Smurfit WestRock PLC (SW) 2017 Q2 法說會逐字稿

Okay. All right. So good morning, lady -- I think there's only -- well, 2 ladies and gentlemen. And thank you for taking the time to join us here in London or on the line for our second quarter and first half results. I am joined by our Group CFO, Ken Bowles, and our Group Treasurer, Paul Regan.

I'll give a brief run-through of the highlights of our first half year performance before handing over to Ken for a detailed run-through of the financials. And before commencing, I would, of course, refer you to the note on forward-looking statements set out in the press release and in Slide 2 of this presentation, which applies to our discussion today.

As I mentioned, I am pleased to report a strong revenue growth of 5% for the first half of 2017, with strong demand in most markets as we continue to deliver against key performance measures.

In the second quarter, we reported EBITDA of EUR 292 million. And as you can see from the graph, an increased sequential margin of 13.9%. This is on the back of solid demand, improved mill performance and the start of box price recovery. These results were achieved against the backdrop, as you all know, of continued and unprecedented recovered fiber cost inflation, which costs us approximately EUR 75 million year-on-year for the first half. We are now in the process of recovering these input costs and this will enable us to progress earnings as we move through 2017 and into 2018.

As many of you know, the global containerboard market remains extremely tight. Global kraftliner demand, in particular, is extremely robust and further highlights the strength of Smurfit Kappa's business positioning as the largest producer of kraftliner in Europe, along with the kraftliner production in the Americas.

Together with our industry-leading position in European recycle containerboard, we have been able to give our corrugated customers uninterrupted supply at a time when supply in the containerboard market has indeed been very challenging.

To meet this demand, we continue to invest in our asset base with the latest technologies and adding incremental low-cost capacity to ensure we meet our supplier requirements.

In line with our progressive dividend policy and the board's continued confidence in the strength and prospects for our business, the group has proposed an increased interim dividend of EUR 0.231 per share.

Now turning to our European operations and their performance in the first half.

Recovered fiber costs, as I've mentioned, have risen throughout the year. And indeed, they continue to rise to unprecedented levels due to strong local and global demand. These input cost pressures have necessitated prices for containerboard to rise in the first half, and this is continuing into the third quarter. As a result, this will require a further round of box price increases, which we would expect to materialize into the fourth quarter of 2017 and into 2018.

In the first quarter this year, we saw box pricing actually slightly down year-on-year with some annual index accounts triggering reductions. From this quarter 1 baseline, and on a constant currency basis, we have implemented price increases that are up around 2% in the second quarter. And we expect this to progress further in the second half of 2017 and into 2018.

Our European EBITDA margin recovered in the second quarter from 13.6% to 14.2%. And we reported a sequential EBITDA increase of EUR 14 million to EUR 227 million, with improved profitability in our mill division and the start of the corrugated price recovery.

We saw a strong demand in the second quarter, which led to a first half increase in absolute box volumes of 2.5%. On a days adjusted basis, we saw improvement in underlying demand close to 5% in Q2, which positions the European very well as we enter the second half of the year.

France, the U.K., Spain and Portugal and all of our Eastern European countries all reported strong volumes for the quarter and for the first half.

In the eyes of many customers and other key stakeholders, our approach, and you'll have heard us say this too before, to value selling and innovation is truly the distinguishing feature of the group. The group continues to be recognized with 22 national awards won by the company in the first half alone, the most recent being the aptly named Wonky Box, which you can see on this slide, which was recognized for its sustainability credentials in helping agricultural customers commercialize nonstandard vegetables in ASDA and avoid them going to waste.

We continue to develop our experience -- develop our network of experience centers around the world, which allows us to bring together all of the group's expertise. They allow us to help our customers with their supply chain challenges, understanding retailer developments and any trends impacted that enable our customers to win in their marketplace. To this end, Smurfit Kappa continues to hold innovation events across its network, the most recent being in Paris where over 250 local customers attended. This follows a highly successful innovation event held in the Netherlands in May where over 150 national -- multinational customers attended.

Now turning to the Americas.

