Smurfit Kappa Group Plc

Tony Smurfit - President & COO Ken Bowles - CFO Roberto Villaquiran - CEO, Europe Juan Guillermo Castañeda - CEO, Americas

Lars Kjellberg - Head of Research, Credit Suisse Securities Europe Ltd. Barry Dixon - J&E Davy Justin Jordan - Jefferies International Ltd.

Gérard Moore - Investec Capital & Investments Ireland Ltd. David O'Brien - Goodbody Stockbrokers

Okay. Thank you all for being here and good morning, ladies and gentlemen, and thank you for taking the time to join us here in London or as the majority are on the line for our full year 2016 results.

I'm joined today by Ken Bowles or CFO; and Paul Ragan our Group Treasurer, Roberto Villaquiran, our CEO of Europe; and Juan Guillermo Castañeda, our CEO of the Americas and they all will be speaking to you in few minutes. I'll give a brief run through the highlights of our performance in 2016 before handing over to Ken for detail run-through of the financials.

And then Roberto and Juan will give you an overview of their respective operating performances before handing back to me for brief conclusion. As usual, please note the disclaimer on Slide 2 which I will take as read.

What I hope you will get a sense of today is not just what we've achieved in 2016 but also a greater understanding of our business; the key drivers and what truly makes Smurfit Kappa Group a great company. As we said consistently over many years, we have a great bunch of people, a superb and constantly improving asset base and we are geographically diverse business with market-leading positions in our chosen sectors.

We are the market leader in Europe in car [ph], the number one. Equally we have an integrated business and we're the number one producer of both recycled paper and virgin-based papers with three world-class top-class mills in the kraftliner business.

We're also a player of scale in the Americas and the only significant PAN regional player. At Smurfit Kappa we have a strong cash generative business and we've delivered EBITDA of over €1.2 billion in 2016.

That was a record year for the business. And we have built a compelling operating platform with a unique franchise with sustained performance today and of course tomorrow.

For those of you who attended our capital markets in London in June of last year, you may recall the vision that I set out for SKG till 2020. The vision is to be a globally admired business; dynamically delivering, secure and superior returns for all stakeholders.

Our recent admission as a FTSE100 constituents broadens the recognition and appeal of Smurfit Kappa Group dynamically delivering reflect both our ability to move quickly as opportunities arise but also a mindset never ever to be complacent as the market leader. Delivering secure and superior returns for all stakeholders together with the increasing strength of both, our business model and our balance sheet we aim to deliver secured returns through the cycle and to grow the business and the dividends for our shareholders.

Turning to the key business drivers that continue to provide an industry-leading platform for our business; when we and Smurfit Kappa talk of growth, we always refer to disciplined and profitable growth. SKG's operating management understands that capital cost and volume is not at the expense of price.

We have a business profile which is truly unique and sets us apart from all peers. Our geographic diversity is a key differentiator with operations in Europe, North America and Latin America.

Each market has its own dynamics and this leads to greater stability and diversity of earnings of equal importance, it provides our customer base with excellent geographic coverage. Our integrated model allows us to run our machines here in Europe full all the time and in turn maximize our performance.

We're short over 600,000 tons in recycled and we're long 500,000 tons of kraft. In the European markets, the kraft market that is structurally short of 1 million tons or more.

The integrated model delivers better quality and certainty of paper supply and better quality earnings through the cycle. Our Smurfit Kappa, the Americas business is similarly integrated.

However, we are a large net buyer of kraftliner which is something we may address in the future. Our capital allocation policy has been very consistent through the cycle focused on balancing net debt reduction and business growth and of course, returns to our stakeholders.

We'll touch on this in a bit. And finally, our culture.

Culture is something which I am particularly passionate about. We have in Smurfit Kappa a performance-led culture which is evident throughout our business.

We're always first up and last to bet. Alignment with our integration model ensures that our managers focus on returns culture; so familial, yet professional culture is evident by our high rate of people retention.

And now turning to the performance in 2016; as you've look seen we delivered earnings growth with a positive performance from both Europe and the Americas, and this is reflected in the 5% increase of our EBITDA to €1.236 billion for the year which was of course a strong result against the backdrop of rising OCC prices, softening recycled prices, and foreign exchange headwinds; three very large negative for us to counter. Return on capital employed at 15.4% continues to exceed our target of 15% through the cycle and it is up on the underlying 15.1% we achieved in 2015.

From a cash flow perspective we continue to deliver cash flows with a reported €303 million in 2016 and this after a year of significant CapEx and some adverse currency impact on some of our components of free cash flow. In June, you'll all be aware we became a member of FTSE All Share Index and we of course were delighted in December to be admitted to the FTSE100 Index.

The strength that you've seen of our business allows us to avail of attractive debt markets and in January 2017 this resulted in a low coupon of 2% and 3.8% for our 7-year €500 million bonds. Finally, reflecting the distinct strengths and capabilities of our business, the board of Smurfit Kappa has recommended a 20% increase in the final dividends to €0.576 per share.

I'll now hand you over to Ken who will take you through some of the financials of our results. And I'll let you see his picture longer than mine.

I was tempted to wear exactly the same clothes but just to confuse everybody. Thank you, Tony.

Good morning everybody and welcome and thank you for taking the time. Before you get to kind of Roberto and Juan and the really interesting side of the business, just a few slides for me on the financials and how the year turned out.

Firstly, looking at the fourth quarter; revenue of €206 million in fourth quarter was about 1% down in the fourth quarter of 2015. However, the underlying year-on-year move in group revenue when you adjust for a net negative currency movement and net acquisition was actually an increase of 2%.

