Smurfit WestRock PLC (SW) 2009 Q1 法說會逐字稿

Welcome to the Smurfit Kappa Group's Q1 results conference call. 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 his opening remarks. Please go ahead, sir.

Thanks, operator. Good morning or good afternoon, ladies and gentlemen, and welcome to the Smurfit Kappa Group 2009 first quarter conference call.

Before we review earnings, we'd like to preface the call with 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 may 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 the results overview, in a difficult operating environment we are pleased to report resilient EBITDA margins and continued strong free cash flow -- strong cash flow movement. Notwithstanding the impact of the weak macroenvironment on both our volumes and price, we continue to report industry-leading EBITDA margins of 11.9% in the first quarter of '09, primarily reflecting the strength of our integrated model and deepened efforts in the area of cost control and cost takeout.

Our net debt remains stable in a seasonally weak quarter for our business and we continue to maintain a strong liquidity position, with in excess of EUR 700 million of cash on the balance sheet, unused committed credit facilities of EUR 600 million, and no material debt maturity until December, 2012.

The Group's financial priority continues to be on generating positive free cash flow and net debt reductions throughout the cycle.

Turning to the financial highlights, while the Group's EBITDA in the first quarter was 30% lower than in the same period in 2008, or 27% of adjusted foreclosures and currency, our free cash flow performance remained stable. This relatively good cash flow performance, despite the reduced earnings, primarily reflects lower debt servicing costs and continued strong working capital control.

At the end of March, 2009, the Group's net debt was broadly flat compared to the December 2008 levels at just under EUR 3.2 billion. Year-on-year, the Group reduced its net debt by EUR 186 million, the equivalent of 6%.

The Group's stable net debt in the first quarter also reflects the benefits of our debt buyback tender. In February we launched an auction process to buy back up to EUR 100 million of our senior bank debt. And in total, just over EUR 100 million of offers were received, of which EUR 43 million were accepted at an average purchase price of 76% of par value. The buyback is expected to reduce the Group's net debt by EUR 8 million, of which EUR 6 million has been reflected in the first quarter.

In the current credit environment, the Group continues to benefit from its strong liquidity position and long-term debt profile. The Group is also benefiting from the lower interest rate environment, with an average interest cost of 5.1% at the end of March, 2009, compared to 6.1% at the end of March, 2008. Every 1% move in interest rates impacts our annual cash interest bill by approximately EUR 12 million. At the end of March, 55% of our interest was fixed for the following 12 months.

In view of the difficult economic environment, and consistent with our financial strategy, in February the Group announced a series of measures to maximize its free cash flow capability in 2009. These included a tightening of our capital expenditure, a suspension of dividend payments and an increase of our three-year cost takeout objective.

Due to phasing of certain project initiatives in 2008, capital expenditure equated to 71% of depreciation in the first quarter. However, we are on target to achieve our full-year objective of reducing expenditure to our 60% of depreciation. The reduction in capital expenditure is expected to enhance the Group's free cash flow generation by up to EUR 120 million over the remaining 3 quarters of 2009.

There's a suspension of dividend payments in 2009. The Group is maximizing its debt pay-down capability by a further EUR 70 million compared to 2008.

To further strengthen the competitiveness of our operations and maximize EBITDA in the current challenging environment, the Group is deepening its cost takeout efforts, and now expects to deliver in excess of EUR 250 million in its former cost takeout program over the three year period 2008 to 2010.

While the Kappa Group delivered EUR 30 million of savings in the first quarter of 2009, we now expect to deliver a total of EUR 130 million of cost takeout benefits for the full-year '09, an increase from our previously announced objective of EUR 75 million.

In addition to our former cost takeout program, the Group is also focusing on curtailing all discretionary expenditure within its system. This effort delivered savings in excess of EUR 30 million in quarter one.

Turning to performance drivers, in the first quarter the Group's financial outcomes reflects another strong performance by the Latin American operations, the continuing benefit of the integrated business model and a progressively lower cost base.

The Group's corrugated volumes in the first quarter decreased by just under 12% year-on-year, reflecting a more significant volume drop in sheets, with box deliveries declining by just under 10%.

The year-on-year comparison in quarter one is tough as markets were showing healthy growth on the first quarter of 2008. Compared to the fourth quarter of 2008, the Group's corrugated deliveries declined by 3% in the first three months of '09.

While the fall in demand in quarter one reflects the overall economic slowdown in Europe, taking a medium term view, corrugated packaging remains a growth industry. Demand for the Group's products is expected to continue tracking industrial production growth of a full business cycle.

Notwithstanding the lower demand, our corrugated division delivered a solid financial performance as corrugated pricing remained more resilient than that of containerboard. On average for the first quarter, the Group's corrugated prices in Europe declined by approximately 4% compared to the fourth quarter of '08 on a constant currency basis.

At the end of March, 2009, the Group's corrugated prices have declined by approximately 9% from the year earlier. [Besides] the containerboard price [indices] declined by up to 40% in the same period. While corrugated pricing continues to be under pressure, the Group benefits from its service differentiation strategy, it's broad-based Pan-European offering and it's geographical diversity.

Entering the second quarter of '09, recycled containerboard prices are at a level below the previous trough in 2005. At these prices the increasing number of capacity closures in the industry demonstrates a significant level of stress for higher cost and our non-integrated producers. Year-to-date in 2009, announcements of capacity closures at our [stalled] machines amount to over 1.3 million tones, the equivalent of 6% of European capacity.

While capacity closures are clearly a positive for the overall market balance, new recycled capacity is still expected to come on stream in Europe in the second half of 2009, despite the weak demand environment. As a result, the Group anticipates a sustained containerboard pricing pressure should force non-integrated and/or higher cost paper producers, among others, to consider closing further capacity. In such an environment, the Group's performance continues to benefit from our fully-integrated, generally lower-cost paper system.

Following significant market-related down time in the fourth quarter of 2008, creating the 13% of our capacity, we took 15,000 tonnes of downtime in our recycled containerboard system in the first quarter of '09 as we further integrated our own paper capacity.

As a result of the inefficient management of -- as a result of the efficient management of our integrated system, and despite the significant drop in demand, the Group's inventory levels at the end of March 2009 are approximately 4% higher than the year-ago levels. By comparison, industry inventory levels are 13% higher year-on-year.

