Smurfit WestRock PLC (SW) 2016 Q3 法說會逐字稿

Hello, everyone, and welcome to the Smurfit Kappa Q3 results conference call. Throughout the call, all participants will be in listen-only mode, and afterwards there will be a question-and-answer session. Please note that this call is being recorded.

The call is hosted by Tony Smurfit, Group CEO, and I will now hand you over to Tony for his opening remarks.

Yes, thank you, operator, and good afternoon and thank you for taking the time to join our 2016 third-quarter earnings call. I'm joined today on the call by our Group CFO, Ken Bowles, and our Group Treasurer, Paul Regan.

Before commencing, I would refer you to the note on forward-looking statements set out in our press release, which also applies to our discussion today. I expect at this stage in the day you'll have had the opportunity to review the detail in the release, so rather than go through our performance line by line, I will provide you a brief summary and then go on to Q&A.

Our EBITDA growth of 6% in the third quarter and 7% in the year to date underscores the quality of our team, our portfolio of geographically diverse operations and the strength of our business model. In the quarter, we delivered an improved performance across all key measures, despite a number of significant headwinds.

This performance continues its six-year trend of consecutive EBITDA growth, and we expect 2017 to be the seventh and a record year. Our continuing and unrelenting focus on operating efficiency has driven the strength of our EBITDA margin, which reached 15.7% in the third quarter and is 15% for the first nine months.

In addition to margin strength, our return on capital employed continues to improve, and at 16.1% in the third quarter, is clearly ahead of our stated target of 15%. We're very pleased with our performance in the third quarter and in the year to date.

While we would highlight an environment of significantly higher recovered fiber input costs and continued adverse currency movements, we believe that the characteristics which position us as leader in our sector -- our innovation leadership, our geographic diversity, our integrated model, our capital efficiency and our performance-orientated, experienced team -- mean we can and we will continue to deliver in all market conditions.

We are pleased to have delivered volume growth of 3% for the quarter. While our objective is always to drive growth, we do not chase volume in Smurfit Kappa. Our purpose is to provide our customers with the broadest range and the most innovative range of paper-based packaging products in the market. Our growing business, together with the many awards we continue to win, affirm that we are doing just that and are a testament to the commitment and the experience of the people we have and the globally networked system that we run.

On capital allocation and driving shareholder value, as you've heard us say before, we will continue to evaluate all major capital allocation decisions in the best long-term interests of the business and by extension all stakeholders. We are well positioned and we have a capital structure to invest internally or externally where we see opportunities for growth and earnings accretion.

We have a strong balance sheet and net debt to EBITDA is now down to 2.4 times, which is well within our stated leverage range. We continue to build balance sheet strength to expand the range and strategic financial options open to us.

On internal investments, we're in the third and final year of our Quick Win capital investment program. We will deliver on our stated EUR75 million incremental EBITDA target, of which EUR25 million will be in this year and the final EUR33 million next year. While we remain committed to investing to improve the quality of our asset base, as highlighted at the half year, for 2017, we expect to return to our normal level of 100% or so CapEx to depreciation, while we realize the benefits of a period of significant capital spend and evaluate a new program of high-return investments in support of our Group return on capital target of 15%-plus.

On our mergers and acquisitions, we will target acquisitions where we identify compelling long-term value while maintaining balance sheet strength. We have in Smurfit Kappa an annual capacity for acquisitions of over EUR300 million from free cash flow. We have invested almost EUR850 million since 2012, adding operations in 10 countries, which have all been integrated successfully and seamlessly. We in Smurfit Kappa are a disciplined acquirer and we will participate in logical M&A opportunities if it represents the best use of available capital.

Finally, as you know, dividends are an important component of our capital allocation process. The strength of our cash flow will enable us to continue to invest to support profitable growth while sustaining an attractive dividend stream for our shareholders. We delivered EUR164 million of free cash flow in the third quarter and almost EUR200 million in the year to date.

To conclude, we are pleased with the third-quarter outcome, and based on current operating conditions, we will deliver earnings growth and a record EBITDA in 2016. We have built and will continue to invest in a compelling operating platform and a unique franchise, which will sustain and improve performance across all market conditions.

Thank you, operator, and now we are happy to take any questions from the participants.