Our revenues in Europe decreased by about €36 million primarily driven by adverse currency move. In the Americas, however, revenues increased by €7 million year-on-year driven by both an underlying revenue growth and the benefit of acquisitions, partly offset by some of the currency headwinds that Tony alluded to earlier on.

EBITDA for the fourth quarter was €320 million, €6 million down in the same period last year but earnings growth in the Americas offset by lower earnings in Europe and some higher group center costs as a result of some win-off by some center cost in 2015. However, allowing for currency movements and net acquisitions, the underlying move in EBITDA for the quarter was an increase of about 1%.

Our [indiscernible] profit before tax of €170 million was 9% lower year-on-year, lower EBITDA, higher net finance cost, primarily due to the full effect of our acquisition financing resulting in a decrease in our pre-exceptional EPS €0.474 for the quarter to December '16. The group reported free cash of €104 million in quarter four 2016 compared to €152 million in the same quarter in 2015.

The main variance related to the proceeds from the sale of our non-tariff in 2015 which obviously didn't reoccur in 2016. The remainder of the decrease reflected lower inflows mainly respective of working capital and higher inflows with respect of tax and cash interest equally in relation to our acquisition financing.

Our net debt however fell to 2.4 times net debt to EBITDA, down from 2.6 times at December 2015. And importantly, the group's net debt continues to reduce in both absolute and in multiple terms positioning the group with considerable financial strategic flexibility subject to our stated leverage target of 2 to 3 times and within our WBA1 [ph] credit ratings.

Moving on to the full year, revenue for the year to December of €8.2 billion was about 1% higher than 2015, with higher reported revenues in the Americas partly offset by lower revenue in Europe predominately due to adverse currency impacts and the absence of some of our close and disposed operations out of 2015. EBITDA for the full year of 2016 of €1236 million, which is a record for the group compared to €1182 million in 2015 with higher earnings in both Europe and the Americas offset by slightly higher group center costs allowing for currency movements and the contribution from acquisitions net of some disposables comparable earnings in Europe and the Americas were €39 million and €47 million higher respectively than 2016.

Our operating profit after exceptional items for the year was €815 million compared to €711 million for 2015, an increase of almost 15%, and an increase of 6% before those exceptional items. The groups pre-exceptional profit before tax of €657 million was less than 1% down year-on-year with again higher EBITDA offset by some higher net finance costs.

With our increased taxable profits our tax charge is also slightly higher and therefore our pre-exceptional to EPS felt slightly from €0.197 to €0.189 in 2016, predominantly due to the higher finance cost. Our free cash flow for the year which we deal with more detail on the next slide was €303 million; again the big impact there was the sale of the non-tariff sites in 2015.

And just looking at the free cash flow bridge because there is a lot of moving parts within it the group of afforded free cash flow of €303 million in 2016 compared to €388 million in 2015. Again, the non-ferrous [ph] side is a big impact from there when you see that in change in the sale of fixed assets year-on-year but the rest of that decrease is mainly related to higher cash flows for working capital and retirement benefits, tax and indeed cash interest.

Importantly, our EBITDA grew by €54 million year-on-year. Our exceptional outflow of €15 million related to restructuring and reorganization costs in our Americas segment.

Our cash interest of €148 million for the year with €25 million higher than 2015 reflecting the higher level of debt following our acquisition activity in 2015 and at early '16 and a slight increase in the average interest rate, partly as a result of our exposure to high interest rates in Brazil, and also our cash interest income on year-on-year as deposit rates turned progressively negative across 2016. Our working capital move in December with an outflow of €95 million compared to €24 million in '15; yes 2016 was a combination of an increase in stock to a lesser extent better offset by increasing pressures.

And our working capital balance amounts to €573 million at the end of '16 but importantly, represents the 7% of annualized sales, very much within our same range of between 7% and 8% with 6.6% at the end of December '15. The outflow of €8 million in respect to provisions largely relates to some of those restructuring projects of 2015.

Our CapEx at €499 million represents approximately 127% of depreciation, slightly higher than we guided due to elements of currency and a lease capitalization towards the backend of 2016 and we expect capital expenditure to guide lower to about 100% depreciation in 2017. Our cash tax of €151 million is €20 million higher than 2015 primarily and reflecting the impact of the higher profitability across the use of tax losses etcetera.

And finally, other - other comprises our moves in capital debt which are capitalized and are received but not yet get paid for. And we'll expect some of that to reverse through 2017.

And then I'll also add flows in relation to our retirement benefits which are higher year-on-year as a result of the focus we have on eliminating debts and schemes where it's economically advantageous to us. And that brings us to our free cash flow of €303 million for the year.

So with that I'd like to thank you for your attention and I hand you over to Roberto.

Thank you, Ken and good morning to all of you. The European division delivered a good performance in 2016 with a full year EBITDA of €928 million, an increase of €27 million or 3% year-on-year.

This reflected a solid operational performance on both sides of the business; paper and corrugated. In paper, we completed a number of large capital projects delivering improved efficiencies.

In corrugated, box volumes increased by 2% year-on-year and average corrugated prices increased by 1% when taken on a constant currency basis despite lower paper prices movements during the year. Currency volatility was a negative feature throughout the year and reduce our EBITDA result by €11 million predominantly due to the weakening of the U.K.

sterling and the Swedish kroner. As Tony outlined earlier, a core business driver for us is disciplined profitable growth.

Our differentiation initiative launched a number of years ago is now providing us with a solid market insight-led foundation upon which to build new businesses and grow with our existing customers. While this impact is visible at every level of our business, nowhere is this more evident than at Pan-European level where our volume group 4% in 2016 as we developed scalable solutions with our largest customers to help them succeed in their marketplace.

