Smurfit WestRock PLC (SW) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Smurfit Kappa Group 2015 first quarter results conference call.

Throughout the call all participants will be in a listen-only mode, and afterwards there will be a question and answer session. Just to remind you, this conference call is being recorded today.

I am pleased to present Gary McGann, Group CEO. Please begin your meeting, sir.

Thank you very much, operator. Good morning or good afternoon, ladies and gentlemen, and thank you for taking the time to join our 2015 first quarter earnings call. I'm joined on the call by our President and COO, Tony Smurfit, and some Group colleagues.

Before commencing, I'd refer you to the note on forward-looking statements set out in our press release, which also applies to the discussion this morning or afternoon.

In terms of the first quarter, we're pleased to report a solid performance with an underlying increase in earnings and good business growth across most of our geographies. Against the backdrop of the generally more positive economic environment in Europe, our Group packaging volumes improved by over 3% year-on-year, with revenues 2% higher at almost EUR2 billion in the quarter.

Our reported EBITDA of EUR266 million includes a EUR14 million charge following our decision to consolidate the results of our Venezuelan operations at the new variable SIMADI rate. As a result, our first quarter outcome was 1% lower than unadjusted EBITDA of EUR269 million reported in 2014.

We believe that this is the most prudent course of action to take, and has been implemented at the first practical opportunity available to us. Venezuela's earnings are now expected to make up less than 1% of the Group's EBITDA in 2015.

The Group's EBITDA margin of 13.5%, which was lower when compared to 2014, has been impacted in the short term by some currency pressures in the Americas, a number of one-off operational issues now resolved, and some temporary pricing pressure in Europe.

In Europe, corrugated packaging volumes increased by almost 4%, with good growth throughout most of the region and particularly strong volumes in the Southern European countries. With relatively stable input costs and a good supply-demand outlook, the containerboard market is well placed to progress pricing.

This has been slightly delayed by resistance from some independent operators. These containerboard price increases, once implemented, will provide a solid platform for corrugated pricing in the latter part of the year.

In the Americas, volumes have grown by almost 16% year-on-year, supported by a number of acquisitions in the region during 2014. The segment's EBITDA margin has also improved, achieving a margin of 16.2% in the first quarter, up from lower levels in the second half of 2014.

While improved, margins remains at the lower end of the historic range for the segment, and we expect continued improvement over the course of 2015.

Our differentiation initiative is building momentum, and the first quarter saw the development of a number of marketing pilots in Europe and the Americas alongside the expansion of training programs for our key market-facing people in the areas of insight development, innovation, and value selling.

In April, we launched our Shelf Smart packaging solution, which combines and channels the Group's packaging expertise, consumer insights, proprietary technologies, and key partnerships to drive real value for our customers.

This will be achieved through increased sales as a result of competitive advantage at the point of purchase, and through cost reductions by optimizing our customer supply chains from source to end markets.

Looking at our leverage position, our net debt has increased by approximately EUR170 million since the year-end, mainly due to currency issues. As a result, our net debt to EBITDA ratio was 2.5 times at the end of the quarter.

We are committed to preserving our BB+/Ba1 credit rating, and have consistently guided that our net debt to EBITDA ratio will remain between 2 and 3 times through the cycle, maintaining our capital structure at optimal levels for the business.

Our EUR250 million 10 year bond, issued at 2.75%, the lowest coupon ever achieved by the Group to date, enabled us to successfully amend and extend our lower EUR1.1 billion senior credit facility to March 2020 at a reduced margin.

These two transactions firmly underscore the strength of the Group's capital structure and standing in the debt markets, and lock in cost efficient borrowings and a healthy maturity profile.

We reported a free cash inflow of EUR25 million in the quarter compared to EUR59 million in the first quarter of 2014. This decrease year-on-year was a result of higher outflows related to exceptional items, capital expenditure, and tax which, when combined, more than offset the benefit of cash interest savings and lower other outflow.

However, the delivery of a second consecutive year of positive free cash flow in a typically weaker first quarter illustrates the Group's enhanced capacity to generate stronger free cash flows in recent years through business growth, a lower cost capital structure, and strong working capital management.

In February, we announced a further cost takeout target of EUR75 million for 2015, and we are progressing well against this target. In the year to March, we have delivered EUR18 million in cost takeout, with particularly strong delivery in the areas of raw materials and labor cost containment.

We are also in the second year of our three year EUR150 million program of Quick Win capital expenditure, and we expect to deliver on our target of up to EUR75 million incremental EBITDA in 2017. Furthermore, we are on track to deliver our target of EUR18 million of incremental EBITDA for 2015.

Turning to Europe, the Group's operations have gone reasonably well in the first quarter, with a 4% increase in corrugated volumes year-on-year and a resilient EBITDA margin performance of 13.1% despite some specific negative factors in the quarter.

These mainly related to 1% lower corrugated prices year-on-year, reduced recycled containerboard production as a result of downtime taken in the quarter, the delayed commencement of production at the 250,000 tonne recycled mill in Townsend Hook, and the closure of the 80,000 tonne recycled mill Viersen in February as planned.

Within Europe's packaging volume increase of 4%, the operations delivered in excess of a 3% increase in box volumes and an almost 9% increase in sheet volumes. Looking geographically, there were generally good performances across the region, with particularly strong volumes in Southern Europe.

