Smurfit WestRock PLC (SW) 2020 Q2 法說會逐字稿

Hello, and welcome to the Smurfit Kappa half year results. (Operator Instructions) Just to remind you, this conference call is being recorded.

Today, I'm pleased to present Tony Smurfit, CEO. Please go ahead with your meeting.

Thank you, operator. And good morning, everybody, and thank you all for taking the time to join us today. I'm joined on our call by our group CFO, Ken Bowles. Please note that Ken and I are presenting remotely from different locations, something to bear in mind in the unlikely event of any issues. As is custom, I will draw your attention to Slide 2 and the disclaimer and take this as read.

As we said to you in April, our priority is the safety and welfare of our people, their families and the communities in which we operate. Our core values of safety, loyalty, integrity and respect have never been more relevant. Today, we express our pride in the SKG workforce for their part in delivering in the midst of a pandemic.

During the height of the pandemic, we placed massive emphasis on continued communication and employee engagement. The result of this was, during a company-wide survey conducted in May, over 90% of our employees were positive on how management were tackling the crisis and looking after their safety. During the period, all of our facilities remained operational. Our scale and geographic reach and supply chain expertise allowed our customer base to deliver their essential and critical supplies, including the key food and pharma sectors.

The unique position of the group within a secure integrated system of over 350 facilities with extensive reach and a motivated workforce represents a significant strength. We are naturally pleased to support the communities in which we operate through the provision of financial support, PPE and by continuing to help the most vulnerable groups within our society. I am very proud of how our company has reacted so strongly to this pandemic.

In previous presentations, we talked to you about the transformation of our business. A business transforms -- transformation is a journey guided by the ever-increasing quality of our business. Here on this slide, we present against key longer-term performance measures over a 5-year period. This is the basis for the underlying thesis of our presentation: SKG, a quality business consistently delivering. Our objective is to do as we say, consistently delivering against our strategic, operational and financial commitments.

Looking at these measures in more detail. The business has generated EUR 2.2 billion of free cash flow, which has been allocated to just under EUR 900 million of dividends to our shareholders, this after a returns-focused capital spend of just under EUR 3 billion and disciplined and effective acquisitions of EUR 1 billion and at all times maintaining a secure and strong balance sheet.

As today's reported performance shows, we are continuing to deliver and, in many instances, exceed the expected level of performance. We're delivering for all stakeholders. Within this 5-year time frame, we have delivered a TSR of 76%, this against the TSR for the FTSE 100 of 16% and the STOXX 600 of 12%.

When we last presented to you in February, we said that our focus in 2020 is continued strong free cash flow generation. This performance represents a significant step towards that goal, delivering today while building a durable business for long-term performance and success. Innovation and sustainability are central to such success, and I will talk to each of those in greater detail.

In Smurfit Kappa, we strive to lead the way in everything we do, leading in our chosen markets, leading in sustainability and showing leadership in how we as a company turned up during COVID-19. We have continued to deliver for our customers, with development projects going virtual but still adding value at a critical time for many of our customers. Our unique SupplySmart application has been fundamental in our ability to continue to deliver virtually as all our customers target profit improvement programs and carbon reduction strategies. Our designers, engineers and salespeople have adapted to this new normal, hosting over 1,000 customers across our operations through virtual webinars on e-commerce, Better Planet Packaging, our Smart Applications and many other topics. At the high point of the lockdown, we had 9,000 Smurfit Kappa employees working remotely from their homes.

The group's investments in IT infrastructure over the years have allowed Smurfit Kappa to adapt with flexibility and agility to the challenges brought on by the pandemic and deal with any future challenges. Ken and his team put in world-class systems for the company that have enabled seamless communication and efficiency across the company. We have had additional costs, of course, associated with adapting to the pandemic, but through targeted cost takeout, this is something we have mitigated in full. Indeed, cost takeout has exceeded our expectations.

Sustainability is in our DNA and has always guided our approach to business, demonstrated once again during the first half with the publication of our 13th sustainability report in May, outlining our continued progress across 3 key focus areas of people, planet and impactful business, committing Smurfit Kappa to align our CO2 reduction targets with the Science Based Target initiative and supporting the recommendations of the TCFD or the Task Force on Climate-related Financial Disclosures. We also continued to invest in material carbon reduction projects. all Of this contribute to the many third-party rating companies that have SKG as leaders within our broader subset. In May, Smurfit Kappa published a Balancing Sustainability and Profitability Survey conducted by an affiliate of the Financial Times. The survey examined companies' and consumers' views on sustainability. As you can see on this slide, the results were unequivocal and build on the outcomes of a Kantar survey, one of the world's leading evidence-based insight companies.

Sustainability is not a trend and it is here to stay. For Smurfit Kappa, led by our Better Planet Packaging initiative, the group is uniquely positioned to help our customers overcome these challenges with effective, sustainable packaging solutions that could demonstrably reduce their carbon footprint and their operating costs.

Here you'll see just 4 examples from Italy, The Netherlands, Poland and Russia of how Smurfit Kappa are providing effective sustainable packaging solutions for our customers, moving from less sustainable materials to 100% recyclable, renewable, biodegradable solutions. Corrugated has replaced plastic, polys, rigid plastic, foam chips and styrofoam in these examples, easily done, better for the customer, better for the planet and, of course, better for Smurfit Kappa.

We're also working behind the scenes or in the kitchen, if you will, in order to meet our sustainability commitments. Great example of this is our recently completed recovery boiler in our Austrian kraftliner mill. This mill in the heart of our system finished on time and on budget with a spend of EUR 134 million. The reduction in CO2 emissions of 40,000 tonnes is a significant achievement. And as you will be all aware, under the EU Green Deal, carbon costs will only be increasing. And this will contribute almost 1.5% towards the group's CO2 emissions reduction target of 40% by 2030.

