Smurfit WestRock PLC (SW) 2014 Q3 法說會逐字稿

Good afternoon, and welcome to the Smurfit Kappa Group third quarter results call. (Operator Instructions). Just to remind you, the conference call is being recorded.

Today, I'm pleased to present Gary McGann. Please begin your meeting.

Thank you very much, operator. Good morning, or good afternoon, ladies and gentlemen, and thank you for taking the time to join our 2014 third quarter results call. I'm joined on the call by our Group COO, Tony Smurfit, and our Group CFO, Ian Curley.

Before commencing, I would refer you to the note on forward-looking statements and principal risks and uncertainties, set out in our press release, and which also applies to our discussion today.

We're pleased to report a good operating performance in the first nine months of 2014, with pre-exceptional EBITDA growth of 6% to EUR866 million, and pre-exceptional EPS growth of 55%, to EUR1.152 on the same period last year.

These results reflect the continuing benefit of the Group's geographically diversified portfolio of operations; its integrated business model; the consistent delivery on cost reduction initiatives; and a fundamentally improved capital structure.

As a consequence, return on capital employed, which is a key performance measure for the Group, continued to improve, to 14.5% in the quarter.

In line with our declared strategy, the Group's strong free cash flow has facilitated a number of accretive acquisitions during the year. The acquisitions of Bates Container in the US, Corrumed in Colombia, and Rierba in the Dominican Republic, will further enhance the Group's packaging footprint across the Americas, strengthening our market positions, and increasing our exposure to higher growth markets.

With an aggregate consideration of approximately EUR155 million, these acquisitions reflect the Group's objective of delivering increased returns in its chosen markets and sectors.

Concurrently, our strong free cash flow is also supporting a materially higher year-on-year dividend payment, and continued leveraged net debt reduction to 2.2 times EBITDA.

In line with extensive value creation initiatives since the Smurfit Kappa merger in 2005, we're continuing to optimize and drive our integrated business model, through a combination of asset optimization activity and targeted investments.

We've recently commenced a process of engagement with our works councils and trade unions, regarding the rationalization or closure of four corrugated facilities, and a recycle containerboard mill in our European business. This processes will incur a total cost of approximately EUR50 million, with EUR15 million being charged in the third quarter, and the remainder in the fourth quarter.

However, these actions will deliver a further reduction in operating costs, and will significantly enhance operational efficiency in our European business, delivering a strong IRR from the initiatives.

Looking to Europe, in spite of a somewhat weaker macroeconomic backdrop in the third quarter, the Group continued to see good demand growth. Our European packaging operations, in particular, performed well, supported by containerboard pricing and volume momentum in the quarter.

We continued to deliver good corrugated volumes in Europe, with 2% growth year on year, on a days-adjusted basis, for both the third quarter and the first nine months of 2014.

Following some downward pressure, due primarily to adjustments in the index price agreements, as a result of lower containerboard prices in the first half, the Group's average European corrugated prices decreased by 1% in the third quarter. However, the containerboard price increases achieved in the quarter are expected to provide solid support to corrugated prices.

In September, the Group successfully implemented a EUR30 a tonne price increase in both recycled containerboard and kraftliner. Strong demand, along with positive inventory levels, allowed the Group to implement these increases.

As Europe's largest producer of kraftliner, with a net long position of approximately 500,000 tonnes, the Group will quickly benefit from the higher price environment.

Prices for OCC have continued to remain reasonably steady in Europe throughout the period, despite a 7% year to September reduction in exports of recovered fiber to China. However, a number of structural developments continued to positively offset weaker Chinese import activity, including the incremental demand in the US and Europe, supplier reductions through further newsprint capacity closures, and higher quality thresholds.

In our Americas business, we continued to operate well, with organic volume growth across most countries in the quarter. We delivered volume growth of 7% in the quarter, and 3% in the year to date.

Colombia and Mexico had particularly good performances, reflective of structural improvements in the domestic economies, as well as a generally improving business environment, as the strengthening US economy benefits imports from these countries.

Venezuela remains challenging, due to high inflation and a weakening currency. However, with a market-leading position and a strong local management team, our operations continues to perform well, despite the country's challenges.

Although currency weaknesses impacted profitability in the Americas during the quarter, strong market growth trends, increasing engagement with our large international customer base, and accretive acquisitions, will continue to drive the business's expansion in the region.

In that context, the acquisition of Bates Container, completed in October for approximately $158 million, will fundamentally strengthen the US business, increasing the integration of the 350,000 tonne recycle containerboard mill in Dallas, and improving the Group's operational footprint in the region.

As a Group, we continue to progress our commercial and innovation offering. In June 2014, the Group launched its Open the Future brand strategy. The primary objectives of the initiative is to differentiate our business and our customer engagement from the other industry players by providing customers with insights and innovations, and developing strategic partnerships with them, to the mutual benefit of our customers and Smurfit Kappa.

