Smurfit WestRock PLC (SW) 2015 Q4 法說會逐字稿

Okay. I was going to say good morning, ladies and gentlemen, but I'll say good morning, lady and gentlemen. Thanks for taking the time to join us here in London or on the line for our full-year 2015 results.

I am joined today by Ian Curley, our CFO; Paul Regan, our Group Treasurer; Roberto Villaquiran, our CEO of Europe; and Juan Guillermo Castaneda, our CEO of the Americas.

I will give a brief run through of the highlights of our performance in 2015 before handing over to Ian for a detailed run through of the financials. Then Roberto and Juan will give you an overview of their respective operating performances, before handing back to me.

As usual, I suspect all of you have read this disclaimer on slide 2, so therefore I will take it as read.

Here, I have set out a brief overview of who we are in Smurfit Kappa and how we think about our business split between Europe and the Americas. Smurfit Kappa generated approximately 76% of its EBITDA in Europe in 2015, with the result of slightly over EUR900m, and today we employ approximately 28,000 people across this region.

We are the number one player in corrugated, with strong positions in practically every market. We continue to invest in upgrading and rationalizing our facilities, to develop our business to meet new customer trends and improve efficiencies.

We are also the number one in recycled containerboard, where we produce 3m tonnes in 12 mills across Europe. In kraftliner, our number one position is augmented by strong and developing integration, with very well-positioned mills for our businesses. We also have a very successful and high growth business in bag-in-box, which we have grown into a European number one position from a zero start.

In the Americas, we reported 2015 EBITDA of slightly over EUR300m, and we currently employ approximately 17,000 people in this region. We are the only significant pan-regional supplier and have material positions throughout the continent, with a small but growing presence in the US and a new platform in Brazil following our recent acquisitions in December.

This region has been an immensely successful business area for us since our entry here in 1986. From our original three countries, we now operate in 13 countries, with strong local business operations. We continue to invest and grow in the region and we continue to see significant opportunities.

All in all, an out turn of almost EUR1.2b last year was a record for the Company and illustrates the strength of our business.

Now turning to the performance for 2015, as I've said, we've have a good out turn, with underlying earnings growth in both Europe and the Americas. This is reflected in the 21% increase in our pre-exceptional EPS year on year, which at almost EUR2 per share is 90% higher than it was three years ago, in 2012.

Return on capital employed is a key metric for us as managers of the business, and at an underlying 15.1% for the full year, we have maintained a good performance against our stated long-term target. Equally, our balance sheet position is strong and is firmly supported by our proven track record of solid free cash flow generation.

Through 2015, we delivered good corrugated volume growth for the Group as a whole, up 3% year on year excluding acquisitions. We've also been able to recover part of the containerboard price increases which occurred in 2015 into our corrugated prices, with the expectation of further recovery in the first quarter of 2016.

In 2015, we invested EUR380m in acquisitions, which are bedding down well within the organization. These will enhance our scope to service our customers throughout our business universe. Additionally, we've invested EUR450m of capital to continue to develop and enhance our operational performance and future capability.

Now I'd like to hand over to Ian Curley for a run through of our financial performance.

Thank you, Tony.

Revenue in Q4, at EUR2,089m, was 1% lower than in 2014, while 3% higher than in Q3. The year-on-year decrease was driven by negative currency moves that were just mainly in Venezuela. Although revenue was boosted by acquisitions, these were offset by the absence of the solidboard operations, which were sold in April 2015. The underlying move was a year-on-year increase of EUR84m, which equated to about 4%. Comparable revenue was higher in both Europe and the Americas, reflecting volume growth and improved pricing.

Pre-exceptional EBITDA of EUR326m was 11% higher than in 2014 and 7% higher than in Q3. The underlying increase in EBITDA was EUR48m, the equivalent of 17%, with higher earnings in both Europe and the Americas and lower center costs. With higher EBITDA and lower revenue, our EBITDA margin improved to 15.6%.

Our pre-exceptional profit before tax of EUR202m was 36% higher year on year, with higher EBITDA and lower net finance costs partly offset by higher charge for depreciation, depletion and amortization. As a result of higher profits, our tax charge excluding exceptionals was also higher, resulting in a 25% increase in our pre-exceptional EPS to EUR0.593.

Driven by EBITDA growth, a higher working capital inflow, fixed asset sales proceeds of EUR29m, which primarily was the Nanterre site in Paris, and lower outflows for capital expenditure and tax, our free cash flow for Q4 2015 was EUR152m, compared to EUR19m in 2014.

Net debt increased by EUR95m during the quarter to EUR3,048m, equating to a reported 2.6 times net debt to EBITDA, or 2.4 times after adjusting for the impact of the Brazilian acquisitions. This increase was primarily a result of negative currency movements, acquisitions and higher dividend payments during the year.