While I'm on capital expenditure, I'm very happy to report that our strategic plan continues to deliver. In Europe, we have seen significant productivity improvements across our system with our converting machine park increasing productivity by 3.2% year-on-year. In the Americas, the improvement in margin is in part attributable to the increased efficiency and market positioning we are doing with our improved asset base.

On this slide, there are 3 examples of larger capital projects completed in the first half. A new state-of-the-art, highly efficient corrugated facility has just been completed in Burgos, Spain. This plant is positioned to serve a growing FMCG customer base in that region. The benefits of this circa EUR 30 million investment will accrue in the years ahead.

Building on our European knowledge in sheet-to-sheet digital print, we've installed our first machine in the Americas in our newest Mexican facility. We expect further investment across both regions in this fast-growing and exciting subset of our corrugated business. I'm also happy to report that we've completed the development of our PM5 in our French kraftliner mill. This EUR 55 million project will bring significant benefits to the group with high-quality white top kraftliner and an extra 44,000 tonnes when fully ramped up.

In addition to these 3 projects, we, of course, have executed many hundreds of other beneficial projects as part of our strategic investment plan. As I outlined in February, the main material paper projects were done -- are set to be done in the first half of 2020. We have reduced our capital program before the pandemic in order to give us maximum flexibility as we look forward, and this remains the case.

Now turning to innovation. With our 27 experience centers harnessing the power of 1,000 designers from all over the world, we have created applications that are unique, supported by extensive datasets from all over the world. Our smart solutions of ShelfSmart, SupplySmart and eSmart give Smurfit Kappa an unrivaled competitive advantage that nobody else even comes close to. To show you just a few examples of how we're making innovation pay both for us and our customers, I've selected just a few examples.

Here's the example of Rheem, one of the largest -- world's largest manufacturers of water heaters and refrigeration units who operate in the fast-growing maquiladora region of Northern Mexico. Rheem approached us with both a sustainability and cost challenge. By using SupplySmart, we delivered a solution that replaced polystyrene with 100% recyclable and renewable paper-based materials. The solution complies with Amazon's frost and free -- frustration-free packaging requirements. It saves Rheem $600,000 and created a new revenue stream from -- for SKG via product substitution.

In February, I mentioned a new concept, TopClip product. In the interim, we've successfully launched it in The Netherlands. TopClip meets the needs of customers searching for ways to enhance their brand through effective marketing and, at the same time, respond to the pressure from consumers and governments to reduce and, where possible, remove plastic.

We're working on the development for a large water company customer for the same reasons, which look promising at early stage. Building on the customer interest in TopClip, we've now partnered with one of the world's leading machine suppliers to the alcohol and non-alcohol beverage industries, a company called KHS based out of Germany. The collaborative approach has already resulted in a large pipeline for SKG's patented TopClip products.

Turning to the mega trend of e-commerce, which is not only good for the corrugated industry but has been and will continue to be a big opportunity for SKG as we leverage our eSmart application and industry insights. On this slide, you can see the growth of an online craft beer company of ours where sales have increased in recent months, up 400% as more people have ordered their beer online. For obvious reasons, I won't name the customer, but since the outbreak in the U.K., we've seen sales move from 50,000 boxes a month to 200,000.

Another example on e-commerce is with eBay. eBay needed rapidly 5 million boxes in the U.K. within 10 days to meet their surge in demand. No other company was able to supply their needs in the lead time except Smurfit Kappa Group due to our network of operations. These are just a few examples where innovation, market positioning and deep industry knowledge are making the difference for our company.

Now to see how this is all translating into delivery, including the 17.5% EBITDA margin in the first half, I'll pass you over to Ken. Ken?

Thanks, Tony. Good morning, everybody, and thanks for taking the time to join us albeit virtually.

We are pleased to deliver another strong performance across all our key metrics in the first half of 2020. This performance when placed alongside our performance over the longer term shows not only the resilience of our business but also the benefits of everything we do from both an investment perspective but also cultural perspective. A performance-led culture builds on the foundations of a quality asset base and a focus on innovation and sustainability to solve the challenges not only of today but for the years to come. It is also important to remember that these results have been delivered against the backdrop of COVID-19, a significant operational challenge that the group overcame. The lessons learned and the practices we are beginning to implement ensure that we are also ready for any future challenge.

Turning now and looking at the group results in a little more detail. Group revenue was EUR 4.2 billion for the year, down 9% from the first half of 2019 or 7% on an underlying basis, which is a strong result against the backdrop of lower containerboard and box prices. EBITDA was down 13% with both Europe and the Americas affected by COVID-19. I'll expand on the divisional split in a moment, but on a group level, EBITDA was also negatively impacted by currency.

And although we saw a reduction in the EBITDA margin from 18.3% in the first half of 2019 to 17.5% in the first half of 2020, we did see margin progression from quarter 1 to quarter 2. The margin for the 6 months reflects a lower margin year-on-year in Europe but, pleasingly, a higher margin in the Americas. And as noted above, these results reflect the resilience of the group's integrated model, the benefits of our customer-focused innovation, capital spend program and rigorous cost management.

Free cash flow for the year was EUR 238 million, a 50% increase on the EUR 159 million delivered in the first half of 2019. The EBITDA reduction was more than offset by lower outflows for CapEx, lower cash interest expense and other items as well as a lower working capital outflow. As you know, the management of working capital has always been and remains a key focus for us, and the working capital as a percentage of sales at 8.4% was lower than the 9.8% reported last year and expected to fall back within the 7% to 8% range as we move towards the year-end.

Net debt to EBITDA of 2.1x was in line with the 2.1x we reported at the end of December and down from the 2.2x reported at the end of June '19. And finally, reflecting the confidence both we and the Board have in the group and indeed the strength and resilience of the cash flows, we are delighted to announce an interim dividend of EUR 0.809, essentially paying the dividend withdrawn from earlier on this year.

