Ladies and gentlemen, hello and welcome to the Smurfit Kappa 2022 half-year results call. Throughout the call, all participants will be in a listen-only mode, and afterwards will be a question and answer session. Just to remind you that this conference call is being recorded. Today, I am pleased to present Mr. Tony Smurfit, Group CEO. Please go ahead with your meeting.
Thank you, Sharon, and good morning, ladies and gentlemen, and thank you for joining us today on our half year results. I'm delighted that Ken Bowles, our CFO, joins me today on this call. Before we get started, I refer to the disclaimer concerning future expectations listed on the slide above. As you will have seen today, our results, we'll go through them shortly, but I would like to remind you all of our vision, which we have been evolving over the last number of years. This vision guides our approach to our business and our culture, and I think we have demonstrated to you all that we are truly living this vision in Smurfit Kappa. Turning the page, as you'll have seen from this morning's release, we have delivered a very strong performance against all measures.
We've talked to you before about the transformation of our business with quality at the center of that journey. I believe our reported performance very much reflects that. Moreover, some years back, we set ourselves an objective to deliver the type of performance that we are now delivering, earnings growth of some 50%, an EBITDA margin of 18.4%, and a return on capital employed of over 19%, all the while continuing to invest significantly behind customer growth and the many internal growth, efficiency, and sustainability opportunities presented throughout our business. Ken will take you through the detailed performance, but for me, the core message is that the steps that we have taken, and of course, continue to take over the last number of years, are driving financial and operational outperformance. Those steps include building on our established competitive strengths as outlined on this slide 5.
We are an acknowledged leader in sustainability in our sector. Our integrated business model has proven to be effective through the decades. Smurfit Kappa typically has a number one or number two market position in each of the markets in which we operate. We have proven to be a disciplined and effective capital allocator, which is part of the DNA of the company. We continue to deploy significant capital to support our customers and to optimize our system. In Smurfit Kappa, we've built an unparalleled knowledge-based suite of applications to ensure our customers have the most effective packaging solutions. It is these strengths, I believe, that has allowed us to both live and to deliver our vision, a vision that you all know is shared throughout Smurfit Kappa Group. Turning to the next slide, I continue to talk about the quality and importance of our people.
I will not apologize for this. Our people are exceptional, with loyalty, integrity, and respect as the core values that drive the Smurfit Kappa team. Our culture is performance-led, but it also has as its core, ownership and autonomy. We in Smurfit Kappa are investing heavily over many years in our people and their development. This investment is a cornerstone of the continued success of the company, both in the past and into the future. Onto the next slide, you've often heard us talk about our integrated model. This model, as I said, works for decades for Smurfit Kappa and its stakeholders, including customers and shareholders. Integration inherently means reduced volatility with consistency and quality as the power of innovation is harnessed by our box business and the efficiency of our mill system is maximized.
The integrated model is good for customers in all markets, as it ensures security of supply, delivery in a world of sustainability and ease of chain of custody. While I've always said that success is never a straight line, our focus is and continues to be on building a quality business to deliver and to support long-term growth and to ensure we meet our customers' expectations. Over the last 18 months, we have approved some EUR 2 billion of capital to improve our operating efficiency and to support customers' growth. We continue to see significant and growing opportunities across our markets. Corrugated remains the most environmentally friendly transport and merchandising medium in the marketplace. A huge differentiating factor for Smurfit Kappa is our business applications. No other company in our sector can offer the solutions that Smurfit Kappa provides through these applications.
We anticipate and we solve our customers' pain, whatever that may be, whether it's supply chain issues, design, sustainability, or merchandising. The corrugated box business has changed remarkably over the years, and our use of our extensive geographic network, our 29 global experience centers, our over 1,000 designers, allows the continuous transfer of best practice and innovation capabilities for the benefit of all of our customers. Our results clearly demonstrate these benefits also for SKG. We continue to make significant progress on achieving our sustainability targets as outlined in our 15th Sustainable Development Report. Compared to the baseline in 2005, the group has reduced its emissions intensity by 41% by the end of 2021, which is another significant step towards the group's net zero target.
Other highlights from 2021 SDR include the reduction in water consumption of over 6% year-on-year, and a reduction in waste to landfill intensity of 7% year-on-year. I'm delighted that in February of this year that SKG was recognized as a top ESG performer by Sustainalytics. By committing to our sustainability targets, the group's Better Planet Packaging portfolio of sustainable products will continue to help our customers deliver on their own sustainability goals. Every day in Smurfit Kappa, we are working on helping our customers use more sustainable packaging, helping them with the changing demands of consumers, helping them to market their products to sell more, and to help them take advantage of the e-commerce developments. The next few slides provide just a few simple illustrations out of the many thousands we have developed of how our packaging is helping our customers.
Above, we've helped a large customer move out of non-branded, difficult to clean and unsustainable plastic trays into a branded, renewable and recyclable corrugated alternative. Another example is with a large sanitary ware company, where the removal of EPS with a fully paper-based corrugated alternative eliminated both waste and unsustainable packaging, which EPS certainly is. This area of opportunity is especially pronounced for our Hexacomb business, which has been growing strongly. The importance of brand perception has led to an evolution in the way our customers are viewed by the consumer. There is a need for our customers, pushed by the consumer, and indeed legislation, to become more green and more innovative in providing paper-based packaging solutions. As mentioned, our innovation capabilities solve that problem. Just a couple of examples are our Safe & Closed detergent boxes or our green portfolio for fruit and vegetables.