As guided at our 2014 full year results, corrugated pricing in the first quarter was 1% lower year-on-year, but was sequentially flat when compared to the fourth quarter of 2014. This was the result of some downward pressure in the latter part of 2014 following testliner weakness during the year.

We expect the combination of a good supply-demand balance in the containerboard market, together with decent demand and healthy inventory levels, to provide a generally supportive platform for corrugated pricing in the latter part of the year.

European OCC prices have remained have remained stable within a tight band of EUR110 per tonne to EUR120 per tonne since the third quarter of 2012. Current upwards pressure is also expected to provide a solid unpin to recycled containerboard pricing initiatives.

The European recycled containerboard market is expected to remain well balanced for the next few years as a result of market growth and limited capacity additions over the period. Against this backdrop, Smurfit Kappa announced recycled price increases which, although slightly delayed, are expected to be implemented in full by midyear due to the strong demand and the healthy inventory levels.

The European kraftliner market has also been strong in 2015 which, combined with favorable foreign exchange dynamics, has enabled the Group to achieve a EUR40.00 a tonne price increase in Southern Europe in March and April. A further EUR40.00 a tonne price increase for Northern Europe is expected to be announced in May. The market fundamentals are very supportive of its full implementation.

As the largest European producer of kraftliner, with 1.6 million tonnes of production and a net long position of 500,000 tonnes, the Group is well positioned to benefit from this improving outlook for the grade.

The Group's highly profitable Bag-in-box operations continued to deliver solid double digit growth in the first quarter, and we intend to continue investing to support this growing business.

Looking at the Americas, the region delivered an improved EBITDA margin of 16.2% in the first quarter of 2015, ahead of the same period last year. The improvement in the region's margins will be further supported by the resolution of a number of temporary operational issues in the quarter and an expected improved second half performance in the Group's key markets of Mexico and Colombia, as they implement pricing following weakening of the domestic currencies.

Smurfit Kappa Orange County's business continues to perform well, with a substantial improvement in EBITDA margin year-on-year. This was driven by the realization of the benefits of the cost takeout program and from process improvements in its mill and box system, alongside the transition from sheet sales to higher priced packaging in its US business.

The business in California continues to be negatively impacted by the drought, but the Bates packaging business in Texas, which was acquired in November of last year, has delivered good volume growth. We are confident of delivering our two year synergy target of at least $6 million following the Bates acquisition.

Smurfit Kappa Mexico performed reasonably well in the first quarter. Packaging volumes are improving. For the full year, we expect that EBITDA margins to continue to improve, underpinned by expected higher corrugated pricing to offset the weakened local currency, lower raw material costs, significantly lower energy costs, and continued good delivery on cost takeout objectives.

Lower oil prices and mineral exports caused some weakness in the Colombian peso during the period, and we are currently in the process of implementing price increases in the country. The Group has seen a 6% increase in underlying volumes year-on-year, aided by the weaker currency, making Colombian industry more competitive internationally.

The previously announced acquisition of CYBSA in Central America is expected to close in May 2015, and will contribute a post synergy EBITDA of $19 million.

In Argentina, the Group's operations have performed well in the first quarter, delivering 3% volume growth year-on-year in a recessionary environment and consistent EBITDA progression by driving further integration and operational efficiencies.

The economic environment in Venezuela is progressively deteriorating, but our operations are performing well in this difficult environment. We remain fundamentally committed to our operations and our people in the region.

Expansion of the Group's business in the Americas remains a core part of our strategy for growth, and our pipeline for acquisitions in the region remains strong following the expenditure of almost EUR260 million on successful acquisitions in the last 12 months.

In terms of acquisitions and disposals, supported by our strengthened capital structured we have accelerated our delivery of accretive acquisitions in our target markets.

In 2015, year-to-date we have announced four transactions totaling over EUR180 million, with market-facing packaging acquisitions in Costa Rica, El Salvador, the UK, Continental Europe, and Mexico. They will each be completed in the second quarter of 2015.

In addition to acquisitions, we continue to focus on making our existing business more efficient. In November 2014, we announced the closure of four converting plants across Germany, France, and Sweden, and an 80,000 tonne recycled containerboard mill in Germany, which closed in February.

Although the rationalizations and the mill closure had a combined EUR200 million negative impact on EBITDA in the first quarter, they will improve the long term profitability of the business. And the projects, when completed by the end of 2015, will have a combined IRR of 26%.

As a further progression of the Group's objective to focus on its core business, in April we announced the sale of our solidboard and graphicboard operations in the Netherlands, Belgium, and the UK to the Aurelius Group. The operations being sold have net assets amounting to EUR42 million and comprise two graphicboard mills and an integrated solidboard operation consisting of two mills and four converting sites.

In conclusion, against the backdrop of a more positive European business environment and expected improvements in our operational performance across the Group, we will deliver earnings growth in 2015. As we build the business through our differentiated offering, new investments, and from a strong financial base, we remain committed to our core financial and operating disciplines.

Our focus continues to be one of driving strong returns through superior operating performance, a progressive dividend, targeted high return internal investments, and accretive acquisitions.

So, thank you for your attention. And operator, we're now happy to take questions.

Thank you, sir. (Operator instructions.) Lars Kjellberg, Credit Suisse.

