Smurfit WestRock PLC (SW) 2016 Q4 法說會逐字稿

Okay, thank you all for being here. And good morning ladies and gentlemen. And thank you for taking the time to join us here in London, or as the majority are on the line, for our full year 2016 results.

I'm joined today by Ken Bowles, our CFO, Paul Regan, our Group Treasurer, Roberto Villaquiran, our CEO of Europe and Juan Guillermo Castaneda, our CEO of The Americas and they'll all be speaking to you in a few minutes.

I'll give a brief run through the highlights of our performance in 2016 before handing over to Ken 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 for a brief conclusion. As usual, please note the disclaimer on slide 2, which I will take as read.

What I hope you will get a sense of today is not just what we've achieved in 2016 but also a greater understanding of our business, the key drivers and what truly makes Smurfit Kappa Group a great company. As we've said consistently over many years, we have a great bunch of people, a superb and constantly improving asset base. And we are a geographically diverse business with market-leading positions in our chosen sectors.

We are the market leader in Europe in corrugated, the number one. Equally, we have an integrated business. And we are the number one producer of both recycled paper and virgin-based papers, with three world-class top-class mills in the kraftliner business. We are also a player of scale in The Americas and the only significant pan-regional player.

(Technical difficulty) we have a strong cash generative business and we've delivered EBITDA of over EUR1.2 billion in 2016. That was a record year for the business. And we have built a compelling operating platform with a unique franchise with sustained performance today and, of course, tomorrow.

For those of you who attended our capital markets day in London in June of last year, you may recall the vision that I set out for SKG until 2020. The vision is to be a globally admired business, dynamically delivering secure and superior returns for all stakeholders.

Our recent admission as a FTSE 100 constituent broadens the recognition and appeal of Smurfit Kappa Group, dynamically delivering to reflect both our ability to move quickly as opportunities arise, but also a mindset never ever to be complacent as the market leader.

Delivering secure and superior returns for all stakeholders, together with the increasing strength of both our business model and our balance sheet, we aim to deliver secure returns through the cycle. And to grow the business and the dividend for our shareholders.

Turning to the key business drivers that continue to provide an industry-leading platform for our business. When we in Smurfit Kappa talk of growth, we always refer to disciplined and profitable growth. SKG's operating management understands that capital costs and volume is not at the expense of price.

We have a business profile, which is truly unique and sets us apart from all peers. Our geographic diversity is a key differentiator with operations in Europe, North America and Latin America. Each market has its own dynamics. And this leads to greater stability and diversity of earnings. Of equal importance, it provides our customer base with excellent geographic coverage.

Our integrated model allows us to run our machines here in Europe full all the time and in turn maximize our performance. We are short over 600,000 tonnes in recycled and we are long 500,000 tonnes of kraft in a European market, the kraft market that is structurally short of 1 million tonnes or more.

The integrated model delivers better quality and certainty of paper supply and better quality earnings through the cycle. At Smurfit Kappa, the Americas business is similarly integrated. However, we are a large net buyer of kraftliner, which is something we may address in the future.

Our capital allocation policy has been very consistent through the cycle, focused on balancing net debt reduction and business growth and, of course, returns to our stakeholders. We'll touch on this in a bit.

And finally, our culture, culture is something, which I am particularly passionate about. We have in Smurfit Kappa a performance-led culture, which is evident throughout our business. We are always first up and last to bed. Alignment with our integration model ensures that our managers focus on a returns culture. The familiar yet professional culture is evidenced by our high rate of people retention.

And now turning to the performance in 2016, as you'll have seen we delivered earnings growth with a positive performance from both Europe and The Americas. And this is reflected in the 5% increase of our EBITDA to EUR1.236 billion for the year, which was of course a strong result against the backdrop of rising OCC prices, softening recycled prices and foreign exchange headwinds, three very large negatives for us to counter.

Return on capital employed at 15.4% continues to exceed our target of 15% through the cycle, and it is up on the underlying 15.1% we achieved in 2015. From a cash flow perspective, we continue to deliver cash flows with a reported EUR303 million in 2016. And this after a year of significant CapEx and some adverse currency impacts on some of our components of free cash flow.

In June, you'll all be aware we became a member of the FTSE All Share Index. And we, of course, were delighted in December to be admitted to the FTSE 100 Index.

The strength that you have seen of our business allows us to avail of attractive debt markets. And in January 2017, this resulted in a low coupon of 2.38% for our seven year $500 million bond -- EUR500 million bond, I beg your pardon.

Finally, reflecting the distinct strengths and capabilities of our business the Board of Smurfit Kappa has recommended a 20% increase in the final dividend to EUR0.576 per share.

I'll now hand you over to Ken who will take you through some of the financials of our results. And I'll let you see his picture longer than mine.

I was tempted to wear exactly the same clothes just to confuse everybody. Thank you, Tony. And good morning everybody and welcome. And thank you for taking the time. Before you get to Roberto and Juan and the really interesting side of the business, just a few slides from me on the financials and how the year turned out.

Firstly, looking at the fourth quarter, revenue of EUR2,060 million in the fourth quarter was about 1% down on the fourth quarter of 2015. However, the underlying year-on-year move in Group revenue when you adjust for net negative currency movements and net acquisitions was actually an increase of 2%.

Revenues in Europe decreased by about EUR36 million primarily driven by adverse currency moves. In the Americas, however, revenues increased by EUR7 million year-on-year driven by both an underlying revenue growth and the benefit of acquisitions, partly offset by some of the currency headwinds that Tony alluded to earlier on.

EBITDA for the fourth quarter was EUR320 million, EUR6 million down on the same period last year but earnings growth in the Americas offset by lower earnings in Europe and some higher Group center costs as a result of some one-off items in center costs in 2015. However, allowing for currency movements and net acquisitions, the underlying move in EBITDA for the quarter was an increase of about 1%.