Looking back through our integrated supply chain, our recycled business performed well into 2016 and is primed to perform strongly in 2017. While we saw some increase in supply in 2016 with a number of new machines starting up, the market has tightened dramatically as demand has remained strong and inventories were drawn down over the Christmas period.

As a result, we have announced a €60 per ton price increase effective the February 1 of which we are confident of achieving. In kraftliner, the market was strong for the majority of 2016 following some earlier softness as new capacity bedded down in the first quarter.

This trend has continued into 2017 and the global fundamentals are solid with good supply demand balances in both Europe and the U.S. markets.

Reflecting this, the group has announced three price increases across Europe year-to-date with a €60 per ton increase for both brown and white kraftliner across our European markets from March 1. And two separate €40 per ton increases in the Mediterranean region for February and April respectively.

It should also be noted that we completed an acquisition of our corrugated packaging business in the U.K. in November, facts and packaging, and this integration is progressing well.

An interesting question that is continuously posed to us at investor events is how our customer offering is fully differentiated from our largest peers. Each of us are able to point out to new customer wins and industry design awards but what our competitors are unable to replicate is SKG's ability to systematically apply our global collective intelligence to the supply chains and marketing impact of our customers with a local or multinational.

The scale of our company gives us unrivalled quality data and the benefit to our customers are speed and their ability to benchmark. Looking at this slide you can see the daily usage of our full suite of tools across our businesses on a scale that no competitor possess.

Our Shelf Smart [ph] holds 72,000 of our customers products on the super market shelves across Europe and the Americas and was used an average of 346 times per day in 2016 to show our customers exactly how their projects look at the point of purchase. Our inner book holds 6,900 of best in place concepts of which five of the red dot awards are displayed here in the room today.

These are used on average 614 times per day to share the knowledge of our 700 designers around the world. Our supply chain tools, paper to box and pack experts have analyzed 53,000 supply chains and used thousands of times they need to optimize the paper composition of our boxes and the transport planning of our customers.

Linked to real-time data, each of our 160 corrugated plants across Europe we can optimize and quote to a customer the cost and specifications of the packaging down to the fuel two emissions of their box. Finally, our Shelf Smart process uses a direct consumer feedback through our IC Technology to test and verify the impact of our designs before they are rolled out by our customers.

Over a hundred of these were carried out per day in 2016 and this number is expected to continue and rise. As one example of how we apply this collective intelligence to our individual customers you see on this slide the five full growth we have enjoyed with Nestle and Espresso over the past ten years.

Espresso, as many of you know is a popular premium coffee category within Nestle worldwide. We were giving a brief along with industry peers to deliver a solution for the e-commerce shipper for Espresso.

SKG's price will surpass the original brief by applying the latest insights in e-commerce packaging, using the collective power of the seven hundred designers worldwide and undertaking consumer research on customer's experience with an Espresso. Not surprisingly, Nestle selected Smurfit Kappa securing business for five years.

The solution delivered an enhanced premium perception achieved the period required for the pick and pack facility. It's easy to open for the consumers, increase protection of the Espresso sleeve in the supply chain and provided a secondary use post-delivery as return shippers are used for the capsules.

Looking to 2017, our key business drivers for European business, it is clear that our differentiation strategy is driving positive results both in terms of energizing our teams and generating more collaborative customer relationships. For those customers who wish to focus on added value throughout the supply chain, we are working together for mutual growth.

We have invested significantly into our business in recent years and are seeing tangible benefits coming through with higher quality earnings, improved returns on our assets and strengthening cash flows. In paper, we are delivering on a number of large projects to further enhance our integration and our integration by grade, rummage [ph] and capacity while positioning our systems firmly as one of Europe's lowest cost producers.

In corrugated while efficiencies in automation remain key objectives, we are consistently investing in new advancing printing and packaging technology. Turning to the industry fundamentals in Europe, if current demand conditions prevail, we can expect 2017 to be a positive year for Smurfit Kappa.

Consistently high OCC prices and a solid demand for packaging has created the necessary conditions in Europe to implement containerboard price increases. And this should be passed on to corrugated prices subject to the usual time lag of 3 to 6 months.

In kraftliner our market leading position of 1.6 million ton system is well positioned to benefits from solid demand and the current support of market conditions. In a market where approximately 15 to 20 percent of boxes have virgin inputs, we continue to use the capacity as a key competitive advantage for SKG over the longer term.

In recycle container board specifically we have seen capacity additions in recent years and more is expected in 2017 as the new existing producers have brought on machines of varying levels of efficiency. However, their volumes have been absorbed well by a growing market to-date.

While OCC costs continue to ramp upwards, this produce will remain under pressure to cover the cost base. I thank you for your attention and I'd like now to turn you over to Juan to give you an oversight of the Americas.

Thank you very much Roberto and good morning, ladies and gentlemen. The America's business continues to provide a source of geographic diversification and growth opportunity for us.

If you talk about the year and quarter what's up 11% delivering €339 million and €98 million respectively. EBITDA margin increased again in the fourth quarter to 17.8% and was 16.8% for the full year compared to 16.4% in full year 2015.

These thresholds were delivered against the backdrop of adverse currency impacts of approximately €34 million. This currency impact was offset by the positive contribution of acquisition in the region, continued pricing initiatives in most markets, a strong underlying volume growth and the benefit of our capital investment program.

Year-on-year corrugated volumes increased by over 20% driven by our acquisitions in the region together with a strong growth in the largest economy in which we operate, specifically the three major markets of the U.S., Colombia and Mexico. In the U.S.

corrugated volumes were up 14% year-on-year driven mainly by the benefit of acquisitions. The Mexican and Colombian businesses were bought up 6% year-on-year.

Overall, underlying volume growth in the region excluding the impact and at precision was 2%. Pan America continues to deliver above market growth for the group with customers enjoying the ability to partner with Smurfit Kappa Group on a regional basis.