The Group continues to work to the highest standards of sustainable production and good governance throughout its global operations. During the quarter, we were included in both the FTSE4Good Global Index and the FTSE4Good Europe Index. The FTSE4Good Index series measures the performance of companies demonstrating strong environmental, social, and governance practices. Our inclusion in the indices validates our commitment in this area.

In summary, we're pleased to report a good quarter and first nine months' business performance. In the period, we've seen EBITDA growth of 6% to EUR866 million, and pre-exceptional EPS increase by 55% to EUR1.152. Following a period of debt pay down, Smurfit Kappa Group is substantially better positioned today than at any other point in its recent history, with a well-invested asset base and an optimal capital structure.

The full-year contribution of recently acquired businesses, a substantially reduced interest expense, and the Group's unrelenting focus on operating efficiency, will deliver and drive value. Going forward, this presents a broad range of strategic and financial options and the capacity to deliver an improved financial performance at all points of the industry cycle.

Thank you for listening and, operator, we're now happy to take questions.

(Operator Instructions). Matthias Pfeifenberger, Deutsche Bank.

A couple of questions from my side. Firstly, my question would be, the [EUR30] quite solid achievement. Are you a bit underwhelmed still by this outcome, given how low the inventories were and was it maybe this two-step approach in terms of the price increases, that's something you will continue to do, going forward, or would it have been better to do a one-go approach?

Given that inventories are still quite low and there was just another news item today from a potential outage in Italy, is there more fresh scope to maybe go for another price attempt early 2015?

The second question relates to the reshuffling. Maybe you can give us more color in terms of what -- as I understand it, the volume losses are compensated by Townsend Hook, and IRRs are quite high on that approach, so maybe you can attach a number in terms of earnings contribution on an annualized basis for 2015 and so on. Thank you.

Thanks, Matthias. I'll ask Tony to comment on the price increase. Just to say, we're not going to get into forecasting or predicting 2015, because that's obviously not something that's within our competence to do. But let me take the general point and, Tony, ask you on the EUR30 and the approach to the price increase?

Yes, hi, Matthias. I think, obviously, it would be our preference to go for the full increase that we announced initially, but we're in a very diverse market and the two-step approach that was [tried] for was really the market really decided that that's the way they wanted to do it.

We clearly believed, and expected, that the EUR60 or EUR50 that we would have expected would have been implemented, given the dynamics of the market. But against that, a lot of our independent competitors would probably look at their margins currently and want to give some slack to the independent corrugators out there.

Hence, the reason some sort of balance in between was found by the independents, which is, while we produce a lot of containerboard, we're short containerboard, so we actually know what's happening in the market and that's what ended up happening.

We have to follow the market because our box system is, well, integrated, must stand on its own two feet and we must transfer the market price. So we would try for the whole amount in an original way, but obviously that didn't happen.

As to price increase for next year, as Gary said, it's far too early to even contemplate next year; we have to finish this year yet, and we haven't finished our budget views yet. But clearly, the market is still relatively tight and if the conditions warrant it, we will obviously keep an open mind to price increases as and when it's possible to do.

Perfect. Thank you.

[For that one], Matthias, as a general comment we don't go for price increases that we don't think a) they're justifiable, and b) be necessary. So obviously, that's the overarching point. Ian, do you want to take the rationalization program and the IRR?

Yes, actually, Matthias, when you look at the slides that went on the site this morning you can see on slide 14 [of slide 17], you can see we talked about capital allocation, capital expenditure. And on the second paragraph, we talk about continuous improvement in asset quality and system efficiencies. And we talk about an IRR of 26% from the current initiatives that have been outlined in the press release.

Yes, okay. Thank you.

Fabio Lopes, Bank of America Merrill Lynch.

I have a couple of questions, actually three. First one on the pricing; would it be fair to assume that this first leg of the price increase in containerboard would result in corrugated prices being flat from the plus 2% that they were in the beginning of the year? And if you don't go for a second leg of price increases, we should then see prices flat year on year in 2015 versus 2014?

The second question is on Venezuela. Given all the confusion that is going on in there, would you be able to clarify how much EBITDA you have there so that we can move on from this issue?

And the third question would be just a clarification on the CapEx. The EUR50 million that you're spending in the rationalization program, is that included in the EUR420 million guidance for CapEx? Thank you very much.

Thanks, Fabio. Let me deal with the last one first. The last one is no, it's not included in the EUR410 million (sic - see press release, "EUR420 million"), it's incremental. And, Tony, do you want to take the pricing subject?

Yes, hi, Fabio. We would say that EUR30 is not enough to trigger automatically the contracts. We have about somewhere between 30% and 40% of our business is index-linked and the EUR30 does not trigger that; it's not at a sufficient level. So therefore, those contracts will not move upwards on the basis of EUR30; we need more than that.

There will be some osmosis upwards, I would say, in a sense that the price increase will allow for some of the more commodity type business to get increases within our business mix. But I wouldn't hold out that it would be a very substantial amount because, on the other side of that, sometimes you have tenders where you have the lower prices. So on the whole, I would say that we would be broadly flat --

Flat to marginally upside.