In light of ongoing market weakness, and to maintain our lower inventory level, we have closed our Nanterre paper machine in France for six months from the 30th of April. This action will remove approximately 85,000 tonnes from the recycled containerboard market over that period. This temporary closure is expected to enhance the Group's earnings by EUR 4 million by minimizing production stoppage at our other three recycle paper mills in France.

In addition, as part of its deepened cost take-out program, we've initiated the closure of three of our underperforming corrugated box plants in the first quarter of 2009 in Spain, the Netherlands and Denmark.

In the remainder of the year, the Group will continue to proactively match its production to the sustainable level of demand. And we'll continue to rationalize underperforming operations to maximize cost efficiency while maintaining superior customer service.

In the first quarter the Group also experienced a 16% reduction in its overall cost base compared to the first quarter of 2008. This reflects lower production output, a material reduction in input costs, especially for recovered paper, the EUR 30 million of cost takeout achieved in the period, and continuing downward pressure of discretionary expenditure.

Excluding the volume impact, our recovered paper costs in the first quarter were down 45% year-on-year and our wood costs were flat year-on-year as higher Latin American prices offset a slight decrease in European prices.

Our underlying distribution costs in the quarter were down 2%.

Energy costs were down 5% year-on-year at face value. However, when adjusting for lower production, our underlying energy cost showed an 8% increase compared to the first quarter of '08. This increase reflects the lag in regulated index contracts, particularly in Germany, together with the Group's hedging positions taking in '07 and '08.

In the latter part of 2009, the Group anticipates benefitting from a significant reduction in wood costs in France and Spain as a result of a storm that occurred in the region in December, 2008. We also expect a reduction of our energy costs in the coming quarters. At the end of March, approximately 76% of our energy expenditure for 2009 was fixed.

Turning to Kraftliner, where Smurfit Kappa Group is a clear leader in Europe with 34% market share overall and 40% market share for [wide-top]. Notwithstanding increased pricing pressure as a result of the weak fundamentals in the recycled market, Kraftliner margins remained higher than those of other paper grades in the first quarter. This result was delivered despite 43,000 tonnes of downtime taken over the period, a large part of which was related to the tri-annual maintenance shutdown at our Facture mill in France.

Finally, the Group's performance in the first quarter reflects the ongoing benefits of our geographical diversity as our Latin American businesses continued to deliver superior performance.

The Group's Latin American operations reported a 21% EBITDA growth year-on-year for the quarter on a constant currency basis. As a result of the sustained performance, the region contributed approximately 16% of the Group's revenue and over 25% of the Group's EBITDA in the first quarter.

The Group's Latin American EBITDA margins in the first quarter remained over 20%, reflecting relatively stable pricing and lower input costs. However, Latin America is not immune from the overall slowing environment and the lower level of demand is expected to somewhat increase pricing pressure on the Group's products in the coming few quarters.

In summary, I'd like to underline once more that, despite the challenging environment, we are pleased to report resilient EBITDA margins and continued strong cash flow management. The Group continues to report industry-leading performance supported by the superior profitability of a geographically diverse Latin American operation. The continuing benefits of our integrated model, our lower cost mill system and a progressively lower cost base.

Smurfit Kappa Group continues to maintain a strong liquidity position with an excess of EUR 700 million cash on our balance sheet, unused committed credit facilities of EUR 600 million and no material debt maturity until 2012.

The ongoing uncertainty in the global economy makes it difficult to provide guidance in any meaningful manner. While demand in pricing remains under pressure, we are now seeing signs of increasing capacity rationalization.

From the Group's perspective, we will continue to proactively adapt our production to the sustainable level of demand in our system. And we'll continue to rationalize our system to maximize cost efficiency while maintaining superior customer service.

Reduced capital expenditure and further input cost relief, especially for energy and wood, are expected to deliver their full benefit in the latter part of 2009.

The Group has also increased it's full-year formal cost takeout target to EUR 130 million for 2009. These factors should contribute to maintaining the Group's industry-leading margins, and to maximizing cash flow generation and net debt reduction in the year and beyond.

I'd like to thank you for being on the call today. And now Tony Smurfit, Ian Curley and I are happy to take your questions. And in that context, could I ask that detailed financial questions be taken offline. Thank you. And it's back to you --.

Thank you. (OPERATOR INSTRUCTIONS.) We'll take our first question from Lars Kjellberg from Credit Suisse. Please go ahead.

Hi, gentlemen. I've got three questions. Can you give us any sense of the sequential progression of the cost takeout beyond the EUR 30 million you're talking about? You had EUR 30 million in Q1, of course.

The other question relates to why exactly do you have 4% higher inventories? Should you not have lower inventories considering that the volumes are down, the sales volume?

And I guess the final point (inaudible). Let's get back to that.

Okay. Thanks, Lars. In terms of sequential cost takeout, I suppose the only guidance we can sensibly give is that we started the former program we're talking about and, basically, with an objective of originally EUR 180 million between '08 and '10, which we upgraded at the end of year results to EUR 200 million or a little bit more. And we're now upgrading that further to EUR 250 million approximately over the three years. And that basically is made up of just short of EUR 75 million in '08.

We're upgrading to EUR 130 million in '09 and we're expecting still the EUR 50 million in the sense that we haven't really looked at it more deeply for '10, which gives us approximately EUR 250 million or a little bit more. And as I say in the context of the first quarter we've delivered EUR 30 million and obviously targeting EUR 130 million for the full year.

And the follow-up question to that one. Should we expect any incremental cash costs associated with this cost takeout?

This particular cost takeout program is broadly from the organizational structure as we currently have it. So, it's basically associated with already committed and investment -- or being invested CapEx and ongoing activities. So, there's no assumed major rationalization costs associated with it. If there was to be anything like that, it would be dealt with separately.

Okay.

And on your second question on the inventories, I'll ask Tony to -- Tony Smurfit to take that one.

Yes. I think, Lars, in the context of the tonnage you're talking about, it's about 7,000 tonnes So, it's not a substantial amount of tonnes and that probably just reflects the end of the month inventory build that we didn't quite expect; hence, the reason we're taking some down time in April and progressively taking a bit more in May and June, just to make sure that our inventories don't rise anywhere significantly.