Our pre-exceptional profit before tax of EUR170 million was about 9% lower year-on-year, lower EBITDA, higher net finance costs primarily due to the full effect of our acquisition financing resulting in a decrease in our pre-exceptional EPS EUR0.474 for the quarter to December 2016.

The Group reported free cash flow of EUR104 million in quarter 4 2016 compared to EUR152 million in the same quarter in 2015. The main variance relates to the proceeds from the sale of our Nanterre site in 2015, which obviously didn't reoccur in 2016.

The remainder of the decrease reflected lower inflows, mainly in respect of working capital and higher inflows in respect of tax and the cash interest equally in relation to acquisition financing.

Our net debt, however, fell to 2.4 times net debt to EBITDA down from 2.6 times at December 2015. And importantly, the Group's net debt continues to reduce in both absolute and in multiple terms, positions the Group with considerable financial strategic flexibility, subject to our stated leverage target of 2 times to 3 times and within our BB+/Ba1 credit rating.

Moving onto the full year, revenue for the year to December of EUR8.2 billion was about 1% higher than 2015 with higher reported revenue in the Americas, partly offset by lower revenue in Europe predominantly due to adverse currency impacts and the absence of some of our closed and disposed operations out of 2015.

EBITDA for the full year of 2016 of EUR1,236 million, which is a record for the Group, compared to EUR1,182 million in 2015. The higher earnings in both Europe and the Americas offset by slightly higher Group center costs.

Allowing for currency movements and the contribution from acquisitions net of some disposals, comparable earnings in Europe and the Americas were EUR39 million and EUR47 million higher respectively in 2016.

Our operating profit after exceptional items for the year was EUR815 million compared to EUR711 million for 2015, an increase of almost 15%, an increase of 6% before those exceptional items.

The Group's pre-exceptional profit before tax of EUR657 million was less than 1% down year-on-year with again higher EBITDA offset by some higher net finance costs.

With our increased taxable profits, our tax charge was also slightly higher. And, therefore, our pre-exceptional basic EPS fell slightly from EUR1.97 to EUR1.89 in 2016, predominantly due to the higher finance cost.

Our free cash flow for the year, which we deal with in more detail on the next slide, was EUR303 million. Again, the big impactor there was the sale of the Nanterre site in 2015.

And just looking at the free cash flow bridge, because there is a lot of moving parts within it, the Group reported free cash flow of EUR303 million in 2016 compared to EUR388 million in 2015.

Again, the Nanterre site is a big impactor in there and you see that in the change in the sale of fixed assets year-on-year. But the rest of that decrease is mainly related to higher outflows for working capital, retirement benefit, tax and indeed cash interest.

And fourthly our EBITDA grew by EUR54 million year-on-year. Our exceptional outflow of EUR15 million relates to restructuring and reorganization costs in our Americas segment.

Our cash interest of EUR148 million for the year was EUR25 million higher than 2015 reflecting the higher level of debt following our acquisition activity in 2015 and into early 2016. And a slight increase in the average interest rate, partly as a result of our exposure to the relatively high interest rates in Brazil and also our cash interest income fell year-on-year as deposit rates turned progressively negative across 2016.

Our working capital move in December was an outflow of EUR95 million compared to EUR24 million in 2015. The outflow in 2016 was the combination of an increase in stocks, to a lesser extent debtors offset by an increase in creditors. Our working capital balance amounted to EUR573 million at the end of 2016. But importantly represents about 7% of annualized sales very much within our stated range of between 7% and 8% with 6.6% at the end of December 2015.

The outflow of EUR8 million in respect of provisions largely relates to some of those restructuring projects out of 2015. Our CapEx at EUR499 million represents approximately 127% of depreciation, slightly higher than we guided due to elements of currency and a lease capitalization towards the back end of 2016. And we expect capital expenditure to guide lower to about 100% of depreciation in 2017.

Our cash tax of EUR151 million is EUR20 million higher than 2015 primarily reflecting the impact of higher profitability across the systems, use of tax losses et cetera.

And finally, other, and other comprises our moves in capital debt (inaudible) which are capital items that are received but not yet paid for. And we'll expect some of that to reverse through 2017.

And then also outflows in relation to our retirement benefits, which are higher year-on-year as a result of the focus we have on eliminating debts and schemes where it's economically advantageous to us. And that brings us to our free cash flow of EUR303 million for the year.

So with that, I'd like to thank you for your attention. And I'll hand you over to Roberto.

Thank you Ken. And good morning to all of you. The European division delivered a good performance in 2016 with a full year EBITDA of EUR928 million, an increase of EUR27 million or 3% year-on-year. This reflected a solid operational performance on both sides of the business, paper and corrugated.

In paper, we completed a number of large capital projects, delivering improved efficiencies. In corrugated, box volumes increased by 2% year-on-year and average corrugated prices increased by 1% when taken on a constant currency basis despite lower paper prices movements during the year.

Currency volatility was a negative feature throughout the year. And we reduced our EBITDA result by EUR11million, predominantly due to the weakening of the UK sterling and the Swedish kroner.

As Tony outlined earlier, a core business driver for us is disciplined profitable growth. Our differentiation initiative launched a number of years ago is now providing us with a solid market insight-led foundation upon which to build new businesses and growth with our existing customers.

While this impact is visible at every level of our business, nowhere is this more evident than at Pan-European level where our volume grew 4% in 2016 as we developed scalable solutions with our largest customers to help them succeed in their market place.

Looking back to our integrated supply chain, our recycled business performed well in 2016, and is primed to perform strongly in 2017. While we saw some increase in supply in 2016 with a number of new machines starting up, the market has tightened dramatically as demand has remained strong and inventories were drawn down over the Christmas period. As a result, we have announced a EUR60 per tonne price increase effective February 1, of which we are confident of achieving.

In kraftliner, the market was strong for the majority of 2016 following some early softness as new capacity bedded down in the first quarter. This trend has continued into 2017 and the global fundamentals are solid with good supply/demand balance in both Europe and the US markets.

