Good day, thank you for standing by. Welcome to the Smurfit Kappa 2022 full year results conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, CEO Tony Smurfit. Please go ahead.
Thank you, operator, good morning, everyone. It is good to be with you all. I'm joined, as you know, by Ken Bowles, our CFO, who I think most of you know well at this stage. As usual, I refer to the disclaimer concerning future expectations. Which, with your permission, I will take as read. You all know Smurfit Kappa's vision, which we put in place some seven years ago, and I, as I say, is no doubt familiar to all of you by now. The vision which has evolved guides our total approach to business, ensuring that we are able to deliver for all of our stakeholders. Dynamically and sustainably delivering is central to that vision. In the next few slides, we will take you through what we have delivered, but more importantly, how we have delivered. Turning to the next slide.
In your world of finance, you have a tendency to say that past performance is no guarantee of future success. It is no different in our business. However, as in your world, it is a good indicator. Over the past number of years, you can see that our stable management team has delivered for all stakeholders and against all the key performance indicators outlined in this slide. I'm naturally proud of what this team has delivered as we continue to embrace and live our core values. As a management team, our objective is always to manage for continuous improvement. Our past delivery and our future potential is demonstrated by the success shown in the numbers on this slide. More importantly, we are both excited and ambitious for our future, which is best reflected by the capital plans and actions we have taken, both internally through investment and externally through acquisition.
Our performance has been and will continue to be driven by a number of factors, one of which is our capital plans. On this slide, you will see that in the past 24 months in the group, we have approved EUR 2.3 billion. This includes mill efficiency projects, corrugator projects, and converting equipment projects, together with our contribution to the environment and the pursuit of our own sustainability goals. These investments that have been made and are going to be made are a platform for continued future success in growth and efficiency of the group. As we say on the next slide, simply put, Smurfit Kappa will continue to deliver going forward. Quality people are and always will be at the heart of our performance. As owner operators, we treat capital as a scarce resource, ensuring it is deployed in a measured way to deliver today and tomorrow.
Our leading market positions and integrated model ensure security of supply both internally and externally. Innovation is also a key driver, partnering with our customers to define and, in many instances, to anticipate their packaging needs. Our market position as the number one or number two operator in most of the markets in which we operate allow us to, together with our innovation, to service our customers with the most advanced applications in our business, allowing us to capitalize on all market trends. Our products own positioning for today's world as the most sustainable, biodegradable, renewable, and environmentally friendly packaging medium will continue to drive medium to long-term demand growth. Together with our geographic balance, our leading integrated business model, as illustrated on the next slide, will drive future performance. The integrated system provides us with two consistent profit streams, and it optimizes operating efficiency.
Importantly, an integrated system reduces costs in areas such as transportation forever and continually optimizes our stock levels. A key component of the integrated model is also security of supply, and this helps drive capital allocation decisions. A good example of this is that as we expanded our corrugated business, we became short in paper. In addition to internal investment in existing paper mills, we identified and acquired two world-class paper mills in Reparenco and Verzuolo, adding nearly 900,000 tons to our system. That was delivering in action. Turning the page, I have always said that the commitment of our people to our core values of safety, loyalty, integrity, and respect is what truly differentiates our company from all others in the sector. The average tenure amongst our management team is 22 years, which demonstrates the experience and commitment of them to SKG.
But it is a two-way commitment. We continue to put in place the most advanced bespoke programs for training and development to ensure our people become part of the culture that so differentiates us. As a company, we're passionate about maintaining our culture through openness and meritocracy. Turning to the next slide. Innovation is of course, at the heart of everything we do. With a growing network of 29 experience centers across our business. These innovation centers are fed with new ideas by our over 1,000 connected designers, giving our 4,000 sales professionals across the world and across our 36 countries, unique access to irreplaceable ideas and applications that have been developed. One such idea, more recently, is illustrated here on the Click-to-Lock detergent box, which demonstrates there is a world of plastic ready to be replaced by our sustainable corrugated packaging.
To show you how we are intertwining our investment plans, innovations in sustainability and cost reductions, there are three examples I'm gonna show you that demonstrate how far this company has progressed and of course, how far we are going to continue to progress as we affect our future plans. First example on the next page is one of our mills, which demonstrates continuous improvements through investment in, and innovation. This mill's productivity per man hour has improved enormously as we've expanded capacity on the existing footprint and attacked our costs. We have also made this mill fit for purpose, producing ever lighter weight paper and reducing our carbon footprints. This example also illustrates how the Smurfit Kappa across our recycling system has improved its output. When Smurfit and Kappa came together, we produced 3.2 million tons at 22 mills.
Whereas today, through our investment and acquisition, we produce 4 million tons at 15 mills. Another important statistic is that we are completely self-sufficient in lightweight containerboard, whereas at the beginning we had practically zero. Turning to our corrugated system on the following slide, this example of just one of our 243 corrugated plants demonstrates how we are investing to improve security of supply for our customers, capacity in our corrugators, and efficiency and quality within our converting machines. This specific example illustrates the kind of improvement we are seeing and will continue to see going forward in the corrugated system in general. Within Smurfit Kappa, we've a number of specialty business that are allied with our core business.
