Smurfit WestRock PLC (SW) 2018 Q2 法說會逐字稿

It's 10:00, so I think we'll get going, if that's okay. Ladies and gentlemen, good morning, and thank you for joining us this morning for the First Half 2018 Results Call and Webcast. We welcome all of you in the room but also those that are joining us on the live call or on the audio webcast.

At the outset, let me refer you to the disclaimer on Slide 2 of the presentation and the principal risks and uncertainties set out in the press release.

Turning now to Slide 3 and the first of the 3 core messages from today's presentation. In understanding Smurfit Kappa, I believe there are 3 simple concepts which describe what we do: we lead; we innovate; and we consistently deliver superior performance. Smurfit Kappa is the global corrugated packaging leader, offering our customers scientifically backed solutions that enable them to succeed in their marketplace. From performance packaging, to ShelfSmart, from our machine systems experience, to our sustainability credentials, we lead the corrugated industry in innovation, CSR and delivery of results. Ken will take you through the results later on, but before that, I want to tell you how we achieved those results and how we're going to continue to perform in the future.

In Smurfit Kappa we are proud to be the global leader in our sector. We have a decentralized and entrepreneurial culture. Our management is incentivized on the performance of their local business. Our culture is truly performance led. Our business model is an integrated model which has delivered and will continue to deliver consistency of earnings and quality of earnings, enhanced by the geographic diversity that we have.

Our track record of performance is now well known, 9 consecutive years of earnings growth, with this year being materially ahead of last year. Integration is now seen as the model of choice in the industry. We lead. Others have followed. And we build a unique position of credibility within the industry by consistently delivering superior performance.

Who wants to be the best house on a bad street? We are a great house on a great street. We have increasingly attractive growth prospects, and we are uniquely positioned to capitalize on those prospects.

I want to remind you of our leading market positions and geographic reach. In fact, we have an irreplaceable footprint. We're the #1 producer of corrugated packaging solutions in Europe, operating in 22 countries; and the only Pan-American integrated supplier of corrugated packaging solutions from Canada in the North, to Argentina and Chile in the South. We also have 3 leading kraftliner mills in Europe, and we lead the recycled paper market. We bring the benefits of scale, knowledge and applications for our customers.

We're an integrated company, and we have significant value within our asset base. Our asset base is the bedrock for consistent quality earnings and will always give us operational and commercial advantage in our sector. We continue to invest in that asset base, which allows us to deliver to our customers cost-effective, sustainable packaging that caters for market trends and positions Smurfit Kappa increasingly as the key part of our customers' marketing requirements.

With over 64,000 customers, both big and small, spread across all industries, from pure-play eCommerce to FMCG, pharmaceutical, to agriculture, to name just a few.

But while we are the leader, we're not complacent. A key focus for Smurfit Kappa is sustaining our market-leading positions and building on these positions to drive enhanced returns. It is with this in mind that, in February, we communicated to the market our medium-term plan, which outlines an increased strategic spend of EUR 1.6 billion over base capital, an improved through-the-cycle ROCE of 17% upon completion and a lower leverage range of 1.75 to 2.5x.

We've made very significant progress with the acquisition of an independent containerboard producer, Reparenco, securing our current and future recycle board, containerboard requirements in a very disciplined manner. We acquired the business on a pre-synergy 2018 multiple of 6.4x and closer to 4x post synergies.

When we set out the plan, we talked about the need to be agile and to be able to flex the plan based upon what we saw in front of us. Reparenco is such an example. We bought rather than built capacity, and it gave us immediate tonnage day 1 and was immediately accretive for our shareholders.

Also in line with the plan, to the end of June, we have ordered and improved -- approved over EUR 325 million of strategic CapEx across all of our operations. This gives us a very exciting platform to build on in future years, and some examples of this are set out in the slide.

Turning to sustainability. I am very proud of the path that we are on with our CSR agenda. I am proud of the continued commitments the company makes to the communities in which we operate. We see this as our responsibility as a good corporate citizen. We are particularly enthused by the tremendous work that we do in our local communities to help improve living standards. We're also proud that this long-term commitment has been recognized across our world. And part of our responsibility to our communities is our sustainable use of local resources, driven by our market-leading sustainable strategies and our overall sustainability philosophy where we believe that paper is the future of packaging. It is biodegradable, renewable and recyclable.

Now you may ask yourself why we place such a premium on innovation. Innovation helps our customers optimize their supply chains. Innovation helps our customers reduce their costs. Innovation helps our customers reduce their global footprint -- global carbon footprint. In Smurfit Kappa, we have over 700 designers pooling their global knowledge and ensuring customers get the right answer to their business challenges. In return, Smurfit Kappa continues to ensure growth in our margins based upon innovation.

Our innovation is built on the competitive advantage of having the industry's largest database covering supply chains, shopper insights and concept designs built up over decades and across multiple markets. No one else, no one else has the depth of applications or the level of investments and expertise required to build up this advantage. The advantage is truly impossible to replicate.

This data, coupled with our deep culture of material science and the creativity of our 700 designers, has been at the foundation of the market-leading smart portfolio, as we call them. These smart solutions are measurable. And we have numerous examples how they've impacted our customers' bottom line, some of which are highlighted in the displays which you've all seen outside this morning. Whether it's driving new growth at the point of purchase with ShelfSmart or decreasing costs and improving efficiency of supply chains with SupplySmart or reducing labor costs with the breadth and depth of our experience in automated machine systems, Smurfit Kappa's innovation is leading and delivering. And to ensure we maintain our leading edge in innovation, we have built a global infrastructure of Experience Centres where we can meet the innovation needs of our customers both now and into the future.

