Smurfit WestRock PLC (SW) 2008 Q3 法說會逐字稿

Good day, and welcome to the Smurfit Kappa Q3 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Gary McGann. Please go ahead, sir.

Thank you, operator. Good morning or good afternoon, ladies and gentlemen, and welcome to the Smurfit Kappa Group 2008 third quarter and first nine months' earnings call.

Before we review the earnings we would like to preface the call with the Safe Harbor disclosure. Although the Group does not 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 factors relating to our business, which may affect our predictions.

Turning to our results, in an increasingly challenging operating environment, we're pleased to report a strong free cash flow performance of EUR226 million for the first nine months of 2008, double the levels of the corresponding period in 2007.

The continued strong cash flow generation has allowed the Group to reduce its net debt by 7% in the past 12 months. We're also pleased to reaffirm our previous guidance, as we remain on target to deliver the expected level of financial performance in 2008.

While the Group's EBITDA in the first nine months of the year was 6% lower than in the same period in '07, our free cash flow performance over the period doubled to EUR226 million. This performance reflects our commitment to retaining strong cash flow generation across the industry cycle, supported by our reduced debt servicing costs, sustainable low cash tax, tight working capital control, and continued efficient management of capital expenditure.

Furthermore, to further increase our free cash flow and maximize debt pay down in the expectation of continued tough operating environment, we will progressively reduce our capital expenditure from current levels towards 60% of depreciation by 2010.

The incremental cash flow impact from lower capital expenditure relative to depreciation is expected to be approximately EUR100 million over the next five quarters, from Q4 '08 to the end of 2009.

The Group continues to single-mindedly apply its cash flow proceeds to further net debt reduction. As such, in the first nine months of 2008, the Group is the only company amongst its peers to deliver net debt reduction.

At the end of September 2008, the Group's net debt was below EUR3.2 billion, down from over EUR3.4 billion at the end of September 2007. Looking at leverage multiples, the Group's net debt to EBITDA was reduced from 3.3 times at the end of September 2007 to 3.1 times at the end of September 2008, giving it continuing significant headroom compared to its covenant level of 4.85 times at the end of the third quarter.

In the current environment, the Group continues to benefit from its lower than average interest costs of 6.2%, and from its long term debt profile with no material maturity in the next four years. In addition, the Group benefits from strong liquidity, with approximately EUR730 million of cash on its balance sheet at the end of September 2008, and unused committed credit lines of approximately EUR600 million, maturing in December 2012.

Turning to the performance drivers, reflecting the overall slowing economic environment, in the nine months to September, the Group's corrugated volumes for 2008 decreased by 1.9% year-on-year. This decrease was brought in line with the trend indicated at the first half of '08. In the third quarter, our volumes in August were very slow, our corrugated shipments in July and September were generally flat, year-on-year, benefiting from the Group's Pan-European offering and our broadly based customer group, primarily in the more resilient food and beverage sector.

On withstanding the lower demand, our corrugated division delivered a solid financial performance as Smurfit Kappa Group resisted the downward pressure on pricing.

In the third quarter, the Group's corrugated prices declined by approximately 1.5%, as index contracts started to reverse the price increases implemented in the first half of the year.

At the end of September, the Group's average box prices are flat compared to December 2007. Everything else being equal, a 1% move in corrugated pricing is EUR43 million EBITDA for Smurfit Kappa Group, while a 1% move (inaudible) [EUR15 million]. While pricing is under increasing pressure, the Group is maintaining its ongoing focus on pricing, rather than on volumes.

The positive achievements within our corrugated business were substantially offset by weaker conditions within our recycled containerboard system, where prices declined by EUR90 a tonne from March to July in most European markets, which is the equivalent of 18%.

Prices remained reasonably stable in August and September, as a significant part of the industry began to feel the economic pain of the current environment. The sharp price decline arose as the lower demand across the market led to a continued inventory overhang. At the end of June 2008, industry inventories were 38% higher than in June 2007. Ongoing market downtime in the third quarter and easier comparators reduced this overhang to 25% at the end of September.

In that context, in order to avoid an increase in its own inventory levels, and to maintain working capital at the lowest level in the industry, the Group has taken 65,000 tonnes of market downtime in the first nine months of the year, and is planning a further 95,000 tonnes of downtime for the fourth quarter. In effect, Smurfit Kappa Group will have reduced its annual recycled containerboard production by over 200,000 tonnes in 2008. That's approximately 6.5% of its capacity, through the permanent closure of its Valladolid mill in Spain in July, as well as the market downtime.

Notwithstanding all of that, with inventory levels across the industry remaining high, the recycled containerboard price increase announced in October has not succeeded, while the recent drop in OCC prices reduces the magnitude of the margin depression for all industry players. The Group estimates that a significant number of paper mills are at break-even or even loss-making at current price levels. This is beginning to be reflected in the increasing number of capacity reduction announcements from small private businesses, as well as from larger industry players in quarter three.