2016 Pan American sales volumes were up 6% excluding Venezuela. Growth in Brazil was seen as American sales on the back of Smurfit Kappa Group entry into the Brazilian market in December 2015.

From a containable price perspective, the $40 per ton increase in the U.S., that's also been implemented across U.S. exports markets and we see these being supportive of corrugated price increases above the U.S.

and Latin American markets, particularly in Mexico and Colombia where we have been successfully parting price increases to recover cost inflation. This slide highlights the importance of being the largest Pan American supplier for corrugated packaging, a key differentiation for Smurfit Kappa Group.

You can see in the graph that we have increased sales to our Pan American customers by almost 40% in the last three years alone. By providing only Pan regional offering, our [indiscernible] with our unique tools and expertise which Roberto has just mentioned.

We are building three new experience centers in the U.S., in Dallas, Mexico City and Colombia. These new experience centers will provide a unique platform for us in our three main regional markets.

It will allow us to develop more collaborative relationship with our customers driving more added value solutions and ultimately above market growth level of 6% excluding Venezuela as indicated above. Pan American sales continues to be a key driver of corrugated growth for us in Americas and something I would elaborate further in the next slide.

More on lease [ph] provides a tangible example of our Pan American sales offering and its corresponding volume grow for Smurfit Kappa Group. In the last few years we have experience over 150% increase in the volumes we supplied more on the lease across the Americas.

If you see being high, if you are incremental volume, we have developed in Brazil after our precision in late 2015. Through our regional coverage we have been able to provide more on lease but [indiscernible] for the corrugated needs across the Americas and as indicated with our Europe which had leveraged our tools and expertise to further differentiate our offering.

As part of our corporate organization, [indiscernible] move some manufacturing operation across country, Smurfit Kappa Group's ability to supply and manage providing among the lease the lower solution with our supplier they can choose. Lastly, with more on lease, we're looking for a partner to work on the 2017 campaign, they choose Smurfit Kappa Group.

The two main drivers for these were our expertise in packaging automation and our market insight. In conclusion we have seen good underlying volume growth across most of our market but you will be aware of the challenging environment in Venezuela which has seen volume reduce by 48% year-on-year.

Argentina has seen a top 2016 as the content saw structural changes but will remain positive on grow prospects in the medium term there. Brazil has seen both weak demand and higher cost in 2016.

However, in both Argentina and Brazil, we have grown above market levels and in the case of Brazil; there have been some normalizing of OCC cost in general. The strong volume growth in our TMA markets of Columbia, Mexico and the U.S.

in 2016 has continued into 2017. Our differentiator strategy along with our Pan American networks continues to deliver for us and will remain actively focused on the coming year as we roll out our experience center.

As we have done historically, the group continues to drive price recovery markets impacted by adverse currency and raw material input cost. The Americas continues to be a region with the scope of consolidation and a region with a strong M&A pipeline.

We also have plans for 2017 to increase our paper capacity and assist in reducing our short position in the America, currently approximated to 450,000 tons and so drive further integration and in assorting group continuation. I will now hand back to Tony.

Thanks Roberto, and thanks Ken. Turning to capital allocation, this slide sets out our core objectives and how we allocate our free cash flow.

And allocation, I think everyone in the room will know we've outlined many times before and it's consistent with the commitment we have to drive long-term shareholder value creations. We have maintained our net debt to EBITDA at a comfortable mid two times level since 2012, both recently reporting as Ken said 2.4 times at year end 2016.

Our debt maturities average is 4.3 years following the very successful completion of our 7-year bond which I alluded to earlier and we are committed as a company to preserving our current credit rating as in our position of the strong crossover credit. As significant shareholders ourselves, management's interests are truly aligned with our shareholders.

We have consistently focused on capital spend on optimizing our asset base and enhancing operating efficiencies throughout the network of our 370 facilities with an average of €460 million per year spent over the last three years. This result has resulted in a low cost integrated and very well invested business that will sustain performance, both today and of course for tomorrow.

Successful M&A as you all know is very much a part of this market cap of DNA; so we have significant financial capacity to acquire attractive assets when they make sense for the group and of course for our shareholders. Looking at our medium term drivers, the factors which have sustained us on a journey over the past 7 years and delivered record EBITDA in 2016 will drive our future performance from 2012 to 2016 in what we have described as very average market conditions are unique business model and most importantly, our team and our culture have delivered a 15% compound annual growth in EPS, free cash flow of €1.7 billion, net debt to EBITDA from 2.7 to 2.4 times while investing €850 million in acquisitions and €2 billion in continuously improving the asset quality of your company.

We at Smurfit Kappa I believe know that we have built a compelling operating platform and a very unique franchise which will sustain improved performance in all market conditions. We have a strong and proven team to share and embrace a performance-led culture which is, as I said, totally aligned with shareholder interests.

So in conclusion let me recap on what the key points you've heard today. We have delivered - again, we delivered a record EBITDA of over €1.2 billion, and as you have seen, we continue to perform against all key measures.

So for that I would like to record our appreciation to the total Smurfit Kappa team in delivering this performance. The board's confidence in the strength of our business model is reflected in the increase of 20% in our dividend and for that I would like to thank them but also I would like to thank you all especially for your attention and for your continued support to Smurfit Kappa.

We'll now take any questions from the floor and from the radio and mike. So we'll start with Lars.

[Technical Difficulty] Tony, you mentioned quite a number of headwinds and yet you delivered quite a solid result. Could you walk us through the buckets that you were offsetting these multiple headwinds, you and Ken I guess in terms of FX, OCC falling recycled containable prices, what will be offsets to see you have that decent EBITDA growth?