We report an EBITDA of EUR 71 million, which was a sequentially higher margin, up 14.2% for the second quarter. The underlying result was 5% better year-on-year for the second quarter. For the first half, the reported results was down 6% due, of course, again to higher recovered fiber costs of approximately EUR 25 million and adverse currency moves, which really manifested themselves towards the end of the second quarter.

In Colombia, the group's operation have continued to operate well, with volumes up 5% in the first 6 months of the year over the same period of 2016. Box price increases were implemented in the first half and further increases are expected to be recovered in the second half.

In Mexico, volumes were strong, up 4% for the first half, with particularly high growth in our Northern Mexican business. The U.S. dollar price for recovered fiber in Mexico was up over 25% at the half year, which together with the strong demand, has driven containerboard increases. Corrugated prices have increased in the first half against the same period in 2016.

Our U.S. operations, focused primarily in Texas, continue to perform well, although our Forney Mill has been impacted by recovered fiber costs, which have risen by almost 60% for the first half year-on-year.

In Brazil, I'm happy to say that our year-on-year volumes were up 11% for the first half and 16% for the second quarter, showing a strong turnaround for our operations. Margins in Brazil also improved sequentially for the second quarter.

Our reported EBITDA in Argentina was down in the first half due to lower volumes, which have shown some signs of tentative improvement at the end of the second quarter and into July.

Our Venezuelan business, as you will have seen, continues to be extremely challenging with volumes down 50% for the first half of the year. However, we continue to export paper to our own operations in the Americas, which have provided a valuable source of kraftliner for our business.

As is the case in Europe, containerboard price increases have been implemented, with box price increases being realized as we progress through 2017 and '18.

Excluding Venezuela, volumes in the Americas for the first half overall grew a little over 3%, with our business in Colombia, Mexico and the U.S. representing today around 80% of the region's EBITDA.

Moving to Slide 9. To give an example of how we look at innovation in one of our major countries in the Americas.

In Colombia, we've seen strong growth, as I've just said, with the expansion of the agricultural, food and fruit sectors, an ongoing focus for our local Colombian business. A global trend which Smurfit Kappa has seen in Colombia is the increase in corrugated sales through product substitution for plastic crates. Although the application of our supply chain research -- through the application of our supply chain research and our testing methodologies, we have delivered superior solutions for our customers in terms of cost, hygiene and increased marketing opportunities.

The graph above illustrates how we continue to grow in the dairy, meat and baking industries over the last 4 years, outstripping the market and driving increased corrugated consumption.

As in Europe, we continue to develop our experience center network with a new center in Dallas hosting an Americas innovation event where over 140 multinational customers have attended -- confirmed their attendance in September.

I'll now hand you over to Ken, who will take you through our financial highlights.

Thanks, Tony, and again, thanks, everybody, for taking the time to attend.

Over the next few slides, I just want to take you through the quarter, the half year and just an update, a reminder of where we are in terms of capital allocation.

Firstly, turning to the quarter.

So for the second quarter, the group reported revenue of EUR 2.1 billion, 3% higher than the same period last year. Underlying EBITDA for the quarter was down 4% year-on-year, negatively impacted by both reduced working days because of Easter, and indeed, the continued pressure of recovered fiber costs.

Our second quarter EBITDA fell 7% to EUR 292 million from EUR 312 million in the same period last year, but more importantly, was 5% ahead of the first quarter in 2017. We also saw an improvement in the EBITDA margin in the second quarter, recovering to 13.9% from 13% in the first quarter, driven by improved margins in both Europe and the Americas. And this is quite simply as a result of our investment in our high-return capital projects, the strength of the integrated business model, and indeed, the start of the corrugated price recovery.

Pre-exception EPS for the second quarter was 33% up on the first quarter, and we had a return on capital employed of 14.7%, broadly in line with our stated target of 15%.

Free cash flow, which, as you know, is a key metric for the group for the second quarter of 2017 was EUR 30 million compared to EUR 28 million in 2016. And in broad terms, lower working capital outflows and lower capital outflows offset the decline in EBITDA.

And finally, our net debt-to-EBITDA ratio at 2.5x was in line with the same period last year and slightly up on the first quarter at 2.4x, but this really sets us up well for the traditionally second half of the year when we're more cash generative.