We're actively working with many of our customers on the development of paper-based product boxes, which are required to be moved away from plastic through legislation across Europe. This is occurring across all the regions in which we operate. Today, corrugated is a marketing medium for our customers. The days of decanting products in supermarkets have passed due to labor cost and shortages of labor. As such, our product is in many ways, and in many instances, the primary display for customers. With advancements in technology and digital print, where we continue to invest, and with continued development in print quality, and of course, through our knowledge in development centers, demand from our customers for solutions like this can be fulfilled.
These examples show an award-winning display for a chocolate producer in Sweden, a corrugated solution for a homeware producer, and similarly, a corrugated solution for a crisp manufacturer in the UK. Our solutions obviously promote our customers' products in a very impactful manner. Again, corrugated has won out. This is a further illustration of why our investments towards graphics and big data is winning for our customers and of course, for Smurfit Kappa. A lot has been said about e-commerce and the potential to slow down. In the first half of the year, though, in Smurfit Kappa, we've seen significant growth in many of our countries. This has been done through innovation and the continuing need for customers to move online in practically all territories in which we operate. The above examples are just minor illustrations of the need of many of our customers' needs.
I was recently in Colombia, where the major flower grower commented, as he is moving more and more directly to the consumer, that we in Smurfit Kappa sell happiness. I do think that might be a slight stretch, but at least I do know that we are making this growing online customer happy, and therefore his customers happy. With that, I will hand you over to Ken, who will take you through the financials.
Thank you, Tony. Good morning, everyone, and thank you for taking the time to join us. As Tony has outlined, and I think you can see anyway, the performance is yet another illustration of the dedication and commitment of everyone in Smurfit Kappa. We are pleased to deliver significant year-on-year improvement against almost all key performance measures for the first half of 2022. As Tony also mentioned, this performance is a result of the many actions we have taken over the years. It illustrates the benefits of the group's integrated and resilient business model, our geographic diversity, our performance-led culture, and our continued investment to meet long-term customer growth.
It is also important to remember that these results have been delivered against the backdrop of a global pandemic that continues to disrupt our daily lives, significant supply chain problems that have not abated, and the ongoing conflict in Ukraine. The performance has also been delivered in the face of rising input costs, principally, but not limited to energy. We continue to overcome these hurdles as evidenced in the results today. Let's look at the past performance in a little more detail. Looking to the group results on slide 17 and that delivery. Group revenue is approximately EUR 6.4 billion for the first half of 2022, up 36% on the first half of 2021, or 32% on an underlying basis. With the rise reflecting box price recovery and volume growth that was in line with our expectations.
Group EBITDA was up 50% to EUR 1,174 million. The group EBITDA margin improved by 1.7 percentage points from 16.7% in the first half of 2021 to 18.4%. The result reflects the resilience of the group's integrated model, box price recovery and the benefits of our capital spend program, partly offset by much higher year-on-year energy, recovered fiber, labor, distribution, and other raw material costs. EPS is up 85% in the first half of 2022 to EUR 2.219 per share, and the group's return on capital employed increased from 14.8% for the first six months of 2021 to 19.3% for the first six months of 2022.
Free cash flow for the first half was a net outflow of EUR 28 billion, compared to a net inflow of EUR 117 billion in the first half of 2021. Although EBITDA was up significantly year-on-year for the first six months, so too was CapEx expenditure and working capital. The management of working capital, as ever, remains a key focus for us, and working capital as a percentage of sales of 9.7% of June 2022 is expected to fall within our guided 7%-8% range by the end of the year. As noted in the press release, on the first of April, the group announced its decision to exit the Russian market in an orderly manner. While this process is ongoing, we hope to conclude it by the end of the year.
Finally, reflecting the confidence both we and the board have in the group, and indeed the strength and resilience of the cash flows and our future prospects, we are pleased to announce an 8% increase in the interim dividend to EUR 0.316 per share. I'm turning now to our European operations on slide 18 and their performance. EBITDA increased by 57% to EUR 926 million, primarily as a result of box price recovery. The EBITDA margin was 18.7%, up from 16.2% from the same period in 2021, delivered against the backdrop of supply chain disruption and significant cost inflation. Corrugated demand was up approximately 1% in the first half of 2022 against very strong comparatives. Corrugated pricing has continued to improve in line with our expectations, with continued progression into the second half.
Finally, our European business continued to build on its strong operating platform in the first half, with a number of projects across our paper and corrugated divisions. In our paper division, we announced the completion of a large-scale sustainability project at our Zülpich mill in Germany that will reduce CO2 annually by 55,000 tons, a 2% reduction for the group. We have also approved projects in our Facture, Mold, and Roermond mills that will reduce costs, increase efficiency, and improve the group's sustainability footprint. In our corrugated division, we approved projects across a number of our core European markets, and the group also announced an investment in its first Moroccan facility and the acquisition of a corrugated business in the UK. Now turning to the Americas on slide 19.
In the Americas, EBITDA increased by 29% in the first half of 2021 to EUR 271 million. The EBITDA margin was 18.8% in the first half of 2022 versus 20.4% in the first half of 2021. Colombia, Mexico, and the US accounted for 80% of the region's earnings, with strong performances in all three countries. Box demand for the first half was up 8% year on year or 5% on an underlying basis. In April, the group announced the acquisition of Argencor, a corrugated business in Argentina, and we've also recently approved expansion and sustainability focused projects in our paper, corrugated, and sack businesses in North, Central, and South America.
