Smurfit Westrock - Q1 2021

Transcript

Operator (participant)

Hello, and welcome to Smurfit Kappa Group 2021 first quarter trading update. Throughout the call, all participants will be in listen-only mode, and afterwards, there will be a question-and-answer section. Just to remind you, this conference call is being recorded. Today, I'm pleased to present Tony Smurfit. Please go ahead with your meeting.

Anthony Smurfit (CEO)

Thank you, operator, and good morning, and thank you all for taking the time to join us today. I'm joined on the call by our Group CFO, Ken Bowles, and before commencing, we will refer you to the note on forward-looking statements set out in our trading update, which also applies to our discussion today. Finally, two quick housekeeping notes. Please note that Ken and I are calling in from separate locations, so please bear with us should there be any technical issues, and as we're holding our AGM this morning, we'll be limiting Q&A to two questions per person, and also, should you have any detailed modeling questions, please direct them to Garrett or Ciaran in our investor relations team. During these uncertain times of COVID-19, we would like to pay tribute to our workforce, who have ensured our customers have received their critical supplies.

We also remember those families who have been impacted by the pandemic. I remain very proud of the way our company has addressed all internal safety issues related to the pandemic. In Smurfit Kappa, we're a big believer in giving back. We have broad societal and community-related responsibilities, so we continue to support the communities in which we operate. Indeed, in the past year, we have redoubled our efforts as part of our response to the pandemic. As the leader in our industry, we have announced a set of enhanced sustainability targets across our focus areas of People, Planet, and Business. All employees of Smurfit Kappa are especially proud to play our part in making this a better planet through our packaging.

When Smurfit Kappa launched our Medium-Term Plan, the objective we set ourselves was, and is, to put ourselves in a position to deliver the kind of performance we have reported today. Smurfit Kappa today is a structurally different company, with a unique asset base and a business operating with secular growth drivers that are becoming more and more apparent. The culture in our company of performance and disciplined capital allocation decisions, both for capital investment and acquisitions, gives this company significant scope for future developments and growth. During the first quarter, Smurfit Kappa has delivered underlying revenue growth of 6%, an EBITDA of EUR 386 million, having absorbed EUR 100 million of additional year-on-year cost, mainly in recovered fiber, and an EBITDA margin of 17%, reflecting in hard numbers our structural improvement.

It is now apparent to our sixty-five thousand customers and all our stakeholders that due to our integrated model, ensuring security of supply, our innovation, and our sustainable packaging solutions, Smurfit Kappa is in a very strong position. Our structural improvements have positioned this company to take advantage of the significant opportunities in what is a growth industry. Our first quarter performance has established a strong foundation for accelerated revenue and earnings growth as we move through 2021. The underlying revenue growth of 6% for the first three months of 2021 reflects the strong demand we've experienced across our operations, driven by growth in e-commerce and the switch to sustainable packaging. We've also seen a recovery in industrial demand alongside the recovery of FMCG sectors impacted during 2020.

It is clear from the levels of interest and demand for our products, that Smurfit Kappa is continually seen as the partner of choice, irrespective of the market, segment, or sector, as a result of our service-focused culture, innovative packaging products, and sustainability credentials. Stripping out the impact of foreign exchange, EBITDA was up almost 5% on an underlying basis and demonstrates the strength of Smurfit Kappa and its integrated business model, which has been driven by continued strong demand growth across our operations, self-help actions taken to neutralize labor inflation, and the continued benefits of our capital programs, which delivered a strong operational performance in both Europe and the Americas. The Americas, in particular in the quarter, has continued to deliver improved results, with underlying EBITDA up 20% year on year and corrugated volume growth up 7%.

This despite the negative impact of winter storms in our Texas and Mexican business of approximately 1%. We remain extremely excited about the region and its relatively higher margins, and we're accelerating the deployment of capital to capture the inherent growth opportunities there, that exist there. While the industry is experiencing increased costs and security supply issues, Smurfit Kappa's geographically integrated model is again proving a key differentiator, with continued continuity and certainty of supply to our 65,000 customers. This security of supply has enabled Smurfit Kappa to both extend existing customer contracts and win many new ones, with customers placing even greater emphasis and value on security and sustainability of their supply chain requirements.