Turning now to our European operations and their performance in the first half of 2020. EBITDA decreased by 16% primarily as a result of lower average containerboard and box prices. The EBITDA margin of 17.6% is down from 19.3% in 2019 but represents a resilient price -- represents resilient pricing and is very much in line with our expectations. Box demand was flat for the 6 months on an organic basis but with particularly notable performances in FMCG, e-commerce and some industrial sectors such as health care and pharma.

And as Tony mentioned earlier, having invested EUR 134 million, the start-up of the new recovery boiler in Nettingsdorf was particularly noteworthy. The reduction in CO2 emissions by 40,000 tonnes is another significant step towards the group's targeted reduction. Our commitment to align with Science Based Targets and the Task Force on Climate-related Financial Disclosures demonstrates our further ambition in this area. And also, as Tony mentioned, our track record in this area and the recognition we receive are further proof of our leadership in sustainability.

I'm now turning to the Americas. In the Americas for the first 6 months, EBITDA decreased by 1%. However, EBITDA margins continued to improve from 17.1% in the first half of '19 to 19% in the first half of 2020. For the first half, over 85% of the region's earnings were delivered by Colombia, Mexico and the U.S., with strong year-on-year performances in all 3 countries. After a strong start to the year, the region's volumes were heavily impacted by COVID-19 in the second quarter. Volumes therefore for the first half were about 2.6% down year-on-year.

Colombia, Mexico and the U.S. demonstrated considerable margin improvement in the first half of 2020. In Colombia, the demand for agricultural products was up approximately 8% in the first half of 2019, although there was some COVID-related softness in the industrial and in the (inaudible) segment. The use of our experience center network, our pan-American sales offering and the continued promotion and awareness around our Better Planet Packaging initiatives have been delivering growth for ourselves and our customers in this region.

Finally, looking at capital allocation and how we use it to drive returns for all stakeholders and indeed build and grow the business while retaining significant firepower through a strong balance sheet, maturity profile and available liquidity. As you know, the group has always been a generator of significant free cash flow, evidenced again by the delivery of a EUR 238 million number in the first 6 months of this year and as you can see on the slide. The continual focus on free cash flow enables us to balance our capital allocation priorities while ensuring the balance sheet remains strong.

As you can see, it remains a balance sheet with considerable flexibility, well within our target leverage range of 1.75 to 2.5x. We believe capital allocation to internal projects is key to the continued growth and performance of the business. We will continue to take a returns-based approach to all our capital allocation decisions. We've had considerable success to date, and we continue to see the returns being generated by the medium-term plan.

The dividend is fundamental to capital allocation. It's a central component of our capital allocation discussion, an input rather than output and evidenced today by our announcement of the payment of the withdrawn dividend earlier on in the year. We have a strong track record in demonstrating that we are effective stewards of capital, disciplined when it comes to acquiring targets, disciplined when it comes to internal investment and, as recent history has shown, prudent and considerate when it comes to cash preservation and distribution.

Finally, looking beyond the cash flow delivery. And to echo Tony's earlier sentiment, this organization has delivered in a much broader context: for its employees, ensuring their health and well-being, both physical and mental, through the pandemic; for the communities in which we operate, helping the vulnerable, supporting research and developing products for safe work practices; and for our customers, ensuring that their supply chains operate efficiently and effectively, enabling them to deliver their essential products across multiple sectors.

What is clear from this performance over the first 6 months of the year against the backdrop of COVID-19 but indeed over the longer term is that SKG is increasingly well positioned strategically, operationally and financially. The financial and operating discipline that are fundamental to our approach will continue to serve us well across all market conditions.

I'll now hand you back to Tony for some concluding remarks.

Thank you, Ken. As you're all aware, we're operating in a period of continued uncertainty, something which, I hope you'll see from the presentation, we have navigated well through so far. And while I've always said that success is never a straight line, let's not forget that the long-term global containerboard demand outlook remains very encouraging and continues to be expected to grow over the coming periods, supported by the structural drivers of corrugated as the material of choice for brand owners and indeed for private label manufacturers, corrugated as the most sustainable and effective solution in the battle against waste and less sustainable materials, a trend that really is still relatively nascent and as mentioned earlier in the presentation, is increasingly important for the consumer and companies alike. Obviously, there's a more obvious growth driver of e-commerce, which even in mature markets has shown higher penetration levels in recent months. And corrugated has become more and more of a merchandising medium, a key consideration for brand owners and private labels as they battle for the consumer both online and offline. Corrugated is renewable. It is recyclable, and it is biodegradable and, as I say, is increasingly the preferred solution of both consumers and our customers, which has us very excited of the long-term prospects for the industry and, of course, Smurfit Kappa as the leader within it.

By way of conclusion, let me recap what we said 6 months ago. We said that the quality of our business has, over the last 5 years, improved immeasurably. It is, in fact, a measure -- it is, in fact, measurable, and I would hope that the long-term performance measures presented at the outset demonstrates our transformation. Today's reported performance with EBITDA of EUR 735 million represents the second best H1 outcome in our history, with good results across our key performance measures.

We know that our integrated business model with leading positions in our chosen markets is a core strength. Our capital allocation framework is both disciplined, effective and inherently agile. Whether it's through acquisition or internal investment, this framework has meaningfully contributed to the quality of our asset base and the consistent quality of Smurfit Kappa's returns. We've shown you just very few examples today of our key pillars of innovation and sustainability in action. These will be central to future performance. Our extensive geographic network of experience centers enables us to meet and exceed customers' needs.

I began talking about the quality of our people, and I want to conclude that way. They are a defining feature who embrace our owner-operator performance-led culture, with the customer at the heart of everything we do. We have longevity across our business and across our management team, and we work hard to help our customers succeed in their marketplace. Our half 1 performance against this backdrop communicates more than words, it communicates the quality and professionalism of our people.

Smurfit Kappa will remain agile and resilient and will continue to deliver. And while, of course, macro and economic risks remain, we are confident in our future prospects and to continue to deliver on our vision, which is to be a globally admired business, dynamically delivering secure and superior returns for all stakeholders.

