Smurfit WestRock PLC (SW) 2018 Q4 法說會逐字稿

Okay. Well, good morning, ladies and gentlemen, and thank you all very much for the time coming to see us today. Of course, before I start, I have to draw your attention to this disclaimer, which I think a few of you in the room will know at this stage. So I'll take this as read, if I can.

So by now, I hope many of you, if not all of you, will have seen our results, which are materially better than the prior year and have delivered significantly improved performance against all the key measures that we measure. You've often heard me describe our strategic direction as evolution, not revolution. Today, we're presenting a story of transformation based on the 5 key pillars that drive our company. And these are all listed on the slide.

Continuous evolution has delivered in Smurfit Kappa a transformed business, transformed results and transformed prospects. To chart our transformation, we have used Smurfit Kappa Group's first year in existence in 2006, which actually marked the first full financial year of this company. You can see significant uplift in both our absolute EBITDA and our EBITDA margin. This reflects paper and corrugated as an integrated model, which delivers consistency and stability of earnings, which is -- sometimes people forget. It delivers our customer focus, our innovation and our unique culture.

We continue to make smart investments and to deploy capital effectively. Hence, our return on capital employed has grown to over 19%, an almost threefold improvement. Equally, we have reduced our leverage multiple to 2x, reflecting the financial discipline of the company. All of this demonstrates the steps we have taken, and I must emphasize, we'll continue to take with an objective to deliver progressively superior returns.

What defines us in Smurfit Kappa is our customer-centric focus. We have developed the best applications and tools for our customers to reduce cost and drive innovation. In 4 years, we have opened up 26 innovation centers across our operations in Europe and the Americas. Equally, we continue to invest in and acquire high-quality assets in existing or adjacent markets, which are highly complementary with our existing businesses. We are also excited about the continuing development of our machine systems business, which links corrugated supply to our customers on a long-term commitment basis. Equally, we have transformed over the years our mill system by having an ever-more efficient footprint and capability to meet the needs of the modern world with lightweight paper.

Sustainability is important for our business, our customers and for the planet. Our product, corrugated, is the most sustainable transport and merchandising medium that exists today. Due to our knowledge and credentials and footprint, Smurfit Kappa is uniquely positioned to capitalize on something that is good for us and good for the planet.

In 2018, we took the next step in our sustainability journey when we rolled out a new ambitious set of goals to ensure we continue to make real and measurable progress against 5 strategic sustainability priorities. Responding to a step change in consumer demand, brand owners and retailers have made their plans and goals clear. And this is to move away from unsustainable packaging materials.

Our better planet initiative -- Better Planet Packaging initiative builds on the group's industry-leading sustainability credentials and business applications so that we're able to help our customers, both existing and prospective, with their challenges of finding more sustainable packaging and merchandising solutions. This is really a nascent opportunity for us. And as the industry leader, you can be sure we're going to take it.

SKG's transformation has built a better platform for continued performance in 2019 and beyond. Our operating and financial disciplines, together with an unrelenting focus on delivering value for our customers, are part of a performance-led culture, which demands continuous improvement. In that context, we launched our medium-term plan this time last year. And I think it provides a clear returns-focused framework for capital allocation. Important to note that we retain a degree of flexibility and agility within that plan and it is based on what we consider to be conservative assumptions of expected market conditions.

Increasing geographic reach is, I believe, one of the factors that distinguishes Smurfit Kappa Group. Our medium-term plan reflects that as an objective and again provides a clear framework to allocate capital into higher growth or strategic regions.

I will now hand you over to Ken, who will take you through the financials of the company.

Thanks, Tony, and good morning, everybody, and thanks for taking the time to join us. Before moving on to the results itself, I'd point you to the appendix for some technical guidance for 2019. And also in terms of detailed modeling questions, I suggest we do those after rather than -- sticking to some of the bigger topics for the day we have.

Now turning to results in more detail. We're pleased to deliver significant performance -- year-on-year performance in all our key measures. In 2018, we delivered revenue growth of 4% for the year to EUR 8.9 billion, which on an underlying basis was 7%. Full year EBITDA was up 25% to EUR 1,545 million with earnings in both Europe and the Americas.

I'll expand on the divisions bit in a moment. But at the group level, while net acquisition, primarily Reparenco, contributed EUR 36 million, EBITDA was negatively impacted by currency of almost EUR 50 million and as previously mentioned, the Venezuela deconsolidation. Therefore, on an underlying basis, EBITDA was actually up close to 27% year-on-year.

We also saw an improvement in the EBITDA margin, moving to 17.3% from 14.5% in 2017. And we saw improved margins in both Europe and the Americas, driven by our investment in our high-return capital projects, volume growth and continued input cost recovery.

As Tony mentioned, the group delivered improved return on capital employed of 19.3%. And remember, this is against our 2017 ROCE of 15% and ahead of our stated target of 17%. And that target was set on the basis of the full implementation of the medium-term plan exiting 2021. So to be in this position after 1 year of the plan should give you some insights into how we are returns-focused and our ability to drive those returns when the opportunity presents itself.

Free cash flow for the year at EUR 494 million, a 61% increase on 2017. And although EBITDA was significantly up in the year, so too was CapEx, impacted by the medium-term plan and the tax payments as a result of increased profitability. Those increases were offset, cash interest is marginally down and there's a small decrease in the working capital outflow.

The management of working capital remains a key focus of the group. And at the end of year, the working capital as a percentage of sales was 7.5% versus 7.3% last year, very much within our normal range. And again, we've shown further progress on the leverage.