Although reported revenue for the full year was broadly unchanged at EUR8,109m, the underlying movement was an increase of EUR248m, equating to over 3%, with growth in both Europe and the Americas driven primarily by higher volumes. As in the case of Q4, the underlying growth was complemented by the contribution of acquisitions net of disposals, while offset by negative currency moves, again mainly in Venezuela. When Venezuela is excluded, the impact of currency on revenue was slightly positive due to the strong dollar and sterling through the year.

Pre-exceptional EBITDA of EUR1,182m was 2% higher than in 2014. The underlying increase in EBITDA when adjusted for acquisitions and currency was EUR66m, equating to almost 6%, with higher earnings in both Europe and the Americas and broadly unchanged center costs.

The Group's net pre-exceptional profit before tax of EUR654m was 25% higher year on year as a result of higher EBITDA, lower net finance costs and only a slight increase in the charge for depreciation, depletion and amortization. With higher profits, our tax charge, again excluding exceptionals, was also higher, resulting in a 21% growth in our pre-exceptional EPS to EUR1.973.

Our free cash flow for the year was EUR388m, EUR28.6m higher than in 2014. The increase resulted mainly from EBITDA growth, fixed asset sale proceeds, lower working capital and other outflows, and cash savings, offset by higher outflows for exceptional items, provisions and tax. Capital outflows were broadly similar in both years.

With the free cash flow more than offset by acquisition expenditure and net currency translation, net debt increased by EUR289m for the year.

Turning now to slide 8, free cash flow for 2015 amounted to EUR388m, which was EUR26m higher than in 2014. EBITDA grew by EUR21m to EUR1,182m, providing the base for the growth in future cash flows.

The exceptional outflow of EUR69m was in respect of the currency trading loss on the bolivar and then subsequently adjusted for hyper-inflation following our adoption of the Simadi rate. Cash interest of EUR123m was EUR14m lower than in 2014, primarily as a result of our refinancing activities in previous years.

The working capital outflow in 2015 was EUR24m, with working capital at EUR548m at December, representing 6.6% of annualized sales. The outflow of EUR28m in respect of provisions relates to restructuring costs booked in 2014 for our European rationalization programs, now complete. Capital expenditure, at EUR451m, equated to 123% of depreciation compared to 120% in 2014.

Cash tax of EUR131m is EUR20m higher -- EUR24m higher than in 2014, with the increase mainly due to higher profitability. Higher payments in Europe were partly offset by lower payments in the Americas, where the adoption of the Simadi rate reduced the tax payments in Venezuela. Free cash flow in 2015 included EUR33m of proceeds from fixed asset sales, primarily, as I said, the sale of the Nanterre site.

I'm going to turn it over to Roberto now, who will give an overview of the European operations and outlook, before handing to Juan for the Americas. Thank you.

Thank you, Ian.

Overall, European packaging demand was decent in 2015 and we certainly benefited from this, with good growth throughout the year. Despite our focus on margins over volumes, we were able to grow ahead of market, with a 3% underlying volume increase year on year, while implementing price increases from the fourth quarter.

Structurally, the market was positive in 2015 and remained so into 2016. Tight recycled inventories through much of the year allowed for testliner price increases of EUR30 per tonne in July. This has supported our push for box price increases.

In kraftliner, we implemented a EUR20 per tonne price increase in the first half and year on year saw good demand for the year, both internally and externally. In 2016, despite some erosion on the kraftliner pricing post the introduction of some new capacity, the impact on SKG will be relatively contained, due to our swap system and internal consumption.

During the year, we completed the acquisition of two corrugated packaging businesses in the UK, which are integrating well into the Group. The rationalization program of our 80,000 tonne mill in Germany and four corrugated plants across Sweden, Germany and France is now complete, and our 250,000 tonne recycled containerboard mill in Townsend Hook in the UK is now running well.

For the last number of years, we have been able to fundamentally strengthen the business here in Europe through balanced investments and cost takeout actions across the integrated system. This has led to solidly improving margins as we maximize our operational efficiencies and build on our service offerings to our customers.

Looking at the balance in more detail, I have set out, one, our investment track record in the recent years, and two, our constantly evolving focus on differentiation and quality management.

Reinvestments. Over the last number of years, we have systematically lowered the cost of our paper system through investments and rationalizations, with the goal of becoming the lowest cost and highest quality producer in Europe. This is augmented by the integration of our paper system into 157 corrugated facilities across Europe, optimizing paper supply and minimizing logistical costs.

A good example of our cost reduction through our paper system is that our 12 recycled containerboard mills in Europe today produce broadly the same tonnage as the 23 mills operated in 2005 at a much reduced cost per tonne. This fixed cost reduction tangibly contributes to improved margins in our operations.