And the other thing I guess, if you talk about the relative resilience in box prices, versus falling restart their container board market price, how should be view box prices in '17 as your recover that? Should we expect a meaningful flow through into box prices?

I think I'll take the second part and let you do with Ken with the first part. You know when you look at what we did in 2016; Roberto and his team and Juan Guillermo and his team really were able to offset some of the falling paper prices with innovative packaging for our customers, helping them sell in their marketplace.

So we were giving advantage to our customers, at the same time maintaining our own margins; so part of the whole innovation strategy that we have embarked on a number of years ago as Roberto said is to continually evolve our customer experience with us to make sure that they feel like they're getting value and they certainly are because we're helping them sell more in most cases. The huge evolution toward the merchandising of corrugated packaging today versus what it used to and I think that you know, being the leaders in that and you'll see these awards when you're coming up with your customers with ideas to help them you know, we expect to get paid for that and clearly that's what's happened in the last year.

You know, they also understand that as the raw material prices move up and as we've seen in the last year that you know we have this terrible scenario where you have you know, paper prices going down and raw materials going up you know, as you've had that scenario happening you know, we have been telling them that that scenario can't continue forever and you will know Lars that you know, there was a lot of worry in the middle of last year about additional capacity and I said if you if there's normal market growth, the new capacity that's been entered into '16 and '17 is easily absorbable and that will set up I think the half year and so it's proving to be the case so far. I mean you know we can't predict the future but that's what we think.

So I think it's the methodology of how we've actually approached the customer has allowed us to stay in our margins in the box business. Going forward as what raw material prices are going up and they're going up sharply in relation to waste paper, they're also going up; the demand levels are very good.

You know I think in that scenario we will be approaching our customers and implementing price increases based upon raw material. You know, there will be a margin compression as raw was is, as waste paper goes up and paper needs to go up the boxes but we would be relatively comfortable but we and the industry have to do it, to the first point.

You can probably go with the headwinds and tailwinds and kind of intrigued to stay in focus. Taken currency first in the currency headwinds for the year was €53 million of those you know, 10-11 in the European business, the rest in the Americas business, take an OCC as Tony said you know, the average prices OCC in Europe grew by about €13 a ton in the year so you know, out of consumer 4.3 million tons you're looking at headwinds there about €55-56 million and then as you know Brazilian OCC also went through the roof and indeed in Colombia and other territories so you know, broadly you're looking at a €70 million headwind for the OCC for the group.

Offsetting that cycle, you have the energy tailwind which you know, the kind of slight inhibitor to any kind of price increases in the early part of last year because they were kind of taking that in so that you know, for the group our size the energy tailwind is probably 50-50. It's still kind of net €70 million out there in terms of headwinds that we've doubt and I think it goes back to what Tony said which is the resilience of the business.

You know, the focus on price of our volume and indeed the cost takeout program and indeed the focus on cost efficiency throughout the business not just in terms of programs.

And to the capital point, we have invested capital in 2014 that came - was not very good for us like [indiscernible] 2015 which improved. It's still far away from the level Roberta where it should be but you know, it will be in the future but you know, if it was a positive tailwind for us.

And so a lot of our capital projects that we've worked quickly and they're all working for us. We'll go to Barry and then to you Justin.

Thanks, Tony, its Barry Dixon from Davy, a couple of questions. Tony, you talked about the demand environment and outlook, perhaps what you might just talk us, give us a bit more color around demand, what demand trends around Europe through the fourth quarter and into this year.

And in that context also you might give us some sense as to the significant decline in inventory which resides in this statement which obviously has given you confidence around those price increases and a bit of a stupid question but how confident are you that those price increases on both recycles and profit can be implemented in full. And the second question is really around OCC cost and again you've alluded to it I think just now that that costs are certainly rising again.

Does that mean that you may be going back or the industry may be looking for further price increases as the year progresses if we see further developments in raw material costs. And then finally, on Venezuela and it's a question for one.

Just you see now to be able to export volumes out of Venezuela, is that a new development and how should we think about the Venezuelan business in that context both in terms of the underlying performance of that business given that export potential but also in terms of ability to take cash out of the country. Thank you.

Okay. I'll take the middle one and then I'll ask Roberto to take the first one and you take the third one and jump in on Venezuela.

And that basically on paper prices you know, waste paper price have gone up relatively steadily during last year from about 125 to 140 broadly, 126 to 140. You know, we have seen a dramatic increase in waste paper prices in the first six weeks of this year specifically even this week and last week.

You know, with regard to the confidence of us getting the paper price increases through you know we are seeing very tight markets and very low inventory. We have announced €60 in recycle for February 1 and that is broadly all going in.

Certainly the vast - the majority of it going in the February 1 and then we'll have to see whether there is anything more based upon the moving vans of weight paper in the next couple of weeks. Whether that will go forward in a greater capacity and we are looking at a crop line of markets across the world, Barry that is extremely tight but it was extremely tight before the incident that happened in the United States with that, the IP mail.

We were having difficulty sourcing some of craft liners very late and before that happened to many of our Latin American markets and the reason why we were confident before anything that we would implement that increased broadly in full. So, therefore we don't see any reason to change that as we sit here today or stand here today.

So you know, it also carries through to sac paper and to mg paper that you know, they're all very strong and in demand level at the moment. So you know, there's for a January, it's a very good start to the year.

But Roberto do you want to take the point on box prices and demand?

Yes I think various, Tony has said Q4 was a positive quarter in the sense that the volume growth was over 3% so that's actually been a positive for the industry for us and also actually to help and the whole inventory. Inventories at the end of the year, and continue aboard were low and even year to date you've seen and we see that despite our ranks going [indiscernible] you know, which have actually added volume in our inventory levels are over 60,000 tons lower than last year with production being 60,000 tons plus in the current so far.