But I mean, it's not a lot of tonnes in any even. And obviously, we're continuing to adjust as we see demand. Frankly, we didn't expect demand in the corrugated to be so week in the first quarter and we obviously adjust as we go along. And the amount, the absolute number of tonnes is not that much.

And the actual number of tonnes, are you happy with this position or would you like them to be lower?

Oh, well frankly, we'd like the whole industry to have lower inventory levels. I mean, that's part of the issue right now this, and hence, the reason why the industry is taking significant down time across the piece. And we are contributing now in the second quarter and we'll probably contribute going forward into the rest of the year to make sure that we keep our inventories under control. They're pretty well -- they're slightly higher than we'd like at the quarter end, but not materially so, and certainly significantly less than the rest of the industry.

And as you're aware, Lars, we've publicly announced that we've taken the (inaudible) mill down for six months. So, there's action already underway in that regard.

It's worth noting that, if you go back to -- at industry level, if you go back to the last time we saw material price occur in the industry, the inventory levels then compared to now, the excess is less than 200,000 tonnes. So, the actual inventory reduction requirement across the total industry isn't a big ask if everybody was to do the appropriate thing.

Okay. Just a final question. If you would comment a bit on the specialties, have you seen any shifting in that market at all? I guess really packed paper and paper sacks continues to be really bad, but any flavor to that.

Tony, do you want to take that?

No. I think it continues to be difficult. We've seen a closure in Portugal of 60,000 tonnes, which is a lot of the sack business. We've seen some idling of capacity in the east in Russia by a large competitor. Clearly, it's heavily influenced by construction.

And construction, we have not seen any real pickup in our customer base on that at this time. But it's -- our mill continues to be running well and the actual cost base is coming down considerably. As Gary mentioned in his script, we are benefiting from some lower wood cost, primarily the result of a storm in the southwest of France, which obviously is influencing and will influence our cost position in our mill in Northern Spain.

Thank you.

Thanks, Lars.

We'll take our next question from Barry Dixon from Davy.

Yes, hi. Good afternoon, guys. Two questions, please. One in terms of box prices. You talked about them being down 4% sequentially in the quarter. Give us some sense, Gary or Ian or Tony, in terms of how much of that is kind of mix effect and how much of that is kind of customers moving from a higher -- or is there any sort of different in terms of the quality of corrugated in terms of pricing?

And then a second question is just in terms of the volume decline, the 12% volume decline. Maybe give us some sense across the different sectors. I know food and beverage is a significant part of the business. You might give us some sense as to the volume trends there, and maybe even since the end of the quarter. We saw Unilever yesterday reporting a 3.5% decline in volumes, but also stating that volumes were improving over the course of the quarter. And just trying to get a sense as to are there any sectors where you see things might be improving or at least bottoming out.

Maybe just to take the first one and I'll get Tony to talk about the general market conditions.

Just to be clear, obviously in terms of box prices, sequentially they're down 4% on a constant currency basis. Obviously, there have been some weaker currencies that would have impacted that on an absolute level, which is about 2%.

And in terms of the quality and the mix, other than the normal seasonal aspect of quarter one, there's no particular aspects of this that are obviously materially influencing it. It is true to say, and you're quite right to say, that we have 55% to 60% in food and beverage related activity in our business, and obviously that is less impacted by the downturn and general economic climate. On the other hand, other types of businesses are very materially impacted. And so, you would have that aspect to it overlaid on the seasonality.

But I don't think there's any particular quality or mix, Tony, that we have discerned.

No. I think -- clearly there's -- in food and beverage I think that the business is pretty well stable and it's -- you have a mix effect somewhat with some shoppers turning from a Tesco to a [Ladler] and Aldi. But obviously, from a corrugated perspective, it doesn't make any difference as they use equal amounts or, in fact, our discounters use actually more corrugated.

The areas that are impacted heavily, as you would have know, it's generally electronic goods and cars, and all things related to those, and chemical companies. And they're obviously suffering a little bit and we would suffer with them.

And any signs, Tony, of the famous green shoots in any sector?

No. I don't think that we could say -- there are certain markets which -- I think we're certainly not seeing it get any worse. I think that we would -- it'd be too early first to say there are green shoots. But clearly, a lot of what's happened is destocking through the system and at some point that will come back and there will be restocking. So, we wait for that day, but we can't say that it's here yet.

And the minus 12, do you think that's the worst of it then on a year-on-year basis, that you could actually see some moderation of that rate of decline as the year progresses?

You need to remember, Barry, when you're looking at us that that's minus 12 on the quarter-on-quarter.

Yes.

Obviously, the comparators change. And so, I think what Tony has said is effectively, in absolute volume terms, we sense that it may be leveling off. And so therefore, the relevant comparators get a little bit easier as the year progresses.

Okay. Okay. Okay. Thanks very much then.

Thanks, Barry.

The next question comes from Ross Gilardi from Banc of America-Merrill Lynch.

Yes, good afternoon, everybody. Just had a few questions. First of all, just on free cash flow. Last year we saw some substantial free cash flow generation in the second quarter. Earnings had clearly, I mean, lower than last year. Is there any reason not to expect a comparable level of free cash flow for the second quarter this year, particularly as you work down some of those inventories that you spoke about?

As a general comment, Ross, obviously we're not forecasting and guiding. But Ian, do you want to take the specific --?

Yes. Ross, in relation to -- when you look at overall free cash flow, our expectation and our focus always is to generate free cash flow. And you probably have seen when we're doing the presentations, the past 15 years that we've always been free cash flow positive with the exception of two years when we did -- it was post the Kappa merger. So, our expectation is that we would be free cash flow positive for the year. And we don't break it out in the quarterly basis, but that would be the sort of the view of the year as such.

Okay. Recognizing that you guys aren't giving any guidance, but you could a little bit just about your -- sort of the expected EBITDA margin trajectory as the year progresses, going forward? Prices, you're still feeling pricing pressure, but it sounds like you've got a lot of cost savings on the way, too. This margin level that we're at in the first quarter, does this feel close to the bottom or do you think margins still have room to slip lower as the year progresses?

