Smurfit WestRock PLC (SW) 2013 Q4 法說會逐字稿

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... the Kappa Group's full-year 2013 results. (Conference Instructions).

With me today at the top table is Ian Curley, who is our Group CFO; Tony Smurfit, our Group President and COO; and Paul Regan, who's our Group Treasurer. And we also have top at the right, my right here Brendan Glynn who's the Assistant Treasurer, who has all the answers; and Seamus Murphy the IR Manager, who's keeping up the back of the hall there.

I draw your attention to the usual disclaimer, which all of your probably know off by heart by now, so I won't torture you by basically reading it, but we're all bound by this disclaimer.

The format we're going to go through is we're going to make the presentation, and then we'll take questions from the floor here, and then we'll take questions over the phone lines. So, in the questioning process, for the benefit of the people on the phones, we have a microphone, so if you'd wait 'til you get the microphone so they can hear your question.

We're obviously -- based on what you've seen so far, we're pleased to announce revenue, EBITDA and free cash flow growth for 2013. Smurfit Kappa Group's business has been fundamentally repositioned over the last 12 or 24 months and we now have a solid balance sheet, strong free cash flow and, as a consequence, we have a broader strategic and a financial set of options to drive value for shareholders.

Our free cash flow, as you've seen, has increased by 30% year on year. This is reflected by, firstly, a solid operating performance, EBITDA of just over EUR1.1 billion, a reduced cash interest and strong working capital performance, all of which Ian will touch on later.

This represents, I think, a structural shift for our business; enables us to announce a series of shareholder and value enhancing initiatives today.

And they include increasing our dividend by 50% to EUR0.3075; basically targeting, as we've indicated before, a credit rating of BB+/Ba1. Increasing our capital expenditure by basically invoking a strong pipeline of value-accreting propositions we have in CapEx. So we're increasing it by EUR150 million over three years. And these are growth focused high return projects, which we will touch on later.

And as a priority, growth through M&A-type activities and this is a priority for us first and foremost. But in the absence of that, lest anybody be under any illusions, we will return capital to shareholders.

So this slide basically demonstrates our consistent delivery of the quality of earnings. As you can see from our graph of our EBITDA margin, you've got that strong steady progression, albeit we'd like to see the accent being a bit steeper, but it is strong and it is steady through the cycle.

And the EBITDA margins are underpinned by, first of all, a market-focused innovative strategy in -- towards our customers and that's supported by a strong cost efficient backward integration into paper and raw material.

I think our focus on returns is evident from the right-hand chart, where we continue to deliver a strong and improving performance in terms of return on capital employed, something which we intend to progress through 2014 and onwards. And in that context we're announcing today, as I mentioned, a returns-focused capital investment program to which I'll return.

The consistently robust operational performance and strong free cash flow generation has reduced our net debt by approximately EUR800 million since its peak in 2007. And this progressive reduction in net debt and the improving EBITDA means the net debt to EBITDA has decreased from the peak of 4.1 times net debt to EBITDA in 2009, to just below 2.4 times at the end of 2013.

And we believe that this substantial reduction marks the completion of the transition of Smurfit Kappa Group from being a leverage company to a corporate credit profile. We're committed to maintaining leverage between 2 times and 3 times net debt to EBITDA through the cycle and we're targeting a rating of BB+/Ba1, as I've mentioned earlier.

And this repositioned capital structure provides us with a very solid platform to continue to grow the business and the capacity to deliver increased returns for the shareholders.

The strong performance reflects a number of factors. First of all, we have a market-focused expertize and differentiation strategy towards our customers, which is critical to growing our market and growing out top line. And that's underpinned by superior packaging solutions, which address two aspects of our customers' needs; firstly, their performance in the retail environment; and secondly, their whole supply chain optimization.

We continue to drive this innovation strategy in our product range, not just in Europe, but across the 32 countries across the 230 corrugated plants we have in our business. We have, for example in the design area, and this is a small part of the total innovation, 740 designers who are in a virtual design center, with a design book or library of about 5,500 quality designs that have passed the test of their peers and, indeed, in the whole area of online shopping. We're growing in the number of designs we have in our portfolio, with north of 350 designs so far.

The other feature of business today, and in our business in particular, is we have a strong commitment to sustainability and corporate responsibility. And these are key components of our offerings to our shareholders. And it's fairly critical in the world in which we live, and particularly the world in which our pan-European customers live. And with those customers, both pan-European and pan-Latin American and American, we have a leading market share with most of the major ones in this portfolio.

And I think our ability to drive innovation, and establish ourselves as a supplier of choice, is not just focused on any particular market, but is enhanced by the extent of our geographic footprint, which is something in which we have an objective to grow.

So let me now hand over to Ian to do the financial review.

Thank you, Gary. Looking at performance in the fourth quarter, what you're seeing here, you see that sales were effectively up 11% quarter 4 on quarter 4; and acquisitions represented about EUR80 million of that. And that was offset by currency of about EUR50 million, which showed an underlying increase of EUR176 million.