Reflecting this, the Group has announced three price increases across Europe year-to-date with a EUR60 per tonne increase for both brown and white kraftliner across our European markets from March 1. And two separate EUR40 per tonne increases in the Mediterranean region for February and April respectively.

It should also be noted that we completed an acquisition of a corrugated packaging business in the UK in November, Saxon Packaging, and the integration is well -- progressing well.

An interesting question that is continuously posed to us at investor events is how our customer offering is fully differentiated from our largest peers. Each of us are able to point out to new customer wins and industry design awards.

But what our competitors are unable to replicate is SKG's ability to systematically apply our global collective intelligence to the supply chains and marketing impact of our customers be they local or multinational. The scale of our company gives us unrivaled quality data and the benefit to our customers are speed and the ability to benchmark.

Looking at this slide you can see the daily usage of our bespoke suite of tools across our businesses on a scale that no competitor possesses. Our Shelf Viewer holds 72,000 of our customer's products on the supermarket shelves across Europe and the Americas, and were viewed an average of 346 times per day in 2016 to show our customers exactly how their products look at the point of purchase.

Our InnoBook holds 6,900 of best in class concepts of which five of the Red Dot Awards are displayed here in the room today. These are used on average 614 times per day to share the knowledge of our 700 designs -- 700 designers around the world.

Our supply chain tools, paper to box and pack expert, have analyzed 53,000 supply chains and are used thousands of times daily to optimize the paper composition of our boxes and the transport planning of our customers. Linked to real-time data each of our 160 corrugated plants across Europe we can optimize and quote to our customers the cost and specifications of our packaging down to the CO2 emissions of their box.

Finally, our Shelf Smart process uses direct consumer feedback through our [RC] technology to test and verify the impact of our designs before they're rolled out by our customers. Over 100 of these were carried out per day in 2016 and this number is expected to continue and rise.

As one example of how we apply this collective intelligence to individual customers, you see on this slide the five-fold growth we have enjoyed with Nestle Nespresso over the past 10 years. Nespresso, as many of you know, is a popular premium coffee category within Nestle worldwide.

We were given a brief along with industry peers to deliver a solution for their ecommerce shipper for Nespresso. SKG surpassed the original brief. By applying the latest insights in ecommerce packaging, using the collective power of the 700 (sic - "600" see slide 15) designers worldwide and undertaking consumer research on customer's experience with Nespresso.

Not surprisingly, Nestle selected Smurfit Kappa, securing business for five years. The solution delivered an enhanced premium perception achieved the productivity required for the pick and pack facility, is easy to open for the consumers, increased protection of the Nespresso sleeves in the supply chain and provided a secondary use post-delivery as return shippers are used for the capsules.

Looking to 2017, our key business drivers for our European business, it is clear that our differentiation strategy is driving positive results both in terms of energizing our teams and generating more collaborative customer relationships.

For those customers that wish to focus on added value throughout the supply chain, we are working together for mutual growth. We have invested significantly into our business in recent years and are seeing tangible benefits coming through with higher quality earnings, improved returns on our assets and strengthening cash flows.

In paper, we are delivering on a number of large projects to further enhance our integration and our integration by grade, grammage and capacity while positioning our systems firmly as one of Europe's lowest cost producers.

In corrugated, while efficiencies in automation remains key objectives we are consistently investing in new advances in printing and packaging technologies.

Turning to the industry fundamentals in Europe, if current demand conditions prevail we can expect 2017 to be a positive year for Smurfit Kappa. Consistently high OCC prices and solid demand for packaging has created the necessary conditions in Europe to implement containerboard price increases. And this should be passed onto corrugated prices subject to the usual time lag of three months to six months.

In kraftliner, our market leading position of 1.6 million tonne system is well positioned to benefit from solid demand and the current support of market conditions. In a market where approximately 15% to 20% of boxes have virgin imports, we continue to use the capacity as a key competitive advantage for SKG over the longer term.

In recycled containerboards specifically, we have seen capacity additions in recent years and more is expected in 2017 as the new -- existing producers have brought on machines of varying levels of efficiency. However, their volumes have been absorbed well by a growing market to date. While OCC cost continues to ramp upwards, these producers will remain under pressure to cover their cost base.

I thank you for your attention. And I'd like now to turn you over to Juan to give you an oversight of the Americas.

Thank you very much Roberto. And good morning ladies and gentlemen. The Americas business continues to provide a source of geographic diversification and growth opportunity for us. EBITDA for the year and quarter was up 11% delivering EUR339 million and EUR98 million respectively. EBITDA margin increased again in the fourth quarter to 17.8% and was 16.8% for the full year compared to 16.4% in full year 2015.

These results were delivered against a backdrop of adverse currency impacts of approximately EUR34 million (sic - "EUR42 million" page 8, press release). This currency impact was offset by the positive contribution of acquisitions in the region, continued pricing initiatives in most markets, a strong underlying volume growth and the benefits of our capital investment program.

Year-on-year, corrugated volumes increased by over 20% driven by our acquisitions in the region, together with the strong growth in the largest economies in which we operate, specifically the three major markets of the US, Colombia and Mexico.

In the US, corrugated volumes were up 14% year-on-year driven mainly by the benefit of acquisitions. The Mexican and Colombian businesses were both up 6% year-on-year. Overall underlying volume growth in the region, excluding the impact and acquisitions was 2%.

Pan-American sales continues to deliver above market growth for the Group with customers enjoying the ability to partner with the Smurfit Kappa Group on a regional basis, 2016 Pan-American sales volumes were up 6% excluding Venezuela. Growth in Brazil was seen in Pan-American sales on the back of the Smurfit Kappa Group entry into the Brazilian market in December 2015.

From a containerboard price perspective, the $40 per tonne increase in the US has also been implemented across US exports market and we see this being supportive of corrugated price increases throughout the US and Latin American market, particularly Mexico and Colombia where we have been successfully passing price increases to recover cost inflation.