Our Better Planet Packaging initiative, our unique Pan America sales offering, together with our Experience Center network and coupled with the benefits derived from our investments in the region in recent years, continue to deliver growth for both SKG and our customers in the region. Turning now to slide 20, and you'll see a number of ways that Smurfit Kappa is positioned to continue to overcome the unprecedented energy cost inflation I mentioned earlier. Notwithstanding the fact that box pricing has needed to reflect rising energy prices, SKG's unique position in the market ensures that we continue to successfully navigate through these cost pressures, and you can see that in the performance I outlined earlier.
For those of you on the call today who are maybe less familiar with our business, it may be a surprise to learn that almost half of our fuel consumption across all operations comes from biofuels and not fossil fuels. While the topic generally centers around supply and German production, it's important to remember that we have a network of recycled paper mills, not only in Germany, which accounts for maybe less than, slightly less than 20% of our total production that might be affected, and of which 10% could be switched to alternative fuels. We also have a mill system in the Czech Republic, France, Italy, the Netherlands, Spain, Serbia, and the UK, territories which will be largely unaffected in supply terms. This is alongside our Kraftliner production in Austria, France, and Sweden.
As you know, we are the number one Kraftliner producer in Europe, producing over 1.6 million tons of containerboard each year from a mill system that is largely energy self-sufficient. Our integrated model and centralized logistics systems means that we can not only maintain security of supply of this premium paper grade, but we can effectively carousel the paper around the network to ensure that our box plants stay supplied. Another important factor has been our geographic diversity. Not only do we operate in 23 countries across Europe, one quarter of our business is spread across 13 countries in the Americas, a region that has been largely insulated from the energy cost inflation we see here in Europe.
The group has also invested over EUR 900 million since 2005 directly in energy efficiency improvements. This means that we have accelerated our transition to renewables and have ensured that we maintain a world-class asset base with our plant and machinery at the lower end of the cost curve in our sector, giving us a real competitive advantage at a time when high energy prices are putting paper makers under pressure. At Smurfit Kappa, we've also operated a prudent and conservative hedging policy for a number of years. This policy has continued to protect the group from exposure to the exceptional energy price increases that we have witnessed to date. At the end of June, we have hedged over 80% of our energy needs for 2022, with partial hedge cover in line with our policy also in place for 2023 and 2024.
Lastly, an important reminder from COVID that Smurfit Kappa was classified globally as a provider of an essential service. Paper-based packaging is essential for global supply chains, which are already under enormous pressure. It's also vital for our 65,000 customers, the majority of whom are in essential sectors such as FMCG, pharmaceutical, and healthcare. Sectors directly linked to the end consumer. Slide 21 gives you an overview on capital allocation. The performance both Tony and I have spoken about today has been built on the foundations of a capital allocation framework that is integral to our success. Given the uncertainty and volatility of the world around us, we thought it might be worthwhile taking a moment and reminding you of the key features of each of our capital allocation priorities.
As you know, our aim is to provide a fair and balanced allocation of capital across all our stakeholder groups. It's a return-focused allocation, which as you can see, continues to be a key underpin to our success. We believe capital allocated to internal projects is key to the continued growth and performance of the business. We continue to see multiple opportunities around us as the world reopens and our customers begin to focus on their priorities around areas such as sustainable packaging. As you know, our current plan will see Smurfit Kappa invest circa EUR 1 billion per annum for the next couple of years. That capital we deploy internally has a number of goals. Providing capacity to support our customers' growth, providing capacity to meet the needs for sustainable packaging products, and investing in optimization and cost takeout to continue to manage our cost base.
You should also remember that when we build our plans, we make them flexible and agile with the ability to react quickly as the market does. This can be seen in our current performance as we were able to accelerate investments during the last couple of years of high growth. This will remain the case as we deploy our capital on our current investment plan. Turning to slide 23 in M&A. Before we take a bit to talk about M&A specifically, let's remember that SKG is already a group with significant global scale and reach. We are a global player, something which is again a point of differentiation for our customers.
We have spent in excess of EUR 2 billion since 2012 on acquisitions, which have included our return to the U.S. and our subsequent expansion, the building of our Balkan region with acquisitions in Greece, Serbia, and Bulgaria. Expansion in Central America. Box plants across numerous geographies such as Argentina, France, U.K., Mexico, Spain, and our first entries into Brazil, Peru, and Morocco. The purchase of the world-class Verzuolo paper mill, which together have strengthened both integration and security of supply. Our expansion has enabled us to support our customers' growth and will continue to do so. Equally, we will remain disciplined when it comes to M&A. It is always benchmarked against any other alternatives, buy versus build, for example. As always, we have a number of projects in the pipeline focused on building out our strong geographic network or further enhancing our product portfolio.
The dividend is a key pillar of our thinking around capital allocation, and slide 24 is very much an illustration of that. The clearest example of this was in 2020, where we were one of the few to recognize the importance of the dividend to our shareholders and paid in full. We've said it before, but I will reiterate it. The dividend is an input to our capital allocation framework rather than an output. Our policy is progressive and aims to ensure that the allocation of cash flows to the dividend is proportionate to other forms of allocated capital over the long term. SKG is a highly cash-generative business, and with the integrated model, results in less volatility in those cash flows.