(Operator Instructions). Our first question comes from Matthias Pfeifenberger from Deutsche Bank. Please go ahead. Your line is open.

Yes. Good afternoon, gents, congrats to the resilience of the results. A couple of questions. Firstly, on the OCC front, my question would be what do you see? France I think is down EUR10 in the second month already and there is ongoing talk that Germany might follow. So what's the balance here, and are you still comfortable that current OCC prices will actually support containerboard and box prices?

Secondly, since testliner are still down EUR40, what do you see on the supply side in terms of new projects? Specifically, some of those are getting delayed, and even more specifically, Hamburger. I've read that they have reapplied for a permit, and previously they had plans to set up a plant in Turkey, and maybe that has been jeopardized by some of the turmoil that we're seeing there. So maybe you don't comment on some of your competitors, but what does it actually mean when you reapply for a permit? The old one has expired. What does that mean from a timing perspective? That's the first one. I'll maybe come back with one more. Thanks.

Okay, just on OCC -- first, hi, Matthias, how are you? Just on the OCC, first of all, there was a very strong move up in the early part of the third quarter, upwards and clearly we felt that that was -- we needed to recover some pricing if that continued. As you said, that started to weaken off in September in the export market and has weakened off a little bit in some of the markets, whether it's Spain, France or slight weakness in Germany.

I think unquestionably the long-term trend is up for OCC. We don't believe that this is a long-term move, but OCC is very much driven by global trends, and on the assumption that global growth is going to continue, OCC will continue to creep up over time. There will always be movements, whether it's the Chinese New Year or whether it's greater collection at certain moments in time that might move that particular slice one way or the other.

But we do see that OCC trending-wise is always going to be up, but in the short term, we've seen some weakness due to I suppose some greater collections in the European market more than anything. But do we think it's long term? No. Do we think that assuming growth for next year that OCC will continue to go up, the answer is yes.

As to new products, as you say, we can't commentate -- have any commentary on anyone else's business. We read the same things you do about other people. I think that unquestionably, the -- because of the price slippage -- that the levels of returns out of recycled paper mills today is significantly worse than it would have been six months ago, with energy creeping up a little bit, with wastepaper still at a high level, albeit having some relief.

We would say that the return calculations that anybody would have been making six months ago will be very different to what they are today, and clearly, that may at some point make people pause to think about whether or not this is the right thing to do, if they're able to delay.

I think with regard to new capacity coming into the market, what we see is really only two machines coming on during this year and next year. Perenco started apparently in August. We're just this week trialing some paper from them -- maybe last week, I beg your pardon, we trialed some paper from them, so we'll have to see how that actually works. So that's coming into the market as we speak, and the other mill is [Shollenheimer Mill], which is due to start up sometime in the latter part of the first quarter, maybe into the first quarter, and we just have to wait and see. But that's all that's coming in as far as we can see during the next 15 months at this time.

Great. Two follow-ups if I may. Can you comment a bit on the OCC situation in Brazil? You mentioned OCC up 60%, probably some currency angle there involved, but how can you be certain there will be a relief next year? And also, I'm looking at the 16% return on capital with your 15% I think through the cycle]target, and there is more cost initiatives that you will consider next year. So at that time, would you also consider raising the bar?

You take the second -- you take the third.

You do the first, I'll do the second?

Just quickly on OCC in Brazil, obviously, a lot of what happened in Brazil was because of the very big weakness in the currency at the start of the year, and people would export OCC, plus lack of generation in the country. That has continued and it has stayed stubbornly high. We would hope we get some relief, but there's no guarantee about it. If we don't get relief, we and others in the country are going to have to continue to raise prices. We have had some increases, but not nearly enough to cover such a massive increase that has continued.

But on the Brazilian acquisition, Matthias, everything aside from OCC has worked out very well for us. Volumes have been okay. Integration of management has been okay. The assets that we bought have been good, so everything has worked and ticked the box except for this massive material increase in our main cost, which was unexpected, and that cost us about -- on an annualized basis, it would have been about $15 million, so so far I think, Ken, it's about $8 million.