Now as you've heard me say and discussed in the recent past, the increasing focus on substitution of plastic and related substrates is very much in its infancy and is a truly fantastic opportunity for both Smurfit Kappa and the broader sector.

Here, you will see just one small but ingenious example of how we've moved from a multi-material solution to a paper-based packaging solution, critically removing polystyrene from the packaging and replacing it with our paper-based honeycomb product. The solution has delivered significant benefits for Scania, and some of the benefits are outlined in the slide. This is just one example. This is a scalable opportunity for us, and there are many such opportunities for us to look at in the future. This is where our leadership in innovation and sustainability increasingly intersect as we meet the future needs of our customers.

Turning to our Americas business. Here, we have a great example that highlights the strategic advantage the group has marrying our innovative market offering with our unique position as the only true Pan-American supplier of corrugated packaging solutions.

Nutresa is truly a great company, a leader in the region and one of the largest companies in Colombia. Through leveraging the group's scale and geographic footprint, we have grown strongly together with Nutresa. We are now supplying them across 7 countries in the region, and we have recently received their award for the Best Supplier across all categories for all products. We remain very excited about the group's prospects for -- to development in this -- in the Latin American region.

Now with that, I'm going to hand you over to Ken, who will discuss how we deliver on our market-leading innovation offering. Ken?

Thank you, Tony. And good morning, everybody.

Over the next few slides, I want to reflect on the excellent performance in the first 6 months of the year but also take a small pause and look back at our relative performance over the last number of years and the foundation that essentially has built to our medium-term plan for the years to come.

We are very pleased to deliver significant year-on-year improvement against all our key performance metrics in the first half of 2018, with an increase of EBITDA of over 27% to EUR 724 million and a record group EBITDA margin of 16.4%. Our first half performance reflects the quality of our assets, our geographic reach and our market positions, but more importantly, the capability and commitment of our team. I'm also delighted to report a very strong return on capital employed of 18.1%, another group record and very much in line with our recently announced medium-term targets.

We delivered strong free cash flow of EUR 148 million to the 6 months, an improvement of EUR 102 million year-on-year. And our net debt-to-EBITDA continues to trend down, lower at 2.1x versus 2.5x this time last year.

During the first half, the group showed significant operational improvement across both divisions, which I'll expand upon in a moment. We've also made material progress on the medium-term plan, with over EUR 325 million in projects either ordered or approved; and also significantly the acquisition of Reparenco, which closed on July 2, delivering on the key elements of that plan, earlier than anticipated and at a multiple out of the box of 6.4x. And this acquisition was financed by a EUR 600 million bond issue in June.

What the performance shows is that our integrated business model and our performance-led culture continue to drive demonstrably superior returns. And finally, reflecting the confidence in both our current performance and indeed our future prospects, the board has approved a 10% increase in the interim dividend to EUR 0.254 per share.

Turning now to Europe, where we delivered underlying revenue growth of 8%. We also delivered record EBITDA of EUR 587 million and an EBITDA margin of 17.3%, both of which are significantly up year-on-year. Operating conditions for the region remained strong as we continued to recover containerboard price increases in corrugated boxes in line with our expectations. The benefits of our prior year capital investments, input cost recovery and volume growth were all central to achieving this result. Reported corrugated volume growth for the first half was 3% year-on-year, with the benefits of some acquisitions on organic growth being offset, in part, by our practice of price over volume in certain cases.

Pricing for both recycled containerboard and kraftliner were stable in the second quarter, after increases in both grades in the first quarter. Industry inventory levels of recycled containerboard remained below critical levels in June, highlighting the tight market situation notwithstanding some recent capacity additions. And finally, as mentioned, we completed the acquisition of Reparenco in the period. And this really secures our current and indeed future recycled containerboard needs for the region.

And now turning to the Americas. Our Americas business showed -- equally showed significant year-on-year improvement in the first half, with a reported EBITDA margin up 160 basis points. The region also continued to recover recent containerboard price increases, where, as you'll recall, were some 300,000 tonnes short of kraftliner. We will also benefit further from the ramping up of our 2017 paper machine investments in both Colombia and Mexico. And these investments deliver incremental tonnage for integration as well as some key paper grades for SKG, allowing us to innovate and differentiate in the area of performance packaging which is a high-growth area of the region.

Corrugated volume growth in Colombia and Mexico, 2 of our largest countries in the region, were strong as we progressed through the first half, with volume growth in Colombia of 6% and in our legacy Mexico business of 3%, with a particularly strong finish to the half year.

And on the back of this growth in these countries, we continued to service our customers' needs. We've invested in corrugated operations in both countries to cater for both the necessary capacity growth and indeed, the increasing shelf-ready packaging trends. And as Tony mentioned, we continue to see this region as a source of growth, with many ongoing opportunities, both internal and indeed external, to further expand our geographic reach as we progress through our plan.

And as I said at the start, I think it's important to kind of look back at the delivery over the last number of years. And as you can see from this slide, the last number of years have represented a period of continued improvement against all -- almost all or any relevant measures.

The announcement of a further increase in the interim dividend by 10% reflects the board's continued confidence in the group's performance and prospects in the short, medium and indeed, the long term.

With a compound annual growth rate in EPS of over 30% in the last 5 years, this is, of course, a reflection of the continued growth in demand for our products, for innovative and sustainable products, but also reflects the benefits of our capital spend and the importance of the integrated model. And the strength of that model was enhanced, obviously, with the Reparenco acquisition.

It also reflects the focus and drive within the business to recover the input cost pressures we experienced, particularly during 2017, but also those pressures we see during 2018.