I'm pleased to report net debt-to-EBITDA of 2x at the end of 2018 versus 2.3x at the same point last year. On a pro forma basis with the acquisitions, we're actually sub 2. And that progress on the year in terms of leverage has to be placed in the context of almost EUR 1 billion spent internally on acquisitions and indeed capital projects, so a really good outcome.

And finally and reflecting the confidence the board has about the current and indeed the future prospects of the group, we've approved a 12% increase in the final dividend to EUR 0.722 per share. And that represents an 11% increase in total dividend year-on-year.

Turning now to our European operations and their performance in 2018. The European business delivered an underlying increase in revenue of 7% in 2018. EBITDA of EUR 1,267 million represents a year-on-year increase of 33%. EBITDA margin for the year was 18.3% compared to 14.9% in 2017. And the benefits of corrugated volume growth, input cost recovery and previous years' capital investments were fundamental in achieving that result.

Box volumes grew by 2% in the year with notable performances in France, Portugal, Russia, Scandinavia, Spain and Eastern Europe. And in certain countries, the group prioritized input cost recovery over volume, which impacted demand in certain countries. As you know, we tend to price over volume when we can do it. Input cost recovery in corrugated pricing continued through the second half of 2018 and was at the upper end of our expectations as we finished the year.

Average recovered fiber prices were 27% lower year-on-year, progressing on what was a significant headwind in 2017. Pricing for the grade has been relatively stable at a level just below the average price from 2012 to 2016. And the group expects that recovered fiber prices will, in the region, remain stable in the short term but increase and trend upwards in the longer term.

The European markets for both testliner and kraftliner were relatively stable during 2018. With market increases for both grades through the first quarter, prices for recycled containerboard reduced in the fourth quarter, ending the year flat with kraftliner up for the same period.

And in the latter part of the year, we commenced a cost reduction program across our operations. These actions will help reduce our fixed labor costs through 2019 and beyond. And the benefits of those are in addition to any benefits we've outlined in the medium-term plan.

And looking now at our Americas operations. And while the Americas business reported a year-on-year increase of 2%, the increase was actually close 20% if you exclude Venezuela. And that's a fair reflection, I think, of the work done by the region in 2018.

The EBITDA margin in the Americas continues to recover and increased to 15.7% from 14.4% in 2017. And the momentum here is noteworthy as the EBITDA margin in the first half was a little over 15%. And in the second half, that number progressed to 16.2%., and as Tony mentioned, returning towards a more normal level.

Underlying revenue growth for the year was 8%, driven by volume growth of 2% and the price recovery initiatives following on from the significant containerboard price increases in the region during 2017 and indeed part of 2018. And you'll recall that in that region, we're about 300,000 tonnes short of kraftliner.

For 2018, 85% of the region's earnings was delivered by our big 3 countries of Colombia, Mexico and the U.S. And the combined EBITDA margin for these 3 countries actually increased close to 230 basis points year-on-year as they grew corrugated volumes, recovered their input costs and progressed mill investments, particularly in Colombia and indeed Mexico.

Moving on to our balance sheet. The net debt at the end of 2018 was EUR 3.1 billion, resulting in a net debt-to-EBITDA ratio of 2x compared to 2.3x at the end of '17. And the group's balance sheet continues to provide considerable flexibility well within our stated range of 1.75 to 2.5x, so in very good shape. During 2018 and early '19 and under the leadership and direction of Paul Regan, who's with us, the group undertook a number of refinancing activities that extended the group's maturity profile, diversified the group's source of funding and increased the group's liquidity.

In June '18, we issued a EUR 600 million bond at a rate of 2.875%, and in January '19, priced a EUR 400 million upsizing to that offering. And also in January, the group signed and completed a new 5-year unsecured EUR 1.35 billion revolving credit facility with 21 of our existing relationship banks, all of whom are represented here today. And I think it's appropriate if we extend our thanks for their continued participation and support. And that new RCF refinances the group's existing senior credit facility, which was due to mature in March 2020.

As of 31 December 2018 and on a pro forma basis, the group's average interest rate was 3.7% compared to 4.1% at the end of '17. And the group's diversified funding base and long-dated maturity profile of 4.6 years provides a very stable funding outlook. The balance sheet, as it is today, is well positioned to support the plans we have in place as part of our medium-term plan.

And lastly, turning to our capital allocation priorities. And this slide shows our core objectives, which have been relatively consistent for a long number of years. As you remember, the guiding principle, we deploy capital to enhance the development of the business over the short, the medium and more importantly the long term. Internal investments or acquisitions must meet IRRs in excess of where we are in terms of return on capital. And indeed, as shareholders ourselves, our interests are very closely aligned with all stakeholders.

Return on capital employed in 2018, as Tony noted, was well ahead of where we were a decade ago. We developed a business model with broad geographic diversity and a resilient integrated business model. And while innovation has evolved that box beyond something more than kind of pure transport medium for our customers, it's also clear that the disciplined capital allocation decisions we made have been instrumental in pushing our ROCE towards 19.3%.

Since 2007, our IPO year, the group delivered over EUR 8.1 billion in available cash flows. And linking that directly to the transformation piece that Tony talked about, we put EUR 4.5 billion back into the business in the form of CapEx. This investment positions us to continue to provide the most innovative and sustainable packaging solutions on the market, backed by the most efficient, cost-effective integrated paper and box system.

We've also spent EUR 1.7 billion on acquisitions, expanding into new geographies and territories in North, Central and South America as well expanding in the Eastern part of your Europe. And this opens not only new markets but also that is to serve our customers in markets we weren't previously present. And that's particularly important in Latin America.