The pre-exceptional EBITDA grew, as you can see here, by 22%. There was minimal currency effect in the fourth quarter. The acquisition effect was EUR13 million, and the underlying increase was EUR36 million, and that was mainly from the Americas.

Likewise, pre-exceptional EPS grew by 18%.

And you can see the free cash flow here was EUR103 million, and that came from similar working capital movements last year, which was EUR74 million. Capital expenditure, as we expected, as highlighted, is EUR150 million in quarter 4, and other moves which are affected the insurance [capital allocation], hyperinflationary effect, and pension costs. And as Gary said, you'll see the net debt to EBITDA came from 2.7 times down to marginally under 2.4 times.

Just if we look at the full year now, we can see again sales grew by 8% from EUR7.3 billion to effectively EUR8 billion. And, while currency hit us in that number for about EUR180 million, acquisitions brought about EUR400 million; so the underlying increase was in the order of EUR330 million from the Americas, and about EUR70 million for Europe.

We see a record level EBITDA at EUR1,107 million, again up 9%. Currency in the 12 months was basically flat. With the acquisitions bringing about EUR60 million, which was Orange County and CRP in the UK; and so there's an underlying increase in the EBITDA of EUR42 million.

Pre-exceptional EPS rose by about 10%, but post-exceptional was actually down, but that reflected the refi that you saw us do, particularly in the last quarter of last year, Townsend Hook and some devaluation.

Return on capital at 13.1%, effectively hitting our target, which we said we'd hit, of about 13%.

And the free cash flow was very strong at EUR365 million, which reflected the stronger EBITDA, lower interest, and positive working capital, offset by capital expenditure.

Break out some of those numbers and just having a brief look at the conversion of EBITDA to free cash flow, you can see here the cash interest was EUR197 million, down EUR38 million in the year, and we'll give guidance later on some of these numbers for 2014.

Working capital as a percentage of sales was 6.6%, which is actually slightly better than the range that we always highlight of 7% to 8%.

Capital expenditure, we continue to invest in the business, was at 98% of depreciation, compared to 82% in the prior year.

Cash tax at EUR112 million was effectively similar to the prior year. And other reflects, as I said, the insurance, hyperinflation and pension. So overall, giving you a free cash flow of EUR365 million.

Looking at the full year, continuing the full year, and the focus on cash management, and you can see that, over the past two years, we've had a fundamental shift and a repositioning of the Group's capital structure, as well you've seen consistent debt pay down. You've seen particularly strong cash flow generation over that period of time. We've been very judicious in our investments. We've bought a couple of acquisitions. We've done Orange County and we've done CRP here in the UK.

And our program of active capital management in 2012 and 2013 you're seeing that we refi-ed about EUR1.1 billion of bonds. We completed the amend and extend; upsized our senior credit facility to EUR1.4 billion; used [AR] securitization, and redeemed about EUR500 million of bonds in the last quarter of last year.

We've improved our working capital metric, as you can see here to, as I said, just outside our target range which was 7% to 8%; so at 6.6%, a particularly good result.

So, as Gary said, we do have a very flexible balance sheet, which supports the Group capital allocation strategy. As I said, annualized interest costs are down by EUR120 million, with debt down by EUR800 million. The average interest cost is actually now 5%, and the maturity is 5.2 years.

[And so] the key points effectively for the year, really, are the capital profile and reduced interest, revenue growth of 8%; the sustainable increase of return on capital at 13.1%; particularly strong free cash flow; continued macroeconomic movement in Venezuela; and a very successful integration of Orange County.

Breaking out into European and then subsequently the Americas, so some detail; we saw in the European packaging market, effectively we saw a particularly strong testliner market with three price increases during 2013, with a net amount in the order of about EUR80 million. And this was supported by a strong demand, stable supply, and underlying steady OCC prices.

Kraftliner saw some weakness in the latter part of the year and into January, with pricing off in the order of about EUR40 per tonne, but abating now supported by lower imports of the US, they're down about 17%, 11 months on 11 months, and some downtime in the market, you'll see ourselves saying that, 30,000 tonnes in Facture, and through technical issues 10,000 tonnes in Nettingsdorfer.

Corrugated pricing is progressing, and we expect to cover paper price increases. We broadly need around 5%. And, as we said in the press release, we see ourselves at 2% at the end of January. Volumes continue to be reasonable with up 2% year on year with a solid start to the year.

Looking to the Americas, the Americas performed strongly in 2013 with corrugated volumes up by 2% year on year, and a full EBITDA margin for the year of 18%. Within the Venezuela and Orange County delivered particularly strong results. The acquisition integration of Orange County has been a highly successful and we are delivering on our synergy target.

On the macro side, growth in Latin America consistently exceeds the US, and euro areas, and even Eastern European markets. As you can see from this chart, forecasts for 2014 confirm this trend.

The superior pace of growth is an opportunity we see here SKG and, as our target, continue to invest in that region. This is a region we know particularly well, because we've been there since the mid-80's and have the management capability to support acquisition growth here.

