Smurfit Kappa Group Plc

Gary McGann - Chief Executive Officer & Executive Director Tony Smurfit - Chief Operating Officer & Executive Director Paul Regan - Treasurer

Lars Kjellberg - Head of Research, Credit Suisse Securities Europe Ltd. David O'Brien - Goodbody Stockbrokers Barry Dixon - J&E Davy Justin Jordan - Jefferies International Ltd.

Gérard Moore - Investec Capital & Investments Ireland Ltd. Mikael Jåfs - Kepler Capital Markets SA

Okay. Good morning, everybody, and welcome to those who are here in the room and to those who are on the phones and the web.

I kind of say at the beginning, first of all, that we will be showing a video in the middle of Tony's presentation, which is available to those on webinar to be shown after slide 13, so if you could download it, it will obviously help you keep track. So, welcome to our second half results.

I won't read the usual disclaimer. I'm joined here in the room by Tony Smurfit, who is the Chief Operating Office and CEO designate; Paul Regan, who is our Group Treasurer; and Seamus Murphy, who's our IR Manager.

So in terms of results, we've had a strong first half in the 2015 results, basically a good underlying performance, driven by the fundamental activities in Europe, particularly reduced funding costs and the earnings impact of capital investments and investments in acquisitions and efficiency programs, which as you know have been going on for quite some time now. As you can see from the graph on this slide, our pre-exceptional EPS of €0.887 is up 38% on the year-on-year, and our focus obviously remains on maintaining, accelerating this earnings growth.

The adoption of the Simadi rate in Venezuela impacted our first quarter results and impacted the reported EBITDA for the half year by €30 million. But if we look at the underlying business performance, excluding Venezuela, and the impact from acquisitions, net of disposals, we're still growing well with an underlying 3% EBITDA growth in the six months.

Our volume growth in the business in 2015 is quite strong. We delivered over 6% total volume growth, 3% of that is underlying growth when we compare with 2014.

And importantly, the outlook looks strong for the rest of the year in both regions. We're making good progress on our capital allocation programs, with a further 30% increase in the interim dividend and the completion of almost €190 million in acquisitions in the year-to-date in Central America, the UK, and a number of other countries.

So, let's go to the second quarter results. Reported revenue in the second quarter was 1% higher than in 2014, with higher revenue in Europe partly offset by a reduction in the Americas as a result of our adoption of Simadi exchange rate.

And adjusting for this and for the acquisitions, net of disposals, the underlying revenue increase was the equivalent of 3%. And although the reported EBITDA decreased by 3% in the quarter, the underlying move was an increase of 3% with higher earnings in Europe and higher underlying earnings in the Americas.

As I mentioned, our EBITDA margin for the quarter increased to 14%, primarily due to an improved margin in Europe, which increased from 13.1% in the first quarter to 14.1% in the second quarter. At €0.446, our pre-exceptional EPS was 34% high year-on-year, reflecting the progress achieved on costs below the EBITDA line.

In terms of free cash flow, the group's free cash flow in the quarter was 35% lower than 2014, mainly due to higher capital expenditure and tax payments with the similar level of working capital year-on-year, but partly offset by lower cash interest. Our net debt was higher year-on-year when compared to the first quarter with over €160 million of acquisition expenditure and a 30% higher final dividend payment, partly offset by positive currency movements in the quarter.

And as a consequence, our leverage temporarily increased to 2.7 times net debt to EBITDA at the end of the quarter, but reduced to 2.6 times when looked at pro forma for acquisitions less disposals. And this is expected to further reduce in the second half with normal strong free cash flows in the period.

Turing to the half year, revenue increased by 1% to almost €4 billion with an underlying improvement of 2% due to higher revenues in both segments as a result of volumes and price, offset by net currency movements. The pre-exceptional EBITDA at €551 million was 2% lower than the same period in 2014.

And the outcome reflects the higher earnings in Europe offset by the negative impact of EBITDA results in the Americas due to the adoption of the Simadi rate in Venezuela. And note that following this adoption, Venezuela has now accounted for less than 1% of group EBITDA in the first six months of the year.

Adjusting for the net negative currency movements and acquisitions, net of disposals, in the year, the group has delivered a 1% underlying increase year-on-year and expects Venezuela to continue to be in relative terms at the same level. The pre-exceptional EPS of €0.887 for the half year was 38% up on 2014, principally as a result of lower funding costs, a significantly reduced hyperinflationary adjustment and lower tax expenses in the six-month period.

Again, the adoption of the Simadi rate is to ensure that the impact of Venezuela and the group earnings will be substantially reduced going forward. And the below-the-line numbers will be quite clean.

The ROCE has continued to improve year-on-year with 14.6% at the half year, but has decreased from 15.3% at the end of the quarter. And this primarily reflects the completion of a number of acquisitions in the year-to-date, particularly in the quarter and it's expected to recover to the 15% target level by the year-end.