Our progressive dividend policy, and as previously mentioned, the 12% increase in the final dividend year-on-year, means our shareholders continue to benefit directly from the strong free cash flow generation of this business. And while investing in the business and distributing cash to shareholders, we've decreased the absolute debt level by EUR 300 million over the same period.

We're still very early on in terms of our medium-term plan. But as you may recall, that plan was based on full implementation in 2021 and a through-the-cycle return on capital employed of 17%, up on our previous 15% target. But as Tony mentioned and just to reiterate, that plan was built on long-term average pricing and relatively conservative volume assumptions. So our confidence is very strong in our ability to deliver on those targets within that plan.

And as a key component of that plan but really of all capital allocation decisions we make, it has to remain flexible and agile, flexible to allocate capital when it makes sense or reallocate when there are more sensible options. And we saw that very clearly that flexibility and agility with acquisition of Parenco. We solved our paper needs early, reduced execution risk and provided an opportunity for further containerboard capacity at the time of our choosing. Our track record here shows that we are proven, responsible stewards of capital.

And with that, I will now pass you over to Saverio to take you through the transformation of our European operations.

Thank you, Ken. Good morning, ladies and gentlemen. My name is Saverio Mayer. I'm the CEO of Smurfit Kappa Europe. And I am 33 years in the company and 2 years in the present role. Over the next few slides, I'd like to give you a flavor of how we have transformed our operations in Europe based on some of the key pillars Tony outlined at the beginning of the presentation.

So let's start looking at optimizing the integrated model, a key operational cornerstone of our business. We are integrated from the manufacture of the box to the production of the containerboard and finally the control of our recovered fiber sourcing. Remember, from a financial perspective, the integrated model provides a more stable margin profile over time. Operationally, our philosophy has been to differentiate and add value in our box business, our market-facing business, and to optimize our containerboard mill system.

To illustrate this, we have standardized 50 paper grades in our mill systems. And with these 50 grades, we can make limitless box designs in our box system, facilitating a differentiated offer to our end customers but critically keeping the production complexity away from the mill system. This makes it impossible to replicate because you need advanced analytical tools, like Paper to Box and strict quality monitoring. It has taken years to build and it is a key competitive advantage of Smurfit Kappa.

In our box business, we've been investing in more added-value conversion assets. In the last 6 years, we have approved, installed almost 160 conversion machines in our business to cater for the more complex needs of our customers. This has included investments in die cutters and multipoint gluers for e-commerce packaging, high-quality printers for our FMCG customers and digital print for the display market.

We focused our operation not just on providing innovative, sustainable solutions but critically on customer service and quality, transforming our quality performance by reducing our parts per million defect score by 53% since 2014. In line with this same focus, we have improved our OTIF, or on-time, in-full, by almost 10% since 2014.

In the case of recovered fiber, we have and we will continue to invest in our own 16 recovered fiber depots across Europe to ensure we secure the sourcing and quality of recovered fiber for our system for the long term. You will have seen how we have opened a new depot in Spain in 2018. And we have plans to expand in Germany and Italy in the near future.

Unlike the box business, we look to simplify the product offering from our paper mills, reducing complexity in the manufacturing process and in turn, driving higher productivity, lower waste, lower cost solution and greater product availability, so our customers have security of supply in all market conditions.

Since the time of our IPO, we have closed 12 containerboard machines and yet grown our capacity. The average size and profile of our containerboard has increased, generating 44% more volume of each machine, a clear indication of the quality asset platform that we have and of the achieved competitive level.

We have invested in [champion] mills to make lightweight recycled containerboard. These investments have meant we now have lightweight capacity of over 1 million tonnes, a key growth grade in Europe. These have included Townsend Hook in the U.K., Roermond in the Netherlands, Saillat in France and most recently, the acquisition of Reparenco in the Netherlands.

When we look at the capital allocation, we have and we will continue to be disciplined in how we allocate capital, this being a key pillar to our financial performance. And first, looking at acquisition, we have grown in existing territories but also expanded into new ones. In 2017, we expanded into the Moscow area of Russia, a key growth area for both our customers and Smurfit Kappa Group.

In late 2017, we also commenced our Southeastern European expansion strategy with our big acquisition in Thessaloniki on the doorstep of the Balkans in Northeast Greece. In late 2018, we announced further progress on this strategy. We then turned to the Serbian market, acquiring the #1 corrugated player and a mill system with expansion potential in the future.

We have also acquired in existing territories, strengthening where we are strong, acquiring business in France, the Netherlands, Spain and the U.K. These acquisitions included targeted entry into new products as was the case in Hexacomb in the Netherlands and high-quality printing and high-definition preprint in the U.K.

As we expand our geographic footprint, we see the continued benefit of our pan-European offering as customers that we deal with on a pan-European basis look to grow with us as our operational footprint grows. This is clearly seen through the continued growth of Smurfit Kappa supply with the top 5 FMCG brands in the world, where we have significant supply position and we continue to see growth opportunities as business partners.

We have also continued to develop our leadership position in bag-in-box, a profitable niche but growing segment of our business, where we are #1 in Europe and #2 in the world, with acquisition of businesses in Spain and also the construction of a new plant in Spain. 2019 will also see the startup of a new injection plant in San Antonio, Texas in order to serve the U.S. market with our unique product offering.

With 60% of our operation in Western Europe, we have a constant focus on cost takeout activities. The benefit of automation through palletizer and conveyor system and its resulting cost reduction are key drivers of our medium-term plan for Europe. In fact, in our 2018 results today, you will see that we reported on a cost reduction program commencing in Europe at the end of 2018 with benefits expected in 2019 and beyond.