As a sign of confidence in both those cash flows and our future prospects, we are announcing an 8% increase in our interim dividend to EUR 0.316 per share. Finally, our balance sheet, which has significant financial flexibility and firepower. Again, slide 25 is a perfect illustration of the work we have done here. If you think about all the capital allocations to internal investment, M&A, and dividend, we've also managed to reduce our leverage. We have no near-term maturities and an average coupon of 2.86%. We also have the lowest cost funding in our sector with the 50 basis points 8-year and 1% 12-year green bonds we issued last September. A clear example of not only the strength of the credit of SKG, but the strength of our circular business model.
With a net debt to EBITDA of 1.6 times, the strength of the group's balance sheet continues to secure long-term strategic flexibility and the group remains strongly positioned within its BBB-, BBB-, Baa3 investment-grade credit rating. Thank you all for your time, and I'll now hand you back to Tony for some concluding remarks.
Thank you, Ken. The continuing development of our business, our people, our culture, and our vision is an immense source of pride for me. Over the last number of years, we have capitalized on customer growth opportunities and will continue to invest significantly behind those opportunities. Equally, the many acquisitions across our platform have and will continue to considerably strengthen our customer offering. I'm delighted with how those businesses have integrated with and in our system, delivering in many instances, exceeding expected returns. A key point to understand Smurfit Kappa's competitive strength is our geographic business. With businesses in 36 countries and leading market positions, primarily oriented to FMCG and the strong secular drivers of sustainable packaging and e-commerce. Geographic balance provides us with multiple opportunities across different markets at different times, and is a meaningful contributor to both today's performance and tomorrow's prospects.
While of course there are current global uncertainties that we have not seen in recent history, we remain and are very confident about our future prospects. I have no doubt that our first half performance has set a strong foundation for the remainder of 2022 and beyond. As I mentioned earlier, and was said by one of our largest customers in Colombia last week, we do bring happiness in Smurfit Kappa. That said, although we are happy, we are never, ever satisfied. My concluding comments very much reflect the points made at the outset. The steps that we have taken and continue to take are delivering financial and operational outperformance. At the heart of this is our disciplined and effective capital allocation decision-making process.
As significant shareholders in the business, which all the management team are, we treat capital as our own, with some EUR 7.3 billion deployed since 2012. That process has contributed to a 460 basis point increase in EBITDA margin and a 730 basis point increase in return on capital employed. A leverage multiple of 1.6x today and an investment grade balance sheet provides us with significant financial and strategic flexibility, and our dividends have grown substantially, as I believe Ken has shown you just a few minutes ago. Whether expressed in terms of performance or prospects, the Smurfit Kappa business today is unrecognizable from years past. Quite simply, it is a better, stronger and higher quality business.
I thank you all for your attention for both Ken and myself, and now we are very happy to take your questions about our results. Thank you all.
Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. Once again, if you would like to ask a question, please press star one and one on your telephone keypad. Please stand by while we compile the Q&A roster. We will take our first question. Please stand by. Your first question today comes from Lars Kjellberg from Credit Suisse. Please go ahead. Your line is open.
Good morning and congrats on a very strong result. I have three questions, if I may. Starting with just volumes. Can you share with us the second quarter volumes in the two geographies? And also, when you're talking about you know, going into second half, how do you see these volumes moving forward? You're also talking about the opportunities for growth in your outlook statement, talking about sustainable and innovative packaging. Can you share with us what that really means, how you see this driving your volumes versus market? And the final point, Ken, if you can clarify a bit on the energy side, you called out, of course, your hedge levels, et cetera.
How should we think about energy costs, assuming we're steady where we are today in terms of market prices, whatever that is, but looking into 2023. We could get some sort of sense of the underlying cost inflation going into that year. That'd be really helpful. Thank you.
Okay. Lars, I'll take your first question and let Ken take your second one and third. Basically, you know, if you take volume one of the things that we are seeing is continued volume growth in the Americas. We have about 8% and without acquisitions, about 5% in the second half, second quarter. And that continues to be strong against very high comparisons, about 7% growth last year. So we see good growth in the Americas against a massive increase of 14.5% in Q2 last year. We see basically flat growth in the second quarter, and that's really a mix of different countries. Some countries are suffering with volume.
I would say specifically, and I think I called this out on the first quarter call that the U.K. has had a very slow first half of the year or first quarter and now second quarter. That is, of course, related to things that you'll be well aware of, such as Brexit and such as supply chain disruption. What we have seen is some slowdown in our German market, which again, will be affected by energy, consumer confidence, and also the supply chain issues during the second quarter. Equally, we see, you know, pickups in other markets, such as the Spanish market. The French market is continuing to do well. The Italian market is continuing to do well. So it's a bit like the curate's egg in many respects.
You know, there are good points and bad points, but clearly the UK and Germany, which are big markets for us, will drag us down a little bit on the volume side as well as still reporting Russia because we still own it. And clearly there's been some very significant volume drops in that region. So that does have an influence. Overall, you know, one of the interesting things that our UK manager said to me a couple of days ago was the fact that he has a bit of capacity now. He has actually the time to work on many of the sustainability projects which we frankly couldn't work on for the last couple of years because we had no capacity. So there's a silver lining to everything.
You know, if you take last year when we grew at 14.5%, we were working Saturdays and Sundays. Yes, we put in a bit of capacity, but if we had grown very significantly this year again, we would not have been able to meet the capacity needs. We're actually more efficient this year than we were last year. That in some way contributes to the result that we have. What we're seeing right now, if this is your second question, is we're seeing basically a continuation of that trend. There's nothing dramatic at the moment. But you know it is still we would. I think the third quarter we grew at 7.5% in Europe and similarly in the Americas. We're seeing a similar sort of trend as we go into the third quarter that we saw in the second quarter, with some of the bigger industrial economies still suffering. As I say, it's still a little early to say that. The other economies which we would expect, such as Spain, Italy, France, where there's more tourism benefiting from that. I don't know if you want to add anything to that, Ken.