Our current investments, like the EUR114m rebuild of Townsend Hook and the EUR40m upgrade at our Roermond mill will continue this process of cost reduction and quality improvement. In parallel, our conversion of our 60,000 tonne virgin containerboard machine in Sanguesa, Spain to MG papers will expand our exposure to a profitable and developing market.

As growth has come back to Europe, we have been investing to, A, service the new volumes, and B, meet and exceed our customers' quality requirements. In 2015 alone, conversion machines valued at EUR85m were installed throughout the region and commenced production. In Spain, we opened a new bag-in-box plant for EUR28m in late 2014, further expanding our number one position in Europe and number two position globally in this space.

While it has been difficult to justify some of the higher prices paid for packaging assets in recent years, we have been able to complete some very accretive acquisitions at good valuations, bolstering our print and litho capabilities in the UK. We will continue to look for reasonably priced businesses to bolt into the European system.

Turning to differentiation and quality, we're the number one packaging supplier in Europe today, with over 250 facilities across 21 countries and over 50,000 customers. Combined with our strong links to American operations, we have the broadest geographic diversity in the industry and an unrivalled breadth and depth to our offering.

Our ShelfSmart approach, launched in 2015, continues to gain traction and our customers -- traction with our customers, and clearly sets us apart from our competitors. ShelfSmart delivers a scientific approach to in-store marketing, focusing on improving visibility, navigation and quality perception for our brands. With over 60% of our business in the FMCG area, this is a value-added service that will continue to drive growth for Smurfit Kappa and translate into increased sales for our customers.

Another key differentiator is our commitment to our customers in the area of quality management. Through continuous benchmarking, standardization of controls, targeted investments and strong operational central support, we have reduced our defect rate by over 50% in the recent years.

Turning to the outlook and key business drivers, we remain optimistic. We expect our restructuring completed in 2015 and the benefits from our major capital projects to be a solid tailwind in 2016. We have seen a good start to the year into our corrugated business, following our strong performance in 2015. While the kraftliner market is under some pressure, our market leading position remains a key competitive advantage in a market where 20% of the boxes are made from kraftliner.

While stable OCC prices at relatively high levels in January and February, a healthy demand outlook for the recycled containerboard market and a positive growth in our board system, we expect 2016 to be a positive year, delivering continuous growth and quality earnings.

I would now like to turn you to Juan Guillermo, who will give you an overview of the Americas.

Thank you, Roberto, and good morning to you all.

The Americas delivered a very solid EBITDA performance in 2015, despite the significant negative impact to EBITDA of EUR70m from the adoption of the Simadi rate for our Venezuelan operations. Nonetheless, our business in that country remains well managed and positioned for a recovery at some point in the future.

The rest of our Americas performance was driven by a number of factors. As you can see in the chart, we delivered another year of strong volume growth, with an 18% increase in 2015 when compared to 2014. A large part of this was acquired volumes, but the underlying business excluding Venezuela is growing at a good rate of 3% year on year, with an acceleration in the second half.

EBITDA margins have also improved, primarily as a result of good implementation of price increases across the region to offset currency headwinds, continuous cost takeout and the improvement in the margin of our newly acquired businesses as they are integrated into the Group and synergies are obtained.

As we have grown our footprint in the region from nine countries in 2012 to 13 countries today, we have seen a notable improvement in our traction with international customers. We are now in a strong position to offer them a comprehensive offering across Europe, Latin America, and increasingly in the US. This had been further strengthened by our recent acquisition in Brazil, which despite its current economic difficulties will be an important market for growth for Smurfit Kappa into the future.

Turning to look at some of the core characteristics of our business in the Americas, we have operated in the region with local management system since 1986. Our business in the Americas provides an important geographic diversity to the Group's end-market exposure, and we have successfully managed to support the delivery of strong earnings for three decades.

We operate a similarly integrated business to Europe, with a strong integration between our corrugated and containerboard facilities. We have seen that this model provides us with a balanced exposure to the market, and ultimately smoothing earnings over the longer term.

Our strong links to Europe allow us to maximize the very real benefits of transferring operational knowledge and customer relationships each way. Furthermore, we have the opportunity to maximize our asset base by transferring assets across regions. A prime example of this is the current project to increase paper production in Mexico by 100,000 tonnes, where we have used assets from our previously closed Spanish mill and the recently shut Viersen mill in Germany.

Our customers and ourselves view our product and service offering as truly differentiated in the region by virtue of our combined global footprint through the scale of our operations across the region, our ability to harness Group collective intelligence and creativity, and our experience and commitment to sustainability and CSR.