Flat to marginally upside based upon the EUR30 a tonne increase. And as I said earlier, obviously we need a further initiative to push corrugated box prices.

Okay, on Venezuela I'm not sure that there is actually confusion because I think we elaborate quite substantially in our notes on the press release on the whole Venezuelan situation. As you probably know, Fabio, and if not forgive me, I'll clarify it anyway. Our stance, historically, has been very simple. We do not break out our performance by country for a number of very simple reasons. In most countries, a) many of our competitors in many countries do not publish results and, quite frankly, it's hostage to fortune for us to indicate how good or, indeed, how bad we're doing in any particular country. As it happens in Venezuela, our business does reasonably well.

Secondly, in the context of the environment that exists in Venezuela, it does not benefit us or, indeed, anybody, to be explicit on it. It is not, as we have said on many occasions, a significantly material issue. I think where the confusion, if there is confusion, is as to what has happened in the Americas in quarters, there are a number of factors.

There are generally currency weaknesses, including Venezuela currency and hyperinflation. We also have a very nice opportunity, which is part of the Orange County synergies where we have a press section in our Forney Mill in Dallas, which has been installed to give us greater capacity and quality of paper, which will pay back very, very well once done. It had to be done in quarter 3 and, therefore, the mill had to be taken down.

Thirdly, we indicated earlier in the year that we had bottom slicing activities in our US facilities of Orange County; we're slowly building that back up. And then we also had in the quarter, and quite a quarter specific issue, around a couple of customers. One in terms of the drought in California where, basically, the product and the produce wasn't produced; and the other customer that, basically, had a major promotional program that was over-calculated and somewhat under-delivered, which is specific to the quarter.

So that's probably as much as we can elaborate on. If there are other specific questions I'm sure, Ian, you would be happy to take them on or off the call.

Just a quick follow-up. If the rate stays the same I understand for the hyperinflation, and please correct me if I'm wrong, you're going to in Q4 recognize retroactive for the beginning of the year. So there would be no impact in 2015 incremental to 2014. But other than that, the exchange rate of the Venezuelan, if it remains the same, what would be the impact that you would have in 2015 broadly, at the moment?

Ian, do you want to take that?

That's fine, no problem. When you look, Fabio, at the exchange rate, you look in quarter 1 of this year was [VEB10.7], quarter 2 was [VEB10.6], quarter 3 was [VEB12] and, hence, the currency move as you caught up. In the case of Venezuela, and we would have a view obviously when we make a statement by consensus, we would have a view on rate. Venezuela, the rate we reckon in [VEB12 or VEB13], so there would be a minimal change in the numbers going backwards. But you also must bear in mind that there's an underlying seasonality, to a certain extent, because a lot of these Latin countries, also in December, they take longer Christmas holidays than the rest of us.

So for the rate for 2014, we'd be very comfortable. In the case of 2015, it goes back to, I think, Gary's earlier point, all things being equal the answer is yes, it stays flat, but there is an underlying operational results and pricing etc., etc., but the pieces as you outlined is correct. So year to date it's [VEB12] and that reflects in the [VEB12] for our forecasts for the remainder of the year would be included -- our view would be in there in the consensus and we're happy with the overall consensus number.

Okay, and you'd be able to quantify the underlying impact for 2015, if rates were to stay the same?

Yes, the issue there if they'd be no underlying impact expect I don't know the profitability for 2015 because I don't have the budget done for 2015. But all things being equal, that is correct.

Fair enough. Okay, I get it. Thank you.

Fabio, we can deal with that in more detail at some other point when we have the numbers.

Okay. Thank you very much.

Lars Kjellberg, Credit Suisse.

A couple of questions. When you're looking into 2015, you have a number of initiatives that would, hopefully, improve margins and drive top line in terms of the M&A activity in particular. Is there anything you can share with us in terms of how you think about your cost improvements through the high yielding investments, maybe Townsend Hook, and your continuation with EUR100 million with cost take-out program, how that's going to work in what seems to be very low inflationary environment, if there's actually any real cost savings coming from that, over and above cost inflation?

Yes, as a generality, Lars, if we break them out, our ongoing cost take-out program as you will have seen over the last number of years and last certainly couple of years where inflation has been relatively low but, nonetheless, has existed, we have seen two factors that have addressed, or have been addressed by, our cost take-out program. One has been that inflation and, in the case of labor particularly where there has been labor inflation make no mistake about it, notwithstanding the overall inflationary numbers in the countries.

And then secondly, it comes back to my point about where the pricing of our products, both at paper and then ultimately in packaging, which is our key business area, the spreads and the margins are not at where they have been previously. So therefore, we have had some of that gobbled up there in terms of not getting it through to a margin enhancement. Having said that, we are seeing some slow but progressive margin enhancement.

If you then take the extra work that we're doing, a) the rationalization or asset optimization program around the closures, they clearly are intended to make our overall existing system better and more efficient because we will transfer the business to them, and Tony might want to comment on that.

