Smurfit WestRock PLC (SW) 2008 Q2 法說會逐字稿

Welcome to the Smurfit Kappa's Q2 and first-half results conference call. For your information today's conference is being recorded. Today's call is being hosted by Smurfit Kappa's CEO, Mr. Gary McGann, Mr. Ian Curley, CFO, and Mr. Tony Smurfit, President and COO.

I will now pass the call over to Mr. McGann for opening remarks. Please go ahead, sir.

Thank you very much, operator. Good morning or good afternoon, ladies and gentlemen. And welcome to the Smurfit Kappa Group second-quarter and first-half earnings call.

Before we review the earnings we would like to preface the call with the Safe Harbor disclosure. Although the Group doesn't provide financial projections or specific earnings guidance, our discussions may include predictions, estimates, or other information that could be considered forward-looking. While these statements represent our best current judgment of what the future holds, they are subject to the risk of uncertainty which could cause actual results to differ materially. Throughout the call we will attempt to discuss important matters relating to our business, which may affect our predictions.

Trading to our results, we are pleased to report EBITDA of EUR514 million for the six months period to 30 of June 2008, which is the same level as the first-half of 2007. A strong cash flow performance has delivered further net debt reduction.

The better EBITDA outcome than expected by the market of EUR514 million in the first-half reflects the continuing benefits of our integrated model and our focus on operating efficiency and cost takeout.

The Group continues to outperform its industry peers over the period with an EBITDA margin of 14% and a return on capital employed of 11.3%.

Our net debt in the first-half of 2008 reduced by EUR119 million, primarily reflecting a strong free cash flow generation of EUR77 million in the second quarter, proceeds from the sale of our shareholding in Duropack in May, and a dividend payment of EUR35 million to our shareholders. Year-on-year our net debt was reduced by EUR320 million, the equivalent of 9%.

We remain committed to generate strong cash flow throughout the cycle. Our free cash flow use for 2008 currently exceeds 25%. This reflects our continued capital restraint, our working capital sales ratio at the lowest level in the industry, and our sustainable low cash tax.

Our strong track record of acquiring well-invested assets at the optimal point in the cycle allows us to maintain a lower level of CapEx than others, without appearing the quality of our assets. However, we continue to invest up to EUR360 million annually in our operations, which is at or below depreciation levels.

We invest to maintain our competitive advantage on the market, focusing on market and customer needs, energy efficiency and labor cost reduction. Our main financial objective in 2008 continues to be further net debt reduction. We have a well structured long-term maturity profile, with the first material maturity being over five years away. Approximately 60% of our debt is fixed, and our average interest cost is 6.2%.

With such a competitive package, our strong free cash flow generation is kept on the balance sheet. Therefore, while reducing our level of net debt, we have over EUR450 million of cash available at the end of June, in addition to unused credit lines of over EUR750 million.

Our main debt covenant is net debt to EBITDA, which has remained below 4.75 times in 2008, and the low 4.5 times in 2009. And we remain countable with this covenant test.

Our strengthening financial platform provides us with the resources to increase our exposure to higher growth markets where appropriate.

Turning to the performance drivers, as anticipated earlier this year after a positive demand growth in the first four months of the year, demand for corrugated in Europe was weaker in May and June, contributing to a market decline of approximately 1% in the first-half. Notwithstanding that, are Corrugated Division delivered a strong set of results, reflecting our continuous focus on pricing, and in particular margins, can even at the expense of volume.

Everything else being equal, the 1% move in corrugated pricing is EUR43 million to the bottom line, while the 1% move in volume is EUR14 million.

While our corrugated prices increased by further 1.6% in the first quarter and remains stable in the second, our volumes in the first-half decreased by almost 2% year-on-year. This number particularly reflexes drops in the more commodity type sheet volumes, while our volumes of value-added corrugated boxes were broadly flat year-on-year.

The positive achievements in our corrugated business was substantially offset by weakening conditions within our containerboard system, where higher inventories at inventories levels and lower demand combined to generate a sharp fall in recycled containerboard prices. At the end of June a EUR60 a tonne price slippage for recycled containerboard was reported in the indices in most markets. In July a further EUR30 a tonne decrease was reported. This represents a 12% decrease compared to December 2007 prices.

