Smurfit WestRock PLC (SW) 2007 Q2 法說會逐字稿

Welcome and thank you for being here at so prompt -- particularly welcome also to those who are joining us by phone.

This is our second-quarter results presentation and I'm joined at the table here by Tony Smurfit, who is our President and COO, Ian Curley, who is the group CFO, and Paul Regan, or group Treasurer. What I am going to do at the outset is present some financial and operations highlights for the second quarter and the first half, followed by an operating and market review. Ian Curley will then go into more detail on the financial performance and will conclude with an outlook for the year. Then we'll take questions from the -- which the whole team will answer.

In terms of the 2007 quarter two and half one highlights, we're reporting what we believe are strong EBITDA growth numbers year-on-year for the second quarter and the first half and we have an industry-leading EBITDA margin of 14.2% for both periods. This reflects strong demand growth and positive price environments for both recycled containerboard and for corrugated.

We're reporting we believe is a solid financial performance despite higher-than-expected input cost increases resulting in some margin impressions. Continuation of the strong market conditions, balanced capacity and rising input costs should form the basis to deliver continued corrugated price improvements into the second half and indeed into 2008.

Turning to the financial highlights, revenue for the second quarter of 2007 of EUR1.8 billion increased by 4% on the same period in 2006, but if you take out impact of currency, disposals, and closures, in fact the true underlying growth is around 7% for the second quarter.

EBITDA before exceptionals of and EUR260 million increased 18% compared to the first quarter -- the equivalent quarter of last year. This represents a margin of 40.2% compared to 12.5% in 2006.

Looking at the first half of 2007, revenue of EUR3.6 billion also increased 4% on the same period in 2006. Again, allowing for the negative impact of currency and for the impact of disposals and closures, revenue shows an underlying increase of EUR216 million, or 6.2%, for the first half. EBITDA before exceptional items of EUR514 million increased 28% compared EBITDA of EUR400 million for the first half of 2006. This represents a margin revenue of 14.2% compared to 11.5%.

The growth in revenue and EBITDA for the period and indeed for the second quarter primarily reflects product price improvements in Europe, but also important to remember, a very strong performance from the group's operations in Latin America.

This next slide outlines the progression in the group's EBITDA for the last six quarters and it shows continued improvement, notwithstanding the fact that we've seen some slowing in the past couple of quarters reflecting a number of factors. During the first quarter, we experience a rapid and higher-than-anticipated increase in recovered paper prices, which contributed to the margin compression I mentioned earlier. This impacted us approximately EUR19 million in the first half.

The anticipated Kraftliner price increases for 2007 were not sustained due to increased imports from the U.S. into the strong European markets, and this together with higher wood costs, limited profit Kraftliner profit growth. During the second quarter, we implemented a second recycled containerboard price increase to recover rising input costs. This also had a short-term negative impact on the earnings momentum of the group's Corrugated business, while price increases are passed through to the end box.

The consequent margin compression is reflected in the modest decline in Smurfit Kappa Group's EBITDA margins in the first and second quarters relative to the last quarter in '06. On the positive side, corrugated demand growth remains strong in Europe and Smurfit Kappa Group is progressively implementing recovered paper and containerboard price increases into our box prices. The increasing input costs, while causing margin pressure, underpin product price momentum and is expected to deliver continued corrugated price with improvement and EBITDA growth in the second half and into 2008.

Despite a difficult operating environment, the group commands the best EBITDA margins in the packaging sector, as is outlined here. Our objective is obviously to sustain industry-leading margin progression. Factors that impacted the margin compression in the first half, as already stated, were Kraftliner imports from the U.S., constraining pricing and higher-than-expected recovered fiber prices. The Combined impact of those were almost EUR30 million in the first half.

Turning to European Packaging, we continue to benefit from both balanced market conditions in Europe and good demand growth. The recycled containerboard volumes, excluding the impact of disposals and closures, increased almost 4% in the first half compared to the same period last year. And a more balanced market with tight inventories has allowed producers to recover significant increases in input costs, primarily recovered paper prices and energy.

The recovered paper prices increased by approximately 30%, that's about EUR20 per tonne, in the first half of 2007 and were up 22% year-on-year. Two consecutive recycled containerboard increased price increases of EUR30 a tonne each were implemented in the first half of '07. A further price increase of EUR40 a tonne has been announced for September 2007 as a result of the tight markets and even higher recovered fiber costs.

The Kraftliner market in Europe is a little bit more difficult and while market conditions are good, the U.S. Kraftliner imports increased 29% year-on-year to the end of April and this level of imports sustained up to the half year. This increase in U.S. imports reflects the relative weakness of the U.S. dollar and slower U.S. domestic demand. In addition to increased U.S. imports, Kraftliner has also experienced upward pressure on input costs, with wood chip costs increasing year-on-year, depending on the region, anywhere between five and 20%.

Smurfit Kappa Group's performance was also impacted by the fire at Facture, which resulted in significant unplanned downtime. Obviously the impact of this fire was covered by the group's fire insurance.

As a result of the sharp increasing U.S. imports, Kraftliner price increase was not achieved during the first half and this impacted our EBITDA margins and EBITDA numbers by about EUR8 million for the first half. The total European Kraftliner volumes declined 10% in the first half primarily driven by the fire at Facture. If that is excluded from the numbers, the underlying increase was approximately 3% in volume terms.