And then secondly, they obviously are delivering us, as we've stated in the slides and as Ian has alluded to, approximately an IRR of 26%, which should start to come through. But obviously, these won't get closed overnight; we have to negotiate with our unions and we have just about started that process because, obviously, we wanted to get our communications alignment in place.

And then the final one is, obviously, the extra capital investments on quick wins. And we have guided today that we have approved between us about EUR60 million of CapEx this year so far. Approved, some of them are starting to be implemented; while they're quick wins it doesn't mean they necessarily get done immediately approve them, we have to buy equipment in some cases, etc., and so there's a lead time on that.

But we confidently expect to start seeing some upside on that going into 2015 and thereafter. And we've guided, as you know, that coming out of 2016 or into 2017 we should be at a run rate of about EUR75 million EBITDA incremental.

Obviously, all of the other moving parts are something we have to be conscious of as well. But I think you will see, over the last number of years, and certainly the last few years, an increasingly resilient margin progression and a particularly resilient and growing return on capital employed. So whilst it can be frustrating at times to try to nail down where exactly we're getting and not getting the benefits, I think the underlying evidence is we're beginning to get them to come through to the bottom line.

Yes, that makes sense. Townsend Hook, two things on that point; of course, you are mitigating some of that incremental volume through the actions you're now taking. But in the context of what we saw last year with a big inventory build over the holiday season, and a reversal of the positive pricing trend, how do we monitor that situation in the context of restarting or starting the accounts at nil again? How do you deal with it?

Just if you take Townsend Hook, we would expect to do about 160,000/170,000 tonnes of paper next year in Townsend Hook. As you'll have seen today, we have withdrawn 80,000 tonnes, or we will be withdrawing 80,000 tonnes. We also are buying significantly more tonnage on the outside because we used to run Townsend Hook to 230,000 tonnes. So clearly, we have still that paper within the system that we will be utilizing.

We are a big net buyer in the market in Italy where we'll be doing some swap trades to eat up into the additional tonnage from Townsend Hook. So we see very little problem in the introduction of the tonnage from Townsend Hook and its effect on the market. It's very minor and if there's any sort of growth that would be able to take care of that tonnage.

As to the Christmas, the Christmas before last there was a very big shortage in January so, therefore, the reason that people ran last Christmas was because of the experience from the year before. We hope that -- well, we can't obviously do anything about people in the industry, but for ourselves, we certainly will not be going into January with an excess of inventory, and that's all we can manage.

I think there's two other points, Tony's point about the Townsend Hook one, we are seeing demand in growth in the paper side and we have been seeing it for quite a number of months and almost a year at this stage. So there is an underlying demand growth, notwithstanding the general macroeconomics.

And the second one is, I think Tony has said, all we can do and we certainly have done during this year, during the summer period, and, indeed, in quarter 2 when we saw the consequences of the excess inventories into the Christmas and New Year period, we have taken the actions appropriate to our system. And clearly, the inventory levels that have evolved since then demonstrate that others have been taking a similar approach and, obviously, whether all of them have or only some of them is anybody's guess. But I think what we can do is just say we will be doing the right thing.

Final two questions, if I may? You talk about steady growth in October in Europe is that the same as you continue to see the trend you saw in the September quarter?

And the other thing, just on the Americas' growth, a big step up in growth in Q3 versus what it had been the prior quarters. What is driving that and are you seeing any continuation of that in Q4?

Just on the latter point, Tony, [Colombia]?

We're seeing very strong growth in certain of our markets in Latin America, specifically Colombia is, I would say, in a booming state. I think that Mexico has had a more difficult year than we would have initially imagined, or thought of. But we are seeing some signs of a return to a little bit better scenario in October.

The US business at the [Maquila] is growing well but, as you'll have seen, the overall US industry numbers are basically flat for the year and we are suffering from the issues with our two box plants that Gary has mentioned about the drought and specific customer issues.

So I think it's very country specific, but I think, in general, I would say that the underlying business in Latin America and the Americas is good, or very good. It depends on the market you're talking about. And we're only suffering in Argentina, which is relatively small, but our profit improvement there is better.

But the general view would be, we got a bit of a bounce in particularly in the likes of Colombia in quarter 3, which was specific to some events where we had lost business with currency strength that we've won back. It's not indicative of an underlying growth trend. We would expect the year to date to be somewhat similar to the type of number we'd expect, three, four, maybe five, when you take them all together.

Okay. Thank you.

Barry Dixon, Davy Research.

A few questions, please. The first is in terms of the Americas; could you quantify, if you can, the impact of those once-off items where I think you quantified the currency impact of EUR32 million in the statement? But maybe those other issues, perhaps you could quantify that so that we can get a sense of the underlying growth in the EBITDA in the Americas?

Secondly, just in terms of corrugated price competition in Europe, prices were off 1% sequentially, how competitive is that market now and we're hearing that maybe some of your peers are being more aggressive on pricing? Is that having an impact on you?