The last part of my presentation before I hand you over to Juan Guillermo is on our customer-focused innovation. When you look at the journey we have been through in the last years, we transformed corrugated packaging from the transportation brown box to the added-value product capable to support top line growth of our customers and to help them optimizing their supply chain while improving efficiency, reducing cost and especially minimizing risks. Thanks to this transformation, we are now much more than a paper-based packaging producer. We are the added-value partner.

Smurfit Kappa has pioneered technology development, such as ShelfSmart, an innovation that has scientifically proven to increase sales for our customers with about 123,000 in-store views in our Shelf Viewer. Additionally, in the case of SupplySmart, which contains more than 72,000 supply chains in our Pack Expert system, we enable our customers to reduce cost in their supply chains, looking beyond the corrugated box on a simple cost per unit base.

Turning to our experience center network. We have developed an unrivaled network of experience centers across Europe and the Americas, which Juan Guillermo will expand on. We started in 2015 with our global experience center in Schiphol Airport Amsterdam, and we have added 21 more with 3 in 2018 alone in Germany, Russia and Spain. These experience centers have enabled us to expand our conversation with customers beyond the purchasing department. We have the marketing, branding, logistics, sustainability leaders from our customers visiting our experience centers to understand how the power of Smurfit Kappa can help them to sell more, reduce cost and/or reduce risk. We have had only this year more than 3,750 visitors in our experience center network, meaning above 26 visits per week.

Lastly, something you may not know about Smurfit Kappa is that we are the largest producer of the machine systems in the industry, producing packaging machinery since 1967. We sell 4, 5 machines every week and have installed over 8,000 machines in the marketplace. This allows us to be strictly linked to our customers in the long term and to be recognized as the provider of packaging who can be responsible overall for their packaging line, a real transformation. The strategy deployed in Europe has facilitated the delivery of our 2018 results, and together with our medium-term plan, has us excited about our future prospects.

I now have the pleasure to handing you over to Juan Guillermo to take you through some slides on the Americas division. Thank you.

Good morning, ladies and gentlemen, and thank you, Saverio. My name is Juan Guillermo Castañeda. I'm the CEO of Smurfit Kappa for the Americas, and I've been with the company for 35 years now. Building on what my colleagues have presented, I will spend the next few slides giving you a flavor of how our American regions have transformed over the years and most important, how I believe we are very well positioned and excited about the future.

Let's start with the concept of optimizing our integrated model. Something that you can see clearly in the Americas results in 2017 and to a lesser extent, in 2018, is the impact on the region in the form of lower margins due to an exposure to buying approximately 300,000 tonnes of containerboard from third-party sources. This has been and will continue to be an area of focus.

And I'm delighted to show the improvement in our results as we progressed through 2018 with the benefit of our mill investment. It is also worth noting the potential for further integration is not just about earnings but also increasing the security of supply for our customers.

As the region grows, we have already considerably in containerboard -- we have invested considerably in containerboard capacity in the last 6 years. With a combination of acquisitions and investments, we have transformed our mill systems by adding 700,000 tonnes of containerboard capacity. Along these investments and leveraging of our paper technology team, we have also been able to reach a reduction in the average basic weight of containerboard by around 15% without compromising quality.

At the same time, we have been optimizing the paper supply chains across the region and with Europe, transforming what was a pure country-based supply chain to a more global concept. In managing our grip on recovered fiber, we have moved to a more collaborative management structure that optimizes the distribution across our region to minimize cost but also optimize availability and quality. The geographic spread of our business is instrumental in providing this scope of coverage.

Now let's turn to our capital allocation strategy. Looking first at our corrugated business, we have totally transformed our converting capabilities by investing close to $160 million in equipment since 2012. We have optimized our corrugators in line with our paper mill system to minimize nonstandard requirements. We have invested in 3- and 4-color box machines across the region to cater for growing market needs and more added-value trends. I will discuss in a few moments how this had been key in growing in our major countries as retailers changed their priorities, shifting to, in some cases, to a more European solution, most notable in Colombia, Mexico. Having the in-house experience give us real competitive advantage.

When you look at how we apply the group expertise across our business to generate higher returns, a great example is in the case of our acquisition of Orange County of 2012. As part of this acquisition, we gained a recycled containerboard mill in Texas. Our paper performance team posted an initial assessment, implemented plans to generate 30,000 tonnes of additional paper without any capital spent, a highly synergistic Smurfit Kappa Group-specific action.

One of the [stand] of our transformation for Smurfit Kappa since 2012 has been the level of M&A in the region. When looking at this strategy, this must be seen against the deteriorating situation in Venezuela. We have completed over 14 acquisitions during this time, entering 4 new geographies in the U.S., Brazil, Costa Rica and El Salvador. The entry in the U.S. in 2012 has turned into profitable business for the group with a strong Texas operational footprint. The entry into Brazil in late 2015 has been equally a productive strategy with strong growth for Smurfit Kappa Group as our pan-American customers and local customers alike looked to Smurfit Kappa Group for supply in the Brazilian market.

We have built on Europe's market leadership in bag-in-box with a mix of investments and acquisitions, expanding our bag-in-box production footprint and market offering in Canada, Argentina, U.S. and Northern Mexico. We have also focused on strengthening where we're strong with acquisitions in Colombia, Dominican Republic, Mexico and Argentina. This acquisition has also brought the group product diversity with products like Hexacomb, a product that we have developed into a sustainable paper-based alternative to polystyrene.