The last time that I attended an investor event was the Group Capital Markets Day in 2013, when we set out our M&A priorities to all investors. It is satisfying to see the progress that we have made against our objectives in the last two to three years, with acquisitions across the US, Central America, the Caribbean, Colombia, and most recently Brazil. Our key priority now is to continue to integrate these businesses into Smurfit Kappa and remaining open to consider further accretive M&A.

Turning to the market, in 2015 we delivered a decent EBITDA margin of 16.4%, and we believe with the integration of acquisitions, volume growth and pricing initiatives, there is scope for improvement in 2016.

In volume terms, we reported a strong fourth quarter in 2015, with 5% organic growth excluding Venezuela. We aim to build on this to 2016.

After a difficult year in 2015, currency headwinds have persisted into the current year, particularly in Mexico and Colombia. We remain focused on offsetting this and are making good progress.

Our core markets of US, Mexico and Colombia made up over 80% of the Americas EBITDA in 2015. We will continue to grow our business in these stable markets.

And as I previously said, we're keenly focused on ensuring our recent acquisitions are integrated well over the coming months and years, and are confident of achieving our synergy targets.

I will now hand back to Tony, and thank you.

Thank you, Juan.

Now turning to our objectives and outlook, the Group's capacity to deliver high quality earnings is evident over the last number of years, where we have maintained EBITDA margins within a tight range, including the extremely difficult recession years of 2009 and 2010. This points to the strength of the integrated and geographically diversified business model that Roberto and Juan have just alluded to.

The chart on this slide demonstrates that we have a track record of always converting a sizable proportion of our EBITDA to free cash flow. Cash being the truest measure of performance, we have delivered over EUR2b of free cash flow since 2009, and in recent years we have consistently been above 30% free cash flow conversion. These cash flows allow us to support our capital allocation objectives.

This slide sets out our core objectives in this regard, which you will all be aware has been consistent for the last number of years. We have maintained a net debt to EBITDA at a comfortable mid 2 times level since 2012. Our debt maturities average 4.7 years, and we are committed to preserving our current credit rating and our position as a strong crossover credit.

We will deploy capital to enhance the development of the business over the short, medium and long term. Internal investments, our acquisitions must meet a minimum IRR threshold of 15%. As significant shareholders, management's interests are aligned with all stakeholders.

We have consistently focused our capital spend on optimizing our asset base and enhancing operating efficiencies throughout our network of 370 facilities, with almost EUR900m of capital spent in 2014 and in 2015. The result is a low cost, integrated and very well invested business that will perform in any market environment.

Our EUR150m capital program of quick win investments are progressing well and we are confident of delivering our target of EUR75m of incremental EBITDA in 2017.

Successful M&A is central to the development of our Company. To this end, we've completed EUR0.5b worth of acquisitions since the start of 2014, and we'll continue to look for earnings enhancing acquisitions that make sense for our stakeholders.

In this slide, you will see that we've had a progressive dividend since 2011, with a compound annual growth rate of some 34%. Our dividend, which totaled EUR141m in 2015, is supported by our capacity to generate strong cash flows through the cycle, as I've already alluded to.

Now turning to outlook, in spite of the current equity market volatility, as I stand here today, we see good fundamentals across most of our markets into 2016. Against this backdrop and supported by our integrated business model, geographic diversity, our well invested asset base and differentiated offering, we are confident that our business will continue to deliver high quality earnings and strong free cash flows.

Separately, we confirm we are reviewing our current listing arrangements, with a view to upgrading our London listing to a premium listing. While we remain 100% committed to our Irish euro denominated listing, we believe a liquid sterling denominated UK listing will provide access to a wider investor audience. Subject to meeting the required eligibility criteria, we believe this move, over time, will position the Group for potential future admission to the UK series of FTSE indices.

Looking ahead, we will continue to drive the business through organic growth while remaining focused on completing accretive business enhancing acquisitions where we can find reasonable valuations. These investments and our expectations of good earnings growth in 2016 will sustainably support our return on capital target of 15% and position us well for the future.

For 2015, the Board has proposed an increase of 20% to the final dividend to EUR0.48 a share. This reflects a 23% year-on-year dividend increase and reflects the Board's confidence in the performance and strength of our business.

I'd like to thank you all for your time and listening to us. My colleagues and I will be delighted to take any questions that you have on the results or the Company.

We'll start in the room with -- we'll go left to right, so Justin's first.

Thanks. Justin Jordan from Jefferies. Just I think you've mentioned this already on one or two press calls this morning, but your central thinking if we just cast into 2016 is something like 2%, 3% organic volume growth in Europe?

Yes. We would have grown, as we mentioned, around 3%. We didn't see any fall back on that in the quarter four, and January we see around -- on a same day basis, around 3%. So our working assumption is that given the environment that we're operating in, around 2% to 3% for the year.