Free cash flow decreased by 45% to €74 million, in spite of a €20 million savings in cash interest year-on-year as a result of higher capital expenditure and tax payment and the impact on EBITDA and exceptional charges of the adoption of the Simadi rate. The underlying free cash flow remains strong and is expected to strengthen as normal into the second half of the year.

Again, the net debt of €2.7 billion increased by 16% year-on-year for the same reasons as I mentioned on the quarterly numbers. Let me now handover to Tony, who is going to take you through the operational business review.

Thanks, Gary. Let me start with Europe, where the first half has seen very strong corrugated demand growth within our business.

In half one, we have grown 4% year-on-year and this is a result of some very strong southern markets, namely, Italy and Spain, as well as some good customer wins in other markets. Pricing has remained essentially steady during the first half with a 1% upward movement primarily currency related.

During the second quarter, we completed two good acquisitions here in the UK, Inspirepac and Beacon Packaging, which will add incrementally to our earnings in the second half. When we look at containerboard during half one, we see a very strong and tight market as we predicted at the end of the first quarter.

Inventory levels are currently below 500,000 tonnes, and a price increase of €40 a tonne has been implemented in most European markets as of July 1. We continue to see a very tight market in recycled containerboard and this is underpinned by rising OCC costs.

A word on our Townsend Hook mill, which has had a slower than expected ramp up; we're now seeing improvement over the last number of weeks and, I would say, we're now in the normal startup curve for this operation. Our kraftliner market also remained strong, with good demand characteristics and strong internal shipments.

We have implemented an increase of €40 a tonne in Southern Europe and €20 a tonne in Northern Europe countries to date. In half two, our mills will take routine maintenance downtime, which will approximate 38,000 tonnes, approximately 10,000 tonnes more than in the second half of 2014.

With corrugated shipment strong and price increases in all containerboard grades, we expect to see box price increases implemented at the back-end of 2015 and into 2016 to offset paper price increases. Turning to the market, based on what we see today, we expect a good demand outlook to 2017.

At a baseline level of growth at 2% to 3% and, remember, in the context of 4% underlying growth, which we're currently seeing in Europe, this will necessitate some 400,000 tonnes to 700,000 tonnes of new capacity next year. Given the additional capacity that will be [ph] auctioned in 2015 and 2016, the supply/demand outlook remains [ph] bullish additionally, this level of demand supports the continued high prices for OCC.

We in Smurfit Kappa continue to strengthen our own mill system significantly, reducing our cost base in containerboard system with investments to make our mills best-in-class due to the integrated strategy and efficient running we have. Over to the Americas, the region's revenues and earnings have been impacted by our adoption, as Gary mentioned, of the Simadi rate earlier in the year.

But you will note that we've delivered strong earnings growth when Venezuela is excluded. On this basis, Smurfit Kappa the Americas has delivered EBITDA growth of 20% over the last year in the first half.

On the volume side, we have grown 18% year-on-year, reflecting much of the progress we've made in acquisitions in late 2014 and 2015. If one adjusts for Venezuela, we have seen 20% volume growth in the first half and are growing at a 3% underlying rate.

Our business is operating very well in our Mexican and U.S. areas with an improving situation in Argentina.

Our strong platform in Colombia has performed well. The weakened peso has made the country more competitive, but it takes time to recover the impact through higher prices.

As a result, we're focused on driving prices and volumes to improve margins through the second half of the year in this country. While our Venezuelan business continues to be less than 1% of group EBITDA following the adoption of Simadi, we have a strong business and professional people operating well in a challenging market.

In the region, we're focused on looking for acquisition opportunities as growth prospects remain strong and help balance our geographic footprint. Our recent acquisitions in the Dominican Republic, El Salvador, and Costa Rica are integrating well and we are on track with synergy estimates.

I would just take - like to take a few minutes to talk about performance drivers within Smurfit Kappa. Performance orientation is segmented on the two headings: business growth and cost efficiency.

On the business growth side, Smurfit Kappa's seen growth levels increase from 2% to 4% organic volume growth in Europe this year. This has been driven primarily by our unrelenting focus on innovation and by helping our customers win more in their marketplace.

The Americas is growing well with 3% organic growth, excluding Venezuela. Additionally on growth, we in Smurfit Kappa are committed to bringing our customers further geographic footprints and further operations that will help us serve them better.

To this end, we've invested €160 million in acquisitions last year and €189 million in acquisition to-date in 2015. This helps drive volume growth, but most importantly for our international customers, it gives them the opportunity to be served by us on a broader geographic reach.

On the other side of the ledger, we're completely committed to our integrated business model. As the largest European and Pan American packaging solutions company, we're committed to operating our paper system on a market fold rather than production push basis and, as such, supply our box plants as required at market price.

We have an unrelenting cost take-out program and we've delivered €117 million in 2014 and are on target for €75 million in 2015. A huge area of opportunity for us is in our capital investment program, where we started last year at €150 million of CapEx over three years, which we call our Quick Win.

At the end of this program, we should deliver €75 million incremental EBITDA, of which €18 million is expected to be in our P&L in 2015. An additional string to our bow is our ability as a large company to optimize assets.