And lastly for the Americas, I would like to discuss the customer-led innovation we have in Smurfit Kappa, what we do and what it means for our customers. When you look at the collective intelligence of Smurfit Kappa in both the Americas and Europe, we have an unrivaled depth of understanding market trends and insight, allowing us to always stay a step ahead of our competitors and deliver industry-leading sustainable solutions.

We have transformed the way the corrugated business is perceived by our customers and the customers of our customers. We have developed a network of 4 experience centers across the Americas. These experience centers truly position Smurfit Kappa in a different class in our market. We are leveraging the know-how that we have developed to offer our customers not just something different, but something that delivers real value to them. In 2018, we opened our Brazilian experience center, building on 2017 openings in the U.S., Mexico and Colombia. We will follow shortly with Chile and Argentina.

We can see how Smurfit Kappa market offering is delivering for both us and our customers with the group pan-American volumes growing at a compounding rate -- annual rate of 7%. Our customers value the innovative offerings that Smurfit Kappa Group delivers, the benefit of our smart business applications. And we have seen the volume growth as a result.

As I just discussed a few moments ago, we have invested significantly in our corrugated assets in the last 6 years, investing in multicolor, shelf-ready packaging-capable equipment across the region. We have seen how business like Walmart in Mexico are moving to shelf-ready packaging and how Smurfit Kappa Group has grown as a result. We're also seeing the model of retail discounters expand in the region, all trends where we are extremely well positioned to benefit.

Finally, we have seen how Smurfit Kappa have led with innovative, sustainable solutions for our customers. We are extremely excited about the additional potential that our recent Better Planet Packaging launch will deliver for us. The region has already delivered several innovative solutions as a result of this initiative with the launch of a corrugated salmon box in Chile to replace polystyrene.

And with that note, I will hand over you to Tony to conclude. Thank you.

Thanks. So today, I hope you'll understand that Smurfit Kappa Group is a business with transformed results and prospects with a continuing focus on delivery. What makes this happen, of course, is our people and the culture that exists within Smurfit Kappa.

Ken has taken you through the 2018 results, which are materially better than prior year and continuing to deliver and exceed against all key performance measures. Ken has also taken you through our capital allocation decision-making process. It is disciplined, rigorous and has been proven to deliver. The medium-term plan is flexible and is based on conservative expectations on market conditions.

Saverio outlined how our European business has transformed. He gave you some perspective on how we've optimized the integrated model, allocated capital with discipline and transformed how our products are seen and used. Our relationship with customers are stickier, the benefits of our knowledge to them, more tangible. And we're growing in our chosen markets. Saverio also outlined how we've driven significant performance on service and quality, together with a unique product offering to our customers.

Finally, you've just had Juan Guillermo, who outlined similar themes to Saverio. An exciting part of the Americas story is how we leverage the group's expertise, giving us first-mover advantage in that region. In the Americas, our focus is to optimize the integrated model. Juan Guillermo outlined our significant progress to date and our plans for the future. We've expanded into new geographies. We entered the U.S., entered Brazil and expanded in Central America. We are seeing significant underlying growth and a welcome return to historic margins.

In 2016, and as many of you will have seen it at the time, we set out our shared vision for the company. Our vision defines our approach to business and informs our culture. What this slide shows is a reconciliation of the vision and with what we have delivered. As a company, we have more and more attributable awards, whether these are in the CSR area, in the customer area or within the industry by recognition.

We have dynamically delivered through acquisitions, capital deployment and above all else, financial and operational performance. Our balance sheet is comfortably within our stated range and our returns have exceeded our immediate objective. While 2018 was a significant step in our journey towards our vision, we do recognize in Smurfit Kappa, there always still exists many more opportunities. As for that reason, Smurfit Kappa has, we all believe, a very exciting future. 2018 provides the platform for continued performance.

Some of you will have always heard me say that success is never a straight line. Although over the last 10 years, that suggests we're moving in the right direction with continuing profit opportunity.

If we look at the industry backdrop of today, of course, there are and there will always be challenges. But we believe the opportunities for Smurfit Kappa are significantly greater. Our work over previous years has put our company in a position to demonstrate the strength of our business with the results we have delivered in 2018.

Within our industry, strong secular drivers have allowed us to launch our new Better Planet Packaging initiative. This initiative galvanizes our whole organization behind the replacement of less environmentally friendly products with paper-based solutions. In conjunction with our medium-term plan, which will drive structurally higher returns, Smurfit Kappa is better positioned than at any time in the past to develop the company forward.

Again, I'd like to thank you all for your attendance and for being with us. And I would like to maybe turn it over to you to ask questions to myself, to Paul, to Ken, to Saverio and Juan Guillermo. So we'll start on the left, we'll go that way, left to right. And if you can say it for the listeners who -- I know who you are but just for the listeners.

This is Alex Berglund from Bank of America Merrill Lynch. A couple of questions from me. First of all, given kind of the recent decline we've seen in containerboard prices, has that resulted in any of your box prices coming down so far this year? And if not, how much would we have to see of a decline from here to trigger those box contracts lower in a material way?

Second question is on volumes. I appreciate that you -- especially in Europe going for price recovery over volume. But how is the kind of underlying demand environment in Europe right now? And is there any potential for volumes to increase into H1? And a final question, just on cost inflation, do you think that you'll be able to offset all of the labor inflation with your cost measures this year?