The Americas continues as a primary target for our M&A for us in 2014.

And now I'd like to hand back to Gary, who will discuss our capital allocation program.

Thanks, Ian. I think as we said earlier, our key focus for the last number of years, which was consistent with what we communicated to the market, was that we were paying down debt; basically, driving the cash flow at the pay down debt.

We have, as I said earlier, completed, in our view, the transition from this leveraged company status to the corporate transfer -- corporate credit profile. And, in that context, we feel it's important to now define our new business focus in the circumstances.

And, before we walk through our capital allocation strategy, it's worth pointing out that the strength of our current position reflects two major factors. Firstly, it reflects the strong free cash flows that we have delivered through the various cycles, both macro and micro, over the last number of years. with the integrated model, which is an important key part of our business proposition, underpinning very strong operational performance.

And then the second one is the fundamental repositioning of the capital structure as we've mentioned already.

So as a consequence of this, our 2014 annual cash interest will be approximately EUR120 million less than that in 2007 and, obviously, we will continue to focus on driving the strong free cash flow through 2014 and beyond.

Turning to capital allocation, we've knocked out this slide the options for capital allocation and these are a series of shareholder initiatives intended to increase returns and we're going to take you through each of these options in more detail. Each of the options will be evaluated on the basis of what we believe creates the most value, which obviously has a degree of logic attaching to it.

First of all, let's talk about dividend. Dividend has moved up our agenda. I'm sure you've noticed from our release this morning that that's, obviously, a case in point. And that reflects the structural shift and repositioning in our business, which I referred to earlier.

We realize that an attractive dividend is an important factor for our shareholders, particularly in a low interest rate environment. A 50% increase in our dividend, in fact 105% increase in our dividend since the reinstatement of it, reflects the confidence of the Company is Smurfit Kappa Group's business model and the business going forward.

And our intention in terms of dividend policy remains to maintain a progressive dividend stream consistent with earnings performance.

Turning to debt, a leverage multiple, which is reduced from over 4 times to 2.4 times or slightly less today, reflects the progress on the financial repositioning of the business. Moreover we have reduced our net debt by almost EUR800 million since 2007 based on the consistent performance of the operating model and the geographically diverse operation.

And it is our intention to maintain our discipline and our focus on our leverage structure. In that context, we have a very clear remit to work within 2 times/3 times net debt to EBITDA, while pursuing the shareholder initiatives.

As part of the capital allocation process we look internally at our own business and the opportunities within it. We have a very rich pipeline of projects, which we have chosen not to do historically, as we drove the debt pay-down agenda, which are now projects that are very much in vogue for us.

Our intention, over and above the capital -- 100% of capital depreciation, our intention to -- is spend an incremental EUR150 million over three years, pursuing these investments, which are very clearly measureable and very strongly under our control. And the objective is to come out of the three-year program with an annualized EUR75 million to EUR80 million of incremental EBITDA towards the end of the program, obviously building during the program.

And the projects include investments in areas, such as operating efficiency, in terms of rationalization, and energy cost reduction initiatives etc.; so very, very tangible projects.

The other key focus area in terms of capital allocation is growth through accretive M&A, and this is a priority for the Company in the context of the new capital structure and the transitioned business. And the objective is, clearly, to build durable sustainable value for shareholders over time. We have an annual financial capacity of a minimum of EUR300 million per annum, which we can deploy while maintaining net debt to EBITDA comfortably within the range of 2 times to 3 times.

Any target acquisition, obviously, must be able to deliver returns of 20% plus. And, in the absence of accretive M&A we want to be clear we will return capital to shareholders, but the priority focus is, first of all, growing sustainable business through M&A activities that are accretive.

So, in summary, we've fundamentally repositioned the business and we improved our business during that time. We have continued our operating performance and that has allowed the Group to deliver and exceed our debt pay-down objectives, as articulated to the markets some two years or three years ago.

And, as a consequence, we're confident in our ability to deliver on the series of value creating initiatives presented to you today.

So, firstly, I want to thank you for being here physically and also on the line. We're now going to open the floor to questions. Tony, Ian, Paul, our Group Treasurer and myself will deal with the questions.

What I'd ask you to do is as we take questions from the floor, first of all, can I ask you to wait for the microphone to the benefit of the people on the line. And then we'll -- when we complete the questions here we will move to questions from people on the phones.

So let me start with Barry and then Lars.

Barry Dixon, Davy. A few questions if I could -- well, three if I could. I suppose just in a general sense, Gary, you mentioned about a weaker though improving performance in Europe. You might just talk about the demand outlook in Europe, as you see it, and how it evolved through the fourth quarter and how you see it evolving over the next 12 months? And you might touch particular in terms of the growth in corrugated versus sheets and what that might mean?

The second question is related I suppose in terms of pricing and you talked about -- in the statement about an EUR85 a tonne increase in container board and we saw it in container board prices in 2013. And Ian mentioned a 5% -- a requirement to get a 5% increase in box prices.