Reacting early to the anticipated challenging operating environment we announced a permanent closure of 130,000 tonnes of less efficient containerboard capacity in Spain. This closure further illustrates our continued focus on operating efficiencies. Since the merger in '05 we have continued to close higher cost capacity, now totaling 20% of our then total capacity.

As a result of these actions, it should be noted that our recycling mills comprise an increasingly efficient high-quality system, which is no longer likely to be a source of material capacity rationalization.

Our average delivered cash cost in the first-half of 2008 across our main [roads] was in the order of EUR300 a tonne, with our lowest mills well below that number. Current kraftliner [tube] prices in mainland Europe are in the order of EUR400 a tonne. We estimate that higher cost producers must be currently selling at or below cash cost of production. As such, inevitable industry casualties will occur if current conditions sustain.

In the context of the proposed significant capacity additions to the market for 2009/10 it is worth noting that integrated players comprise over 50% of the European market. These companies, like Smurfit Kappa Group, supply their plants from their own paper resources, and therefore benefit from secure containerboard customers in an over-supplied market.

As a result, the existing nonintegrated players in the newly introduced capacity will have to share a market demand of less than 10 million tonnes. The announced new capacity in the industry for '09/'11 now totals 2.5 million tonnes, representing 25% of the nonintegrated tonnage.

In addition to the mill closure, the Group is continuing to take market-related downtime to address the lower level of demand, and to maintain its working capital at the lowest level in the industry.

The Group has taken 50,000 tonnes of downtime to the end of June at a cost of EUR6 million in the first-half, and applying a further 30,000 tonnes of downtime in the second half of the year.

Our increasingly efficient recycle mill system, together with sustained pressure on operating efficiencies and cost reductions, contributed to partially mitigate the adverse impacts of the recycling containerboard price slippage in the first-half of the year, continued to outperform our peers over that period.

Trading to kraftliner, the Group is a clear leader in Europe with 34% market share overall, and 40% market share for White-Top. Kraftliner is a premium grade, which enjoys premium margins. In the first-half of '08 the Group's underlying kraftliner volumes increased by approximately 3%. But continuing imports from the US maintained downward price pressure. However, as the $55 a tonne price increase implemented in the US domestic market in July is implemented for export, it will create the opportunity for kraftliner pricing momentum in Europe in the second half.

In that context, the Group is already implementing a [$50] a tonne price increase for kraftliner in the UK in July, and has announced a $40 -- EUR40 a tonne price increase initially for September and a EUR40 a tonne from the 1st of October in the rest of Europe.

Our Latin American business continues to perform relatively well in the first-half, although volumes in some markets, notably Mexico, were affected by general economic conditions. In addition, the overall financial contribution of Latin America to the Group's earnings, while increasing in dollar terms, was adversely affected by the relative strength of the euro.

The Group continues to enjoy superior performance in its Latin American business, reflecting leading market positions, strong focus on pricing and cost control, supported by downstream integration and the recovered fiber in forestry.

Our average sales in Latin America was 13% per annum in the past five years, while our EBITDA margins are sustainable strong in the late teens to 20% over the same period.

In an environment characterized by broad based cost inflation, the Group continues its major focus on cost reduction. We remain on schedule to finalize the achievement of over EUR180 million of synergy benefits by the end of '08. And this program will contribute to 200 basis points of sustainable margin improvement throughout the cycle.

In addition to these synergies, the Group has now initiated a three-year cost takeout program, targeted to deliver at least EUR60 million in 2008 with a cumulative delivery of up to EUR160 million by 2010.

Turing to our raw materials cost evolution. Despite softening prices in the second quarter, our recovered fiber costs increased by 15% in the first-half of '08 compared to the same period in '07. Our wood costs, although 5% higher in the first-half, were lower than expected, primarily reflecting the geographical spread of our wood needs between Scandinavia and Europe.

Our French, Austrian, Spanish and Slovak mills were less impacted by the implementation of Russian duties due to the geographical location, competition and other circumstances.

Lower wood costs contributed to maintaining good kraftliner margins over the period.