And then probably in terms of the capital allocation strategy, clearly a very strong cash performance in Q3. How should we think about -- I know you've detailed in the statement, fairly clearly, the priorities in terms of the ongoing progressive dividend and accretive M&A. As you move towards that 2 times debt to EBITDA, how likely or relevant is a share buyback program in that environment? Thank you.

Thanks, Barry. Ian, I put you notice I'll give you the third question; Tony, I'll give you the corrugated one.

Let me deal with the first one, Barry. We're not going to get into parsing and analyzing all the numbers. Let me try and be helpful here. If we take a constant currency approach to the Americas, quarter on quarter the underlying margins are flat to marginally positive, very, very marginally. So these issues are having a very minor but, nonetheless, impact in one quarter. But if we get into parsing and analyzing we'll be down to trying to do a reconciliation we'll be back to what's the Venezuelan number and I'm not going there, quite frankly.

If it continues to be a problem for people, we can take it offline and try and be as helpful as possible. But not (multiple speakers).

Constant currency underlying performance quarter on quarter is fine and there are no fundamental dark holes in the Americas as a consequence of quarter 3.

Corrugated Europe, Tony?

Yes, I think, Barry, I would say that it would be wrong to think that the European market has not been always very competitive. It is a very competitive market. We believe we have a superior offering; that's why we continue to grow and win customers. We deal with all the major multinationals, who are extremely demanding in quality, extremely demanding in their CSR requirements, extremely demanding in machine efficiencies and transport and supply chain. So the market in Europe is very, very competitive; make no mistake about it.

What we continue to do is give our customers an advantage by giving them superior solutions to their problems, and that can be by way of design, or CSR or something. And what we try and do is get pricing for our services, our innovations and all that we bring, and that's reflected in margins of the Company over the years as we improve our business model, as we improve our asset base, as we improve our tools that we offer the customers.

We're, obviously, able to improve our margins and, at the same time, give our customers a superior service. To think that the market is any more competitive this quarter or next quarter, or in next year than it has been in the last five years, I think is wrong. Don't forget, we've been through a massive, massive recession in Europe and a very tepid recovery and yet still, we've been able to grow our business and develop our business because we have the tools to be able to do so.

So I don't think this quarter's any different to -- or any quarter's any different to what we've experienced over the last five, six, seven years.

Okay. Thank you.

Ian, will you take the capital allocation?

Sure, no problem. Actually, Barry, you're right when you look at it, and I'll take the year to date. The free cash flow for the year to date is EUR343 million playing EUR262 million last year so you're right, we do have a lot of free cash flow. But I think we have been fairly good at allocating it so far.

When you look at the detail, you see that capital expenditure after nine months is EUR253 million, and in the three months of the third quarter it's EUR100 million. So we said that number's going to be around the EUR400 million for the year. That's on the CapEx side.

On the debt pay-down side, you can see our interest bill last year, year to date, was EUR158 million. This year it's EUR108 million, and it's EUR29 million for the quarter. So our cash interest, you're right, has come right down.

Our dividends, EUR76 million, in total for the year it'll be about EUR105 million for that. I suppose, we've said before, in the absence of acquisitions we would look as a returning capital to shareholders, but we've found EUR155 million of acquisitions to date. We continue to look; we have not moved from that position at all, which is, focus on acquisitions, and if we don't find acquisitions we'll return capital to shareholders. But we have spent, or will have spent, EUR155 million year to date.

Okay, perfect. Just one follow-up question Ian, while I have you, just in terms of the energy. How should we think about the total energy cost for next year, for the Group?

So if you take it, Barry, like, last year our energy bill was EUR515 million, and our forecast for this year, for 2014, be EUR482 million. Of that EUR482 million, EUR384 million will be spent in Europe and EUR98 million, EUR100 million will be spent in Latin America.

Into 2015 and, again, we'll give guidance on this when we have the numbers on the budget, but in spend terms, we have 40% of our energy fixed for 2015. But again, as I said, when we do the budget and we talk again at the end of January, February, I'll give you better details. So for the remainder of this year, for the total of this year, it would be EUR483 million, of which 40% we are fixed for 2015.

But we should be thinking about a downward trajectory presumably in 2015 rather than upward.

Barry, I would assume so, but until I see the numbers I won't comment really.

Okay, great. Thank you.

Justin Jordan, Jefferies.

I just want to follow up on the M&A aspect of capital allocation. So having spent EUR155 million year to date, and obviously based on a number of other smaller bolt-ons, do you still have a clear geographical preference for Americas' M&A opportunities as opposed to Europe, given their superior growth and similar, if not more, appealing valuations of purchase?

Our indicated areas of focus, Justin, have been Europe, Eastern Europe, but even Western and Central Europe where we have synergistic opportunities. It actually depends on the circumstances and conditions. We have done, for example, in the last year in the UK we bought a very nice small but very, very effective high quality display packaging business, called CRP, so there are bolt-ons in Europe as well. It would be wrong to assume that we've abandoned Europe or that Europe has not opportunities for us.