I suppose, you know, Lars, maybe we spoke about it in a few quarters where we, you know, you asked the same question. We said, look, people, we haven't had the space and time to get on those kind of projects. I think some of the examples, UK is a clear example of, you know, maybe one of the slight upsides to volumes going back is a little bit to more normalized levels is that people can begin to focus on those kind of projects. Clearly regulation is playing a part, particularly around things like green punnet. There is that ever-increasing shift towards where people need to start making clearer decisions and where they stand on.
Remember, you know, when you think about our customers, their biggest impact from a Scope emissions perspective is Scope 3, rather than say Scope 1 or 2, which is more us. In reality, when they look back into the supply chain we will be one of the ones who can give them the biggest benefit around that kind of Scope 3 reduction emissions target, which a lot will have out to 2030 and beyond. You know, and that deadline isn't moving for anybody. There clearly is a need and a willingness for them to move towards it also. I think that momentum we still see very much coming.
Look, you know, all through COVID, all through 2021 now, we're very engaged and our customers feel very engaged on it. I suppose you look back to the EU Green Week as well and the participation we have from customers at that. There clearly is appetite to find solutions for their supply chain problems around emissions. On energy, I suppose, Lars, I'll get this by saying if you asked me in 10 minutes, I'd probably give you a different answer the way the markets are moving at the moment. I think we would have guided at the first quarter, we would have said energy for 2022 was probably, you know, EUR 500-600 million headwind on last year. That's probably about, you know, EUR 650-700 as we sit here today.
Clearly the work we've done around box pricing and everything else over the first six months has put us in a great position to be able to. As you look forward to 2023, clearly, you know, it's very difficult to kind of pin a number on where you might get to. Will there be a headwind? You'd have to say yes, as we sit here today. Is that in the order of maybe somewhere between EUR 250 and EUR 300? Probably. But the reality is, if that's the space where we are, everybody's either in at least that space or incrementally worse, given that we already have hedging going into 2022-2023 and 2024.
The reality is, if I think it's fair to say that if energy prices continue at these kind of levels, will be a necessity either for downtime because it becomes uneconomic for business to operate at these kind of levels or further price increase to offset the energy costs. You know, the. It's not a square gap issue, it's a, I think it's a total industrial production issue, let alone a paper industry issue.
Thanks, Lars.
Thank you. Thank you.
Thank you. We will now take our next question. Please stand by. Your next question comes from David O'Brien from Goodbody. Please go ahead. Your line is open.
Good morning. Thanks for taking my questions. Three from me, please. Firstly, box price momentum, you know, exceptionally strong again during the period. Just wondering if you could give us any color, if there's any variance in the experience between the index stuff is going straight through, but any change in behaviors about the free negotiators is still very tight. There's still no pushback. Just how the experience has gone on that front. Sorry to bring you back to energy again, but you know, I guess if we look at the level of hedging you have in, what do you estimate now? I understand it's a moving feast. What do you estimate that saved you or will save you in 2022 in terms of cost?
If we were to assume the current price at spot persists, could you give us some color on the level of hedging you have in place for 2023? Just touching on the points you brought up, Ken, in terms of people taking commercial downtime. If they don't get pricing through, as one of the largest buyers of Testliner in Europe, are you guys already seeing some of the independents pushing for material increases? Do you think inventory levels are sufficiently low for them to stick in the market?
I'll take 1 and 3, and then Ken will take energy. He's become an expert on the energy. He knows all things about energy over the last 6 months. With regard to box price and momentum, you know, as we said in the latter part of last year that we would be pushing through price increases as normal. Clearly, everybody, us less than most, I would say, but everybody got caught out by the momentum of inflation. We have adjusted all, obviously, of our contracts as they become due to reflect inflation pressures out there. We have been very active in pushing box prices through the first half of the year to basically recover inflation and costs and of course paper price.
You know what stands out for Smurfit Kappa is the areas that I talked about, David, which is our innovation, our ability to work with customers to reduce their costs, and to give them security of supply. There has been no real change in the customers that we have in behavior because they frankly still see the same issues that are out there that we see, which is, you know, very difficult supply chains and very difficult situation for them to make sure that they have their products to market. I think there's no real changes there. I think that we still will have momentum of box price increases into the second half as some of the contracts that we have with customers come due during, you know, July, August, September, October.
I think there's still some momentum in box prices. With regard to customer paper, we're not really actually one of the biggest buyers anymore because Verzuolo in many respects has taken care of that. We still do buy boxes and paper, and we still do get letters from customers. As recently as one hour ago, we got a letter from one of our big suppliers to say that basically they are taking downtime in August due to the costs. We are also taking downtime in August due to costs. We understand from practically all participants that downtime has been taken, and this was due to costs that were a week ago.
Now with costs, you know, considerably higher in the last three or four days, I would imagine that many independents are contemplating more downtime in order to not produce paper that is basically, you know, sending money with every roll of paper to their customers. There will be more downtime. If prices of energy persist, there will be price increases to offset that irrespective of anything.
Morning, Dave. I suppose to kind of frame it a bit in terms of your question. As I said, we're about 80% hedged for 2022 as we stand here today. That breaks down into, for the remainder of the year, a little over 60% for quarter three and kind of mid-50s for quarter four. That's very much in line with our policy. A lot of our hedging coming into 2022 was done way before 2022. I think, and again, similar to what I said to Lars, if you ring me in 10 minutes, I'd probably give you a different answer the way energy pricing at the moment.