It's probably about $8 million in the year to date, Matthias, but [form of it], $15 million. In terms of returns, this is something we continue to look at, Matthias. If you remember, it's not that long ago that we increased the target to 15%. So one swallow doesn't make it summer, so one quarter at 16%, we'll sit back and see. It's also September, so let's -- we'll see how it goes through the year end and maybe into 2017. If we feel it's appropriate then, we revisit our return on capital hurdles.

Great. Thanks a lot.

Thanks, Matthias.

Our next question comes from Lars Kjellberg from Credit Suisse. Please go ahead. Your line is open.

Thank you. Just looking slightly beyond the present, you did pull off a very good performance, margin expansion in a challenging quarter in Q3. Looking into 2017, what sort of leverage -- levers do you have to pull to continue to see growth? You mentioned of course the continuation of the Quick Win, but are there any other aspects of your business that would promote incremental growth in that EBITDA, cost take out, carryover from M&A and those sort of things?

The second question was about M&A. I think, Tony, you were quoted on the screen today saying there's quite a number of assets that are unattractive on account of high valuation, and it seems as if UK investor base have some degree of risk aversion for companies above a 2 times leverage. Can you consider to put more capital towards debt reduction again to bring down the leverage below 2 times to adhere more to what the UK investor base care about?

Okay. When we talk about levers into next year, let me just qualify that we haven't yet seen our budgets for next year from our operations, so we will be doing that next week, and then we will obviously challenge them and decide if their assumptions are correct.

We do see obviously some incremental benefits going into 2017 from the CapEx programs that we have implemented this year. We also see some continued benefits into 2017 of some of the projects that would be -- would have hurt us in the first half that have not yet ramped up to the level that we expected them to do through the third quarter, so that will be beneficial.

So CapEx, Quick Win and CapEx that we have put in this year will be positives into next year, and some minor acquisitions that we'll have made during this year that will have a positive situation for us going next year. So I would say that that will be the main one-off positive that you would be referring to as you look into 2017. But as I say, we haven't yet looked at our budgets, and we'll do that in the next week or so.

Ken, do you want to take the second question?

In terms of the second question, Lars, M&A, as we were talking before, you've seen multiples in double digits, and I don't think that's attractive to us, partly driven by a low interest rate environment and everything else. But equally, we still have a reasonably active pipeline of projects that we continue to look at.

I think the natural thought along from there is in the absence of M&A, I think you'll see natural net debt reduction. I think equally the return to 100% depreciation for CapEx next year will equally feed into that kind of net debt reduction. So I think part of the thesis is whether you believe 2.4 times is levered, our view would be probably not, but we understand how the UK market sees it.

But I think our natural progression, given where we see it in terms of cash flow profile over the next 15, 18 months is towards lower levels of leverage, without pinning ourselves to a number again. It's going to be dependent on how the budgets fall out over the next few weeks to see how that drives us out through 2017. But I think you can see the work we've done over the last few years in terms of both the quantum and indeed the times reduction of our leverage, so it's something we've actively worked on and we've continued to do so.

That's fair. Just a quick one on the Americas. Of course, there's been a price increase put through in the US market, and you indicate in your write-up that you would see some benefit in the US pricing, but also you're talking about better pricing environment in Colombia and margin recovery, and I would assume the same would apply to Mexico.

What sort of momentum do you leave this year in that business? Are you now starting to cycle or lap the negatives from currency depreciation? We're actually going to see both margin expansion and recovery to the 17%, 18% that we've been accustomed to and again, a better pricing environment that would lead you to that's where you see meaningful growth coming into 2017 in terms of EBITDA.

I think the thesis of what you say is correct. We do see some momentum in the US market. We do see momentum in the Mexican market, where we have some both capital that has been or will be deployed next year, that will benefit us and also the market is -- has received price increases from us. And also, in the Colombian market, we also potentially will see some turnaround. It's a little bit early in Argentina to say that, but the -- it has had a difficult year this year. It's a relatively small market for us, but it's had a difficult year this year in relation to some of the actions, positive actions taken by the government to reduce some of the things that went on there in the past.

In a general sense, I would agree with what you say, but it's a little bit early for us to comment on that, Lars. It feels better, because we will as you say already have a lot of the currency issues dealt with this year.