Notwithstanding the upward pressure, distribution cost in the Group's system remained unchanged in the first-half, continuing to benefit from our focus on synergies from logistics optimization within our integrated system.

Our underlying energy cost was 10% higher year-on-year reflecting the higher price for oil and other energy sources, offset by our proactive hedging and focus on energy efficiency. As an example, last year we started a new [EUR85 million -- EUR5 million] recovery boiler at our largest kraftliner mill in Sweden, allowing us reduce the energy cost of that mill by 45%.

We're also in the process of participating in a bioenergy project in France. And at the end of June our energy needs were almost entirely fixed for '08. And we estimate energy cost inflation to between EUR70 million to EUR80 million for the full year.

Free cash flow for the first six months of '08 was a net inflow of EUR77 millions, compared to an outflow of EUR37 million in the same period in '07. Our pre-exceptional EBITDA was unchanged. Improved cash flow primarily reflects a EUR29 million reduction in cash interest outflow as a result of our IPO in March 2007, combined with reduced outflows in respective current provisions and lower capital expenditure.

Working capital increased by EUR83 million in the first six months of '08, with higher [debtors in stock] offset by higher creditors.

The comparative increase in '07 was EUR98 million. As a percentage of annualized net sales revenue, working capital at June 2008 represented 10.4% compared to 10.2% at March '08 and 10.4% again at June '07.

The Group has the lowest working capital to sales ratio in the industry, comparing very favorably with that of our competitors. We anticipate that our ratio will reduce in the second half as seasonal factors reverse.

Capital expenditure of EUR128 million in the first six months of '08 represented 73% of depreciation compared to 84% in '07. The lower expenditure in the first-half is a function of timing of our projects.

Tax payments of EUR30 million in '08 were EUR5 million higher than in 2007, reflecting the overall improvements in the pretax profits.

In terms of outlook, while the operating and general environment today continues to be characterized by a slowdown in corrugated demand growth, pressure on pricing, and broad based cost inflation, we believe we will deliver a financial outcome in line with current market expectations for '08.

As an industry leader we base our capacity management programs on a realistic assessment of demand for our products today and not tomorrow. Across all industry cycles we will continue to exercise restraint in our capital programs and maximize our cash flow generation.

Our current performance reflects our continued belief that superior returns in this industry can be delivered through effective acquisitions of well-invested assets at the optimal time in the cycle, followed by a subsequent restructuring, a source of sustainable synergies.

As can be seen from our first-half results, we are well-positioned to outpoerform our peers in the industry and deliver strong returns across all metrics through the cycle.

I want to thank you for your attention. And now Tony, Ian and myself are happy to take your questions.

(OPERATOR INSTRUCTIONS). Bill Hoffmann, UBS.

I wonder if you guys could talk a little bit about the strategic outlook. I know historical you have talked about potentially now that you have gotten to this kind of leverage level looking at strategic bolt-ons, both in the European market and in Latin America. I want to get a sense a little bit more of what your thoughts are there.

I think our position is very clear. Our priority consistently has been over the last 18 months, two years to pay down debt. I think our results at the half-year have demonstrated that we're continuing to be on track for that.

We have also identified the fact that irrespective of cycles and general economic environments, there are from time to time opportunities that are strategically good fits arise, and we need to be in a position to take advantage of those opportunities as and when they arise. And we are open to that.

We are obviously of the view that we can't afford to overpay, and we need to make sure that they are generally strategic and deliver synergies and ultimately benefits for the shareholders.

And in terms of, you appreciate obviously we're not compared to front run anything we're going to do in that regard, but our key focus areas continue to be, firstly, the markets we are well-positioned in, Latin America being the best positioned one in terms of the major growth markets. Eastern Europe, obviously we have a good foothold in it, and see further opportunities for sustained growth over time. And indeed, ultimately China can't be ignored given the clear outlook for manufacturing developments in China, and given that we package lots manufactured in locales, China has to be ultimately on our agenda.

But in the near term, priority for debt paydowns, opportunistic approach to acquisitions that present themselves as strategically fit. And we can't ignore in the climate that we're in, and were particularly with the type of capacity additions we're facing, we can't ignore that we need to be alert to the opportunities and ready to deal with them in the event that there is major consolidation opportunities that fit our book.