I think -- it's difficult for us to answer that, Ross, for the reason we said. But to try and help in terms of being as transparent as we can on the factors, I suppose what we're saying is obviously volume has been severely impacted in quarter four and much less so in quarter one. So, you're seeing this slowing trend of decline. And as Tony has said, in absolute terms, potentially maybe we're there or thereabouts and, therefore, you get some sense of what way volumes are going.

Obviously, in terms of pricing, on the input pricing side, effectively the paper prices are to our mind at levels that are almost inexplicable across the total industry given that they're at levels that many, many, many people are not covering cash cost reduction or, in some cases, anything like cash cost reduction. So, you'd have to draw a conclusion as to where the pricing is going or staying in that regard.

And then the (inaudible) impact to the corrugated is a function of two things, obviously. One, the indices associated with the contracted part of our business, which is somewhere of 25% to 30%, and the rest, which is tough negotiations with customers in the context of the rear market.

And I think that's where we have -- or we believe we are good and commercial and that's our core business and we would expect our (inaudible) been doing for the last number of quarters, to be basically adapting for every bit of margin they can retain and keep in terms of pricing activities and product changes and repricing of new references and so on.

In terms of the costs, I think we're just seeing -- we've stated clearly what we're doing on the structure cost takeout program. And again, we're digging deep. We've already dug deep in the first quarter.

But (inaudible) you note in our comments, we also have a suppression of ongoing in all the cost activities in our business, which we call, for want of a better word, discretionary costs. And we've delivered EUR 30 million plus in the first quarter in that regard. And while we're not guiding what we're going to deliver for the year, because obviously it's hard to call, certainly the pressure's not easing up.

So, there are all the ingredients. And I think you need to make some judgment calls yourself because, obviously, if we guide on margin the rest is fairly simple.

Got you. Okay. Well, thanks very much. That's very helpful.

And then just my last question. I was just wondering if you could talk a little bit about what you're seeing in the overall credit markets and if you could just address your covenants. If you look at (inaudible) numbers right now, it seems like the numbers that are already out there have you close to your key net debt to EBITDA covenants, and just how are you thinking about that? What's the overall mood with your banks and so forth? How might you approach your covenants going forward?

Ian, do you want to take that one?

Ross, when you look at the overall credit markets, they've evolved over a long period of time. They went though a tough period. We see some opening up of the markets. The high-yield bond market has opened. The market in general has become more prescriptive in certain areas. We were involved in a (inaudible) buyback on the first in there. So, I think we're fairly in tune with the markets in areas that we like to deal in. So, there's been a somewhat easing of the markets. Obviously, you've got to pay your way at this moment in time -- that one would look for.

We always have very good relationships with our banks. We've work very hard on it over the years, at all our capital providers. So, anyone that's provided capital to us over the years, we've always worked very well with them and we very rarely lose a relationship.

With regards to covenants, we operate comfortably in the covenants. And when we look at any transaction, and using the debt buyback as an example, we don't front-lead any transaction. We will always talk about it subsequently but, up front, we would never front-lead anything.

Got you. Okay. Well, thanks very much. Best of luck to you.

Thanks, Ross.

Thanks, Ross.

The next question comes from Robert Eason from Goodbody Stockbrokers.

Hi. I've just got a number of questions. Just one, your division in Latin America obviously had a very good quarter. And in your opening address, you kind of commented in terms of you foresee pricing pressure in the next few quarters. How much of that will be offset by the cost reductions? Firstly talk about whether it's raw materials or just cost takeout. And should we be penciling in a deterioration in the trend of EBITDA growth as we go through the quarters this year?

I think, Robert, it's true to day that as you experience the type of volume pressure and demand decline that we've experienced over the last two quarters, particularly in the fourth quarter '08 and into quarter one '09, but at a slower pace, there inevitably is a pressure on pricing.

But specific to Latin America, I mean, Tony, maybe you'd like to talk to that one.

Yes. I think, Robert, we've done I think a reasonably good job in Latin America in holding on to margin. I mean, volumes have been very weak in Latin America and while that will probably continue to be so for at least the next quarter or so, we would feel fairly comfortable that the margin can be withheld, given our market positions in the various countries.

Additionally, we have some capital programs which are coming to fruition in a couple of the countries which would -- will significantly benefit some of the countries' performance. So, we would hope that Latin America can continue. And if -- we have seen some pick up in the United States so there has been talk of some significant pickup in the United States. And that is obviously -- could help us in the Latin American region.

I know you're not giving specific guidance, but can I interpret that as saying that you'd be very disappointed if you don't continue to achieve year-on-year growth in each of the next three quarters in Latin America? Is that a fair interpretation?

It's definitely not an interpretation, what you said, Robert. Clearly, the answer is yes, we would be. But that doesn't necessarily mean we expect it. I think what Tony is clearly saying is we should be able to -- with all of the activities, Latin America is more resilient because of the geographical diversity and the mix of business. And in particular, the investment he mentioned in Columbia, which is a very substantial investment in our posting business and our recovery boiler system and our turbine system there.

So, the mix of things will basically sustain us through a tough environment. And it may well be that, if there were early recovery activities, some of Latin America, namely Mexico particularly, will be an early beneficiary. But that's why we don't feel able to guide because who knows.

Okay. Just in terms of -- you mentioned that you have 75% of your energy bill hedged. Can you just give us a bit of feel in terms of, if oil prices stay where they are, where your energy bill would be in terms of up or down in percentage terms for the year?

Ian, do you want to take that?

Yes. Robert, it's first a -- obviously, you've got a volume effect in there somewhere. But overall, the expectation is that energy prices on an annualized basis would be down between 7% and 10%, effectively adjusting for volume at the lower end and 10% probably on an absolute basis.

Okay. Thank you. And just, sorry, two further questions. Are there any further plans to look at the debt market again in terms of buying back (inaudible)? And just on your cost takeout, you clearly cited in your opening remarks that you -- in terms of getting to the EUR 250 million you upgraded your '09 figure to EUR 130 million and you left the EUR 50 million unchanged in 2010. Do you feel there is still a lot of scope to come out with a higher figure than EUR 250 million as we go through the year?