Thank you. And Tony, congratulations on today's announcement.

Thank you, Lars. Thank you.

So, starting with the European side, you have talked about [Tritium] and [Torres], etc., and yet we have a delay in this pricing. Can you go through the dynamics, why we had this small delay and why we -- what sort of visibility you have, I should say, on implementing it fully come June?

Also, quite intrigued about the pretty strong margin improvement in the Americas despite all those issues that you mentioned in terms of operational and of course the Venezuelan issues, if you want to comment what is driving that margin expansion and gradual recovery up to where you need to be again.

Tony, do you want to take the Europe one and I'll take the Asian?

Yes. Basically, Lars, what -- the increase was effectively done in April until the inventories around Easter went up a little bit and the independent buyers were able to push back during that period of temporary weakness to the independent paper mills. And that meant that the independent paper mills didn't push as strongly as we though they could have and should have, and effectively the increase didn't go through.

What has happened subsequently has been that inventories have righted themselves and in fact are in extremely good shape right now. We have around 500,000 tonnes of inventories as we go into May, which is a very low level.

And if you -- while we can't be guaranteed of this, but if you look at our own internal forecasts of what will happen in June and July, which are very strong shipping months for the industry generally, we would expect to see a very tight market. And under that backdrop, there is no question that increases should go through.

Obviously, we are pushing -- it looks like EUR20.00 will go through in May. We're on May 1st, and so holidays in Europe. But, we believe the EUR20.00 will go through in May. And against the backdrop of very tight inventories, we see no reason why the additional EUR30.00 to EUR40.00 will not go through in June. And that's what we'll be pushing for.

But, obviously that's forecasting the future, and we don't have any certainty on that. But, we would certainly believe that, given the backdrop of inventories, this should go through and we're fairly confident as we sit here.

It's on the back, Lars, of continuing decent corrugated demand. And as Gary mentioned in the script, there is very good demand out of some of the Southern European countries. Germany is doing well. Most of our countries around Europe are doing well with perhaps the exception of France. And once, I believe, the uncertainty in the UK is out of the way, I think that will also see some significant growth in the UK.

So, in general, the European market for corrugated is doing well with some outstanding performances in the southern cones. And then, from there we believe that inventories will remain tight and even get tighter as we go into the stronger summer season. And as you know, after that you're looking at September, October, and November, which are also very strong shipping months.

So, in general, yes, that's why we believe the outlook looks good as we sit here right now.

On the Americas margins, Lars, if we run through them in general, first of all, the Smurfit Kappa Orange County business is progressing well. The synergy program, the cost takeout program and technology transfer program, is particularly improving our mill system and box system in terms of operational activity.

And while we have some headwinds in terms of the drought activities and some customer issues in California, the maquiladora region is very strong and Mexico is generally good. In Colombia, the activity level is good. Venezuela is not good and Argentina is quite good.

If you then turn to pricing and the currencies, obviously the currency devaluation in the countries has impacted us in a challenging way. But, obviously there is the equal and opposite impact of the dollar/euro translation of our America business.

So, when you put them all together, the weakness on -- the underlying business is strong. The currencies are having an influence. The Venezuelan effectively write-down to almost nothing is obviously taking that drag factor and overhang off the table.

We're getting a true read, a more true read of the performance of the region. And the expectation is that that region will continue to move up that range of performance that we historically were used to.

Final question for me. When you look at your net debt to EBITDA now, you had a small change in that in direction upwards on account of this SIMADI change. You talked about you wanted to be in a 2 to 2.5 time range, although you said 3 is the upper range. Does that put any sort of more cautious view in terms of your pipeline you referred to in M&A, or you're fine with continuing what you see despite that 2.5 handle?

Yes, as you say, the 2.5 -- the move, the absolute move in terms of the debt is fundamentally currencies, the SIMADI exchange rate. And also we have dollar and sterling borrowings, and obviously depreciation in both of those currencies against the euro also impact it. So, the effect of the total move, in fact, is made up of those three items.

More importantly obviously, as we indicated, while we've had a very good performance in quarter one -- the second year sequentially for being positive, in fact, in cash flow -- as you know traditionally in our business, with the way the market activity we have in the first half of the year and the amount of days of activity and so on, tends to be a softer cash flow half of the year than the second half of the year.

And so, our confidence in terms of our cash flows, the strength of our management of the working capital activities, and the -- even with allowing for the increased capital expenditure still gives us plenty of confidence of the strong cash flow generation capability of this business.

And if you factor that into the equation, obviously the net debt direction is clearly positive, and the type of write-down is at the lower end of the zone we expect it to be, subject to what we do in M&A.

So, this dynamic and the underlying factors behind it in no way changes our confidence, both in terms of our capital allocation strategy or our ability to do it.

Very good. Thank you.

Thanks very much, Lars.

Justin Jordan, Jefferies.

Thank you and good morning, everyone. I just wanted to explore -- obviously Lars covered price, and I just wanted to explore the volume side. You've now shown in Europe volumes accelerating from 2% in Q3 last year to 3% in Q4 and now 4% in Q1. I'm just trying to understand, given that European industrial production numbers are still pretty subdued to say the least, what's underlying going on here? Is the market recovering, or are you really taking share through innovation like you shared with us two weeks ago? What's your take on why you're extreme in accelerating volume in Europe?