Turning to European Corrugated business, corrugated demand remains relatively strong in Europe and Smurfit Kappa Group's European Corrugated volumes. excluding the impact of disposals and closures, increased approximately 1.3% in the first half compared to the same period in '06. First half growth of 1.3%, however, compares to a broader 2.6% market growth in the same period. Our lower volume growth in the market during the first quarter reflects our strong position and disciplined stance on pricing. Our volumes improved in the second quarter due to strong demand in places such as the UK, Benelux, and Germany, in particular, as a result of the general underlying market demand growth.

As an integrated producer, the containerboard price increases have resulted in increasing input costs for our corrugated business, resulting in near-term margin compression. We achieved an increase of approximately 4% in corrugated prices in the first half of 2007 and clearly the clear priority in the second half is to continue to implement the necessary price increases to recover the input costs. July, for example, a further 1.2% of corrugated price increases has been achieved.

Strong demand environment in Europe together with balanced capacity in containerboard and rising input costs do underpin pricing momentum and will deliver continued Corrugated price increases and EBITDA growth in the second half of '07 and into '08.

Turning to Latin America, the region continues to make a sustained, strong contribution to our business. We have a strong market position in high growth markets and we have a good geographic spread, which de-risks any country-specific risks. As you can see from the charts, the region has concert delivered consistent growth in both revenue and EBITDA. And for the period, the group's operations benefited from higher sales volumes and higher average selling prices, which contributed to increased earnings growth for the region.

While market conditions vary from country to country, demand growth was generally strong across the region, with containerboard volumes up approximately 6.8% in the first half and Corrugated volumes up approximately 7.2%. Mexico, Columbia, and Argentina experienced growth rates of between 6% and 15% in the first half of '07, with positive price momentum also in each of those markets.

In Venezuela and the Dominican Republic, volume declined somewhat in '06 for a variety of reasons. However, these declines were more than offset by higher product pricing. Argentina's growth rate slowed year-on-year, affecting the country's difficulties in energy terms. However, the first half financial performance showed a small increase from the same period in 2006.

Turning to our group Specialties Division, the Specialties Division comprises those European mills which produce grades of paper other than containerboard, together with the related converting operations. So they principally comprised graphicboard mills and solidboard and boxboard mills, our paper sack business, and our group's bag-in-box operations.

The financial performance of this division declined on the comparable period in 2006 in the first half and primarily reflects a reduced level of profitability in the solidboard operations against a backdrop of a very competitive market. Our performance was also impacted by the absence, should I say, of one solidboard operation, which we were forced to sell as part of the merger conditions by the EU.

The performance of this division, particularly solidboard, has also been more severely impacted by rising recovered paper costs because of the higher favorite fiber content than in containerboard. While board price increases have increased year-on-year, further price initiatives are required to recover the increase in input costs. Without a good supply/demand balance as we have in the containerboard market, it is much more difficult to achieve. Our strong and discipline stance on pricing, which continues, is having a consequent negative impact on volumes.

The boxboard business improved in the second quarter and the first half over last year. In our sack business, we are operating also in a very competitive environment and sack craft paper prices continue to increase as a result of a very good balance between supply and demand. However, on the converting side, it is a very fragmented and competitive marketplace. That means that the paper price increases are much more difficult to achieve in the converting business.

Our bag-in-box business reported strong growth in both volumes and profitability in the first half and is currently operating near full capacity. The group has concluded an agreement to acquire a further bag-in-box business, which was underpinned continued growth.

I would now like to hand over to Ian to take us through the financials in some more detail.

Thank you, Gary. Good morning, ladies and gentlemen. This slide outlines the strong performance in first half with improved performance against each financial metric. Third party revenue increased by 4% year-on-year driven by strong demand growth and pricing momentum in Europe, with continued strong performance in our Latin American operations. Allowing for the impact of closures, disposals, and currency, the underlying year-on-year growth in revenue was just over 6%.

With the benefit of strengthening selling prices, the overall profitability of our operations improved and pre-exceptional EBITDA was 28% higher year-on-year. Allowing for the impact of closures, disposals, and currency, the underlying year-on-year growth in EBITDA was over 30%.

Within Europe, the greater growth in earnings came on the mills side, with the benefited of improving box prices on the Corrugated side being partly offset by higher cost of containerboard. Market conditions were relatively difficult for some of our specialty packaging businesses. With depreciation and amortization broadly unchanged, the year-on-year increase in operating profit was 54% higher year-on-year.

With interest savings in '07 offset by higher currency gains in '06, our net finance costs were broadly similar year-on-year, resulting in a pre-exceptional profit before tax of EUR139 million in '07 compared to EUR34 million in '06, an increase of over 300%. Operating exceptionals, primarily [reorg] and restructuring costs, amounted to EUR35 million compared to EUR83 million in '06, with financial exceptions of EUR103 million relating to our debt refinancing following the IPO.

Turning now to the segmental analysis, our Packaging segment comprised of our European Packaging operations and our Latin American operations in total, revenue increased by 5% to EUR3.154 billion in '07 from just over EUR3 billion in '06. Allowing for the impacted disposals of closures, the underlying year-on-your move in revenue was an increase of EUR215 million.

Pre-exceptional operating profit from our Packaging segment amounted to EUR302 million, compared to EUR183 million in '06. The year-on-year increase of EUR119 million, the equivalent of about 65%, primarily reflected the strong demand growth and pricing momentum in recycled containerboard and corrugated in Europe.