So with that dynamic you know, that reflects that the year has started in a positive manner. And if those dynamics continue and that is actually the base to actually go forward with box price increase because there is no corrugated box company in the world or at least in Europe that can sustain €60 per ton and do nothing.

So you're going to have to - the important thing is that those paper prizes are sustainable throughout the year and at this moment and time we do not see why that wouldn't be you know, for a big part of this year.

Did you say 3% volume growth in fourth quarter?

Excluding Germany, in the sense when we look at as you all know we closed four facilities in 2015, one in France, one in Sweden and two in Germany. And at the end the core has been to bed [ph] those in has been very positive for us in sixty and that is enabled us to actually have the correct place to go forward.

So it's been - in the sense the markets in Europe so far are quite positive.

Juan, do you want to take Venezuela? And Ken?

Barry, as you heard me saying in basically corrugated demand in Venezuela is going down. We have three paper machines in Venezuela, one of them is kraft.

So basically the two recycling machines can supply the internal demand and we have dedicated the kraft machine to export kraftliner and then we can median. Basically we have the advantage of having the need in our own operations in Central America, the Caribbean and Mexico, without the ability to export from Venezuela, we have the fiber.

So putting everything together, it's very nice. I cannot even strategy to maintain Venezuela operating.

Yes, I think it's important to highlight Barry, we're getting dollars out of Venezuela but we're putting it in the release that Venezuela as a country does have some issues. So we've put it very clearly that it's around 3% of our EBITDA but there is a distorting effect potentially; I mean this could change tomorrow but the board is aware this sorting effect with regard to the hyper-inflation that you have there and the currency rates which is fixed; and that's something we and the board will keep an eye on during the year as a big potential to explode your EBITDA but it also has a big potential to mess up your EPS and balance sheet.

So you know, we are - you know, at the moment it's a very - it's a very fluid situation. The country - as Juan said, minus 48% in corrugated box demand last year is not particularly good.

So I think what we're - what we've been able to do and what the team has been able to do and in a great way is needed for our American businesses to actually export and get real dollars out of the country, and that's been a real positive experience for us. But you know, it is a country that we're keeping an eye on.

I think Barry, you're - in note 14 we kind of detailed that you're dealing with a country that had 333% inflation in 2016, so not an inconsequential number and you know we've been in the hyperinflation Venezuela since 2009 now and for the first 7, 8 years it's got 25%, 30%, 40%; 2015 was 181%, 207% actually and this year it's 333%. So it's obviously increasing.

The issue we have in 2015, we had a devaluation, that kind of tempered that level of inflation but 2016 the exchange moved out towards June but then kind of stayed broadly within a very tight range, June to December, so you've got an impact of the hyper-inflation where you most clearly see that in our numbers. It is in that kind of net monetary gain/loss in financing expense which obviously you see directly.

And as Tony says, you've got two things happening, you've got high inflation and a relatively stable exchange rate. So if the exchange rate blows up to 3,000, it's an impact on the EBITDA, if it doesn't then you get an impact on adverse [ph] in terms of working capital because you're replacing higher value debtors with lower values debtors, EPS [indiscernible] but fundamentally as a component of a balance sheet, it's less than €100 million, €91 million in terms of assets, it's another big proportion.

But we call that quite clearly and specifically so that during the course of the year if it does begin to trend away from and the stores of numbers at least, we can give you some clear guidance on what that is and how you're going to adjust for that.

Thanks. I'm Justin Jordan from Jefferies.

Can I just go back to the pricing thing just a start way but obviously we wish you every success in getting the price increases through both the cycles there but I think the whole industry needs it. But in this seriousness, can we just talk through just the transmission of that into higher box prices, thereafter how confident are you recouping to really a sense of that will definitely go through in three to six months or you can just talk us through just - you know, the transmission mechanisms; what sort of index closes have you got and your confidence regarding recovering that?

I mean you know as we stand here today, if it goes up by €60 or it has to go through as Roberto just said, the reality is that very few box makers when corrugate - when paper and corrugate is around 50% or 60%, depending on what type of business it is, 50% or 60% of your costs, you have to recover. So I would say that given the movement at the moment, I would not see - I mean it's never easy but it's a trend, I mean the reality is you know there are other costs going up and we would expect.

We will not have a choice but to push our price up and Roberto and his team are already telling their people - we have been pushing box prices up strongly in Mexico and in Colombia and other markets, Argentina. It's not apparent because it's all getting lost in the mix with regard to currency but we are pushing very strongly in most of our markets to get box prices up.

It's going to start in Europe as of March, you know, maybe even earlier; Roberto [indiscernible]. But we expect to our box price.

Okay, thanks. Just a quick follow-up, can we just talk through other than price and volume, just some of the puts and takes in '17, just within the business.

Obviously in '17 we've got positive relief, full year benefits and quick wins, I think that's an extra 30. We've got a full year in terms of hook I guess.

I'm trying to think of that sort of potential positives that we're just - very specific in '17. And equally just can you give us some color on just the offset side, should we think in terms of increased energy prices?

Yes, I mean energy is going to go up by €20 million or €30 million by the looks of it right now. It looks like wage inflation is always going to be broadly €50 million across the group, maybe bit more and then you look at the other one - the other major ones, that's really the two.

I mean our two biggest costs are wages and energy, I think it's 1% to 2%. And white paper which is even last summer weeks is 5%, 10% or 15% - some markets and you've got high waste paper cost in Americas too, the markets are $200 a ton and Brazil too, you know, while declining still $200 a ton for OCC out of Brazil so still some headwinds there.