One such business is our Bag-in-Box operation, which I'm immensely proud of, and which has grown from practically nothing to number two in the world. This business is replete with potential, and it is a highly sustainable product to replace both glass bottles and heavy plastic containers. We continue to have ambitious growth plans for this operation. With that, I'll now hand you over to Ken, who will take you through sustainability and our financials.
Thank you, Tony. Good morning, everyone, thank you all for taking the time to join us. As Tony mentioned, 2022 has been another fantastic year of continued delivery for the group, both operationally and financially, which I'll speak to in a bit more detail shortly. Also in terms of delivering on our sustainability agenda. We don't see ESG as separate from our financial performance. They're clearly linked. As a circular economy business with an ever-improving environmental footprint, our leadership and sustainability is clear. On this slide, you will see the progress we have made as outlined in our 15th Annual Sustainable Development Report. These achievements in the areas of climate, water, waste, chain of custody certification, and people are a key pillar in Smurfit Kappa strategy for the future and a testament to the work we've done over many years.
These results can only be achieved by investing time, effort, and financial resources to foster the change required to become the leader in sustainability in our industry. We began the year strongly with SBTI validation of the group's emissions reduction targets and reached a number of other important milestones, including the completion of a large-scale sustainability project at our Zülpich paper mill in Germany, which significantly reduces the mill's CO2 emissions by over 55,000 tons, at the 2% reduction for the group. At our Nettingsdorf paper mill in Austria, we launched a district heating project which will save approximately 21,000 tons of CO2 while also providing heat to local businesses, schools, and 20,000 homes. This project followed on from the recent installation of the heat recovery boiler at the mill, which eliminated 40,000 tons of CO2 per year.
The group also announced a $100 million investment to sustainable biomass boiler at our paper mill in Cali, Colombia, which will reduce our global Scope 1 and Scope 2 CO2 emissions by approximately 6%. This ambitious project is the latest example of the circularity of our business as we find another use for our organic waste and transition away from fossil fuels. At a time when many of us talk about their sustainability ambitions for the future, Smurfit Kappa is delivering today. We are pleased to be both listed on so many ESG indices and score strongly across the leading third-party certification bodies. We were especially pleased with the recent recognition of our work by Sustainalytics, who awarded SKG the industry top-rated badge, ranking it in the top percentile out of over 100 companies, in addition to again achieving the regional top-rated honor.
Through our leadership in innovation and backed up by the group's Better Planet Packaging portfolio of sustainable products, SKG continues to help our customers deliver on their own sustainability goals. One of the many examples of the work we do with our customers can be seen here on this slide. This project used a new Design2Market Factory, which provides customers with a tangible packaging prototype that can be tested with consumers and subsequently refined before moving into large-scale production. In this example, the request came from Danone, a company with clear ambitions around sustainability itself, who wanted a sustainable packaging solution for its popular Alpro drinks range. The brief was eliminate the plastic, safeguard the supply chain, and enhance the product appeal on shelf. The results, over 730 tons of plastic eliminated and over 1,800 tons of CO₂ reduced. Turning the page.
In 2022, in addition to the group's established programs in education, well-being and the environment, the Smurfit Kappa Foundation invested in over 40 projects across 18 countries to improve basic care, education and health facilities to positively impact the lives of underprivileged people in the communities in which the group operates. Some examples include in Germany, where over 60 employees volunteered their time to supplement the financial donation by the foundation to construct a therapy riding project for children. In Brazil, $250,000 was donated to upgrade the infrastructure of a childcare facility. In Argentina, the foundation contributed to the construction of a new mother and child ward at the Dr. Raúl Caccavo Hospital. In Ukraine, a basement was refurbished to facilitate the safe schooling of young children in Kiev.
Turning now to our financial performance and the group's full year 2022 results. Tony talked a little bit about our performance earlier on, and let's look at that in more detail now. Our overall performance in 2022 against every metric is a result of many factors, not least the dedication and commitment of the 48,000 employees who work relentlessly to achieve that performance. It is also a result of our multi-year investment programs and the returns that we are evidently achieving through them. Group revenue was over EUR 12.8 billion for the year, up 27% on 2021, or 23% on an underlying basis, with the rise reflecting success with box price recovery initiatives. Group EBITDA for the year was up 38% to EUR 2.355 billion.
The group EBITDA margin improved from 16.8% in 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 higher year-over-year energy, labor, distribution, and other raw material costs. Pre-exceptional EPS was up 62% of the year to EUR 4.441 per share, and the group's Return on Capital Employed increased from 16% in 2021 to 21.8% in 2022. As always, the group is focused not only on the here and now, but also what's to come. This year we have taken an exceptional charge of EUR 223 million.