What I am reading from your tone here is that, just given some of the softness in European market right now, plus the capacity coming on, that you're somewhat more conservative about your outlook at the moment?

No, I think what we said from early this year was '08 would be down on '07. And we guided the market at the end of our first quarter results as best we could. And the market analysts took a view on that which we wouldn't fundamentally disagree with. And we are basically saying, based on the half-year results and what we're currently seeing, we're prepared to underpin that view.

(OPERATOR INSTRUCTIONS). Alexi Soroca, Smurfit Capital.

This is Alexi Soroca from BNP Paribas actually. Not quite Smurfit Capital. Actually, as of follow-up to the previous question, and reversing it, I would say Q2 was ahead of ahead of our expectation, and I think consensus expectations as well.

First of all, just to calibrate what you mean about the market expectations, I saw Bloomberg at an intermediate target of EUR940 million. Is that something you are subscribing to? That is the first question.

The second question is whether you see a possibility of outperforming relative to the target, or you really think that as realistic as it can be, given the environment, also that would imply fairly visible drops in EBITDA for the second half of this year?

Just to be clear, I guess, our view of markets consensus in the order of EUR940 million to EUR950 million, that type of range. In the EUR940s million. So the Bloomberg view would be in or around where we're at. That is consistent where we were at three months ago when we were on the first-quarter results, notwithstanding the fact that I saw some commentator this morning indicating a view that we had come off the type of number we were on. We are not. We're basically saying the guidance we gave in the first quarter, we're reconfirming now at this point in time.

As to whether that is -- given that the second quarter, to your point, the second quarter and the first-half certainly was ahead of market expectations. And so is that basically saying that we're saying there would be a slowing down in the second half? That is consistent exactly with we said from the outset. Because the key point, and maybe I will get Tony to talk to it, is the knock-on effect of paper pricing on corrugated. Tony, do you want to talk?

I think obviously what we're trying to do is mitigate any of the falls in recycled paper pricing into boxes as best we can. Inevitably there will be some. And that is obviously what is built into some, or most, of the forecast. On the positive side, we see some areas of opportunity, such as waste paper reductions that may happen or the potential for kraftliner price increases, which as Gary mentioned in his commentary, we're announcing right now.

At the moment, we would obviously be taking your point that the second-half will be weaker than the first-half. It certainly is looking that way, but clearly we're going to do our best to mitigate as best we can.

The straw is in the wind. Just bear in mind the straw is in the wind, which we certainly wouldn't have been talking about at the end of quarter one. This kraftliner pricing is now announced. A question mark as to whether it is sustained. It is sustaining so far.

Secondly, we certainly wouldn't have seen -- we had no view as to where oil prices would have gone, and consequently energy costs, but clearly oil prices have come off recently. Now whether they sustainably come off or not is anybody's question. But there are positives and negatives out there. And it brings us to a conclusion that says we're saying we're reconfirming where we were at at the end of quarter one.

But would say there is scope for better performance that is currently implied by the market?

I think we wouldn't want people to take away anything more than what we're saying. And that is not a coy way of saying yes, but I don't want to admit to it. Basically we are saying -- I think in the current climate, given the volatility, the general economic uncertainty out there, lack of financing in the debt market, etc., etc., to be able the to confirm anything with a reasonable degree of confidence I think of itself is an achievement. And we have done that two quarters in a row in a very clear and definitive fashion.

Notwithstanding the fact that we're accused by some people that some of our competitors have a different view on life, we are basically saying what we said is what we delivered at the half-year. And we're reconfirming what we're saying for the full year. We're not saying it is more than that. Obviously by definition we're obviously saying it is not less than that either.

Finally, again taking your earlier comments, I understand your view about bolt-on acquisitions. Does it mean that you're open to transformational transactions of some sort should the opportunities present themselves as you implied that you need to be opportunistic on a larger scale potentially?