Does that mean that you've forgone the increase that you saw in the first half of 2013 and that you're just going for the increases in container board that were achieved in the latter half of last year?

And then finally just in terms of the capital allocation, and it's great to see such a specific program. I suppose maybe some color around how long do you give it in terms of doing a deal before you decide, okay, we don't see a deal here, so we'll give the cash back to shareholders. What kind of timeframe are you talking about before you consider doing the share buyback? Thank you.

Thanks, Barry. Let me get Tony to deal with the first question, which is the one on demand, quarter 4 and into 2014; Tony?

Yes, specifically in Europe, Barry, we did see an improving trend in Q4, demand and we've seen that continue. If one looks at the comparators last year January was one of our strongest months and we have been very similar to that in January of this year. I would say that demand is better than okay, but not particularly brilliant; it's solid, as we look forward.

We see that the paper stocks rose sharply from very low levels during Q4, almost unheard of levels, but a lot of people ran over Christmas and the supply chain got filled. But we've also now seen those come down to much more manageable levels as we've exited January and into February.

And on the kraftliner side stock levels have as well been very much under control, so we see our stock levels in the kraftliner been very good going into our shut. As you know we announced the shut in -- which is a normal three-year maintenance shut that we're doing; in fact, where we've a little bit more to do following the explosion that we had in our -- in one of our tanks 18 months ago. So we're taking a few extra days to do that work.

Just for notation everyone, we had a technical incident in our other large mill, which is going to take us out of production for about eight days, last Sunday; nothing serious, but serious enough that it's going to take us eight days to fix.

So when we look at the demand environment I think it's reasonably good and the paper stocks are under control.

If you take our Latin American business in a general sense, I'd say it's Americas and Latin American business are good to very good, depending on the country.

And Tony, just while you have the Mike and I've just put it on to slide 12 again, which is the -- you want to maybe talk about the EUR85 a tonne and the (multiple speakers)?

Yes, what we're saying here, Barry, is that when you look at the price when it went down so sharply we didn't give away all of the down price. It went down so sharp and started to recover so sharply that there was a time lag that we didn't give away the price.

So to fully recover all of the various movements we're estimating somewhere between 5% and 6% depending on the market is what we need. We're currently at around 2%, we expect to get at least to the 4% to 5% level. Then we'll see how we recover the rest of it either through volume increments or design changes over the coming year.

We feel fairly confident that we'll recover the majority of what is necessary for us to recover the paper price. After all, that is our model so we have to.

In terms of capital allocation, I think, first of all, we're not going to commit to timelines. But I think what we've tried to do is be helpful to our investors in terms of figuring out how this thing will play out. We've made a couple of clear statements, one that we want to be a BB+ rated company.

And, secondly, that that means effectively both on the bottom end and the top end we've defined the type of leverages we're prepared to work within. So that means really working between 2 times net debt to EBITDA to 3 times net debt to EBITDA.

So if we kind of create those parameters as fixtures and then measure the business as we go forward in the context of the allocations it's possible to figure out at some point in time when that will kick in.

So we don't want people to be basically of the view that this is an either or. Capital allocation is going to be based on the best returns, but on the industrial proposition and the market proposition we believe the best value creation for shareholders is good quality accretive acquisitions; for example, like Orange County.

Lars, you were next, I think. Can we get the mic here?

Lars Kjellberg, Credit Suisse. I just want to come back to your CapEx, just to clarify. You talk about EUR150 million. Is that an annual number we're talking for the EUR150 million for the growth investments? Because when you talked about the [120] -- 1.2 times depreciation, that number would be EUR225 million. Just to clarify, what are we -- what is growth investments per annum, going forward?

Ian, do you want to take this one?

Yes, sure. Lars, clearly, what we're saying, we're saying that we're guiding that, for capital expenditure per annum for the next three years will go up by an incremental EUR50 per year. So, for example, we're saying that CapEx next year for 2014 would be about EUR420 million.

Now, we're saying that, over the three-year period, you're going to see EUR150 million. And as we exit the third year, those particular projects which we will identify, you will see an EBITDA improvement from those CapExes in the order of about EUR70 million to EUR75 million.

That seems an awful high return on EUR150 million.

Yes, but these are projects, Lars, that are fast payback projects, have very, very strong paybacks. And they range; they range from six to nine months payback, to three years payback.

But they are -- the important thing is the fact that they are within our control. They're not creating capacity and trying to find a market for it, they're not depending on price movements in the market; so their cost take-outs of a specific very nature, driving efficiencies, but also very measurable. They are also energy products, which have -- the right ones have very clear paybacks and very rapid paybacks.

And there's some big investments that have integration potential for us, which is, again, very easy to capture and very easy to execute.

Tony, do you want to add anything?

Not really, Gary. If you take, for example, in Mexico where we're taking a secondhand paper machine, we're bringing it to our site in Mexico and putting it down. We've had that project on the agenda for a long time, but we haven't had the room to do it, with all the other stuff that we have.

That is a very quick payback project, because we already have all the paper sold. We're actually buying the paper in the marketplace. So from the point of view of a quick payback, once that machine starts, it's going to pay back a lot of money to us.