By the end of 2008, approximately 390,000 tonnes of higher cost recycled containerboard capacity will be permanently closed, with a further 360,000 tonnes formally announced for 2010. This is the equivalent of 4% of European recycled capacity. Further capacity closure announcements or industry casualties should occur if current operating conditions sustain.

By comparison, the Group's overall containerboard system remains competitive in the current environment, supported by their lower cost base, optimized integrated paper and corrugated system, and an unrelenting focus on cost reduction. In addition, our integrated system is short by approximately 250,000 tonnes of brown recycled containerboard, giving us a competitive advantage against our competitors that are long on paper.

In the first nine months of 2008, prior to the reduction in input costs, the average delivered cash cost of production of our main mills remains around EUR300 a tonne, with our flagship mills well below that number, and this compared to Testliner 2 prices in mainland Europe of almost EUR400 a tonne at the end of September.

Turning to Kraftliner, where Smurfit Kappa Group is a clear leader in Europe, in the first half of 2008, continuing imports from the US generated downward pricing pressure for Kraftliner in Europe. However, on the back of the strengthened US dollar and supported by a healthy demand growth of approximately 2% in the first nine months of the year, the Group sought to implement a EUR40 a tonne price increase.

The implementation of this increase is proving somewhat challenging, due to the poor fundamentals but we have achieved a EUR20 a tonne price increase in most countries.

Our Specialties division reported a slight improvement in EBITDA in the first nine months of the year, supported by somewhat better conditions in solidboard, characterized by higher prices and incremental volumes following the bankruptcy of a competitor in the Netherlands.

However, our sack paper business, which was positively influenced by strong overseas demand in the first half of the year, fell sharply in the third quarter, following the widespread collapse in the construction industry. Pricing and volumes for sacks and sack paper continue under significant downward pressure, with sack converting have a very difficult time. While the outlook for this grade is extremely challenging, the Sack division represents no more than 2% of the Group's EBITDA in the first nine months of 2008.

Our Latin American business continues to perform well in the first nine months of the year, despite its 3% volume decrease year-on-year, driven by the economic slowdown in Mexico and Colombia and the farmers' strike in Argentina. However, profitability in local currency remained flat over the period, protecting the Group's continued focus on pricing. Furthermore, while Latin America represented 17% of the Group's EBITDA on average in the first nine months of the year, the region's contribution to the Group's earnings increased to 19% in the third quarter as a result of the weaker euro and the more resilient earnings profile of our operations in the region.

The Group continues to outperform its peers through the industry cycle, primarily reflecting the benefits of our integrated model, the resilience of our downstream corrugated business, the superior profitability of the growing Latin American operations and our leading Kraftliner presence across Europe.

Over the past 15 years, despite the cyclicality of recycling containerboard prices, the Group's EBITDA margins only fell below 10% once. That was in 1993.

Moving forward and notwithstanding the particularly unique aspects of the current global economy and particularly industry factors, we expect [trough] margins to be higher than in previous cycles, primarily due to the EUR180 million of synergies achieved between '05 and '08, which contributed to sustainable margin expansion.

Turning to costs, in an environment characterized by broad base cost inflation, Smurfit Kappa Group continued its major focus on cost reductions.

We remain on schedule to finalize the achievement of our EUR180 million of synergy benefits by the end of '08 and in addition to these synergies, the Group has initiated a three year cost take-out program targeted to deliver at least EUR60 million in 2008, with a cumulative delivery of up to EUR150 million by 2010.

This new cost take-out program reflects the Group's early anticipation of challenging economic times, and the need for a relentless focus on cost efficiency and total system optimization.

In the area of raw materials, despite softening prices in the second quarter, our recovered fiber costs were 5% higher in the first nine months of 2008 compared with the same period in '07.

In the fourth quarter, however, OCC prices are under very significant downward pressure, as European demand is lower, and Chinese producers have delayed their capacity expansion plans, reflecting a slowing in that economy also.

Our wood costs, although 6% higher in the first nine months of the year, 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 geographical location, competition and other circumstances. Lower wood costs contributed to maintaining good Kraftliner margins over the period.

Notwithstanding the upward pressure, distribution costs in the SKG system increased by just under 1% in the first nine months of the year, continuing to benefit from our focus on synergies from logistics optimization within our integrated systems.

Our underlying energy cost was 14% higher year-on-year, reflecting the higher price of oil and of other energy sources, offset by our proactive hedging and focus on energy efficiency. As an example, in '07 we started a new EUR85 million recovery boiler at our largest Kraftliner mill in Sweden, which allowed us to reduce the energy costs of that mill by 45%. At the end of June, our energy needs are almost entirely fixed for 2008 and we estimate energy cost inflation will be approximately EUR70 million for the year. At the end of October 2008, the Group has hedged 50% of its 2009 energy needs.