I think there are two dimensions to it. When we talk about opportunistic, there are businesses in parts of the world -- we are in 31 countries -- there are businesses in countries indeed we're operating in, which will be a very good strategic fit for us. Which if they become available at a point in time, irrespective of the cycle, you take that opportunity, otherwise it doesn't come again. If it makes sense, then we will find a way of doing it. There are more bolt-ons of a less scale.

And then the second reality of life is that I think everybody accepts that this industry is far too fragmented, particularly really in Europe, and indeed, to a lesser extent in Latin America, the two theaters of operation for Smurfit Kappa Group.

Given that reality and the likelihood that capacity additions that we're going to see substantial change of some shape or form. That change needs, A., to be to the benefit of the industry that we come out of this better than we went into it.

Secondly, I believe our track record is very strong in this regard. We have been good at finding and executing transforming deals over time. We have done a deal probably every three or four years of some substance. And I don't see any reason for us to stop at this point in time. And we need to find ourselves in a position to do so, hence the reason for us staying reasonably -- notwithstanding our overall leverage -- staying reasonably liquid with cash on the balance sheet and available lines for such transaction.

George Staphos, Banc of America.

A couple of market-related questions. Have you seen early in the second-half any receding at all in the pace of imports online or into Europe? Could you comment to effect?

Also, more broadly, could you give us a feel for volume trends either by geography or product as you are seeing it early in the summer months here at third quarter?

I will get Tony to deal with that.

On the imports, we have seen consistently a little bit weaker this year than last year. I suppose that pace is -- I won't see accelerating, but it certainly is not getting any worse for us. So I think that -- with the dollar where its got to and with the shipping container rates, we are seeing the Brazilians start to announce price increases, the Americans start to announce price increases. So that broadly should be very positive for the European market. And we're seeing our own order books, which is generally the best sign of all, start to expand in kraftliner.

I would say broadly speaking I think that imports from United States and Latin America would be weakening a little bit, and we're seeing the benefit of that in the order books of our kraftliner mills.

On the market themselves, I would say that up until the first-half we have seen reasonable demand in Germany and Benelux areas, softer demand in the southern countries, including France, and Eastern Europe being okay without being as good as it was last year. Albeit that we held on to significant margin there, so we're doing reasonably well.

Latin America, second quarter was weaker than we would have expected, mainly due to currency and mainly due to some local slowdowns in the Mexican market. But we start to see some signs as we look forward into the third quarter as to a slight pickup there, especially with energy costs coming off in certain markets such as Mexico.

It would be fair to say that third quarter has been continuing at that trend thus far?

Yes, I think that is fair to say. Yes.

Is a very strange quarter, as you know. Because we've got these funny summer periods in it. But as a generality, it is as you say.

Last question and I will turn it over. Bigger picture, not that you can actually enact this or wish for it, but do you think higher energy prices would actually be beneficial to you longer-term, as it might affect the cost curve and some of the capacity that needs to come out in the market?

I suppose the simple answer is, if it was part of the catalyst of flushing out people who are destroying the market in terms of pricing and very, very low margin business, yes. But overall, as a somewhat energy dependent industry, clearly ultimately you never volunteer for this. But in the near-term I don't think it would be up to us anyway. I think -- the big cat is already out there.

Matthew Armas, Goldman Sachs.

T2o quick questions. Can you say what your current level of testliner integration is and what your current test capacity is, net of your Spanish closure?

Tony?

The Valladolid mill is the 130,000 tonnes. We were about 350,000 tonnes short of testliner. With some of the efficiency improvements we have made within our system, we would expect next year to be about 400,000 tonnes, a little bit more, 400,000 tonnes short of recycled capacity.

And your current recycle capacity in Europe is?

(multiple speakers), 3.5 million tonnes or so.

Fraser Lundie, Fortis.

A couple of quick questions. On the downtime which you have earmarked for the second-half, I think the number you said was 30,000. How flexible is that? Is that the sort of thing that could be quite a serious -- quite a big range depending upon the supply and demand dynamics?

Secondly, just on the acquisition policy, and bearing in mind what you said about the debt markets being closed currently, does that rule in things like JVs and your optimal sort of equity debt funding of these acquisitions you mentioned going forward?