I'd estimate that the hedging we've put in place for 2022 has probably saved us something in the order of anywhere between EUR 450 million-EUR 500 million as we sit here today. It's important to point out though that we don't base any of our pricing models around it, that the hedge price or the net price we base on the world we see around us. So it doesn't, which is why I think you see some of the outperformance. Then as we look forward to 2023, 2024, well, where we'd be very much in line with our policy as we begin that is about, you know, 20-odd% for 2023 and 20-odd% for 2024.
That would be, and again, some of those hedges, most of which we've put in way before 2022. At these levels, I mean, I think it's fair to say that, you know, it'd be very difficult to find a hedge counterparty at kind of if you woke up this morning at 200. I think it's where we'd like to be in terms of our policy as we sit here. What we do is we have a steering committee on energy who've done an incredible job, as you can see, over the last year to 18 months and continue to do so in tough markets, who help us navigate through that particular kind of cost bucket.
That's brilliant.
Thanks, Dave.
Thanks very much, guys.
Thank you. We will now take our next question. Please stand by. Your next question comes from Justin Jordan from BNP Paribas Exane. Please go ahead. Your line is open.
Thank you. Good morning, everyone. I've got two quick questions. Can we just talk about price versus cost spread? Because, you know, when I look at your Q1 EBITDA margin at a group level of 17.0%, that actually improved to 19.6% in Q2 2022. Can you just help us understand just the positive price increases that you've had in excess of cost inflation in Q2 over Q1? It's clearly demonstrating through the higher end margin. I suppose just following on from that, Ken, in your prepared remarks, you talked about continued progression in corrugated box prices in H2.
I just want to sort of delve into that a bit deeper, particularly given we've seen some softness in German container prices recently. Then secondly, just following up, I'm sorry, I know energy is the topic du jour, but, can you help us understand, you know, back in Q2 2020 at the peak of COVID lockdowns, clearly, Smurfit Kappa was deemed to be pretty much an essential service and mandated by various governments to continue producing packaging, particularly for food and beverages. Does that give you potential prioritization in a situation of gas rationing if we see that in 2022, in the second half of this year? Thank you.
On margin, Justin, I suppose it's difficult to kinda give you know, the excess box price achieved over cost base. I suppose what we do is, you know, as you know, the teams particularly go out and try and achieve as much as they can possibly do in the context of whatever relationship they're in. Look, I think it's really simple if you think about it. We've raised box prices from the low to where we are at the end of June by close on 40%, you know, 10% in Q2 over Q1. No matter how you kind of look at it's a phenomenal performance by both the teams, the various teams in Europe and indeed Laurent's teams in the Americas.
You know, and that's why, but also it's not just that, though, it's also that kind of constant focus on the cost base, the investments we make to take any cost out. You know us, we don't. It's not about looking just at the top line, what you can achieve on price. It's what you can take out in the cost line and make sure you manage that too, because that's the bit that can actually get out of control in times of growth, and we just didn't allow that to do it. I think some of the investment has allowed, as we've spoken before, to be structurally better anyway in terms of the cost base. I think you've seen some of that investment also feed through to the margin and the margin resilience.
I think it's an element of, yes, you know, pushing hard on the box price, as Tony said, but pushing hard early on the box price, I mean, from about a year ago now, but also being conscious that, you know, trying to get ahead of the problem as we see it, but also managing the cost base, because that is fundamentally what you have to do, and you can't let that get away from you. In terms of myself and Tony are kind of tossing the ball between us here and kind of pricing into the second half of the year, but there clearly is a bit to go because like as we sit here, as costs continue to rise, you really can't allow that to kinda get away from you.
Clearly, you know, indices will trigger whenever they trigger and depending on where prices go. For the freely negotiated stuff, if it's necessary, we'll go again. We certainly see a little bit more to go on box pricing as we begin the second half.
Yeah. With regard to Justin, with regard to essential service, I mean, yes, you're entirely right. Corrugated packaging was, during the pandemic, deemed as an essential service, and I think Ken mentioned that in his speech earlier on. I think that we would expect to be prioritized, but I don't think that we're not in the event of gas rationing. I think that we, the industry, would be rationed as well. I think it is obviously a massive unknown situation as to what will happen in the event that there's a lack of gas. Will we be allowed to burn brown coal again in our Zülpich mill, which is about 9% of our production in Germany?
I suspect that we will if we can get a brown coal supplier, because most of those guys have stopped the digging, but you know. Or will we bring coal from Colombia? We don't know. I mean, there's a lot of unknowns at the moment. You know, I would suspect that we will be seen as an essential service. Practically all of our box plants can continue to run, because they can shift over to oil if necessary. As Ken mentioned, about 11% of our paper production is fully exposed towards gas in Germany, where we can't actually switch over at this moment in time. Aside from that's what would be affected.
Clearly that would have a very dramatic effect on the general marketplace because the largest paper producing nation in Europe is Germany. If there was power to be stopped, while we would be happy enough that we can continue to supply our box plant and our customers, and that's what customers are actually asking us for, right now, we would say that there will be some shortages of paper in Europe in that event that gas supply is stopped to Germany.
Great.
Okay. Thank you very much, Justin.
Thank you. We'll now take our next question. Please stand by. Your next question comes from Cole Hathorn from Jefferies. Please go ahead. Your line is open.