This not only means moving machinery around, but also to optimize our stronger plants. This necessitates taking some actions on rationalization, which we have done this year by closing four corrugated box plants and a mill, which are in our P&L numbers and will not be repeated in 2016.

By themselves, the rationalizations have an IRR of over 20%. A lot of people talk about innovation and value creation.

In Smurfit Kappa, we're doing it on a daily basis. We've over 64,000 customers across Europe and the Americas, and we're helping them strongly in the whole area of product branding, product differentiation, supply chain efficiency, and supply chain sustainability credentials.

Many of you will have heard us talk about insights, the application of new processes and technology such as Shelf Smart and IC. And we in the company are seeing that these are really driving incremental volume growth, customer stability and margin enhancement.

The recent example of our traction with customers in this regard was the announcement by Nestlé of their award to Smurfit Kappa of its prestigious Supplier of the Year Award for 2015. We've been awarded the European Supplier of the Year for all-round excellence and the Nestlé European Innovation Recognition award for outstanding innovation.

Those of you who attended our Innovation Day in Amsterdam would've seen many of these insights and concepts in practice. Most fundamentally, our innovative packaging solutions help our customers sell more and reduce supply chain costs.

By way of illustration, a short two-minute video will give some background detail about our recently launched Shelf Smart process and the technologies and expertise which underpin it. And before handing it back to Gary, who'll take you through the strategic objectives - who'll take you through strategic objectives and outlook.

For those of you on the call, could you please now play the video, which hopefully you downloaded earlier today? [Video Presentation] (15:52-17:58)

So, you've read the book, now you've seen the movie. Let me talk about our capital allocation objectives and our outlook going forward.

This slide, which you would've seen before, basically charts the evolution of our capital allocation framework and it's - on it you will see that there is a subtle change in terms of our focus and priorities. On the left from 2007 to 2014, you'll see that net debt reduction is top of the pile and on the right you won't see net debt reduction on the slide, notwithstanding that it underpins an important part of our DNA.

But the critical issue is that we view our capital structure as providing a solid underpin to the group's capital allocation strategy, which is on the right hand side and still committed to preserving our Ba1/BB+ credit rating. And this effective capital structure provides the platform for us to deliver across the range of measures to drive continued earnings growth and improve returns for shareholders, which is our priority focus.

The graph on slide 16 emphasizes the evolution of our capital structure and, in particular, our financing activities. In recent years, which range from the issue of the 10-year bonds in 2009 and 7.75% through to our recent issue of €250 million 10-year bonds of 2.75%.

And we're committed to preserving, as I said before, the Ba1/BB+ credit rating, and we'll continue to actively manage this capital structure as necessary. And a good example of this was the recent amend and extend of our €1.1 billion senior credit facility, which extended the maturity from 2018 to 2020 on improved terms.

On the next slide, the dividend is an integral part of the group's equity story providing certainty of value to our shareholders. It's well supported by our capacity to generate strong free cash flows through the cycle and will be progressively grown to reflect our continued earnings growth.

We're increasing the interim payment in 2015 by 30% to €0.20 and this in turn will increase the total 2015 cash payment to €0.60. As you would expect, this signals our continued confidence in both the performance and prospects of the business.

In terms of capital allocation on CapEx other than maintenance CapEx, our capital expenditure is focused on high return projects and we maintain firm minimum IRRs of 15% at least on any non-maintenance related capital projects. And we balance CapEx spend across other capital allocation alternatives with a view to maximizing shareholder returns.

Investments to date have focused on maximizing the efficiency of the system. But more recently, we have adjusted to reflect the growth profile of the European market and customer and market-facing CapEx activity.

Our Quick Win program is progressing well and we continue to expect to deliver incremental EBITDA of €75 million by 2017 from our three-years spend of €150 million. We expect an incremental EBITDA of €18 million in 2015 from these activities.

In terms of M&A, our overarching objective is to deploy capital to build long-term durable profit growth for our shareholders and get this fully recognized in our share valuation. Including one of the key strategic options now well underway is to deploy this capital for long-term growth through M&A opportunities.

Such opportunities obviously have to be consistent with our framework of complementary markets and sectors and meet our demanded rate of return. We believe the transfer of knowledge and operating best practices create significant opportunity for us over and above the normal synergies and is very much, for example, the Smurfit Kappa Orange County synergy story.

Absent decretive acquisitions and subject to maintaining our ratings, we will evaluate alternative use of capital. On the final slide, the group continues to prioritize sustainable higher earnings and superior returns to, firstly, its integrated business model, secondly, extensive geographic diversity and, thirdly, increasing customer differentiation.

Our objective is to deliver continued earnings growth in the current financial year and we expect to do so. Industry fundamentals today are as good as we've seen them for quite some time.

And assuming these conditions continue, and we believe they well, we expect to realize higher corrugated pricing towards the end of 2015 and into 2016. Looking out, we expect to deliver continued earnings growth in 2015, which will facilitate our continued progress against our capital allocation objectives.