In the growth market in Europe and Eastern Europe, we have some good positions but we're not complete in places; for example, we've opportunities in Poland and so on.

But there are probably greater potential candidates in the wider Americas; particularly integration into our Forney mill is obviously where the Bates project worked. Central America we've indicated before, Mexico is attractive to us, and parts of Latin America that we currently don't operate in, for example, Peru. Brazil is the obvious one, but we're not in Brazil, because price [wise it would] be extremely expensive and we don't have on the ground synergies automatically, so it's a greater challenge, but not impossible for us to do.

So the focus area is Eastern Europe, Europe for synergies and the Americas in general.

And just following up on the Europe, have you seen vendor expectations move up, or have you seen more competition from, be it trade or private equity backed buyers for opportunities in Europe in, let's say, year to date?

I think there's no doubt, and I'll let Tony or Ian come in, there's no doubt that there's a wall of money in the private equity world; there's a wall of money in general. Interest rates are low. While the economics and the general macroeconomy might be putting people off, the availability of money is certainly something that stimulates interest. So there's no shortage of interest and I don't think there's any abatement in terms of pricing and price expectations.

We see there are probably going to be a business coming up soon. The indications, I think, are already there that Duropack will be sold this year. Or if not this year, certainly next year, and I suspect there'll be a lot of interest in that.

Okay. Thank you.

Catriona O'Grady UBS.

Just one, because my other ones have already been asked. Could we just get some highlights around particularly strong and particularly weak sectors within Europe for the corrugated? Any standout best performance there in terms of volumes?

Tony, do you want to take this?

I would say it's difficult to see which sector is doing well. More around the country side, I'd say that Spain is doing particularly well for us. We've had decent growth in our German business and decent growth in our UK business.

So I think country-wise, we would say that the Spanish, other than smaller economies that can be influenced heavily by a win, by one customer versus a loss, I think the biggest wins that we've had are Spain and Portugal as countries, and that's across all sectors, but mainly in the agricultural sector. And I think then again, Germany continues to do reasonably well with around the 3% growth rate for us.

And just to follow up, if I may, Tony? You made reference to customer wins. Is that kind of growth coming through more from those customer wins, or is it more from those sectors and those regions seeing better GDP growth?

I would say it's more that the countries are recovering a little bit in the ones that I've mentioned. Germany is probably more wins, whereas Spain is more a country.

That's very helpful. Thanks very much.

David O'Brien, Goodbody.

Just a couple from me, and maybe following up on Catriona's question. Smurfit Kappa's volume performance has been extremely steady throughout the year, but can you give a comment on maybe, has your outperformance relative to the market, has that got bigger in the last quarter, or have you seen an overall deterioration in general activity levels?

And then maybe following up just on Barry's question on energy; maybe you could give us just a bit of a flavor on the other cost lines, particularly in Europe, given the very strong drop through into EBITDA in the current period?

Let me just make a general comment and then I'll ask Tony to speak to the specific point, David. In terms of our approach to volume versus price, it hasn't fundamentally changed. We have clearly indicated at times that there are business areas where we will draw a line in terms of people basically taking potshots at our business because we have to.

But as a principle, our focus is on price and pricing, and getting profitability for our business rather than being busy fools. So in terms of our volume outperformance, I'm not sure it's a volume outperformance, Tony, but maybe you'd comment.

I think one of the things that we have noticed, David, is that a lot of our customers, given the less certain economic environment, and certainly in the southern countries, I would say that, because Smurfit Kappa is deemed as a reasonably strong company, I think that we are seeing more companies coming to us for security, more of our customers coming to us for security. And that's resulted in one or two big wins for us with a number of customers, so I think that's a positive.

I think that, genuinely, our offer is an extremely strong offer to our customer base, whether it's in CSR as I mentioned earlier, or whether it's in some of the tools and initiatives that we give on shelf-ready packaging, or in a way to help our customers sell more. So that offer, and you'll see it yourself when you visit our innovation center in March, or in April, shows our customers the advantage of dealing with Smurfit Kappa.

And that does result ultimately in wins. And I think that our whole approach to rebranding, the insights that we're doing in helping our customers understand how the supply chain, and how their own products work within the supply chain, again helps us win. And so there is a degree of over-performance, I imagine, in our numbers, and we expect that to continue.

But it's in those particular value added areas where we can -- and, David, Tony makes a point there, and you guys quite rightly feed back at times, it's very hard to distinguish as to whether one company is more innovative or more successful in its delivery on its stated commitment to being a differentiated business.

At the end of the day, words are cheap. We'll end up having to prove that through business wins, margin wins and better profitability, and that's what we're trying to do. But if there's going to be a place where we outperform, that is where we want to outperform, not in the volume commodity type activities where it's, basically, what's the cheapest price. That just is not a platform for us to grow the business like we want to.

On your cost question, Ian, do you want to address the costs?

Yes, sure, no problem. David, so if you take nine months and nine months, our total cost for the first nine months of this year were [EUR5.108 billion]. And last year, our costs were [EUR5.109 billion], so exactly flat year on year. And when you break that out, you can see actually our raw materials were flat at literally 0%.