Turning to the 6 months. And indeed, the dynamic for the 6 months is very much the same as the second quarter in terms of cost input trends. So our revenue for the first half was EUR 4.2 billion, an increase of 5% on 2016. Indeed, in Europe, revenues increased by EUR 86 million on an underlying basis, while in the Americas, revenues increased by EUR 94 million on an underlying basis.

For the reasons noted earlier, our margin decreased, however, from 14.6% in the first half of 2016 to 13.4% in 2017. On a pre-exceptional EPS basis, our EPS for the first half was 12% lower year-on-year at EUR 0.75 compared to EUR 0.856 in 2016. And as we noted above, our return on capital employed, however, is very much in line with our targets. In terms of free cash flow, the group reported a free cash inflow of EUR 46 million compared to EUR 35 million first half of 2016. Working capital remains very much a key focus for the group and our ratio of working capital to sales of 8.3% for the half year was slightly ahead of the first quarter and in line with last year, and again, sets us up very well for the second half of the year where we expect that to trend back down toward normal levels, especially if you consider the rising price environment, recovered fiber, paper and boxes, it's quite a good outcome. And as noted above, our net debt decreased by about EUR 136 million to EUR 2.98 billion at the end of June, again, a leverage of 2.5x.

And finally, just turning to capital allocation. This is a slide that you've seen before and it just sets out our core objectives in this regard. And as you know, we've been consistent on these for a number of years, but just to remind everybody.

As a guiding principle, we will deploy capital to enhance the development of the business over the short, the medium, and indeed, the long term. Internal investments or acquisitions must meet that minimum internal threshold of 15%. And as indeed, as significant shareholders, management interests are aligned with all of the stakeholders. In 2016, the group completed the investment stage of our Quick Win program, and the benefits of these high-return investments have been delivered since 2014, and indeed, are expected to deliver a total incremental EBITDA of EUR 75 million by the end of the program. We've maintained our net debt at a very comfortable mid-2x since 2012. And our debt maturity has now averaged 3.9 years and we're committed to preserving at least our current rating.

Our balance sheet continues to provide us with the financial -- considerable financial strategic flexibility we desire subject to our stated revenue leverage ranges of 2 to 3x through the cycle, and indeed, in line with our BB+/BB+/Ba1 credit rating. We remain focused on the delivery of accretive acquisitions and our track record is very clear in this regard. And from our fee cash flow, we do retain that ability to kind of spend about EUR 300 million without disturbing the underlying leverage, but obviously, bigger deals are equally possible for us. And as Tony noted earlier, we have increased our proposed interim dividend for 2017 of EUR 0.231 per share, which is an increase of 5% on 2016's interim.

We noted early on in the year that, at the end of our Quick Win program, we would now embark on a Phase 2 or Mark 2 of that, and indeed, we're very much in the design stage of that. And the idea would be that by the end of the year-end results cycle, we will update you on where that is, our targets for that going forward, et cetera.

So with that now, I'd like to hand you back to Tony for the summary and the outlook.

Thanks, Ken.

So in summary, the first half saw us implementing, as you know, containerboard price increases in advance of the corrugated price recovery in the second half. Additional containerboard increases are underway in the third quarter, which will require further corrugated price increases. We expect box price recovery to be ongoing through 2017 and into 2018 as the group recovers lost margin with both our indexed customers and negotiated customers.

We are pleased with European box volumes growth at over 2.5% for the first half. The group continues to see a strong demand environment as we enter the second half and July has continued that trend. The group continues to expand our global experience network with the opening of our first experience center in the Americas, in Dallas and the opening of our latest experience center in Madrid. These experience centers allow us to showcase how we leverage our unique tools and insights to help our customers succeed in their own marketplaces. We plan to open 2 additional centers in Cali, Colombia and Mexico City by the end of 2017, which will bring our global network to 19.

Aside from the situation in Venezuela, the environment in the Americas is generally improving, particularly in Colombia, Mexico and Brazil.

For the group, growth and cost reduction investments, allied with our track record of earnings-enhancing acquisitions, will continue to improve the prospects for the company. By year-end, we expect to communicate our medium-term development plans, as Ken has just mentioned, as we look forward to the years ahead.

I would take -- like to take this opportunity to thank the people in Smurfit Kappa globally for their continued hard work and dedication.