I'm not sure on the program on the sustainable long-term kind of permanent cost takeout to be a huge scope above that. Because, as you can imagine, it's a fairly large step-up. Obviously, one of the benefits, of course, is that it carries over into 2010, achieving (inaudible) in the three-year program. So, I certainly wouldn't be getting into that country.

But needs must, and we talk very, very deep. I think the other area where it's hard to be specific is obviously the extent to which we've been able to suppress expenditure effectively, which is quasi-discretionary, and there may be some there. So, maybe more there than perhaps in the programmed one.

Ian, on the --.

Yes. Robert, in relationship to your question on debt buyback, no, not -- it's not our intention to go back in the market at this moment in time. It's interesting, as a market, the market was on a (inaudible) to improve slightly and debt levels of trading in the sort of area of about 83.5 to about 85. And that's up from the sort of high 60s, early 70s of trade volume. So, in short, the answer is no at this time.

I'm sorry, just one last, just to follow up on that. Were you slightly disappointed that you weren't near the 100 mark in terms of picks since the buyback?

No. When you look at -- Robert, we got offered just north with 100 and we took 40-odd million at 76% of face. It could've been the other way. The question could be in the 400 I'd been offered, you'd be asking me something different. So, we went out with 100, got 100 and we took what we thought -- it was a tradeoff between good value and liquidity and keeping good cash on the balance sheet.

And a strong vote of confidence from the debt market on the Company, Robert, quite frankly.

Yes. Thank you.

Thanks.

The next question comes from Myles Allsop from UBS.

Myles?

Sorry about that. How much has (inaudible) prices come down during Q1?

Tony, do you have that?

Approximately -- it depends on the market, Myles. I mean, obviously, the southern markets are more affected than the northern markets. But around EUR 30 is a good ballpark figure.

Yes. And how's -- I mean, looking at the first quarter results, is any of that decline reflected in the actual EBIT, or is that coming through in Q2 and Q3? Is there any lag to kind of seeing the list price change --?

No, not really. No.

No huge lag (inaudible). It slipped over the quarter so there may be a bit more in Q2, but there's no dramatic carry forward.

I mean, we do consume a lot of the Kraftliner ourselves. And obviously, it goes to the same point that we are holding onto a lot of the slippage into our box system, which we will continue to do. And also, we swap a lot of Kraftliner with recycled from various producers. So, in actuality, I think we use about 75% if you include swaps and our own consumption in Kraftliner. So, obviously it's the same issue that we have to hold onto it in the box prices.

Okay. And with the wastepaper prices, which have started to pick up a little bit. I mean, all the benefit from low wastepaper costs is now reflected in the numbers. And any kind of small increase that we start seeing coming through towards the end of this quarter will go against the margin. Is that the way we should look at wastepaper costs?

Well, if that happens that is the way. But we're certainly not -- the amount of downtime that's being taken in the industry in April and in May should mitigate any issues on wastepaper. But the issue currently on wastepaper is that the Chinese are buying and that is having -- putting pressure on the wastepaper market. But there is by no means a scenario where we're expecting increases in wastepaper at the moment.

And you were talking about sort of temporarily closing Nanterre. But will Smurfit close any capacity permanently?

What we've said, Myles, is obviously we continue, as you would expect, in our system to look at the sustainable demand patterns and outlook and adjust our system accordingly. And by sustainable, I mean sustainable in profitability terms, not sustainable in terms of just operational terms.

So, you never say never, but we have been very consistent as we have more than stepped up to the plate and more than balanced our own system progressively post the merger and every year since then we've closed one machine per year post the major closure steps and we not have Nanterre down effectively for six months. So, we're doing what we think is appropriate and necessary for our own integration and we'll see how the rest play out.

Okay. And then, when you talk about the EUR 30 million of discretionary expenditure, can you give us a sense of what exactly that is, just so we can --?

Yes. It's all of the expenditure areas where we don't have to do it. So, it goes from anything as simple as travel and subsistence and expenditure on consultancy and fees, etc., etc.

Okay. Thanks.

Thanks, Myles.

Our next question comes from John Mattimoe from Merrion Stockbrokers. Please go ahead.

Good afternoon.

Hey, John.

I have two questions on operations and two on finances. On the operational side -- and you may have touched on some of these things briefly, but the first one is just in relation to destocking in the customer base. Have these -- have you seen any radical movement, say, from Q4 to Q1 as to whether destocking continues or if there's any evidence of restocking, or how are those dynamics working out?

And the second question then is just a follow-up from the -- on what you touched on, on the cash cost of production. Can you give us a sense on where recycled prices might be versus where you think average cash cost is on the recycle side? And are we at a point yet where it's going to be inevitable that people -- the nonintegrated people start falling out of the system?

Yes. I think on the whole stocking, destocking, restocking and so on, I mean, to be clear, we certainly -- we've been asked to comment on, we're not calling it a trough or a turn or nothing like that at this point in time. We certainly know, for example in the US, a number of the players in the US have talked quite positively about the early week in April seeing an upturn that may be the first sign of the green shoots. We've seen one of our competitors talk about their sense of the end of the destocking, and we've seen others saying that they think that the level of demand decline is going to stabilize at the level it's at.

I think what we're seeing from our perspective is that, in absolute volume terms, we think we can sustain the level we're at. And we don't get a sense that it's getting worse, but we don't certainly call any trough or turn in the context of volume price relationships.

And over Q1, Gary, do you think there was still an element of destocking going on during the quarter?

Well, if you take it that the volumes decline have basically slowed down quarter four into quarter one and they're slowing down in quarter one, the sense would be that it's petering out, which obviously you would need it to be if you're expected to hold at the level you're at for the rest of the year. But there's certainly no -- turning it upside-down, there's certainly no sense of major resurgence of even minor resurgence.

Okay.

It's kind of stabilized if anything, but nothing more than that.

Okay. I see. Thanks.

Tony, on the cash cost reductions.

John, I would say that right now the industry is at or below the cash cost production of the most efficient users if they're running full. And you might have one or two or three mills in Europe that are slightly cash positive at the current pricing levels. But they would have to have everything right. And that would mean that they are running their machines full, and I don't believe that any independent third-party paper maker is running full at the moment. So therefore, they're carrying costs over a shorter working time.