As we noted at our year-end results, we do expect some continued cost inflation as we progress through 2021, but this will be recovered as we progress through the year as well. Smurfit Kappa has always been, and remains focused on solving our customers' challenges through providing innovative, sustainable packaging solutions with our industry-leading smart applications and innovation capabilities, brought to life for our customers through our global network of 28 experience centers. It is truly an unrivaled set of applications and expertise, which is ever more valuable in an increasingly digital world. Our Better Planet Packaging initiative continues to drive significant interest among our customer base, with over 22,700 attendees joining our biannual conference in March. The increased value and application of corrugated as the most sustainable merchandising and transport medium is ever more apparent.

This will, this will remain a strong driver of future growth, as paper is renewable, recyclable, and biodegradable, and the product of choice by consumers in a more sustainable world. Our packaging solutions are an integral part of our customers meeting their own ESG goals. Today, I'm proud to say we released our fourteenth annual sustainability development report with continued progress across our three pillars of Planet, People, and Impactful Business. On our CO2 target, we have further reduced our footprint by over 4% in the last twelve months alone. Simply put, we make a sustainable product in a sustainable way, and we're recognized as such, with Smurfit Kappa being the first FTSE 100 company to be awarded the five-star status by Support the Goals, and one of the top-rated corporates by Sustainalytics and ISS ESG.

You will recall our vision is to dynamically deliver secure and superior returns for all stakeholders, and today, the combination of our results and the publication of our fourteenth annual sustainable development report are further evidence that our plans and strategies continue to deliver with progress across the piece. The first quarter was remarkable in many ways. Against what were very challenging market conditions, I'm very proud of the team who've continued to deliver in these exceptional times, ensuring security of supply to our customers, while also continuing to support them through our approach to innovation and our sustainable packaging products. Smurfit Kappa has, over the last number of years, through continuous investment and acquisitions, structurally improved the business for the benefit of all stakeholders.

I'm also happy to report that both Moody's and Standard & Poor's have recently upgraded our long-term issuer rating to Baa3 and triple B minus, respectively, in addition to Fitch's triple B minus rating. Our strong first quarter performance has set the foundation for accelerated revenue and earnings growth as we move through 2021. This performance and these prospects reflect the strength and quality of the Smurfit Kappa business. While risk is, of course, ever present, currently, current industry conditions are as good as I've ever seen. I can also say that Smurfit Kappa's business today has never been in better shape, with very significant structural improvements to our business already implemented. Through innovation, sustainability, and our geographic reach, we're exposed to high growth sectors and markets.

Our recent equity raise enables us to support our customers and to capitalize on those opportunities from a position of enhanced financial strength, which will improve our offering and structure even more in the years ahead. Thank you, operator, and now we're ready to take any questions, when you're ready.

Operator (participant)

Thank you. If you do wish to ask a question, please press 01 on your telephone keypad. If you do wish to withdraw your question, you can do so by pressing zero two on your telephone keypad. Our first question comes from the line of Allan Smillie from Kepler Cheuvreux. Please go ahead. Your line is open.

Allan Smillie (Analyst)

Hi, good morning, Tony. Good morning, Ken. It's Allan over Cheuvreux. So, I have a couple to kick off. The first one's just a really big picture question. And Tony, you mentioned numerous times in your opening comments about the structural improvements that you've seen in the business, and like, sometimes this can be difficult to see externally, but it really appears through the first quarter that operating leverage, for example, in your underlying business was particularly strong. So, if you could perhaps comment on, you know, from your perspective, the principal areas of structural improvement you could identify in the SKG system now versus, say, four or five years ago. And then on the Americas, you flagged, you know, really strong EBITDA growth, 20% underlying.

So, some color on the principal drivers behind that, I think, would be helpful. And if you could remind us of your medium-term margin expectations for that region, and if they've changed, you know, post what you're seeing currently. Thank you.

Anthony Smurfit (CEO)

Thanks, Allan. You know, we invested in a Medium-Term Plan a number of years ago, and that basically put billions into our business, and those billions, you know, we would say, have basically been spent very wisely. For example, we have improved our efficiency on our paper machines radically over the years. We used to have 22 machines doing 3 million tons. We've now 11 machines or 12 machines doing 3.5 million tons on the same footprint. So, sorry, mills, not machines. And so that's part of the, you know, efficiency gains. Also, in the corrugated box plants, you know, we've been continually investing in, you know, improving our corrugators, improving our converting machinery across the piece, and this goes for the Americas, too. That is actually...