Okay, I'll let Ken take the cost inflation question. On box prices, we're not seeing any downward movement. In fact, because of momentum, we're seeing slight increases in boxes as we entered this year. And we're not -- I can't get into speculation of whether or not there's going to be movement in the future in box prices. But at the moment, we see a solid platform. I mean, one swallow doesn't make a summer, but the year started well. And so therefore, we continue to see good, reasonable growth in Europe. But I mean, not as good as it was in the first half of last year and remembering that we had strong comparators, I would say that the business environment for our normal package businesses, such as FMCG goods, is normal.

I'd say some of the industrial companies have been affected, the carmakers and chemical makers during the second half of the year. But we're not seeing any movements in box prices at the moment. Maybe a slight bit on sheet prices, which is the very, very commodity end of business but nothing material at the moment. And then on volumes, as I say, we've seen a reasonable start to the year, an improvement over last year, which was welcome to see after a December that was definitely worse than we would have expected, mainly driven by the industrial side of our business. But also I would say, December was just -- where Christmas fell and all that, was just a difficult month for us. But in -- with regard to cost inflation?

Alex, I think the simple answer is yes. We expect the CTO [proned asset], wage inflation in 2019, not only our normal CTO, but obviously the plan that Saverio and the region put into place at the end of '18 in terms of fixed cost reduction will also help. So broad strokes, I would expect it to offset.

Next up, and you better say your name.

I'm Justin Jordan from Exane. Three quick questions. Sorry to kind of push you on the first 6 weeks of 2019, but...

I was made to look pretty silly in the last one, when I said prices aren't moving down. And 3 days later, they went down by EUR 20. So I'm not good at speculation.

You're better at it than most people, I think, certainly most of the sell-side analysts like me. But also is there any help you can give us in terms of organic volume growth that you've seen in 2019 year-to-date. I appreciate it's only 6 weeks, in Europe and Americas? That's the first question. I'll let you think about it. And then secondly, just in the context of the wider industry in Europe, we're seeing pure capacity additions of probably something like 1.2 million, 1.6 million tonnes in '18, '19, '20, lots of newsprint conversions and graphic paper conversions to testliner, helped by clearly low OCC costs.

Is that a concern? Or how does that impact your medium-term capital allocation plans? And certainly, switching geographies to Americas, you've been very open. You talked about it this morning, about being short 300,000 tonnes of kraftliner in the Americas. What's the plan there? Do you have to potentially buy something? Or is there options organically to potentially look at adding 1 million in kraftliner in the Americas? So please...

I'm going to let the guys speak, both you guys, what do you think about this, the question on volumes for the month -- or 6 weeks for both your regions. With regard to capacity, capacity is always a concern in this business. It has been a concern since God was a boy. So I mean, the reality is we've always dealt with that. We've had 10 years of continuous growth in our profitability, our EBITDA. And as we've had paper prices go up and go down during that period of time, I think that we just have to recognize that there will always be capacity coming into this business and it will depend on the economic environment at the time how it's going to be absorbed. And so we, ourselves, have taken out capacity and added capacity. And clearly, as Saverio outlined and Juan Guillermo outlined, we're improving the efficiency in our mill system. So that's making us more and more efficient in that commodity piece of the business. And on the box side, we become more and more innovative. So we're obviously able to help our customers with regard to reducing their box sizes, reducing their weight to make sure that they have competitive packaging. So that works for us.

And with regard to the capacity in the Americas, I would just say that we do have a plan. We have a mill in Colombia, where we have the trees, we have the people and we have the site. The question is when and if we would want to push that trigger. And that's obviously something that the board will decide nearer the time. That's something that's in our plan. But we'll obviously take account of where the world is. But we have -- it's a -- I mean, the benefit of our business is integration. And clearly, the strength of the business is integration. So we're giving profitability to other people with that 300,000 tonnes. And as we're growing, it's obviously going to grow much more and we need to address that. But on the 2 regions, do you want to, guys, just quickly talk about how the year started?

Well, on the volume side, I would say that after quite a slowdown in Q4, specifically in November and December, and December particularly due to the fact that there was no possibility of shipping because of the calendar between Christmas and the last day of the year, probably this has led to also some destocking and some waiting in December. And January, the first 6 weeks, they have started absolutely normal, and potentially despite all we hear and read about the different economies. I'm Italian, so you can imagine how proud we are of our economy in these days. But the reality is that it's really business as usual. It's normal. There is growth versus last year. Of course, we are not talking of the growth that we had in the first half of last year versus '17. But it's absolutely normal business.

Juan Guillermo?

The year started well in summary, particularly in our strongest operations that are Mexico, Colombia and the U.S. as well 2019 in good shape. We might have some issues in the South, in Argentina and in Brazil, which I truly believe are temporary adjustments. And we are positive about a recovery in Brazil on the second quarter. But let's say, Colombia, Mexico and the U.S. continue very strong.

David O'Brien from Goodbody. Four for me, please. Sorry to focus on pricing again. But can you help us rather speculate where price is going to go in the next 3 months? I think if we transfer back to October, when we speak to the market, we all would have been surprised to see containerboard come down to the extent it has. But can you help us explain the behavior of people in the market when capacity utilization is still high, demand has slowed a little bit. We've seen consolidation. What has driven the behaviors to cut pricing back over that period? Secondly, in the context of M&A, we've seen a [derailing] of the sector in equity markets widely. Has vendor expectations in non-publicly listed companies maybe starting to present more opportunities on that front?