Profit growth, though, was constrained, however, by the higher-than-anticipated increase in recovered fiber costs during the current year. Although these increases resulted in a second recycled containerboard price increase, which was implemented in quarter two.

Exceptional costs of $18 million relate primarily to reorg and restructuring costs and that was mainly the controls of Alaincourt Mill in France. Post-exceptionals, the operating profit at our Packaging operations amounted to EUR284 million compared EUR102 million in '06.

Revenue from our Specialties segment decreased by 2% from EUR482 million in '06 to EUR471 million in '07 due to the absence in '07 of our loan and solidboard operation in the sale of our Swedish paper sack business. Allowing for the impact of those disposals, the underlying year-on-your move was a marginal increase of about EUR1 million.

The pre-exceptional operating profit from our specialty segment was $24 million in '07 compared to $26 million in '06 and, again, allowing for those disposals, overall, it was effectively flat, unchanged year-on-year. Exceptional costs of $7 million relate primarily to reorg and restructuring costs mainly in respect to the closure of our Dutch solidboard mill. Post-exceptionals, the operating profit in our Specialties segment was EUR17 million in '07 compared to EUR25 million in '06.

Turning now to costs, on the left-hand side of the slide are the cost developments comparing the half-year financials of '07 with '06. While headline cost movements appear modest, the underlying cost movements, adjusted for reductions incapacity following closure and disposals, show increases year-on-year. Recovered fiber and wood costs show significant double-digit increases year-on-year. Recovered fibers for reasons already discussed and wood costs given to tight markets given by biomass considerations. Labor and energy also increased year-on-year on an underlying basis while distribution costs marginally declined.

Excluding fiber and energy, the other costs combined equate to an underlying inflation level of about two to 2.5%, which would mean about 3.5% was enough for synergies.

Turning now specifically to synergies, in our synergy program we continue to deliver synergies savings which are ahead of target. The annualized synergy run rate at the end of '06 was approximately EUR124 million. This is ahead of our original expectation of a run rate of EUR95 million by the end of '06. Momentum behind the synergy program continues and the run rate at the end of '07 was approximately $146 million. SKG's current objective is to deliver total synergy benefits of EUR180 million ahead of the original EUR160 million and earlier than planned.

Turning now to cash flow, free cash flow for the first half of the year was a net outflow of EUR37 million compared to a net outflow in the prior year of EUR128 million in '06. The improvement in free cash flow reflects a combination of higher profits generated at lower working capital outflow.

Working capital increased by EUR98 million the half-year to June 0 7 with higher debt (inaudible) SOX primarily driven by pricing issues, offset by higher creditors. Capital expenditure at EUR147 million in '07 represented 84% of depreciation. Our full-year target is approximately 90%.

Looking now to debt paydown, as you are aware, SKG successfully returned to public equity markets in March. The group raised gross proceeds of almost EUR1.5 million for a global institutional offering, which was, as I said before, significantly over-subscribed. This comprised an initial public offering of EUR1.3 billion and the full exercise of the Green Shoe.

Proceeds were used to reduce debt and optimize our capital structure. On June 30 '07, our net debt was EUR3.6 billion, which compares to EUR4.9 billion at December 31, '06. This has reduced the net debt to EBITDA from 5.5 times to 3.6 times.

The group's financial objective remains the same, which is equity accretion through debt paydown. We remain on track deliver net debt to EBITDA ratio at least to the bottom of our range, which the original range was 3.25 to 4.25.

Looking now at the profile of our debt portfolio, it is particularly well structured and has a long-term maturity profile. During the second quarter, we announced an intention to further reduce the overall cost of debt by seeking approval to amend certain terms of our senior credit facilities, including a reduction in margin across each of the group's facilities. In July we successfully secured approval from our lenders for this.

The amendment, considered together with successful cash tender offer for some of SKG's U.S. dollar bonds and euro-denominated bonds due 2012, has reduced the cost of debt by approximately EUR10 million per annum. In terms of the bank amendment, over the life of the facility, this results in a saving over EUR50 million. This reduction cost of debt together with payment of debt post-IPO has resulted in a reduction of the group's overall interest cost by approximately EUR160 million per annum. We have now repaid all of our high costs debt and our first material debt maturities is about four years away.

So to summarize our 2007 first-half performance, we're reporting a solid financial performance with 28% growth in EBITDA year-on-year. SKG remains -- industry-leading margins with 14.2%. We continue to make good progress in our synergy program and are ahead of our target. We continue to focus on debt paydown and expect to meet a net debt level of EBITDA at the lower end of our range, as I said.

Looking now to the outlook for the industry supply and demand in Europe, demand remains strong, is expected to grow by 10.2% from '07 through 2010, a growth rate will demand approximately 1.7 million tonnes of new capacity. There are announcements in the market of new capacity which equate to about 1.6 million tonnes, but are unlikely to impact the market until early 2010. This means that market should remain balanced in the near to medium-term.

In the event of any excess capacity, players in the industry vindicated their commitment to capacity closures. The industry has closed 2 million tonnes over the past two years, while 1.6 million new tonnes were being introduced. This underscores the new broad-based commitment to efficient capacity management that we're seeking in this industry. It should not be misconstrued as a commitment from SKG, which is fundamentally an integrated player, to compensate disproportionately for excessive capacity additions by others.