Let me take the first one. I will get Ian to deal with the second one. I think in terms of the first one, we announced back -- when we indicated that the 2008 outlook was going to be tougher than 2007, we also indicated at that time that there had been an inventory build over the Christmas and the early Easter that needed to be addressed, because obviously the demand side wasn't going to be as bullish, and therefore was going to come to the rescue.

We announced contemporaneous with that two things. One, that we would take out the Valladolid Mill, and we would enter into discussions with the unions to close that. And secondly, that we would take up to 80,000 tonnes of market downtime. We have done both the mill closure and 50,000 of the downtime. But bear in mind that the mill closure will deliver in the second half of the order of 70,000 tonnes of downtime, plus potentially another 30,000 tonnes of downtime.

All in all, with an inventory excess in the market at any time during this year of anywhere between 150,000 and 200,000 tonnes. By the end of this year we will have dealt with 150,000 tonnes of that with reduced production by Smurfit Kappa Group. We're not going to do any more than that. It deals with our own inventory system. It deals with our working capital levels. And it satisfies our own internal needs. Ian, you want to take that?

With regard to our view on acquisitions. And when you look at it at the moment we have cash of about EUR450 million northwards on the balance sheet. The unused lines of about EUR0.75 billion. We borrow at 200 over, and our first real debt maturity is about December 2013. So we see ourselves in very good shape there.

One of the issues as far is we're very good at converting profit into cash. And what we find with JVs in particular, it is very difficult when you're doing an acquisition with a JV are a minority in there, to get obviously control of the cash flow and to get the synergies very quickly, because you're always looking at the other side. Ideally we never go into a JV, if at all possible.

On going private in '02 we actually sold about EUR1 billion of assets. We brought in about EUR0.5 billion of assets. And that was to make our capital structure effectively very efficient from a cash perspective.

When we, again in private going in '02, our EBITDA was in the order -- I can remember -- EUR500 million ,EUR600 million. Our cash tax was EUR135 million. Last year our EBITDA was EUR1.064 billion, and our cash tax was EUR80 million. That is because we're good at sort of debt push down. We are good at efficiently managing our positions.

We have very, very limited minorities on our balance sheet so we have very good access to our cash flows. And that would be something we would really, really want to think very, very long and hard about changing that. Effectively it is a cornerstone of our acquisition strategy, and that is to control the cash flow.

We have, just to be clear, and we have been absolutely consistent, and Ian and the guys have driven this, and as we have said, when you look below our EBITDA line we have benefited usually from that strategy. But we're also -- I think, we have a very, very strong track record of identifying deals that make industrial and strategic sense for ourselves. Now given our scale, they need also to be such that they change the shape of the industry. And then figuring a way of getting them done.

We never -- I think it is safe to say we have never failed to do a sensible strategic and industrially logical deal for the want of financing or financeability.

Like we would, again, from being BBB+ credit down to a single B, to a BB flat credit, where we're very comfortable, we would have built a lot of long-term relationships with the debt markets. So as Gary said, provided a deal is sensible, even in the current climate, it is possible to do it.

(OPERATOR INSTRUCTIONS). [Glenn Zahn], [FNC].

Most of my questions have been answered, but I'm just trying to understand a little bit about some of the pricing, the weakening conditions you had in the recycled containerboard. Can you just talk about when this started and the magnitude of the deterioration?

Tony?

We have about EUR90 off the high-price that we would have had probably at the start of this year, February or so. So basically it has been an accelerating trend over the last four to five months. And that is a function of general -- the stock that we announced in first quarter was in the system, which we obviously have taken action to do, but the industry has not done enough. And ultimately the market I would say just basically cracked and gave away a lot of the gains that it had actually got to recover all the input costs.

Really at the end of the July we're about EUR90 down on the high point. Probably at these levels we have really, if not got bottom -- bottomed out, we've got to the level we're it is near the bottom. And we should suspect to see some bouncing along here.

We are currently seeing recovered paper prices going down a little bit. We are currently seeing energy going down a little bit, and that might have some effect of not being able to raise pricing. But at these levels, a lot of the mid to high cost mills will be underwater and will have to do something about it.