So, I think the situation for a nonintegrated person is fairly critical at this moment. And pricing will have to adjust upwards at some point. The question is when. As Gary's mentioned, we just -- we don't have a sense of when that's going to happen, but it can't stay like this for too long because, as you say, there will be a number of people falling out of bed. And we do see, even in the last couple of weeks, an acceleration of people announcing closures of machines in Europe. And I think it's inevitable that it's going to continue.

Okay. Thanks a lot, Tony. On the finance side, then, the first question is just in relation to the working capital performance in the first quarter. I was just wondering what's the best way to look at that in the context of the full year? Is it a case that you've done very well in the time of the year that you should see a seasonal slow and, therefore, the seasonal unwind in the second half won't be as good? Or is it really a direct function of turnover? So, as volumes and prices impacts turnover, thus you're going to -- you don't see as big a buildup in the first half and you'll see greater inflow in the second half?

Okay.

John, when you look at the working capital outflow on the order -- it was EUR 7 million in quarter one this year -- planned an outflow of 75 in quarter one last year. While positive in the sense that it's a much lower number, in there we've had a one-off benefit of the change in low in France where people must be paid within 60 days. So, we've had an inflow on the order of about EUR 20 million there, which is a one-off benefit.

And when you look at it as a percentage of sales versus quarter one this year versus quarter one last year, we're probably towards -- close to 1% better. So, as a percentage of sales, in good shape versus the year end at just marginally worse. But I think if running numbers, I would keep it at the 9% to 10% of sales. Because as a percentage of sales versus peer group, it would be at the lower end, if not the lowest, of working capitals around the place.

Okay. So, the second half then we should just kind of keep projecting it on the basis of that 9% to 10% of working -- of sales.

That's typically what we say, yes.

Yes. Okay. That's useful. And then just the last one was just in relation to the energy prices and the wood costs. I take it that if you were looking for declines of 7% to 10% for the full year, it means that the declines over the rest of the year would be greater than what you've seen in the first quarter. And I presume it also means that wood will start declining then year-on-year as the quarters go through the rest of the year.

Maybe we'll get Tony just to talk on the wood prices.

Yes. I mean, as Gary mentioned, and I think he mentioned earlier, we had a large storm which -- in February. And the effects of that are going to be felt very significantly from really May onwards. And in Sweden, in Northern Sweden, where we have a large operation, those wood costs are starting to fall somewhat and obviously we're putting pressure on them to fall as much as we can and that is starting to occur. So yes, the answer on the wood is that we are expecting significant wood cost reductions as we go through the year.

And there is sort of a hedging effect in there, too, John. As the hedges come off and then more is floating. So, there's an element of that, too, but yes, it will come off in the second half of the year.

Okay. So, it's kind of the lag of the unwind of hedges and contracts and regulated prices --.

A combination.

And the regulated side, John. I mean, the regulated side has a natural lag into it.

Yes.

So, a large -- a big percentage of ours is regulated.

Okay. That's good. Thanks a lot.

Thanks, John.

We'll take our next question from Sumanta Biswas from Polaris Capital Management.

Good afternoon, gentlemen. Quite a few of my questions have already been answered, but I have a few follow-up, general industry questions. Like, just out of curiosity, what is the capacity utilization rate for the industry now and what is it for you?

Capacity utilization rate. I would honestly say to you that, if you look at it in terms of if everybody was running full -- if everybody had their machines running full and had them available to run full, you would be at a relatively low level; certainly in the 80s and God knows where.

The big issue is, obviously you'll have seen that effectively in the last few months there have been effectively seven machine closures and four idled machines announced, the net effect of which is about 1.3 million tonnes either currently idled and/or coming out in the second to third quarter.

So, there's a substantial amount of activity in rationalization terms going on, as well as obviously the amount of down time that has been taken and reported in quarter one and indicated to be taken in quarter two through quarter four. So notionally, probably in the 80s. And obviously, between idled and down time it's bringing it back up to sensible levels of operation.

Sure. But this may not be a fair comparison, but in the paper industry, because of some players either with government backing or private companies or companies owned by forest owners, there had -- that industry has faced a considerable number of years where they were ready to run at cash loss. And please don't ask me where they got the money from.

But in your industry there has been capacity closures, which is very good. But if you look at what more needs to be done and kind of the rate at which it needs to be done, how would you categorize the players? I mean, are they -- or do they have deep pockets to sustain cash losses for some time or do they have government backing? Or do you think that they're all -- they have to do something quick?

I would say -- I mean, I suppose the (inaudible) answer, as Tony has indicated, at these type of price levels, just looking at our own system and equivalent systems, there are a lot of people who are under water. And certainly, there are factors at play other than basic economics that sometimes prevail in that. But this is at a period where all the new capacity hasn't yet been introduced. So, the law of gravity can't be defied for too long.

So, our inclination is, not knowing specifically when and where, that there's a rationalization coming and it's not necessarily always from the most obvious places, namely the small, high-cost machines. I think across the industry we'll find some signs of that and some evidence of that in the relatively near term, simply, basically on the basis that people -- the economics just don't work for people.

Who's bringing on the recycled capacity in Europe?

There are a number of players that, in '09, '10 we're talking about [David and Smith] have brought on tonnes and has obviously taken some tonnes out. Hamburger is brining on tonnes in the second half of the year. [Mondi] are taking on tonnes in the second half of the year and taking tonnes out. And in '10 we have the big machine coming from [Pravda].

So, what are they seeing that makes them think that they can (inaudible) on their capital and earn good returns?

I unfortunately -- I'm the wrong person to ask of that.

I know. But I'm just wondering if --.

I think that -- no, the decisions were made in better times. I mean, these decisions -- these times the decisions for execution are quite long and people always make decisions on the sunny days.

Yes. I hear you. And on the energy contracts, I think you said it's hedged. So, did you -- I mean, and then you're saying that prices are going to come down for you. So, you hedged them at lower prices or -- because I'm thinking if you hedged them when they were (inaudible) high, then you wouldn't be able to enjoy the benefit of it. So, I'm sure I'm not getting something right.

Ian?

