of January so we lost some tonnage, and therefore, we're scrambling to get tonnes and we can't get them. So the market is extremely tight. And then adding fuel to that is the strike in Finland where there is a strike going on which -- now 2 weeks into the strike or close to 2 weeks, and that's obviously taking some virgin capacity out of the marketplace. So it is a tight market and we're continuing to watch the space with regard to the success of the recycled price increase, and then maybe we'll have to consider what we do on virgin if that price increase is successful. With regards to machine systems, it's very -- like with 8,000 of them in the business, we're doing, I think, how many per month approximately do we...
So we're -- I mean, it's just part of our offering, Cole, that we continue to be able to say to our customers either we make it ourselves, we have -- in the U.K., Germany, Italy we have our own manufacturing for machine systems, our own design; or we buy it as we're working with this particular company that is going to help us with the beverage industry where we don't have the capability internally to provide the machine. So I mean we tend to -- we have a machine system division that tends to act as an adjunct to our selling arm, and it's a very positive thing. As I say, whether we do it internally or externally, that's sort of a matter of the machine that -- and the products that we're offering. So it's just another string to our bow, I would call it like that.
I think, Cole, as well it kind of feeds back into David's point around stickability of customers in the sense that, it's very difficult with your machine system supplier, really difficult to kind of change away in short notice if it's on the base of price or something else. Also, much easy to innovate on the box end if you're the supplier. So I think we've seen great success in that part of our machine system business. But it kind of -- it blends Smurfit Kappa beyond the -- it used to be the supplier of paper and now it's the supply chain partner all the way through, which is really has that kind of stickability your customers want a better (inaudible).
And the same, we provide the most modern, the most own design machines in our bag and box business. So basically, if you're a high-speed filler of bag and box wine, you come to Smurfit Kappa and we provide the machine. They can buy it or they can lease it. But we service it and they use our bag, they use our taps for whatever period of time.
Justin Jordan from Exane. I appreciate you can't give us an OCC forecast, but can you just -- one factual historical question. Can you tell us how much of a benefit it was in terms of an EBITDA bridge to the business in 2019?
Sure. It was for the full year '19, the benefit was EUR 83 million, and that was split EUR 33 million in the first half and EUR 50 million in the second half.
Okay. And can you just -- again, a sort of factual question. Appreciate that before that. What sort of quantum of OCC are you buying in Europe and Americas as the business sits today?
In the Americas, about 1 million tonnes. And in Europe, it's a net 4 million to 4.5 million tonnes. If you remember, it was slightly higher, but we bought -- when we bought Reparenco, we acquired a recovered fiber facility as well. So in essence, we probably -- there's about 1 million tonnes in there we kind of transfer from, if you like, that operation to our paper mill. So we don't get the benefit of 1 million tonnes of any benefit in OCC, it's just a bit like the paper price and transfer us from one division to another. But net-net, between 4 million, 4.5 million tonnes of OCC consumed in Europe by European mills.
And if we think about bridging from, let's say, the EUR 1,650 million 2019 EBITDA to whatever the outcome may be for 2020, and I appreciate there are a number of things that are frankly beyond your control in terms of ultimate box price concessions and ultimately industry volume growth, but the things that are within your control, you've already told us about a EUR 50 million contribution from the Medium-Term Plan additionally in 2020, then who knows, there might be some positive from OCC. Are there any other sort of major cost items, up or down, we should be aware of?
Yes. I suppose going in the usual kind of cost trends we talk about, I should say, Medium-Term Plan, we'll probably deliver EUR 50 million in [2019]. As usual, labor is definitely a headwind and it tends to be 1.5% to 2% a year, so call it EUR 50 million to EUR 60 million. But we tend to do a lot of cost takeout programs that primarily offset the inflation there. But given the good results in the last number of years, as you know, we've had increased profit participation in places like France and, indeed, Mexico and Europe. So whether it's a full offset or not, we'll see in time.
I think we're still seeing a headwind on things like distribution costs probably to kind of EUR 15 million and EUR 20 million. I think when we go beyond our broader business, into kind of more discrete grades of paper, call it, sack, MG, those kind of grades of paper, I think we'd see probably a drag '20 over '19 of somewhere 10 to 15. Energy will probably be a tailwind as we go through the year, Justin, but it's too early to call it yet, so probably kind of flat to slight tailwind as we kind of sit here today. And beyond that, I can't think of any big cost drivers that I...