Recovered fiber was marginally down, wood marginally up, starch down. Wages and salaries, which is our next bigger cost after raw materials, is up 1% year on year. So up actually EUR8 million, so [EUR1,428 million then EUR1,420 million]. And we've always said that line is trying to inflate it 2%, 3% plus, so that's good evidence of cost reduction and how that's coming through.

Distribution cost actually flat; energy, I touched on with Barry, is down 10% nine months on nine months. So overall total costs flat at, and actually EUR1 million down year on year.

That's great. Thanks very much.

Gerard Moore, Investec.

Just two questions from me, and apologies if I'm doubling up on some of the points that you've already been talking about. But for the Americas, given the factors that have impacted this quarter, most of them seem like one-off in nature. Is it fair to assume that you'd be targeting the Q4 EBITDA margin to get back to its historical range for that region?

And the second question then, again it's just in terms of your Open the Future initiative. Maybe if you could just give us a quick update on the feedback that you've got from that and if it's already led to any specific customer wins? Thanks.

Thanks, Gerard. On the Americas, I think the important point to point out is that the constant currency basis where our margins are holding up very, very well, obviously currencies, there are a number of currencies in the Americas, not just the Venezuelan bolivar, that we're dealing with. So predicting them is, obviously, a challenge in terms of the currency move versus our ability to price the consequences of currency moves in our profitability.

So as a generality, the margin in quarter 3 is non-representative of what we would expect. And secondly, we would expect to progress from that. To what level, it would be getting into -- not in speculation, but it certainly will improve on that. And as I say, the underlying business is in good health.

On the Open the Future, I'll get Tony in a minute to talk about it, but in very simple terms, our objective in Open the Future is to differentiate ourselves in the marketplace from our competitors, not just through design expertise, which we think we have a significant amount of. But everybody claims to be the best designers and we all showcase our good designs. I suppose, testimony on how good or bad people are is what percentage of the very sophisticated international businesses people have on their books. And we would argue we would have a substantial amount of that, and certainly more than most of our competitors.

In terms of the activities, we are developing -- one of our objectives is to understand the consumer and the customers' end market. And we are developing not just research and information, but also tools that allow us to showcase for our customers and get into prediction capability on the likely performance of packaging on the shelf for future new products.

These are the type of bespoke, patentable software activities that will actually differentiate us in time. We are winning business and we, obviously, will not talk about specific customers because it's not appropriate. But we are starting to win business from this type of initiative, and other related initiatives, that are coming in under the umbrella of, how do we ensure that as a decentralized diverse business geographically we actually operate to the highest standards of our differentiation capabilities.

We've rolled out, as a Company, exceptionally well operating efficiencies, lean manufacturing, the various tools, the men in black, all of that. We need to do the equivalent in terms of sales, marketing and differentiation activities. And that is, quite frankly, something I'm very confident we can do because, if we can do it in operations, there's no particular reason why we can't do it in the other part of the business as well, which is a much more lucrative part of the business in terms of high quality top-line growth.

Tony, do you want to add anything?

I think you did it all very well, Gary.

Is that okay, Gerard?

Yes, that's great. Thanks.

(inaudible)

I have a question, to come back to Venezuela and I hear you, that you don't want to give a number and I'm not trying to get a number; it's purely qualitative. But we're bondholders and Smurfit, as a credit story, has always been a good, strong, improving story, and a very clean story, in terms of the risks that we have to think about and get comfortable with relative to other opportunities.

And then there's Venezuela, which is the kind of thing that you can get hung up on in a credit committee, for example. And I guess the things that we ask ourselves about Venezuela from our armchairs here in Dublin is, there's so many obvious reasons why you wouldn't want to be there and why, if you are there, you might think about getting out.

And there must be countervailing considerations for your guys to stay there, so my question is, just from a purely qualitative perspective, what is the value proposition for you for Venezuela, and what's your investment case and what has to happen there for your case to pan out? Is it something that works, even in the tough environment you're facing right now, or do you need hyperinflation to normalize? Do you need something normal to happen with the currency? Do you need things to change? How do you think about the good reasons for being there?

I'll make a couple of comments, and then maybe I'll ask Ian to come in and we may need to take some of it offline, just to get into detail. But staying with the tenor of your request, the proposition is actually a very simple one, [Brad]. If we exited countries and markets where there were difficulties, we wouldn't be in Mexico today; we wouldn't be in Colombia today; we wouldn't be in Argentina today. And you might say, I'd like if we were out of Argentina, but I can guarantee you, within the next year or so, Argentina will be very attractive. We basically don't run from markets that are challenging, number one.

Number two, we have a very significant business in Venezuela and we have been consistently profitable in Venezuela, both in local currency terms and in dollar terms, so there isn't an issue around profitability. There isn't an issue about access to money, currency, hard currency if it's imports or raw material or for equipment. There are no such issues, so the only issue in Venezuela is access to the cash.