With that, operator, I will hand it back to you, and you may open the line to questioning.

(Operator Instructions) Our first question comes from Lars Kjellberg, Crédit Suisse.

Extremely well done on the performance through the pandemic. A couple of questions that I just wanted to get some clarity on. You -- it appears to me, given the data we -- I've seen and some of your competitors have talked about, that you had a comparatively strong performance during the second quarter with only 2% contraction in the European corrugated volumes. Could you walk us through a bit on the various segments of where you saw good growth and, of course, the offset in some of the industrial segments? And will you see the exit rates on the start of July if there's been any meaningful change in that?

Also, cost management appear to be very good. Can you sort of bring us through the incremental cost for the pandemic that you had and, equally so, the big surge in OCC cost that was impacted and how you dealt with that? And you mentioned, of course, the cost-out exceeded expectations. And if you can elaborate a bit on where that happened in a way. And I just -- and I have a follow-up question after that.

Lars, thank you. I'll take the first one, and Ken, if you take the cost question. Basically, Lars, I mean, we were very comfortable with our customer prospects as we entered this year. I think I would have said that the last year -- at the end of last year, that we had seen a lot of customer wins, that we've seen a lot of customer gains. And it's because Smurfit Kappa has developed over the years -- and we keep banging on about it, about our applications and our innovation and our sustainability agenda, but that's real. And the reason why we've had market share gains is because customers are coming to us for our expertise. I mean we don't win every business, and obviously, from time to time, we lose some business. But typically, we are outperforming across the piece. And that's why we've had a better-than-market performance in the second quarter versus our peers, I would suggest.

You've asked what we see coming out of July -- or sorry, into July. I would say that July so far -- I mean we're not finished yet, but so far, has been above our expectations. We're seeing a reasonably -- July last year was incredibly strong, and this year is not too far away from the performance of July of last year. So we're pretty encouraged about July. I think one of the big surprises to me, and I wouldn't want you to take this as being a certainty, but we're seeing that our sheet feeding volume, which is the commodity business that we have -- it only represents somewhere between 10% and 15% of our business, but the commodity business that we have has accelerated very sharply in July versus June and -- sorry, during April, May, June. And I can't, honestly, explain why.

Obviously, smaller businesses are going back to work. They're starting to supply their own customers. Is that a positive trend for the world or Europe in general? It would be too early to say that. I think it's certainly positive. And so when you see that segment of our business somewhere down between 20% to 40% and completely reversing in July, it's a positive thing. But as I say, I wouldn't want to call it out as being a massive part of economic recovery yet. But clearly, that's a positive as we've gone into July.

Ken, do you want to take the cost question?

Sure. Lars, on the OCC question, I suppose, if you take it on a pro forma basis, if you like, the tonnes consumed, the difference between the price at the start of the year and where it went to, we estimate that's probably a cost take in -- or would have been the cost take in of about EUR 30 million. And on the broader cost in relation to COVID-19, I think for the year, we probably see that somewhere in the kind of EUR 20 million to EUR 30 million space. I suppose -- if you take both that and the OCC question together on cost management, I suppose you've got to track back here a bit of history. We're the first ones to put a cost takeout program in place, and that still remains today. So we see, fundamentally, cost efficiency and management as very much in our DNA.

In relation to the COVID-19 costs specifically, we've had some natural savings around travel and entertainment. Obviously, nobody's moving anywhere. We've had other kind of efficiency gains in productivity as we managed to kind of work our way through either in plant or at home. And the [challenge to] the business we stay [driven] to is to kind of keep that cost takeout delivery going through the second half of the year.

So I think when we sit and look back at it, COVID-19, we consider to be essentially awash for us. We don't expect any incremental cost take in because we worked hard to take cost out. But the cost going forward will be more around provision of PPE, deep cleaning of factories, backfilling position where we have our employees at home, that kind of area, but not expecting necessarily any material plus or minus on that cost. OCC looks like it's beginning to turn backwards. But as I say, for the first 6 months, probably an incremental EUR 30 million that we wouldn't necessarily have expected.

Okay. Fine. Can you remind us, Ken, about the medium-term plan, what you believe is going to be the benefit this year and 2021?

And then the final one, Tony, you mentioned the -- it's in a nascent phase but the sort of substrate change where you benefit. Can you give us any sense where business wins sits now, where you have benefited from substrate changes into corrugated in terms of any percent of your current business and where you kind of believe that should be in around 5 years? It's a big question, of course, but...

Look, on the medium-term plan, Lars, I think this year, we would have guided somewhere between 40 to 50 for the medium-term plan. I think given the lack of travel, people not being able to implement projects, I think we see that somewhere in the 30 to 40 space for 2020. On 2021, I'll defer to -- I'd get back to you when we do our budget for 2021 and update in February, if that's okay. We haven't quite gotten there yet.

Yes. I mean -- Lars, it's a big question. I mean I just showed you the example of Rheem in the presentation, and that's just one example. We've got so many examples. It's probably something we should probably start to collate a little bit better. We've got customer -- I mean the TopClip example. I don't know if it's going to work or not, whether it's going to be a game changer. But like we've got a lot of inquiries for that particular product to move away from plastic around cans, and that has a very material impact if and when it takes off.

A lot of the issues that we have is it takes a long time for customers to move their own lines out of what they're currently using. I mean a very good example, we've started a new factory in Houston -- sorry, in San Antonio in Texas for making tops for bag-in-box and bags for bag-in-box for Procter & Gamble on their Tide detergents, which is moving out -- their online offering is moving out of plastic containers into a bag-in-box operation.

And that is potentially huge. I mean it's just starting. But clearly, if Procter & Gamble uses their main brand and it becomes -- and people are shopping more online now, and if they are using the bag-in-box solution, I mean, that is a very significant reduction in plastic usage. Albeit there's still some plastic and there will always need to be some plastic, but it's a very -- it's like something like 79% reduction in plastic. And companies like Procter & Gamble are putting a lot of emphasis behind that.