I think currency could equally be a slight headwind and probably not - but you could hear on the averages is coming up a scale of 16 but still in there somewhere. But you know, you got that the quicker and program our cost take it to offset some of that inflation but beyond that SKG specific [ph].

I just wanted you to talk about tenure in customer sales being up 4% in '16 in volume terms. You just don't see, that's growing in excessive SKG volume for several years now.

Could you just remind us what percentage of total European volumes are now pan European customers?

It's 20%.

Thank you.

Gerard Moore from Investec, three questions, two on America's one finance costs. Just on the America, Tony ,I think you mentioned in your opening remarks that you have a group of short position in our in kraftliner in the Americas and this might be something you look to address, maybe just give a bit more color around that has you could address that.

I know you're opening a new mill in Mexico but I'm not sure if that's recycled container board or our kraftliner. And in the second question then in the Americas in volume growth underlined for [indiscernible] maybe how you see that trending in 2017 because there's a lot of moving parts but maybe gives a bit more color in some of the larger markets like Mexico, Colombia and the U.S.

And then the third question just on the financial costs. Again I think you've explained issued a new bond in the beginning of January, alternatively bring down your average cost of that.

Where would you see that from an average cost of day to day and what you need to do to realize that in terms of hiring the old expense of debt. So when will we see that and if you lower your cost of that.

Thanks.

I'll take that and can jump in here too. The bond was opportunistic in the sense it was in Q point chasing and as you see it's 2 and 3, it's very much at the lower end - the lowest we've ever achieved.

In the near term though is expected to increase the average interest costs in 2017 simply by if you remember what we did was pay down the securitization senior for a forward starter in Iran but all in terms of the average interest savings over time and [indiscernible].

And do your cost in the first year about €8 million. Next year you're pretty clash and from following year onwards report €9 million a year interest cost saving, was it to perform average coupon with a twenty eight into taking out coming down from the current 4.3% to about 3.8% of all material reduction in the average coupon?

We can't take 2018 out now, they don't mature up. And just on the crop light up.

I mean clearly we're looking at different strategies Gerard and obviously when we're ready to address those, we'll tell you. I mean just highlighting the fact that we are big buyer of kraftliner and we have a potentially opportunity but we need to do some more work on that obviously when we have - when we have our work done and when it's ready we will address that.

But we have we have idea so as much we say at this moment and then -

On volume side, let's say that the number of 2016 as you see it on the line growth this is severely affected by [indiscernible]. As we entered 2017 we see Mexico still strong, we see Columbia still strong, we see recovery in Argentina and for sure Brazil.

So we are both positive [ph], you know, volumes for 2017. It's important to you know only in my party is that, despite the behavior of the market in Argentina, Brazil we are able absolutely to go above the market in both countries.

Okay, thanks and may we go to the phone?

Yes good morning. A couple of questions.

First in volumes, can you maybe attach a number to what you've said on Q1, you mentioned close to 3% for the market in Q4. Has that been sustained in Q1 and then also in Mexico, can you remind us of your position there I guess it's much local suppliers to any cross border business that could be affected by as some of the Trump plants and lastly on the price increase again is it for you no more questions if you could the full 60 or maybe 30-40 or are you also contemplating a step up in the price increase announcement.

I mean we have seen obviously new initiatives on across Atlanta so like another price increase. We are today contemplating a U.S.

price increase on the recycle side because of dimension effect, because of OCC going up further in the last couple of weeks. So my question is more like typically you get a good share of the announcement, of the headline increase, is this different this time around?

Let's see the middle first, Mexico, we grew at 7% in the fourth quarter Mexico and 6% for the year. You know, Mexico as a country has 120 million people, it's very big country on rise and much of the product that goes from Mexico towards America's food and food related really and clearly there is an agreement has in place.

And as I have said before if you believe that republican, congress and senate would put up trade barriers and you know, as that is not in the nature of republican, it's generally for free trade [indiscernible] in the opposite. I think we should not call what's going to happen there, we're very comfortable with our Mexican business, we've presented there we are number two in the market.

And we have invested strongly and will continue to invest strongly until such time that things would change when we see some change but honestly it's difficult to imagine that trade barriers would put in place but we'll wait and see. I mean you know, Trump is saying one thing.

We'll have to wait and see what he says. On volumes in Q1 I think so far, I mean it's always going to be difficult in the January to look at what volumes look like, suffice to say that demand has been good in January continues to be good in February but obviously we're early into February.

We have Easter early this year, sorry later this year as opposed to early last year. So you know we just have to look at it at the end of the quarter and see where volumes are but we don't have any feeling that things are worse than they were in Q4.

In fact just as good I would say. Roberto you agree with that?

And then price increases for more - I think that we'll just continue to watch this I mean you know the Southwest price of waste paper went up $25 on Monday of this week. It went up €25 in Friday of last week.

You know these are very, very large increases that we haven't seen for many, many years and you have to see what the market does about them for thirty days and we would expect you know, maybe we would expect the full amount of €60 to go through maybe not go through in February 1st. You know, either €60 or potentially more as we go through, as we look forward but we have to wait and see these are very large increases very recently and through the rest of Europe and the world it's just thirty days.

Yes. Okay, thanks, understood.

Very helpful.

Thank you.

Good afternoon, Tony. Or morning nice to say, the question has to do with the capital spending you all have done quite a bit in the last few years, you could you just give us a view to kind of the average rate of CapEx you see for the next one to three years and how that might differ from what it has been and then secondly I know you're still flashing out your kraftliner short position in the Americas.

But you know, are you looking at maybe opportunities to you know, relieve that situation is projects outside the U.S. or within the U.S.?

Same answer to Gerard. We are still looking at what if anything makes sense and not chip on the kraftliner side; so leave that with us for a couple of quarters and we'll come back to you on that.