So that's why you get to those very high numbers, which is very good. But they're, as Gary said, very real.

And even -- just to be clear, even at the lower end of the pricing range within Mexico, in other words, the margin spread that we give to third-party suppliers of paper, that's what we're capturing in the returns, minimum.

And Townsend Hook is not included in this incremental?

No.

Can you give us any sense then, if you progress, how the -- how we should model going forward, when you're going to get the incremental steps in EBIT? I appreciate, three years out, that's EUR75 million to EUR80 million. When should we start to get any incremental (multiple speakers).

Realistically, it'll be early 2015. Because one of the biggest challenges, and you've often heard us say this, and one of the reasons why we want to emphasize that this is not, in any way, an abandonment of capital discipline. In fact, we're being very precise as to what we're prepared to do.

But Tony will consistently say the executional management of this is as important as the financial availability for the investment. And we have resources to support these projects, which are critical in their execution. But they're limited in resources. And more importantly, the quality of the execution is all the better for having a lesser number.

So realistically, it will be 2015 before we see anything. And it's probably going to be phased. If we phase this EUR50 million, EUR50 million, EUR50 million, it's probably reasonable to say EUR20 million to EUR25 million per annum. But it may well be -- but it will be that classic lift off.

Okay. And just a final thing, on the particular [curve] in corrugated, on an average basis, how much -- can you clarify how much you really got in Q4, of the 2% that you talked about that you've gone from?

Realistically, about 1%, 1.25%. It's -- and each month differs, depending on whether you have contracts (multiple speakers).

Yes, depending on the mix, but basically 1%, a little bit more than 1% Q4, a bit more (multiple speakers).

And finally, then, specifically on kraftliner, we talked about it and you mentioned it, of course, [about] upward pricing pressure. When do you see -- what will it take for you to announce a price increase in kraftliner? When would you be ready for this?

Tony?

I think when the market conditions are right.

Yes, but maybe two minutes on what the market conditions were. He's not normally this coy.

No, I think we have to be careful not to front lead. But I think the fourth quarter, we saw a weakness in kraftliner, and we saw that continuing in January; a weakness on pricing, because of the perception that there was going to be significant tonnage coming from America, based upon their own stock builds, which did not happen. We have no evidence of significant increases in kraftliner coming into Europe from the United States during Q4.

We now see that the stock levels are very much under control. Stock levels have come to a level where demand is good. We're going into the busier period, which the main usage of kraftliner is in agriculture areas, and now you're going into the growing season. So there might exist possibilities there to capitalize on that, as we look forward.

Thanks, Lars. Gerard Moore, and then, I'll go to the back of the room to Catriona.

Three questions from me, please; just one -up question on the CapEx. Are there any expansion plans included in the CapEx -- the additional CapEx that you announced today, i.e., new packaging facilities? Or is it more internal operations that you've alluded to?

Secondly, in terms of Latin America, or the Americas, you gave us an indication of the currency impact that it had on your results. But if we look at 2014 and where spot rates are at the moment, what kind of level do you think currency movements could have on your results in 2014?

And I guess, with that in mind, can you explain to us a little bit how you manage currency movements in Latin America? To what extent do you actually try to recover your EBITDA in euro terms? Or do you just accept what the market is and the translation effect is the translation effect?

And then, finally, in terms of your tax rate, Q4 came in a little bit lower than I was expecting. But maybe if you could just give us an indication of what you expect going forward. Thanks.

Okay, let me hand them out; Tony, the CapEx and new facilities.

Now, we do have a couple of new facilities that we're currently constructing, one for Bag-in-Box down in Spain. And we are looking at a couple of new facility constructions in Latin America and the Americas.

So -- but they are not included in the quick win CapExes. They would be included in -- we're still spending, Gerard, an awful lot of money in our normal CapEx, and they would be in our normal CapEx development plan. And that will be, I would say, over the next two years, a couple of new facilities around the Americas, other than the Bag-in-Box facility. We don't envisage constructing new facilities in Europe, other than in corrugated.

And Ian, the currency's impact.

Gerard, what I'll do, I'll work backwards from the tax rate, and some guidance, and Paul can do the currency.

So if you look at the tax rate, the tax rate that we have is in the order of about 30.5%, and that will be our forecast rate. And I suppose to give some guidance going through the cash flow for 2014, to use that opportunity.

So if you take I said that the depreciation we see next year is going to be about EUR420 million; the cash tax next year we see in the order of about EUR140 million. Working capital, we give the guidance typically at 7% to 8%. Cash interest is going to be EUR155 million to EUR160 million. And as I said, the P&L tax charge is going to be around 30%/35%.

In relation to the currency?

In relation to the currency, we don't tend to hedge translation risk, as such. Where we have debt -- and we have debt in Argentina and we have debt in Orange County, where we have debt, we tend to have that debt in the currency -- in the reporting currency of the entity.