But you're right, we'll probably need to try and figure out how we can capture this better. But it's just an evolving thing. It's -- every experience center we have has people coming through it, talking about moving. But talking about moving and moving is a journey rather than an instance.

Our next question comes from Barry Dixon, Davy.

Well done on a great first half. Three questions, if you don't mind. First one, Ken, would you mind just taking us through the margin improvement in the Americas? Clearly, you had great performance, but you commented in the statement that the volumes have deteriorated through Q2. Would you mind just giving us a sense as to how you see margins in the Americas progressing through the remainder of the year? What are the dynamics around that?

The second question, you also referenced in the statement about the reversal of the price increase in containerboard prices in July. And I didn't pick up what you said about box prices in the first half, if they were in line with expectations. But just would you mind giving us some sense as to what price movements were like in the first half and whether there was any sequential movements in box prices between Q1 and Q2 and then also thoughts around containerboard prices going into the second half of the year?

And then finally, just around capital allocation. And I think the payment of the dividend is clearly -- it's really welcome for all shareholders in the business. Maybe just talk a little bit about -- and I know you have your capital allocation framework. Would you mind just giving us a sense as to how the priorities within that change as the environment changes?

And I suppose I'm thinking that you have a medium-term plan and -- which is delivering. When you look forward over the next sort of 3 to 4 years, how does that sort of like medium-term plan 2 stack up against M&A and potential consolidation in the industry given that sort of the very positive growth opportunities that, Tony, you've outlined in terms of all of those sort of structural growth drivers? Maybe just to think about internal versus M&A in that capital allocation framework.

Barry, the good news is, for Ken, he's going to take 1, 2 and 3 questions.

That's easy-peasy, Tony.

That is good news because Tony was taking off. I'll let Tony ruminate on capital allocation as I do the first 3. You could jump in whenever. I'll take 1 and 4 if you're going to take 2 and 3, Tony.

So on the Americas margin, I think the reality is, Barry, it's not a -- it's just attention to detail and focus on what we're trying to do. It's back to innovation. It's back to the building out of the experience centers. It's back to the pan-American sales offering and the building of that. And it's back to focus on price. As you know, the Americas has probably been slightly lagging behind Europe in terms of price recovery, and they're still seeing some of that come through. I think it's things like the continued integration of our mill in Forney into our box plant hub. Integration like this support pricing.

So it's no one thing. It really is a sense of making sure that all across the pitch, in any particular market or region, we're focusing on the details. And yes, they did have a tough time in the second quarter, but they did have a strong start to the year, which kind of helps there too. So not one particular thing.

On box pricing, in the second quarter, we saw very little movement, to be honest with you. I think if you go back from the high point, call it, of early 2019, we're probably seeing box prices somewhere down between 6.5% to 7% now. But you can kind of -- you could place that against containerboard prices being down kind of 25%. So really, the second quarter was more about supplying product for customers rather than any conversations around pricing.

Tony, do you want to do containerboard pricing? And then I'll think about capital allocation.

Okay. I mean Barry, we don't forecast going forward, as you know, about containerboard pricing. I mean it has -- it went up in the first half by EUR 30 or so, and it's given that back in July. I mean stocks are a little bit too high at the moment. So that's the reason why.

Additionally, as was referenced earlier to an earlier question from Lars, I mean, we had wastepaper going up in the first -- from February, March, April, May. And then since then, it started to reverse. And so that gave some impetus for containerboard pricing in the early part of the year. We didn't follow with some further announcements in -- for May and June by others because we didn't think that the circumstances were right for an increase. And obviously, we've been proven right with that. And with wastepaper now coming off sharply, that is actually causing for another downward movement in paper of EUR 30, which happened in July.

I can't really predict what's going to happen. I mean there's a bull case and a bear case. The bull case is that the excess capacity that's coming into the market is going to be taken over by China, and that will all be eaten up as China, as you all know, has said that at the end of this year, is not going to take any wastepaper in under its own green initiatives. If that's the case, they need to get containerboard from somewhere, and there's plenty of it in Europe for them to get. So I would say that's the bull case. Obviously, the bear case is that prices will continue to slip downwards and that high-cost producers will be in trouble and we have to eventually get out of the business, which has historically happened.

So we've managed through this. So you see our margins at 17.5% despite paper going down. Our business model remains strong. I think one thing to always bear in mind is that as box prices go down, it doesn't mean -- necessarily mean lower margins for us because we're continually engineering lower-cost boxes for our customers so that they have a cost saving and we have a margin benefit. So part of our innovation strategy is to make sure that it's a win-win situation for everyone. And as I say, because we're meeting so many of the customers' requirements and needs on not only innovation and not only on merchandising, not only on sustainability but on the total package, that's why our margins are holding up. And so we just have to manage through what happens with paper, and we'll see what happens.

Ken?

On capital allocation, Barry, I'll give you the smaller answer because I could go on for days on this one. I suppose when we think about returns-focused, it probably underestimates or understates really what we do. When you step back from a -- we start off with having, pre CapEx, EUR 1 billion of allocable capital on an annual basis and it's a bit where that best fits. I think over the last number of years, you would have seen us pivot and change by the -- as we saw that.

So coming out of the financial crisis, the focus is debt paydown. When we got that in the right place, the focus was back into capital investments. If you remember the incremental EUR 50 million a year for '14, '15, '16, driven back into the business to kind of get back on that. Through 17, '18, the acquisition of Parenco for EUR 0.5 billion and then adding on Serbia, Bulgaria and France to that picture, so -- and then equally, at all times, maintaining the strong dividend and the incremental growth in that. So the attractive dividend stream remains kind of an underpin to our investment thesis. So I think we think about it quite fluidly. We think about it in a flexible and agile way but always with a sense of where our best returns were for all stakeholders.