Our return on capital target has continued to evolve as the business delivers the returns from investment programs. We have continuously set and met our return on capital targets, from 13% to 15%. And in February of this year, we reset the target of 17%, so the outturn of 18.1% at the half year is very much in line with that plan.

The group's continued focus on cash flow also remains key, with over EUR 1.6 billion of free cash flow delivered over the last 5 years. And that's after the EUR 2.2 billion we spent on internal investments in the business. And those investments further enhance our high-quality asset base.

And finally, the 16.4% EBITDA margin, an improvement of some 330 basis points in the 5 years since June 2013, is further evidence of the operational improvements we've made in our business. And alongside those investments we've made, we have continued to grow, with a compound annual growth rate of 4% over the same period.

Now, as you may recall from the medium-term plan, we have a balance sheet that consists of both strength and firepower. And indeed, it gives us a platform to drive the group forward, capitalizing on some of the secular growth trends that Tony alluded to. But what also remains key to this plan is that it's ambitious, agile and achievable. And back in February, we gave you initial indication of how we're going to achieve those ambitions. We outlined our plan to spend EUR 1.6 billion over and above normal CapEx in our business through the cycle, with an aim of return on capital employed of 17%. And at that time, we also reduced our leverage range to between 1.75x and 2.5x.

And we outlined the plan to spend in 3 main areas. So firstly, having identified the profitable growth in our corrugated business, we need to invest to capitalize on those opportunities. So new corrugated, new digital printers, new specialist machinery will maintain our leadership position in our industry and also maintain our position as the packaging solution provider of choice.

Secondly, we're investing to maintain the strength of our integrated model. And fundamentally, integration ensures security of supply in all market conditions and allows us to optimize our through-the-cycle returns. Reparenco is that significant and early milestone in the context of that. And the action itself highlights the agility of the plan to flex the market to opportunities when they do present compelling strategic and indeed, financial logic. We're also continued to invest in our kraftliner system to provide additional capacity in the most efficient manner possible. And as the plans progress to short -- to solve our short paper positions in the Americas, we will of course keep you informed.

And finally, we have identified a range of cost-reduction projects to ensure the returns and value created in both our corrugated and paper businesses are maximized through management of both the fixed- and variable-cost elements of those businesses. The initial plan had a base amount of projects in it, but as the plan progresses, we continue to see more opportunities in this area.

The significant amount of progress made even at this early stage demonstrates the agility of the plan. And we expect the plan to continue to remain agile as we survey the opportunity set that sits in front of us both in terms of internal investment and indeed, in any further M&A opportunities.

So with that, I'll hand you back to Tony for the outlook.

Thanks, Ken.

Now turning to the way we see things. As previously stated, our sector has very, very significant positive growth characteristics across not only Europe but across the world. We are, as you will know, the material of choice in a world that is more and more influenced by sustainability agenda -- issues and agendas. And I have placed out there, the National Geographic, which you're welcome to take a copy of, that really said, "Plastic or planet?" and I think we all prefer the planet. So our product is very much at the forefront of that.

We are the material of choice for transportation packaging especially in the areas such as eCommerce. And we're the material of choice as an in-store merchandising medium. Our product, as you all know, is highly adaptable, highly visual and highly printable. And again, I would urge you to look at some of the examples that we have outside which show you the versatility of the products that we make. In Smurfit Kappa, we have the widest geographic footprint to take advantage of these secular trends.

As we look forward, thus far, we see good demand in most of our markets. We continue to recover input costs in the year in our box systems both here in Europe and in the Americas. Global containerboards markets remain in a good situation. We continue to implement, as Ken has mentioned, our medium-term plan, which has many exciting projects as we look forward. And as stated in our release this morning, we expect 2018 EBITDA to be materially better than 2017.

Now, while many of you have heard me say that success is never a straight line, we've now delivered 9 consecutive years of earnings growth. The steps we've taken and continue to take are building a strong platform to deliver continually superior performance. This includes delivering on our medium-term plan, optimizing our integrated model, continuing to expand our geographic reach and our balance sheet strength to broaden the strategic and financial opportunity sets available to us. That is at the heart of our excitement about our short-, medium- and long-term prospects.

Like everyone else, I know that we live in an uncertain world, but I do believe that Smurfit Kappa will continue to deliver superior performance. The strength of our platform today; our proven track record; and above all else, the quality of the Smurfit Kappa team sustains that belief.

Now, I'd like to thank you all for your attendance, both here and online. And as I said, Ken and I will now take any questions that you have. And we'll start off with questions in the room; and we'll start off right to left, if that's okay.

Barry?

Fantastic half-year. Two or maybe 3 questions, 2 to start with. And just in terms of, I suppose, the medium-term outlook and the strategy. To date, it looks like, between the EUR 325 million plus the EUR 460 million, you've spent almost half of the EUR 1.6 billion that you outlined in February. Just to get a sense: Is that quicker or faster than you thought? And I know Reparenco was probably -- maybe was opportunistic in terms of how that arrived, but should we therefore expect to see delivery of profitability from the MTO earlier perhaps than we would have thought previously? The second question is really around raw material costs and the prospects for those. And I suppose the big question and maybe just to get your views on OCC pricing. And I suppose a lot of this depends in terms of what China does or doesn't do in terms of buying OCC, but for the moment, it looks like that the move is towards a complete ban on OCC imports, which would -- should imply lower OCC prices in Europe for longer. And so your thoughts around that and your thoughts on around how China might actually supply its own corrugated system. Does it actually have to start to buy containerboard from Europe or the U.S.? Or is it due to some other source of fiber? And we've seen chat around that lately. And then maybe just lastly, on wood costs. There's been a lot of talk about rising wood costs or maybe rising logistics costs related to wood supplies. Maybe give your -- give us your thoughts around that and what sort of level of inflation you've seen in wood prices to date.