Over half of that is related to the planned disposal of our business in Russia. We have also taken a restructuring charge in our Americas segment to take out labor costs, in addition to rightsizing goodwill in Argentina due to hyperinflation and in Peru, given the current economic backdrop there. Our free cash flow in 2022 amounts to EUR 544 million, an increase of EUR 90 million compared to the prior year. EBITDA growth of EUR 653 million, combined with a lower outflow for changes in employee benefits and other provisions, was partly offset by a higher working capital outflow, higher capital expenditure, higher cash interest, and higher tax payments. While we saw OCC paper and energy reduce towards the end of the year, box prices did not.
As a result, as a percent of sales was where our working capital was as a percent of sales, 8.3% at the end of 2022, slightly outside our normal guided range of 7%-8%. It goes without saying, though, that the management of working capital, as ever, remains the key focus for us. Finally, reflecting the confidence both we and the board have in the group and indeed the strength and resilience of our cash flows and our future prospects, we are pleased to announce a 12% increase in the final dividend to EUR 107.6 per share. Turning now to our European operations and their performance in 2022.
EBITDA increased by 42% to EUR 1.846 billion, primarily as a result of the progress on box pricing, as mentioned earlier, and the benefits of our customer-led capital spend program, offsetting significantly higher input costs. The EBITDA margin in Europe was 18.6% in 2022, up from 16.6% in 2021. Corrugated box volumes were down 2% when compared to the exceptionally strong volume growth in 2021. The slowdown in our Germany, UK markets in particular, being partly offset by a more robust performance in countries such as France and Spain. 2022 also saw our European operations record their best ever safety scores and their lowest ever parts per million quality scores, two significant milestones.
Our European business continued to build on a strong operating platform during the year with a number of projects across our paper and corrugated divisions. Tony mentioned a number of these initiatives earlier. During the year, the group also announced an investment into its first Moroccan facility, along with the acquisition of a corrugated business in the U.K. and a Bag-in-Box pant in Spain. And now turning to the Americas. In the Americas, EBITDA increased by 25% on 2021 to EUR 553 million. The EBITDA margin was marginally lower at 19% in 2022 compared to 19.5% in 2021. Colombia, Mexico, and the U.S. account for over 80% of the region's earnings, with strong performances in all three countries.
Box volumes in the Americas, excluding acquisitions, were broadly flat year and year compared with a very strong prior year comparative. The group continued to invest across the business with significant efficiency, capacity, and sustainability related investments into corrugated containerboard and specialty businesses in Central America, Argentina, Colombia, Mexico, and the U.S. Our Americas operations also recorded their best ever safety score in 2022. In our corrugated plants, we are expanding capacity and investing in state-of-the-art converting equipment across the region. In our specialties business, we are expanding our portfolio in paper sacks and Bag-in-Box. During the year, we also acquired corrugated packaging plants in Argentina and Brazil, expanding both our footprint and customer offering in these attractive growth markets. Finally, turning to the next slide, an important reminder of how we think about capital allocation, a very dynamic allocation at its heart.
As you know, our aim is to ensure that allocation of capital takes into account all stakeholder groups. It is very much a returns-focused allocation, which as you can see, continues to be a key underpin to our success. At Smurfit Kappa, we believe that capital allocated to internal projects is central to the success. We are investing in our asset base to improve our environmental footprint, to take out cost, to improve efficiency, and to capture the long-term growth opportunities presented by the end consumers' push for the most sustainable packaging solutions. The acquisitions we made in 2022 are clear indicators of how we see M&A. 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.
We remain, of course, disciplined around M&A and as always, benchmark them against all other capital allocation alternatives. Given the high levels of capital the group has deployed over recent years, we are especially pleased to have recorded our highest ever return on capital employed at 21.8% at the end of December. The dividend is another cornerstone for capital allocation strategy. 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. The increase in the final dividend of 12% is yet another illustration of our confidence in the future prospects and the cash generation ability of our business.
With net debt to EBITDA 1.3 times, the lowest in the group's history, the strength of the group's balance sheet continues to secure long-term strategic and financial flexibility. With no near-term maturities, an average interest rate of less than 2.9% and over 95% for gross borrowings at fixed interest rates, the group's balance sheet has never been stronger. The expansion of our capital allocation framework to now include buybacks underscores the flexibility and agility of the framework, and ensures that all avenues to create and return value to our shareholders are considered and benchmarked against all options. I'll now hand you back to Tony for some concluding remarks.
Thank you, Ken. Well, as you have seen, we have again delivered against all key performance measures. In Smurfit Kappa, our performance-led culture has delivered. Our multi-year capital program have delivered and will continue to deliver. Our acquisitions have delivered and will continue to deliver. I hope you realize from today's presentation, we are delivering for our customers due to our innovation, our service-led and sustainable packaging solutions that we offer. This is happening as a result of our dedicated and loyal 48,000 employees who strive to deliver successfully to our customers day in, day out. Together with Smurfit Kappa's geographically balanced and integrated business model, we are providing security of supply across all market conditions, and this has never been more evidenced by the difficult 2022, which we have very successfully navigated through.