I think your, if you like -- to your discrete question around M&A versus internal investments, that's really about the quality and fit of assets and then the geographies and markets in which we want to participate. So it's really a set of -- it's a bit like Parenco. If you remember, in the early stages of the medium-term plan, that was going to be build a machine in Europe. And Parenco came along, and we acquired them instead. So I suppose it's maintaining that flexibility and agility as we move through whatever phase of time we are, MTP 1 or MTP 2, for want of a better phrase. But we always kind of keep an eye on it.

So it's not rigid or fluid. I think as Tony mentioned in the presentation, we've done a lot of the heavy lifting on paper projects. A lot of that's done now as we exit 2020, which means we can naturally pivot towards our consumer-facing business in the years ahead, which is where we see those long-term trends and growth appearing, whether it's e-commerce, discount retailers, online in general sense. So it's, I suppose net-net, very fluid and agile but always looking to the future and always returns-based.

Our next question comes from Justin Jordan, Exane.

Clearly, I just want to echo, firstly, well done, frankly, on incredibly good first half performance in what is an incredibly difficult global pandemic situation. I've got 2 quick questions.

Firstly, you talked on sustainability earlier and gave some great examples. Can you give us some more color on e-commerce?

And clearly, you've got a slide in your deck on eBay. And I'm just wondering -- I don't want to say e-commerce has been a COVID winner, but certainly, e-commerce as a percentage of retail sales seems to have increased both in Europe and North America.

And secondly, just on the dividend. I guess I want to ask this in a positive manner. What's changed as it were in the Board's thinking between the 15th of April when you postponed the 2019 final dividend to now deciding to pay it? And how should we think about dividend policy going forward as it were? And I really don't mean that as a positive -- sorry, as a negative question. I really do mean that as a positive. It's a really positive surprise, what you've decided to do. I'm just wondering what that changes, if anything, in terms of dividend policy going forward.

Okay. I'll leave that dividend question to you, Ken. On the e-commerce, I mean, yes, it is a positive. But for every positive, there's a negative, too, as well, Justin. I mean we are seeing -- the example of the beer we gave is a real positive example, and I think we're seeing more and more of that. And we're seeing people, old fellows like me, who've changed their buying habits, who are happy enough now to buy online.

And that is going to continue, and that's why we feel, even in mature markets, there's going to be a fundamental shift towards e-commerce. And we see that with our customer bases, they want to get more online. They want to -- they've got to figure out how do they -- the brand owners, how do they get to the consumer directly because it's a whole new avenue of margin potentially but also a big risk to their brands. So they have to work very hard, and they're coming to us to help them figure that out. It's a growing business, and as you say, the pandemic probably accelerated that.

Equally, there have been some businesses that would be -- that would have -- you weren't buying a lot of high-fashion stuff during pandemic times because nobody was going out. So there are some losers in e-commerce during the period.

And so I think the trend is absolutely up. We are trying desperately to put a figure on it. We think it's somewhere between 10% and 15% growth, but that's sort of a little bit of a finger in the air a bit. But that's what we sort of think overall. But in certain areas, it's much, much higher. And then you have sometimes the offset. We have one large company of ours that its store sales have been decimated, but its online sales have accelerated very strongly. So -- and in like-for-like, it's the same -- the customer is the same, but there's a lot more boxes for us in the whole business.

So at the end, it's for sure high growth for us and high development. We are actually starting our own WeShop type thing, which we are going to roll out probably in the second half and into the first half of next year. We'll update you on that in the first quarter of next year or this time next year. It depends on how it goes. But we think that there's a whole nascent lot of businesses out there that need corrugated packaging that we will reach out to.

Ken, do you want to take the dividend question?

Sure, yes. Justin, I suppose what's changed -- visibility, I think, is the key thing. If you track back to March, I mean, the world has moved so quickly in 3 months. It's hard to remember what the level of is generally around March was in terms of what was about to come in terms of lockdowns and everything else. So we took the decision before the ex-dividend date, I think, if memory serves me correctly, to give people maximum time to do whatever they needed to do in relation to us. So I think it was a prudent capital allocation decision at the time, in a period of massive uncertainty for all companies, to be honest with you.

I think what's changed is visibility. Well, the first 6 months are behind us. And you can see through the cash flows and the balance sheet strength, that's a business that presents -- that has been well able to pay this dividend. And indeed, when we track back again to our trading update that we gave at the time, you would have felt from our commentary that it was very much our intention to do it. It was just really a matter of timing, and we've reached that timing now. So I think our record date of 11th (sic) [14th] and paying early September is again proof that we just want to get this dividend behind us.

In terms of going forward, I think it's again about -- as Tony noted in his closing comments, we still haven't really come out of that period of uncertainty and risk. I think we do need to see the world appear before us and see what happens. But I think what's clear from this decision and indeed, the previous decisions around dividend is that the dividend is (inaudible). So it's really just about making sure that we keep everything in good shape, and I think that's where we are. I think EUR 0.809 and a total of EUR 193 million of dividend today is a strong indication of how we feel about the future.

Our next question comes from Alexander Berglund from Bank of America.

Two questions from my side. First one is a follow-up modeling question really on the cost side. I'm just wondering what you're seeing right now for the full year effect on energy, wood, chemicals and any other costs. My second question is if you have any more thoughts on converting the graphic paper machine you got through for the Parenco acquisition, given the recent collapse we've seen in graphic paper demand.

I'll take the second one, and then, Ken, you can take the first one. Alex, I think the graphic paper machine in Parenco is working just fine. I mean it's not shooting the lights out, but it's having to take a little bit of downtime here and there for market-related reasons. But we've got a particular niche in a particular segment, and it's working just fine. It's -- obviously, we're leaving some money on the table because we're not running at full time, but it's working fine. And I don't think that in the short term, we will be planning to convert that over.