Well, quickly, on the -- I'll take OCC. Ken will take the wood costs and other cost issues. And on the medium-term plan, obviously, in general we are, in some senses, slightly behind our plan because, when you actually talk about buying equipment today, instead of taking a year, it might take 18 months to get the equipment because the suppliers are generally pretty full. But on another sense, we're ahead of our plan because we've actually acquired the Reparenco assets for EUR 460 million. In our plan, we had planned to build a machine for EUR 300 million in one of our facilities. So we're much ahead of the earnings side of that because that would have taken some 3.5, 4 years or so before it ramped up and gave us earnings. Obviously, it's a little bit more money-wise, but also the returns are higher. So I would say that we're well ahead of the plan, but some of the projects are taking longer, more the smaller projects that -- and that's why we're a little bit behind on our other CapEx spend and the implementation of it. But I think in general, I would say that we're ahead of the plan because of Reparenco, and that's going to deliver us a lot of profitability. And I think the thing that one has to focus on when you look at that asset, and we've talked a little bit about it today, is it is right in the heartland of our business in the sense that it is -- we have a very strong box system around the Netherlands and Germany. And also, Reparenco is sitting on a very good river, so therefore, we have a tremendous opportunity to export if we want to from that asset. So I think it's fit us like a glove, frankly. And the earnings coming out of there are going to be substantial with the synergies, obviously depending a little bit on where wastepaper is, but in general, I think it's a very strong asset for us. In relation to OCC, I mean, I think we all have to believe that China is very serious about the environment. It's not only doing it about OCC. It's doing it about other raw materials as well. And I think that -- I think they're trying to take a leadership role. So we're -- obviously, nobody is really sure what's going to happen, but I think that OCC prices have remained low in the first 6 months, are low-ish. I mean they're still around the average. I think Garrett did some work for us. They're still about the average of the last 4 or 5 years, but they're still lower than what they were last year when they were considered to be higher. I think our view is that we are already starting to see some tightening up, especially in the American markets. I mean the reality is at these low levels, as well as some secular trends such as eCommerce which are showing more disposal of containerboard into landfill, I think that you're going to see wastepaper prices going up. I mean I don't know if it's going to happen in Europe in September or October or January, but it's going to happen. We're already seeing it, as I said, in our Americas business, some trending upwards and some tightness in the market. And that's despite China being out of the market. So I think one has to always work on the assumption that wastepaper is a temporary phenomenon. And in a sense, that's good for us. We've always said that that's a -- we get a short-term relief, but in the end, we'd like -- we prefer higher wastepaper costs. In other costs?

Other costs. So other costs including wood. Taking wood first, Barry, I suppose, we certainly haven't seen any kind of supply restrictions that would cause production issues, but there is certainly a tightness in supply; worse for some than others, if you listen to the commentary over the last few weeks. And of course, that supply tightening kind of leads into a little bit of a cost headwind. And I suppose for us, if we look out over the remainder of the year, so the annualized effect of that is probably in the order of about EUR 20 million for our entire system. In relation to other raw material costs, I suppose there's those that we would have guided back in February with energy, we felt it was going to be about EUR 25 million of a headwind. I think we're still fairly solid on that number. We alluded to kind of distribution and logistics costs being generally higher around the place. That's still -- we still see that in the kind of EUR 10 million to EUR 15 million space. Labor, actually which we would have guided as -- normally we use the CTO program as an offset to labor predominantly. Plus there's a small inflationary cost. We'd see labor probably in the region of kind of even between EUR 30 million and EUR 40 million ahead this year, and that's built on 2 things: really, the inflationary pressures, but as a kind of a consequence of the good results we're showing here, we have a number of countries where we have employee profit-sharing arrangements, participation in countries like France and indeed, incentive provisions for all our managers. So that's kind of driving up that a little bit. Wood trend, you had talked about. And then just general. I mean pulp starch, everything is kind of trending upwards or, call it, between EUR 10 million and EUR 15 million, but they're the general cost focus we're seeing as -- on an annualized effect as we -- as you go through the year.

But no major surprises relative to where we were back in February?

Probably the new information is soft winter and Arctic fires has caused (inaudible), but beyond that, everything is broadly trending as you would have seen it.

Alexander Berglund, Bank of America Merrill Lynch. Just first, kind of, on Reparenco and your -- on your synergy target there of EUR 30 million, do you mind giving us some more color on kind of the timing on that and also kind of on what basis that is? And when you're talking about above EUR 30 million, what will you need to see to go above EUR 30 million? Does that include any revenue synergies as well? And then maybe kind of also to follow up, Ken, around the -- on the integration part and also kind of your comments that some of the other CapEx is taking longer time than you initially kind of expected. Does not mean that you maybe are more inclined to do M&A, obviously, at a right price? And then, kind of, if you can give any commentary of kind of multiple for paper assets, I think, especially in the Americas where you're short 300,000 tonnes of kraftliner.