My next question -- okay. Historically, clearly a smaller business a year or 2 ago, you've talked about potentially every 1% of box volume being something like EUR 17 million, EUR 18 million of EBITDA and 1% of box prices being about EUR 45 million, EUR 48 million of EBITDA. I'm just conscious about the business, it continues to grow. Well done. Presumably, what are those numbers today?
I think, yes, it's usually 1% with EUR 15 million in volume, 1% with EUR 45 million on boxes. I think with the increase in box prices over the last year, 1.5 years, I think you could logically say that, that 1% on box prices are probably more EUR 45 million to EUR 50 million in terms of quantum. And equally on volume, given, again, the scale and size of the business, you probably are EUR 15 million, and it's probably gone to EUR 15 million to EUR 17 million in terms of volume.
Just one final question for Tony on Better Planet. Yes, I appreciate we're at the early innings of this, and you know your son and every millennial consumer is probably the driving force of this as much as anything. But can you give us some sense of -- again, historical factual question, in 2019, of the 1.5% organic volume growth, what contribution to that was from plastic replacing with the corrugated packaging? And then as we think about it going forward, I appreciate it's going to be a larger number per annum over the next 5 years, but can you give us some idea of the scale of the opportunity potentially ahead?
It's very -- I mean, I would say that it would be very minimal in 2019. I mean, for example, we did a launch with a medium-sized Belgian beer customer which we had planned in 2018, picked up the machine and they're just launching now their product in, let's say, the last quarter. So that was really -- I want to be out of shrink, I want to be out of old plastics. I want to just be in paper-based packaging. And it took 18 months to go from start to finish. And we put it online, so it's a public thing. It's a great initiative by them. But changing the packing lines and filling lines takes a long time. So it's really impossible to quantify all. The only evidence that we can see is that we're working on tons and tons of projects all over the place, and it is going to be a -- it is a very big positive tailwind for us as we look out into the years ahead. And that multi-clip thing that I told you about is -- if that works, then it is a huge amount of -- not only amount of TopClips but it's a huge amount of paper. You're talking in the many billions. So obviously, we have to see it work. But I mean, the cost -- relative cost, it is more expensive for the filler than what they're currently using. But over the -- I mean, we have a chairman who's in that space, and he would say that it's cost which the consumer will be happy to pay. It's -- I know peanuts, [I mean, for them], cents on the -- not even cents on the percentage of cents. So it's nothing per can.
Just a couple of questions here. In terms of the midterm investment plan, you mentioned the EUR 50 million benefit in 2020. Could you talk a little bit about what is going in there? What is driving that?
Mikael, I think it's impossible to kind of break it down into individual projects or indeed across divisions, because ultimately, that, if you remember, was a portfolio of many, many investments across the paper and the corrugated division. But I think it's fair to say that the EUR 50 million is been driven by efficiency and increased capacity in the paper mills. It's been driven by new investments and growth and differentiation, innovation in the box system and, indeed, by some cost takeout projects. So across 370 sites, the EUR 50 million has been delivered by some or all of them in small way. So hard to break it down into bigger buckets than that.
And then just a final question on Latin America, obviously, the selling environment there right now in terms of demand and pricing and cost inflation.
Yes, Mikael, I think it's -- you have to look at every country differently in a sense because they are distinct. I mean we are seeing, as we pointed out in the press release, extremely strong growth in Colombia all through last year, and that has continued into the month of January. Mexico didn't grow as much as we had anticipated and that has continued also in January. It's still not a booming economy. The North American business, which is smaller for us, is doing okay. It's acceptable.
And then one of the interesting thing actually is that where we've had difficulty in Brazil and Argentina and Chile from a demand perspective over the first 9 months of last year, that reversed in the month -- in the last quarter and has continued in January, where we've seen much higher-than-anticipated demand out of those 3 countries. And I think the pricing environment is fine pretty well everywhere. I mean there's no -- we have some input cost tailwinds in certain countries and we have some input cost headwinds in other countries. So I think in the round, I think it's doing well. And then certainly, we started off the year well in those -- in practically all of the countries in the Americas.
Okay. I think we finished the questions and we're finishing on time. To all those on the line, I'd say thank you. And of course, to all of you in the room, I very much appreciate your attendance. And on behalf of Ken and Paul and myself and the whole team in Smurfit Kappa Group, thanks for your support during 2019 and we look forward to 2020 with some optimism. Thank you.
Post time: Feb-12-2020