And just following on from that, on pricing in corrugated in Europe, I know obviously you achieved 1% in Q4, and well done on that. Can you just share with us some thoughts as to what you think the pricing environment's like in Q1, in the first half of 2016? And are you targeting further price increases in corrugated?

Yes. We have -- as you know, the increase for paper went ahead in July of last year, and by the time Roberto and his team got their act together and started to implement pricing in 2015 in the fourth quarter, we got some agreements with customers that we would implement in a staged way a number of increases that would happen in 2015 -- late 2015 and into early 2016. Those are happening.

I would caution, one of the things that I would say is that as you look at some of the currency dislocations that are happening, when you translate some of those increases that we're getting back into euros, you don't see them. Because, for example, the UK sterling has weakened by 5% in January versus the euro, so our UK price has actually gone down. Our sterling price is actually reflecting a lower number in euro terms. But we are getting increases as per what Roberto had expected to get in Q1, and obviously then it will be up to us to maintain those during the year.

Just one final thing. Obviously, the introduction of Varkaus has caused a bit of turbulence -- sorry, Stora Enso Varkaus machinery in the kraftliner market in Europe. We've seen German kraftliner prices down 5% in January. What's your take on the pricing outlook for kraftliner in 2016 in Europe?

Yes. Obviously, new capacity in any industry, doesn't matter where it is, is not helpful. They've brought in the new capacity. It has had some dislocation on pricing and has meant that prices have fallen. The increase of last year has effectively gone away.

We would say that we think we're there or thereabouts, because the price is not exactly very high. And there will be some transfer back up from TL1, which is the substitute kraftliner grade, to back to kraft if it goes much lower. So I think we're there or thereabouts, but obviously we can't forecast what other companies are going to do.

From our own perspective, as Roberto mentioned in his presentation, we're effectively sold out in brown kraftliner. We do about 70%, between 65% and 70% internal consumption, which we're growing. There's specific reasons for that in the agriculture and in heavy duty markets, which we're growing strongly in. And the other 30% we swap out with our -- because we're short on recycle, we swap with recycle producers. So we don't really play in the market. Obviously, it'll affect our profitability if price goes down, but from a demand perspective, we don't really play in the marketplace.

Lars?

Just to follow up on that, you've said you sold out on kraftliner.

Brown kraftliner.

Brown kraftliner, okay. So is that done through any contractual agreements? Do you have a good visibility on that sold out position?

Yes. We're assuming normal growth of 1% and yes, we have -- Roberto, do you want to comment on that?

I think, as Tony said, we are 65% integrated, and the remaining is actually with swaps. And most of the swaps are negotiated in the first quarter and very early in the year. So when you take a look at that, the system today between swap and (technical difficulty) from actually a sales perspective, we're in an excellent situation.

Given the uncertainty generally in the economy, of course, I just wanted to get some sort of sense how you view your controllables when it comes to, for example, the quick win investment for that will deliver in 2016, the restructuring done in Europe, what the benefit of that is. Townsend Hook, from whatever number losses last year to less losses or positive M&A. Can you share some sort of bridge what those big four items would underpin earnings this year?

Ian, do you want to take that?

I think, Lars, Seamus separately will give guidance as you go through the cash flows and stuff like that with regard to interest, etc., but if you go back and have a look and try to build a bridge, Seamus will run you through that.

But of course, in your guidance you factored in some meaningful contribution. Do you think quick win (multiple speakers)?

Yes. I think quick win will be EUR20m odd. Our CapEx program, with EUR450m invested last year, some of the benefits are going to be in this year. We do see some energy tailwinds. We do see some benefit in a loss making in Townsend Hook last year, a significant loss maker, to worst case scenario we would say, touch wood, would be a breakeven and that would be a bad result. I think that you see the full effect of the full-year acquisitions that we have made for those in the middle part of the year and then ultimately, of course, Brazil at the latter part of the year.

So we do see a lot of positives, and that's why we're saying we expect to have a good year. We are taking the hedge there, of course, but if there is a macro issue out there that is much bigger than anybody has thus far thought about, we will obviously be affected in the same way. But we don't see that right now and as we sit here demands are good, stock levels are good, and we started off reasonably okay in the year.

So I think that's where we sit right now. And obviously, we read the same newspapers that you do and see the stock markets react in the same way that you do. You wonder if it is going to go into main street. It is not in main street at this moment in time.

Sorry. Barry.

Barry Dixon from Davy. Just to maybe follow on from that, Tony, in the statement you talked that you're guiding CapEx is EUR450m (technical difficulty) just give us your own thoughts on that in terms of (technical difficulty) at that level of investment between (technical difficulty) given that 15% (technical difficulty) IRR that's going to be achievable from that.