So in conclusion, recovered fiber pressures are still there and they present short-term challenges. However, Smurfit Kappa is better positioned today than in any other point in our recent history. Our capital structure, our asset base, our business model, all continue to strengthen, and this will enhance our ability to translate today's market conditions into improved earnings in 2017 and well beyond.

So with that, I would open the floor to questions. And then after the floor, we would go on to the phones. So Lars, first one up?

Starting with the pressure side. I mean, there are various of sources here, right, and if we look at RISI, they added sequential downtick. In OCC, costs forward slightly up. Can you give us a sense of what you're looking at? What is most representative? Give you -- give us a cadence of your OCC costs. And we sort of have a good view of what's going on in Europe, but also if you can give any sense of what's happening in the Americas in totality, the whole picture. The other thing from your release today, you called out clearly that kraftliner, the EUR 50 is a done deal. You have a third sizable price increase. You didn't necessarily call out the testliner one, I guess you've announced EUR 50. Where do you see that landing? And why haven't we've seen that coming through at this stage, right? The second -- or the third question, I guess, is when you look at the boxes, clearly, demand is directionally seemingly somewhat better than you had expected, which is good. Box prices are coming up somewhat, at least, relative to my own expectation, quicker. How much do you need or how much are you thinking about as we head out 6, 9 months out now in terms of where do you need to move box prices to compensate for what you're seeing on the testliner side in particular?

I didn't hear your first question. Sorry, Lars.

The first question was about OCC. There are some differences between different sources. RISI was down sequentially, FOEX was slightly up. But your OCC costs went from EUR 30 million headwind to EUR 45 million, which is a meaningful step-up, which doesn't necessarily -- you can't really see that in the data from those providers. It would suggest flat to very marginally up as opposed to big step-up. So I guess, the -- extending that question a bit. Is there other things than price? Meaning that you -- your costs are moving up on account of having to travel further to get the fiber because of scarcity, or is there anything else? Or is this a thing actually happening in the Americas that has less visibility on the actual moving parts?

On the OCC, I'll take that one. I mean, basically, across Europe, there is a shortage of OCC. And whenever there is OCC available, in general, it is snapped up. And the exporters are moving very quickly into the OCC market to get it when they can. Now what does happen in the export market is, as happened in April, it went down for, let's say, 3 weeks. And it was quite a sizable export reduction in 3 weeks because the Chinese stepped out of the market because there was no containers. So the export market had a slightly different dynamic than the European market, which has been going up steadily through the year. So we would see our OCC prices somewhere around [$165] right now from around [$125] at the start of the year. So that's a meaningful -- more than meaningful price. The export price is actually higher than that, but that's more of a spot type of arrangement. So when you look out and you would say, what's the outlook? There is new capacity coming on stream. Europe has actually produced 5.6% more containerboard this year and it's all being absorbed, both by exports and by internal consumption across the market. And as I said, we are seeing stock levels at record lows on recycled containerboard. So therefore, you would imagine that should translate into higher -- to the third question you asked about OCC -- recycled containerboard. We would expect that to go through. The extent of the increase is somewhere between depending on the markets because there is slightly different markets across Europe, Italy, Poland, U.K., somewhere between EUR 25 and EUR 40 of the EUR 50 announced. Why the whole -- not the whole EUR 50? I don't know. That's -- to be honest, I would have thought we're a net buyer, but that's what the market is applying somewhere, as you could say, an average of around EUR 30, which I would expect is going to be seen in the indexes in August. Because some people applied it on the 17th of July, some people applied it on the 1st of August, so I'd expect you to see it in the indexes in -- whenever they publish in August. With regard to the Americas, we are a very large collector of wastepaper in the U.S., and frankly speaking, the market is very, very hot. And that's because of local production in every kraftliner -- not every, but most kraftliner sheet, there's wastepaper, and so they're using a lot of wastepaper in a ramped up production cycle in the U.S. Exports are extremely high and we're seeing almost a ridiculous level of demand in wastepaper in the U.S. and in the Americas in general. The one market that's actually down in OCC is Brazilian market and that's helped our results because it was double the price of the rest of the markets last year. So with regard to recycled, I've answered. The third question?