Turning to outlook, as indicated since our first quarter report in May, we expect conditions to remain challenging, characterized by the slowdown in corrugated demand and pressure on pricing.

Against that backdrop, we are pleased to reaffirm our previous guidance, as we remain on target to deliver the expected level of financial performance in 2008. This is primarily supported by our optimized integrated model, the resilience of our downstream corrugated business and superior profitability in our growing Latin American operations.

Our declining interest rates, stronger dollar, further capacity rationalization decisions, and increased financing risk for the announced new capacity are all potential positive developments. We nonetheless expect a continuation of tough operating conditions for 2009.

In that context, to further increase our cash flow generation capability and to maximize our debt pay-down through the cycle, we will progressively reduce our capital expenditure from current levels towards 60% of depreciation by 2010. This measure is expected to build incremental free cash flow benefits of EUR100 million over the coming five quarters.

As can be seen from the results reported today, we're committed to continuing to deliver strong free cash flow generation and to focus relentlessly on reducing net debt, regardless of operating conditions.

We are well positioned to continue outperforming our peers through the industry cycle.

Thank you for your attention, and I now would like to take questions, and I'll be joined on the questions by Tony Smurfit, our Group President and COO and Ian Curley, our Group CFO. Operator?

Thank you. Ladies and gentlemen, the question and answering session will be conducted electronically. (Operator Instructions). We will pause for just a moment to allow everyone to signal for questions.

Our first question is coming from Lars Kjellberg from Credit Suisse. Please go ahead.

Hi gentlemen. A question for you on your guidance for the full year. You seem happy about the consensus numbers, which still call for quite a meaningful sequential erosion in Q4 conditions. Do you want to talk us through what you're seeing and if this is more a seasonal effect from December, etc., or give us an update of what you see?

Sure, thanks Lars. I think what we're seeing is, on the top line we're seeing demand in general right across the European continent particularly, not quite so in Latin American, a softening in demand on a progressive basis. So that's the first issue.

I think secondly, at this time of the year, obviously December's always a challenging month to predict in terms of how much activity will take place from mid-month but most particularly this year, one of the assumptions that we are making, and presumably an assumption others should be making, is that with the high inventories that still prevail in the industry in recycled containerboard, that people should be taking downtime and the consequences of that downtime have to be borne, obviously, in the numbers.

So there's an element of seasonality, an element of the current economic climate and downtime.

Okay. In terms of pricing, you've clearly had a relatively moderate decline in corrugated pricing in Q3. Is that something that continues, or are you seeing a stabilization of prices or continued downward pressure?

No, I think, as you know, we've indicated that our corrugated pricing is down 1.4%, 1.5% from the peak. It's flat, basically, on December '07. And obviously, all pricing is associated with contracted agreements that are based on PPI and (inaudible), with a three, six or 12 months test point, are going to continue to be under pressure following what is effectively a EUR90 or 18% drop in recyclable containerboard since the beginning of the year.

So you have to make an assumption that that's going to come through. And obviously it is reasonable to assume that we will be under some pressure on other aspects of our corrugated pricing to other customers, local and national, that are not necessarily contractually bound to PPI (inaudible) but obviously we have a weather eye on it. And as you're aware, the quality of our box people, who I believe have done an incredible job to defend pricing and maintain our price levels and margin levels right through this year, because this year's been challenging from the outset. This is where they really perform and we indicated to the market on the way up that it took time to get pricing through to corrugated, but we also said that in the event of downturn, it would equally take time to get pricing back out of corrugated.

So you're seeing that element, you're also seeing an element of our guys battling for pricing that is not just driven by paper prices, but also has factored into it the other costs, like energy, like chemicals, like [solid], like transport, like labor, etc. And we're making progress in that regard, but I suppose the short answer, Lars, is that the pressure on corrugated pricing will continue downward.

I've just got two final questions. Obviously OCC is coming off quite a bit and diesel costs, energy costs should be starting to filter through, I guess. If you can quantify what you're seeing at this moment, what kind of annual effect that would have?

And the final point I guess, in terms of your own downtime planning for this quarter, if you can quantify how much that is and what's the cost associated with it?

I can't put a total cost on it because part of it, Lars, is -- in this quarter we will have our Valladolid mill closed, so we've already taken the hits for that in quarter three effectively. And in quarter three, our downtime, which was, we took how many downs?

15,000 in quarter three and that cost us about EUR2 million in costs to the bottom line. And in quarter four, we're basically saying we will do effectively 95,000 in total.

Thank you.

So it's not insubstantial.

In terms of OCC prices, we're seeing OCC prices -- at the end of September, we're seeing OCC prices at somewhere around EUR80 a tonne -- EUR88 a tonne, and those prices have come up in October-November and will come up again in December and they could be in the order of the magnitude of EUR40 and maybe more. Every EUR10 a tonne in OCC across the system is EUR50 million to the bottom line if it didn't have any knock-on effect. But of course, as you well know, not only does it have a knock-on effect, but in the climate where you've excess capacity and people selling at the margin, it has very immediate knock-on effects.