Then, of course, just on capital allocation, you talked before about selective M&A (technical difficulty). Has anything changed in any way on that, given the relative (technical difficulty) opportunity there for you faster now in the US, given what's happened to the valuations, and given that, what the target IRRs are on the acquisition (inaudible) 15%?

Then finally, maybe just pulling it together in terms of that target of (technical difficulty) you gave of 15% return on capital through the cycle, what's the range around that? Where are we -- how far are we from (inaudible) peak return range? As a very (inaudible) one, can you just get back on the debt level [net return]?

I'll just take the last question. On peak return, we don't want to talk about peak returns or where we are in the cycle. At the end of the day, what we've said and I think Roberto's said this and Juan said it also, we're an integrated business; we're very geographically diversified. Every market acts in a very different way.

And what we've been consistently doing with the capital we've been employing into the business is improving our asset quality in a major way. Roberto mentioned we had 23 mills going down to 12 mills. We're producing basically the same amount of tonnes. It's an incredibly strong system that's pretty well able to weather most storms, and I think when paper -- if paper goes down, corrugated goes up and vice versa.

And so, as you're continually reducing your cost base on the more commodity end of the business, which is paper, and increasing your innovation and your efficiency and your development on the market facing end of the business, that's also giving us reason to believe that we can continue to grow our EBITDA and reason to believe we can continue to grow our return on capital employed.

So, target IRRs and acquisitions, Ian, do you want to take that?

I suppose just to take a step back, Barry, when you go through the numbers and you're looking for the free cash flow for 2015, and to Lars' point earlier, and you look at the numbers and the guidance with the exception -- without looking at EBITDA, it's a very cash generative business. And so the focus really is where do you allocate the cash. And we've been very clear. Keep the leverage in the 2's. (Technical difficulty) very, very important to us.

Capital expenditure, as Tony was saying, is about EUR450m. So capital expenditure is in good shape. A lot of money has gone into the business, where we're seeing returns for that. It's very positive from looking at the future. The dividends, you've seen again a further increase.

So we have very good cash generation. The issue really is, to maybe touch on your US point, is to try to find the places that you can buy stuff at appropriate valuations. And, for example, we were long-time failures in Brazil, but we stuck to our netting. You must control the cash flows and buy at the appropriate multiples, and it took a long time, quite frankly, to get there. In fairness to our American colleagues, to get two done in December was a huge success. So the issue is more about finding the location, where do you put your money in, no minorities, getting the cash back out.

And again, I would argue in some of the countries you would expect a higher IRR, higher return, given the risk that you are taking in some of these places. But we've stuck to our netting, which is appropriate multiples and control the cash flows.

Gerard.

Gerard Moore from Investec. A couple of questions from me, please. Just within the Americas, you have a pretty good track record of being able to catch up with devaluing currencies and protect euro returns or dollar returns. Could you maybe just give us an update of where you see you are now in that constant battle? We've obviously had very sharp currency movements of late. How confident are you being able to put through local price increases or reduce your local costs in order to protect euro returns, and how long that might take you?

Second question then, really just on Mexico, if you could give us a bit more color there on that particular market, how you see it performing in 2016 and how pricing might evolve there relative to what we're seeing in the US market? Thanks.

Gerard, thank you for justifying his plane ticket over. So go ahead, Juan Guillermo.

What we try to do locally and when we see what is happening with currency in all the countries in Latin America, our first priority is obviously try to recover that through local pricing, and we are doing good progress in that. Probably the pace of the devaluation sometimes is too quickly to be able to hopefully catch up very quickly.

But, for instance, in Argentina we did it very -- we recovered the devaluation that we had in December. Basically, by end of February we'll be able to recover all the ground. We are doing good progress in Mexico too, as well as in Colombia. And that's the first step to actually being able to recover the risk of currency.

I'll just add to what Juan Guillermo was saying, Gerard. We would work very closely together in something like Brazil, and first thing is you've got to match your cash flows really, as such. So we would collectively call all the guys. We have a very good presence in these countries, so we load up with as much local debt as we possibly can, and so that was a starting point.

So these are cornerstones of the financial strategy. You've got to match your currencies. And sometimes people say, oh, you could rock up with your expensive dollars, but you put your expensive dollars into a country and you get start getting paid in a devaluing peso, you're never going to make a return. So again, it comes back to it. You're not going to do that.

But again, working together, stick as much debt as you can into the place. It doesn't work -- it is not great for the accretion. It's expensive. But in the long term, it's always been proven right to always -- to do that, and it's something that we've done for years.

I think the other point is that people say (technical difficulty).