We're just becoming much more efficient. Our quality levels are much better, so we have less waste. We have, we're able to with the new technology we're putting into our business, we're reducing headcounts as, and when it's able, we're able to do it, whether it's through work and process implementations, or whether it's through faster machines, taking out two machines and doing more than those two machines quantity in one machine. So it's across the piece.

We've also, as you know, and as you'll have seen in the last quarter, we took a small charge to continue to look at our headcount levels and, you know, because the new way of working through digital has allowed us to relook at a number of our areas to see where we can take you know a little bit of excess costs out that may have crept into the system. So, all of these things add up to structural improvement, and if you go into a Smurfit Kappa plant today compared to what it was five years ago, it's unrecognizable. Not in every plant, obviously, but the vast majority. I think that you would see that. It goes the same for Latin America.

You know, exactly the same is occurring in the Americas, that has been happening in Europe. So, you know, I'm answering the two questions at the same time, because I won't forecast where the Americas margins can go, but clearly, you know, we've been very comfortable and happy with the progress of how our capital plans have helped both regions and to capitalize on growth, and you know, to put it very simply, you know, everywhere we look, we see opportunities, whether it's in the agricultural sector, whether it's in the drinks sector, whether it's in the graphics sector, whether it's in the specialty packaging areas, such as Bag-in-Box packaging, which has grown at record levels in the first quarter. You know, so all of these things are working for us.

You know, as you correctly said, Allan, there is an issue of cost, and that did hit us EUR 100 million in the first quarter, but we've been able to recover that through these efforts. And we will continue to see some costs in the second quarter, increasing. But then, you know, as we progress through the year, we'll recover all of those into our end products. Thanks, Allan.

Allan Smillie (Analyst)

Sure. Thanks, Tony.

Operator (participant)

Thank you. Our next question comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead, your line is open.

Lars Kjellberg (Analyst)

Yeah, I just wanted to continue a bit about the sort of incredible margin resilience that you had. You called out EUR 100 million in incremental cost. Yes, there may be a structural improvement in the way you run your business, but again, the operating leverage, is that anything you can address? Has that changed in the past? You talked about EUR 15 million per 1% of growth. Is that now a bigger number? And Ken, if you could provide a bit of a bridge, how you get from, you know, last year's Q1, which essentially was slightly lower than the current, considering that incremental, significant cost headwind. In the release, you also mentioned you're accelerating investments to capitalize on the, you know, strong growth and optimized costs. Is that a change?

Are you doing something new, and how should we think about CapEx levels for the current year? Has that changed in any shape or form? And can you share what you're doing as a couple of examples of that acceleration?

Anthony Smurfit (CEO)

I'm delighted, Lars, to hand all those questions over to my dear colleague, Ken.

Ken Bowles (CFO)

Hey, Lars, and I'm delighted to receive them. I suppose-

Yeah, good morning. Good to talk to you. You know, I suppose it goes back to a bit of the answer that Tony gave to Allan. You know, we didn't start from today. It kind of goes back to the medium-term plan and the building blocks towards this point, and I suppose the continued focus on improving every aspect of the business. You know, you can look at the top line, but really, unless it comes through to the bottom line, you are not trapping those gains. So where do we kind of see that? Clearly, volume being stronger is a key driver of the performance in the first quarter, and I think the incremental uptick, if you like, in 1% of our volume, is probably delivering more like EUR 20 million than maybe the traditional EUR 15.

I think also the medium-term plan continues to deliver, Lars, in the first quarter, you know, probably somewhere between EUR 18 million and EUR 20 million coming through the two regions for that. You know, as Tony pointed out, new ways of working, still reduced travel, is probably delivering benefits in the order of, you know, EUR 10 million year on year. Simple things like we had some shuts last year, which didn't occur this year, probably gave us five or six or seven. You know, but then it comes back to the operational leverage point and, you know, just that ever-efficient piece through the system, reducing waste, you know, reducing PPM, improved quality, and driving it out.

And I suppose the level of investment that's done in the business over the last four years just creates efficiency once you trap it, and I think that's something we've always been very good at. In terms of CapEx for the year, not necessarily changing the number at the moment. I still think it's around that kind of 800-825 number. But when we talk about acceleration, I think that's a nod towards how we see the market as it is now. You know, we are bumping up against capacity constraints in certain of our plants because we just cannot cope with the sheer volume orders coming at us and what customers need from us. So, you know, where we can accelerate projects, we're doing that, certainly at the consumer-facing part of our business, if you like.