With regard to CapEx spend, you know what we've said is last year that we would be spending around €480 million but there was a bit of currency and at least that we have to capitalize at the end of last year that brought close to the €500 million level. So we've been consistent about where we said, what we said we'd be around 100% of depreciation this year which is broadly €400 million and because we wanted to make sure that make sure that the CapEx that we've spent is actually flushed through the system.

And what we said is we'd be looking at our program into '18, '19 and '20 during the course of this year and probably announcing either second or third quarter as to what our intentions are in that regard. So we're not ready yet to tell you but we're certainly thinking about it and we want to make sure that we get value for the CapEx and the money that we've spent.

Understood. And just one quick follow-up, do you see this OCC surge and I know this is €64 million question but do you see the surge in OCC, something more inventory driven where do you think it might be more structurally driven?

I think structurally it is going to go up. You know, there is no question that we have been consistent, and I think most of the industry players would say to you that the OCC is going up based upon, there are really very few kraftliner mills being built in the world.

Mixed waste is in decline because of the structural nature of newsprint and coded papers and other things, so there is less mixed waste throughout. And those that have been using mix waste as a filler will be moving over towards those OCC.

And of course all new capacity that's coming into the world, whether it's in Europe or whether it's in the Asia is recycled base, are practically old. So they need a raw material and you know, the world has been pretty good over the last number of years collecting waste paper, of course there is still more to collect but not a whole lot of landfill as it's been a relatively valuable commodity for a long period of time.

So I would see that it is a structural move. The move frankly of €25 last week and in dollars in southwest is a very dramatic amount; and so that's something that we need to reflect on.

But as I say it's relatively new news.

Understood. Thank you very much.

Firstly, can you just confirm Q4 you said volume growth has is about 3%; is that in line with the industry or are you performing to any extent there? Secondly, just on M&A, could you give us a run through what the pipeline looks like and given multiples that are pretty prohibitive in North America and scale deals in Europe are few and far between but that's what the focus is on the South American.

And finally, on towns I hope you mentioned you're far away from where that now should be. I think previously you said it should make about €20 million in a decent year; are we halfway towards achieving that targets or how far do we have to go?

Last one first, that was really for Roberto to get the mail running better. So actually half way it would be a good number, about half way.

And 3% is - as Roberto said, it went out without our German operations, it was actually around 3% let's say. And I think that would be broadly - we're not seeing that we're out of the markets per say.

And then on M&A, Ken, do you want to take that?

In terms of M&A, we never stopped looking. You're right, I mean if you saw the West Rock and PS deal, last week at 9.6, 9.7 times multiple still so quite high.

But the reality is that if we could make it work, it can fit into the Smurfit Kappa network, we can get the synergies out of it to bring that multiple down to something more like trading multiple than nothing really on the table. And we're not small acquisition to U.K.

in November time and in fact there so needed geography is out of our consideration. But still we have an active pipeline, some of them working through but it's really about getting the compelling proposition around the initial valuation and the synergy benefits.

Okay, perfect. And One final one maybe - there is a lot of - I suppose conflicting reports on the scale of capacity coming online over the next 12 to 18 months, how do you see as and with your industry knowledge in the second half of 2017 and first time of '18 how much tonnage do you see hitting the European recycle market?

It's difficult to know David. I mean you know, obviously these projects get delayed and pushed back.

You know, we're just - honestly it's difficult to know. I just put things into context a little bit you know, the U.S.

market grew at 2% last year which is the strongest growth it's had in the last six years or so. And I think that the world market is growing and growing again.

I mean if you look at the context of around 150 million tons in the world market and for containerboard, you know - and the real new capacity is coming on here in Europe and I think that you know the amount of new capacity if people are sensible can be absorbed without even if - as long as there is some growth in the world, you know, we're seeing very, very, very strong export demands and prices looming up in the export market at the moment, both for kraftliner and for recycled papers. And so we'll just have to wait and see.

You know, we won't be completely black about 2018 or 2019 until we're in this and we're not in it yet and I don't know necessarily if we have to get in it. So I think that as I said at the half year results, we felt that the capacity that was announced for 2017 and 2016 was absorbable and dealable with and that's so proven to be the case.

And we'll have to wait and see about 2018, we'll have a better view of that as we go through this year.

Great, thanks very much.

Okay, I think that's all the questions on the line. Is there any further questions in the room?

We just need the mike if anybody is on the line?

Sorry, [indiscernible]. I guess just thinking about the general and cost inflation environment and what you've seen in 2016, does it prompt you to sort of step back and think about revisiting rationalization, cost takeout programs; and if so - I mean when do you think it will be appropriate to update people on that?

Kevin, I think Smurfit Kappa have also got a costs program. If we don't have a cost, I mean the difficulty for all of us is we don't see it because we have this massive cost takeout program but we have cost take in too.

You know, you talk about 2.5% wage growth, it's €50 million to €60 million per year for the company. So you know we are continually taking that cost either through CapEx or through by it being smarter.

And rationalizations, I think there is always some to do and we are continuing to look at them but we don't have that many left to do. We've been rationalizing our business since 2005 when we came together with Kappa.

So I would say that there is a few that we can look at but they are not going to be significant over the next number of years.

Okay, so what you should think about offsetting price inflation principally to pricing?

No, we would say - sorry, repeat that?

How offsetting future price inflation through pricing increases is that fair rather than -

If there is significant cost inflation in our raw materials and our base and we're not able to offset of with regular cost takeout we will have to go for pricing.

Okay.

Okay. So on that note I'd like to thank you all for your attendance.

And as I said earlier, thank you so much for your support of Smurfit Kappa. Thank you.