Thanks, Alex. Basically, on the Reparenco, the major -- if you'll remember, Reparenco is an independent paper producer starting up for the last 18 months. So imagine that they've got a lot of customers far away from their mill, so there's a tremendous logistics savings. There's also some -- because of the way that they would approach the market versus the way we approach the market, there's obviously some pricing issues that we have -- able -- we're able to adjust. So therefore, they're the primary reasons of savings. I don't want to go much higher than EUR 30 million. Our guys are saying higher than EUR 30 million, but I don't want to say that it's more than that because I think that's a relatively conservative view. To be honest with you, when we did -- when we were in the first stages of this, I didn't think it was going to be as much as that. I thought it would be EUR 20 million or EUR 15 million, but when the guys came forward with a much higher number, I'd rather be sure that we're going to make the EUR 30 million. It's generally in the logistics and pricing and essentially the ramp-up of the mill to the final 40,000, 50,000 tonnes that they're not there yet with. So we will -- I mean it's interesting actually when you look at Reparenco, which is a brand-new machine done by people who know how to run high-speed machines, they are still only at about 80% of the rate of capacity after about nearly 2 years of running. So it shows you that machines take a long time in general to get up to the levels they need to get to. So I think that's -- that, I think, is positive. On the integration M&A, Ken, do you want to take this?

Yes, I suppose taking the integration CapEx/multiple piece as one. I suppose, if we were having difficulties in like our lengthening lead times on corrugated machinery, so is everybody else. We're not unique in that position. I think it's just a function of the market strength and the demand that's out there for whether it's digital, printed products or the specialty products. We always look. I mean the fundamental pieces of the agile plan is that you always benchmark the internal return versus any return you can get on M&A, so -- and that will continue through. So to your point, you're right. If we saw a box system that offers the same returns as boxes that we can create internally through replacing machinery in our existing facilities, we'd do that. In relation to assets in the U.S. and multiples, there really isn't many -- in terms of paper mills on their own, you've very little stand-alone paper mill assets. Similar to the Reparenco one in the U.S., they tend to be at this stage, very few, young, ramping up, potentially slightly older, more mature assets and probably already integrated into systems. And I don't think we've seen multiples come back to the same extent now or at all really at this stage. In the U.S., they're still talking double digits for most systems over there. And even in Europe now, through recent acquisitions, absent our own, we've seen multiples very much in the double-digit space. But again, if it fits and we like it, then we tend to go for it. And Reparenco is, if you like, particularly strong proof of that.

And just kind of on the timing of the synergies, should we expect kind of most of that will run into 2019?

I mean it's really a 2019 thing. In the first few months of any kind of plan, you'll get a little bit, but most of the synergies will come through in '19. The reality is, as you know, the paper system in Europe is fairly balanced in terms of the supply flow, so you -- the first thing is integrate it, integrate the people, see the opportunity set. Some synergies come through quicker than others, but I think most of that will be going through in '19 I would say.

Lars?

Lars Kjellberg, Crédit Suisse. Just coming back on the cost side a bit. You gave the full year numbers, what you expect. You called that a (inaudible) this year of about EUR 73 million in the first half. Could you give us sort of the net number? Should we sort of put this sort of annual number in half and that would be rough guidance for the net cost deflation, if you like?

I think it depends on your view -- it depends on your view on where OCC is going. I think certainly, we see it trend...

No, but I'm -- that's really on the first half.

In the first half, I mean it's what I'd predict in the second half, Lars. The EUR 73 million is -- well, we see the trend down, 20, 30 a tonne on average over the year, but will that continue into the second half? Hard to say at this point in time. We've certainly seen it go up slightly in certain parts of Europe. As Tony said, we've seen it go up in certain parts of Latin America. Equally, we've seen the CCIC begin to operate out of Rotterdam Port. So maybe the Chinese are coming back, the pre-starts in Europe. So it begins to have that feeling of movement across all these kind of pieces, but it's -- what we do, I think, is quite simply we kind of bank it as you go, if you like. We're not -- it was never going to be the underpin to a good year. That was always going to be box prices. So it's nice to have, but as Tony said, it's -- in the long term, it's better if it trends up for us given the nature of our model.

And in terms of the other cost items, is that broadly balanced between the first and second half? Or any change direction?

No. Most -- certainly, wood is nearly all second half. Energy would be predominantly second half. Labor, you can kind of annualize a bit half and half. And the others probably start above distribution again, that kind of thing. Wood and energy predominately second half is the best way to think about it.

Okay. If you look on the Americas. I mean clearly the European performance has been outstanding for some time, and the Americas kind of been lagging. And Tony, you mentioned, of course, your short paper position as an issue in the U.S. I mean, currency must have been an inflationary issue. How quickly can we get back to the 16% or, call it, 17% return? You've been -- I mean there's a change in the business mix, but do you see that returning to 17%? And let's say we found a stabilization on the paper price hike, could we get there within 6 months? Is that doable?

I mean I wouldn't rush to predict going forward in 6 months, but I think the momentum is certainly positive in the Americas. And certainly, some of our big countries such as Mexico and Colombia are doing much, much better in relation to demand and some of the programs that we've put in place in those 2 countries with regard to paper investment. So that's actually balancing it. If you'll remember, we've been buying some box plants. And just by their very nature, box plants have a lower EBITDA margin than paper mills at -- when the cycle has sort of normalized. So I would say that we are right now in -- moving in the right direction. I'm not going to predict whether we get there in the next 6 months, but we're certainly comfortable with the way we're moving.

And finally, in terms of the somewhat behind schedule in terms of CapEx. It tends to be that engineers and machines also get more expensive, and it's tight. Does that change your CapEx sort of per unit, if you like, in any shape or form? And how should we think -- maybe that was a question earlier, but you spent an awful lot of money on upfront, so to speak. The EUR 1.6 billion, is that a lower number now? If you can quantify if that's changed organic.