Again, let me thank you all for being here and present personally or on the call. And I'm now going to turn it over to the operator for questions.

We'll, first of all, however, take questions from the room.

Thank you. Good morning.

Lars Kjellberg, Credit Suisse. Right upfront in your release and you talked about today, you talked about margin expansion in the second half.

Could you walk us through considering how that's going to happen, considering OCC coming up, testliner price moving up and your short testliner for the drivers for that margin expansion and where? Also when you talk about earnings growth, are you thinking an EPS which seems to be relatively easy or are you actually considering EBITDA where you're down year to-date in real terms?

And also, finally, if you can discuss FX impact in the Americas, excluding the Simadi, i.e., there is a lot of moving parts, peso, Colombia and Mexican, the dollar, what's the net impact on revenue economics?

Let me take the first one. I'll put Tony on for the second and Paul on the third; give them time to think about it.

In terms of margin expansion, as we said on our call this morning, in Europe, we've already seen margin expansion this year year-on-year, and that's despite the fact that we have seen OCC, for example, we start with the most basic, we've seen OCC creeping up and now up by about €20 a tonne. If we deal with the mill system first, obviously, one of the factors that we tend to sometimes forget talking about is the efficiency programs and more importantly the capital investments we've been making in all of our significant mills.

And these have been substantial over the last number of years and we now believe we have a mill system that is of a very high standard and the operating efficiencies are delivering some benefits there, notwithstanding the input cost on OCC. As you said quite rightly, we obviously have a shortage in recycle paper, but we're long on kraftliner and, obviously, we're getting the pricing in kraftliner to compensate it in the swap market and the third-party market where kraftliner is up year-on-year and, obviously, margins up.

And then on the corrugated business, whilst it's underlying flat, at face value it’s up, because of currency tailwinds half year on half year, and while it's going to be back-ended before we really get it, there is some ticking up in that. And then finally, obviously, we have this cost take-out program that has to be giving us some benefits along the way and the Quick Win program.

So there are the factors that are going to drive it. Now, obviously, that's Europe.

We then go to the Americas. In the Americas, if we ignore Venezuela, which causes noise and we've talked about it and I think you're all fairly comfortable how to do that number.

If you exclude that in the Americas effectively, what we've seen particularly in Columbia and to a lesser but significant extent, nonetheless in Mexico. We have underlying business at local level in local currencies doing very well.

But as you even seen in this morning, with the [ph] Chinese Malays, emerging market currencies are weakening all the time. And so, the peso point-to-point in Colombia is down 40%, average down 25%.

We are increasing our pricing and, obviously, driving our cost to compensate that, but a jump of that nature takes time to reverse. So there is upside from that and, likewise, the average in Mexico year-on-year is down 15%, and while that's a lesser number, it's still substantial in the context of the country with 3% to 4% inflation.

So, again, we are going for it and we are getting it already and we will see some benefits there. Also, then you factor in the second half, obviously, the acquisitions from last year as we drive through the synergies and the acquisitions this year as we start to integrate them.

Pull them altogether this is what's driving the half year on half year. Tony?

And all that good news that Gary is talking about means that EBITDA will be up in the second half of the year, which should mean EBITDA progression rather than just EPS progression.

Yeah. We measure both scenarios.

To your point - I think the main thrust and, particularly, we have a number of key analysts here in the room. We are trying to at least get a focus on both measures [indiscernible] from the one for two reasons.

One, physiologically the EBITDA measure is a leverage company type measure and, quite frankly, we are passed that. But more importantly, we had a continuation of noise below the EBITDA line, below the operating profit line around amortization of debt costs when we were actually refinancing and, obviously, the hyperinflationary adjustments.

Because Venezuela is now so small, these adjustments are relatively insignificant and we are in reach of the steady stage on the refinancing, such that you're not going to see amortization. So, you're getting a fairly clean read below the line as well, which justify people looking at it and having some sense of ability to be able to predict it rather than wondering what wonders are going to appear, [indiscernible] in the type of environment we've had in the last few years.

Paul, in terms of currencies.

[Indiscernible] the dollar is up against the euro by about 23% half one 2014 versus half one 2015. On the other hand, the Mexican peso is down 13% against the dollar and the Colombian peso, as Gary said, down even more at 21%.

Net effect of all of that is a net positive FX impact of €8 million on translation of the Americas earnings excluding Venezuela and, as said, the Simadi effect of Venezuela was €30 million.

I'll keep going down the row. I'll go to David first and then Barry.

David O'Brien from Goodbody, just a couple, please. Firstly on volumes, how does the performance of Smurfit Kappa, plus 4%, compare to the overall market?

Are you taking more shares there? And can you give us a sense of what Pan European accounts are growing versus the more localized business?

And just your comment on, over the next couple of months, we're coming into a pretty busy period for the industry, inventory levels still seem very tight. Is there scope for further upside to containerboard pricing in the next couple of months?

Tony, do you want to take that?