Good morning. Thank you very much for taking my question. Just to focus on, you know, the box pricing environment, you've continued to push that through. I mean, as the European number one in boxes, how are you positioned here? I mean, if paper prices are being supported, surely your box price business must still relatively be doing very well. You know, all your customers, they don't really have an item to push back on from a cost perspective. You should be holding on to this higher box pricing environment, even if, you know, volumes are a little bit softer because you've got that cost support, which means a better profitability for your box business.
Just trying to understand, you know, how should box pricing develop this cycle, even if 2023 is soft and from a macro environment?
Well, as I said. Thanks, Cole, for the question. I mean, at the end of the day, what we've said is we still have momentum in box price increases, in July, August, and September. We would suggest that security supply is still the largest issue for our customers right now. Remember, the box, you know, unfortunately, is not the highest cost element of most of our customers' issues and having security of supply is very important for them. The most expensive box they can have is the one they don't have. Therefore, you know, we are a great provider of services to our customers. We're a great provider of innovation. We're a great provider of sustainable packaging, and that's not gonna change.
You know, I think our customers appreciate what we do for them, and we are winning business. We continue to be very comfortable in where we sit with practically all of our customers. While, you know, we don't win every bit of business, we continue to win business as I see it. I don't see the box pricing environment changing in the short term. I think obviously if paper again moves up because of energy, we will have to go back to the market again.
Equally, we may have to go for box price increases irrespective because if inflation is going to be stronger than anticipated for next year for labor costs, for starch, for transport, for everything else, then there might need to be box price increases even outside of the cost of paper. You know, it's a very fluid situation. You know, as we mentioned in the press release, we haven't seen times as volatile as this, you know, in practically all of our lifetimes. I mean, I'm sure it was like that in the early seventies, when inflation was taking off. I think we just need to continue to watch it and manage it as we've done in the past.
You know, I think we've proven that we are able to manage it, whatever's thrown at us.
Is the right way to think about Smurfit Kappa's paper mill asset base. I mean, you, Ken, yourself have brought out a few comments around, you know, EUR 900 million invested in energy projects, you know, 50% biomass fuel mix, and being in the low end of the cost curve, plus your hedges. Should we be thinking that relative to a fragmented market, I mean, if the market's taking commercial downtime, you should just be relatively better positioned. We'll be the net winner versus some of the smaller players, no matter where energy effectively goes here.
I could give you a very long answer to that, but the simple answer is yes.
Then finally, a quick one for Ken. I just missed. You called out the percentage energy hedges in the second half, and into 2023. Apologies, I just missed that.
Sorry, Cole. Morning. For the second half, we're about 60, a little over 60% hedged for Q3 and kind of 54-55% for Q4, and then call it 20% for 2023 and 2024 as we sit here today.
Thank you.
Thank you.
Thanks, Cole.
Thank you. We'll take our next question. Please stand by. Your next question comes from the line of James Twyman from Prescient. Please go ahead. Your line is open.
Yes. Thank you very much. I've got two questions. Firstly, are you seeing de-stocking going on in the European containerboard system at the moment? If not, is that something that you would expect to see given the level of stocks in the system? Secondly, you mentioned that you're going to be taking downtime. Could you just give us some idea of the sort of scale of what you're planning in the next couple of months? Thank you very much.
Thanks, James. We're gonna take somewhere around 30,000-50,000 tons. We're not sure yet. I mean, it's a bit of a moving feast because of the price of energy. We don't want to build up stocks in August. Typically our business builds up stocks in August because paper mills run 31 days and box plants shut for holidays. Typically we build up stocks during the month of August so that when business starts to come back in September through the rest of the year, we have enough stock in our warehouses. At this moment in time, stocks are already high enough, so therefore, with the current price of energy, there is absolutely no sense whatsoever to make stock when you can actually take some downtime.
In fact, it helps our hedges a little bit. You know, we have heard of many instances where people are taking downtime and selling their hedges for profitability, but that's not what we're necessarily doing. We're just making sure that we don't have too much stock as we come into August and making paper with 200 plus energy, which doesn't make a whole lot of sense to us. We're gonna continue to adjust, you know, really on a daily basis because, you know, we don't want to. If I was speaking to you a week ago, James, we would've been saying, we'd have taken around 30,000 tons, but today at 220 we might take 50,000 tons because it just doesn't make any sense to make paper.
We're seeing that announcements, as I said, just as early as this morning from a totally independent guy that we buy from who's taking 15% of his production out in August, that wasn't expected, you know, yesterday. So I think you're gonna see a lot more of that because it's just uneconomic for us and uneconomic for industry to produce at energy prices at EUR 200+. With regard to de-stocking, you know, there will be de-stocking going on as people take downtime and as demand is normal in September. I wouldn't say you'll see much de-stocking in July and August because just as I say, there was already sufficient stock in the system, but there won't be any further buildup in stock, I don't think.
Great. Thank you very much. Thank you.
Thanks, James.
Thank you. We'll now take the next question. Please stand by. Your next question comes from Kevin Fogarty from Numis. Please go ahead. Your line is open.
Good morning, guys. Thanks for taking the questions. I've got two, please. Number one, just given the balance of the sort of demand outlook and what you've said in terms of industry downtime, I just wondered, you know, to what extent do you think sort of this year follows, you know, somewhat kind of normal seasonality for you guys, as much as you can tell at this point, you know, again, given the sort of strong H1 that you've just delivered. Just secondly, in terms of cash generation, clearly a lot of working cap investment in H1. Just sort of against that, just sort of confidence on a lot of that sort of unwinding should that unwind as normal in the second half of the year.