This slide highlights the importance of being the largest Pan-American supplier of corrugated packaging, a key differentiation for the Smurfit Kappa Group. You can see in the graph that we have increased sales to our Pan-American customers by almost 40% in the last three years alone. By providing only -- the only Pan-regional offering and marrying this with our unique tools and expertise, which Roberto has just mentioned.

We are building three new experience centers in the US in Dallas, Mexico City and Colombia. These new experience centers will provide a unique platform for us in our three main regional markets, will allow us to develop more collaborative relationships with our customers, driving more added value solutions and ultimately above market growth levels of 6% excluding Venezuela as indicated above.

Pan-American sales continue to be a key driver of corrugated growth for us in the Americas, and something I will elaborate further in the next slide.

Mondelez provides a tangible example of our Pan-American sales offering and its corresponding volume growth for the Smurfit Kappa Group. In the last years we have experienced over 150% increase in the volumes we supplied Mondelez across the Americas. This is even higher if you add incremental volumes we have developed in Brazil after our acquisition in late 2015.

Through our regional coverage, we have been able to provide Mondelez with a one-stop-shop for their corrugated needs across the Americas. And as is the case with our colleagues in Europe, we have leveraged our tools and expertise to further differentiate our offering.

As part of our corporate organization, Mondelez moved some manufacturing operations across countries. The Smurfit Kappa Group's ability to supply and manage the transition (inaudible) provided Mondelez the [lowest] solution with a supplier they can trust.

Lastly, with Mondelez, were looking for a partner to work on the 2017 Easter campaign, they choose the Smurfit Kappa Group. The two main drivers for this were our expertise in packaging, automation and our market insight.

In conclusion, we have seen good underlying volume growth across most of our markets. But you will be aware of the challenging environment in Venezuela, which have seen volumes reduce by 48% year-on-year. Argentina has seen a tough 2016 as they constantly adjust to structural changes, but we remain positive on growth prospects in the medium-term there.

Brazil has seen both weak demand and high OCC costs for 2016. However, in both Argentina and Brazil, we have grown above market levels. And in the case of Brazil, there have been some normalizing of OCC costs in January.

The strong volume growth in our three main markets of Colombia, Mexico and the US in 2016, have continued into 2017. Our differentiated strategy along with our Pan-American sales network continues to deliver for us and will remain a key focus in the coming year as we roll out our experience centers.

As we have done historically, the Group continues to drive price recovery in markets impacted by adverse currency and raw material import costs. The Americas continues to be a region with scope for consolidation and a region with a strong M&A pipeline.

We also have plans for 2017 to increase our paper capacity and assist in reducing our short position in the Americas currently approximated to 450,000 tonnes, and so drive further integration and the resulting Group contribution.

I will now hand back to Tony.

Thanks Juan, thanks Roberto and thanks Ken. Turning to capital allocation, this slide sets out our core objectives and how we allocate our free cash flow. And allocation I think everyone in the room will know, we've outlined many times before, and it's consistent with the commitment we have to drive long-term shareholder value creation.

We have maintained our net debt to EBITDA at a comfortable mid 2 times level since 2012, most recently reporting, as Ken said, 2.4 times at yearend 2016. Our debt maturities average is 4.3 years following the very successful completion of our seven year bond, which I alluded to earlier. And we are committed as a company to preserving our current credit rating as a -- in our position as a strong cross-over credit.

As significant shareholders ourselves, management's interests are truly aligned with our shareholders. We have consistently focused on capital spend and optimizing our asset base and enhancing operating efficiencies throughout the network of our 370 facilities, with an average of EUR460 million per year spent over the last three years. This result -- has resulted in a low cost, integrated and very well invested business that will sustain performance both today and of course for tomorrow.

Successful M&A as you all know is very much a part of the Smurfit Kappa DNA. So we have significant financial capacity to acquire attractive assets when they make sense for the Group and, of course, for our shareholders.

Looking at our medium-term drivers, the factors which have sustained us on our journey over the past seven years and delivered record EBITDA in 2016 will drive our future performance. From 2012 to 2016, in what we have described as very average market conditions, our unique business model and most importantly our team and our culture have delivered a 15% compound annual growth in EPS. Free cash flow of EUR1.7 billion, net debt to EBITDA from 2.7 times to 2.4 times while investing EUR850 million in acquisitions and EUR2 billion in continuously improving the asset quality of your company.

We in Smurfit Kappa, I believe, know that we have built a compelling operating platform and a very unique franchise, which will sustain improved performance in all market conditions. We have a strong and proven team who share and embrace a performance-led culture, which is, as I've said, totally aligned with shareholders' interests.

So in conclusion, let me recap on what the key points you've heard today. We have delivered again. We delivered a record EBITDA of over EUR1.2 billion. And as you'll have seen, we continue to perform against all key measures. So for that, I would like to record our appreciation to the total Smurfit Kappa team in delivering this performance.

The Board's confidence in the strength of our business model is reflected in the increase of a 20% in our dividend. And for that, I would like to thank them. But also I would like to thank you all, especially for your attention, and for your continued support to Smurfit Kappa.

We'll now take any questions from the floor and from the radio and mic, so we'll start with Lars.

(Operator Instructions).

Tony, you mentioned quite a number of headwinds and yet you delivered quite a solid result. Could you walk us through the buckets that you were offsetting these multiple headwinds, you and Ken I guess, in terms of FX, OCC, falling recycle containerboard prices? What were the offsets to see you have that decent EBITDA growth?

And the other thing if you talk about the relative resilience in box prices versus the fall in recycled containerboard market price, how should we view box prices in 2017 as you recover that? Should we expect a meaningful flow through into box prices?

I think I'll take the second part and let you deal, Ken, with the first part. When you look at what we did in 2016, Roberto and his team and Juan Guillermo and his team, really were able to offset some of the fall in paper prices with innovative packaging for our customers, helping them sell in their marketplace. So we were giving advantage to our customers at the same time maintaining our own margins.