Yeah. I think that it's probably fair to say in certain of our markets such as the Italian market, we are gaining significant market share.

There has been a big structural change in that market and that's allowed us to take some significant market share in that market and it's substantial enough that it would move the needle in the European context. But I think in other markets, our innovative offering, the things that we're talking about with Shelf Smart and with other things that we're doing with our customers is leading us to get market share across these.

I wouldn't say that it's specifically big companies versus small. I think, in general, we're selling smarter.

We have a very strong geographic footprint. So, clearly, from a Pan American and European basis, we're leveraging that a little bit and we're seeing some successes in that area.

But on a local level, the tools that we offer to the big customers we're equally offering to the small customers and I think we have a very substantial offering. And as we've developed out our footprints with regard to printing and capabilities, that's giving us further advantages to sell against competition.

And I think you're not seeing any diminution in margins, in fact, quite the country, so therefore, we're selling smarter with higher prices and I think that's allowing us to gain market share. So, I think on the European side and the American side, we are a very strong position right now.

And then for the inventories?

The inventory levels right now are under 500,000 tonnes. We are seeing a very strong recycled containerboard markets market, so much so that paper is difficult to get.

In those circumstances, there obviously is some thoughts in the marketplace whether or not further increases are justifiable and with the rising OCC prices, you would certainly be right to think that others are thinking about it and we're certainly thinking about it, but obviously no decision has made yet.

Thanks, Tony. Barry next and then we'll go to over to the other side.

Thanks, Gary. It's Barry Dixon from Davy.

Three questions if you don't mind. Just in terms of follow-on on the pricing side, the increase in kraftliner pricing of €20 per tonne is obviously a lot less than what you're getting on the recycled side.

Do you think that you can achieve the full €40 on the kraftliner as you had planned to earlier in the year? And on the whole Shelf Smart and product innovation side and it is interesting in terms of progress there.

In addition to some of market share gains, which you've just alluded to are you seeing anything coming through in terms of corrugated pricing from these initiatives? And I suppose the big question is how do you get paid, again, how do you get paid for Shelf Smart and for the investment that you're making in that?

Should we start to see it in the form of higher corrugated prices? And in terms of the dividend, how should we think about dividend?

And, I suppose, if we look at it in terms of basic payout ratio on EPS and the increased focus on EPS, which actually deteriorated from 25% in the first half of last year to 22.5% in the first half of this year. Is that the wrong way to look at it or how should we think about a progressive?

Should we think about dividend growing in line with earnings or just a sort of a steady upward progress? And if I could stick one sneaky one in just at the end, in terms of the Americas business, if I do a sort of a very - perform a very - just in terms of very rough bridge from last year to this year, you were €80 million last year and versus €72 million this year.

If I take €80 million minus the €16 million for Venezuela, plus the €8 million from currency, it would suggest a flat underlying performance, but then I presume you had some contribution from acquisitions, which may suggest that the underlying performance in the business was down. You might just give us some sense in terms of a rough bridge?

Thank you.

Right. And Tony, let's start with you on the kraftliner.

Sorry, Paul, the Americas one is for you.

Thank you, Gary. And on the kraftliner, Barry, as you know there is a gap differential between kraft and recycled and until pushing the €40 a tonne kraft increase was difficult given the gap between recycled and kraft.

That has now narrowed with the €40 a tonne increase and, clearly, if there were any further pricing initiatives that will certainly make kraft more - more easy to get the price up. I think that we are still pushing for the other €20, and we are certainly not giving up on this, and we would have expectations that we will get it.

And - but that's a wait and see at the moment, but I would say that not only is the recycled market tight, the kraftliner market is extremely tight. In fact, our shipments to ourselves are up 9% year-on-year, which is about 35,000 tonnes of additional shipments to ourselves in kraftliner, because the markets that we service are growing very strongly.

So there is no reason why we shouldn't be able to get the additional €20.

On the Shelf Smart and the, are we getting pay for it? I think you have to look at it very much as a holistic process.

When you take a Nestlé into your design sense and you show them what you can do for them, not only do you maintain your business, but you gain business. So, your volume growth is part of that whole story.

Do you get higher prices? The answer is yes.

But it's always difficult to see how that - how you can translate that into pure, I've got a higher price because of this innovation. What is for sure is if you innovate with your customer base and you're giving them a solution that helps them save money and your margins are acceptable, that you are able to get those margins for a considerable period of time until it goes out and bids that package.

Is it one year? Is it three years?

Is it five years? Depends on the customer.

So, when you offer a solution to a customer to 99% of them, which you're giving a good solution via their loyalty for a period of time with that solution and those margins are very acceptable for a period of time. Ultimately, if it commoditizes, that design will be bid out and price will go down.

But when you're innovating, you get better margins than if you're not innovating, that's 100% right.

And I think, to Tony's point, Barry, and I think most of the audience know this. This is a journey.

The nature of the relationship with the customer is changing. The nature of interaction with the customer is expanding from purchasing only to marketing, design, sales and so on.