Having said that, who knows what's going to happen with regard to some of the political issues out there with regard to currencies that could affect things? So we're still naturally cautious on calling that as being a big positive for next year.

Very fair. Thanks for the color.

Thank you.

Our next question comes from the line of Justin Jordan from Jefferies. Please go ahead. Your line is open.

Thank you and good afternoon, everyone. I've got two I guess clarifications and one just follow-up question. Firstly, just a clarification on European volume growth. The statement talks about 2% organic volume growth year to date. Am I right to infer it was slightly below that organically in Q3 specifically?

And secondly, just on corrugated pricing in Europe, you talk about it in the third quarter being broadly stable year on year. Now, obviously given the price increases that you got in Q4 2015 and early Q1 2016, does that imply that essentially you've had to give that back as it were over the last two, three, quarters or so.

Yes, I think basically yes to both questions, Justin. Organically, July and August were not particularly strong months for us. We're not really -- we can't really put any finger on it, because we didn't lose any customers, per se, but July especially was itself pretty soft. It improved in September and we're back to normalized levels of growth in September, but yes, organically it wasn't as strong as we would have liked, albeit that our returns were still okay during the months, because as you said, their pricing is basically stable.

When you look at our stable pricing, there was a slight increase during the first -- the latter part of last year. I think from memory we got about 1%, 1% and a bit and that probably eked away over the last three, four months, so we're about broadly similar to the same period last year, which we think is a good performance given all the macro issues out there and go back to the results. The results are speaking for themselves. I think they're fairly decent.

Okay, just on pricing going forward and switching from boxes to containerboard, obviously, you and peers certainly didn't achieve what you hoped for in September in terms of testliner price increases. When we think about 2017, does potentially easing OCC prices, does that negate any hopes potentially of testliner price increases in 2017? I'm just [going] to the fact that testliner is also easing in recent weeks as well.

Well, obviously, as I said, we're not calling anything right now. What we would like to see is we would like to see firmer OCC prices and lower inventories so that we can have some pricing momentum, and that's normally the signal for higher prices in containerboard.

In this go around, we felt that OCC had got to such a level that there would be broad support for a price increase, which in the end there wasn't, because OCC started to trail off relatively quickly after our announcement. And that's the reason why we didn't get enough support for pushing an increase, together with stocks that are still higher than we'd like.

So in actuality, I think that we need to see both stock levels at decent levels and OCC to be higher before you'll have pricing momentum.

Okay, thank you very much.

Thanks, Justin.

Our next question comes from the line of Barry Dixon from Davy. Please go ahead. Your line is open.

Good afternoon, gentlemen. A couple of questions from me if you don't mind. On kraftliner pricing, you've obviously been successful in getting EUR20 of the EUR40 through. Given the dynamics going on in the US at the moment, what do you think are the chances that you can get the remaining EUR20 through on kraftliner between now and the end of the year, or as we look into 2017?

Just second question on those inventory levels, can you give us some sense as to where those inventories are relative to the start of the year or relative to this time last year?

Then finally, just looking at the UK in terms of Townsend Hook, where is that machine now in terms of ramping back up and can you give us some sense as to the contribution from that in the third quarter? Thank you.

Thanks, Barry. On kraftliner pricing, basically on kraftliner pricing, as you say, we got EUR20 through. I wouldn't suspect until you start seeing the export price of the US materially move upwards into Europe -- I wouldn't suspect that you'll see any further increases of kraftliner here in Europe. But it is actually very good news that the US is pushing kraftliner pricing, and we'll wait and see in the export market as to how that does as we move into Q1, but at this, I wouldn't be calling any further increases in kraftliner towards year end.

On Townshend Hook, Townsend Hook has ramped up pretty well now. We are getting close to the levels of speed that we need to get to. Production is at a sustained high level. Quality is excellent. We would expect that mill to be making decent returns for us as we go into -- this year is a material turnaround from last year, and next year will be again, better than this year, assuming everything remains constant.

Then on stock levels, they're broadly similar to the start of the year in recycled containerboard. We saw them trend upwards. They're trending downwards as we speak, but still not to the level where we would like them to be. They're around 560,000, 570,000 tonnes, when we'd ideally like them to be around the 530,000, 540,000 level, which is not a material amount, but it's enough that it doesn't give enough momentum for pricing initiatives.