Thirdly, just on the CapEx. Clearly, it's going well. Can you give us a sense of what the contribution will be to profitability in 2019 and what kind of spend we should assume over the next 2 years? And maybe just following up on Saverio's point, we talked about maybe some destocking at customer level, the comment has been made that containerboard inventories are somewhat elevated. Given those two points, shall we see testliner inventory levels move back towards 600 reasonably quickly in your view?

Okay, I'll just take the first one. Ken, will you take the M&A and CapEx things? But just -- why does pricing go up and down? It can be a whole bunch of things. But I would say there was more supply in the market based upon -- from October, November, December, then the demand was there because as Saverio just alluded to that there was less demand than we had anticipated and probably the industry anticipated. So it's probably a supply-demand issue. With regard to the last question, was this on...

I guess, if you look at customers that destock themselves, assuming they have to replenish their stocks, if you look at European testliner inventories, they've spiked materially...

I mean, there's a lot of psychology that goes along with stocks. I mean, if people have a belief the prices are going down, they destock. And if they believe the prices are going up, they restock. So at the moment, they're a little bit elevated. That could easily change if people's view on the world becomes more optimistic. And people will then say, "We need paper." So I mean, we can't really speculate where stocks are going to go. But Ken, do you want to take the...

On the M&A one, I think logically, you would expect under-expectations started to revert. But it's probably too early to see that yet. I think, from our own perspective, we've been very smart and clear on the deals we've done during '18 in terms of multiples anyway. When we look at the combined multiples paper, Reparenco Serbia are considered -- we talk about a solid, disciplined capital allocation. That's proven that point, given the multiples we've seen around the industry in previous years. So we wait and see. But as always, we remain active and poised and with the level of liquidity we have, ready to kind of jump on opportunities that present themselves. In relation to CapEx, the appendix there has the kind of guidance for '19. You'll forgive me if we don't give you '20 yet even though (inaudible) for asking.

So we're thinking about EUR 650 million to EUR 700 million for CapEx for this year, so call it about 150% depreciation, so very much progress continuing on the medium-term plan in terms of broad strokes. If we outline last year, EUR 1.6 billion of the plan to be spent. There's probably EUR 1 billion to go over the remainder of the life of that plan. And then as I said, it's flexible and agile. And so we constantly revisit that in terms of opportunities that present themselves, like Parenco or indeed where we see opportunities in marketplaces, so diverting machinery or time to outsource. So it's very much evolutionary. But I think at this point, we see EUR 650 million, EUR 700 million, excluding the effect of leasing. And then '20, we'll give you guidance on this time next year.

It's Barry Dixon from Davy. Two questions. Tony, just looking at the containerboard price environment and corrugated price environment, maybe give us your sense as to how sticky you think corrugated prices are now and whether that has changed in recent years? You didn't recover as much on the way up as you did in, say, previous cycles. So would you expect to give less back on the way down? And maybe might just give us your thoughts on why that might be if that is the case.

And then just second question on capital allocation. And I know you've outlined the 4 uses of capital and how effective that has been over the last 10 years. Does that change depending on where we are in the cycle? And I suppose I'm just thinking that if we are going into a down cycle, does it inform how you think about capital allocation, either in terms of internal CapEx rather than M&A or buybacks or dividends? Or how do you think about that?

I'll let Ken take the second question and then -- just with regard to recovery, I mean, there's no question that as the business is evolving with more machine systems, with more high-quality requirements by our customers that the customers are much more sticky than in the past. With regard to recovery of paper, we did, I think, an excellent job of recovery for the vast majority of the paper price increases at the expense of some volume from time to time. But basically, we basically recovered the vast majority. So I don't recognize the statement as to we are far behind previous times. I don't think that's necessarily true.

So I think the teams did a very good job to make sure that our input cost were recovered during the last 18 months or so. And that's reflected in the results. The results show the fact that the -- not only have the things worked -- some things worked (inaudible) different prices, some things haven't worked in our favor, like currency, which was a cost of EUR 50 million during last year. I think that -- so I think the team did a great job in recovering. And I would say the customers are stickier than they have been in the past. And Ken, do you want to take the capital allocation?

I think we think of the capital allocation irrespective of where we are in what might be a cycle. I think we think of the capital allocation in the context of the strength of what we have internally and then how we see that going forward. So if you think back over those -- we've been talking here about, if you like -- since the formation of Smurfit Kappa back in 2006, I think we've evolved those priorities as markets present themselves in different kind of ways. So initially, from '06 onwards, for the fair level of debt paydown needed, I think that the work that Paul and the team did on refi-ing from that date to now has allowed us unlock a lot of value in terms of interest expense and transfer that to the equity holders through dividends. So almost it's always a reconciliation of the available cash flows and the best use for those going forward.

So we have a very big paper system. And we see that as best-in-class. And to keep that at low cost irrespective of where you are in a cycle will require investments. I think at the box end in both regions, it's about market-facing and making sure that you're serving, whether it's current trends or indeed coming secular drivers of growth. So it's -- the risk here is that you don't invest in your business and there is some kind of downturn. And when it turns, you're not ready for what happens then. So I think the discipline and the skill of the teams of Saverio and Juan Guillermo is to make sure that as market conditions change, we're ready for that. And as they turn back, and we're not at that place, even close to thinking of those times, we're ready for that, too. So I think it's not necessarily indicative of where we might be in a cycle. It's more about how do we feel about our prospects and what can we do.

Cole Hathorn from Jefferies. Just following up on kraftliner, what have you seen from the import market of kraftliner with some of the players? Have you seen an impact from global shipments being moved around the world into Europe from China, et cetera? And then secondly, on OCC prices, you talk about securing supply into the future in that business. Can you give a little bit more color around that and your thoughts on the Chinese situation at the moment?