The people you would've seen in our innovation center and it's more than design, its innovation and insights and it's solving problems or proactively finding opportunities. And if we can develop, as some customers are talking just that the relationship and wider holistic one in terms of a cradle-to-grave type relationship.

We're getting longer contracts. So, there's less mid-term negotiations and downgrading of the pricing.

But also the nature of the pricing to start with depends on what you're delivering, are you delivering a package, are you delivering a total offering. So, this is a journey and an evolution.

And there isn't going to be a silver bullet that says some day we have a category of pricing or a category of product or service that we're going to get something dramatic into. But we certainly believe we're going to get better prices, longer contracts and more sustained relationships.

And the most critical one of all, none of our innovations, not none but very little, are paid little. And some people say that's a weakness.

That's a strength because it means we got to keep innovating. So, whatever you've seen today in the innovation center will be at least that and a lot more this time next year.

Otherwise, there's no point investing in the innovation center. So, it's a very strong platform for future growth in terms of a non-commodity type offering and opportunity.

On the dividends, let me just - two words on the dividend. I think the key to progressive dividends, we stayed away, as you know, from payout ratios for a couple of reasons.

One, in a cyclical industry, you don't want to get ahead of yourself, so therefore you get into payout ratios where people say they're conservative. Two, we had come from a leverage background and very low or no dividend at one stage, so we're progressively building it.

Three, from the get-go in 2007, we said the dividend was an underpin not the priority focus, but an important underpin. And finally, I think the level of increase of dividends year-on-year is whatever ratios you can calculate, I think, 30% plus of dividend increase year-on-year is probably not leaving people too unhappy in terms of ratio.

So, I'm not committing to that level. I'm just saying we are committed to growing them as profits grow.

Are they aligned? Do we start getting into deeper calculation of ratios?

Possibly, but we're not committing to a fixed one at this stage. Paul, the Americas?

Yeah. Barry, just to take the bridge, I think, what you asked from EBITDA in the first - quarter two 2014 to quarter two 2015, so the EBITDA in 2014 was [ph] €80 million.

The currency move was a negative €19 million, most of which obviously was in Venezuela, acquisitions added €9 million, so that would've left a small underlying increase of €2 million.

Yeah. I think it's fair to say to that point some of our Latin American countries are improving strongly.

We have had one or two issues in our California business, which we're solving. But it's - I think, in general, we have a very strong and optimistic outlook for the second half of the year in our America's business.

I think it's fair to say.

Yeah. And I think we cited earlier that the Colombia and Mexican ones have taken one hell of whack in terms of peso devaluations.

No matter how good you are in the marketplace, trying to put through price increase of 15% to 20% in a six-month period is a recipe for disaster. So there's obviously upside there.

Yes.

Thanks, folks. Justin Jordan with Jefferies.

Can we just go back to slide 15 for a second? I'm just - I know Barry talked about dividends, but I just want to talk through the other elements of capital allocation.

When you think about it going forward, obviously, you've changed the order slightly for very understandable reasons. The business is in great financial shape.

But I guess when we think about, for example CapEx, there's obvious understandable maintenance CapEx, you've talked extensively about the Quick Win CapEx. I'm just wondering, given the financial health of the business, whether we should be thinking about perhaps further de-bottlenecking or energy efficiency investments potentially in 2016/2017 over and above the Quick Win potentially.

And just can you comment on the M&A outlook? The M&A pipeline, I get the sense from here is that balance sheets across the European sector are pretty strong and, therefore, the competition for M&A opportunities could be pretty intense from trade peers and also from private equity.

Just how should we think about capital allocation that goes between those two other areas as we're going forward?

Well, let me give you the July 2015 view and then you can hear the 2016 view from my learned colleague on my left. But I think the starting point is that we're now spending €430 million-ish a year on capital expenditure, which in a business that's generating a bit in plus whatever the EBITDA will be as a substantial reinvestment.

It's about - just over 5% of our revenue. So the days of people doing comparisons across the various companies and seeing Smurfit Kappa at 4% or less of revenue are gone.

And we certainly would debate internally whether the percentage of depreciation is a good measure going forward, given the depreciation is impacted by all sorts of things, including the lighter Venezuela. So the bottom line is we're spending about €430 million.

The critical issue of our capital investments, particularly substantial ones are just not kind of bolt-on, switch on type ones. They need management.

They need capabilities technically to implement them and to execute them properly. And we can be spending like crazy and not getting the returns.

Obviously, even the maintenance CapEx, while they're kind of the ones that don't necessarily enthuse us, they need management, they need significant technical management for the implementation. So, it's not a function of us not being prepared or seeing opportunities to get better returns from an internal investment.

Tony is very focused on that and we have an insatiable appetite for that quite frankly. But one of our critical challenges is to cross compare the returns from the different capital allocations in terms of potential and certainty of delivery.

And for shareholders dividends are absolutely certain. It's black and white; they get them or they don't get them, and when they get them they appreciate them.