Tony, do you want it?

Yes. I think it's a mixture of things, Justin. As you say, I think Europe is slightly improving. I think we see that with our customers and, again, depending on the market.

In certain markets like the Italian market, there has been a number of closures and restructurings that have gone on that have allowed us, as one of the stronger players in the market, to increase our volumes and take advantage of that situation.

We're seeing very strong growth in certain of our markets for exports, for example tobacco boxes which are dollar denominated out of Italy for the world, so to speak. And we're seeing growth there. We're seeing very good growth in agriculture and kraftliner into agriculture.

So, I think it's a mixture of things. And I think if you overlay that on what you saw in Amsterdam, Justin, where we do have a very extensive innovation program which many of our customers really appreciate, not only in keeping business with us but awarding new business, I think that is playing well to us.

And we do see, despite having lost a major customer, which has affected us in the first quarter that you would all be aware of on price, I think that we would say that our pipeline for getting new business is extremely strong. And it's on the basis of the innovations and the creativity that we're bringing to our customers, and the supply chain disciplines that we're able to bring to our customers and help them on the shelf.

So, in general, it's a mixture of things, Justin, and I think with certain markets doing extremely well.

Sure, okay. And just one quick follow up. You've obviously been busy year-to-date on the M&A front. Given the improving financial flexibility of the business, are you potentially thinking about accelerating some of the Quick Win capital investments? You've obviously got the financial flexibility to do it and they're very high return projects.

I think, just to add one sentence on the growth, one of the benefits I think Smurfit Kappa have in its favor is the portfolio effect of our geographic business, but also the range of companies and customer types that we serve, both for domestic and export markets, and obviously the routes to those markets.

Obviously we also serve all the channels. So, we've got a tremendous range of potential in terms of tapping into the deeper veins that are flowing at any particular point in time.

On your wider question, I mean, one of the main reasons that we didn't advance the Quick Win CapExes any quicker than we are currently planning to do was not due to financial impediments. We could have seriously considered them as a priority over anything else if it fitted our bill.

But, we need the technical execution to be effective as well. These IRRs are all very attractive, but they need to be executed well. And one of the things that's most important is not to assume that it's just plug it in and switch it on.

These are technical implementations that need technical support. So, we do it in a manner which ensures that we get the impact of the investments properly through to the bottom line. And that's the reason for the timing.

Okay, thanks. And just one final quick question. Tax rate in Q1 was much lower than probably all of us were expecting. What should we be thinking about for 2015 overall in terms of the tax rate, and whether -- is there any implications of the Q1 tax rate going forward?

No. I mean, I think you get aberrations between initial taxes, deferred taxes. The basis of the tax rate is around the 30% and is consistent with what we've been guiding.

Thank you.

Thanks very much, Justin.

Barry Dixon, Davy Research.

Good afternoon, gentlemen. Three questions, if I could, one just in terms of the corrugated price. I know that you're saying it's flat sequentially, just in terms of -- maybe give us some color around the competitive environment, particularly in markets like Germany where we're hearing that the market is becoming more intensive on the corrugated side particularly.

The second question is really on capacity and seeing a lot of -- or, I suppose, an increase in the number of announcements rather than confirmations of new capacity additions. How well do you think the market is positioned to cope with that additional capacity over the next two to three years?

And then finally, you've talked about your strategy for expansion in the Americas. Where exactly would you see the opportunities, and where would you desired, I suppose, geographies be in that region in terms of acquisition activity? Thank you.

Thanks, Barry. Tony, do you want to take the corrugated pricing?

Yes. I think what we're seeing in -- I mean, let's be clear that the corrugated business is always competitive. And what we have to do is we always have to come up with new ways to help our customers sell more and obviously find ways to help them reduce their cost, but at the same time enhance our margins. And that's one of the things that we're particularly good at.

I think that if you take the German market, which you referred to, it is a very competitive market. Effectively what has happened in Germany is that the market has done very well over the last number of years.

And with that, we have seen a lot of our competitors, independent and integrated, putting in new capacity in the corrugated business. We ourselves have, as you know, decided to close two facilities so that we can make our own facilities more competitive by transferring that volume.

And I think the German market will be a competitive market for a period of time. And that's just something we are well positioned to live with and deal with. We have got a very competitive offering with regard to innovation and creativity for our customers. But, if you go to the very simple boxes, that is a competitive market and we'll just have to accept that for a period of time.

I think other markets are also -- it's normal cut and thrust of our business. I think in the French market there's a desperate need for some price restoration, because the market itself is not doing well. And I suspect we'll see that as soon as paper prices start going through.

And in general, I think that there is positives in certain markets like the Italian market and where -- and the agricultural market in southern Spain where demand is very good and pricing initiatives are starting to happen.

And clearly what will happen, Barry, is, if the paper prices go through as we suspect and expect, that will put a very strong need for people to turn to get their prices up rather than maintain or go down. So, I think we feel good about the latter part of the second half, that pricing initiatives should improve.

On the capacity issues, Barry, if you start with the present situation, we've guided that the inventories are progressively tightening, to the point of where they are now definitely in the zone where there's pricing power within the industry.

And given the demand performance that we've had, and presumably the industry collectively has probably done reasonably well, then the demand side is quite robust.