Just talking about the inventory overhang, how bad is it? And can you talk a little bit about the magnitude of that overhang?

Is about -- it varies between 150,000 and 250,000 tonnes. It is minimal really, but obviously it needs to be dealt with and hasn't been dealt with by the industry thus far.

Any thoughts how the industry, whether you're seeing anything that is going in a positive direction?

Yes, I think that at these current levels people are realizing that it is pretty silly continue to run their machines. So we have seen some people announcing downtimes. Not enough, but there have been some that have announced downtimes. And we have obviously done our piece, but the rest of the industry needs to do it.

These downtimes that you're seeing, do you feel they are going to be more of a temporary or they might lead to some type of permanent closures?

I think if the price stays at these levels for long enough, it will ultimately lead to some closures, yes.

The one thing then just to bear in mind, that notwithstanding the guidance we're giving, which is -- if you look at the economy you can figure it out yourself, which is a slowing, and obviously, the consequence of the overhang on paper price, as Tony has covered.

But in that negative outlook, the reality of life is that the opportunity exist for these deteriorating circumstances to drive the marginal players out of business. This is an industry that has been dogged with fragmentation, the smaller places players basically selling for cash. And it is only in these circumstances that you ever get these guys to basically not be able to afford to continue, because every tonne they sell, they're losing money on it.

It is an industry that needs consolidation. It is an industry that we will only get consolidation by necessity, not by desire. So I don't want to get into kind of clouds having silver linings, but the reality, the upside of the outlook that we are seeing in the marketplace is that inevitably the shape of the industry and the consolidation of the industry will improve as we come out of it.

Just furthermore on the kraftliner price increases you announced that you're seeing, are you seeing any pushbacks from your customers or are these things -- price increases that you think are going to go through?

I think if you remember we said there are three stages to it. We had $50 in the UK, which was driven quite a bit by the sterling euro rate. We've got EUR40 in Italy, which is in a market that obviously tends to hit the low levels quicker than anywhere else. And we're announcing a third -- EUR40 dimension of it, which is EUR40 for the rest of Europe.

In the UK it is reasonably well-established. It is too early to say in the rest of Europe. But so far, so good. But it is obviously into a market that is nervous and volatile. But clearly we wouldn't have got out there with the price increase, and indeed the industry collectively has gone out with this price increase, without some reasonable expectations that it would hold.

I don't know if this is a fair enough question, but when will we know that these price prices are sticking?

Certainly when we talk again we will. (multiple speakers). And we report quarterly.

I know that. On the input costs, just the magnitude of those input costs in the quarter and how those input costs basically fared as the quarter progressed, did they increase, did they decrease, did they abate somewhat?

Ian, do you want to take that?

When you look at the input costs half-year on half-year, what you're looking at OCC went up by about 15%, energy up 10%, wood up 5%, and labor just up about 2%.

Within the OCC we have said we have seen a bit of the OCC prices going down in the latter part of the half-year. Likewise, energy down I think about $15, around that stage. They would be the main. And wood prices, our wood prices were effectively -- were more affected in Pitea, up in the North of Sweden, rather than France and Austria. So we expect to be flat in those countries.

That is effectively the movement on the three major costs. And then the remaining labor would up 2%. That is very much an annualized thing.

Labor one, as Ian says, it is an annualized thing, but the reality that of the current inflationary environment, of course, is pressure on labor costs is used everywhere across Europe. But it depends on when the agreements are concluded.

As we have no further questions, I would now like to turn the call back over to Mr. McGann for any additional or closing remarks.

Thanks, operator. Again, ladies and gentlemen, thanks for your interest in today's call and for your ongoing support. We are obviously pleased to report and overall good EBITDA and cash flow have come in the first-half. And our continued focus on the cash flow has delivered the further net debt reduction we have spoken about.

Despite the increasingly challenging operating environment, we believe that our strong customer orientation and geographic spread, as well as our focus on efficiency and cost takeout, and the financial strength that Ian has talked about, will deliver current market expectation for 2008.

And as can be the seen from our first-half results, the Group is positioned to outperform the peers, and continue to deliver strong results across all metrics in the cycle.

Again, thank you all for attending the call. Have a good day.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.