We are pleased to be reporting today a strong financial and performance growth for the second quarter and the first half of '07. This performance reflects continued strong demand growth, balanced capacity across the group's market, and a generally positive pricing environment.

Increased input costs and paper prices have not yet fully translated into higher corrugated prices, which are being progressively achieved. Increasing input costs by causing margin pressure in the first half underpin product pricing momentum and is expected to deliver continued corrugated price improvement and EBITDA growth in the second half of '07 and into '08.

Thank you very much for your attention. I will now hand back to Gary, who will chair any questions. But before I do, for the benefit of those who are listening by conference call, would we ask you that you use a microphone when asking any questions. Thank you, over to Gary.

(OPERATOR INSTRUCTIONS)

(Inaudible question - microphone inaccessible)

It's Barry Dixon from Davy. Just a couple of questions. First in terms of the corrugated pricing, 1.2% in July following (technical difficulty) quarter, it certainly looks like it was a momentum. Just in terms of the July increase, can you give us some sense as to how much of that is contracts which are being renewed (technical difficulty) being renewed, how much is sort of long-term contracts which are index-linked being -- the price is getting the lift in that and maybe some sense as to where you see corrugated prices going for the rest of the year? I know you've talked before about needing to get an 18% increase (technical difficulty) corrugated. What about the numbers around that performance?

Let me just frame the context and then I'll ask Tony to deal with the detail. As you say, on a previous call-in at IPO time were looking at EUR230 a tonnes price increases for paper as a consequence of cost pressure from import costs. To achieve them right through the boxes in total would have required about 18%, and as we said at that time, highly unlikely that the totality of that would be achieved, so one to 1.5% of slippage would be quite normal for a couple reasons. Prices that are much higher than the average in some customers, very, very important customer relationships, and so on and so forth.

So that is the context in which we're shooting. Obvious that number does not factor in the new price increases we have announced. Tony, do you want a talk about the makeup of the July --?

If you take the July increase, as you know, it is a half-year, so there is obviously some degree of price point at the half-year for the six-month contracts that are coming up for renewal. If you look at our broad business mix, about 25 to 30% is somewhere in the region of European-type accounts and most of those will be on three-month, six-month, or in some cases yearly contracts. As those kick in at their particular moment in time, you start to see the effect.

July would have really reflected sort of the first-quarter price increase rather than the second-quarter price increase for those type of businesses. It is much more immediate in local accounts where you, generally speaking, would be starting to see the second increase coming through into the other part of the business, the 50, 60% business, which is starting to feed in during July -- June, July, August, September. So we'll see those starting to see the momentum in the second price increase there.

The second price increase and potentially the third price increase will, again, lag in the bigger accounts because there is this time in effect. It is also on the way down and it works to our advantage, obviously, in a different type of market, but on the way up, it is a little bit slower than we would like. 1.2% was a reasonably satisfying results for seeing the reality of some of the increases that we have seen. As I say, some of the bigger -- a small percentage of the business that we have for yearly contracts and we'll start to negotiate those in the third and fourth quarter.

Could I quarterize that and say three times 1.2 is 3.6. It would be a bit optimistic, would it?

I think so, yes. You'll see a bigger lump in July than you would in the subsequent months, but then we have another price increase announced. If that announcement is (technical difficulty) you're seeing more people following our announcement (technical difficulty) that announcement is successful, then you'll see a further push in the corrugated industry for increases that will start to have a material effect probably '08 onwards.

In guiding, Barry, (technical difficulty) guiding we would probably be saying the prudent approach is the full EUR60 a tonne in the first-half going to go through corrugated by the end (technical difficulty) EUR40 a tonne number (technical difficulty) little of that of really. The 1.2% in July is a classic example of how careful one needs to be in terms of modeling it. That is basically in index trigger. 24 hours made the difference. 30th of June it did not exist for us. (technical difficulty) care needs to be taken (technical difficulty)

Another question in terms of Kraftliner and I know you've talked about the difficulty getting price increases. There's been some talk recently of price increases, particularly in Southern Europe and Spain and Portugal, coming through in terms of Kraftliner. Have you seen any evidence of that or is there any evidence that the market is strengthening to an extent that it is able to cope with the additional U.S. --?

Barry, I would not say there is evidence of price increases yet of any substance in the southern parts of Europe. As you say, they are really the key indicators, but what we're seeing evidence of is a tightening of the market. We're seeing a general slowdown in the exports from the United States to Europe and other part of the world. In fact, in Latin America where we are a big net buyer of Kraftliner, we're seeing some evidence of I won't say shortage would be too strong, but certainly tightness that did not exist at this time last year.

So we see encouraging signs on Kraftliner, but it is too early to call it as to a turn in Kraftliner. I think one of the interesting things is that as the recycled paper price has moved up on a square-meter basis, on a like-for-like basis, Kraftliner is actually cheaper now then Testliner, so that obviously will have some impacts as we move forward to reverse substitution in certain instances, not in many, but in certain instances. It is not to take a whole lot on a 3-million-tonne Kraftliner market to change the weight of movement in that market. So I think that is -- there's some very positive straws in the wind, but that is with they are, straws in the wind at the moment.

John Mattimoe, Merrion. Just some questions on the follow-through on the pricing from Barry, just in relation to the September price increase that you've planned, is there any reaction for the market yet that would give you any encouragement with regards to the probability of that increase being successful?