So part of the whole innovation strategy that we have embarked on a number of years ago, as Roberto said, is to continually evolve our customer experience with us to make sure that they feel like they're getting value. And they certainly are, because we're helping them sell more in most cases.

There's a huge evolution towards the merchandising of corrugated packaging today versus what it used to be, and I think that being the leaders in that, and you'll see these awards, when you're coming up with your customers with ideas to help them, we expect to get paid for that. And clearly that's what's happened in the last year.

They also understand that as the raw material prices move up, and as we've seen in the last year, that we had this terrible scenario where you had paper prices going down and raw materials going up, as you've had that scenario happening, we have been telling them that that scenario can't continue forever.

You will know, Lars, that there was a lot of worry in the middle of last year about additional capacity, and I said if there's normal market growth, the new capacity that's been entered into 2016 and 2017 is easily absorbable, and that was said at I think the half year, and so is proving to be the case so far. We can't predict the future, but that's what we think.

So I think it's the methodology of how we've actually approached the customer has allowed us to sustain our margins in the box business.

Going forward, as raw material prices are going up and they're going up sharply in relation to waste paper, they're also going up -- the demand levels are very good. I think in that scenario, we will be approaching our customers and implementing price increases based upon raw materials, as there will be a margin compression, as there always is. If wastepaper goes up and paper needs to go up and then boxes, but we would be relatively comfortable that we and the industry have to do it.

To the first point?

Hi Lars. You can probably deal with the headwinds and also tailwinds in three distinct buckets. Taking currency first, the currency headwinds for the year was EUR53 million, about call it EUR10 million, EUR11 million in the European business, the rest in the Americas business.

Taking OCC, as Tony said, the average price of OCC in Europe grew by about EUR13 a tonne during the year, so at a consumer of 4.3 million tonnes, you're looking at a headwind there of about EUR55 million, EUR56 million. Then as you know, Brazilian OCC also went through the roof, and indeed in Colombia and other territories.

So broadly, you're looking at a EUR70 million headwind for OCC for the Group. Offsetting that slightly, you had the energy tailwind, which was a slight inhibitor to any price increases in the early part of last year, because we're baking that in. So that for a Group our size, the energy tailwind is probably [EUR50 million]. So you're still net EUR70 million out there in terms of headwinds that we've dealt with.

I think it goes back to what Tony just said, which is the resilience of the business, the focus on price over volume and indeed the cost take-out program, and indeed the focus on cost efficiency throughout the business, not just in terms of programs.

And to the capital point, we have invested capital in 2014 that was not very good for us, like Townsend Hook in 2015, which improved -- still far away from the level, Roberto, where it should be and will be in the future, but it was a positive tailwind for us. So a lot of our capital projects that we've worked for quick wins, they're all working for us.

We'll go to Barry and then to you, Justin.

Thanks, Tony. It's Barry Dixon from Davy. A couple of questions. Tony, you talked about the demand environment and the outlook. Perhaps you might just give us a bit more color around demand, box demand trends around Europe through the fourth quarter and into this year?

And in that context, also you might give us some sense as to the significant decline in inventory which you cite in the statement, which obviously has given you confidence around those price increases. And maybe it's a bit of a stupid question, but how confident are you that those price increases on both recycled and kraftliner can be implemented in full?

The second question is really around OCC costs, and again, you've alluded to it I think just now that costs are certainly rising again. Does that mean that you may be going back or the industry may be looking for further price increases as the year progresses if we see further developments in raw material costs?

And then finally, on Venezuela, and maybe it's a question for Juan, just you see not to be able to export volumes out of Venezuela. Is that a new development, and how should we think about the Venezuelan business in that context, both in terms of the underlying performance of that business, given that export potential but also in terms of the ability to take cash out of the country? Thank you.

Okay, I'll take the middle one, and then I'll ask Roberto, you take the first one, and Juan, you take the third one, and we'll jump in on Venezuela.

Basically, on paper prices, wastepaper prices have gone up relatively steadily during last year from about [125 to 140], broadly -- [126 to 140]. We have seen a dramatic increase in wastepaper prices in the first six weeks of this year, specifically even this week and last week.

With regard to the confidence of us getting the paper price increase through, we are seeing very tight markets and very low inventories. We have announced the [EUR60] in recycled for February 1, and that is broadly all going in. Certainly the majority of its going in on February 1, and then we'll have to see whether there is anything more, based upon the moving stands of wastepaper in the next couple of weeks, whether that will go forward in any greater capacity.

We are looking at a kraftliner market across the world, Barry, that is extremely tight. But it was extremely tight before the incidents that happened in the United States with the IP mill. We were having difficulty sourcing some of the kraftliners and very late before that happened to many of our Latin American markets. And hence the reason why we were confident before anything that we would implement that increase broadly in full.

So therefore, we don't see any reason to change that as we sit here today or stand here today. So it also carries through to sack paper and to MG papers. They're all very strong in demand levels at the moment. So for a January, it's a very good start to the year, but Roberto, do you want to take the point on box prices and demand?

Yes, I think, Barry, as Tony has said, Q4 was a positive quarter in the sense that the volume growth was over the 3%, so that has actually been a positive for the industry, for us, and also actually to help in the whole inventory. Inventories at the end of the year, as far as containerboard, were low. And even year to date, you've seen and we see that despite (inaudible), which have actually added volume, inventory levels are over 60,000 tonnes lower than last year, with production being 60,000 tonnes plus in the current so far.

So with that dynamic, that reflects that the year has started in a positive manner, and if those dynamics continue, that is actually the base to actually go forward with box price increase, because there is no corrugated box company in the world, or at least in Europe, that can sustain EUR60 per tonne and do nothing. So you're going to have to -- the important thing is that those paper prices are sustainable throughout the year, and at this moment in time, we do not see why they wouldn't be for a big part of this year.

Roberto, did you say 3% volume growth in the fourth quarter?

Yes.