Sure, thanks.

Okay, thanks, Lars.

Our next question is coming from Myles Allsop from UBS. Please go ahead.

Thanks, yes, just a few questions, what was the market for corrugated volumes in the first nine months of the year. You were down to just under 2% but what was the market actually down?

Hard to know, Myles, we don't have a precise number, but I would suspect that we're not hugely dissimilar. Tony, do you have a view?

No, I think we're roughly -- it will depend by country, Myles, but I think basically we're in and around where the market is. Certainly on boxes, we probably over performed but on sheet feeding, we've significantly underperformed because as Gary mentioned in his script, the thing that we were focusing very hard on is margins rather than volumes.

But in a sense, a lot of the moving parts that we've seen over the last year whereby our business has got stronger, where others have got maybe not as strong, has come to our benefit with our customer relationships, so we've been able despite holding on to margins, to effectively not lose too much volume on the box side.

On the sheet feeding side, we've given up a lot of a volume.

Okay. And with taking temporary downtime, can we expect any more permanent closures to be announced by yourself? Clearly it's going to be a challenging couple of years ahead of us.

Yes, I think it's a good question. Just on the market one, I'm just reminded that SCA indicated that their volumes were down about 2%, so it's a similar type of numbers.

On the more permanent situations, I think the important thing to remember is that we've taken 650,000 tonnes of capacity out of the system. We've taken 10 machines out of the system. We haven't built a new machine; we've a bunch of people out there building new machines into the system, they have plenty of capacity too. So the priority order in which this needs to be addressed is by the people who are adding the capacity. We're obviously around the edges, even since we took the major capacity out in '06. We took [Alencour] out in '07; we took Valladolid out in '08.

So we're not indifferent to what's going on, but we're certainly not going to be the paymaster for the new capacity that's being brought in. And I think it will be interesting to see how the whole market deals with it. To me, in this current climate, the first priority is should all of the new equipment go ahead? Should the financing involved in new equipment be forthcoming in the context of the type of markets and the financial world we're living in? And then secondly, if it does go ahead, well, the people who are adding it have the first priority in terms of solving the problem and the rest of us will deal with the consequences.

What proportion of your capacity, your Testliner capacity is break-even or cash negative at the moment?

You hardly think, Myles, I'm going to even go remotely into answering that question. Very little is the answer. What we've indicated to you consistently is we, at the type of prices that prevail right now, we have mills that are up there competing with the best of them. Cash cost of production to my mind is only half the picture, it's cash delivered costs is the critical question. And we are extremely well positioned with the number of mills and box plants we have and the network systems that we have.

And we're satisfied that we have very little around the margins that would materially solve the significant excess capacity that's coming on stream. We'll deal with, obviously, any of our own inventory issues in the context of the marketplace as we find it, but I don't think we'll be found wanting in the context of cash cost of production or high cost mill systems. We have a range of mills but the average is in the market and well in the market.

And you're suggesting that maybe the current financing issues could cancel some of the new projects. Are there any particular projects you have in mind? Certainly the five core ones, DS Smith, Mondi, Hamburger, [Pro Group] and (inaudible) all seem to be happening. Is it more the kind of other ones that have been vaguely discussed or do you think there's any problems with those five core projects?

My attitude is, in any other industry where the market conditions change to such an extent, quite often you'll find people making judgment calls that they'll stall projects that they're bringing on-stream. The Chinese have demonstrated how that's done. The airline industry demonstrates it frequently. And quite frankly, the world I'm living in is asking for borrowings from banks for productive activities tend to go through very rigorous review processes and quite frankly, if the review process incorporates a declining demand market, a significant excess of capacity already in the market, a large amount of fragmentation in the market historically proving itself to be quite sticky, and the returns on the projects should be revisited. And quite frankly, I've yet to meet that the bankers that are giving several hundred millions to people for that type of project but it's amazing, they seem to be out there.

But there's no specific project that you (multiple speakers).

No, I'm just saying --

But no, I certainly agree with the logic, but in terms of reality I suppose.

Myles, there is one of those that potentially we are hearing in the marketplace is delayed at least, so we'll have to see which one it is and when but that's somewhat of a positive, as Gary mentioned in his script. The reality is there are some positives out there.

Okay. And just thinking about 2009, what's your expectations for demand and net costs at least for [free] waste paper?

I'll be honest with you, Myles, we haven't even finished our budget reviews yet. There was a time when we were struggling to actually tell you what December might look like. So honestly speaking, I think a reasonable assumption Myles, with the exception of the points Tony was making and has made in the script about interest rate costs, etc., I think you need to assume that 2009 will be tougher than 2008, and it's a question of degree.