So, it's more a nod towards, you know, be reassured, a bit like we did with the Medium-Term Plan, where flexibility and agility are needed to ensure that projects get done quicker than they might normally do. We're absolutely on top of that. So, you know, if you like, our modus here is the market is in great shape, we're in great shape, and we're in great shape to trap all the opportunities that come at us.

Lars Kjellberg (Analyst)

Thank you.

Anthony Smurfit (CEO)

Thanks, Lars.

Operator (participant)

Thank you. Our next question comes from the line of Alexander Berglund from Bank of America. Please go ahead, your line is open.

Alexander Berglund (Analyst)

Thank you, good morning, and well done on the margins. Two questions from my side. So first of all, on price negotiations, I think you're negotiating on the non-index side now for Q2. I was wondering if you can give some color on how those negotiations are going, and also, you know, the portion of those contracts that you expect to finalize now in Q2. My second question is on OCC. I'm not gonna ask you to forecast OCC, but I just wanted to get your view on kind of dynamics in the medium term, considering collection rates, you know, supply additions in the cycled containerboard, including, you know, what new conversions have been announced.

Just generally, do you think that there's enough virgin capacity coming into the system over the medium term to achieve a good balance on OCC availability? Thanks.

Anthony Smurfit (CEO)

Okay. Thank you for those questions. I'll try and take them, and Ken, jump in if you want. On price negotiations, let's say, the non-index volume, I would say that's going very well. I mean, we're in a sold-out position. The need for us to recover paper price increases is apparent to our customers. And, you know, we're in a sold-out position, many of our competitors are in a sold-out position, and there's a lack of paper. So that tends to lead us to a situation where things are, you know, in a very strong position to negotiate the increases that we need. And so, I feel it's going as well as I could expect.

Those will, some of those are already in the first quarter. One of those things to bear in mind is that we did have many increases in the first quarter, but because of our indexation, we would have had some decreases with many of our customers, which will reverse when we get to this time in the second quarter, third quarter, fourth quarter. So, you know, that's why our box pricing was flat in Q1, basically flat in Q1. So, we had increases and decreases, and we're gonna have more increases in Q2 as we negotiate with customers. Less decreases, 'cause most of the indexes have finished at this stage.

And then obviously, as the half year comes in, those index customers will go up as per contract, because that's what needs to happen and will happen. With regard to OCC, and I should make the point that, you know, corrugated is not the only material that's going up. All other materials are going up, so that makes it even easier, let's say, to have that discussion, 'cause we're not the only commodity or the only packaging product that is going up to our customers. With regard to OCC, I mean, the current view is that I mean, it's at an all-time high. It continues to go up in our system in April and May, versus the first quarter, and obviously, it continues to move up sharply in the first quarter.

So, we will see, again, significant increases in Q2 versus last year. I think that you know, the current view, and as I would have said before, that's sort of like trying to predict foreign exchange control markets. The current view is that it should stabilize at these levels. And we'll wait and see. It certainly is gonna be higher in May than it was in April, but after that, we would hope that it's gonna stabilize because collections should get a little bit better as some of the reopenings happen, and that should allow for more collections. But longer term, to your longer-term question, you know, OCC is going to be an issue to make sure that you have enough grip.

In our company's case, we have kraft everywhere, so we have plenty of supply. But you know, you will have to make sure you have enough product, because it will be an issue. There isn't enough OCC being collected to meet the demand of all the machines that are going in globally, and there isn't enough virgin coming in. And another structural point I should mention is that as OCC is being used more, there's less mixed waste that's going into the system, such as newsprint, such as coated papers, because they're just disappearing, as you can imagine. So, it's really becoming a more pure OCC market and will become a more pure OCC market.

Again, a lack of fiber will be there from time to time, depending on how the economy is doing. And I think that's why we very happy to have a foot in both camps with kraftliner and recycled papers.

Alexander Berglund (Analyst)

Thank you very much.

Anthony Smurfit (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of David O'Brien from Goodbody. Please go ahead, your line is open.