So the debt in Orange County would be in dollars, and the debt in Argentina is in pesos. But we don't hedge translation risk, as such, in terms of selling forward the earnings from Latin America or from North America.

And so, therefore, the currency impact on future earnings is a function of whatever it will be, (multiple speakers) with the economic hedge in place?

Yes, absolutely.

Okay, Catriona, and then I'll come to Mannie.

Catriona O'Grady, UBS; three questions for me. The first one, looking at the European box volumes, can you give any additional color on any particular countries that were strong? I know you said in the release that Eastern Europe was strong, and particularly Poland, but any other moving parts?

Related to that, also any changes in terms of the end-market industries, have you seen any particular growth?

The second one would be, when you look at the box market, have you seen any change in competitive pressures for winning contracts, both in terms of maybe smaller players chasing volumes at the expense of not putting through the price increases? Or was there any change in customers drive for innovation and picking other players? Thanks.

Thanks, Catriona. Tony, some color on the countries.

On the countries, I would say that most countries are doing reasonably okay. The one that is most challenged, I think, right now is the French market. We would see that French market having very little growth and a lot of players struggling in that market. So that would be our most challenged market.

We see on the positive side, as you mentioned, Eastern Europe is doing well. The German market continues to do well. The UK is good. And surprisingly, some of the periphery markets, which you would think are doing badly, they're not. Spain is doing well, but that's primarily the function of the agricultural market doing reasonably a strong performance; and again, Italy not too bad.

So, all in all, I'd say just the one market that we worry about right now is the French market.

In Europe.

In Europe.

And Tony, the end-market industries, any dynamics?

I think we're continuing to see growth in agriculture and, of course, agricultural products. We're not losing any particular share. As an industry, sometimes you lose a little bit, but -- here and there, but the growth areas continue to be in agricultural trays and food, in agricultural trays.

I think that the Internet obviously is a big plus for us as an industry and we see significant growth in the whole area of transport packaging via the Internet. And I think that's something that we, as a Company -- as Gary mentioned in his speech, we, as a Company, are concentrating more and more on and we see some very strong wins in that whole area during the last 18 months or so.

And while you have the sword, and competitive pressure, smaller players, pricing?

I think in our industry, you always have people playing to different agendas. I think that you have a number of competitors who do have a volume agenda and the way we try and beat them, in a sense, is by our product offering, if they're after volume only.

We continue to try to sell to the majority of our customers the value proposition. It's not just about the price of the box; it's about the price of the whole supply chain. We can add more value in that whole area than anybody else in the business and we continue to make sure that we try and emphasize that to the customer. Sometimes we do lose customers; sometimes we gain customers on price or lose them on price. But primarily, we try and sell a value proposition, which has worked for us over the time.

And I think that's evidenced by the fact if you look at our growth in our pan-European accounts, which are probably the most discerning and hard-driving of customers with regard to quality and service, and I would say for on-time deliveries, I think we're well above the market in growth in those areas, and I think that's a function of the fact that we are offering something different.

Yes, we're spending a lot of money -- just on that point, we're spending a lot of money and we have some further initiatives underway with the objective of driving our top line in the whole area of differentiation.

There's a challenge, and some of you would have challenged us as to whether it's discernibly possible to understand which company is better positioned for innovative propositions for customers and convincing them to work with them.

Other -- ultimately, the numbers don't lie so you have to look at the financial performance ultimately to measure everything, but we are investing a lot behind the scenes in terms of innovation in the broader sense, not just designs, but science and alternative substrates and so on and so forth.

One of our big challenge now is to make sure that we're coherent, consistent and cohesive in how we deliver to customers and that they understand this and that they pay something for it.

And we believe in the better relationships, Tony has mentioned, we are achieving an element of that, that's why we're in the businesses. But once we can deliver for the big people, we can obviously, more importantly, look after the local customers who are critical to our whole DNA.

Mannie, I think you were next and then I come this side as well. Mannie's first and then Kartik; ladies first.

Mannie Larchet, Davy; just a mish-mash, some of which you've kind of answered. The rise of the hard discounters, the Aldi's and Lidl, that's clearly been a driver of higher value/margin packaging. How do you fit in in the supply chain? Do you have to be approved by Aldi and Lidl, etc.?

And again, it goes to the point about how you differentiate and is that one of the reasons why margin slipped a little, because you had to pay more and didn't get -- you had to invent more or invest more and you didn't get the returns on that?

Tony, do you want to take the first one, the -- how we engage with the Aldi, Lidl's and so on?

Yes, basically, you have to -- in the case of both of those particular companies, they have obviously suppliers which are sometimes branded companies and sometimes specific to them. We engage with those customers, their suppliers, as you would do in any normal commercial relationship.

As you would know, that whether you're dealing with the Tesco's or the Aldi's or the Lidl's, you have to offer a very strong degree of development work for them. And, in many cases, in order to supply their suppliers, you have to have a relationship with these big multiples, and we do have. We have [implants] in many of the big organizations that are grocers, Sainsbury's or Tesco's, and that's a part of normal business, to be able to service their suppliers.