I think for the -- certainly, for the foreseeable future, we believe that with the cost structure of that mill and with the efficiency of that machine, we think that, that will be a long-term survivor. There will always be a need for some white paper, and we think that we can be a long-term survivor with that particular machine, at least for the next 3, 4 years anyway. We'll see what happens after that.

Alex, on the kind of broader cost base, outside of the kind of the guidance in the back around CapEx and tax rates and things like that, I think the area is probably -- energy, probably similar tailwind of, call it, somewhere between EUR 40 million -- EUR 45 million and EUR 50 million for the year. Distribution, we would have talked about, and most people have talked about it, a bit of headwind on distribution in the early part of the year certainly as a result of slower port -- slower entry to borders. I think for the year, we see that as a headwind of somewhere around EUR 25 million.

As I mentioned to Lars earlier on, I think the medium-term plan will fall somewhere between EUR 30 million to EUR 40 million for this year. And then for kind of all other costs, if you wrap in wood, starches, dyes, of the lot, you're probably talking somewhere between EUR 15 million and EUR 20 million for that. So that -- they're probably the bigger cost categories as we see it.

Our next question comes from Kevin Fogarty, Numis Securities.

Well done, guys. Just 3 quick ones, if I could, please. Just appreciate on the dividend, it's difficult to be precise, but with visibility being the driver going forward, is there any reason to think that dividend payments don't revert back to sort of historic payout levels? So that will be the sort of first question.

Secondly, just in terms of CapEx, the guidance for the year has sort of edged up. I just wondered if anything in particular has pulled forward there in terms of projects. And just finally, I wonder if there's any color you can give on the performance of industrial. Is there anything you can call out in terms of the industrial-focused markets or perhaps how they've improved recently, either sort of towards the end of Q2 or more recent?

I'll take the last one, Kevin. I think it's really difficult -- when you look through the whole countries that we -- or the countries in which we operate, we've probably seen a little bit slower markets in France than other countries. But aside from that, it's almost week-to-week, the way things are going. And so trying to make trends is very difficult.

As I said earlier to an earlier question, one of the things -- the only thing that I found surprising in July has been the level of activity, in general, has been pretty good. And the industrial side of our business has -- which is through the sheet feeders, has been very different to what it has been over the last 4 months. So that is a big change. I don't know what it means. It's too early to say, but it is certainly a positive.

I don't think that -- we obviously would have been affected -- automakers and the things you would expect would have been affected in the second quarter. I'm not necessarily saying everything is getting back to normal. I don't see that yet. But probably in a couple of months, I'll give you a better view, but it's too early, sorry. Thanks, Kevin. Ken?

Sure. Again, on CapEx, yes, the guidance has slightly widened, but that's sort of naturally as we move through the year and sometimes projects appear, whether it's cost takeouts or we see market opportunities. So we've just taken the opportunity to widen the guidance slightly, but there's nothing particularly -- nothing particularly any big project within that. I think it's just where we might see the number land by the end of the year but nothing in particular.

On the dividend, I think it's fair to say that, that's a decision that's yet to come. I mean that's a decision for myself, Tony and the Board in total to take. I think the decision today on the interim is a strong indicator of where we believe dividend should be in the story. And we are, of course, cognizant of the fact that we'd normally be announcing an interim for the year at this point, but I think we've still got a long road to get through to 2020 and the uncertainty out there.

And we've got the touch points along the way, including year-end 2020, when we can revisit this. But I think it would be wrong to kind of front-lead on where we think it will go back to with, A, the economic uncertainty; and B, with the fact that we haven't had a conversation, quite frankly, with the Board around that yet. So -- but I think our confidence today is built on the ability to pay the EUR 0.809, and we are aware of where we are in the cycle around dividend payments going forward.

Next question comes from Mikael Doepel, UBS.

I had a couple of questions still here. Firstly, on e-commerce, coming back to the discussion around that. I tend to recall that you've said that e-commerce used to be about 10% of your business or at least that would be the ballpark. Where would you say it's right now?

And then secondly, on the Americas, we saw a fairly meaningful demand drop or corrugated volumes drop in Q2. How do you see that trending now into July? And then finally, on the box pricing, you mentioned the decline in containerboard in July. How do you expect this to impact box pricing in the second half of the year?

Okay. I guess 3 for me there, Ken. The -- take the Latin American thing first. I mean obviously, the Latin American markets and the American markets have different dynamics than the European market. There's a lot more of a social underpin in Europe than there is in the Americas. And so therefore, when countries stop and the Americas income stops, therefore, there's less consumer spending power, which means, obviously, less boxes.

So we saw a pretty dramatic -- you will have heard me talk about Colombia in the past as being a standout performer in volume growth over the last number of years. That was a fairly dramatic stoppage in the month of April especially and then May, to a lesser extent. It's improved a lot in June. But -- and to a lesser extent, some other markets are moving in the same sort of direction.

So the volume issue is as much a social issue as much as anything because when those economies don't work, people just don't eat and they just don't have the income support. So therefore, there's less box demand. And that is obviously a problem for -- socially for the countries. But -- so that's why the volumes have been pretty dramatically down in some of those markets.

Nonetheless, as I say, we've been able to cost control and we've been able to make sure that our mills have been running. And we've been able to transfer paper from Brazil to El Salvador and move around from Dominican Republic to sack paper from Nervion in Northern Spain to Dominican Republic. So we're continuing to use the network of Smurfit Kappa to make sure that we enhance all margin opportunities, and that's why we've been able to keep the show on the road in such a good way as we have.

With regard to e-commerce, as I said earlier, it's pretty hard, Mikael, to know where we land, what percentage it is. There are work that we're trying to do to understand our FMCG -- how much of FMCG is now moving online. It's probably clicked up a couple of percent e-commerce, I would say, but we will try in the next half year to give a better view on the amounts -- the more scientific numbers that we can get for the market because we recognize it's a growing market -- a growing area of the market.