David O’Brien (Analyst)

Good morning, guys. Thanks for taking my questions. Firstly, just on sustainability, if I could. You know, can you give us a sense of... Look, there's been a, you know, we've talked about sustainability and Better Planet Packaging and, you know, the trend from plastics to paper for some time. Like, are we at the precipice of that moving from proof of concept into reality on shelf, I mean, in projects and your customers? And can you give us any color on maybe where we are on that and on what you're seeing on the ground?

And then secondly, just in terms of your, you know, I guess the level of growth we're seeing in end markets, I guess if that keeps up, your short paper position is going to become shorter on the recycled side. You know, is there enough or I suppose, can you address that potential shortfall with internal CapEx only? Or do you think you'll have to eventually look at M&A to I suppose, avoid your short position becoming too big?

Anthony Smurfit (CEO)

I think the two very good questions. Ken, jump in if you want, on the plastic side, but I would say precipice is the wrong word, David. I think you know, we're at the start, at mountain going up. It just takes longer than we think. You know, when you look at some of these very big volume projects, whether it's TopClip or whether it's SafeBox, you know, going through the systems with these larger companies who are talking about, you know, many, many thousands and thousands of tons of movement from plastic tubs to, to, corrugated tubs, it just takes longer than we'd ideally like. But, you know, the interest is huge with our customers. And you've... As we said, you'd have seen that from the...

And it's everywhere, in every region, including the Americas. So you've seen that from 2,700 people that joined our Better Planet Packaging Initiative. With regard to paper, I would say that we will have an issue. We have ways to solve it internally. It may take us longer than we'd ideally like to solve it internally, so we wouldn't rule out M&A if it was possible. But, you know, again, we're not in the business. You know, we've been around a long time because we don't overpay, so, you know, we've got to find the right deals at the right price.

Clearly, you know, it's not an ideal time to be buying businesses when people have higher expectations than what we're able to get our heads around. So, I think, you know, we will, if we continue this level of growth, we have projects that are gonna happen. They always, they take, unfortunately, paper projects take, you know, at least 18 months, more like 24 months or more, sometimes even 30 months to get implemented. So, we're a little bit behind because we wouldn't have expected to see the growth that we've seen over the last year or so. But we'll find ways to catch up. We always do. Ken, do you want to add anything?

Ken Bowles (CFO)

Yeah, sure, Dave. Dave, I suppose the one point I'd make on sustainability is what has happened, if you like, over the last 12-18 months, and I suppose what we've seen is gone from the idea to the reality. You know, what's compelling, I think, for our customers, is when they actually see it running in real life in our plants, and that's where we're at now. It's gone beyond the idea of the theoretical, if you like, to the real. I think that sometimes is the point at which they begin to really start to think about this as a change.

I think also you've got to remember that, you know, in a world where just about everybody at this point has pointed towards either net zero by 2050 or some other metric around CO2 reduction, for our customers, one of those biggest things tends to be around Scope 3 emissions. And in reality, we're probably the only partner that can help them do that. So, if you like, the push from the consumer side in, and their supplier in, their customer in, brings them back to us and our skill set around how we help them achieve those objectives. So, I think those two pushes, along with our expertise in the space and things like Green Planet and SafeBox and TopClip and everything else we do, are accelerating those conversations, which is obviously clearly healthy.

David O’Brien (Analyst)

Great. Thanks very much. Take care.

Operator (participant)

Thank you. Our next question comes from the line of Kevin Fogarty from Numis Securities. Please go ahead. Your line is open.

Kevin Fogarty (Analyst)

Good morning, gents. Thank you for taking my questions. Just, obviously sticking to two. The first one, in terms of the comments on the tightness in the paper market, I just wondered, are you at the point yet where you're seeing this impacting, you know, non-integrated players, and could it be a source of market share gain, for you in the near term? And just second question, just in terms of, you know, you highlighted the demand environment spreading to other sectors. But if you think about e-commerce, I guess, has there been any shift in Q1 this year that might give you an idea, you know, how much of the demand last year might have been exceptional versus how much might be retained going forward, just in e-commerce alone, if that makes sense?

Anthony Smurfit (CEO)

Yeah, I'll give that question, the latter question to Ken. But on the tightness in the market, is it impacting? Yeah, as we said in the statement, the answer is yes. I mean, we have many customers all over the world coming to us as the supplier of choice because we're able to. We are in a sold-out position at the moment. So, it's very difficult for us to take new volume. Obviously, we do so selectively and with the customers that are going to be with us for the long term. We're not interested in taking... solving somebody else's problems for the next three or four months and then reverting to norm. We are interested in developing long-term relationships with our customer base.