I would say that it has never been any different. What we're probably doing a little bit more of today is helping the Aldi's and the Lidl's display the products that are going on their shelf, whether it's for cereals where we have an in-store set-up for them; or by helping them with the whole area of innovation and how to sell more of their suppliers' products in what locations in the stores. And it depends on the multiple -- it depends on which supermarket you're talking about.

So we have some very good relationships with supermarkets and sometimes -- where they allow us and sometimes you have no relationships with them. And Aldi and Lidl are no different.

But, as you state, I think a very important point that Aldi and Lidl have really led a drive towards having more white packaging and more display-type packaging. And, obviously, that has meant that the other multiples have had to follow them in trying to upgrade the packaging and that has been a benefit in general.

On the issue of the margins, Mannie, it's difficult to compare quarter on quarter in this and particularly quarter 3/quarter 4, because they're very, very different quarters, and I don't want to run to the usual defense which is mix and currency and so on.

But there are actually different cost dynamics and mix of the business between quarter 3 and quarter 4 as you can imagine. And quarter 4 obviously has a long Christmas break. So I wouldn't take the quarter-on-quarter margins as the guide or the trend but rather the overall margins for year on year.

Kartik? Can we get the mic?

Kartik Swaminathan, BofA Merrill Lynch. My first question was on working capital. It seems to be, well, becoming an industry theme now that people are cutting working capital to levels that we haven't seen for a long time, if not, ever.

I just wanted to ask how we still have guidance of working capital at a sales ratio of 7% to 8% if you've already reached below that. Is that conservative? Or are there any kind of clear indications that you're going to be ramping up in LatAm and perhaps the ratio could be a little bit skewed?

Secondly, Gary, I'm not entirely sure whether I heard you correctly, but did you mention that there could also be some rationalization projects as part of this EUR150 million of CapEx? And, if so, could we see some shrinking of your footprint in Europe?

And then finally, just to come back to competition, I was wondering if you had any feedback on the mills that were converted into testliner in Europe and whether there's been any momentum there.

Thanks, Kartik. Let me start with the -- Ian, on the first one, on the working capital, are you giving soft guidance?

Well, Kartik, you're right. Working capital has been a big issue. I think every company, like, we would see a [loss] in the market over the years and we've always had a fairly good working capital as a percentage of sales, but people are demanding longer terms out there and people are not paying on time as well.

But it's been a huge focus for us always, and particularly coming from the leveraged background that we did, so it's always been an area of value and we would have taken a lot of money out of working capital over the years.

So it has been helped now by some of the laws coming in in France and Spain, where you must pay in a certain time. So when you look at our yearend working capital, as I said, it was about 6.6% of sales, so you go back and when you do the analysis there you can actually see that our debtor days have actually come down.

Effectively, our debtor days at the end of last year were 54 days. Our debtor days are 49 days. Our inventory days were 72 and they're down to 64. So we've done a huge amount and continue to do a huge amount of work in here, but there's always a lot of pressure and an increasing amount of pressure in this area. So while we're outside our guidance range of marginally below the 7%, 7% I still think is a reasonable guidance range.

Thanks, Ian. And Tony, do you want to deal with the conversions with the testliners and I'll deal with the rationalization one, if I can figure out an answer?

I think on the testliner conversion, we, as you know, Kartik, we've seen one blue paper. That was due to start up in October and we believe we will get test rolls, because we will be swapping paper with them. We will be getting test rolls at the end of this month from them, so they're broadly five months delayed.

It is not an easy conversion from -- to make a conversion from another grade into packaging board. You better have the market. One of the things that is our bigger strength is that all of the capacity that we have is sold from the day that it's produced. So, in this case, they are Klingele and VPK so they will be able to sell a lot of their capacity. But if you're a new guy trying to convert a paper machine, you want to be very, very brave.

And we have been in a benign waste paper environment for the last 15 months. There is nobody to think that's going to continue over the next period of time, so you want to be sure that you secure your raw material source at a reasonable price and that will be a dangerous.

So I think conversions are always possible, you can never rule it out, but it is a dangerous thing to do and even with papermakers in VPK and in Klingele, they're five months delayed and obviously there's a massive cost to something like that, I guess.

Does it make sense to assume that if we see much further momentum in testliner that you could see these people coming pulling triggers on your projects, or would it be box prices that would have to fundamentally rise to a new level to incentivize them?

I think inevitably as a returns for papermaking and recycled are high then it's going to attract somebody. We ourselves are bringing back Townsend Hook this time next year, so that will be additional tonnage which we have, as I said, already sold internally ourselves.

But, yes, so there will be some capacity coming on to the market next year that the market needs to factor in. But I think you can never rule out the fact that with these higher prices, that somebody might do it at some point in time. In any event, if you look at the Klingele experience and VPK experience I think you're talking about 15 to 18 months away.

Your question or your point is very valid. If people were approaching investments of this significant, and these are not cheap. While they are less than brand new investments, they're not cheap conversions and the hidden piece of it, as Tony has said, is basically the ramp up and the execution of it. The concepts are easy.