Okay, thanks, Tony.

Thanks, Barry.

(Operator Instructions). Our next question comes from the line of James Armstrong from Vertical Research Partners. Please go ahead. Your line is open.

Good day, and thanks for taking my question. First, on OCC, just coming back to that a little bit, are you seeing any signs of shortages at all yet? And what's the supply response been that you've seen?

Then on that, have you seen any degradation in the quality of OCC in the market yet?

We saw very significant shortages over the summer period in certain markets. We don't see them right now, but that doesn't mean to say, James, that it couldn't happen very quickly, but right now, we can't say the shortages of OCC. There is -- there was very short situations in some of the Latin American countries, again, during the summer. But at this moment in time, as we sit here, we don't have any particular issues with supply.

With regard to degradation, it's very difficult to say. The answer is probably not yet, but there has been a structural shift from grades like mixed waste towards OCC, because the mixed waste is clearly the advantage of using mixed waste has gone away. There's much less mixed waste available, and that means that people are moving more towards OCC, which is a slightly higher price. And ultimately that will mean that OCC will be more in demand, which will ultimately lead to our long-term thesis that OCC is going to go up in price. So mix for structural reasons is declining and OCC is going to be more used and that being more used is going to create in the -- over time an issue with regard to supply.

That helps, and then other than OCC, what are you seeing on the cost side? Any large changes? You've mentioned energy, but just wanted to get your thoughts on cost.

No, James. It's Ken here. Generally outside of OCC and energy, they're the two big cost movers this year, obviously in opposite directions. Wood prices have been broadly stable, and the only other thing we'd have, which we'd have every year, would be wage inflation of about that 1.5% to 2%, which traditionally we cover through our normal CTO program, which is on track this year.

Perfect. Thank you very much.

Thanks, James.

Thank you. Our next question comes from the line of Gerard Moore from Investec. Please go ahead. Your line is open.

Hi. Good morning or good afternoon, gentlemen. Just going back to a couple of questions already raised during the conference call in terms of perhaps the box price and how that trended within Q3. For me, looking at what containerboard prices did in H1 was a relatively resilient performance. I'm wondering I guess would you agree with that? What does that tell us perhaps about your pricing power? Is this early signs or ongoing evidence that your investment in innovation, etc. is paying off? And then generally what do you see as the outlook for the box price as we go into Q4?

The second question then, just in terms of containerboard prices, specifically for the UK, I think you managed to put an increase in there to compensate for the move in sterling. Do you see any scope for another price increase for the UK given the ongoing decline that we've seen in sterling? Thanks.

Okay, thanks, Gerard. I think to your point about our innovation strategy, as you know -- as everyone knows here, we have a global innovation center based in Amsterdam, and we're rolling that innovation centers down into country level and lead in sometimes into plant level. For sure, when we're able to explain the benefits to our customer base of the innovation that we're doing and the way that we can help our customers develop their own product or reduce their supply chain, this is a big, big positive for our story in relation to selling boxes.

So yes, it is more resilient. Yes, we are getting longer contracts. Yes, we are having much better interface than we've ever had with our customers. That does not mean to say that it is not a competitive environment out there. It is a competitive environment, but the fact is that we are offering something different, and I think that makes a big difference when you're interacting with our customer base to -- for the relationship and the development of our business together, either by volume or by way of margins.

So is our business resilient? Yes. To what extent is obviously always an open question, but we're very comfortable with the space that we're in and the service that we're able to offer our customers.

With regard to containerboard in the UK, I think we had an increase. I think the sterling had declined already when we made the first announcement. It then bounced a bit and now has come back down again. I think we'll just have to wait and see whether or not we would implement further price increases. Obviously, the UK is going to be hit by some inflationary pressures. How severe those will be I still think is an open question, and I think it's watch this space, but we have no plans to further raise pricing here at this juncture.

Okay, thanks very much. Just one follow-up if I can, so in terms of the outlook for the box price into Q4 and next year?

Well, it's a bit early to talk about next year, but in Q4 we don't expect any major material shift from where we are at the moment.

Great. That's very clear. Thanks a lot.

Thank you.