Excluding --

Excluding Germany. When we look at -- as you all know, we closed four facilities in 2015, one in France, one in Sweden and two in Germany. And at the end, the core has been to bed those in -- it's been very positive for us in 2016, and that has enabled us to actually have the correct base to go forward. So it's been in a sense the markets in Europe so far are quite positive.

Juan, do you want to take Venezuela, and Ken?

Barry, as you heard me say, basically corrugated demand in Venezuela is going down. We have three paper machines in Venezuela, one of them a kraft mill. So basically, the two recycling machines can supply the internal demand, and we have dedicated the kraft machine to export kraftliner, and then (inaudible).

Basically, we have the advantage of having the needs in our own operations in Central America, the Caribbean and Mexico. We have the ability to export from Venezuela. We have the fiber, so putting everything together, it's a very nice alternative and a strategy to maintain Venezuela operating as normal as possible.

Yes, I think it's important to highlight, Barry, we're getting dollars out of Venezuela, but we're putting it in the release that Venezuela as a country does have some issues. So we put it very clearly that it's around 3% of our EBITDA, but there is a distorting effect potentially.

This could change tomorrow, but the Board is aware there is a distorting effect with regard to the hyperinflation that you have there and the currency rate, which is fixed. That's something we and the Board will keep an eye on during the year.

It has a big potential to explode your EBITDA, but it also has a big potential to mess up your EPS and balance sheet. So at the moment, it's a very fluid situation. The country, as Juan said, it's minus 48% in corrugated box demand last year. It's not particularly good.

So I think what we've been able to do and what the team have been able to do in a great way, and needed for our American business, is to actually export and get real dollars out of the country, and that's been a real positive experience for us. But it is a country that we're keeping an eye on.

Ken, do you want to add on it?

Yes, I think, Barry, in note 14 we detail it, but you're dealing with a country that had 333% inflation in 2016, so not an inconsequential number. We've been dealing with hyperinflation in Venezuela since 2009 now, and for the first seven, eight years, it was 25%, 30%, 40%. 2015 was 181% -- 207% actually, and this year it's 333%, so it's obviously increasing.

The issue we have is in 2015, they had a devaluation, so that tempered that level of inflation, but through 2016, the exchange rate moved out towards June, but then stayed broadly within a very tight range, June to December, so you got an impact of the hyperinflation. Where you most clearly see that in our numbers is in that net monetary gain loss within finance, income and expense, which obviously feeds directly into our EPS.

As Tony says, you've got two things happening. You've got high inflation and a relatively stable exchange rate, so if the exchange rate blows out to 3,000, it's an impact on the EBITDA. If it doesn't, then you get an impact on adverse moves in terms of working capital, because you're replacing higher-value debtors with lower-value debtors, EPS through net monetary loss.

But fundamentally, as a component of our balance sheet, it's less than EUR100 million. It's EUR91 million in terms of assets, so it's not a big proportion. But we called it out quite clearly and specifically, so that during the course of the year, if it does begin to trend away from and distort the numbers, at least we can give you some clearer guidance on what that is and how you can adjust for that.

Thanks. Justin Jordan from Jefferies. Can I just go back to the pricing thing just to start with? Obviously, we wish you every success in getting the price increases through in both virgin and in recycled there. I think that the whole industry needs it.

But in all seriousness, can we just talk through just the transmission of that into higher box prices thereafter. How confident are you recouping that? Is there any sense of that will definitely go through in three to six months? Or can you just talk us through just the transmission mechanisms, what sort of index was it that we got and your confidence regarding recovering that?

As we stand here today, if it goes up by EUR60 a tonne, it has to go through, as Roberto just said. The reality is, there are very few box makers -- when paper and corrugated is around 50% or 60%, depending on what type of business it is, 50% or 60% of your costs, you have to recover it.

I would say that given the movement at the moment, I would not see -- it's never easy, but it's a trend. The reality is, there are other costs going up, and we would expect -- we will not have a choice but to push our prices up. Roberto and his team are already telling their people, we have been pushing box prices up strongly in Mexico and in Colombia and other markets, Argentina.

It's not apparent, because it's all getting lost in the mix with regard to currency, but we are pushing very strongly in most of our markets to get box prices up. It's going to start in Europe as of March, maybe even earlier, Roberto, in sheetfeeding, but we expect to move our box prices.

Okay, thanks. Just a quick follow up. Can we just talk through, other than price and volume, just some of the puts and takes in 2017? Just within the business obviously in 2017, we've got positive [lead], full-year benefit of Quick Wins. I think that's an extra EUR30 million.

We've got full-year Townsend Hook I guess. I'm trying to think of other potential positives that were just very SKG specific in 2017, and equally, just can you give us some more color or just be -- you offset the other side. Should we think in terms of increased energy prices? As you say (multiple speakers) --

Energy is going to go up by EUR20 million or EUR30 million by the looks of it right now. It looks like wage inflation is always going to be broadly EUR50 million-odd across the Group, maybe a bit more. Then you look at -- what's the other one, other major one? That's really the two big ones.

Our two biggest costs, as you know, are wages and in energy. I think the 1% to 2%.

Wastepaper.

And wastepaper, which even the last number of weeks has ticked up by EUR10, EUR15 a tonne in some markets, and you've got high wastepaper costs in the Americas, too, some markets at $200 a tonne, and Brazil still -- while declining, still $200 a tonne for OCC out of Brazil, so still some headwinds there.

I think currency could equally be a slight headwind, probably not, as you sit here on the average, probably not to the scale of 2016, but still in there somewhere. But you've got the Quick Win program, our cost taker to offset some of that inflation, but beyond that, SKG specific, big-ticket items, probably none just at this stage.

Just one final thing for Roberto. You talked about pan-European customer sales being up 4% in 2016 in volume terms. Could you just -- obviously, that's growing in excess of SKG volumes for several years now as it were in Europe. Can you just remind us what percentage of total European volumes are now pan-European customers?

It's got to around 20%.

Thank you.

Gerard?