And could you give us some reassurance around the dividend and the dividend policy, and the importance of dividend within that kind of cash flow mix?

I can give you absolute confidence that we paid the first interim dividend for 2008 about a month ago and so, therefore, we're a dividend paying company.

Given the type of volatility in the market out there and given the type of perceptions that certainly some observers seem to have about our industry and maybe even some of our competitors, I think it would be very, very difficult to give you any sense of what our views will be in 12 months' time, other than we set out to be a dividend paying company. We have paid dividends to date. Our dividend yield is very, very high but that's a function of a number of moving parts.

And we review all considerations at the time it's appropriate and make decisions accordingly. But what I can say to you without any equivocation, is this is a company that understands how to manage leverage. This is a company that's taken a medium-term view on this downturn, I would argue earlier than most, has been planning accordingly, has never breached covenants, and understands how to manage its equations in order to avoid doing so.

And notwithstanding the views of others who think we may do, including your good self, our job is to make sure that we don't even go there.

With the dividend, are there any restrictions in the debt that could stop it being paid if you do get close to covenant, or is there any limitation on the dividend and the ability of the Board to decide on dividend?

Ian, do you want to take that?

Yes, Myles, there's a dividend table that's going between 3.75 and 4.25 and 4.25 upwards, and we are well within any of those ratchets at this point in time.

The dividend isn't (inaudible) because as you know, we did pitch our dividend at a level where we could take a progressive view on dividends. We didn't set out to be a dividend company or a yield company. We set out to be a growing company and a leverage growing company with focus on other priorities. So it's not one of the ones that would cause us any difficulties.

Okay, perfect, thanks.

Thanks, Myles.

Our next question is coming from Anna Torma from Soleil Securities. Please go ahead.

Hello, good afternoon. I was wondering if you could give us some color on what you're seeing in both Europe and in Latin American, Mexico, with respect to US Kraftliner board exports. Have you seen a meaningful shift in the trade flows in the past two months?

Tony, do you want to take that?

Yes, I would say that it was characterized, Anna, by a stronger third quarter but since the third quarter, we would say that things have weakened off a little bit.

In our Mexican operations, we have received the increase in the third quarter. The fourth quarter increase that was mooted has gone away and I would say there is probably the downside pressure on pricing, but without it having moved down at this moment in time.

And into Europe, we've seen, basically, a fairly consistent situation where there hasn't been much significant movement in price, but it hasn't gone down either. Obviously, in Europe, we're affected by the dollar, as Gary mentioned in his script, and that is a positive for us as European producers of Kraftliner. So, we haven't really seen anything positive from the US into Europe since the announced price increases. But, still, we're a lot more competitive given the dollar.

Great. Thanks.

Thanks, Anna.

(Operator Instructions). We're now going to take a question coming from John Mattimoe from Merrion Capital. Please go ahead.

Hello.

Hi, John.

Excuse me. Just four questions, if I may. The first one is just on the dynamics of the relationship between box price movements and the recycled containerboard prices. Is there any rough factor we should keep in mind as for each 1% in box price movements, that that equates to a certain percentage move in recycled containerboard prices? And if so, has that relationship changed in recent months or years?

In very simple terms, John, the answer is there's a presumed mathematical one. But that's a function of just a simple formula pass-through of pricing going up or down. And, as you well know, the price recovery in box prices, when paper was going up, a) lagged it, and b) didn't quite recover the whole lot of it, mainly because we would have had higher priced customers that didn't go for the whole amount on etc., etc.

It is equally the case on the way down. And so, to try to draw a direct comparison between box prices and recycled paper price movements will give you a mathematically logical answer, but won't tell you what the human behavioral factors are. And I think where we have consistently, and certainly through '08 performed, is in not, basically, having that correlation effect, which is, effectively, that paper is approximately 50% of the cost of the box. And you should, in theory, have approximately 50% of your box price influenced by the price of paper.

But the job of our guys is to a) resist it timing-wise, and b) to bring to bear other factors such as cost inputs, like energy, labor, transport, etc., but most particularly in terms of the value-add which, even the most cynical of people will accept that, for good companies doing a full range of product activity with the customers, they will add value and they can fight about it around the edges. So, there isn't a perfect correlation.

If I could rephrase it maybe then, Gary. Just, do you think that that non-paper based element has increased in importance over the last year or two?

Yes. I think in the sense that if you looked -- in very simple terms, if you take it that the paper prices are down EUR90 a tonne since the beginning of the year, and our box prices since the beginning of the year are down 1.4%, 1.5%, you can clearly see that there's no correlation at all.

Now, you can argue part of that is timing, and unquestionably part of it is timing. And then the other part -- but, when do you draw the point of comparison?

Sure. And I presume though that the price that it's fallen from wasn't -- in the recycled, wasn't the price that you got to in the box prices either?

No. But when do you pick your point of measurement?

Okay.