You know, if we help people out at this time, we would hope that they would recognize that, and we would ask them to recognize that and work with us for a longer period of time, which is happening on many different, in all countries, I would say, to some extent. Some more than others, depending on how the paper market is in that particular country, but it's happening everywhere. I think, you know, to give an example, in Mexico, our largest customer has just awarded us, you know, a huge amount of new business because of those dynamics that you have said and the quality and service that we're able to offer to them.

So, you know, I think it's absolutely true. You know, sometimes we look at bottom slicing right now because, you know, at the end of the day, you know, we would rather work with certain customers than some others, sometimes. But overall, I would say the statement is true and ever more so as we've gone into the second quarter, as we sit here. Ken, do you want to take this, the second question?

Ken Bowles (CFO)

Yeah, sure. Morning, Kevin. I suppose the short answer, Kevin, is no. I suppose part of that's down to the comp, what you like, is that if you consider kind of Q1 2020 was, broadly speaking, a pre-pandemic quarter. So, you probably have to wait a while to see what the relative trends around the e-commerce quarter on quarter as we kind of move through 2021. I suppose we're not seeing it. You know, to kind of trail it out a bit, you know, if we do begin to see it, what might it mean? Well, I suppose it means that economies are opening up generally. We'll probably start to see packaging consumed back in the environments that were pre-pandemic, you know, on-trade, hospitality, hotels, through the airlines, aviation.

So I'd imagine, you know, the initial shift would be a kind of a rebalancing, which in theory should help collection rates, so I suppose the answer, no, not necessarily seeing a shift away or back from e-commerce as we see it now, and when we do, I'd imagine more rebalancing than any kind of, you know, structural big shift.

Kevin Fogarty (Analyst)

Great. Thanks for that, guys. Very helpful. Thank you.

Anthony Smurfit (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Cole Hathorn from Jefferies. Please go ahead. Your line is open.

Cole Hathorn (Analyst)

Morning, Tony. Morning, Ken. Wonder if you can just give us a little bit more color around the box price increases that you're trying to put through to recover the cost inflation. I know historically, over the last increase cycle, you did kind of 8%-10% called out, and then I suppose went down about 8% on the downturn. I was just wondering if there's any number that you can call out of what you're targeting, 'cause the paper price increases have been, you know, relative or potentially even higher if we get another 50 EUR a ton in May, June. Is the first question. And then the second question is just around the commercial negotiations for those box price increases.

It's a good situation to be in when demand is good, inventory levels are tight, to be arguing for higher box prices. I was just hoping you could give a little bit more color on how that box price negotiations are progressing, because it is quite a fair chunk to be pushing pricing higher at this stage. Thank you.

Anthony Smurfit (CEO)

Cole, I'll take the second piece, and then I'll ask.

Cole Hathorn (Analyst)

All right

Anthony Smurfit (CEO)

... Ken to take the first. I mean, basically, as I said earlier, the reality is, you know, we are getting box prices up. We got them up in the first quarter, we're gonna get them up in the second quarter, and we'll get them up more in the third and fourth quarter, and even into quarter one, based upon some customers we have. And the amount is obviously different to every customer, depending on the kind of contract that they have, depending on whether it's point to point or whether it's a weighted average. And it's going, as you would expect, it's going well. I mean, you know, it, it's not just, as I said earlier, it's not just our materials that's moving up, it's all materials are moving up.

In a sense, cost inflation is there for us, and the products that we buy, whether it's wastepaper, chemicals, starch, anything that we buy, our costs are going up, and we don't really have a choice but to accept them. Otherwise, we won't get the product and the tightness of the security of supply issue that we need, and it's the same for us with our customers, so there's, I don't want to say no issue, there's always issues, but you know, it is, it's a matter of fact rather than a matter of conjecture.

Ken Bowles (CFO)

Morning, Cole. It won't surprise you to hear me say that I'm not gonna tell you what we're kind of front-leading on box price increases with our customers, 'cause clearly, that's commercially sensitive, and in reality, we'll tell you how we did when we're through it. I suppose to step back from the piece though, and you're right to focus on container board, because a lot of the chatter tends to be around OCC, but you know, people kind of forget the trajectory of paper in the same kind of timeframe from last September. You know, we're looking at kind of a recycle of 190 from the low, kraftliner of 140, and in reality, that's the platform for a negotiation around box price increase with our customers.