Hi, this is Ian here. What you have is we normally have a rolling hedge going forward. And as some of the -- so don't forget, this is across 23 companies. So, effectively what you've seen is a lag over a period of time. As some hedges fall off and they -- at various levels and they go into the free market and such and that's what you're seeing. So, that's -- it's just the overall lag.

Okay. And during the call you did mention a 45% price decline. I'm not sure I caught what was that?

Recovered paper. Wastepaper.

Okay. Fair enough. And one more question on the capacity shutdowns. So, are most of these shutdowns by the industry and by you, what kind of shutdowns are these? Are these -- I mean, how easy or difficult is it to bring them back on if and when things get back?

Some are possible but highly unlikely. Tony, do you want to --?

They're -- just as a broad point, Sumanta, I think one of the things that -- a lot of these capacities that are being shut down are of machines that are no longer fit for purpose. And there are still quite a few machines out there running that are ultimately not going to be fit for purpose, because the general move in the marketplace is towards lighter and lighter weight papers. And typically speaking, older machines are not able, without significant investment, to run lighter weight paper. So, once they shut down, they pretty well shut down for good.

And I'm thinking about a scenario where, okay, all the high-cost plants are being closed and the investors moving down the cost curve, wouldn't it mean that in absolute EUR terms the free cash flow generating of the industry or your company should come down?

No, no.

Because your end consumers are not (inaudible) give you good prices if you're moving down the cost curve. They will let you hold on -- I mean, I'm not talking about the next two quarters. I'm talking about the next three to five years. Even if you hold on to your margins, they should be offer a lower price base because you're moving down the cost curve. Is that a valid argument?

No, not necessarily. You're approaching this industry on a rational economic approach, Sumanta, which is obviously a big mistake. I mean, the danger here in this industry is that people price our product on the basis of their input (inaudible) appropriate market price. It is the case that as lighter weight paper is being produced and being used in boxes, the business is ultimately the boxes. And design comes into it. Obviously, purpose and use comes into it.

More and more people and companies are starting their products based on a fit-for-purpose packaging rather than specifications of what ingredients are going into it and how much the ingredients cost. So, I don't' think it follow on at all. I think the real challenge in the business we're in is to ensure that we maximizes the revenues and margins we can get in the box business and produce our paper at, the lowest possible cost behind the scenes.

Okay. Okay, thank you so much.

Thank you very much. Good to talk to you.

The next question comes from Julian Dumas from Putnam. Please go ahead.

Good afternoon, gentlemen. Just to confirm one thing, which is that you have officially abandoned your less than [EUR 800 million] EBITDA guidance. Also, when I look at your CapEx, it seems to have been higher than last year. Is the 60% of depreciation still basically what you're guiding toward for 2009? And also, can you explain to me why your restricted cash has increased by EUR 24 million? What is the driver behind that? Thank you very much.

Let me take the first two and then I'll ask Ian to take the third.

In terms of -- I wouldn't describe us as having abandoned any particular guidance. We're basically saying at this point in time, in this current climate, given the factors that are at play out there, we think that guidance would be unhelpful. In fact, what we're trying to avoid is misguiding people.

And so, I wouldn't correlate it with anything. Obviously, we still have the analyst community who are well informed in this industry, forming views and they will continue to form the view. And that's one form of -- that's one way of the market taking guidance from informed analysts.

On the second question, which is -- remind me.

CapEx.

Oh, sorry, on the CapEx, yes. I mean, the CapEx in any businesses like ours, again, a bit like the building of new mills. There's a relatively long lead time to any significant CapEx in terms of the planning, the conceptualization, the approval, the ordering, the picking of the timing to do the CapEx, when it's not taking a plant or a mill out of commission at the wrong time of the year, trying to correlate it to normal down time periods and so on. So, you'll have a long lead time from the time of approval to the time of actual expenditure. And therefore, there's always a rolling carryover.

And obviously, from CapEx in '07 and '08, we would still have some carryover into '09, a substantial carryover from the mid -- early to mid-'08 into '09. And the early part of '09, therefore, is effectively showing the impact of that. What's guiding us to be able to continue to guide you, if you like, towards the -- where we were setting our targets at, approximating heading down towards 60% depreciation, is obviously our activity in the approval area. And obviously, we have taken significant action in that regard.

A good example of what I'm talking about is, for example, the CapEx's is associated with any of the work we had planed for Facture have only been done in quarter one. And they probably would have been approved early last year when we had the triennial shutoff factor in quarter one.

And one additional question, if I may, just in line with the (inaudible) cash, which is basically, if I'm not mistaken, your leverage has increased over the quarter because your EBITDA is simply coming down. However, if I assume correctly, the covenants and your senor bank facilities actually are tightening every quarter. So, are you thinking maybe about having some discussion with your banks regarding this, just to have a bit more flexibility?

(Multiple speakers.)

: There are two questions there. The first is the restricted cash. The move in the restricted cash on the order of about EUR 20 million, what that affects is, at the end of the quarter in that we have an A/R securitization program in three of the countries. And as debtors go up and down, you -- in this case, debtors were down in the quarters so you allocate cash on the basis for restricted cash. So, that's the movement and that movement will come off, back down to a lower -- to a lower level than before. It was just a quarter-end issue.

The second question was really in relation to covenants and talking to banks. As we said earlier, we're happy with our covenants and any restructuring or anything we'd do like that, we'd never front-lead us, was -- and I think when speaking to Ross at the beginning we were very comprehensive on that.

I mean, in very simple terms, Julian, we basically never discuss or disclose our conversations with our bankers, with our advisors, etc. And we report on any actions after the fact and we're trading fine at the moment, thanks.

Okay. And one last question. I mean, I know -- well, particularly you are thinking about idling capacity and everything, but out there in the market there must be some good assets with forced sellers. Could you be interested basically in bidding for those assets?

Well, our priority focus without any question of doubt is deleveraging, which we believe is in the beset interest of all the shareholders. And our priority focus in that regard is to throw off the cash for that purpose. So, that's unequivocally what we're focused on.

On the other hand, we clearly are well known as a company that tries to ensure it's aware of the opportunities in the market and we would be very aware of what's going on out there. And if there are circumstances on a basis in which we can do things, consistent with not dis-improving our leverage position, then that's obviously something we would consider. But it's certainly not again something we are currently contemplating. And even if we were, it's not something that we would (inaudible) on.