By way of conclusion, as we say in the release, there will always be challenges along the way. I have always said that success is never a straight line, but our record year in 2022, even with the effects of the global pandemic and the massive inflation we experienced, demonstrates the company's agility and resolve to continuously improve. As we have said, we've never been in better shape financially, strategically and operationally. While it is early in the year in 2023, the year has started well. Our past performance demonstrates our future potential. We remain very confident for the future of our business and our prospects and opportunities that will present themselves in the years ahead. That confidence is best reflected by the 12% increase in our dividend that was announced today.
With that, everybody, I will turn it over to the Q&A, and I thank you for the attention you ha ve given Ken and myself.
Thank you. As a reminder to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile a Q&A queue. We will now take the first question. It comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead. Your line is open.
Good morning, and thanks for taking my questions, and congratulations to you and your team for this delivery. I just want to start with a couple of questions. You got started well in 2023. Clearly judging from incoming calls this morning, investors are generally concerned about volumes, and it did seem as if there was a meaningful volume contraction in Q4. How... You know, that started well. What should we read into that in terms of volume? Then, of course, the next focus is how prices are performing versus costs. If you can share any color on what happened in the final quarter of the year and of course, what you think in the beginning of this year.
Then also you called out, Tony, the great success of your specialties business, the Bag-in-Box, good growth, et cetera. We've seen a number of transactions in that business, putting big multiples on that sort of specialty, high growth, good sustainable product business. We don't really know how big that is in the context of you and how that is progressing. If you can share any color on that'd be extremely helpful. If you can start with
What should we read in started well in terms of volume, price, cost, et cetera? What's your outlook for the current year in broader terms?
Okay, well, I'll take the first question there, Ken, if you take the price versus cost. Basically, what we say with the year started well, it has. I mean, the overall trend of volumes, we would say, with the exception of 1 or 2 major countries, has improved in January. We saw a very sharp drop off in certain markets in the, really specifically in December, that's, we believe, a result of destocking. We haven't lost any customers. We see that as a more of a destocking issue. The only country that really hasn't improved, thus far in the year is Germany, yet it's probably the country that I feel the most confident will improve. Obviously that's caveated by the whole issue on, on the Ukrainian war.
I think the Germans really went into their shell during the month, the last quarter, and the consumption was very low, and the savings was very high. What we've seen is, and that comes from the worry that they were having on what energy was going to do. Governments have in Germany for example, have allowed for a certain portion of any inflationary wage increases to be tax-free, and that's gotta put money in people's pockets. We see savings still very high, but consumption starting to improve, and that will ease up the supply chain, I think as the stock in the supply chain. We feel pretty good when we look forward into Germany about how it's gonna look.
Obviously, again, with the caveat of the Ukrainian War in the background and what that might do. Other markets have, as I say, improved, like the UK improved in January. The Italian market improved in January. We have seen improvements, and we really put down a lot of the falloff in Europe to destocking during Q4 and continuing in Q1, mainly in Germany and the Benelux actually. When I take the Latin America markets, they haven't improved yet. They seem to be, there seems to be a large destocking going on over there.
There are some nascent signs with 1 or 2 customers just as recently as 2 weeks ago that their orders are starting to pick up very significantly in the durable area, but that one swallow doesn't make a summer, so to speak. We'll have to see a little bit more before we see that in the Americas because inflation really does affect the average person there much more than it does in Europe even. So we have to see how that transpires over the next couple of months. Again, a bit more optimism than there was, let's say, 2 or 3 weeks ago in that area. With regard to pricing, you know, we obviously had a good fourth quarter performance, and that has continued into January.
Our costs are down, we consider that we've had a very good start in relation to our earnings, and we'll just see how that pans out as we go through the year. It's early doors, you know, we're very comfortable that we've got our efficiency programs, our capital investment programs are paying off, and obviously, we feel that we're very well positioned to take advantage of any growth that will happen. Ken, do you wanna take the second question, and then I'll talk about bid.
Morning, Lars. I sort of track back a bit to the guidance you gave in November where we, you know, we said we'd do about EUR 2.3 billion, Clearly you've come in ahead of that. I suppose the backdrop to that was, you know, costs are still rising. Yes, we done most of our work, if not all, nearly all of our work around energy and energy hedging for the year, so we had a good line of sight on the open positions. I think at that point, we guided probably somewhere around EUR 700 million of the headwind. Clearly we end up at EUR 600 million, It's important to remember that, you know, while energy kind of came off a little bit in the fourth quarter, further costs didn't.
We still saw some labor inflation, distribution, other raw materials are still kind of climbing. I think eight, if you like, eight into some of that kind of small tailwind as we got towards the back end of the year. As Tony's just said, as we start this year, you know, that picture is kind of, you know, plateauing in certain cost categories. The outlook is largely different than it would have been in the back half of last year. On the price side, we guided at the November call that we'd get about 1%, so we felt 1% was coming through on boxes, primarily to do with some of the inflation pieces that came through.
You know, the box price as I kind of noted there, been kind of solid through the year end and as we start off this year, despite what's happened to date on in paper prices. I suppose it's early in the year to be calling full cost categories, but I suppose the fourth quarter, you know, as you saw, the year got very complex in terms of lots of very large moving parts around cost categories. I suppose the net net is, you know, to Tony's point earlier, we dealt with them and managed to kind of get ahead of where we thought we'd be at the end of October, start of November.