Also then just in relation to the cash flow side, Ian, if you could maybe confirm to us that the big issues in terms of just debt movement in the first-half, outside the IPO costs, were the exceptional items, the debt restructuring costs, and the working capital movements. Maybe if you could just give us a sense going into the second half if there will be any more cash exceptional costs, any further debt restructuring cash costs, and whether the working capital will reverse largely to the second half.

Just in relation to the IPO proceeds, can I just ask you to clarify if the 1.495 was all in the first-quarter or was an element of it received in second quarter, from the Green Shoe, for example?

We will give Ian a couple minutes together his thoughts on that and get Tony to talk about the confidence on the price increase.

John, I would say the reason that we have led the price increase in the third or -- late third quarter early fourth quarter is due to the fact that import costs continue to rise. We had a spike, an unexpected spike in recovered paper prices in July primarily due to the Chinese, which we see no evidence that that is going to go away. So therefore, the industry is seeing not only that, but it is also seeing rising input costs for items such as starch in the fourth quarter that, frankly, are significant.

So there will be a need, I believe, for the industry to recover these costs unless they are happy with margins, which we're not currently happy with. So therefore, what we have seen so far is a number of independents in the last couple of days come out and support the price increase to varying degrees, all September 1 interestingly, some at 30, some at EUR40 a tonne and on white top test as well. So we've seen a, generally speaking, in the last 24 hours, 48 hours a move toward supporting a price increase.

So we feel, I would say, pretty confident. Whether it all goes in on September 1 or whether it ends of being October 1 as people start to negotiate, it is going to be up to how the market sees us in the next couple of weeks. But I would say it is going to happen.

Have any of the other majors (technical difficulty) or is it just the independents?

We have not seen an announcement from any of the other majors, but I think, generally speaking, when you get some of the major independents that have announced that is a generally good lead for the rest of the market, so I think that I would be surprised frankly given the input costs that we are seeing that the other majors must be seeing that they would not follow.

Just on that, it is worth bearing in mind for people that the later in the year a price increase comes through, the more challenging it is to actually get it through and then the more likely there is an element of margin compression. And I'm not trying to give any signal, I'm just saying that nobody start adding any bottom-line benefit from that 40 to freely because it is late in the year. That is not taking weight also Tony's point about I think reason of reasonable confidence that it come. Ian, do you want to talk about the profile?

Good starting point, actually. We actually put in a summarized cash flow on page nine of the press release. It explains things, I think, quite well. So to deal with some of your questions there. Free cash flow, which is effectively excluding -- we try to exclude all the IPO costs, that is for the quarter, for three months is at EUR3 million positive (technical difficulty) in the similar period to the prior year EUR47 negative, EUR37 negative for the half-year, planned 128.

When you look at our cash flows, typically quarter one and quarter two normally are negative and this is the first time that we've seen positive cash flow in this quarter. So when you go back and you look typically at our year in total, as we would expect, if you look quarter four, which was the first quarter of '05 that we were effectively together, you would have seen free cash flow positive of 27. Quarter one of '06, a negative, quarter two '06, negative, quarter three, positive of 63, quarter four, positive of 35. You're seeing here positive actually -- negative in the first quarter, positives in the second. And we would expect, as usual, going forward positive cash flows in quarter three and quarter four.

To deal with specifics with one or two of the other points that you raised, when you look down at the cash flows in general, you see working capital change 70 negative in the first -- sorry, the second quarter of the year, year-to-date 98 negative this year. Playing EUR36 million negative compared the prior year, so slightly better than prior year.

Working at various percentages, like as a working capital as a percentage of sales, we are at about 10%. It is probably gone out about 0.4, 0.5 of a percentage points and that is mainly due to pricing. Compared to our competitors, SCA in a similar period on content of 12% and Monday would be in the order of about 20% working capital. So working capital got out his actually a good percentage.

Capital expenditure is the other big movement in there, which as I said, we would expect to be 90%. The movement in current provisions there of 61 is effectively the closure costs. We had a cash restructuring program which we put in place in '06. The cash cost of that was about EUR175 million, of which we paid broadly around the EUR90 million during '06. This is the carryover of that with some other bits and pieces we carried.

The exceptional cost you see in the quarter and year-to-date, which is 30 odd million, because we split it out between operating and financial because the financial are pure IPO. The operating of EUR35 million, we would not expect significant cash flows against that for the remainder of this year.

To, when you move below -- sorry, I know this is a long answered -- when you move below the free cash flow, dealing with the other question, you can actually see on the far right hand side, you can see the movement of the cash coming in and effectively cost of the various refinancing. So the cost in quarter were EUR19 million from the IPO and various movements on borrowings of 14 of the repayment and various refis of EUR18 million. On the far right hand side, you can actually see them the cash inflow of 1495, which is obviously based on that in quarter one.

So the net cash outflow for the period of EUR49 million is effectively all the IPO costs and bits and pieces, giving a net positive move year-to-date of EUR1.3 million. I'm trying to think, is there anything else I've missed now in that?

(Inaudible question - microphone inaccessible)

Correct, Q1, yes.

Any other questions from the floor?

John Sheehan, NCB. Just to clarify a couple of things, I think you said in the presentation that U.S. imports of Kraftliners were at 29%, but then if you figure for the first quarter it was 15, I'm just wondering the trend there. Everything that accelerate or is it from a broad range of producers or is its kind of a lumpy flow? Can you see a change sharpening and any side of any improvements or reduction in imports? Obviously the dollar is not particularly healthy.