Box prices. Apparently, it's getting traction, but what -- how should we think about that 6, 9 months out in terms of, you talked about 2% now, is that going to be another 6% or what will it end up going to...

Well, we will have to push through with the additional price increase. We were working on that somewhere around 6% to 8%, depending again on the markets and the level. But we would think that 6% is the low side with the additional increases and 8% is the high side.

And I think, Lars, it's also equally fair to think about that as a 6- to 9-month thing, so kind of Q1, as Tony said earlier on, has a lot of triggers than the 2% from guys who came down the first quarter of this year. So when we think about that 6% to 8%, that goes into quarter 1 '18 really. If you had to take your quarter 1 '17 through quarter 1 '18, you're looking at about 6% to 8%.

Just one small follow-up, if I may, on OCC again. If you look at the -- to your point, there is new supply starting up tail end of this year. You've talked about -- sorry, not necessarily sourcing issues, but a very tight OCC market. And these new mills have, whatever tonnage it is, 1 million plus or 1.5 million. Where are you going to find the OCC, in particular, in the German-speaking area?

I mean, it is a problem. I think they will probably take it from the export market, but that will mean that the -- at the end, if you look globally, 160 million tonne market that's growing at, take a number, 2.5% or a global growth of 2.5%, that's a lot of tonnage that's needed. And almost all of that tonnage is going to be supplied by recycled. There are very few kraftliner mills being built in the world. There's a structural shift as well from waste paper in the sense that mixed papers are not being used as much as they have been in the past. And so OCC is going to be in even more demand. And then there is the structural shift that possibly is happening, and we think it's probably a reason why there's a little bit less collection is because of the growth of e-commerce. And that's meaning that when you get your product to your house, you are throwing, not you, of course, because you're Swedish, you collect everything, but let's say some consumers just throw it in the garbage and it gets lost forever, whereas in the past, it would be the distribution centers and it will be all collected. So to the degree of lost wastepaper because of the changes in the industry. Clearly, as wastepaper becomes more valuable, there's more incentives to collect it from general collections and that will happen over time. But at the moment, you're probably seeing a slight structural shift in that regard. Barry? We'll just go along the line, if you don't mind.

It's Barry Dixon from Davy. Three questions, if you don't mind, Tony. First is really in terms of the volume growth environment that you've talked about in Q2 and underlying volume growth of 5%. You might just try to give us some sense as to more detail around that, either in terms of regions or end markets, and how sustainable you think that rate of growth is through the year. Because, certainly, there seems to have been a structural increase in box demand, both here and in the U.S., from the fourth quarter of last year that looks as if it's been sustained through most of this year. And just wondering if this is just a cyclical recovery you're seeing or is there something structural going on in the industry which is driving that. The second question is just on you mentioned that recycled containerboard inventories are at record lows. You might give us some sense on that. I know there are lots of different numbers around 550,000 tonnes and 600,000 tonnes. Maybe give us some sense or some context as to how low those inventories are. And maybe also, any comments you might have around kraftliner imports coming from the U.S. and maybe the potential threat, given the recent weakness in the dollar around those. And then the final question, just on M&A, maybe you might just talk a little bit about the M&A pipeline and how that's looking.

Okay, I'll leave the M&A to Ken. On the demand level, I mean, we are still only saying 2.5% for the year. That's what we're -- we've seen July grow at over 4% as well. So demand is not the issue. Where are the markets that are growing? I think you're seeing very strong Spanish markets. One of the things I've put in the release is the whole issue of us having the ability to supply because of our integrated nature. And when you have kraftliner in such short supply, we are getting new customers who are coming to us because we have the kraftliner to be able to supply boxes. And so that's been a big part of the selling point. Equally, on the recycled side, you're seeing -- you're asking about how low the inventory. It's extremely tight. We are looking for paper for October, and we're finding additional paper because our forecasts are for this higher growth. So we're looking for additional paper for October and we can't. We will find this in the end, but it's very difficult to find a few extra thousand tonnes of paper in the marketplace at this time. So the inventory is at really low level, around 570,000 tonnes, which is about, I think, 60,000 tonnes less than last year.