And I understand. If you stop -- if you freeze the end of each point, and measure the end of each point at the end of each point, you could argue there's a much closer correlation, and the answer to your question is, yes, at that point, I think the other half has grown more important. But it doesn't actually reach the -- it never reaches the end of a point where you can pick that point. There always obfuscation.

Okay. That's helpful. Thanks. The second question was just to confirm, on the OCC sensitivity, the EUR50 million bottom line impact you mentioned, that was based on EUR10 a tonne, was it?

Yes, exactly. We've about 5 million tonnes [of cut-up.]

Okay. And then the next question is just on energy costs. Given that a high proportion of your energy cost requirements would have been hedged or contracted for coming into 2008, and that you've got hedging and contracts in place for a proportion of next year's costs, if you were to assume spot rates on the un-hedged portion going forward, how would your '09 energy cost stack up against the '08 outturn?

Rightly. Hang on. I'll put that one to Ian.

If we go, John -- just take a step back, our energy costs will be in the order of EUR550 million, and that's up EUR70 million on, obviously, EUR480 million. So, at the end of October '08, we had about -- we were 100% fixed for '08. And, at the same time, at the end of October, we were about 50% fixed on our 2009 energy needs.

And after that, versus the current spot rate, it's a very difficult -- all I can say --

It wouldn't be material year-on-year.

Not material. If you take oil at, say, $80 a barrel, and you took the US dollar at [$1.30], movement on that, so what you're saying that the energy cost would increase in the order of about EUR25 million compared to '08 or about 5%.

Okay. That's helpful. And, Ian, my next question's on the finance side as well. Just on the quarterly net interest or net finance costs, they were running at about EUR70 million, which I think was a little bit higher than Q2, and also, if you were to just multiply that by four and put it into your debt, it would imply a significantly higher net interest cost on your debt than what you seem to be paying. I was just wondering, is there other non-debt interest costs within that finance costs that might be skewing the figure upwards?

Yes. The way -- under IFRS, you've got to include things like [movement on] derivatives, and then you have other things like debt amortizing costs. Where I always look, and if you go to page seven of the press release and you have a look at the cash interest number there of EUR60 million for the third quarter, that's a much better number on a cash basis.

Okay. Another EUR60 million for --

Underlying, there's no uptick.

No. Correct.

Okay. And is there any pension element within the IFRS finance cost figure?

In the P&L figure, yes, there's an IFRS number. And then, under others in the cash flow you'd see pension cost movements in there. If you want, John, we can go through that in detail off-line, but --

There's no material swings, John. There's nothing substantial coming through.

Okay. So, the EUR60 million in the cash flow is the one to focus on?

Yes.

Correct.

Yes. Okay. That's great. That's all my questions. Thanks for that.

Thanks, John.

The next question is coming from Ronan Clarke from RBS. Please go ahead.

Good afternoon. I was just wondering if the CapEx guidance is inclusive of any cash restructuring costs that may be associated with the new EUR160 million program, or will that be spent separately?

And, I guess a related point, you seem to have drawn EUR124 million on the restructuring facility in the third quarter. I'm just wondering, is that earmarked for spending for restructuring and, if so, how much? Or should that be viewed more as a liquidity reserve for now?

Okay. Let me take the first one, Ronan, and I'll get Ian to talk about the restructuring result -- draw. On the CapEx, to say to you that the EUR160 million, of which we're targeting EUR60 million this year, it has some element of capital expenditure required to achieve it, but it's in the maintenance, to use that phrase, maintenance capital level. So, it's already counted in the spend this year, next year, the year after, in terms of our normal, keep the organization and the Company running type expenditure.

So, there's no material further outlay to achieve the cost take out, nor, indeed, is there further material costs to be added to the CapEx in terms of achieving some of our objectives going forward.

Ian, do you want to take the restructuring one?

Ronan, in relation to the restructuring facility, the restructuring facility's in the order of about EUR275 million and runs out towards the end of November. What the process is, as you incur restructuring costs, you just keep a list of them and then you give them to the bank. And, effectively, that's what we did. We just drew down on the restructuring facility. It's a very good piece of paper at a very good rate, and that's, effectively, what we did.

And this is historical structuring rather than going forward.

Okay. Thanks very much.

Thank you.

The next question comes from Eshan Toorabally from Goldman Sachs. Please go ahead.

Hi. Good afternoon, gentlemen. Just one question from me on the CapEx, again. In terms of the reduction that you pointed to going through to December '09, is that -- just, first of all, can I assume that's pretty much maintenance CapEx that is being reduced? And secondly, is that pretty much as low as you can go in terms of the CapEx side? Thanks.

Yes. In essence, the guidance for the five quarters is a function of two things. One, in '08, where we had originated with the CapEx number of approximately 100% of depreciation, namely, EUR360 million, we had a number of sizeable advancement projects in that, which are well underway. Part of -- and in terms of predicting the actual timing of the cash hit, is somewhat challenging. So, you'll find, at the end of quarter three, we're well behind anything like 100% of depreciation. Part of that is slowing it down, and part of that is just timing.