They should be thinking about the end market, because they have to find a market place for their product, and if they produce a product that hasn't got an end market, the prices drop and their prices drop and their whole thesis of the investment. But that's not necessarily -- as we all know, that's not important in the way people think about it.

Just turning to your other question then, let me be very clear; we have no plans to shrink our business anywhere. Our focus on the end market is to grow; it's to grow in a very targeted and ideally in a value-adding way. So when we talk about rationalization it covers a broad church of basically having facilities and capabilities and capacity that optimally match the better end of the segmented target market that we are looking at.

Obviously, within that context, we have -- from time to time, we have people retiring whom we always try to ensure we don't replace if we can find efficiencies. We have areas where we can automate and they're -- clearly, they're available in black and white in terms of the type of returns that one can make.

We have, as Tony has said, the Mexican paper mill, which is covered in that broad church, where we took a machine out of our Spanish mill, which we closed some years ago in Valladolid, and we basically have it refurbished and ready to go very successfully, we believe, in Mexico City.

So it's that broad range of things. But we're -- certainly no question of shrinking.

Toby Thorrington, Edison; just a follow-on question on the incremental EUR150 million of CapEx, please. Can you give us some feel of the regional split of that at high level, if you will. And are we to assume that the incremental EBITDA benefits will be in line with the capital allocation?

I think the broad picture, and in fact there are two aspects to this investment. One is, these are projects that we would have done over time anyway, but have really good returns and we're bringing them more near term. They're ones that we could have done in the past, but we've basically focused on debt pay-down.

So, Tony has well-developed projects of a substantial nature with far greater demands than supply in terms of where we're putting -- making available. That's the first point.

So in terms of developing the totality of the Company we need to have regard to all the markets and their particular needs. But also, the internal mindset and motivation of management, who actually have great ideas and projects that they're actually putting forward.

There's an element of being fair across -- as well as looking at the returns, which is the starting point, there's an element of allocation consistently across our business so as to move it forward.

You will see, and we've alluded to this in the past, that our capital investment over the last number of years was skewed, in fact, towards the Americas, and specifically Latin America, because they were higher growth markets and because we had greater opportunity.

This one, as we look at it, at the moment, is broadly speaking -- if we look over the three years with the nearer year very specifically defined, it's broadly in terms of the type of turnover; so it's 70/30 Europe/The Americas.

In terms of the way the returns will come, some of these, as I said, they range from very quick paybacks to slightly longer paybacks. And it depends. Obviously, things like moving equipment from Europe into Latin America, where we have already got integration, they're very fast returns, so they're very high returns.

Generally, intuitively, you should expect that the Americas would deliver more than Europe, because, obviously, the opportunities are greater.

Thank you.

So we have we any other questions from the floor? Can I then turn to the telephone lines. Have we any questions from the telephones?

(Operator Instructions). James Armstrong, Vertical Research Partners.

Most of my questions have already been asked, but the one I have is on OCC prices. Are you seeing any tightness in the OCC market? They've been -- prices have been relatively stable as of yet, and what's your assumptions on OCC as you go through 2014?

And then I have a quick follow-up.

Tony, do you want to take that?

James, we're not really seeing any movements one way or the other. It's -- obviously we have slight different markets in Europe, north to south, east to west. But broadly speaking last year we had complete stability; and for January/February we see stability and we have no reason at this time to think any other way. But obviously, that's a moving feast. But right now we see stability across the piece and that's the way we're thinking about it for the year.

That's very good. And then, quickly, year over year and sequentially -- sorry, knowing that you want to spend about EUR300 million a year on acquisitions, would you consider doing larger deals, but maybe over multiple years and only doing one every two years or something like that? Or, is this one, you want to keep it to the smaller size as you do acquisitions?

No. Ian, do you want to cover it?

I think, James, as Gary outlined, our focus is to get all our metrics right, effectively, and I think we -- we think that we're probably focused very much on being a BB credit. We have big balance sheets and we can actually take on a reasonable size acquisition at a minimum of EUR300 million.

So, we look at everything in the context of, what is the best allocation of capital and what is the best return for the shareholder. We will do the right thing. But to leverage up, given the sort of metrics that we've put out there, would be a very difficult proportion.

All right; very good, thank you.

Our pipeline basically comprises I think, Ian, it's true to say, small bolt-ons in the more developed markets where we're either fitting out a niche skillset, as we did with CRP in the UK, Tony, which was very attractive to the UK market and to our overall. And an accumulation of those have their own value creation and quite often very clear and definitive value creation.

The range, obviously, depends on the opportunities. It's more a seller's than a buyer's market, per se, in these situations, so we look at all options, as Ian has said.

Thank you.

Thanks, James.

(Operator Instructions).

Okay, I think we seem to be done on the questions. Can I finish off, first of all, by thanking everybody here present in the room and all of those who joined us on the call, and have a good day. Thank you very much.

This now concludes our call. Thank you, all, very much for attending. You may now disconnect your lines.