Yes. I think we think about this, what we call the critical level, Barry, and that's the 620,000. And as Tony said, it's down on the kind of 560,000, 570,000 mark at the moment.

So is there anything structurally happening? I think around the edges, of course, e-commerce is good for our business. I think anyone who lives in the U.K. is and watches one of the major networks here is almost every day talking about plastic in the sea and how bad it is. And so paper is a very, very good product for renewability, for sustainability, for recyclability. So as an area of business to be in, it's a pretty good area. So I think there is probably something around the edges where you do see people saying, we're moving away from plastics when we have a very small paper mill in Northern Spain that makes, a thing called MG papers which are machine-glazed papers. We have, I think, 14 weeks of order book in that particular business because people are moving out of plastic bags and into paper bags. And that's a -- we've never seen anything like that. Sack paper is extremely busy. So there are some structural shifts probably towards paper-based packaging, which will play to our advantage over the long term. Obviously, there's still a lot of plastic crates in the world. We showed you one example of a change in Colombia. There's still a lot of plastic crates in the world to try and change around. We think the whole growth of plastic crates has softened a little bit. And we think that -- we know corrugated is a better solution from a hygienic point of view and from a recyclable and renewable point of view. So from the point of view of where we sit in our industry, it's a very good place. And obviously, that's something that we and the industry will work towards. With regard to kraftliner imports, I mean, the U.S. is extremely tight in every respect. We're, as you know, a huge buyer of paper in the Latin American region and the American region. So we see that our suppliers are very late with their deliveries, and it is a -- the U.S. economy continues to do reasonably well, so they are using more and more internal paper than exporting. So we don't see any large influx of paper from the Americas because of the weakening dollar at this time. Certainly, if you're looking to get paper, it will be very difficult to get it much before November, December, at this time.

In terms of Barry's M&A question, yes, I mean, traditionally, the second half of the year is when we tend to complete deals that we're doing and when you get your normal due diligence and usual negotiation. I think, as you remember, Barry, we did about 24, 25 up to the back end of '15 and then took a pause really last year after we completed the 3 in the States to kind of bed down those because there was a lot of integration work to be done. We're kind of largely through that now. The pipeline remains fairly active both in Europe and the Americas in current geographies, and indeed, in some adjacent geographies in the Americas where we don't put out our flags at the moment and would like some. So no, very active and second half of the year, hopefully, will bring some good news in that regard.

And valuations? I mean, we've seen some very toppy-type multiples being paid for business in the U.S., in particular in recent months.

Yes. And I think in the past where we've seen those toppy valuations we participated would walked away when they -- they come really at a place where we don't consider them to be good value for Smurfit Kappa. But I think if you look back again at our track record over the years, we tend to be fairly disciplined in terms of the multiple we pay and the synergies we can drive over because, okay, if you're going to pay over 10x, you better be sure you're going to get the synergies in the back end to get you down to something approximating your trading multiple. And that's always been our philosophy and I don't see that changing.

Gerard?

So 3 questions from me as well, please. Could you give us a steer perhaps in terms of the phasing of box price increases in order to get to that 6% to 8%? Should it be a fairly gradual increase? Or is there any reason to think that Q3 or Q4 could be more significant than the other? Second question then, just in terms of the U.S. market. Could you give us an indication how volumes progressed there over the H1 period? And if anything in particular, what's happening in any of your businesses there? And then, thirdly, really just for kind of modeling purposes, could you give us an idea of the benefits that you got from the Quick Win projects in H1 and what's still to come in H2?

I'll leave the third question to you Ken -- on the phasing, I think every customer is different. And of course, Gerard, when you look at what's happening on the new price increases, that's going to start in certain countries earlier. It will start with sheet feeding earlier than even in September, let's say, the newer increase. Agricultural season happens by every 6 months. You do your bidding for the Orange campaign in Valencia, for example. If that happens, the bid happens in September and the prices are fixed from October onwards for 6 months. So that -- there is all sorts of different phasings that will happen. But I think from a simple point of view, I would say probably just equal whatever we expect, which is something in Q3, something in Q4 and something in Q1 in a very broad macro sense. With regard to the U.S. market, I mean, we're very small in the U.S. market. Our Texas business is doing very well. We have 1 business -- 2 businesses in California that 1 of which is struggling. It's in the more specialty area. The other one has got a lot better. And then our Northern Mexico business, which we -- even if it's Mexico, it basically trades with the Americas. That has grown at almost 9% during the first half of the year and continues to be extremely strong. We don't see any effects from any border adjustment tax discussion or anything like that at this juncture. Ken?