Well, I think the EUR 1.6 billion is probably slightly higher. I mean you take the EUR 460 million off, and then you probably add a bit more for other projects that we have, so -- because we're obviously going to earn the money up quicker. So we are going to actually readdress where we sit on that whole plan in September and then probably, we will update you at the full year. But I think I would say that it's a very good question, Lars, we are seeing suppliers raise their prices, and that is causing us to consider whether or not we delay certain projects. For example, one of our larger projects, paper projects, the supplier put in a price that was much, much higher than we anticipated, so -- and what his initial quote was. So we've delayed the project. We're not going to get ahead with it because it doesn't give us any sort of return. It will come back again. Maybe we'll put it towards the back end of the plan, but now with Reparenco, it allows us to say, well, we don't need that paper in 2 years. We need it in 3 or 4, so we can -- I mean I think the key point is we are not looking at this plan as being set in stone, I mean -- and we said that, at the time. It's an agile plan. If you actually look, we actually did an internal strategic plan 2 years ago, and this is the second version. And it's quite different, the second version after 18 months. And the one we relook at as we relook at these things, they will always differ for different reasons. We will have customer wins. We'll have customer losses. We'll have opportunities. We'll have non-opportunities. So we will -- we're going to keep this thing a moving, living thing. And if there's things to do, we'll do them. And so it's an agile plan, as we've said consistently.

Yes. I think, Lars, you saw that the EUR 1.6 billion was very much a kind of level of spend we felt we could consume, if you like, through the number of projects we had and the time available and indeed, the resources we had, but I suppose that the mill investment takes it down by 300. But as Tony says, we've seen much more opportunity around cost-reduction projects. We've seen other opportunities appear on the horizon on the box side. So the flexibility of the plan was always kind of key, and the agility. And I think, as Tony says, we're demonstrating that. And indeed, as that kind of moves and shapes over the years, we'll give you kind of new and clearer guidance on where that's going. So it's still very early days, but we've done a lot of work in 4 or 5 months.

It's David O'Brien from Goodbody. A couple for me, please. Firstly, on box prices, you've noted that you'll be going for further increases in the second half of the year. Maybe you could quantify what type of level you'll be looking for. And in that regard, you've also noted some discipline around volumes and that you stepped away from a little bit in relation to maintaining price discipline. Can you give me some color on what the competitive backdrop in Europe looks like at the moment? And has there been any marked change? In regard to Reparenco, obviously, there's a print paper mill in there. Has there been any feasibility around the cost to convert that to a containerboard? Or any time line. Or how should we think about it? And finally, just on the return of capital...

Those are two.

Pardon.

I thought you said, "2 questions."

A couple. I'm sorry. If I can fit a third one in. Just in terms of the returns of capital employed through the cycle. 17% is clearly very impressive, but can you give us some color on how should we think about the variability around that 17% as you move through different stages of the cycle?

You take the last one (inaudible). With regard to box prices, David, I think we're hoping to get a couple of percent more as we move into the second half. So we were saying somewhere between 6% and 8%. We've made that. And we're expecting it roughly around a couple of percent more. And we've seen that uplift a little bit in July. So that's on track as we see it. With regard to volumes and us stepping away, I mean, actually, the majority of the business that we would have given up or walked away from would have been happening last year, when we were raising prices to recover our input costs and others were not at that position. I think we've talked about before that there was a degree of believability about the paper price increases in the first half of last year and towards the second half of last year. And so a lot of our customer -- our competitors took views that, that wouldn't last and have been left with very poor business which they've taken from us, but now, obviously, that gives them an opportunity to come back as they need to raise their prices. So I'm not at all concerned about that. We can always go back and get, I mean, what -- there's an old saying in this business, what you lose on price, you get back on price. And so our objective is to continue to innovate with our customers for the long term and help them in their total cost system, not just on the price of a brown box. If it's a brown box, typically, we tend -- we have some. We have a lot of it, and that moves around much easier than the stuff that where you're working on customers through supply chain efficiencies and to reduce their overall costs. And that's the kind of customer we work with and done great work for, and that's the reason why we have the margins we have. Our customers are also winning when we have this situation. And then with regard to the conversion, when the company was for sale with Reparenco, they did a [Yako Pori] conversion study with the sale document. That's something that's very interesting for us to look at. We actually believe that currently, we don't need the additional tonnes, at least for the, let's say, near future. When we need the additional tonnes, we'll have a look at that as one of the options. It's not the only option. That machine that they're currently running is running at a lightweight paper, and it's in white. And that market is doing very, very well actually at the moment. And sort of like last man standing, there being so much closure of capacity in the white paper market, whether it's coated or whether it's the newsprints or particular grades of lightweight coated that these guys do or Parenco does -- us guys, I should say, it's actually a very healthy market. And while it is diminishing, it's diminishing with no new capacity that's going to come into it. So it represents an opportunity for us to continue to look at for the short term, and then we'll just see where we go with that.

On the target, David, well, you'd be disappointed. I'm not upgrading it today even if it is at 18% for the half year. I think I would think about it, we're still in the very early stages of our plan, so some of the spend will incrementally come through as we go. While EUR 325 million is approved and ordered, that's not in your cash flow yet. So it's not feeding into the denominators, but -- so the good results are feeding very much into the numerator there to give you some of that 18%. But even if you took out what you consider the tailwind in OCC, you're still very comfortably in the high 16%, 17%, so very much in line with the target. I think, as we go through it, we still see a very comfortable with the 17% through the cycle given the level of investment we still have to do and some of the returns lagging those investments by a year or so. But as with the 13%, to the 15%, to the 17%, it's something we kind of continue to take a look at. And if we feel that the capacity is there to increase it and indeed, the returns are there, then we'll do that, but at this point in time, still fairly happy with the 17%.