In terms of investments after that, you have to execute well and deliver. So the balance between internal investment and growing our footprint given the we're a market facing company with customer orientation trying to lock in the relationship with customers that nobody else can deliver either in differentiation, execution, supply chain management and geography is an important part of the fundamental proposition of the company.

And it's trying to strike that balance and you need the Wisdom of Solomon and Tony will need the Wisdom of Solomon to try and balance those issues. But they're the considerations rather than us missing or ignoring opportunities.

And let me just touch on the second one. And then Tony, I'll give the floor to you.

On the M&A front, there was never a soft option around M&A. There are very few kind of soft sellers or businesses.

There are a very few in the last number of years, forced sellers of business, there were some, obviously, in the crisis. But generally, people are forced sellers of business in the crisis, the business is already in bad shape or worst shape such that you wouldn't want to buy it.

So one of the things particularly in the bolt-ons, as we're seeing from the major transformational deals, one of the things we have going for us is the wide footprint we've had and our focus in areas where we've already got feet on the ground. And so relationships - Orange County was a critical one.

We weren't the highest bidder in Orange County. The Bates, the Brian Davis - not Brian Davis.

Thomas.

Brian Thomas and the CYBSAs. These are the classic - it's like the showbiz.

These were kind of overnight success after many years of trying. So, money isn't the only differentiator in achieving M&A of this type, relationships and fit - the important thing is fit.

Do we bring something to them to the local people? Many times the sellers of the business stay with us in the business and, therefore, they are - and, in some instances, they remain as shareholders or they come into our share option and they want to see progress from the margin, not just money for their old style business.

And Tony, have you any...

Yeah. I think it's fair to say, Justin that we tend to buy businesses that, first of all, as a principal, we will not overpay.

But the headline number might be a number that you may not like at some point, but the reality is if the synergies are there or it's at a low point in its particular cycle or we can bring something extra special to it then that's the kind of deal we like to do. And I think that all of the deals that we've done whether it's the Inspirepac or whether it's Beacon here in the UK or CYBSA, as Gary mentioned, have been because the sellers wanted to actually sell to us.

Obviously, we paid the right price, but we could bring more to all of those people, all of whom have stayed with the company and that's been - that's part of our strength. And I think the same with Bates in the United States or Orange County.

So, I think the fact is that, we're seen as a good acquirer that isn't going to come in and do a scorched earth type scenario with the culture of the companies and bring them forward and progress them. And I think that's important to a lot of sellers, when they look at selling their business, not only about money, obviously, money is very important, but not only about money.

So, I think we've got a good strategy in that whole area, but be assured that we will not overpay for acquisitions. That's not in our nature, never has been.

And on the CapEx side, I think that, as you say, we have a lot of opportunities in the business and that's something we're going to continue to examine. And clearly, if we do look at it differently, we'll have to address that with the board first and then obviously with yourself at the appropriate time.

Thanks, Justin. Gérard?

Gérard Moore from Investec, three or four questions from me, please. First of all, in terms of capacity outlook, the demand is obviously very strong at the moment and the market is strong or market is tight.

But do you have any concerns about the capacity outlook for 2017? We've seen some recent announcements.

Would you expect to see more announcements now in the coming months albeit for capacity that will come onto the market later stage? And secondly then, maybe just on the Quick Win project, is it fair to assume that the contribution this year is roughly €9 million in H1 and €9 million H2?

Or will that be H2 loaded in any sense? Then maybe also if you could talk about Townsend Hook; you touched on it briefly in your presentation, Tony, but maybe if you just give us an idea of what kind of contribution that could make to the dividend in the second half of the year?

And then the last question, just a housekeeping question. In terms of the guidance for the cash flow items such as cash, interest, CapEx, et cetera, are they all the same as they were at the beginning of the year or there any changes there?

Thanks.

Okay. Tony, let me - you deal with the capacity outlook first.

Yeah. I think if one looks forward given the fact that paper machines either conversions or our new builds take a considerable period of time and given that Europe - our general view on Europe is more optimistic than we would've had six months ago and all that we're seeing would indicate that Europe is doing a bit better than we would've expected.

And if you assume a 2% to 3%, which as I said is less than what we're growing at, but let's assume the market is 2% to 3%, that's somewhere around 400,000 to 700,000 tonnes of new capacity that's needed, and we don't see that coming on in 2017 - or 2016, I should say. So, I think that next year looks very good in the whole capacity area and assuming normal market growth.

So, obviously, there are further additions of capacity in 2017. We'll just have to wait and see how those play out and the ramp up.

And to your - one of your other questions is, when you're starting a paper machine, it's not easy. So, we've had difficulties in our first quarter or the second quarter, I should say, the first quarter of startup for us was second quarter, in Townsend Hook.

And it's been a combination of things mainly related to energy and supply of energy and some of the parts that we're supplied for machine, but as I said, we're now in a normal ramp up and we would expect to see that plant break-even-ish for the second half versus a relatively significant loss in the first half. So that would be a positive for us and, obviously, next year we would expect to see that ramp up go to normal profitability, as we see that machine because it's an integral part of our system.