In terms of Quick Win, Gerard, as you know, it's EUR 75 million in total at the end of the program, and we expect some of those benefits now to come in '18 just in terms of when project started. But for '17, I think you could expect the incremental EBITDA effect to be, call it, EUR 25 million. And you largely expect that to be kind of fairly flat across the year given that all the projects are finished in '16, so you're getting all of start -- nothing really to start in '17. So broadly, very flat run rate of the EUR 25 million over the year.

Alexander Berglund. Sorry, here.

I picked the wrong place. I was going that way.

We may never get there.

Sorry about that.

Yes. Alexander Berglund from Merrill Lynch. I'll ask a follow-up on containerboard. So you were saying that kraftliner is more tied than testliner on a relative basis and you're not getting the full EUR 50 in testliner. How should we think about the spread? How high can the spread go before you see increased substitution into testliner? And can this be elevated in this market environment? Or will that initially put a ceiling on the kraftliner price from here?

That's an excellent question, Alex. I would say that, firstly, both markets are extremely tight. I mean, they're -- just by the very nature of kraftliner because Europe is in that buyer of about, call it, 1 million tonnes of -- 800,000 tonnes of kraftliner, there is a longer supply chain in kraftliner. So therefore -- and -- so therefore, the market is white hot tight, I would say, whereas if you take the recycle liner, there's a lot more produced locally. So if you need an extra truck or 2 in a hurry, you're probably able to get it. But it's very tight, the same way that I said we're looking for an extra few thousand tonnes in October, and we're finding it very difficult to get. So I wouldn't differentiate them too much as to the markets being tight or not. They're both extremely tight. With regard to substitution, a lot of -- because the kraftliner market is in really shortage at the moment, there's been a lot of substitution already, which is also helping to make the market for testliner tighter because you've seen substitution to heavier grammage. It's not as effective, but heavier grammage testliners rather than kraftliners because the kraftliner just hasn't been available. So there is -- I don't think there's any particular limit as to where you could put the price to. But obviously, you need to keep the 2 in some sort of equilibrium. And we're going up EUR 50, let's say, the end of price for recycle goes up EUR 30, that would mean we'll have had EUR 140 on kraftliner and we'll have had EUR 110 on test. That doesn't bother us in relation to whether or not somebody's going to completely go out of kraftliner forever or not because where people are using kraftliner, they just need the product for humidity or strength.

Justin Jordan at Jefferies. Sorry to belabor the point on pricing. I was just trying to get some sense of if we take the view that elevated OCC or recovered paper prices are sadly the new normal, I was trying to sort of back out what you need to achieve in terms of box price increases to sort of almost standstill at an EBITDA level, and I'm sort kind of backing out probably if you think EUR 45 million is the new quarterly year-on-year sort of headwind, that probably implies something like a 4% box price increase being required, shall we say, to recoup that, just OCC cost headwind. Is that sort of what we should be thinking as a necessary increase just to almost stand still, firstly?

Yes. Justin, there's -- I mean, we need to get at least 4%, it will be around 4%, but to just recover just the wastepaper side of things. But there are other cost increases that we have, too, like wages are going up. We talk about we have a cost-reduction program, which is EUR 60-odd million a year, EUR 65 million this year in our business. But wages are going up across the piece. I mean, you're seeing very strong wage inflation in countries in the east. And we're seeing almost tight labor markets in most of the areas which we operate. So that's going to necessitate -- that's going to lead to higher wages. So most of our cost areas are increasing, and therefore, we're having to go for more than just the wastepaper piece of it. I would say also, when you look at what we do internally, we stand still with regard to our input costs are a little bit better for -- than that. But at the end, we are continuing, as I mentioned in the speech, we're continuing to improve our business with investments, with customers, with differentiation, and that's helping to move our margin upwards and that's what we intend to do over the next few years.

