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FTSE 100 packaging giant's anger over Venezuela seizure

The boss of Smurfit Kappa (Frankfurt: SK3.F - news) , Europe's biggest maker of cardboard boxes, has spoken of his anger at the company's business in Venezuela being seized by the country's Marxist government.

President Nicolas Maduro's regime took control of Smurfit Kappa's Venezuelan operations, which employed 1,600 people and which owned production plants in Caracas and paper mills and a recycling plant elsewhere in the country, in August last year.

The move followed a campaign of harassment and intimidation by government officials and immediately had a knock-on effect as consumer goods giant Colgate-Palmolive, a customer of Smurfit Kappa, was forced to halt production of detergents and soap because it no longer had boxes in which to ship its products.

Tony Smurfit, chief executive of Smurfit Kappa, told Sky News: "We are furious what happened in Venezuela.

"It's very sad that six of our managers were detained and put into jail.

"We were fortunate enough to get them all out, eventually, but obviously putting our people at risk like that was not acceptable to the company - so we had to pull all our management out and we had to leave the country, unfortunately.

"The government effectively seized the asset.

"We've been there for 65 years, operated successfully, done a lot of brilliant work on corporate social responsibility activities and for the people of the country.

"One of the saddest parts of it all was that we had a school where we were looking after 180 kids, which we've had to abandon, it's terrible."

Booking the costs of pulling out of Venezuela and deconsolidating the business there generated a €1.27bn (£1.11bn) hit to the accounts and meant that Smurfit Kappa swung to a full year pre-tax loss of €404m (£354m) for 2018, compared with profits the previous year of €576m (£505m).

But Mr Smurfit insisted most of this was an accounting hit and said that the cash cost had only been €60m (£53m).

He added: "We are in international court, looking for arbitration, to make sure that our stakeholders get compensated for the loss of our assets."

It is fair to say that the Venezuela set-back, for which the market had been braced, did not distract investors from what were a strong set of results on an underlying basis.

Full year sales were up by 4%, to €8.9bn (£7.8bn), while earnings before interest, taxation, depreciation and amortisation (EBITDA) - the most basic measure of a company's profitability and ability to generate cash - rose by 25% to a record €1.54bn (£1.36bn).

Mr Smurfit, who said it was a "significantly improved performance against all the key measures", noted that sales were up in Europe by 7% and in the Americas by 8%.

The company, which employs 45,000 people in 34 countries around the world, has also raised its final dividend by 12%.

The results were better than expected and shares of the company, a FTSE 100 member since December 2016, shot up by 7%.

The rally suggests that Smurfit Kappa - and its peers, such as DS Smith (Frankfurt: 877238 - news) - saw their shares over-sold in a market rout last autumn from which they have not fully recovered.

Between the start of September and the end of December, Smurfit Kappa lost a third of its stock market value, while shares of DS Smith fell by 39%.

Both companies came under fire because they are seen as a pretty good proxy for global trade - when trading increases, demand for packaging goes up too, and vice-versa - and investors have been fretting for months that the dispute between the US and China is going to lead to a decline in that.

There have also been concerns about a possible decline in cardboard prices.

These short-term worries have crowded out the longer-term growth story.

While cardboard packaging may not sound like the most thrilling of businesses, it is actually a sector in which there is a constant need for innovation - either in terms of devising enhancements to the product, or improving the production process, by cutting costs, making machinery more efficient or sharpening printing techniques.

One example of this is having to tweak production methods to meet the demands of customers who require smaller box sizes, where possible, to cut down on excess packaging and reduce the weight of the products being shipped.

Yet, at the same time, the packaging has to be sufficiently robust as to ensure the products are not damaged in transit.

The paper and packaging has, ideally, to be lighter and yet stronger at the same time.

So innovation is key and, to this end, Smurfit Kappa has opened 26 innovation centres across Europe and the Americas during the last four years.

But the bigger opportunity, as Mr Smurfit reminded analysts, is in the switch that is taking place away from plastic packaging and towards paper and cardboard.

He said: "Responding to a step change in consumer demand, brand owners and retailers have made their plans and goals clear and this is to move away from unsustainable packaging materials.

"This is really a nascent opportunity for us and, as an industry leader, you can be sure we're going to take it."

In the meantime, the industry is consolidating.

During the last year, Smurfit Kappa has bought businesses in France, the Netherlands and Serbia.

DS Smith has been equally acquisitive.

Europe's packaging market is much less concentrated than the market in the United States and so further takeovers look likely in coming years.

The question is whether this is going to be a game in which only European players are participating.

A little under a year ago, Smurfit Kappa received an unwanted takeover approach from International Paper, the biggest US player.

That approach was easily rebuffed - while some of the factors present a year ago that emboldened the Americans to take a look, such as Donald Trump's tax cuts, are not there today.

But it will not have escaped anyone's attention that, even after today's jump in the shares, Smurfit Kappa is still valued at less than it was when International Paper's interest was first revealed.