Gerard Moore from Investec. I've got three questions, two on the Americas and one on finance costs. Just on the Americas, Tony, I think you mentioned in your opening remarks that you have as a Group a short position in kraftliner in the Americas, and this might be something you'd look to address, could you maybe just give us a bit more color around that, how you could address that? I know you're opening a new mill in Mexico, but I'm not sure if that's recycled containerboard or kraftliner.

Second question, then, in the Americas, I think volume growth underlying for the year was [2%], maybe how you see that trending in 2017? I guess there's a lot of moving parts, but maybe if you could give us a bit more color on some of the larger markets, like Mexico, Colombia and the US?

And then the third question, just on the finance costs, again, I think you've explained -- or obviously, sorry, you've issued a new bond at the beginning of January. That's obviously going to bring down your average cost of debt. Where would you see that pro forma average cost of debt today, and what do you need to do to realize that in terms of retiring old, expensive debt? So when will we see that in a lower new cost of debt? Thanks.

Right. I'll take that one easy (inaudible) and Paul can jump in here, too. The bond was opportunistic in a sense. It wasn't coupon chasing, and as you can see, at two and three-eighths, very much at the lower end, the lowest we've ever achieved.

In the near term, though, it is expected to increase the average interest cost in 2017, simply by if you remember what we did was pay down the securitization and a little bit of the senior for a forward start earlier on. But, Paul, in terms of the average interest saving over time when it beds in?

The cost in the first year --

Oh, speak into the microphone.

The cost in the first year, Gerard, is probably about EUR8 million. Next year, it'll be pretty much flat, and then from the following year onwards, it will be about EUR9 million a year interest cost saving. So we see the pro forma average coupon once the 2018s are taken out, coming down from a current 4.3% to about 3.8%, so a material reduction in the average coupon.

So we can't take the 2018s out now, because they don't mature out until 2018. Just on the kraftliner piece, clearly, we're looking at different strategies, Gerard, and obviously, when we're ready to address those, we'll tell you, and just highlighting the fact that we are a big buyer of kraftliner and we have potentially opportunities, but we need to do some more work on that. Obviously, when we have our work done and when it's ready, we will address that.

But we have ideas, so that's as much we'll say at that in this moment, and then, Juan?

Just on the volume side, let's say that the number of 2016, as you see it on the underlying growth, is heavily affected by the behavior in Argentina, mainly. But as we entered 2017, we see Mexico still strong. We see Colombia still strong. We see a recovery in Argentina and for sure Brazil, so we are very positive regarding volumes for 2017.

It's important to know that as I told in my part is that despite the behavior of the market, in Argentina and Brazil, we were able actually to grow above the market in both countries.

Okay, thanks. Maybe we'll go to the phones.

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

Yes, good morning, gents. Congrats for your results. A couple of questions. Firstly, on volumes, can you maybe attach a number to what you've said on Q1? You mentioned close to 3% for a market in Q4. Has that been sustained in Q1? And then also on Mexico, can you remind us of your position there? I guess it's much local supply. Is there any cross-border business that could be affected by some of the Trump plans?

And lastly, on the price increases again, is it for you now more a question of if you get the full EUR60 or maybe EUR30 to EUR40, or are you also contemplating a step up in the price increase announcement? We have seen obviously new initiatives on the kraftliner side, like another price increase. We are to date contemplating a US price increase on the recycled side because of the mentioned effect, because of OCC going up further in the last couple of weeks.

So my question is more like typically you get a good share of the announcement, of the headline increase. Is this different this time around?

Let's deal with the middle one first. Mexico, we grew at 7% in the fourth quarter in Mexico and 6% for the year. Mexico as a country is 120 million people. It's a very big country on rise.

Much of the products that goes from Mexico towards America is food and food related, and clearly there is an agreement and tariff in place. As I have said before, it beggars belief that a Republican Congress and Senate would perhaps put up trade barriers, as that is not in the nature of Republicans. They're generally for free trade rather than the opposite.

I think we should not call what's going to happen there. We are very comfortable with our Mexican business. We have 2% -- we're number two in the market and we have invested strongly, and we'll continue to invest strongly until such time that things would change when we see some change. But honestly, it's difficult to imagine that trade barriers would be put in place, but we'll wait and see. Trump is saying one thing. We'll have to wait and see what he says.

On volumes in Q1, I think volumes so far -- it's always going to be difficult on a January to look at what volumes look like. Suffice to say, the demand has been good in January, continues to be good in February, but obviously we're early into February.

We have Easter early this year -- sorry, later this year as opposed to early last year, so we just have to look at it at the end of the quarter and see where volumes are, but we don't have any feeling that things are worse than they were in Q4. In fact, just as good, I would say.

Yes.

Unless -- Roberto, you would agree with that?

Absolutely.

Thank you. And then price increases for more [this], Matthias, I think that we'll just continue to watch this. The southwest price of wastepaper went up $25 on Monday of this week. It went up EUR25 in Spain on Friday of last week. These are very, very large increases that we haven't seen for many, many years, and we'll have to see what the market does about them, but it's early days.

And we would expect maybe -- we would expect the full amount of EUR60 to go through. Maybe not go all through on February 1, but the first either EUR60 or potentially more could go through as we look forward. But we have to wait and see. These are very large increases very recently, and how they feed through the rest of Europe and the world, it's just early days.

Yes, okay. Thanks. Understood. Very helpful.

Thank you, Matthias. Next?

Thank you. Our next question comes from Chip Dillon of Vertical Research Partners. Please go ahead. Your line is open.

Yes. Good afternoon, Tony -- or morning, I should say. The question has to do with the capital spending. You all have done quite a bit in the last few years, and could you just give us a view as to the average rate of CapEx you see for the next, say, one to three years, and how that might differ from what it has been?

And then secondly, I know you're still fleshing out your kraftliner short position in the Americas, but are you looking at maybe opportunities to relieve that situation with projects outside the US or within the US?

Well, same answer to Gerard. We're still looking at what, if anything, makes sense and not ship on the kraftliner side. So leave that with us for a couple of quarters, and we'll come back to you on that.