The reason we did it was because we need paper in the UK market, we are developing well in the UK. We have a very strong footprint and we needed to have two paper machines in this island to make sure that we're able to supply our customers primarily.

So, I think capacity looks good for 2016, 2017 we'll wait and see, and Townsend Hook is on track now for the second half and into next year.

And I think to Tony's point here, we read kind of numbers, machines coming on of x 100,000 [ph] tonnes A. Everybody adds them together at the same time as if there are 100% ramped up in the first three, six months.

Many of them are conversions and every conversion that was ever done in this industry, but there was never a simple startup. New machines, totally different proposition, but conversions one of the ones announced is going from 160,000 tonnes to 420,000 tonnes, including widening the frame.

I can tell you that's not a walk in the park. So, simply adding tonnes upon tonnes upon tonnes and worrying about how that hit the market is very, very, very conservative.

I think it's a much lesser impact than you might think. Given the general demand environment, if we're in reasonable demand as long as the economies - global economies don't turn downwards, this is going to be okay.

In terms of first half, second half, on Quick Wins; they're more back ended than the front ended, Gérard. But they're growing as we indicated while the decision to invest has been taken starting in 2014.

The lead time for anything in this industry at the moment in terms of equipment is what?

Yeah.

Up 12 months?

It's amazing that there is a lot of investment going on and there is - as Gary mentioned, there's 12 months of lead time for a basic piece of machinery. So, again, speaking to the idea that Europe is recovering, there is a lot of people ordering machines and there is a lot of - there is a long lead time.

So, we're executing well, we have the orders in place, some of them we're delivering and we're now beginning to get the ramp up of second half over first half. And then the guidance is as is.

There is no change in the guidance in terms of CapEx, in terms of interest and so on. Any other questions from the floor?

Let me go to the people on the phones while you take a breath in the room here. So, any questions from people on the conference call?

Hello. Good morning, everybody.

I just have one question and that is regarding the European volume development that you described. Could you just please give some color and flavor as to how that development looked during the quarter.

Was it an accelerating trend? Some color and flavor on that, please.

Thanks, Mikael. Tony, do you want to take that?

I think it's been fairly consistent - it's better in the second quarter than the first quarter, but clearly the second quarter, third quarter are stronger months in general anyway because of agriculture, because of seasonality. But I do see - we do see some, as I mentioned in our kraftliner business, which is agriculturally related or has to do with heavy duty for heavy industry, we do see some significant pickup in that area and that's really happened I suppose in the second half - the second quarter versus the first quarter.

So, we are seeing a little bit stronger, generally speaking, in second quarter than first quarter, but also its seasonal.

And I think we're making progress ourselves. Certainly, our performance is stronger, but as you said, seasonal and underlying.

Yeah. For example, we've grown very strongly in Italy.

There has been a structural change to that market, we're the number one producer in Italy and there has been a structural change in that market with regard to sheet feeders going out of the market and that has really helped our business. So, we've seen very big growth in that market, which the market itself isn't growing as strongly as we are.

And so, we're gaining the market share as Gary said.

Thanks.

Thanks, Mikael.

Okay. I think, operator, obviously, the people in the room here have exhausted all the hard questions.

So, I think we'll close it with that. Again, let me thank everybody who have been on the call and, more importantly, everybody who has taken the trouble to come here for the live presentation.

I wish you all a good day. Thank you.

Before we conclude, fellow shareholders, analysts, and friends, and Gary does not know I'm doing this. Today is Gary's last earnings presentation as CEO of the group.

And on behalf of the management team, I would like to formally record our appreciation for his contribution to and leadership of Smurfit Kappa over 13 years. Gary led the privatization of Jefferson Smurfit in 2002, the merger with Smurfit - with Kappa in 2005, and our IPO in 2007, which was the largest and most successful capital rising ever within the paper and packaging forest products industry.

Under Gary's leadership and stewardship, Smurfit Kappa has more than doubled in size, consolidated our position as European market leader, increased our presence in Latin America and reentered the U.S. market.

Together with the team, Gary has driven significant net debt reduction while delivering industry-leading returns. And this has significantly broadened our financial and strategic opportunity set.

Gary, we again express our gratitude for your significant contribution. You should look back with pride on a great job.

Some 45,000 people within Smurfit Kappa today have the highest admiration for your achievements and leadership as CEO. We now move to a next phase of growth and development under new leadership.

I recognize and I'm honored to accept to trust both you and the board have placed in me. I and the management team wish you continued health, happiness and success in your retirement.

And we, again, thank you for your very significant contribution to all of us in the group worldwide. Thank you.

Thank you. Thank you very much, Tony, and we work in the principle of no surprises in Smurfit Kappa, so that's obviously blown.

All I can say is thanks to the team. It's a great team job and you've got the team to back you.

And as a shareholder and a board member, I have total confidence in the future prospects of Smurfit Kappa. Thank you all the shareholders for the support over the years.