Thank you very much.

Thank you.

The next question comes from [Julian Raflsauer] from Goldman Sachs.

Yes. Good afternoon.

Hi, Julian.

The box prices of all (inaudible) were quite well. So, shall we expect let's say -- especially if we compare with the (inaudible), shall we expect that spread in your favor to continue? And why actually is there any structural reason for that, or is it only a kind of lagging effect because you're saying I think boxes -- you have more or less medium term contract and then it will come down. So, is there a special reason for this spread to exist, or is it only a lagging effect?

Tony?

Good afternoon. I think there's a bit of both. There's a -- general speaking, there's always a lag effect, especially with our contracted customers, both on the way up and on the way down. And we will expect to see some deterioration with those customers. But obviously, we don't volunteer for giving prices away. So therefore, we actually try to tend to hang onto prices of our redesign packages so that our margin doesn't go down. So, there isn't a natural -- it doesn't translate that all of containerboard as it goes down means that box prices go down in the same proportion.

And so, there's no real substantial reason for the spread to have widened.

No, no. No. I mean -- and I think it's important to remember, Julian, that we are in the boxes, not in the paper business. So, our objective and the role that our guys play is to continue to try to maximize revenues for the products and services we deliver. And while everybody wants to keep talking about paper prices and correlating prices and that, we seek to do the opposite. Some of it we can't because we're contracted into formula-based agreements with major customers that are index based. But in many, many instances, well over 70%, we are in basically commercial negotiations and discussions with our customers for products and services.

Alright. Thank you.

Thank you very much.

We'll take our next question from -- a follow-up question from Robert Eason from Goodbody Stockbrokers. Please go ahead.

Just one follow-up question on the cash flow, and it's probably for Ian.

Sure.

Should -- just (inaudible) the cash flow going forward, should be aware of any provisions that come through or further capital pressures coming through? Because there was a big capital pressures by some in the first quarter.

Yes. What you saw, Robert, you'll receive the equivalent in -- or the opposite of it in quarter four last year. So, when modeling the cash flows and such, no, there's no special issue that we should focus on.

Okay. Thanks.

Thanks, Robert.

We'll take our next question from Paraic Quinn from NCB.

Hi, guys. Three questions, if I may.

Yes.

The first one, just in terms of you mentioned the contribution, the EUR 4 million contribution to earnings from the temporary closure of the machine in France. But just wondering in terms of the three closures of the box plants, in terms of the costs associated there. That was my first question. And secondly then, just wondering in terms of can you provide any guidance on the tax rate that you expect for the year? And then finally, just in terms of -- in light of the Swine Flu in Mexico, I just wonder in terms of is it too early -- or have you started to see any impact in terms of disruption in that market?

Let me take the last one first and I'll get Ian to take the tax one. On Mexico, the -- even in the -- first of all, effectively, Mexico is back to work or on its way back to work as a country. And obviously, people are being careful, but it's still returning to normal.

During the more problematic week or week and a half, we were considered to be a critical industry in that we were heavily involved, as we've often said before, in the food and beverage and related businesses, pharmaceuticals, medicines and so on, from the packaging and delivery and logistics point of view. And so, therefore, we continued to work. And the only issue was a consumption one. So, nobody will have escaped with no economic impact on something as dramatic as that, albeit short-lived. And we think it is, subject to no further outbreaks, it seems to be under control. But our sense is that it'll be minimum.

In terms of the closures, effectively the three areas announced, the provisions -- the cost approaches have all been taken. And so therefore, the benefit of EUR 4 million is clean in terms of being a net positive from the Nanterre idling for six months.

Ian, do you want to take the tax one?

Yes. Paraic, in relation to the cash tax, typically -- actually, when we talk about tax we talk about cash tax. In relation to cash tax we see for the first three months of the year it was about EUR 9 million cash tax compared to EUR 15 million. ON an annualized -- that's not truly indicative. But typically, on an annualized basis we would expect cash tax to be on the order of about mid-70s.

Okay. Good. Thanks very much.

Thanks, Paraic.

We'll take our last question from Ross Gilardi from Banc of America-Merrill Lynch. Please go ahead.

Hey, thanks again. I just had a couple of quick follow-ups. On the CapEx guidance, when you say you're going towards 60% of depreciation, do you expect to be at 60% of depreciation for the full year, or is that just more of the run rate by the end of 2009 for your CapEx?

We expect to be heading very close to that level as an absolute number by the end of the year. But the run rate will be -- the run rate will be close -- will be around the 60%, but the actual number will be somewhat higher, but not materially higher.

Okay. And then I'm just curious. You've had -- I think roughly EUR 40 million of assets for sale on your balance sheet for quite a while now. Are those assets that, in any reasonable scenario or realistic scenario that you would convert to cash or could convert to cash if need be in a short period of time?

We're open to offers, Ross. Ian, do you want to comment on --?

Yes. There's one particular asset in there that, when we back in the late '90s we sold the White Paper Mill into a company called Lecta. We own 7% of Lecta and that's how there's an asset for sale.

But generally speaking, Ross, the assets we have for sale are mainly -- apart from that one, are mainly real estate, land and buildings. And obviously, they are for sale. But the climate for purchasing land and buildings, and more particular financing them, is somewhat difficult. And we will continue to look at it. We're active in it because obviously we want to monetize stuff that's of no value to us in EBITDA terms.

Sure. Okay. Thank you.

Thank you very much.

That will conclude today's question and answer session. I would now like to hand the call over to Mr. McGann for any additional closing remarks.

Thanks, operator. Ladies and gentlemen, again, let me thank you for your interest in today's call and, indeed, your ongoing support. In the first quarter of 2009, in what has certainly been a challenging operating environment, we're pleased to report, as we've described it, resilient EBITDA margins and continued strong cash flow management.

The Group's financial priority, as I've said, continues to be on sustaining positive free cash flow generation and net debt reduction throughout the cycle. And in the remainder of '09, the Group's reduced capital expenditures, dividend elimination and increased cost takeout and to further input cost relief will contribute to that objective.

So again, thanks for your attention and have a good day.

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

Thanks, operator.