With regard to CapEx spend, what we said is last year that we would be spending around -- we said around EUR480 million, but there was a bit of currency and a lease that we had to capitalize at the end of last year that brought us close to the EUR500 million level.

So we've been consistent about where we said, what we said we'd be, around 100% of depreciation this year, which is broadly EUR400 million. Because we wanted to make sure that -- make sure that the CapEx that we spent is actually flushed through the system. And what we said is that we'd be looking at our program into 2018, 2019 and 2020 during the course of this year and probably announcing either second or third quarter as to what our intentions are in that regard.

We're not ready yet to tell you, but we're certainly thinking about it and we want to make sure that we get value for the CapEx and the money that we've spent.

Understood, and just one quick follow up. Do you see this OCC surge, and I know this is a EUR64 million question, but do you see the surge in OCC as something more inventory driven or do you think it might be more structurally driven?

I think structurally it is going to go up. There is no question we have been consistent. I think most of the industry players would say to you that the OCC is going up based upon there are really very few kraftliner mills being built in the world. Mixed waste is in decline because of the structural nature of newsprint and coated papers and other things. So there's less mixed waste around.

And those that have been using mixed waste as a filler will be moving over towards OCC, and of course, all new capacity that's coming into the world, whether it's in Europe or whether it's in Asia, is recycle based, or practically all. So they need a raw material, and the world has been pretty good over the last number of years at collecting wastepaper. Of course, there's still more to collect, but not a whole lot of it's been going to landfill, as it's been a relatively valuable commodity for a long period of time.

So I would see that it is a structural move. The move, frankly, of EUR25 last week and in dollars in southwest is a very dramatic amount, and so that's something that we need to reflect on. But as I say, it's relatively new news.

Understood. Thank you very much.

Thanks, Chip.

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

Hey, guys. Just a couple for me, please. Firstly, can you just confirm, Q4 you said volume growth was about 3%. Is that in line with the industry, or are you outperforming to any extent there?

Secondly, just on M&A, can you give us a run-through on what the pipeline looks like, and given multiples are pretty prohibitive in North America and scale deals in Europe are few and far between, I suppose the focus is on South America there please.

And finally, on Townsend Hook, you mentioned you're far away from where that mill should be. I think previously you said it should make about EUR20 million in a decent year. Are we halfway towards achieving that target, or how far do we have to go?

Last one first, that was really for Roberto to get the mill running better, so actually about halfway, it would be a good number. About halfway. 3% is as Roberto said, it's without our German operations. It was actually around 3%, let's say, and I think that would be broadly -- we're not saying that we're out of the market, per se.

And then on M&A, Ken, do you want to take that?

Hey, David. In terms of M&A, we never stop looking. You're right. If you saw the WestRock-MPS deal last week at 9.6 times, 9.7 times multiples, still quite high, but the reality is that if we feel we can make it work, it can sit in the Smurfit Kappa network, we can get the synergies out of it to bring that multiple down to something more like our trading multiple, then nothing's really off the table.

We're not -- small acquisition in the UK in November time in Saxon there, so neither geography is out of our consideration. But still, reasonably active pipeline, some stuff we're working through, but it is really about getting the compelling proposition around the initial valuation and the synergy benefits.

Okay, perfect. And one final one, maybe. There's a lot of I suppose conflicting reports on the scale of capacity coming online over the next 12 to 18 months. As you see and with your I suppose industry knowledge, in the second half of 2017, the first half of 2018, how much tonnage do you see hitting the European recycle market?

It's difficult to know, David. Obviously, these projects get delayed and pushed back. We'll just -- honestly, it's difficult to know. I just put things into context a little bit. The US market grew at 2% last year, which is the strongest growth it's had in the last six years or so.

I think that the world market is growing and growing again. If you look at it in the context of around 150 million tonnes in the world market for containerboard, and the real new capacity is coming on here in Europe, I think that the amount of new capacity if people are sensible can be absorbed without -- even if -- as long as there's some growth in the world. We're seeing very, very, very strong export demands and prices zooming up in the export market at the moment, both for kraftliner and for recycled papers.

And so we'll just have to wait and see. We won't be completely black about 2018 or 2019 until we're in it, and we're not in it yet, and I don't know necessarily if we have to get in it. So I think that as I said at the half-year results, we felt that the capacity that was announced for 2017 and 2016 was absorbable and deal-able with, and that's so proven to be the case. And we'll have to wait and see about 2018. We'll have a better view of that as we go through this year.

Great. Thanks very much.

Okay. I think that's all the questions on the line. Is there any further questions in the room? Please.

We just need the mic, because if there's anybody on the line, Kevin.

Okay, sorry, Kevin Fogarty from Numis. I guess just thinking about the general cost inflationary environment, and what you've seen in 2016, does it prompt you to step back and think about revisiting rationalization, cost take-out programs, and if so, when do you think it would be appropriate to update people on that?

Kevin, I think Smurfit Kappa have always got a cost take-out program. If we don't have a cost -- the difficulty for all of us is we don't see it, because we have this massive cost take-out program. But we have cost take-in too. We talk about 2.5% wage growth, it's EUR50 million or EUR60 million per year for the Company.

So we are continually taking out costs, either through CapEx or by being smarter. Rationalizations, I think there's always some to do, and we're continuing to look at them, but we don't have that many left to do. We've been rationalizing our business since 2005 when we came together with Kappa.

So I would say that there's a few that we can look at, but they're not going to be significant over the next number of years.

Okay, so we should think about offsetting price inflation principally through pricing?

No, we would say -- sorry, repeat that?

Offsetting future price inflation through pricing increases? Is that fair, rather than --

If there is significant cost inflation in our raw materials and our base and we're not able to offset it with regular cost take-out, we will have to go for pricing, yes.

Okay, fair.

Thank you. Okay, so on that note, I'd like to thank you all for your attendance. And as I said earlier, thank you so much for your support of Smurfit Kappa. Thank you.