Secondly on the synergies, you had to target there for 160 to 180. And the timing was end of 0 9. You're running ahead of that is and what is your view on the timing for the 180 at this stage? You say in the announcement that would be sooner than what you have expected.

Then just a broader question on the Specialties Division, given the unfavorable demand environment I know there's a number of different businesses in there, what sort of capital would be tied up in the business? Solidboard looked like it is pretty challenging environment. Any further actions you can take there or any sinking in terms of long-term positioning for some of these business segments?

Let me hit the Kraftliner one and ask Tony if he can deal with the Specialties one. This synergies one is a quick answer. On the Kraftliner one, the 15% was quarter one and the 29% quarter two, as there was clearly an escalation as obviously U.S. market remains soft and pricing efforts in the U.S. market did not go through, so obviously the attractiveness of the European market in terms of pricing and the euro strength, obviously it was positive.

That has stabilized. First of all, let's quantify, we're talking about approximately 150,000 tonnes in a market that needs about 3 million tonnes, so it is not, as Tony regularly points out, it is not huge numbers that swing pricing in these markets and therefore, the reverse is equally true. On the U.S. pricing, the indications we are hearing is that there is growing confidence that the price increase in the U.S. that has been sought will be achieved. So stabilization of the imports as we have seen from the reduction so far, but these are efficient steps and, obviously, they're not up-to-date July/August yet. But obviously some confidence growing in the price increase.

On the synergies, what we said is EUR160 million would be achieved earlier than planned and we would be reasonably confident that we're heading towards that in '07, certainly early '08. The 180 revision, for those who remember on the IPO roadshow, we indicated that we started with a gross target of EUR180 and we took a conservative perspective because we were banking or financing the deal off the synergies. So it was critical we achieved the numbers.

But the EUR180 has been established because we're confident we can make the gross number probably earlier than '09, but would not want to be pinning our colors yet to the mast because it is still a number -- well-run rates are posted, their actually deals done and decisions made come up the actual execution has to be finalized, so it could be an agreement to close a box plant but still leads to close to do the IR are to do with all of asked, so it is never kind of issue in.

So far I think important to which donated earlier call is a lot of the rationalization we're done importantly has been done without any major IR are problems come a any major issues come a any major business downtime or anything like that. That is important to us as well. It is already find posted one off numbers in project mode into the underlying businesses that impacted by them, so on the specialties in terms of capital tied up first.

Total property fixed assets, effectively we have been a balance sheet is like EUR3.3 billion with a variety giving a total overall assets in the business of 6.3 MMBO dinner us. Current assets of 2.5, within that the specialties would not be very significant amount. We have not actually broken out the specialties cheaper. There effectively in order of magnitude.

Tony on actions and strategies?

I think, John, you have to look at it basically by segment. The three businesses, four businesses -- bag-in-box, sacks, and cartonboard, are actually doing relatively well. The big area of challenge that we have is in the solidboard business, which is a business that has changed a lot over the last decade as it has -- as corrugated in fact has become much more competitive product for it.

Additionally in solidboard it suffers much more than other businesses because the higher content of fiber that goes into making solidboard as prices co-op and in addition to that generally speaking a lot of their businesses done on an annual contractual basis because it has to do with agriculture, so in era of rising prices for recovered paper, it tends to suffer a lot more additional as I say you have higher competition because of supply train, supply chain compression. That is allowing for us to find this challenging area.

We think we have a good business here ultimately, but this year we have downsized, closed one factory, downsized another, and we're in the process of downsizing another. We closed one paper mill. We may have more to do to get to that business into right shape for the future, but there is generally speaking a good business here and we just have to manage it as receipt wetlands come us to speak. But I think in general it is going to get hurt more on the upside than other business and it will succeed a lot more if there is to be a downsized due to recovered paper.

Any other questions in the floor? Operator, can we check if there are any questions on the call?

Myles Allsop, UBS.

First question revolves around the outlook statement. With human results come a user that you expected to deliver full you're out come a line with a current market expectations. Do you -- you omitted that sentence this quarter. Do you still believe it will deliver in line with market expectations?

I think, Myles, the position is at the half-year we're broadly where we expected to be. Notwithstanding the margin compression from the Kraftliner pricing and the recovered paper prices, which is for almost EUR30 million. We have a very strong market position. The fundamentals are exactly as anticipated. There has been no wavering on that. Notwithstanding affect the Kraftliner is presumed not have the pricing anticipated originally in the IPO, we believe still that we can achieve the type of consensus numbers that are out there.

Okay. Other than just clarify the corrugated price increase the 3.7% in the first half, that have fun have to presume rather than year-end year?

That is half-on-half. It is basically -- the way we approach is come a because we need to be very careful they're so many numbers rattled around the market for the variety of different people who comment and report. Rather than trying to talk to anybody else's book, we take a very simple approach which we at least understand. Whether you do are not as another question, but we started the top and our numbers are very straightforward point-to-point numbers, but the troughs 100 we're basically saying at June we're at one under 12.4 point-to-point and in July wondered 13.6 come us about as the progression. We also said it is before the EUR40 a tonne targeted increase later this year with a EUR230 a time on the '06 price increases, to deliver cover that would have needed to be at 118 and realism would never recover the full wondered 18. It is a more like wondered 16.5,117. Against that number we're at one under 13.6 if you factor in July.