On Mexico, do you want to add? The specific question on Mexico, how the market is there.

Again, Mexico has two different dynamics in terms of markets. One dynamic is not a Mexico which is a business related to the maquiladora area, and it's very tied to the US, actually dynamic. But the advance that we're having is that many businesses are actually moving from China back to Mexico, so there is a very healthy dynamic in the whole maquiladora area, the point that we have all our plans for and we are expanding Tijuana and Mexicali to cope with demand. So I would say in that sense, that's what we're showing at [Biko] in Mexico.

And then, on the center part of Mexico that is most related to domestic demand, we finally were able to look at the fourth-quarter pickup in demand which is coming into the first quarter of 2016. And that's mostly oriented to the local Mexican market, which still is huge. It's 180m people. So there is a good reaction in terms of consumer approach in Mexico.

Gerard, we'd see Mexico as a key market for us to invest in, hence the reason why we're spending EUR65m in taking these secondhand paper machines and pieces of paper machine to Mexico and rebuilding it and slotting it into our system there, which is very short of paper. And so we expect that mill to start up in the first quarter next year, and we'll be immediately accretive once we get it up and running successfully.

So, we go to -- if there's no further questions in the room, we'll go to the telephones.

(Operator Instructions). Matthias Pfeifenberger, Deutsche Bank.

Yes. Good morning, gents. A couple of questions from my side. Firstly, on the closures, this is something I think the market is totally blanking out, more on the kraftliner but also in the testliner. What was, for instance, your rationale of closing Sanguesa? And was in the Billerud considerations that they would close a quite sizeable capacity on the kraftliner side, because they just say the new capacities are more efficient?

And in that regard, I guess you're doing your own intel on that, but how many big machines do you see are subject to put into stalling or conversion? Thanks.

Okay. On why we're closing Sanguesa, Matthias, is because Sanguesa is a three machine paper mill. It's near Pamplona. Two of which produces very thin paper called MG papers, and the third was a relatively inefficient semi-kraft machine that produced a grade between kraftliner and recycled. We decided to make that mill a totally MG paper machine mill and close that 60,000 tonne machine and become much more efficient. It's a EUR27m investment, with an IRR about 23%, assuming the market remains in decent shape, which it is in very good shape, that MG paper market position.

It's more like a converting business. They've over 2,000 customers, in fact. And it's a global business and Sanguesa is one of the leaders in that particular space. So we believe that's a good long-term investment for the Company, and of course for that mill. So it's completely -- it's not connected at all with anything other than in kraftliner. It's connected to us making our system more efficient.

With regard to Billerud closing capacity, I'm sorry, I actually don't know about that. I don't know if any of my colleagues know about them closing capacity for any reason. We'll certainly look into it and get Seamus to call you back, Matthias, but I haven't heard what Billerud have said about their own -- their closure of capacity.

Okay. Fair enough. Another one would be on the testliner stock levels. You were kind enough to update us on the explicit stock level, so how does it look early this year? And also, what do you see on the OCC? Is it quite stable? But typically we see an uplift in spring, when the activity starts up, so is anything speaking against it this year? Thanks.

No, nothing speaking against it. Stock levels are slightly higher than they were at this time last year. We have a strong period that we're going to go into now, out of February into March, April, May, June, July. When you look at the actual number of shipping days, even in February this year we have a leap year, so therefore we've an extra shipping day. Easter is earlier this year, but nonetheless March looks like a reasonable shipping month and April is a good month, not having an Easter. And then, actually, May versus last year looks like a much better year, based upon less holidays across Europe; the holidays are falling at different points.

So if you look through the year, there is really no new capacity coming on stream. We've closed Sanguesa. We've taken down our Roermond mill for 42 days, or 44 days I should say, which is going to take about 35,000 to 40,000 tonnes out of the market. I know David S. Smith closed one mill called Wansbrough.

So the new capacity that's coming on between now -- this time -- this year versus last year is negligible. It's really only our own capacity which is in Townsend Hook versus last year. So obviously, then after the summer we'd expect to see some introduction of some new tonnes from Perenco, and after that we don't know -- other than Scholle and Hammer, we don't know of any confirmed, absolutely going to happen new capacity. But obviously, some people have announced and we do hear of some delays, but we don't want to speculate about what other people are doing.

Yes. Great. The last one from me would be on the EUR75m cost take out. You mentioned some deal wins from the energy side, but the question is do you really need -- this take out is typically to fight cost inflation on other end. So can we maybe walk through some of the items like staff costs? Do you expect, I don't know, bigger inflation than last year, for instance?

Ian, do you want to take that?