Cole Hathorn from Jefferies. Just wondering, can you give any more color on your plans for paper capacity in Americas, where you're looking to add it; and if it's going to be into the mills or via M&A? And then secondly, looking towards more Central and Eastern Europe, with OCC prices and the spread between testliner so positive, how do you basically monitor what your competitors are doing by looking at adding new capacity?

Basically, in the Americas, we would obviously look to buy, but we really don't have that many opportunities. I mean we have a very large deficit of paper. And we have trees in Colombia. We have a mill system in Colombia. We have expertise in Colombia, and we need kraftliner. So if we can make a project work down there, it's something that we will consider doing, but I want to do that in a very controlled way. It's not yet even come to our boards yet, that we have to see where enough there's a project that's viable down there. That will be our preferred route, but that's -- and that's -- we're many -- we're talking 3 years away, in any event if that was going to happen, or longer even. So that would be our preferred route to solve our problem for the Americas because we have the infrastructure, but obviously, if something comes up to buy which we're not aware of that there is to buy, I mean there are some conversions that are done, but they're a long way away from our market, in North America. And we have a deficit in South America, primarily Mexico, Colombia and the Caribbean and places like that, so we need paper down there, not up there, for the moment. With regard to what other people are doing, at the end, the spreads are very big in paper. And people are going to add capacity. And we have to see how they're going to introduce the capacity. I mean I think Ken and I have been around for a long time in this business. And every year is going to be there's too much paper coming on, and yet every year has been absorbed for the last number of years. And so we -- one year, it's not going to absorbed. In one year, paper pricing is going to go down. I mean that's night follows day is going to happen, but at the same time, our model will take care of that because we have an integrated system whereby we are -- we'll transfer the profitability from paper to corrugated for a period of time. And then being a commodity, paper will ultimately go up and down. And at the moment, all last year, we were in the -- probably the worst point of that. As paper was going up, one side of our business was not making any money. And we had to struggle to get the box price up, and we've now done that. And so we're at a good point now. If paper goes down, we'll hold onto the profitability in the box system for much longer because we've 64,000 customers. And so what other people do, they do. I mean what we do is we just bat to our own strengths. And that's what we have. We have an integrated system, and that's strong for us.

I think you've heard that the visibility horizon of those projects is essentially quite long. And kind of, as Tony said, we're long enough around to know that if you start to build a machine or order a machine, then you can kind of consider capacity coming in rather than, say, a feasibility study or something else. And I think as Tony said, if we're sitting here in the back half of '15, '16 was going to be an issue for capacity. In '16, it was '17; in '17 was '18. And really, that hasn't happened. And as I noted in my own comments, inventory levels in Europe for recycled containerboard are well below the critical level, so we look to '19 now sort of broadly balanced at the moment. But we take it as we see it. And as we also said, through our own experience and even Reparenco and others, ramp-up takes a lot longer than the machines that are put on the page, so -- but we just deal with that as it comes along. And our own system is well able to cope with that.

Ken, would it accelerate you doing M&A in Central Europe if you see someone potentially adding capacity that's got a good box plant space and you say, well, to prevent you adding the capacity, is it going to make you pull the trigger to acquire them?

It goes back to whether or not you're buying it at full value, can deliver some incremental value forward, whether it fits with your overall strategy. But we've always considered the world to be our map in terms of M&A, so whether it's Latin America, North America, Western Europe or Eastern Europe, everywhere we look at. It's quite a big -- given the 370 plants, we've every general manager is looking for an M&A opportunity to expand their own system. And indeed, when we bought Greece, that was intended not necessarily as a Greek acquisition but a kind of nod into the Balkan region for M&A in the future. So absolutely, we look at everything. And indeed, whether it's Europe or indeed, the Americas, we will always have a number of ongoing projects. Not all come to fruition, be it multiple or we step away from the asset because of quality, but certainly, execution in all those regions is a possibility.

Can we go to -- is there any calls online, Emily?

(Operator Instructions) And our first question comes from the line of Gerard Moore from Investec.

Just 2 more questions from me, please. Could you talk a little bit more about some of the secular drivers you're seeing in the market, things like plastic substitution and eCommerce? Just how powerful do you think they are at the moment? Are they boosting overall market growth by 1% or 2%? Or what's the best way to think about them? And secondly then, in terms of the dividend, you increased the interim dividend by 10%. Is that the best indication that we should take for the full year dividend? Or given the profit growth that you're seeing at the moment, is there scope to do more?

I'll let Ken deal with the dividend question. Just on the -- I mean, for sure, the whole area of eCommerce and any one of us who are involved in buying things on online or when my kids buy things online, it all comes in a box. And I think the world is actually seeing the box more. It's amazing how many investors I talk to say now and say, "Oh, this is what you do, Amazon." Or you do Zalando, or you do something. So there's a degree of awareness about our business that has never been there before, and that is obviously growing. When we see some of our customers around the various different countries, they're -- some of them explode year-to-year. They double their volumes and they continue to grow. With regard to the plastics, I mean, I really think that that's really just starting, Gerard. I think that we see more and more companies starting to wake up to this issue. And it is things like the National Geographic magazine and the Blue Planet which are relatively recent that are making people, myself included, frankly, think differently about how we should all utilize plastic and, where possible, to replace. And as we demonstrated in this small example with Scania, there are ways to give cost-effective solutions in paper-based packaging. Maybe the material is more, but in the case of Scania, they were able to get much many more on the pallet, much more reduce the cost of shipping. And so -- and overall cost was much cheaper, and so actually, there is a win-win-win for everybody: the win for the environment, win for Smurfit Kappa and win for Scania. And that's what we intend to do. And there's -- as I say, we're just -- I mean I think the millennial generation, anybody who's been purchasing will want to not purchase plastic or polystyrene if at all possible. And we have the solutions.