Okay. And just casting forward a little bit maybe to your capital allocation framework, which you talked about potentially coming in at the end of the year. As we sit here today, given what seems like inflational higher OCC prices and higher pulp prices, I guess, as well,as a corollary of that, that would probably make you more likely potentially to add a new virgin mill in Americas, something you've sort of hinted at previously?

Sorry. Something I hinted at?

Sorry. No -- we've sort of -- you've touched on it as a possibility.

Well, listen, I would just say that we buy a lot of tonnage of kraftliner in the Americas, and we continue to grow very strongly in the Americas. So that's something that, amongst all other things that we're looking at, we continue to evaluate different opportunities. And as Ken mentioned and as I mentioned, towards the back end of this year, our latest of year-end results, we will be updating on what our medium-term strategic plans are for the business, which, I have to say, are very exciting for where we can take the company. But obviously, we need to have the capital structure in place. We need to make sure that we're able to tick all the boxes. And that's what we would take you through and everyone through at the appropriate time. Whether it's third quarter or fourth quarter, it's still slightly open, but we will be talking about a lot of different things at that point. David?

David O'Brien from Goodbody. Firstly, I guess, bringing together what you're seeing on OCC, testliner costs going up as well more likely in the next couple of weeks, what the run rate of box price increases are exiting in Q2? Is it too early to forecast a return to EBITDA growth for Europe in Q3? Is that more of a Q4 dynamic? And secondly, what are you hearing on the ground in terms of the new capacity additions in Europe? Are they all still progressing? And how should we think about them impacting, I suppose, corrugated box price negotiations into Q1, what that dynamic will be like and how it will be complicated by the fact that, that would be the period when capacity is likely to be ramping up?

Okay, I'll take the second one. Would you want to take the first one?

Yes, sure. David, if you look at the run rate in quarter 2, going into Q3 and Q4, I think then you would expect a better performance quarter-on-quarter in Europe. But as you say, the key caveat there is where does recovered fiber go in that quarter. I think, more importantly, that kind of environment where we take that back to is where will the margin end up because, ultimately, a lot of the story is to get that margin back to a place where it should be. And if you can do that, then you will get the natural progression into EBITDA recovery. I think, though, yes, you should see progression, but the caveat is recovered fiber could be the one that kind of compresses that again for a period of time, but margin recovery really is where we're at.

Yes. On the new capacity side, David, I think we see a number of the machines that were slated to come on in the middle part of this year not happening in the middle part of this year and more towards either the back end or into Q1 of next year. I think it's worth bearing in mind that there is 5.6% new capacity in the market this year and that has been absorbed. So there is nothing like that is going to happen next year. It's not going to be -- because if you take the ramp-up curve, you assume that all of our businesses today are -- all of the paper business are running at full as they possibly can because there is plenty of orders. There's plenty of opportunities to sell your product. So everyone is running as best they can in the marketplace. I did mention last year that I didn't worry about 2017. I was a bit more worried about 2018 capacity, but that seems all to have been pushed out a bit more and that's obviously good for the industry if that has slower ramp-up and slower developments, and these machines don't just -- you don't just flip the switch and start them. So the new capacity that will be coming on next year is probably dealable with if the sellers are sensible and that's the way I would look at it today. So I don't envisage, with normal economic growth, any particular problem as long as the sellers are sensible. Okay, so we go to the phones.

(Operator Instructions) And our next question comes from the line of Mikael Jafs of Kepler Cheuvreux.

I just have a housekeeping question. In our models, how should we think about the tax rate? What do you guide there?

Mikael, you should model around 29%, 30% for the tax rate.

(Operator Instructions) We have no further questions on the telephone lines.

Okay. Well, obviously, you guys in the room asked all the questions. Thank you for that. So with that, if there's no other further questions, I'll bring the proceedings to a halt, and thank you all for your attendance. We are very excited about the future of Smurfit Kappa. And we continue to push hard to ensure that we deliver good results for our shareholders and to make sure that the company continues to progress in the years ahead. So thanks a lot, and I'm sure we'll be talking to some of you in a few seconds. Okay.

This now concludes our call. Thank you for attending. Telephone participants, you may disconnect your lines.