Lars, just on Bag-in-Box. Bag-in-Box has been a phenomenally good success story for us, over, as I said, starting with nothing back in 1994 to being the number 2 player in the world. We're not breaking out what the turnover and the suffice to say that is, it is above our average. Yes, there's a lot of embedded value there for shareholders, and
We would see that multiple being one day taken for the shareholders. We see very significant growth still in the business. We see very significant opportunity across the world. We intend to take that opportunity within Smurfit Kappa to continue to enhance this business for the future. I think it's, we are the best at what we do. We make a huge number of taps. We make the plastic. It's a sustainable product vis-a-vis things like glass bottles or big plastic drums. It uses a hell of a lot of corrugated to protect it, which we use, we use plenty of, for example, the box in water in Spain.
You know, both from the box side, from the sustainability side, from the expansion side, from the people side, we have got the best team in the world in this particular business, that have grown up with the business. Our CEO of that is obviously a personal friend, but he's been with the business, 35 years. You know, it's a great business and we intend to grow it and develop it, within the system, for the foreseeable future. Obviously that one day may change based on the multiples, but that's not for now.
One quick follow-up, please, if I may. Could you just help us to guide us for, you know, the capital you put through in 2022, what sort of benefits you expect to accrue from that in 23?
Oh, I think, Lars, in reality, you know, capital you put in in 2022 probably takes about 12-18 months to get the kind of full run rate or ramp-up, given some of the smaller they've seen. I suppose if you go back to, you know, the IRRs of those projects as a kind of broad mix, it's gonna be above 20%, and they clearly clear the ROCE hurdle. You won't get the full benefit in 2023. You get it, you know, if it's one third, two thirds in terms of the split, 2023, 2024. Remember then you're gonna get the benefit of 2021 capital coming through in 2023. It's a bit of a kind of a, I suppose, momentum build in terms of implemented capital across all that piece.
Again, for 2023, we're expecting to, you know, put in another EUR 1 billion of capital, which again goes back to building for the future, both through sustainability, through efficiency and through growth.
All right. Thank you.
Thank you. We will now take the next question. One moment please. It comes from the line of Justin Jordan from Davy. Please go ahead. Your line is open.
Thank you. Good morning, everyone. I've got two quick questions. Firstly, on containerboard. We've seen clearly European and North American containerboard prices easing slightly in recent months. How should we think about that feeding through to box prices? I know Ken, you have described them a solid year today, but realistically, should we expect some easing in box prices as we go through the year? Secondly, just on OCC, I think from memory, Smurfit as a group purchased something like 6.5 million tons of OCC in both Europe and Americas. Again, OCC prices have eased significantly in the last three to six months. Can you give us some idea of what that might mean in terms of an annualized cost saving, in addition to the energy cost saving you have already described? Thank you.
No, Justin, I'll save Tony, and I'll take both of those. No doubt he'll jump in if you feel the need, save and correcting or embellishing. On the box price side, look, I think you know the natural trajectory in terms of where paper prices go. I think what we've seen over the last number of years is a better embedded resilience in the box price. I mean, in reality, you know, tradition would tell you know, paper price goes up in a 3 to 6-month kind of arc. Box prices start to come off, you know, 9 plus. That clearly lenten to the last cycle. I think it sort of goes back to a number of factors, which is I don't think that particular trajectory works anymore.
I think we are much more to the partners that we supply. I think we're more embedded. There's more value there, more innovation. It's part of an integrated model and a total supply chain kind of approach. I think if you look back to the last couple of years around what we did during COVID, how do we stretch, I think that was much appreciated. Look, I think, you know, equally, those contracts that traditionally would have been built on a simple model of paper down now include clauses for inflation, energy and other things. There's natural protections around, you know, while paper price might move, it's not gonna move for other factors. Logically and naturally, you would expect some kind of, you know, smaller version of box prices if paper continues to fall.
Is that gonna be in the next three, four months? No, probably more predominantly towards the back half of this year, which will be a natural cycle. I'd sort of remind you of our success in previous call and cycles, if you want, around holding on to that box price and how we've built the margin over time. On OCC, again, look, you can see the PIX index like we see the PIX index. You see the kind of difference in change. I think it sort of goes back to the overall theme here, which is it's still only the early part of February. I have still a lot to play for. You know, China's reopening.
You know, Tony's commentary in Germany and kind of demand picking up could have a material impact on the direction of travel of OCC over the coming months in terms of how it's pulled. Clearly, the China reopening and 1.4 billion Chinese people, you know, back in open economies, back exporting will naturally pull the container back into the country, which will provide a decent underpin to the OCC price. I, you know, I wouldn't. You're right. Your quantum is right around the OCC consume. I'd say, look, you could do like we do.
We look at the PIX price, but I think I'd also think about the general economic backdrop, how Europe is going to come through the next few months, and particularly Tony's comments around the confidence in Germany, but also do not forget China's reopened.
Great. Thank you.
Thank you. We will now take the next question. It comes from the line of Charlie Muir-Sands from BNP Paribas. Please go ahead. Your line is open.