Depending on what we spend in the rest of this year, in other words, and realistically we won't spend 100%, it'll be for projects that are major projects in carry over mode that will go into 2009.

In 2009, if we had spent 2008 numbers, we believe, with the projects we have underway, we could pull our CapEx depreciation to 70%, but will be more like, probably, 75% to 80% with the carryover from '08. We go down to 60% in '10, which is down more like EUR210 million - EUR220 million. And to be quite frank with you, in extremis, we could probably go another 10% or 15%. Wouldn't want to do it, and certainly wouldn't want to do it repetitively, but we could go there.

Great. Thank you very much.

Thank you.

We have a question who comes from -- again, from Myles Allsop from UBS. Please go ahead.

Yes. Just a couple of follow-up questions. Could you give us an update on the specialties business, and what the outlook is there? We should be benefitting from lower waste paper costs, but are prices still under pressure? Can you hold onto margins going into Q4 and 2009?

Yes. Let me -- I'll give you a quick comment, and maybe get Tony to talk about solidboard and Bag-in-Box. Let me deal with the one that's most visible and on all of our minds.

Our sack business, as most people's sack business is in Europe, as distinct from in Latin America because, in fact, in Latin America our sack business in Columbia, Venezuela, Ecuador, and Costa Rica is doing well, but our sack business in Europe, on the paper side, had been doing well. But it had been doing well in the international markets, because we're long on sack paper, and pricing was good. And that has, basically, completely unwound, so sack paper prices are under severe pressure.

But more particularly, sacks and converting, right across Europe at this stage, is under immense pressure. I don't need to tell you that the construction more than anything to do with it, whether it's building materials, cement or building materials of any sort, is in a major downturn and likely to be in that situation for some time. And so our sack business is having a very, very, very tough time.

Thankfully, in our business, the sack business is about 2% of our total business. So, that's one part of our specialty business. Tony, do you want to talk about solidboard and Bag-in-Box?

Yes. As you mentioned, sack business is difficult, Gary, but the Bag-in-Box business had a pretty difficult first nine months, but the volumes seem to be improving there, and we've a lot of projects on. So, I think we feel pretty good about that business at the moment.

And then, if you take our Solidboard business, which represents about 50% of the Specialty business, yes, it's going to get some significant benefit from lower waste paper. It's going to get benefits from lower energy.

The key for us here, as we go forward into next year, is going to be how the demand situation holds up. And thus far, I'd say we're fairly okay that it's going to hold up well. We're actually continuing to gain customers. We've got a very strong market position in all the solidboard businesses that we operate in. So, we feel pretty good about the business but, obviously, we have concern about the overall demand outlook as we go forward.

Is there any kind of index pricing within solidboard, related to (inaudible) paper prices, or is this kind of a stickier market so you can hold on to prices and hopefully see some margin expansion next year?

It's a little bit stickier, there's no index, per se, but clearly solidboard's biggest competitor is corrugated, and if one looks at what might happen in corrugated, you've got to assume that solidboard is going to remain under a little bit of pressure.

Okay, that's fine. And then, with the Kraftliner increase, how much did you actually achieve on average, thinking about the fourth quarter benefit?

Sorry, go ahead, Tony. Tony?

Effectively, we got about EUR20 across most of our European countries during the October implementation. I would say that it's going to be tricky to hold onto it as we go forward, but we're doing our best, and certainly working hard to do so. But we got EUR20 across most of the markets during the month of October.

And, just thinking about Latin America, has the bankruptcy of Durango had any impact on that market?

(multiple speakers)

Not yet, Myles, but certainly it's a positive event for our Mexican businesses. We're seeing their customer base in Mexico start to ask us for quotations, so we would see some positives from that, I think, but we'll have to wait and see how it unwinds over the next six months or so.

Going back to that kind of trade flow question earlier, are you seeing any changes in trade flows after this dramatic move in euro-dollar. Are you seeing fewer imports from North America of Kraftliner, or is that still potentially to come?

No I think, Myles, basically for the first seven or eight months it was obviously up year-on-year, but then we saw the reversal of the currencies, and we're now seeing it stable, or indeed, it's beginning to decline a little bit. So I think in terms of pressure on the European market from the supply side, Kraftliner, US Kraftliner-wise, it seems to have reached (inaudible), and obviously with IP having brought back up one of their mills and basically replaced it with a more, well, a semi-permanent take down of the other mill, and obviously Smurfit still not having taken down Missoula and Hodge, our sense of the tightness, of the reasonable tightness of the supply side, together with the currency and the pricing relativities is a better scenario than it was.

Are there any opportunities for the Europeans to export more Kraftliner in the new currency environment?

No, I don't think that's likely. Tony, I presume you would have the same view?