Clearly, the environment in the platform is good, given the demand backdrop, plus tightness of supply. Plus, I think, you know, coming out of 2020 and what our customers have seen around our expertise, around security of supply in very difficult environments and how we serve them. So, you know, the platform is very good in that respect. And then I suppose I'd probably point back to exactly where you started, which is our skill and experience the last time out. So we clearly have an imperative, which is to recover those costs, because that's the system which we operate. We operate a system of box plants that operate as profit centers.

You know, I think it's fair to say that the system has started to do what it needs to do, and as Tony pointed out earlier on, as we progress through the year, we'll see that continued progression as we get, you know, more into the second half of the year, if you like, rather than the second quarter.

Anthony Smurfit (CEO)

Thanks, Cole.

Cole Hathorn (Analyst)

Thank you.

Operator (participant)

Thank you. Our next question come from the line of Mikael Doepel from UBS. Please go ahead, your line is open.

Mikael Doepel (Analyst)

Thank you. Good morning, gentlemen. Just one more question here in terms of of demand heading into Q2. Now, obviously, we've seen a very strong first quarter, with volumes up quite a lot, and obviously in Q2, there is the comparable number is distorted by the pandemic, of course, and the lockdowns then. But on an underlying basis, what kind of demand trends do you see now? Do you see, you know, within your end users, do you see industrial picking up? Do you see, you know, something within the FMCG changing in any way? If you could just, you know, talk a bit about what you're seeing there, and also maybe if you have anything you can say about the second half and expectations, that would be great. Thanks.

Anthony Smurfit (CEO)

Yeah, I think. Thanks, Mikael. I think demand trends are, as you say, we've got very soft comparisons in Q2 versus last year. We see full order books in April. We see full order books in May. Obviously, June, it's a bit early. We don't anticipate anything negative happening. Obviously, there's a pandemic out there, and it's not going away, but and vaccinations are too slow for us all. But, I think that, you know, we don't anticipate any of the trends that we've seen over the last year and a half or so to be slowed down in any way. Comparators will get more difficult as you go through to Q3 and Q4 versus last year.

And we'll just have to see how those pan out. But you know, paper stocks all over the world are empty. You know, you cannot get paper literally. We had one factory yesterday which was taking some small amounts of American tons, and because of container shortage, those tons did not arrive. And that's not just for us; that's for the whole of the Italian market that is gonna miss tons for a month from America because there's no containers. So, these kinds of disruptions are out there, and so the paper situation is going to certainly remain tight as we can see it going forward for a considerable period of time. Overall, I think the trend, there's no reason to have any negativity on demand trends.

But you know, like, obviously, as I said on CNBC this morning, I do feel that with the amount of stimulus that's been put into the world, especially for our Latin American region, frankly, the amount of stimulus that is going to middle income and lower income pockets, which then translates into repatriations of monies home to their families in the Americas, should lead to a very, very strong demand environment across the board. But you know, that's obviously yet to be seen.

Mikael Doepel (Analyst)

Got it. Thank you very much.

Anthony Smurfit (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Ewan McGeoch from Berenberg. Please go ahead. Your line is open.

Ewan McGeoch (Analyst)

Yeah. Hi, both. Well done on a very good performance today. I guess I just have two quick questions for me, given most have already been asked. I guess, thinking about the sort of carbon price and how that impacts your business, because clearly, that's also been a rising cost. I guess, how do you manage that and the knock-on effect to energy costs? And any color around, I guess, energy cost inflation this year. And then secondly, thinking about longer term, you know, America is doing very strongly. As a proportion of the overall group, where do you think you'll-- that will get to over time? And do you see that being, you know, 30, 40% of earnings, and then that way you'll be comfortable? Or do you think you'll need to grow Europe a bit more in contrast?

Anthony Smurfit (CEO)

To the second, I'll let Ken answer the first question 'cause he's an expert on energy and CO2 pricing. But I think for the first, you know, we don't really have a set target for that, to be honest with you. I mean, you know, we just see opportunities, really, as I say, in practically all regions. And we go to where those opportunities pay back the quickest. And some of them, you know, it's really also a question of the ability of our people to capital deploy and keep the business running at the same time. You know, we can't lose sight of the fact that we're running a business for 65,000 customers, and if we become only doing capital, then we might lose focus. So, you've got to balance everything.