Good morning. Thank you for taking my questions. Mainly a follow-up on what's already been covered. With respect to your outlook on box prices, can you just remind us now what proportion of your business is typically, on index prices, versus open negotiation, and how that should play into our thinking about how the phasing of box prices would evolve over this coming year? Secondly, related to that, do you sort of think about this on a kind of unit profitability basis, you know, depending on where volumes go in this business or, you know, will the sort of spread narrow or widen based upon how you think you can manage those contracts? Finally, just on the acquisition side of things, just wondered what your view is with respect to asset prices at the moment.
Are you seeing it as being a more or less favorable market for securing expansion through M&A? Thank you.
Hi, Charlie. I'll save Ken the breath here. I'll take those. Basically about half of our business is indexed in some way, shape, or form. I think it's important to remember as Ken has just said, that the. They will be generally 3 to 6-month contracts, sometimes yearly contracts, but we're broadly speaking, most of them are 6-month contracts. At the start of the. You average the quarter and there's caps and collars depending on the particular customer. There's all sorts of different formula with every different customer that's different. Some have wastepaper built in, some have energy clauses built in. Most of our contracts now have inflation clauses built in.
As we have come out of the last 18 months of higher inflation, we have been negotiating with customers to have inflation contracts built into their contract. So overall, I would say we're very well positioned. As Ken mentioned, there is a natural up and down. I think one thing that everybody should remember is that we are putting a lot of capital into the business. We are spending a lot of money in innovation. We are giving our customers a different kind of service than what would've been, say, 5, 6, 7 years ago with regard to their whole sustainability agenda. That takes a lot of effort and takes a lot of money on our side, and that's why we have these innovation centers.
That's why we have the cost there. Frankly speaking, if we're not getting a return for that, we shouldn't be doing it. You can see from the results that we are getting a return from it. We're spending a lot of time. It's just not, as Ken mentioned earlier to an earlier question, it's just not up and down like it used to be. It's a very different scenario. Packaging is continually being redesigned, and packaging is continually being modified so that both our customer and ourselves get the best benefit from this supply chain, and that's what's making the difference, and will continue to make the difference. With regard to acquisitions, there was a question on acquisitions. What was the question there, Charlie?
I think it was about asset value, Charlie, wasn't it?
Yeah, correct. Whether you see it as a more or less attractive environment, you know, are asking prices, you know, reasonable at the moment?
I suppose it's more that what you can do with the asset, Charlie, to be honest with you. I mean, we've been traditionally very good at finding businesses that we can bring some value to, on polished diamonds, if you like. You know, and particularly our success in the U.K. this year and in Mexico and in Brazil and in Spain, and in Greenfield, Morocco is kind of, you know, these companies tend to be well run, well managed, and we can learn some from them as well, which we have also done with those assets. I think we kind of try and see the value in it. I don't think our philosophy will have changed around how we see that.
If you look back over history, we tend to be very disciplined in this space. At times we would've been challenged around not doing M&A when valuations were kind of heady multiples, but we stayed away from that, and I think you can see the success of that as we sit here today with a ROCE of 21%-22% and a strong balance sheet, which gives us tons of firepower for whatever we might wanna do. I think, you know, it's less about where asset values are. I think it's more about what you can bring to them in terms of the wider context of bringing the Smurfit Kappa, bringing our innovation, bringing our capital, bringing our customer base, bringing our tools, technology, and our expertise. I think that is where you drive the value from.
Okay. Thank you very much.
Thank you. We will now take the next question. It comes from the line of David O'Brien from Goodbody. Please go ahead. Your line is open.
Morning, guys. Thanks for taking my questions. Three, please, if I could. Firstly, I know you didn't wanna talk to Lars' point on what the capital investment plan is gonna deliver in 2023, could you give us an idea of what it delivered in 2022 and 2021 and just how that is gathering momentum? Secondly, you know, you talk about a culture of continuous improvement. This year you've delivered a return on capital of 21.8%, which is fairly stunning. I'm not gonna ask you how you improve from there, I guess the question is fairly obvious. You've a 17% through the cycle target rate for returns. Is there upward pressure on that at this stage, or how should we think about it now given the strength of your performance?
Finally, again, a record balance sheet strength. Where should we think about the capital deployment opportunities over the next 5 years? I guess you've got EUR 1 billion of organic investment again this year. Is there further opportunity internally within the group that you can continue to deploy towards? You've kind of given your view on acquisitions to Charlie. You've talked about openly, I think, for the first time now, net buybacks. Is there trigger levels of leverage we need to think about before that you won't go under, to think about when you'll start to execute larger buyback programs, or how should we think about, you know, those kind of milestones?
There is more than three questions there, David. Thanks for those questions. They are very thought-provoking, but obviously I'll let the last question go to the last number of questions go to Ken. Just on how did, how should you feel about capital? I mean, basically, if you imagine our depreciation at roughly EUR 500, you know, and there is always some pickup in when you're investing in, let's say, repairs and renewals, there is always some pickup in efficiency or something, some minor returns out of that. You know, I would say anything above that, you should be looking for at least a 25% return.