Yes. I don't think any more than is currently being done, no.

That's clear, thank you.

Thanks, Miles.

The next question comes from Matthew Carter from Goodbody Stockbrokers. Please go ahead.

Good afternoon. Just two quick things. You noted that you reduced working capital to 9.6% of sales. Just wondered if there's much scope for further reduction here.

And then, just secondly on OCC prices, clearly they're falling off and it's a positive from a cost point of view. But just on the overall pricing environment, will it make it more difficult to retain prices at the corrugated level? Possibly, if you could just give some commentary there on what you think?

Let me take the second one first, Matthew. Clearly, while there's reducing OCC prices, always gives short term benefits. We're long on record as saying that low input costs in this business are not ultimately good for the business in a sense that everything gets affected by it. So, ultimately, through the cycle and through the chain, lower OCC costs, particularly in an oversupplied market, will inevitably feed through to paper, which will inevitably feed through to corrugated, and our job is obviously to delay it as long as possible and resist the totality of it in terms of the downturn, but ultimately it drives down prices, yes. There's no question about that.

And Ian on the working capital?

Yes. Hi, Matthew. I think, in relation to working capital, when you look at the comparisons between ourselves and our competitors, our working capital as a percentage of sales would be better than (inaudible), anywhere between 1% and 4% as a percentage of sales, but that's been a product over many, three, four years of work. We always believe that we can improve, but at this moment of time, we don't have any big bangs out there. It's just constant, constant hard work on a monthly basis, so no big inputs. So what we expect is, as volumes would come down or something like that, you'd see an inflow, and normally from a guidance we'd say that as sales move up or down, you'd expect to see a move on the order of between 9% and 10%.

Okay. Thank you.

Thanks, Matthew.

The next question comes from Matthew Armas from Goldman Sachs. Please go ahead.

Good morning, two quick questions. One, can you say, as your cash balance has grown to be quite a hoard, can you say what plans you have for cash and the priority for cash deployment, whether it be for acquisitions or whether it be for debt repayment?

And secondly, given that your subordinated bonds are trading in the high 60s, low 70s, it would seem to present quite an attractive return opportunity to enter the market. Is that something that you guys can do? Can you buy back your subordinated bonds?

(inaudible) able to do that. Just one comment, Matthew, because it obviously didn't come through clearly enough, our priority focus for everything as the markets have reappraised leverage, is that we're going to drive our cash flow to pay down debt relentlessly.

So in terms of what you do with this cash flow, the (inaudible).

Matthew, what we do in the current climate, quite frankly, I think, liquidity is king. So really, what we do, and we've been saying this since the start of the year, our focus is on cash generation. We have very little, we have an amortization next year on the order of EUR64 million. I think, at this point, looking at the credit cycle, our focus would be on that liquidity, and over the near to medium term, our focus will be on the cash generation. There is a cost to carrying that, we believe it's a cost well worth having in the current climate.

With regards to bonds itself, we know that the bonds, where they're trading, we would actually need some form of a waiver to go after those bonds, but again, at this moment in time, our focus is very much on cash generation.

So no immediate plans other than to generate cash. Okay?

Thank you very much.

Thank you.

The next question comes from (inaudible) from BNP Paribas. Please go ahead.

Yes, hello. I just had a question regarding your restructuring facility. Do you intend to fully draw your facility by the end of December 2008, so that basically it converts to a EUR275 million term loan?

At this moment in time, we do not. It wouldn't be our intention to draw the remainder of it, no.

Okay. But why did you draw about EUR100 million during the quarter on that particular line? I think that question was already asked, but I didn't fully understand the reason.

The process is, effectively, the restructuring facility was, on merger, we outlined a whole list of areas that we were going to rationalize - mill closure, etc., and integration costs, and as we incurred those costs, we just accumulated those costs, we paid them over, and then when it came to a certain point in time, we'd just go to the bank with those accumulated costs and draw down on the facility. It's a good piece of paper, and it's just a smart thing to do.

Okay, thanks.

Thank you very much. Operator?

As we have no further questions, I would like to turn the call back over to your host for any additional closing remarks.

Thank you very much. Ladies and gentlemen, let me thank you once again for your interest in today's call and for your ongoing support, indeed. We're pleased, obviously, to report a strong, free cash flow performance of EUR226 million in the first nine months of '08, which is double the level of the corresponding period in 2007, and net debt was significantly reduced over the period, as we've said.

So, despite an increasingly challenging operating environment, we believe that the Group's strong customer orientation, its geographic spread, focus on efficiency and cost take out, strength in financial capacity and increasing capital strength, will deliver current market expectations for 2008.

As can be seen from our first nine months' results, the Group is committed to taking decisive actions to continue generating strong free cash flow, to keep reducing its net debt through the industry cycle.

So again, thank you for your presence on your call, and I wish you a good day. Thank you all.

This concludes today's conference call. You may now disconnect.