As you know yourself, it's always the cost inflation that's the issue for the industry, and that's why cost programs have always been in place to offset that. Our staff bill is in the order of about EUR2b, and as Tony said, what, close to 45,000. So typically the focus is as close to inflation as possible, but there is always some element higher than inflation. To get into detail, you're looking at 1%, maybe 2%, but there's no specific guidance on that.

Okay. Thanks very much. Congrats the result.

Thanks, Matthias. Two more questions.

David O'Brien, Goodbody.

Hi, folks. Just a couple from me. Firstly, on the Americas business, Brazil seems to be the final part in the puzzle in terms of having a truly pan-Latin American offering. Can you give us a sense of the sales in the Americas business? What proportion of them are multi-national? And given the formation of a pan-America sales team, should we be expecting to see an acceleration of growth in that area of business over the next shorter period, two to three years?

And then maybe more longer term, on the Americas business, we focus a lot on innovation in the European side of the business, and is there scope over a longer-term period to bring a more sophisticated packaging solution over to that part of the world, and what can that do for margins as a result?

Okay. Juan.

Let me take the easy one first. In terms of pan-American sales, we have made a lot of progress in the last two years. Actually, the former group of pan-American sales was just assembled two years ago, and we're giving you a true sense of not only pan-America but pan-global sales at Group level.

At this point, in the Americas in total, around 25% of our sales are what you call multi-national or global companies. And one of the advantages that we have and one, actually, of the motivations to come into Brazil is being called by those customers, because if we really wanted to say that we are a truly global player, we had Brazil lacking. Now we have presence in Brazil and we have the opportunity to actually grow in those customers in Brazil, and that, let's say, is what we're doing in terms of (multiple speakers).

Maybe, Roberto, you could give some color as well from the European perspective on how customers are thinking about us and our development across regions.

In general, if we look at pan-European, it represents -- strictly pan-European represents around 20% of our business. But if you look at what Juan was saying, pan-European and M&A, that's circa 50%. The market is changing quite rapidly, and they're looking for companies like Smurfit Kappa that can actually enable them to win in the marketplace.

And when we look at, for example, our launching of ShelfSmart, what actually brings together the complete suite of tools and enables us to look at the business and help our customers develop in quite a very competitive market, it's very exciting what's happening because our key customers are looking end-to-end solutions. It's no longer secondary packaging. Actually, today, in Europe and in the whole area of ShelfSmart, the customers, actually the first moment of truth is actually our packaging.

And there has been quite a disconnect in the past between the primary and the secondary, and there is a huge drive in trying to bring this together and be part of the whole solution from the beginning, to be part of the development and to be part of the whole process. And I think having these tools and as we actually build on this, it's very positive, and what we bring also to the Americas. So we see actually -- I get excited of how we look at the future when we look at how we're engaging with customers today.

Thanks, Roberto. And the second question?

Yes. In terms of, and complementing what Roberto's saying in terms of innovation, even though the dynamic of each country is a little bit different, the Americas and in general, in terms of packaging we are not that advanced compared to Europe. That gives us an advantage, because we have been able to actually show our customers what they can do in terms of offering products and, as Roberto's saying, how to show products in the supermarket.

We have made good progress, for instance, in Colombia, where the market is little by little evolving to a more European type market in terms of boxes and obviously performance packaging and everything. We expect this year to open five experience centers in the region, and then the innovation and technological package that Smurfit Kappa is able to present will be presented in the Americas at the same level that is being presented in Europe.

That's great. Very clear. Thanks very much, guys.

Thanks, David. Last question?

[Nick Alliance], Kepler Cheuvreux.

Yes. Hello. This is Mikael Jafs from Kepler Cheuvreux. Hello, everybody. I have a housekeeping question. Given that your business portfolio to some extent is changing, how should we think about the normal Q1 seasonality in the margins for the European business?

Because of Easter, Mikael?

Yes. Well, basically trying to help us out here, because normally you have a deep dip in Q1; is that what we should expect for Q1?

I think January is always a funny month vis-a-vis the startup. As I say, we would expect normality really in March, because even if Easter's falling in March, it's still a reasonably long month. And as I said, we have an extra day in February. So I think there won't be much difference in seasonality year on year by Easter coming in earlier.

Okay. Perfect. Many thanks.

Thanks, Mikael. Okay. I think -- is there any further questions in the room? Okay. Again, on all of our behalf, I would like to thank you for your attendance here today.

I would also just finally briefly like to say to Ian, who we all know, as you'll have seen from the announcement is moving on to do other things. And on behalf of his colleagues in Smurfit Kappa, on behalf of all of you, we of course wish you great success and great health and great happiness in the years ahead, Ian. And we appreciate all you've done for us in Smurfit Kappa and wish you the best for your future. So I wish you well and thank you all for your attendance here today at Smurfit Kappa full-year results. Thank you.