The supply side has been reasonably static. The only addition this year in the grades, if you like, that we're particularly in is ourselves in Townsend Hood. And as Tony said, we will introduce that in the normal careful manner that we always do. And there's one other machine coming, but it's in the area of shrinks, which is kind of very, very low level of looting.

In 2016, we have some other machines potentially coming through; some definitely, one question mark. Factoring all of those in, we still have -- with these types of demand growth we have the need for that capacity coming in. So, supply-demand balance 2015, 2016 looks fine.

In 2017, there's a lot of talk, and some of them will convert into reality. As to whether they all impact at the same time is the key question. There's some indications that they won't. And as long as they're spread, then the growth of the business and the growth of the demand side is going to be more than capable of absorbing the capacity.

So, the supply-demand outlook is quite robust, certainly for the next couple of years and potentially even thereafter so long as we don't have some of the suggested one all arriving at the same time, which is unlikely.

Just in terms of the Americas, the expansion in the Americas, I mean, our focus is literally our total footprint to date, with some obvious ones still outstanding.

I mean, we would like to have a position in Brazil if we could get any price that makes economic sense for the shareholders. We have avoided doing so because it hasn't made economic sense. We continue to consider that market and we know it very, very well.

We're in a good position in Mexico but would like to grow bigger. We're in a good position now in terms of a start in the US and would like to grow bigger if we can find the right integration propositions. And there are a couple of other countries.

So, there are a number of options in that part of the world, and certainly the pipeline is -- while you can never describe a pipeline as being strong or otherwise, the pipeline is definitely there. And the convertibility of that pipeline over the last 18 months, two years is there for you to see.

Okay. Thank you very much.

Thanks, Barry.

Thanks, Barry.

James Armstrong, Vertical Research Partners.

Good day. Congrats, Gary and Tony, on the announcement today.

Thanks, James.

Thank you.

The first question I have is, overall, what do you think the underlying containerboard demand is growing in Europe? You talked about strong numbers, but could you help us quantify that? And on that, are you seeing any mix shift between virgin and recycled?

Tony, do you want to take that?

I think that, again, we see the inventory numbers as being, despite all the capacity increases that have gone in the last 18 months or so, fairly flat at around 550,000. And as I say, right now they've actually shrunk to 500,000 tonnes.

So, with creep and everything like that, I guess you would say that the industry has probably grown around 2% this year in the paper side. And we're not seeing any particular dramatic shift from recycled to virgin or vice versa.

I think the virgin market itself is in very good shape. As I said, we have some sectors that are doing very well that require kraftliner, such as some of the heavy-duty sectors for automotive, for tobacco, for agriculture. And they use a lot of kraftliner, and we're seeing in our own business very strong growth in those areas.

And so, there is a greater usage in percentage terms in our own business in virgin this year versus last year because of some of the projects in some of the areas which we operate.

But, I don't think there's any dramatic shift in the industry towards virgin. I think that there will always be the price dynamic with the difference between virgin and recycled, that some people, especially in sheet feeding, will switch between the two.

I think we do see, Tony, though that the -- because there's no capacity additions except for the future one coming, with the demand growth and the pro rata percentage, probably virgin is a bit stronger, which is what we're seeing --.

At the moment, yes.

Flow through.

That helps. And then on that, with the currency moves in the euro, do you see any -- do you see imports in Europe falling off, or have you seen the opportunity to export outside of the region?

Tony?

I think when one looks at the cost of us exporting recycled containerboard in dollars, basically the world is a dollar -- outside of Europe, it's dollar denominated. And there are absolutely -- it's a lot more attractive for us to export in certain instances than supply certain markets in Europe.

But, we don't do that because the reality is we have long term customers that we support. And frankly speaking, we don't have any capacity as well. As you know, we're a net buyer of containerboard, recycled containerboard, in Europe. And I think that we don't have any need to export.

I think on the kraft side, undoubtedly there is a need for the American producers to recover some of the significant deterioration in the euro versus the dollar. And hence the reason why we started an implementation of kraftliner in Southern Europe first, and now the rest of Europe with the EUR40 a tonne, which allows us to be as competitive with the American.

So, I think there is that dynamic. And of course, if we wanted to -- which we're not able to because we don't have capacity. But, if we wanted to, we would be able to export kraftliner board around the world at this moment.

Tony, I think it'd be true to say the general dynamic is no particular evidence of a reduction in imports from America into Europe.

Just pricing.

For the pricing. So, the pricing of the grade for everybody is just better as a consequence of the need for the Americans to upgrade their pricing.

Perfect. Thank you very much.

Thank you.

Gerard Moore, Investec.

Hi. Good afternoon, gentlemen. I've just got two questions, please, both focusing on costs. Could you give us an indication of what kind of underlying cost inflation you experienced in the quarter and if there were any particular items that stood out, be it labor or energy cost?

And then secondly, just in terms of for modeling purposes, if you could give us an idea of what you expect the full year depreciation charge to be. Thanks.

Thanks, Gerard. The general trend in the first quarter really is downwards in a number of areas. Given the environment that has prevailed for a while, obviously one of the things we do, wherever we can lock in prices that are attractive, we lock them in for a period of time.

So, we've seen in some of the indirect material areas, like starch and the like, improvements in terms of what we would have experienced over the previous -- the same quarter the previous year.