Watched -- and thinking of what we are sort of talking in January/February time, if all goes as planned, what sort of half on half increased you expected the second half?

Will be honest with you come I think other than stating that -- you'll have to do-it-yourself come a because I do not what to get accused of profit court forecasting because these current price increases are obviously fairly fundamental to the overall profitability. But the 18% which would recover all '06 and '07, the EUR230 a time in paper, the EUR40 a ton extra would target that than somewhere around 21 come at 22% to fully recover. As I said come up 1 to 1.5% may be of the slippage is not abnormal for our perspective and the unlikelihood is that we will recover very much if any of the EUR40 a tonne and '07. It'll probably slip mostly into '08, so I'm thinking about context you can probably figure broadly where we would hope to be.

Opaque images thinking about the increase in the guidance specifically, are you expecting to see a net benefit from matter is a just offsetting the cost inflation?

Well, in essence we're marginally down on where we expected to have the half-year or for 1 to better word in bullet terms in terms of the guidance and would have given. Notwithstanding affect that we have been hit for approximately 30 million you're Rose, so the corollary clearly us with making it up elsewhere and obviously our synergy program was very helpful in that regard.

Okay, and the last question is around the kind of interest charge, the kind of pre-exceptional net interest charge of 69 million you're Rose in queue too. It is at the level we should expect that the rest of the year we hopefully some get paid down to pull it down to the?

Ian here. If you retake the annualized interest savings, the cash annualized interest savings is the order of 90 million you're Rose come a 91 million you're Rose. The recent repricing as another 9 million you're Rose come attending your us to that. To the cash saving on annualized basis is 100 million you're Rose. The interest stating on the PIK side, I even non-cash, is 60. On interest savings for the year, what should be looking for is in relation to cash was 70 and a PIK of 40. New interest build been on a cash perspective would be in the order of annualized about EUR240 million and in '07 number of about EUR270 million.

Thank you.

Johan Sjoberg, Carnegie.

Looking at the average for the second quarter, you mentioned in junior hat index of one under 12.4. What the average the second quarter would use a?

3.7,it would be probably -- and I am guessing, so let me say that we may have to come back with -- to be probably no more than 2%

Opaque a looking at the wondered 13.6 in July were to estimate that this level would be by the end of September?

I think you're going to work at one for yourself. As I said come a corrugated pricing is so correlated with profit bottom-line impact that I am not going to get into that. It is too risky. A get me say to you that would expect -- try to help you. It would expect that in order to recover the EUR230 a tonne paper price increases and all of the '06, we needed 18% from the troughs at the beginning of '06. We do not anticipate to the 40 you're Rose a tonne will deliver very much in terms of box price increases in '07 simply by virtue of timing and the need to get the follow-through for everything we're seeking. It would be optimistic and probably unrealistic to expect to fully recover either the 18 percent or the 21 come a 22% all in. I think if you configure it out from that.

Okay, fine. Also looking at for the fourth quarter, the ongoing price increases in containable containerboard appears -- you without saying that maybe you have hamburger also. Are you basically -- is that FDA that you're waiting for an apple come in price increased you have not seem?

Tony 21 to dust?

We have not seen yet as see a Armand. We have seen yesterday he asked, which is a big independent player, and a couple of other smaller ones who have announced. So obviously we have not seen as see a and we have not seen Monday at.

Final question was on sac paper. Produce a something about how much of you achieved in price increases during the third quarter and what would you see the outlook for the price increase on sec paper going forward? You mentioned it was that you had some problems in the converting business bear, but could you give us some flavor and further price increases?

The sac paper market is extremely strong. We announced EUR60 during the last quarter come a last year, which we achieved by the start of the year. We announced a further 60 arose in April, which was fully -- not fully but that's a three quarters implemented to the fact that some annual deals by July 1. We will look at-bats particular grade in the coming couple of weeks and see what we decide to do for the fourth quarter. The general view on sac paper demand right now on a global basis is extremely strong and in such an environment would expect to see continued improvements. The converting side is a different story. We have seen a lot of closures and in advance of those closures of sac paper machines, we have seen a lot of converters buildup stocks. Those stocks need to work out through the system before converters realize that they need to raise the prices and hence the reason there's been some significant margin compression that business over the last six months. But that will unwind itself as we look forward.

Okay, great. Thank you very much.

Tim Cahill, Davy Stockbrokers.

A couple of questions, starting with OCC prices. Can you tell us a little bit about the kind of dynamic in OCC at the moment? A few other things are little bit higher in July and I suppose essentially how you expect things to play out through the rest of the year? Do see a rather more stable level now, or do you still see some upward pressure?

Okay, Tim, let me get Tony to take that question.

OCC, as I said, is spiked up in July by EUR10 a tonne. That was unexpected. It does not normally go up during the summertime and historically OCC in the fourth quarter, due to collections, tends to weaken up a bit. With the amount of Chinese capacity that has been added and their lack of -- the general lack of raw materials, we're not anticipating any weakness of the moment. But it is a real fools games to try and forecast OCC prices because clearly the Chinese development is having a big influence on that. As I said earlier, as soon as we have seen OCC prices spiked, we have gone to try and recover that in our marketplaces and that is what we and the industry will have to do.

Tony, do you think the recent price increase is mainly due to the Chinese buying or have they been back aggressively in July?

Sorry, come again?

Have the Chinese been back buying aggressively in July?