If we are looking at EUR 500 million above, EUR 500 million or EUR 600 million, whatever the number of depreciation is, and add a bit, I think it's a good number to look at. That will be the overall general improvement in the business. Obviously, it's always masked by so many different moving parts, whether it's costs on one side of the ledger or whether it's savings on the other side of the ledger. It's very difficult to point to an actual number. you know, you sometimes win more customers than you because of your equipment, or you get more efficiency or you get less inefficiency because of your investment in energy.
It's very difficult to point to a number, but the way we broadly think about it, if we're investing, let's say half a million, half a billion above depreciation, and we're not getting a 25% return or so on that additional investment, then we are not doing our job. Ken?
Morning, David. Clearly coming from the Barry Dixon School of Mathematics there are the questions. Like, I suppose how we think about ROCE, right? You know, the way we think about investment is this business, which is, you know, we take a 3 to 5 year view on where we need to put that capital, either at the paper end, as we did in the last cycle where we purchased Verzuolo rather than offset 2 paper projects, or in this cycle where we're pushing it more towards the consumer end and building out the box business and everything around that. You know, we think about the ROCE in the context of that.
The ROCE is less the target, more of a kind of a floor about where we think, as Tony just mentioned, where we think projects should come in at. I think it's a case of, you know, we are on this, our current investment cycle, which comes out of the 2020 equity raise and everything that went with that. Clearly have strong ambitions around sustainability projects and everything else. And then it's about, look, wait till this finishes, then we sit down and review where we think the next level of capital will take us in terms of whether that target should be increased or not. It's not a target we kind of put ourselves to.
It's there as a kind of a placeholder, a reminder of where we've taken the return on capital of this business to over a very short period of time. The reality is, you know, we've a lot of space to build at a 21.8 return on capital. I think what it shows is, you know, if, as Tony just said, if you deploy internal capital well, and if you drive every piece of return from it, and if, to be honest, you treat every pound as a prisoner or euro as a prisoner, this is what you get, and that's the kind of focus. So not touching the target anytime soon, but it's one we review at every kind of capital cycle that we come to. The last one I think was on buybacks, Dave.
I think it's less about a floor price or anything else. I think it's more about a view about where you can generate the best return for shareholders in terms of allocating capital. Clearly, you know, we are in a space now where our balance sheet has never been stronger, and at 1.3 times it's in very healthy shape. We do like efficient balance sheets, and if we felt that capital wasn't going to internal projects or M&A opportunities weren't there for us, or the dividend didn't need to be supported or grown quarter, then clearly buybacks are part that suite. The important point about what we did last December in a small way was to expand the opportunities available to us and expand the portfolio we have around being able to allocate capital and deliver value.
I think that's probably the more important point around that particular program.
Great. Sorry, just on the contribution from the investments in 2021 and 2022 in the rounds, what did they contribute?
I would have said around EUR 100 million, EUR 100 and some million in both occasions, based upon the previous year's lower depreciation. I can't remember exactly what their depreciation level was, and our investment over those. I think last year was the first year that we had close to EUR 1 billion investments. The previous years were around EUR 700 or so, EUR 700 and some million. Obviously the contribution wouldn't have been as big as it will be going forward in this particular cycle of investment.
Great. Thanks very much, guys.
Thanks, David.
Thank you. We will now take the last question. It comes from the line of Cole Hathorn from Jefferies. Please go ahead. Your line is open.
Morning. Thank you for taking my question. Ken, I'm just hoping you can give us a little bit more color on, you know, the cost buckets into 2023. I realize there's a lot of uncertainty on how energy and waste paper and things move, but, you know, the cost buckets you can give us, even if it's just labor, year on year and some of the other dynamics there. Then looking at Smurfit Kappa's business, over the longer term, Tony, you called out, you know, you've got more paper capacity and less mills, and you have gone to integrated kind of better invested projects. You've invested over EUR 1 billion in energy projects alone. How do you see the European containerboard and box market playing out?
You know, all the, all the bigger players like yourselves who've invested and well invested, just going to outperform some of the smaller mills that just haven't had the CapEx to invest in their mills? I mean, are we gonna see a bit of a two-tiered system in Europe? I'd like you to hopefully link that to the U.S. I mean, you see the big players there, it's very consolidated. Whatever the volumes are, the big players generally deliver that. Whatever the volumes are in the U.S., you tend to outperform the market. I'd just like to hear your thoughts, there. Thank you.
Okay. Well, thanks. Thank you, Cole. I'll let, I'll let Tony ruminate on that one for a second and thanks for sharing the questions evenly. I suppose in the cost book, you know, Cole, I suppose the one thing we've seen over the last couple of years is that nobody has a crystal ball, but I'll try and put a little bit of science behind, you know, where we sit to kind of guide you slightly. Let's take energy for a start. I mean, the reality is energy remains volatile. While the prices kind of settle down, that kind of, you know, between 55 and call it 65, 70 range, the reality is that, you know, either hedging at those levels or contracting at those levels is still a relatively liquid market in terms of what's out there.