In the overall sense, the underlying inflation, labor inflation is probably around -- somewhere around 2% on average in Europe, nothing particularly higher. There are places where it is higher and places where it's lower. It's obviously something of a reflection of the performance of the various economies in which we're doing the business in.

And in terms of energy, energy has been under control. We obviously hedge our energy forward, so there's a mix between the forward contracted pieces and the actual price in the market. But, in general, absent the volume activity in energy, we'd expect to be reasonably in line year-on-year.

And so, there's no dramatics. Obviously our cost takeout program drives us to an expectation where we would hope to be a little bit down year or certainly flat in the round, particularly if we get the volume throughput. So, no dynamics in the cost side that would cause you to fundamentally change the way you model.

Okay.

Thanks, Gerard.

And just on the depreciation point? Sorry.

Sorry. On the deprecation, it's now -- it was around EUR300 million. It should be around EUR350 million, I guess, at this stage somewhere, -- maybe EUR360 million.

Yes, about EUR370 million, EUR380 million.

Well, obviously with the devaluation in Venezuela, that would bring it down a bit. So, in around EUR370 million, Gerard.

Okay. Thank you.

Thank you very much.

[Partek Fasa], [Schroder].

Hi. Yes, my questions have actually been answered now. Thank you very much.

Thanks, Partek.

Thanks, Partek.

Chris Ellis, Babson Capital.

Good afternoon, guys. Just --.

Hi, Chris.

(Multiple speakers) understand how the dynamics work from a pricing perspective from containerboard on to the corrugated board. You said it could be the latter part of 2015. I mean, what would you have to see within containerboard to be able to warrant a price increase in corrugated? Is it the EUR20.00 in May, or would you need the extra EUR30.00, EUR40.00 in June?

I think, Chris, you'd need the extra EUR30.00, EUR40.00. It needs to be material enough to move the indexes and to move the psychology of the market.

So, I think EUR20.00 wouldn't do it. I think you probably -- an extra EUR30.00 on top of that would. And certainly together with the kraftliner price increase of EUR40.00, that would be a significant input cost increase for most corrugators that would have to go out and recover.

Remember the margins in corrugated are significantly less in paper mills, especially at this point in the cycle. So, therefore corrugators need to raise -- they don't have very healthy margins and they'll have to raise their price to recover that kind of increase.

So, the reason -- the dynamic is it just takes a while. If you assume June, it takes a while to get the contracts through. And they can be anywhere from two months to a year depending on the customer. And depending on the local customers, it will take somewhere in the region of not more than two months -- not more than three months. But, it just would be after the summer in that scenario.

Thank you. That's really helpful. And just to touch on Venezuela, the EUR96 million cash adjustment, can you just talk through that one and just remind us of how cash repatriation works between Venezuela and the wider group?

Well, I suppose the second part of your question is easy. It doesn't. There is no repatriation. There aren't enough dollars to feed the people in Venezuela, so there's no dollars for getting money out of the country.

That's part of the dilemma in terms of how you actually figure out how to value your business there and translate it. In terms of the approach, if you like, we have -- we get dollars at 6.3 bolivars to the dollar when we can get them. Last year we got about $44 million for raw materials and for spares/capital goods.

And we've become much more self-sufficient in terms of our raw materials by being more ingenious in terms of how we use our forestry to make paper. And our main need for dollars now in terms of running the business is for spare parts and our capital equipment.

And generally speaking, because we're a critical industry in terms of the supply chain in Venezuela, we're more likely to get it than others. But, quite frankly, in the first four months of this year, compared to $44 million last year we got $400,000, or slightly more than $400,000 this year.

So, there just isn't enough dollars for normal activities, much less dividends. So, then you're into how you value your business there. The underlying business in Venezuela is a good business with very good people, and it's a business we're going to continue to support and operate in.

And there will come a time when Venezuela will come out of this problem, because it's a strong oil producing nation and a very substantial population. And it's in the middle of region where progress all around it is taking place, and people won't live forever in a situation where they actually don't have enough food to eat.

So, inevitably something will give. Fifteen years ago we would have had huge worries about Colombia's long term survival as a country and as a company. And now it's amongst the best in the company. And so, we've a strong track record of staying with these things.

On the conversion, we moved from VEF6.3 to VEF12 to SICAD I rate last year, taking a view that VEF6.3 certainly wasn't representative of the appropriate underlying bolivar/dollar rate. Absent knowing precisely what it should be, this was more in the right direction.

But, there was a SICAD II rate also available officially, and we did the calculations and the risk and our sensitivity as to what the numbers would look like at VEF52. Logically speaking, we probably would have move to that VEF52 this year for quarter one on the basis that it's more -- as the hyperinflation continued, it's more representative of what the translation rate should be. And we need an official rate to be able to translate that, not just a dreamt up rate.

Quite frankly, when they married SICAD I and II, there has been no transacting in the SICAD rate now. So, the only two transacting rates are the VEF6.3 official rate, which makes no sense at all, or the SIMADI rate, which is now -- started at about VEF170, is now about VEF193. It was VEF193. It's probably even more now.

And both in terms of certainty of the impact of Venezuela, avoiding overinflating our assets and our earnings, and having a basic conversion exchange rate that was official and logical, the prudent move was to actually take the hit, deal with Venezuela, take it -- remove it from the confusion agenda and get a clear focus on the underlying business dynamics of Smurfit Kappa.