Just, you know, the CapEx plans remain unchanged given, you know, despite sort of, I guess, a kind of softer demand environment. I just wondered what level of flexibility you might have in terms of that CapEx for the second half of the year, i.e., kind of projects that may not have started at this point. Just any color you can give on those would be great.
Yeah. I'll take the first one and let Ken take the second one. I mean, you know, I suppose in some sense that Kevin, and we did say this last year consistently through the year, that we didn't expect the kind of demand levels that we saw last year to continue. I mean, 14.5% in Q2 and 9.5% and 7.5% in Q3 was really exceptional. You know, the fact that we're even line ball with those, I think is a good performance in many respects. I think that the normal seasonality is that in August, we do have a slower month because people take holidays and there is no COVID. Sorry.
There is COVID, there's lots of it, but nobody cares about it anymore.
Okay.
There is a normal seasonal pattern that August is a slower month for corrugated consumption. We would expect to see that again, and then we would expect to see from September onwards a ramp up, as we have always done. Unless, you know, unless your view is very bearish on the world and you think there's gonna be a very severe recession, then I don't suspect that we're gonna see anything different. You know, clearly, you know, we have positioned ourselves well to make sure that we are able to adapt to any situation that happens.
That's why we are taking, you know, the 30,000-50,000 tons of downtime to make sure we don't have excess stock as we go through the year. Ken, do you wanna take the second one?
Yes. Morning, Kevin. Short answer is yes. I mean, the second half of the year tends to be more cash generative than the first half. By the end of the year, I kinda said we do definitely see working capital as a percentage coming back within the 7%-8% range and definitely returning to kind of positive free cash flow. I suppose, you know, a function of the success on box pricing is that kinda EUR half a billion investment in working capital for the first six months, which is a function of kinda two 10%, quarter-to-quarter. As that kind of box price moderates to kinda lower levels and the quarter 10% increases, you'll definitely see that moderation start to unlock and indeed the cash flow return.
On CapEx, you know, I suppose the projects that are coming in this year and being paid for kinda ordered a year or so, 18 months ago, and we were paying out those. We don't have any large, big ticket projects that we have to make any kind of big decisions on as we sit here today. Again, as I kinda said, you know, we kind of build all these plans on being flexible and agile. I suppose, go back to what Tony just said there. You know, we had 14.5% growth in the second quarter last year, followed by 7.5% growth. We really needed some of this machinery just to come in to provide capacity. As we also said last year, you know, if we had...
If we continue to see these levels of growth, we actually wouldn't be able to, not just us, but the industry couldn't possibly service that level of growth. A lot of what's coming in is necessary to capacity just to get us back to kind of normal operating levels where we're not having to work weekends or extra shifts just to kinda get the customer satisfied. There's nothing in there in our plans as we go forward that isn't flexible, that we can't change, that I can't move around. Most we continue to go on as we are because it's for growth to come that we will see.
Okay. No, that's helpful. Thanks a lot. Thank you. Thanks.
Thank you. We will now take our final question. Please stand by. Your final question today comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead. Your line is open.
Yes, thank you. Just a quick follow-up on box prices. Clearly, you managed to accelerate that box price realization relative to some sort of three to six months that we've got accustomed to in the past. How should we think about? You, in a way, have responded to this in a way because it's not necessarily all tied to paper prices, I suppose. Have you taken anything that normally would have fallen into Q3, Q4 up front now, so we, in terms of the way to think about the model that we should temper our price expectations for in the H2 versus kind of the normal trajectory? Or is that not relevant to think about given the various cost pressures you're talking about?
I think, you know, we've demonstrated that we have been pushing our increases through to ensure that we covered our inflationary costs. You know, last year we ate a lot of costs because we didn't have enough clauses in our contracts for inflation, along with the rest of the world, I think. You know, you should expect that, if inflation continues to be strong, that we will deliver further increases to make sure we offset that inflation, throughout our system. You know, that's just an absolute necessity for us. You know, I think we've demonstrated that we are able to do it, and we will continue to do it if necessary.
Clearly, you know, our performance has shown that we have been successful in doing it, and I suspect that we will continue to do it.
Very well. Thank you. Very clear.
Thank you.
Thank you. Thank you, Lars.
Thank you. I will now hand the call back to you, sir, for any closing remarks.
Yeah. Thank you, operator. I want to thank you for taking the time to be on this call with Ken and myself. We look forward to a fantastic future in Smurfit Kappa, notwithstanding the fact that there are, of course, outside forces that are always going to challenge us from time to time. We have continually said that the success is never a straight line. You know, our whole ethos has been to develop our business with our customers, to make sure that our customers are supplied, to make sure that we give great value to our customers, and to make sure that our customers see Smurfit Kappa as the supplier of choice in the corrugated packaging sector across the world.
I think one should never forget that Smurfit Kappa has an irreplaceable footprint that we are all very proud to build on and develop, whether that's through acquisition or through investment. We continue to see significant opportunities across many of our countries in which we operate and many of the factories in which we operate. Hence, that's the reason why we look forward to the future with such confidence. We have the best people in the business, we have the best assets in the business, we have the best market positioning in the business, and we are the best company in the business. I wanna thank you all for your support.
I want to thank you for your continued attention to Smurfit Kappa, and we look forward to seeing you both personally, and going forward into the future. Thank you all.
Thank you. This concludes today's conference call. Participants, you may now disconnect.