You know, they are not the prices people are buying energy at. If, if I was sitting here today, you know, just on a, on a very simple kind of mark-to-market exercise, I'd tell you that I broadly think that if this persisted for the year, my energy bill year and year at the moment, it's probably around flat. That, that's where I see it as I sit here now. In, in terms of labor, which I suppose is the other big cost book is, you know, clearly we did a lot of work around that during 2022 with the full year run rate into 2023. We'll, we'll clearly have a bigger impact and some final adjustments that might come through.
That could be a head within the order of, you know, maybe it's EUR 150 million or so, slightly more probably even between maybe less, depending on CPO program. Remember, we do have an annual CPO program that we do target around EUR 100 million a year designed just purely to take out some of that level of inflation. I suppose we have got to take both sides of the ledger here in the sense of, yes, we know that some costs have moderated, you know, particularly around maybe, you know, distribution and some other raw materials and OCC clearly where it is. Energy could go either way at the moment, but just to kind of help you out, I think I'm broadly flat if I sit here for the year.
Labor clearly a creeping cost. We do have a large workforce. Look at the other side in the sense that we do have a CPO program, and we do use it to offset inflation. We are investing to take out efficiency. The restructuring program in the Americas will take out headcount. So I suppose in the kind of classic Smurfit Kappa fashion, we understand what the inputs are. We are designing opportunities and investments to kind of deal with some of those challenges that come and meet us. That's what we're doing. It's difficult though, Cole, to kind of give you a full year view on some cost book. It's simply because very early, and I think what the world has taught us in the last 18 months is things move fairly quickly.
What we, what we have line of sight on, we're very comfortable with as we start the year.
Cole, to your question about should we outperform, I think it's fair to say that we would be very comfortable and confident that we will always outperform our peers in the way we've set ourselves up. I mean, we are a very, very innovative company. On the box side, we see ourselves, we haven't got the final statistics for the year, but up until the end of October, we've gained share in the last year because of our security supply, because of our design and innovation across practically every European country. Then on the paper side, in Europe, an integrated producer such as ourselves will always do better than a non-integrative. We've seen that from all the mills.
We have bought two of the very large mills, Verzuolo and Reparenco, and they would have been significantly underperforming what we're doing if they were independent. I think that's fair to say that will continue except in the very, very tight markets. Maybe not even then because they don't have a guaranteed source of outlet. They have to go further for their customers. They probably have to discount more, and they don't have the transportation savings that we will have, as I said, forever as an integrated producer because we run our supply chain so tightly.
You know, I would say putting us at the top without sounding in any way arrogant, I'd say we are the by far the best in managing that as an integrated player, and integrated players will typically always outperform non-integrated players. If you have a good box system on the other side of that, then I would say that gives you the double profitability that we have shown and will continue to show. With regards to the American market, it's a different model in America. It's a much more commoditized market. You know, I think it's more traditional in the United States to what, say, Europe would have been 25 years ago. It's still a kraftliner dominated market.
It is very consolidated, but there are still some growing independents in there, which are disruptors potentially for that market. Nonetheless, I think, you know, as you say, it's a consolidated market and the big guys have been taking the downtime to make sure that they don't overstock over the last 3-4 months in America as we can see it. The U.S. market is different to the European market. There's less variety of packaging grades. There's less variety of papers. There's less variety of colors. So it's a different type of market. That's not to say it's a bad market. It can be a good market too, because of the consolidation, but it's a different... You know, we are much more consumer-led merchandising medium in Europe than in the U.S.
Thank you. Tony, just maybe a last question is, on inventory levels. Is there any color you can give on Smurfit Kappa, or what you're seeing in the wider industry for, containerboard or box inventory levels? Thank you.
On box inventories, we don't really have any line of sight on that, but on the container side, we're still a bit above where we'd like to be, but not massively. In fact, the numbers that came out, the last numbers that we saw were, I think in 3 weeks ago, and they were better than we anticipated them to be, and that's really a function of all the downtime that was taken. We took 260,000 tons. We estimate about 2 million tons of downtime was taken in Europe. You know, again, I think we took less downtime for our market share because our system was that much better.But o verall, I think downtime was taken, so inventories are pretty well under control, but, you know, we'd like to see them tighter, obviously.
Thank you.
Thanks, Cole.
Thank you. I would like to hand back over to Tony Smurfit for final remarks.
Thank you, operator. Yes, again, thank you all for being with us today. As I said, and as Ken has said and shown and demonstrated, our results for last year were truly exceptional given the very difficult environment in which we were operating. I think over the years, Smurfit Kappa has made investment plans and developed itself with acquisitions to really put itself in a position to capitalize when markets are doing well. As I say, while success is never a straight line, you know, this company has never been in a better position to take advantage of any opportunities that come before us. So I thank you all for your support and your interest in Smurfit Kappa.
We continue to look forward to the future with optimism, and we look forward to seeing and then speaking to you in the coming weeks and months ahead. Thank you all, and have a very nice day.
That does conclude our conference for today. Thank you for participating. You may all disconnect.