Okay. Thank you. That's very helpful. And that EUR14 million adjustment, is that for the full year, or should we think about it on a run rate and times it by four, roughly, to get what we think the full year impact for Venezuela EBITDA will be?

It's probably -- it's difficult for us to do the calculation for it. It's probably not a million miles away. The simple guidance we're giving people is, at the year-end in February when we run the results, we've said 2014 EBITDA from Venezuela is about 7% of Group EBITDA.

We guided that 2015 should be somewhere between 5% and 7%, depending on the rate, but based on the SICAD I rate which is around VEF12 to VEF15; VEF12 as it was at that point in time, so depending on what that rate was. And we're now guiding for the full year that we would be approximately 1% of Group EBITDA in Venezuela.

So, if you took a midpoint between 5% and 7%, call it 6%, and now 1%, there's a difference of 5%. So, it's drop of 5% of Group EBITDA in Venezuela. And I'll leave the mathematics up to you.

Perfect. Thanks very much. Appreciate that.

Thank you.

Matthias Pfeifenberger, Deutsche Bank.

Yes. Good afternoon, gents. A couple of follow ups. Sorry if it's reiterative, but just on the -- psychology wise, some of the German's mood on the cut, the pricing initiatives. I mean, demand wasn't too bad. Stocks are very low. Last time we spoke they were 520,000. Now they are 500,000. You mentioned this interim pick up over Easter. But, still you also mentioned that corrugated pricing needs to be restored so those guys have incentives to really see a pick up in the pricing.

So, what really was it? Was it the testliner demand was weaker? I mean, you mentioned 2%, but I guess a fraction of that was very strong kraftliner demand, 7% up in January and February. Or, do these guys still have -- do the independents still have -- do good enough margins to not push through more pronounced at this stage? Just maybe a bit more color.

Tony, I think that's you.

Okay, Matthias. I mean, I think really, as you say, the margins in the recycled paper business are not bad at the moment. So, there is healthy margins in recycled containerboard, and there are not so healthy margins in corrugated.

So, there was probably -- with the pleading that went on, there was some degree of shall we say, decency, if that's the right word? It's not the right word, but let's say that they didn't push it through, and they were probably a little bit worried about the stock build that happened around Easter.

That's our take on it. And as I say, we're now seeing a situation and we're forecasting a situation where containerboard looks like it's going to be -- recycled containerboard looks like it's going to be very strong. And it does seem that the EUR20.00 for May has gone through. Obviously, it's only the first of May, but it seems to be accepted.

And so, I would suspect that we should get that. And I think we will be pushing for more as we look forward into June. And that's as simple as that. I can't really explain it any better about the psychology. The increase was there to be had, and a couple of independents walked away at the last minute.

But, the look forward position on this, Matthias, is important. Whatever the psychology, when stocks become tight people who want to get a price increase are more likely to get the price increase, because people can't shop around. And therefore, the people who are fearful of losing volume because there's volume available elsewhere are less likely to be able to do so.

So, once you get the dynamic of people believing there are tight stocks, A, you'll see buying ahead of price increases, buying in fear of weaker stocks. So, it becomes a self-fulfilling prophecy. And then you get the push on the OCC cost going upwards, and you get the second -- get the double whammy.

So, irrespective of the views of the psychology -- and the psychology in the independent market is not to go for pricing until you have to because it's very difficult, in their view, to push it through to their end customer, whereas we think there's a strong legitimacy to push through because of the value we add. They don't add the type of value we add.

So, to get more discipline, I guess the inflation in OCC that we are seeing is definitely helping, right?

It's certainly -- it's a secondary help factor, but certainly one that actually focuses on the smaller guys, because that type of -- as Tony said, the margins in the recycled business are not bad anyway. So, anything that actually makes them a little bit more painful and then ties to availability, you get the double dip.

Yes, great. That's the color I wished for. And secondly, just coming back on M&A, at one stage you mentioned, if you don't spend EUR300 million per annum, it's going to be added on top on the next year. So, now you said the pipeline is very rich now. I have the leverage in mind, but would that be too much, just in theory, for this year to -- in terms of management capacity to execute, to integrate, or is that possible as well if the right targets are there?

I think, first of all, Matthias, I don't think I used the word very rich. You'll never hear us talk about richness in this industry.

And we've a good pipeline, but obviously pipelines take time to execute. And sometimes they come and go out at the same time, as we saw in quarter one. But, pipelines aren't like general business where you just multiply it by four and get the results for the year. So, it's not going to be like that.

I think what we said is we have the financial capacity to do up to EUR300 million a year, but obviously it depends on the shape they come in. If there are 10 or 11 deals of EUR30 million year, we probably wouldn't be excited about doing double that amount because, quite frankly, they all take execution and integration, and we don't have spare people around in terms of technical valuation, due diligence, and so on.

So, it depends on the scale and size of what we can -- it takes -- ironically, we would apply very similar diligence, both in the finances and the technical and operational side of it, to smaller deals as we do to very big deals. So, you get economies of scale in terms of your capacity to do them in the bigger deals. So, it depends on the shape of them.