They were buying aggressively in June and July, and that is what pushed the price up in July, but there were a couple of factors to do with that potential new tariff on exports, new regulations on exports from the European community, which sort of spooked them a little bit which have not really gone into effect. So I think there was a little bit of panic that did not really need to be there by the Chinese, so that has now abated. But nonetheless, you are in a low collections season and generally speaking, the market still remains tight for OCC.

Okay, then if we move on to Kraftliner, Tony mentioned earlier we had seen some positive signs on the Kraftliner side. What would it take for you to look to increase prices? Are we still quite a way away from that or is it just kind of a slight decrease in imports could result in some sort of a price increase?

Tony, do you want to take that?

I think as soon as the market tightens up where we start see the absence of the Americans, we will look to recover our costs. As Gary mentioned in his speech, the cost base due to wood and other materials is going up, so us, along with others, need to recover those costs. Clearly at the first available opportunity, we will take advantage of it.

I think, Tim, is important to remember that as Tony has said, the demand side is in good shape, so obviously the knock on consequences, that is it that does need something on the supply-side to actually facilitate further progress. But the most important aspect of this is demand side is right, because, obviously, it does not take much on the supply-side.

My last question is -- sorry to go back to this, again, Gary, but on the box prices, I just want to make sure I have this right my own head. We forget about the EUR40 per tonne price increase for September, it looks like about 16% would be your goal for the end of the year, starting from the 100 index that you talked about. If I remember correctly, I think you achieved 8% through the end of '06. It feels like you've achieved an incremental 5% through July, which is net at 13%. So does that mean that you need roughly around 13% -- sorry, an extra 3% by the end of the year to achieve your goal?

Yes, 16% maybe a bit -- is not a bad target. The end of '06 was just short of 9%, 9.5. So the balance between the two and 13.6% where we're at today is roughly where you are at. You are correct.

Thank you very much.

Operator, can I just say we're running into some time problems, so we have time for probably about two more questions.

Theodore [Stamos], Blue Mountain.

I just have a couple questions on your capital structure. Specifically it looks like this morning in your press call you said you are going for around 3.25 times leverage target. Is that correct?

Second, if that is correct, is it safe to assume that you will not be tapping the debt markets anytime in the near-term? Then my last question is when and if you do tap the debt markets, would you think you would favor the bank markets or the bond markets?

EBITDA, the forecast we said debt to EBITDA on the road show and the IPO that we would operate in the range of 3.25 to 4.25 times. We started the year at 5.5. We are at 3.6 times and by the end of the year, we will be at the lower end of the three in front of it.

With regards to our capital structure, we would be very happy with the capital structure that we have. We have no intention at this time of tapping the debt market. If at any point in time we do intend to go back to the debt markets, we would have a look at our capital structure at that time. At this time, we have no intention of going back there.

Just to clarify, looking at these headlines from that call this morning, you say that you see leverage at the lower end of that range. Is that just where you see the actual leverage being at the end of the year or is that your actual -- do you see the target being at the lower end of that range?

It would be lower than the 3.25 -- at the end of the year.

Okay, thanks.

Jayanth Kandalam, Lehman Brothers.

Our last question will come from Eshan Toorabally, Goldman Sachs.

Question, again, just going back to box question finally, in terms of the 4% that you've got through in the first half of the year, a recent call from SCA suggested that saw minor price increases 1Q and then 4% increases towards the end of the second quarter. Is that a similar sort of timeline for the price increases that you have seen in boxes?

I think one of the reasons I said we were going to pin our colors to the mast and state exactly what we mean in pricing is so there is no equivocation. So the answer is no two companies will have the same profile. It depends on the contract, it depends on the percentage of the business that is index-based, three-months, six-months, twelve-months contract based. How much of it is local, the timing of the contracts, etc. So it is impossible to compare like as like in the short-term.

Obviously, over periods of 12, 18 months, it is not difficult at all and the expectations are the people will be dancing to the same tune. So I do not know the answer. All I can tell you is what we have done, which is basically close to 4% in the first half and ballpark -- sorry, actually 12.4 point-to-point at the end of June and 13.6 end of July and with a target, as we said to Tim Cahill, of maybe somewhere -- in recovery terms, we recovered the EUR230 a tonne somewhere north of 16% for the rest of '07 -- by the end of '07.

Okay, thanks. Just finally on CapEx, I know you said that in 2007 it'll be approximately sort of around 90-plus-percent of depreciation. Can you give us sort of a target in this phase for 2008 and similarly on the tax rate, what is the latest guidance on that?

Well, in terms of a normal capital investments in our business, we will continue to target to be sub-100%. But obviously depend on what strategic opportunities are out there, so it is still a reasonably good guide for a normalized capital investment.

On the tax rate, Ian?

Cash tax would be in the order of EUR60 million, EUR65 million. The P&L tax charge in the order of about 20%

Okay, is that 2007 or is that going forward as well?

That is '07.

Okay, thank you.

Operator, thank you very much for the call. Thank you, everybody, for being on the call. Indeed, thank you to everybody here this morning.

Just to summarize, as far as we are concerned, we think this is a solid performance despite the unexpected input cost increases. Importantly, we have retained a good, strong EBITDA margin and we are obviously top of the pile in terms of EBITDA margin levels at 14.2% and we think the strong market conditions will underpin increased corrugated price increases and obviously EBITDA growth in the second half and into '08.

So thank you for being here and for your support and have a good day.