Thank you. Our next question comes from the line of Kevin Hellegard from Goldman Sachs. Please go ahead. Your line is open.

Hi. Most of my questions have already been answered, but I have a few follow-ups. So you have given a pretty clear guidance on CapEx into next year. What about interest cost and tax in terms of cash perspective? Are they also going to be relatively flat, or is there any changes here?

I'm delighted to give this one to Ken -- Ken, Kevin.

Hey, Kevin. It's probably too early to say. Again, this is all linked to our budget process, really, and until we see the budget process we really can't drive out either the interest cost or indeed cash taxes as a result of that. Our normal course, we'd give greater guidance on those kind of items as we get toward February next year, so you may just have to hang on a little while for that.

Okay. In terms of FX impact, especially from Americas, has been quite significant this year. If everything stays at spot, would FX turn from a headwind to a tailwind in Americas?

For the remainder of this year, Kevin, or for next year?

No, 2017 versus 2016.

Yes, I suppose, because you would have the comps would be better. I suppose if you think of how it's trended this year, quarter two to quarter three broadly has been flat in terms of FX for the Americas. The trend has really been the year on year, and that's been significant, but you've seen things like the Mexican peso bounce around a fair bit over the last few months, in line with US election polls, etc. So forecasting currency is a finite science, I'd suggest.

But yes, obviously, if currency comes back a little bit, as it has begun to do, it will be some sort of a tailwind. But we tend not to factor that in.

Okay, thank you very much.

Thanks, Kevin.

Thank you. Our next question comes from the line of David O'Brien from Goodbody. Please go ahead. Your line is open.

Hey, fellows, it's a couple of follow-ups for me, please. Firstly, on capital allocation, can you just give a sense, assuming market conditions prevail over the next 18 months, which I know could be a big leap, where do you as a management team see the biggest opportunities to drive shareholder value through capital allocation?

Secondly, could you just give us a comment on Q3 volumes split out by the more industrial segments versus the FMCG and if any particular regions stood out across Europe's growth levels?

With regard to the capital allocation, Ken, jump in if you want, but I would say that our focus as a Company is always to look for the right acquisitions. If they're not there, we will obviously invest in our business, and if we have excess capital -- sorry, and to pay a progressive dividend, as we have been doing. Then obviously if we are in a situation in 18 months from now, if everything remains as is, we will obviously have to look at what's the best use of capital? Is it to pay down debt or is it to do something else? That's something that we would have to determine at the time.

But we are -- when you're in a risk-off mode, as the market seems to be right now, people say, well pay down more debt. And then when you're in risk-on mode, they say, well, you should have more debt. So we've got to be very careful that we manage this business for the long term and in the long-term interests of the shareholders. All options are on the table.

We believe that as we progress our debt to EBITDA reduction to 2.4, as we've done, and then maybe a little bit below that towards year end, that's a very correct place for us to be. But obviously we'll take soundings as to whether or not we need to be lower than that based upon our natural cash flow generating ability as a company. Then we'll decide at the time what's the right thing to do, but it's a little bit early to be calling what we might do in a year or so from now. But as I say, nothing's off the table and we keep an open mind on it.

Yes, I think, David, we've always approached capital allocation on a returns basis, and where we see returns as best for both the business and indeed the other stakeholders, that's where we see ourselves, whether it's M&A, internal investments of dividend or net debt reduction, it really is a case by case, allocating that capital where returns are greatest.

Dave, sorry, what was the second question there?

Outperforming countries or regions, volume.

I think really I don't want to get into the specifics, because I think July and August were a bit sticky months for us, but September was totally normal, and we can't really explain why July was slower. August can be a holiday month, but July was a funny month for us in relation to volume. And as I say, we didn't lose any business. And what we've seen in October is back to normality.

I think when you look at the various countries in which we operate, we have seen a progression in countries such as Germany and France, where we had some problems last year, so we've seen a decent progression in both those countries. We see our Eastern European markets growing nicely. Our UK market, after a sticky July, has done well since then, and Spain has done very well for us. So all in all, I would say that most markets have performed well in the third quarter and hence it's reflected in the results.

Great. Thanks, guys.

Thanks, David.

Thank you. (Operator Instructions). Our next question comes from the line of Corrado Abbattista from Fenician Capital Management. Please go ahead. Your line is open.