Gerard, in relation to the divi, we tend to think it more as a kind of a full year package, including the interim. So we felt that the kind of 10%, doubling of last year's interim, was a fair place to get to at the half year. As we move through the final year and get to that kind of February place with the board, we tend to look at, a, where that might land; and b, how we see that going forward. But as you know, we've always felt that the dividend will grow as the earnings grow, but we don't necessarily want to tie ourselves to a payout ratio or indeed, kind of yield. We feel it needs to be competitive but not in a place where we're kind of too much is going in terms of pay raises. So we felt the interim at 10% was a nice step up from last year, but really, we put much more focus on the final.

Our next question comes from the line of Mikael Jafs from Kepler Cheuvreux.

A repeat question perhaps but on this eCommerce. I mean you mentioned that as a driver. I mean, could you try to explain to us, I mean, how big is the eCommerce for you in terms of total volumes? And what type of growth rates do you see there? And then a sort of general question. I mean, we all know the pricing of the testliner in OCC, but could you try to describe what you see in terms of the market sentiment out there? Are clients noticing this as well? These will be my questions.

Sorry. The last question was clients and seeing the...

No, just sort of -- you are sort of -- if you can give some color and flavor as to discussions with clients. Are they pushing you for discounts on testliner, for instance, given that OCC prices are low? That's what I'm going after.

No. I think, as Ken mentioned, I think the market is in very good shape on the testliner side. And as you know, we just bought this company that was selling into the free market. And most of the customers that we -- they had, we will -- many of them, we'll retain maybe in a different shape and a different way because obviously, as I mentioned earlier, logistics costs are an issue for us. But I think that there isn't any -- as we sit here today, there's been no pressure on testliner prices to go down. And ordinarily, I think the market is very tight in that area. So we don't have any discussions at all about summer discounts, which were in the past somewhat normal but we have had nothing. And we're -- as a big buyer also, and we're still a big buyer, I would say that we're not getting any relief at all on testliner pricing at the moment. And Ken, do you want to take the eCommerce...

On eCommerce, Mikael, I suppose it's -- we've kind of said before, it's kind of difficult sometimes to define what eCommerce actually is because we've had customers for a long period of time that -- USPS in the States, for example, which are the eCommerce institution kind of distribution partner. So when we think about it, I think Europe is probably less advanced with the eCommerce model than the U.S. certainly is. So we see it as very much kind of growing double digits, high single digits in terms of volumes. But certainly, when we look around that kind of customer base, the -- yes, our customer base is not necessarily the kind of -- the usual kind of brown box. And we're partnering with kind of those that are trending towards the higher end, so -- and that's the kind of space we're in. So we see a lot of opportunities for kind of innovation and differentiation in that space out of the box and indeed, as indeed when people maybe move away from plastics towards paper-based packaging even in the eCommerce space, it's a lot of eCommerce partners use plastic bags to ship rather than corrugated; and indeed, in the whole kind of idea of returnable eCommerce, which is again a growing trend, the idea that you might get it home, but you want to send it back. So they're all -- they all offer complexity, which is all very, very good for us. So it's still a strongly growing part of our business but kind of mid-, high single digits in terms of volumes.

Our next question comes from the line of Chip Dillon from Vertical Research Partners.

Tony, I had a question about the -- sort of the global picture. You might have addressed this earlier. And I apologize if you did, but we're hearing rumblings that China might actually ban all imports of wastepaper, which would in essence mean they would shut down, I guess, enough capacity or at least processing capacity of OCC that would equal half of what Europe's capacity is or half of what North America's is, which would be pretty dramatic. And we're seeing signs at least in North America that they are looking to rectify that by making unbleached kraft pulp or even possibly building capacity here. Are you seeing similar actions in Europe from folks in China who are probably looking at what they would do in a situation like that?

I suppose it's fair to say, Chip, that we've seen Chinese people bidding on assets. We believe there was a Chinese bidder on Reparenco. We believe there was Chinese bidder for a big acquisition that went on in the United States. And we know that they bought one thing up in Scandinavia, Nordic Paper. And we believe they were also active on Powerflute, but -- so they certainly are looking to buy paper assets and not being that successful thus far. I would say that, that whole question is still very much up in the air. I think China really needs to address how it will fulfill its containerboard needs in the event that they banned OCC. And I think we just saw this week that Vietnam were talking about doing something similar, banning in -- banning mixed waste OCC. And yet at the same time, as you will know, Chip, from the Americas, you're seeing OCC prices start to move up in the U.S. right now. And so there's a lot of different trends in that whole area that are somewhat difficult to understand. I think the overarching trend that is true is that China is really fixing on making sure that it is seen as an environmentally clean country. I think they are -- they have decided it -- there doesn't seem to be much doubt that they've decided that they are not going to be the junkyard for the world, in all products, as they heretofore have been. And I think now you're going to see them be much more enforcing of -- frankly speaking, they were receiving a lot of literally rubbish, and they're saying, "No more." And so that is going to change the trends, but as to how it's all going to play out, I think it's really difficult to say right now. And -- but I do think ultimately, whatever shift happens, ultimately, OCC starts moving up, as we've said before.

And as we have no more questions registered, I'll now hand back to our speakers in the room.

Thank you, operator. And thank you all for attending today. As I said, we are very happy with the performance of Smurfit Kappa during the first half, and we look forward with optimism to the second half and beyond. And so thanks for attending. And thanks for attending via telephone as well. Thank you all.