Okay. Well, with regards to kraftliner, we're certainly seeing some more activity in the export markets. We're seeing more kraftliner in our -- effectively Spain and Italy coming in from the U.S. And we're seeing some degree of reduction in the Latin American market from -- because we're a big buyer, not as much as we thought it could have been. But there's some degree, around $40 or so. So it's not substantial. So there's no question that there's more kraftliner than there was at this time last year. But the U.S. economy is doing very well and continues to grow. And you could see that change very quickly. But at the moment, we're seeing availability of kraftliner. With regard to OCC, we're seeing no real buying interest from the Chinese at the moment. If anything, OCC is trending down slightly rather than moving up. We see no change to their policies with regard to the whole area, the kind of waste that they're bringing into the country. In fact, even more strict, I would say, it's becoming. So we're selling a little bit of wastepaper to China, which is a high-quality waste that we generate in our own factories. But they don't want to take post-consumer waste hardly at all.

So I think we don't see a big change at least in the foreseeable future. I mean, again, I don't want to get into forecasting because if you think forecasting paper is bad, OCC is even worse. So I think we're comfortable with the OCC story for at least the foreseeable future. And then with regard to our own issue, we believe it's very important that over time, that we have grip on our raw materials, so the OCC is a very important grip. And we work with retailers, we work with industrialists to make sure that we have a good two-way flow between ourselves and them and we're able to do chain of custody and all that sort of good stuff. So it's important for us to have more and more depots to be able to enable that. I think we just need to go to the phone quickly.

(Operator Instructions) And we go to the line of Lars Kjellberg at Crédit Suisse.

Most of them have been answered. I just had one that I want to revisit a bit about the medium-term plan. You talk about conservative assumptions in terms of some of the growth elements of that plan. Can you share with us what they are, i.e. in terms of growth rates, how you think about that?

This is going to be a short question. No. No, Lars, what we do is -- when we go to the board, we presented obviously upside case, downside case, medium case. And the medium case is basically relatively conservative. So obviously, we want to make sure we are a financially disciplined company that has been through -- I think it's been said in all the slides today and that's what we'll continue to be. So any sort of spending plans have to be rooted in the fact that it meets our objectives despite whatever can happen and what's the downside. And so we have a saying, "Look after the downside and let the upside look after itself." And so that's what we do.

And in terms of the buckets that you talked about, I think it was EUR 200 million in cost reduction and then the EUR 700 million in -- one being growth, one being paper integration. Is there anything you can do specifically on the cost reduction side to accelerate that? Or is there any mix change that you've done, considering the environment we're in?

Lars, I think we set aside, if you like, in the plan about EUR 200 million for CTO or cost takeout projects. A lot of that was around kind of palletization, robotization, removing external warehouses from the systems. So there's always opportunity to accelerate that. Again, more than the assumptions in the plan, we were kind of conservative. Also there's a demand on organization to deliver on those plans. So it's a time and resource issue also. But to the extent that we get through some of those projects fairly quickly, we can always accelerate some of those projects. So that goes back to the principles of agility and flexibility. So in short, yes, there is an opportunity to accelerate those projects once we get through the first raft of them.

Understood. Final question for me. It sounds as if you are seeing some real positive developments in the Americas. Can you comment a bit about the Colombian market and Mexico in particular, given the -- what seems to be a somewhat tumultuous relationship with the U.S. at this moment? But Colombia seems to be a strong market. So if you can provide any incremental color what you're seeing in terms of demand trends and pricing in those markets, please?

I'm not sure we got it. But if we got your -- if we got your question because it was a bit -- the line is a bit sort of crackly. I think the Colombian-Mexican markets have been very buoyant for us last year and this year -- and the start of this year. I mean, obviously we don't want to get into -- we're not into forecasting. But the year started, as Juan Guillermo said, very well. And we've got good investment plans in both of those countries that are ongoing and developing. And we don't see any real dangers to those situations right now. And clearly, obviously a lot will depend on the trade issues that are out there, macro issues. And we'll have to just wait and see. But I don't -- both of those countries, we have very, very strong positions in both countries as the leading producer or the second-leading producer. So we feel very good about them.

We now go to the line of Mikael Jafs at Kepler Cheuvreux.

Just one on the Chinese situation. I mean, this is a very open question. But could you, in any way, try to help us understand what the potential implications could be if they actually go for banning totally imports of recovered paper? And what state is the industry sort of over there? I mean, how are they coping with sort of less OCC? A very open question, but some color and flavor perhaps.

Mikael, it's a very good question because frankly speaking, they've cut back a lot. They've been buying pulp. They've been buying a lot of high-quality OCC. So they're probably using -- they've been buying in Japan. They've been making paper in Vietnam. There's been -- they're using -- they've been closing down a lot of the older mills that exist in the country. So I think it's been -- the lack of buying of wastepaper has been in conjunction with perhaps a slowdown in their economy. So it hasn't really manifested itself. If their economy starts to grow again, then they will have to come back and buy. And we don't see a scenario where they're going to stop buying wastepaper at all. There's no scenario where we see that happening. But you can never say that. I suppose you can -- you could always worry about things like that. But at the end, we don't see that happening.

Okay, that was the final call we had a question for. Can I please pass it back to you?

Well, thank you very much, operator. And again, thanks to all of you for attending. It's been a great year 2018 and hopefully onwards and upwards in 2019 and beyond. Thank you all for attending, and thank you for your support of Smurfit Kappa over this year, last year and in the years previous. Thank you.