But, we are confident that we can do these type of deals, obviously. It's a function of us being absolutely committed to BB+/Ba1 and putting -- and never putting in jeopardy that particular positioning because, quite frankly, it's taken us a long painful road to get there.

Yes, perfectly fine. Understood. Thanks very much.

Thanks, Matthias.

Thank you; good weekend.

(Operator instructions.) David O'Brien, Goodbody.

Hey, guys, just a couple for me, please.

Thanks, David.

Firstly, just in Townsend Hook, when that mill is up and running, can you give us an idea of what your integration position will be in the UK specifically? Secondly, is it too ambitious to say that that mill will be break even by the second half?

And then, just following up maybe on Barry's question, expansion in the Americas, would you be happy at this stage to continue to buy nonintegrated corrugators, or would you be looking to pick up more integrated businesses from here on out?

Tony, do you want to take Townsend Hook?

Yes. I think we would expect Townsend Hook to be loss making first half and profitable the second half, all things being equal. I think that -- so, you will see it pick up as we start to ramp up the production.

And I didn't catch the first part, sorry.

Is it too ambitious to expect to break even?

No.

Sorry, the first part is basically integration.

I don't have the exact number in my mind, but we are continuing to grow very strongly in the UK. Our UK market position, with the two acquisitions we've done recently, even if they're sheet plants, they do consume a lot of sheets, which we have sheet feeders in the UK, two very good sheet feeders. So, they will be buying from ourselves.

So, the integration level, I'll have to come back to you on the exact percentage integration. But, we are -- if you include Ireland in that, we are not too far away from being balanced in the UK market.

But, obviously we have kraftliner and we have swaps, so I'd have to look at the exact number to see how the recycled integration is exactly. But, it's not -- it wouldn't bother us where we currently are, because we're buying a lot of tonnes from Europe into the UK as we speak.

That was the strategy, Tony. In terms of -- I mean, the game plan to rebuild Townsend Hook as we planned to do was to ensure that we had the integration.

So, in time -- I mean, our business is packaging backward integrated into paper. And as you can see, Tony and the guys have been acquiring businesses in the UK to actually, A, add the differentiation opportunity but, B, backward integrated into sheets and paper.

On the US expansion, I mean, again, the same kind of fundamental starting point exists, which is that our business is packaging, and then backward integrated into paper. Our general approach to growing our business is to get the packaging -- get the marketplace and the business in the marketplace to create the demand for paper, and then figure out a way of actually finding the paper or delivering it ourselves.

And you can see, for example, in Europe we're short on recycled. We're long on kraftliner. We're generally almost in balance. We're slightly short overall. In Mexico we're seriously short in paper, and are starting to rectify that by rebuilding a former paper -- a Spanish paper machine, which will give us up to about 100,000 tonnes there out of about 140,000 tonnes we're short.

So, the paper side will follow the packaging side. If we can get them by way of integrated acquisitions, that's attractive so long as the piece parts of the integration are attractive in each part. Alternatively, we go finding a way to provide our paper solutions after the fact.

That's very clear. Thanks very much.

Thanks, David.

Thanks, David; good weekend.

[Stephan Yslavitza], [Severoch].

Yes. Hello. Thank you for taking my question. I just have a quick question regarding the FTSE 100 inclusion, if you just can comment on that, given the increase in the market cap, if that's something you're aiming for.

No, I think what we're aiming for is the increase in the market cap rather the FTSE 100 inclusion. I mean, what we have said is that, if we were ever to contemplate moving, that we'd want it to be a significant incentive. And in theory, certainly the FTSE 100 has far more capability of bringing value to us than the FTSE 250 positioning.

Therefore, to even get to first base in terms of considering it, we want to be a strong FTSE 100 and satisfied that we could remain in that position. But, the -- our fundamental thesis, and there are difference of opinions on this and we're listening to them and considering them.

But, it is our view that investors, so long as we actually get in front of investors and get the capability of presenting our story and articulating it well, the accessibility to our stock and liquidity in our stock -- we're the most liquid stock in the sector, quite frankly -- doesn't create and inhibit people buying it. Getting it bought because of index moves, we've done the numbers, there's a win and lose there in terms of sterling wins and euro losses.

So, we have an open mind on it. We keep it under observation, but we don't think it's a fundamentally compelling part of the strategy to get the value in the stock -- or in the company first and the stock secondly as a result of people backing us.

Okay, thank you. That's very clear.

Thanks, Stephan.

Thank you.

Thank you, sir. There appear to be no further questions. I'll return the conference back to you.

Thank you very much, operator. Ladies and gentlemen, thank you for taking the time to be with us this afternoon. We're pleased with the outcome for the first quarter, with revenue growth of 2% to almost EUR2 billion and comparable EBITDA growth of 4% year-on-year.

Our underlying business is performing well, with improving prospects underpinned by good demand and pricing dynamics, as we've stated. Our strategic agenda is well supported by our capacity to drive strong free cash flow and our long term lower cost capital structure.

So, as a consequence, we expect to deliver year-on-year earnings growth in 2015. And our focus remains on driving strong returns to differentiated customers offerings, superior operating performance, a progressive dividend, and targeted high return investments and acquisitions.

So, again, thank you for your time and indeed for your support. And have a good day and good weekend.

Thank you. Ladies and gentlemen, this does conclude today's conference call. Thank you very much for participating. You may now disconnect your lines.