Now, it's a big only clearly but, nonetheless, it is the only factor. The Venezuelan marketplace, as a consumer society, it's actually a constitutional democracy despite all of the noises to the contrary, which is a challenge to get your mind around but it's a fact. And there's no question in my mind that, at some point in time, this will turn and we will be an extremely well run, highly efficient, highly profitable business in there, as we, generally speaking, are today. I would turn the question upside down, where's the incentive to get out and, more importantly, how would you get out if you even were to [disposed that way].

Fair enough. Okay. I guess --

The only point I'd add to that, I think Gary covered it fairly well, is on the basis that we are long-term players in these markets. And when you look at Argentina, as Gary said, some of the other countries, so from a Company that's issued a lot of bonds and we've been in the bond market for many years, we just have a longer-term view on life when it comes to this. And it's proven always to be right, that you should have this longer-term view, so I won't add any more to that.

Okay, I appreciate that. Thanks very much.

James Armstrong, Vertical Research Partners.

The first one's on OCC. Have you seen any pickup in demand from Asia, and what are you seeing in the overall European, or overall OCC market throughout the globe?

Tony?

James, we haven't seen any real pickup; I would say that it's been fairly static to downwards all year from Asia. Remember, we do have an issue here in Europe. The quality of our waste paper is significant worse than what you get out of America and Japan and locally, closer to home, so therefore, we're the last port of call, albeit an important port of call, so we're not seeing any pickup per se.

As to our own markets, demand is basically -- or pricing, I should say, is basically flat with a slight downward movement in pricing this year. It's been like that for two years. We don't see any short-term movements upwards but clearly, we've always said, James, that the fundamentals for the OCC market are upwards and that, given the disintegration of the fibers here in Europe, given the fact that we're continually growing in the market and, ultimately, there is a lot of -- we are a fiber basket for the world, despite the quality levels of fiber here, that the pricing will ultimately move up and that we're sure of. The question is, we're not sure when.

And it moves around James; it moves around quarter by quarter. It's not that predictable. If you look at Asia in general, imports have recovered. Fiber in the quarters are down; overall, quarter 1, 5%, quarter 2, 5%, quarter 3, 8%. If you look at Europe, imports from Europe down 11% in quarter 1 when the real issues that Tony alluded to hit. Quarter 2 only down 3%, and then quarter 3 back up, down 8%. It's all over the place, but it's still a very substantial importer and will be because they just don't have enough fiber, and much of what they produce in the end products is going back out of the market anyway.

That's helpful. Then switching gears a little, with the interest rate so low and you being able to refinance a good portion of your debt, have you re-thought the leverage levels that you're comfortable with to make a significant acquisition, if one were to come along?

Ian, do you want to take that?

Actually, James, one of the things that we are wedded to, really having worked hard at it, is our credit rating of BB+ and that's really key for us. There's a slight difference really between the US market and the European market. In the US, you guys will take on more leverage than the European market, but our focus really is, we go back to a number of years ago and we've always said the two issues were the leverage and maybe the quantum of debt, and the PE overhang. And we've worked hard and we've dealt with that, so we are wedded the BB+ credit rating and we would stick to that.

In that, mathematically, when you look at the size of the balance sheet we have and the EBITDA, and if you take the consensus numbers, it's a big number on an acquisition you could do. But our focus is very much, maybe to one of the earlier questions, very much on the capital allocation, the share price, and not having that issue of the perception of leverage that we had before.

Again, it's true to say, James, that for the right business proposition we believe we could, within the constraints or within the discipline that Ian has talked about, we are up to doing whatever is possible, if it's shareholder value creative and we can get our heads around it. And that's always been the case.

That's helpful. And then a quick last one. The tax rate in the quarter seemed low; could you help us understand a little bit of what was going on there? And what's the underlying tax rate that we really should be looking at?

James, there's no point really looking at the quarter. The guidance that we've always given, last year our tax rate was about 25%, 26% and our guidance for this year will be the exact same.

Perfect. Thank you very much.

As there are no further questions, I return the conference to you.

Thank you very much, operator. And, again, thanks to everybody for joining the call.

In my concluding earlier comment, I made the point that we're better positioned today than at any other point in our recent history. Let me support that point with some numbers and performance measures which underscore our progress.

From 2010 through to 2014, we expect to have generated some EUR1.7 billion of free cash flow. And over that period we've substantially reduced our net debt, effectively halving our annualized cash interest expense. As our capital structure has improved, we've allocated EUR378 million for growth through acquisition, increased our capital expenditure to approximately EUR420 million per annum for the next three years, and reinstated a progressive dividend, which currently equates to approximately EUR110 million per annum.

And these measures, along with our continued delivery on market-facing and operating efficiency-led initiatives, is reflected by an increasingly resilient EBITDA margin, and our return on capital employed, which has increased from almost 10% in 2010 to 14.5% today.

Our focus, therefore, will continue to be on delivering improved financial performance at all points of the industry cycle.

So again, thank you for your continued support and have a good day.

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