So, I don't really have, and I don't think we, as a board, as a company, and nor do Ken or myself or the rest of the management team, really have a target as to where do we think Latin America would end up. You know, there are equally as many opportunities in Europe. There's a couple of big projects that we need to think about, to David O'Brien's question earlier with regard to paper. And really, it's a question of, you know, how we would fit those in, in the years ahead. But they're not short-term issues, they're sort of more medium-term issues. How we would fit them into the capital program, and that might distort earnings once those are in and up and running, in one region versus another.

But overall, I would say we don't really have a target, but, you know, probably over time, the Americas will grow because there just... There's probably more things to be done and more new plants to be built, but I'd say a little bit. Ken, want to take a question more?

Ken Bowles (CFO)

Yeah, sure.

Anthony Smurfit (CEO)

Okay.

Ken Bowles (CFO)

Hey, Owen. I'll keep it simple and won't go into a thesis on CO2 pricing. But quite simply, energy, I mean, energy year on year for quarter one is a small headwind, maybe EUR 5-7 million. I think for the year, though, I think you see that headwind grow a piece. At the moment, I think we'd see that somewhere in the space of kind of 45-50 for the full year. It's kind of how it's sitting at the moment.

Ewan McGeoch (Analyst)

Yeah. Great. Thank you very much.

Anthony Smurfit (CEO)

I think, don't we have to wrap up now, Ken, because of the AGM? We've got quite some time for one more.

Ken Bowles (CFO)

I think we've one more question to go, Tony, and that's it then.

Anthony Smurfit (CEO)

Okay.

Ken Bowles (CFO)

No more of that. Yeah.

Anthony Smurfit (CEO)

Okay.

Operator (participant)

Cool. Our next question comes from the line of Sam Bland from J.P. Morgan. Please go ahead. Your line is open.

Sam Bland (Analyst)

Yeah, morning. It's only really one question. Just on this Americas business, just, you know, it's particularly strong. I just wondered if you could talk about what's going on there. Is it, you know, strong volumes, but maybe not quite as much on cost inflation, or is there anything else, particularly, is there anything that's extraordinary or non-repeatable in the Q1 performance in the Americas as we move through the rest of the year? Thanks.

Anthony Smurfit (CEO)

Yeah. I think, Sam, we've got a very, very good business there. We've been investing behind it. You know, obviously, the demand drops through to the bottom line if we've been doing some smart investments, and that has happened. We're desperately short of paper in the Americas because we're a big net buyer, and, you know, we are really struggling. So, we see other opportunities to grow our paper tonnage down there, which we will take over the next three or four years. It just takes that long, unfortunately. But, you know, I suppose they've had a...

You know, with that negative situation there in Texas, and that kept a lid on the wastepaper price a little bit with the freeze in Texas, but it's also created further problems with paper production and paper availability. But there's nothing really specific other than saying that we have tremendous opportunities. As I mentioned, you know, in one of our Mexican businesses, our largest customers awarded us, you know, significantly new tonnage and growth over a long period of time to develop with them. And so, we're putting urgently as much capital as we can possibly do to meet that demand, but it just takes a while to get the capital into the system.

Sam Bland (Analyst)

Fine. Okay, thank you.

Anthony Smurfit (CEO)

Thank you very much. Operator, I'm gonna wrap up now because you know, we do have an annual general meeting to get to. But I would like to thank everybody for taking the time to be with us today. You know, as I said earlier, you know, while of course there is risk, you know, the industry conditions are as good as I've really seen in my career and most of my colleagues have seen. We've never been in better shape, and we have structured improvements made to our business that are already implemented, but you know, as I've talked about today, we have a lot more to do.

I think the equity raise that we've done recently has really helped support this development and really enhance from a position of enhanced financial strength. We'll go ahead and improve our offering and our structure even more in the years ahead. I want to thank you all for participating in the call. We're excited about the future. We're excited where we sit right now, and I think we have a great ability to capitalize on the growth drivers in this industry, which is, you know, a very good industry overall. Thank you all and then thank you all. I'd like to take the opportunity to thank, on behalf of the board, all of our employees and customers and suppliers for their efforts so far in 2021.

And thank you for joining us on this call. So have a good weekend, everybody. God bless. Bye-bye.