And it's something that is -- it's difficult really to decide what is e-commerce and what is not e-commerce because, obviously, you have still a lot of inherent business in, whether it's DHL or FedEx and things like that. Is that e-commerce? Is some of that going into e-commerce or is some of that just regular transportation? So we'll try our best to try and get a better number on it. But I'd say it's clicked up by a couple of percent.

And then on box pricing, box pricing was pretty resilient during the first half. Obviously, there will be a percentage of boxes that go down in relation to how the paper price moves. That's always the case. As I've said earlier, we are consistently innovating for customers, making sure they have better, lower cost solutions that don't impact our margins.

So looking at box pricing in isolation, I know it's hard for you not to do, but looking at it in isolation without looking at the margins is probably not the correct way to do it. You have to look at the overall picture. And the overall picture is that despite paper dropping so much and despite volumes being down, we still have a 17.5% margin with the second best first half in our history.

Our next question comes from Cole Hathorn from Jefferies.

Just 3 from my side, 2 on sustainability first off. Tony, you've talked in the past about the fact that it does take time when you win new customers to test your packaging on their lines and to see the volume in your business. Can you give us a bit of a -- a bit more color on the time line of when you see -- take your TopClip as an example, when you will see that volume come through in your business? How long does it take to really run on your customer lines?

And then secondly on -- following up on innovation, you did a nice study with the FT on your survey. And there's new data from Ellen Macarthur on plastic, and the drumbeat of legislation is getting bigger. Are you seeing an acceleration in shift from that legislation side coming through in future? I'd just like to get your views on that.

And then finally on conversions. I know you've talked about Reparenco not something to be happening near term. But at the current pricing levels, how do you think about the industry and conversions from graphic paper? Because my view is that doing a conversion at current pricing just may not be that profitable even if you don't need that much CapEx. And who's going to even take those volumes? Just would like to hear your thoughts on that.

I guess 3 for me, Ken.

I'll take the middle one, if you want, Tony.

All right. You take the -- yes. It's a -- taking the time, you're right. If you take TopClip as an example, we developed that a year ago. We've come into partnership with the machine supplier. Those machines to fill the -- industrially, at the speeds that those soft drink or beer companies will need or anyone will need, you need a very sophisticated machine. And that's why KHS came to the party and are building those machines. They take the guts of 9 months to a year to build, so therefore, they're very sophisticated, high-speed machines. And if you've ever seen a filling line for a soft drinks company or a beer company, they move at lightning speed. So they have to be put into -- they have to have the right -- everything has to [fit] together correctly.

So I think when you get a new innovation like a TopClip, getting it really into the market and getting enough machines built will take a couple of years. But once they're in, they're in for a long, long time because those are not inexpensive machines. And once people sign up to the technology and the idea and making sure that it works, it's in for, as I say, a very long time. So I would say, from start to finish, a couple of years.

The other example I just used was on Procter & Gamble's Tide. I mean we started that project 2 years ago now. It was featured by Procter & Gamble, let's say, 18 months ago. And now we're starting -- once you do the consumer test and once you put it out there and then you tweak it a little bit and then you start to ramp it up and then you start to market it, it's now starting to get some decent sales. I would say that it takes a couple of years for it to become somewhat meaningful.

And that's not always the case. The substitutional example I told you in Rheem, that's less than 6 months from start to finish. So it depends on the -- it depends really, I suppose, on the amount of automation that is needed and the amount of specialties that are needed to put it into the market.

With regard to conversions, your thesis is correct. I do believe that at the current price, there is no rationale for anybody to do a conversion. The problem is that people are not rational. If you are choosing between potential life or death, people will choose potential life. So therefore, people might say, "I'll throw the EUR 100 million or EUR 150 million or EUR 80 million, whatever it costs, to convert a machine because my alternative is to close down." And so that might be a reason why you will still see some conversions.

I think -- but your central thesis is right. If you don't have a market, if you don't have a customer and you have to go into the export market with all the costs associated with that and the uncertainty associated with that, you will not make money with a conversion in today's market. You could potentially make money if you're fully integrated and adding capacity. That additional capacity can make money because you're using it yourself.

Or if you were, I don't know, an independent guy like Tim in the marketplace and you decided to build a paper machine for yourself, you -- which obviously, I have no idea if he will or won't. But if you decided to integrate backwards, then you could probably justify a conversion, but you couldn't do it if you're not -- if you don't have your own box plant system. Ken?

Cole, on your question, I suppose, around advancing legislation around sustainability, which I think was the central part of it, I think the EU taxonomy is a good step forward. I think it's a welcome step forward, to be honest with you, because I think if you look at our history, Tony mentioned our sustainability report in May, we've been doing it a long, long time. You got to track back to 2007, '08, '09.

When nobody was doing it, we were doing sustainability reports and benchmarking ourselves for the industry. And our GRI assured rating has been there ever since. So I think we're at the top end, if you like, in terms of the assurance framework and how investors can view the sustainability within Smurfit Kappa, if you like, a sustainable business making a sustainable product.

I think we welcome the level playing field simply because I think there still is a lot of confusion out there, not only around standards but even around comparability of companies. So I think it's welcome because I think it gives investors a cleaner view and a cleaner picture of who the good are and maybe the not so good. So I think it's advanced, and I think it's coming and welcome. And certainly, from our perspective, I think we'd like to see it come.

Thank you. There appears to be no further questions, so I will hand back to the speakers for any other remarks.

Thank you, operator, and thank you all for joining the call today. It's been good having you with us.

We're very comfortable with our results for the first half in what had been a tumultuous time for the world. It is obviously -- our primary mission is to keep our people safe and continue to deliver for our customers. And I think for the most part, we've been able to do that incredibly successfully. And I would like to express my thanks to all of our people for their works to get these efforts and these results through the company at this time.

Also thanks to you all for your support and coming on this call. And I wish you and your family safety, most of all, and well-being, and have a good rest of the summer. Thank you all, and we'll sign off now.

Thank you all for attending. You may now disconnect all your lines.