Thank you. I've got a couple of questions. The first one is very quick to answer. How big is Venezuela within the context of the Group?

And the second one is more philosophical in nature. I have to say that I've been looking at your Company since one year, I would say, so I'm not a long-term shareholder. I'm looking at the great job that's been done so far in terms of growing EBITDA through organic growth, through acquisitions, smart acquisition, and clearly since the many few months -- few years, the stock clearly derated. But since a couple of years, it seems to me that despite the incredible good work that the management team is putting, the market is becoming especially lately more and more skeptical about the ability to continue having the same results.

The market has derated the stock in a very significant way, despite for instance, as you said, we are getting to a point where CapEx is equal to depreciation, so cash flow is going up. In a couple of years, because it's not in the forecasting horizon yet, but your cost of debt on average is north of 5%, and your CDS is trading at 1.5% over swap, so actually, if you would issue a bond now, you would refinance yourself 3.5% lower than you're actually paying today.

So yes, there a lot of uncertainties. You are not ready to comment on the evolution of the market in 2017, but there are a lot of things that are going in the right direction. Why do you think the market is derating so aggressively your Company? And what can you do to answer the clearly some kind of concerns that the market has?

Corrado, we have a guy who runs our marketing for Italy, and I would -- you sound exactly like him, so thank you for that question. The philosophical question I'll come back to, but we'll do Venezuela with Ken for a second.

It's not often the Venezuelan question is the easier one of the two. As you know, Corrado, in the last number of years, Venezuela has become a much smaller part of the Group, and reality now would only approximate 1.5% to 2% of the Group on an annual basis, so much smaller.

Fairly insignificant.

Absolutely, and we've highlighted that as we've had that journey, if you like, in relation to Venezuela. Just to clarify one point in our cost of debt, our cost of debt is actually about 4.1% rather than above 5%, and you'd have to remember that yes, in theory, you could refinance the lot, but there's a serious cost attached to doing that. And so really when we look at refi --

No, no, that's quite clear. You are not going to refinance now, because of course the market will make you pay the refinancing cost, but the point is from 2019 onwards, your cost of debt will collapse.

Oh, absolutely, but --

Not going down. It's not exactly correct. Will collapse.

Corrado, I tell you, if you want a job in marketing in Smurfit Kappa, you're welcome. I can tell you that obviously, as you say, we ourselves are struggling, and it's not our job really to comment on the share price. Only as shareholders we are very surprised that the market has continued to put us at a discount to some of our peers, which is surprising to us.

All we can do as a management team is continue to deliver strong, diversified earnings that will allow the Company to be seen for what it is, which is a truly exceptional company with exceptional people working in it, with an exceptional asset base, with an exceptional spread of business. And at the end of the day, we truly believe that the market will find out about us.

It's quite amazing sometimes to me how many times I go in to see investors and they don't know what we do and they don't understand the Company. It's our job really to continue to explain what we do and to continue to deliver good numbers, and in the end, I think that will be -- people will find out about us.

But until that happens, we're going to have people like you and people like us scratching our heads and say, why are you so cheap? And the only reason we're cheap is because not enough people are buying us.

I remember when we had two guys who used to work in our investor relations once upon a time. They were asked why is the stock down, and these guys smartly said, we have more sellers than buyers, and that's unfortunately -- unfortunately, that is something that we can't -- we actually can't do anything about that.

We have to make sure that people understand the Company. We have to make sure that we deliver good earnings. We have to make sure that we deliver -- we invest appropriately. We have to make sure that we do all the right things, and then at the end, the market has to buy the stock and buy the story.

Thank you very much indeed. Appreciate it.

Thanks, Corrado.

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

Thank you, operator, and thank you all for taking the time to participate in today's call. We are -- as I said already, we are pleased with the third quarter outcome, and based on current operating conditions, we'll deliver earnings growth and a record EBITDA in 2016.

In Smurfit Kappa, we have a market-leading product offering. We've got great geographic diversification, and we have an integrated business model that will enable us to continue to deliver strong operating performance, excellent earnings, and we will build balance sheet strength.

Thanks for all taking the time to join us on this call, and I wish you all a very good day wherever you are.

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